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(originally published by Booz & Company)


The New Chinese Environment

To do business in China, companies can no longer ignore their effect on the country’s water and air.

Just a few years ago, multinational corporations enjoyed a reputation in China as models of environmentally conscious manufacturing; not only did U.S., European, and Japanese firms offer the best jobs with the best pay, they also ran factories that generated far less pollution than their Chinese counterparts. That, at least, was the conventional wisdom. Those days are over.

“There’s been a fundamental shift in the way that multinationals are viewed in China,” says Elizabeth Economy, C.V. Starr senior fellow and director for Asia studies at the Council on Foreign Relations and an authority on China’s environmental crisis. “As China’s environment has become more polluted, as the people have been protesting more and more about the environmental situation, both nongovernmental organizations and the Chinese government have begun to accuse multinationals of exporting their most polluting businesses to China and of not, in fact, employing the best environmental practices and technologies.”

How did this change in attitude occur? First, the reality was always more complicated than the perception. The Chinese government’s enforcement of environmental regulations has been spotty for decades, a fact that some multinationals undoubtedly exploited. For example, the Tianshui Benma Brewery Company, an affiliate of the Danish firm Carlsberg, had been discharging untreated wastewater into rivers in Gansu province since at least the mid-1990s before the local authorities finally cracked down in 2006.

For the most part, however, GDP-obsessed Chinese officials were happy to look the other way, and China’s environmental movement hadn’t yet seized the world’s attention. But as China’s environment worsened — 760,000 Chinese die prematurely each year as a result of air and water pollution, according to a World Bank report published in 2007 — the crisis become a major international news story. Embarrassed by the coverage and by the implicit (or sometimes explicit) charges that the Chinese government was doing little to improve the situation, authorities felt pressured to respond, especially with the Beijing Olympics approaching. And despite the fact that factories run by multinationals represent a tiny fraction of all manufacturing in China, big foreign firms provided a large target, which helped to take the bull’s-eye off the back of Chinese authorities. Hence, these companies bore a disproportionate brunt of the criticism. The same bureaucrats who welcomed multinationals for the jobs they brought to the country now blamed these companies for China’s dirty water, toxic air, and other environmental woes.

At the same time, environmental NGOs like Greenpeace Beijing; the Institute of Public and Environmental Affairs (IPEA), founded by the journalist-turned-activist Ma Jun; and countless other groups were exploding in numbers, ambition, and influence. These organizations rank and rate companies on a variety of sustainability issues, such as their use of poisonous chemicals and how they dispose of their outdated computers. The NGOs typically then out the worst offenders through information campaigns on the Internet and via other media. These groups track Chinese companies as well as multinationals, but they tend to focus more on foreign corporations. That’s not because multinationals pollute more than local firms. (On average, in fact, they pollute less.) It’s because the NGOs get a lot more public relations bang for their buck by attacking multinationals. A poor environmental record for a big Chinese firm may make headlines in China, but the same misstep by a Fortune 500 firm is news worldwide. Last August, the IPEA made a splash when it released a list of 90 multinationals — including Hitachi, Unilever, General Motors, and Yum Brands, which owns Kentucky Fried Chicken and Pizza Hut — that it said have committed water-pollution violations since 2004. (GM and Unilever, among others, have since passed third-party audits and been removed from the list.)

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  1. Elizabeth C. Economy, The River Runs Black: The Environmental Challenge to China’s Future (Cornell University Press, 2004): If you’re going to read one book on China’s environmental crisis, make it this award-winning volume.
  2. Cost of Pollution in China: Economic Estimates of Physical Damages” (PDF)(The World Bank Environmental and Social Development Unit, February 2007): A broad overview of the economic impact of environmental degradation in China.
  3. China Ministry of Environmental Protection Model Cities Web site: A list of Chinese urban areas designated to safeguard air and water resources, even as they encourage new industry.
  4. Institute of Public and Environmental Affairs Web site: Created by Chinese environmental crusader Ma Jun, this online map charts water pollution in the country.
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