Sustainabilty in China will Alter your Game Plan. Stop Whining and Take Control

Friday, July 27, 2012 1:27
Posted in category The Big Picture
Comments Off on Sustainabilty in China will Alter your Game Plan. Stop Whining and Take Control

On a fairly regular basis, I am asked to meet with executives and give presentations about the impact that issues of sustainability will have. For most groups they are interested in the impact to the economy, either as an opportunity or as a potential risk, and what I am coming to understand is (1) While there is no end to the coverage, many outside of China still do not have a tangible understanding of the severity of the problems (2) many are still in denial that China would want to do anything about it, and (3) few have planned appropriately.

Which, like the history that many firms have of failing to oversee their quality in China, is a fatal mistake as it leads to a massive gap in expectations. JCI found about this the hard way when their lead battery facility was closed last year. A factory that was likely given incentives to open had been surrounded by residential blocks, which should have served as a warning sign that a Plan B should have been developed. Instead, JCI found themselves shuttered, and were very public about it.

Globally where this gets important is that as the “workshop of the world” any effort that China undertakes to invest in a cleaner economy is likely to have an impact on the availability of “dirty” products. A cycle that began a few years back with chemical firms feeling a lot of pressure through NIMBY protests as well as over zealous local governments who had no choice but to shut down polluting industries.

A situation that has gained momentum in other industries as well, as the MarketWatch article China’s green policy, forex hit European buyers highlights:

There was a time when buyers from across Europe would flock to China to buy up everything from stone tiling to children’s clothing, fueling a booming trade between the two economies.

But Beijing’s push to clean up its polluting industrial base, along with rising labor costs and unfavorable foreign-exchange rates, is altering the nature of China’s role in global trade, and with European buyers in particular.

Now, at this point I feel compelled to point out that it was not the Chinese government who are at fault here, nor is it their actions that lead to the demise of the industry and consumers being hurt. No, it is the industry’s, and more to the point, it is a direct result of firms who took no issue with moving their supply bases from centers where standards were high and the environment was protected to areas where enforcement of laws (China does have laws) is lax and costs could be cut through the deployment of environmentally damaging practices.

And these firms are now being held accountable, first by local governments forcing investment/ relocation, and then through consumers who are seeking out other products whose costs are more in line with their own expectations.

Which to me is the ultimately lesson of corporate sustainability as it relates to China, or anywhere on the orb for that matter.

The trajectory is pretty clear at this point. Regulations, consumer expectations, and civic action are all on the rise as the externalities of business as usual produce blowouts in the economic, society, and environment… and regardless of how had an executive or firm may wish it weren’t true, this is a fact that will have a negative impact on their model (and bottom line) should they choose to keep their eyes closed and fingers crossed.

APP is a great example of that. So is Adidas. So is Apple. firms who all used supplier relationships, and arm length contracts to protect themselves legally, but failed to understand that they would be be held accountable by external stakeholders when the supplier failed.  They put their brands at risk, even for a brief moment in time.

Which is the core issue I have with these firms.  By burring their heads in the sand, and hoping the “storm” will pass, the executives are essentially creating conditions whereby the no longer control the situation.  And what I am beginning to see in the market is a condition where firms who are not responsible are being held accountable, which costs the firm a multiple of what it would have had they actively engaged and addressed the problems ahead of time.  Through their process.  and it is firms that understand that difference that are able to create a proactive set of policies and practices that reduce their long term business risk in China, and the rest of Asia.

The others?  Well, perhaps watching this Tony Robbins clip will serve as an aid.  Focused on the person, he covers the reasons why you should be in control, not others, and the downsides of ceding control… but it could just as easily be about the firm and how management teams act to maintain control

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