China “EPA” crackdown shuts down tens of thousands of factories… with no end in sight *UPDATE*

UPDATE

As you may have heard recently China’s EPA has shut down tens of thousands of factories with no end in sight.  Not only are factories being fined for not following the new laws, in some severe cases people are going to jail for this!  You can read more about it in this NPR story where they interviewed me.  

China Shuts Down Tens Of Thousands Of Factories In Unprecedented Pollution Crackdown

After speaking to other industry experts on the ground in China, here are some important takeaways that I’d like to share with you especially if you have a business that is sourcing products from China.  

The good news is that China is cleaning up its manufacturing.  

This is positive for both China and the rest of the world.  Beijing is known for its legendary levels of pollution. In China, lung cancer rates are climbing astonishingly fast.  Also the impact of the pollution can be felt as far away as Japan and even North America!  So all in all these stricter environmental regulations are a positive development.  

The air seems to be cleaner these days in Shanghai, Shandong, Guangzhou, and Shenzhen.  Some have told me that they “can’t remember the last time the skies were so blue!”

Previously it was cheaper for factories to pollute than to cleanup.  

In the past the main problem was compliance.  Because fines were small and loosely enforced,  from a business perspective it was cheaper for a factory to continue operating and paying a small fine than to rehaul their operations and invest in new equipment and processes to cleanup.  

But this time the new EPA laws have TEETH.

Local leaders are pressured to force local factories to comply or face stiff fines and penalties. These may include daily fines, cancellation of business licenses, and even criminal enforcement.  

What does this mean if you’re sourcing from China?

Unlike before the new laws are here to stay

In the past, these cleanup efforts were temporary due to large socioeconomic and/or political events such as the 2008 Beijing Olympics, 2010 Shanghai World Expo, and 2012 Hangzhou G-20 Economic Summit.  

The difference now is that the government leaders have issued direct orders from the top down.  We understand that the environmental cleanup is as important as the anti-graft campaigns in China.  This is serious stuff folks.  

Factories that have been closed may stay closed

I have heard reports of dying mills that have been shut down by the dozen because they cannot comply with the new EPA laws.  In other cases factories have been shut down indefinitely.  

On the other hand other factories have gone through their audit and passed inspections with a minimal disruption to their operations.  

The takeaway is that it depends on your industry, your product, as well as your factory’s operations and level of pollution.

Even if your factory wasn’t affected, their subcontractors may be shut down

One important note is that if your factory wasn’t affected you’re not out of the woods yet.  This is because their subcontractors may be affected by the crackdown.  This means that if your product is dyed or treated with chemicals – this part of the production process may become a bottleneck that may delay your delivery.  

Or some factories may even switch out or even eliminate certain processes altogether.  

I’m not necessarily saying that factories are dishonest.  But desperate times call for desperate measures and for some factories it’s a fight for survival.  It’s not unheard of for factories to forego a certain chemical treatment when that treatment may jeopardize the shipment’s delivery date.  

Perhaps more importantly, it boils down to Chinese culture where social harmony is more important that speaking up and causing problems.  Often times these problems will be kept to themselves and only brought up when the sh*t hits the fan.

China is moving up the value ladder

On a macro level, China is moving away from the low end and super cheap products that takes a significant toll on its environment.  This makes sense as pollution levels have skyrocketed in the past 20 years since China’s economy has boomed.  

To put it bluntly, China is willing to let the “dirty” business go to other countries such as India, Bangladesh, and Southeast Asia.  At the same time China is focusing on more valuable products whose manufacturing processes depend more on skilled labor and automation.  Case in point the Apple iphone.  

What can you do?  The three C’s

Communicate with your supplier

Remember don’t expect your supplier to give you an advance notice.  Remember Chinese culture does not encourage one to make waves.  So it’s your job to be proactive in checking with your suppliers if they’re impacted by the new environmental laws.  

It’d be smart to check if your delivery schedules are guaranteed as well because you don’t want to miss out on Q4 and the holiday shopping season.  

I recommend also asking how long they expect the closures to last so you can plan ahead.

Contingency Plan

Don’t put all your eggs in one basket.  It makes sense to have backup suppliers to refer to if your primary supplier goes offline.  These can be either other suppliers in China or in other countries.  

