[Editor's note: This is the first in a two-part series that examines the water risks and solutions facing Chinese supply chains.]
Droughts in the north, floods in the south. Toxic industrial runoff, overdrawn ground water and even bloated pigs and dead ducks in major waterways. The list of China's water woes is long and appears to be growing.
We all know that China is the supply chain hub for the American economy. Nearly everything we use -- mobile phones, TVs, handbags and even U.S. Olympic team clothing -- is made in China, where export jobs support 200 million workers.
Yet despite the avalanche of news reports and stomach-churning photos, I've found it challenging to get to the bottom of the many water risks facing the industrial suppliers of U.S. companies. Media censorship and poor government data means limited access to information for many corporate managers we speak to at Ceres who are only beginning to understand the complicated nature of the water risks facing their Chinese supply base.
So, what do we know about the Chinese water situation?
Some statistics speak for themselves: At least 50 percent of Chinese urban groundwater and 90 percent of urban rivers are considered polluted. About half of all wastewater is released into the environment untreated, affecting ecological and human health alike. And a government assessment released just last week found that half of China's rivers -- 28,000 in all -- have simply "disappeared" since the country's waterways were last surveyed in the 1990s.
Bad water means a weaker economy. The World Bank says that on the low end, China's water woes already cost the country at least 2.3 percent of GDP per year. Some are saying there is potential for the economic burden to get significantly worse. Investment manager HSBC notes that approximately 45 percent of China's GDP currently originates from water-scarce provinces, and that the country is betting on additional industrial growth in 14 of the most water-stressed provinces.
Sounds bad, right? But what does this mean for your suppliers, or your suppliers' suppliers?
Water coming into factories is often too polluted for use and pre-treatment is pricey
Although China mandated the construction of thousands of new wastewater plants in its 10th Five-Year Plan (2001-2006), far fewer actually were built due to funding shortfalls. Of those that were built, half either were operating improperly or not at all. The state's low capacity to treat water supplies has placed a heavy onus on businesses to invest in technology and services to provide clean water required for their operations.
Next page: Impact on production
Water shortages are still slowing down production
Forty-nine factories closed in Beijing in 2009 due to water shortages, while some steel factories and power plants were moved to the coast. Every year Chinese factories face water shortages on the order of 12 million cubic meters -- that's about 24 times the volume of the world's largest super tanker. Reports have suggested that this loss in industrial output could be worth as much as $28 billion annually.
Industrial energy costs are going up, in part due to water issues
The greatest limiting factor to China's rising energy demand will be water availability. About 85 percent of China's power capacity is in water-scarce regions and in the first six months of 2011, severe drought in the south crippled hydropower generation along the Yangtze River and also impeded shipments of coal to thermal power stations. The results were staggering: In the first quarter of 2011, China's five largest utilities reported nearly $1 billion in losses from their coal-fired power plants. These losses were passed on to industrial users, whose electricity rates were hiked, while residential users' rates remained unchanged.
Western companies face significant reputational threats over pollution
It's not clear if the actual number of industrial water pollution incidents is on the rise. What we do know is that the Chinese media is freer to report on incidents that do happen -- and loudly. In February, a reporter in Weifang in Shandong province wrote a blog post that accused local paper mills and chemical plants of pumping carcinogenic industrial waste directly into the city's underground water supply and encouraged others to upload pictures of their polluted waterways, triggering a flurry of other bloggers across China to post similar evidence and accusations, prompting the local government to offer a $16,000 reward for anyone with information.
In this context, Western companies and their suppliers are growing targets for disgruntled citizens and NGOs. Recent campaigns by the influential Institute of Public and Environmental Affairs have focused on significant wastewater violations linked to the Chinese suppliers of more than 40 global apparel brands. Greenpeace has mounted a parallel campaign demanding that the fashion industry "detox" its suppliers' factories, eliminating all toxic wastewater discharges. Similar campaigns against Apple and others in the IT sector also have contributed to a broader discussion of supply chain responsibility in the industry as well as a number of new company commitments.
But enough with the doom and gloom; in my next post, I'll look ahead to signs of enlightened regulatory efforts, as well as new data resources and initiatives that are helping reduce the water impacts of Chinese manufacturing.
Jonars Spielberg contributed to this piece.