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Where Is Chinese Manufacturing Headed And How You Should Manage The Risks

Situation Analysis

The winter of 2017/18 was a watershed in the fight against the persistent and worsening pollution by the Chinese government. The unprecedented drastic measures taken to shut down production in a vast industrial region of China led to a major disruption in supplies of generic agrichemicals to the world markets. Prices of some products rose to more than double those preceding the shutdown. Many products were either not available at all or only a portion of the usual winter demand was met.

Back in 2013, I made a speech at the Agrochemex conference held annually in Shanghai, and the topic was “Chinese agchem manufacturers winning and keeping overseas customers: A sustainable approach.” I urged Chinese agchem manufacturers to go downstream in the international supply chain by getting their own product registrations and collaborating with national distributors in the various country-markets to avoid relying heavily on just the exports of technicals and unbranded formulated products. I also strongly emphasized that the serious pollution prevailing at the time was a major concern and the status quo was unsustainable. Proactive industry-led initiatives and drastic measures were needed. Therefore, I recommended that manufacturers adopt international standards in pollution control as well as having an internal code of conduct pertaining to a sustainable approach in production.

Over the past two decades, there has been a lot of talk of reducing the number of agchem producers in China as one of the measures in containing pollution which would lead to a more sustainable industry. As far back as the late 1990s, there were reportedly 2,000 agchem production plants in China with about a quarter of them producing technicals. However, instead of the planned reduction in output and number of plants, the past decade saw massive increases in production capacities of some products such as glyphosate. In addition, many newer generics were manufactured in China over this period.

While by and large, backyard production in remote villages and areas had stopped, there was an overall major growth in agchem production output and exports, arising from increases in production volumes of older products and increases in the number of newer generics produced as well. To give a sense of the extent of the massive growth in exports of agchem out of China, note that it was worth only around $500 million back in 2000, and jumped to $2 billion 10 years later. In 2017, it is estimated to be a figure just shy of a whopping $5 billion!

Up until now, there has always been a conflict between the need for environmental protection, which means either reducing production or having much more expensive and sophisticated anti-pollution equipment and processes installed, and generating jobs for the seven million new graduates every year. Sustaining the provincial and national economic growth has always been the primary focus. The ability of the government in taking the drastic measures over the past winter is a sign that it is confident in non-polluting industries generating the needed economic growth to provide the jobs needed. The past decade saw the emergence and rapid growth of digital economy companies such as Alibaba and Tencent into global-scale corporate giants, both reaching market-capitalization of over $500 billion in 2018 on the New York Stock Exchange!

With the new confidence of the government that production closures of polluting industries would not cause significant social upheaval, five years after I made the aforementioned speech in Shanghai, the drastic measures in closing down production in many plants over the past winter period took place. As discussed in my earlier article, published in this magazine in March 2018, the drastic measures did have a positive effect in terms of containing the severe winter pollution in the most affected regions of China. However, it is a still a long way from meeting World Health Organization-prescribed standards.

Situation during the next five to 10 years

Going forward, we can expect that many plants — even after they have qualified and obtained the needed permits to resume production over the spring, summer and autumn periods — will have to operate at a reduced capacity over the coming winter of 2018/19. I surmise that it will be a case of observing what reduction in production will do to the winter pollution levels and then deciding what appropriate measures will be needed over the following years.

In the future, when planning further drastic measures, the government will have to take into consideration the plants’ losses and economic pains.  Aside from that, the disruption in supply hurts the reputation of China as a reliable supplier of products to the rest of the world.

Having said that, with new and massive growth in the non-polluting digital economy during the past decade, and with Alibaba and Tencent providing employment to 50,000 and 40,000 well-educated employees, respectively, the government is expected to take more drastic measures against all polluting manufacturing industries without much hesitation.

What this means is that the agchem manufacturing industry will continue to face the kind of drastic measures we saw over the past winter. With the need to improve environmental pollution further to meet international standards over the coming years, disruption in supplies and higher prices of products will certainly be the new normal.

Managing your risk as a manufacturer

As discussed in my recent article mentioned above, Chinese agchem manufacturers will have to seriously consider having a plant outside China so as to manage their risk in facing production shutdowns over the winter periods and this, despite meeting the ever challenging anti-pollution standards. Those not able to meet the standards will no doubt face a permanent shutdown. In Shandong Province alone, planned permanent shutdown of plants unable to meet new pollution standards have already started since 2017. The aim for one city there is to have 30% of the plants shut permanently by 2020.

I have cited India as a good potential location for a second production site since India is not only a large agchem market valued at $6 billion by 2020, it also has a significant agchem manufacturing industry. Furthermore, Prime Minister Modi’s drive towards “Make in India” has made it difficult for import of agchem products from China, and is providing further need and incentives to have technical products made in India. This needs to be done if the Chinese want to partake more effectively in the large and growing Indian agchem market.

If, for cultural and political differences, the suggested and needed collaboration between Indian and Chinese manufacturers cannot take place or take place fast enough, Southeast Asia could be a possible location for the second production plant due to its proximity to China. From market size and opportunity standpoints, a South American location is where it should be, but the long distance from the home base is a downside. There are many players there hungry to collaborate, just as there are in India.

Managing your risk as a buyer

With this new world order in generic agchem manufacturing, as a buyer of generic agchem products, the immediate step to take ought to be to have a second or even third plant in China qualified and registered. Obviously the additional plants need to be located in a different region to the first source registered. This is in case the production disruption is confined to a certain more polluted region only.

Due to the disruptions in supplies from time to time, buyers need to make wise decisions in terms of when to buy and when not to buy, and how much to buy, based on calculated risks prevailing and the sort of measures that can be foreseen as described here. Sourcing products out of China has therefore become even more complex compared to when my article titled, Why sourcing from China is so frustrating” was published in this magazine in 2013.

Conclusion

With the new world order dawning upon the Chinese agchem manufacturing industry, my speech made five years ago in Shanghai on the need of the agchem manufacturing industry to control pollution is even more relevant today. The Chinese manufacturers need to go out and explore the golden opportunities more than ever before. This time, it is not just a matter of obtaining product registrations and selling products under their own brands through collaboration with local distributors with market access, but more on having a second manufacturing site as well.

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