Contrary to popular belief, not all products are made in China these days.  Other countries such as India, Bangladesh, and SE Asia may not be prone to these increased pollution laws.  

I recommend also sourcing new suppliers as a long term strategy.  

In fact we are in the middle of trade show season right now.  I’ve written several articles about how to attend a trade show like a pro. Trade shows are a great way to meet suppliers in person, kick the tires and get your hands on a sample right away so you don’t have to wait for weeks for it to be shipped to you, as well as learn about new product trends and spot new product opportunities.

Change – learn to embrace it

A wise man once said “The only constant thing in business is CHANGE”.  So learn to embrace it.  

One must adapt quickly or be left behind.  If you’re factory is affected it’s up to you to find a supplier that can deliver the right product, at the right price, at the right time.  

Short term outlook – Longer lead times

In the short term I expect longer lead times during the shakeout since certain factories are being closed indefinitely.  

Long term view – Prices to rise

In the long term, expect prices to rise.  Just as California has stricter tailpipe emissions laws which resulted in higher car prices and gas prices, so will China’s stricter environmental laws result in increased costs on suppliers.  And these costs will be passed down as price increases onto you the buyer.  

It costs more to get clean and expect the price increases to be passed on to you sooner or later.  

Moreover raw material prices are rising as well.  

But on the bright side, the cost increases will affect everyone equally so you will not be at a disadvantage.  

Quick favor

I’m doing an informal survey of businesses who’ve been affected by the China EPA factory closures – Can you take 5 minutes to share with my your insights by filling out this short survey?  I’d appreciate it.  

Click here to take my 5 min survey

A hard stance against “heavy polluters”

If your company is sourcing products from China then there is a major disruption that may be flying under your radar.  Since June of 2017, China’s new Ministry of Environment is taking a hard stance against Chinese factories that are “heavy polluters’.  In fact in the most recent round of factory audits, China’s environmental crackdown has shut down tens of thousands of Chinese factories with no end in sight.  

The effects of decades of massive manufacturing growth has taken its toll on the environment.  Now China has some of the most polluted cities in the world.  Air purifying equipment and anti-pollution masks sell out often. Groundwater is polluted making safe drinking water a big concern.  Now the government is doing something about it.

What’s different this time is that a hard stance is being taken in making sure that factories are compliant with environmental laws.  Previously when policies were passed there was little to no compliance.  Many factories were unaware or unwilling to comply so they continued operating in their old polluting ways.  

Now some factories are being forced to cease their production immediately and indefinitely.   And if they don’t comply their power could be shut off leaving them in the dark.  

Power trumps Guanxi

And in this case power trumps “guanxi”.  Decisions are coming directly from the top levels of government so it overrides any relationships factory owners may have at the municipal levels.  If they are noncompliant they will definitely face the consequences if they are audited.  

Lack of transparency with no end in sight

One of the issues the factories face is a lack of transparency.  Government policy details are quite opaque and many factories are not aware of the exact policies that they must abide by so they may unknowingly continue to operate in noncompliant ways and risk being shut down.  

So they face an unpredictable and ongoing risk of being suddenly told to shut down.  And there is no clear timeline which means the factories don’t know when or if they can resume production.

So all of this makes it a very challenging time if you are sourcing products from China.  

Who’s affected?

According to my research, affected industries include but may not be limited to the following industries.  

Affected Industries

  • Textiles
  • Rubber
  • Leather
  • Chemicals
  • Carbon
  • Metal
  • Coating
  • Plastic
  • Dying, Painting, and Printing processes

The environmental audits have been implemented in rollouts that have begun in certain regions mostly centralized in and around Northern China.  The later phases will reach other regions.  Again it’s difficult to pinpoint exact areas due to lack of transparency.  

So far we understand that factories in these regions have been affected

  • Shandong
  • Henan
  • Hebei
  • Tianjin
  • Beijing
  • Zhejiang
  • Jilin
  • Jiangsu
  • Sichuan
  • Guandong

Why is the clampdown happening now?

In 2013, China passed the “10 Measures for Environmental Protection” which outlined measures to improve China’s environment.  This was monumental as China began addressing admitting the environmental problems head-on while in the past China was more focused on developing its economy with manufacturing while paying a huge expense in air, water, and ground waste pollution.  My sources tell me that the newly appointed Minister of Environment is demanding stricter compliance from the factories thus the extensive auditing and review of these tens of thousands of factories.  

Moreover if we look at the macro level, China has an important government meeting in the 19th Plenum, the most important government meeting which takes place every five years.  Taking place on Oct 18th, 2017, the main objectives are to select the top leaders and policies to put in place as a road map for the country going forward.  

Environmental Protection is one of the key issues to be examined.  It would make sense to do a bit of cleaning before the meeting to drum up the numbers and also product some blue skies for them to take credit for.  

Similar supply chain disruptions in China related to major economic, political, and social events have happened in 2016 in the months preceding the G-20 meetings in Hangzhou as well as in 2008 before the Beijing Olympics.  

Other speculators say that another reason is because of a major sporting event and competition at the national level happening in north China in the fall.  In my opinion this is a less probable cause than the 19th Plenum which is the most important event that will set the stage for the future of China in the next five years.  

What do you do if you are sourcing from China and risk being affected?

If you’re factory has not been affected (yet) then now is the time to check with them to ask if they will be affected.  

It’d be smart to ask if their component suppliers are being or will be affected as well.

Note that even if your factories themselves have been audited and approved for production, their component subcontractors may not be so lucky.  If their component suppliers get shutdown then your factory will not be able to follow the normal production process and your product may get delayed as they are left scrambling to find a replacement.  This makes it more difficult to predict delivery lead times as these external factors may be out of their direct control.  

For example if you are manufacturing a mason jar and your glass factory passed inspection but their metal lid subcontractor gets shut down then your factory will have a hard time delivering your product on time as they will need to search for a replacement.  Remember you’re only as strong as your weakest link!

Best practice: Be proactive in communicating with your suppliers!  

It’s important understand that Chinese culture doesn’t encourage people to reveal bad news until it happens.  Often bad news is swept under the carpet until it absolutely has to be revealed.  So it pays for you to be proactive to communicate with your supplier and learn about and minimize the disruption to your supply chain.  

What if your factories are being affected now?  

“Our production scheduling is in total disarray and our suppliers literarily have no idea when they can re-start production.”

Case in point – A friend of mine who has 20+ years experience in China sourcing from a deep base of suppliers is facing a huge headache.  He sources from Chinese suppliers who’s products fall under one of the monitored industries and are based in the Shandong province.  Even though they are compliant, several of his suppliers have been shut down and they have not received any word about the next steps nor when production can resume.  This makes it next to impossible to plan purchase orders for the 4th quarter and pre-Chinese New Year period.  His company headquarters is giving him a lot heat for this.  What can he do?  

Going out of China

One solution is to go out of China.  Since my friend’s industry is one of the targeted ones in the new environmental policy regulations, he’s shifting his production to India where their production has not been impacted by environmental policies.  

Depending on your industry, some products can be manufactured in other countries such as India, Thailand, Vietnam, etc.  This will circumvent the problem until the the disruption passes.  Also a general rule of thumb, it’s a good idea to diversify your risk by not putting all your eggs in one basket in China.  

In summary, China can be a non-transparent place for doing business.  Social-economic and political events can and will affect your business here.  So it’s your responsibility to have a backup plan to reduce the impacts of these events on your supply chain.  Now would be a good time to talk to your suppliers to find out the extend of the problem and work out solutions.  And if you’re facing the impact of these problems head-on, it may be time to consider other countries so you don’t put all your eggs in one basket and have them all break with one sudden jolt.    

Have your suppliers been affected by the environmental audits in China?  If so, hit reply and let me know what happened and what you’re doing about it.  

-Gary

 

Author: Gary

I work with many Amazon sellers to help them source from China. I’ve managed multimillion dollar sourcing campaigns and have been sourcing from China since 2008. I also am an Amazon Private Label seller myself so I know what you’re going through. My goal is to teach you how to source from China quickly and easily so you can own a 7-figure online business.

65 thoughts on “China “EPA” crackdown shuts down tens of thousands of factories… with no end in sight *UPDATE*”

    1. Hey gary, rather than trying to find a way aroubd the environmentsl crackdown, why not help your readers in trying to find the forward thinking environmentally conscious factories, whose prices may be a bit higher but which may be more reluable and more importantly better for the health of our planet? We should be supporting the good actors, the progressive thinkers- i just dont know how to find them very easily. Help!

  1. Our fty have not been impacted by pollution control, but mill have.
    All the fabric delivery cannot be on time, this is the big problem.

    1. Hi Ting,

      Thanks for sharing that insight. So since the mill was affected what will you do about the delay? I’m curious where is that mill located?

      Thanks,
      Gary

  2. what China did is quite good for our planet. your solution is out of China. I do not think that it is good solution. In other low cost countries, factories will continure pollute our planet, buyers like us encourage polluted factories to produce polluted products. I wish all countries do the dame thins like China to stop polluted factories, this will occur us a short hurt, but in future, this action will give us a beautiful future. and all buyers in the world buy clean products from clean factories.

    1. Hi Juan,

      Thanks for your insights. From an environmental perspective – I agree that China is doing the right thing to cleanup the environment. Wintertime air pollution here in China is scary.

      But at the same time, there will be growing pains for manufacturers and businesses. It may be a bumpy ride but I’m optimistic about the future.

      -Gary

    2. Totally agree with you,as my factory produce tartaric acid,a kind of chemical ingredients,before the policy,we used coal fired boiler,after the audits we changed to the gas boiler and only took half month,it’s hardly any effects to our clients,while we will make China better and better,so please don’t change your market when you read this article,it’s totally lopsided view

  3. i have many suppliers in china and i worked there since 2000 , sooner or later should happen , so also i have some suppliers in india, now still we have no clear ideas abt , so we are trying to check what do for future, just from end of august the suppliers are saying abt this problem .
    Thanks Gary, for your support

    1. Hi Antonella,

      Thanks for your feedback. Yes it seems that India is becoming one of the alternatives. How are your suppliers in India working out for you?

      Gary

  4. Our fty have not been impacted by pollution control, but mill have.
    All the fabric delivery cannot be on time, this is the big problem.

    1. Hi Jenna,

      You’re correct. Many dyeing mills have been affected because they may be heavily polluting beyond the EPA’s measures. So what will you do given the fabric delivery delay?

      -Gary

    1. Depends – is the flooring painted or treated with chemicals? Then it may be depending on your factory conditions depending if they’re compliant with the EPA regulations. I would do my due diligence – better safe than sorry!

      -Gary

  5. Not so easy to exit China in many industries as there are sometimes, no alternatives….plus you can ask suppliers to update on the situation but they can tell you what is happening now but not tell what could happen in the near futur…Last but not least, suppliers are smart and they are starting to putt pressure now on prices although negotiation is already done….

  6. Dear Gary,
    Very insightful article. Thanks lot for the awareness.

    It is interested to see that your “affected industries” list did not include solar panel manufacturing industry (if not covered under different category). The vast majority of solar panels are manufacture in China and the environmental impact must be significant.

    In that aspect, please elaborate how the solar panel manufacture industry affected due to these new environmental regulations.

    In any case, I am very enthusiastic to see such actions from China. What’s the point of economic growth at the expense of future generations.

    1. Hi Srinath,

      Thanks for your comment. I agree the solar panel industry has a large impact though not sure if this is one of the highly polluting manufacturing types covered under the compliance measures. I will keep my eyes open and keep you updated as I find out more.

      Best,
      Gary

      1. Dear Gary,

        Thank you very much for the reply.

        Yes, please update what is happening in the solar panel industry with regard to the new environmental reforms.

        The point is that the whole global solar industry virtually depends on China for panel manufacturing. A minor change in China may cause a huge impact on the global solar panels markets.

        Your insightful information will definitely help the solar EPC providers worldwide.

  7. Thanks for creating this awareness.
    China needs to go through this, and so does other countries like India, so sourcing out of China will only solve the issue temporarily.
    Maybe we should look into how to help the existing factories to improve the issue now, and avoid a complete shut down, which is costly for all parties.

  8. Thanks for your useful information, Hary.

    We are fabric manufacturer in Vietnam. But we also get some influences from new policy of China. Many Japanese garment makers and traders come to us to carry out some surveys. They share that they are buying from China but because of those changes they want to find alternatives. Japanese government also encourages domestic enterprises to source from other countries like Vietnam, Thailand and India.
    Till now, I am not sure that Japanese partners will see Vietnam as a good sourcing destination or not. But I am really optimistic that those changes could have a possitive influence on us.

  9. All Chinese industries have been effected even wood products eg flooring and plywood. These closures have had a huge impact on everyone out here. I have been manufacturing & sourcing goods since 1996 in China and have seen lots of good and bad changes over that period but not all factories pollute the environment some have made big improvements to their working conditions. The main impact which has not been mentioned in your report is there is a huge shortage now of raw materials caused by the major shut downs. No one has got any stocks and raw material prices are increasing weekly at crazy prices. I source silicone rubber for one UK client and it has risen from $2.85 kg to over $4.00 kg in the last 4 weeks and still rising. Metals/plastic’s have all increased, Zinc has risen by 10%. Even simple things like carton box’s for packaging have shot up in price and at the moment difficult to purchase because of shortages. So you can only expect all exported goods from China is to increase in price for the next few months before things stabilize.

  10. Gary,
    I appreciate your article.
    The critical piece is how you build your options in China. The vetting of factories, 3rd Party suppliers and established Inbound protocols..keeping a tighter leash on your factories. Not having vetted alternative sourcing is vulnerable.
    Pollution control in China is not new, environmental conditions in some areas are excessively below standard conditions…this is a 20 year, overdue purge from China “EPA”.
    You knowing your factory, having them aligned with your Compliance with all required certifications and credentials, puts you in a much better position.
    Always have options in China.

  11. Dear Gary,
    Very interesting informations from you.
    It’s also impact on Mining companies that supply iron ore. Could you update us on this way?
    Congrats

    1. Dear Mauricio,

      Mining involves many VOC (Volatile Organic Compounds) which are one of the key components that are being controlled by the MEP. So the effect could be severe on this industry.

      What are you seeing from the Vale perspective?

      Thank you
      Gary

      1. On the steel makers markets, environmental is the biggest issue always. If steel factories closing in China, só impact not only who sourcing it, but impact on iron ore mining companies. Solutions to solve environmental issues are available, but need completely interest and engagement to do it.

  12. Hello Gary ,

    Very nice piece of work . For my understanding do you think that after the 19 th Plenum they will go back to business as usual ? Because they like to bring in some blue sky as you mentioned it before the meeting ?
    Or do you think they will structurally shut down plants if they don’t take counter measures for their pollution ?

    Would be nice to here your thoughts about this .

    kind regards ,

    Rudi

  13. Dear Gary
    whats the situation of Dye and dye intermediates and chemical industries. how many factories has been closed there?
    is the closure temporary in nature or permanent.
    also is the crackdown is going to worsen further?
    i am planning to shift the vendor from china to India accordingly.
    Thanks

    1. Dear Alex,

      Dyeing mills have been hit hard. Many of them have been affected and/or shutdown. I don’t think many will reopen.

      India is a popular alternative now.

      -Gary

  14. Hi Gary,

    Nice articel.
    We as a Belgium importer of food additives are also impacted. A lot of our factories had to pull the plug from one day to another. The problem is that they’ve been left in the dark without knowing what to do. The government doesn’t give them any explanation how they should “green up” the production . With this measure we as a distributor need to alert our customers of what is going on in China. Prices and deliveries are very unstable but I’m afraid it’s only the top of the iceberg….

    Best regards,

    1. Hi Thierry,

      Thanks for sharing. You’re right there is not much transparency when (or if) production will resume. Makes it very difficult to plan the supply chain.

      Hope things improve for you soon. Please keep me posted.

      -Gary

    1. Dear Bobby,

      Perhaps they may be affected if they are painted or chemically treated. Have you contacted your suppliers to find out if they were affected?

      Gary

  15. Gary,

    Is there a list of manufacturers that are already compliance with the EPA regulations? Once a company gets audited and “certified” do they received some kind of compliance certification? Is there a list of manufacturers that are currently closed due to pending audits?

    We purchase fasteners from China, so steel mills, cold heading companies, heat treaters, and platers will effect our source of supply.

  16. Dear Gary,

    Thanks for your article.

    We are lucky producer of chemical products (Citric Acid and Sodium Citrate). As our factory was moved to Cambodia from China in 2014.

    I hope the Chinese manufactures can solve this issue and improve their environmental policy ASAP. All are based on safety and health.

    Kind regards
    Cathy

  17. Gary,
    Good comments we are moving some product back to Taiwan and working with new factories in Vietnam hopefully to diversify our sourcing for the future. Short term there may be some things that are delayed and go out of stock.

  18. On one hand, we blame that environment in China is seriously polluted and become “unlivable”; but on the other hand, we argue that China latest clampdown against polluting factories disrupted our orders and purchasing plans and even suggest to ” go out of China”… So you want to continue to pollute the ecology in those countries—also our ecology in fact?

    1. Hi Henry,

      Thanks for sharing. You’re right – it is a Catch 22. On the whole, I feel that this is a positive measure we are seeing and it’s good for the world in the long term.

      -Gary

  19. Dear Garry,
    you are exactly right . I may add also the behavior of some nationals owned private companies who have decided that it was time to leave the floor for brighter future elsewhere .. . Many individual are considering that they made enough money during past years ,and that personal risk is getting too high … so they prefer to pro-actively close their factories ahead of any gov inspection .

    1. Hi Claude,

      I agree 100%. Many factory owners are approaching retirement age and rather investing more in less polluting (and more expensive) equipment, they are considering scaling back or exiting this industry entirely.

      -Gary

  20. Thank for good piece of information . Indeed business is affected due to above
    . I happen to suffer twice . Once around G 20 and second time this July / August .
    With factories based in jiangsu province . Being an agent hvg india and Bangladesh offices as well I cud manage to shift the sourcing and manage .

    1. Hi Rama,

      Thanks for the insight. Yes, we are seeing sourcing moving out of China for certain industries to India. Bangladesh is another option.

      -Gary

  21. Hello Gary,
    Your article has missed to mention a very big global garments player, Bangladesh. They are 2nd largest manufacturer of RMG in the world after China. Here over 2000 factories are now fully compliance to environment that are monitored and certified by European & American buyers’ forum.

    Yet we thank you for your information.
    Nazmul
    Saint John Textiles
    Dhaka

    1. Hi Nazmul,

      Thanks for sharing. I agree Bangladesh is becoming a major player in garment manufacturing. Not sure what the local pollution emission standards are though. Could you tell us more?

      Thank you
      Gary

  22. Hi Gary
    thank you so much for this- great summary of the situation.
    in your view and opinion- until when will this have an effect on China supply? when do you estimate a return to stabilization?
    In addition- we’ve heard also about a wave of safety audit about to take place. Do you feel this would have the similar impact to that of Ecology?
    thank you

    1. Hi SM,

      From what we are seeing and hearing, the increased enforcement is here to stay. In other words expect China to reinforce these standards going forward. The heavily polluting industries may either shutdown of manufacturing moved out of China.

      I hope that helps.
      -Gary

  23. Dear Gary,

    Thank you for all information.
    We work with ceramics from Zibo (Shandong province). We have a problem with closed factories.
    In all the news that I have read until now, ceramics are not a controversial pollution point, but their factories are closed for certain reasons.
    We are in contact with our sourcing company but they say that for now the factories stays closed.

    I’ll read your texts with these news if there are some new information, please share them with us.

    Thank you!
    Regards!

    1. Dear Marco,

      Thanks for sharing. I know that Zibo, Shandong has been hit hard by the shutdowns. Ceramics may involve certain paint or treatment processes that can be polluting. Please keep me posted as well in regards to when your factories reopen.

      Thanks,
      Gary

  24. thanks Gary for lot of information . our company import furniture from north china and facing challenges delayed shipments up to 4 months and no future shipment promises done by any supplier . your suggestion very informative to source products from other countries like Vietnam
    but hard to find suppliers for small orders as bigger factories in Vietnam requires larger opening orders .

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