With the new ‘Water Ten Plan’, China’s War on Water Pollution is at its peak and the textile industry is among the industries which will be hit the hardest. This was reaffirmed with the latest and most stringent water policy to date in China, the Water Ten, which is actually an ultimatum for the industry to reinvent itself and change – if it wants to survive.
Textile manufacturing alone accounted for 10% of industrial wastewater and is more polluting than coal mining & processing
For many years now, the textile industry has been singled out by the Ministry of Environmental Protection (MEP) as one of the most polluting industries. The latest statistics show that textile manufacturing alone (not including chemical fibres, garment & leather) discharged 2.15 billion tonnes of wastewater in 2013. This is about 10% of total industrial wastewater that year, putting textile manufacturing in third place after paper & pulp and chemicals in terms of wastewater discharge. Coal mining & processing came fourth and surprisingly, discharged a third less than textile manufacturing.
Moreover, as we highlighted in our previous report “Dirty Thirsty Fashion: Blindsided by China’s water wars”, textile wastewater discharge is likely underreported since only around 31% of enterprises in the sector were monitored in 2011. So actually, there could be far more pollution!
If China wants to win the war on water pollution, it has to deal with the most polluting industries, especially textiles. As warned last year, China’s new environmental law and rising wastewater discharge fees are significantly increasing pollution costs and violation fines, as high as 30x! To survive, textile companies need to fundamentally change the way they do business.
1. Maximum 3 years to meet water pollution targets – over 90% factories face shutdown risk
Over 90% of textile factories are SMEs. These are the ones that face shutdown risks given the significant capital expenditure required to comply with the more stringent regulation; plus high operating costs, which will eat into their limited profit margins (see chart below).
According to the new Water Ten Plan, the window period for these companies to meet pollution discharge standards in order to survive is only two to three years:
- By 2016, small factories in textile dyeing and finishing that fail to comply with new national standards will be shutdown;
- By 2017, textile dyeing and finishing and leather factories should complete technological upgrades; and
- By 2017, all industrial clusters & parks should have centralized treatment facilities and real time monitoring of pollution discharge. Those in Beijing-Tianjin-Hebei, Yangtze River Delta and Pearl River Delta have a shorter deadline of 2016. Non-compliance with the above deadlines will lead to suspension of operations of the entire industrial cluster and/or industrial park and new projects within the park can also face suspension.
The next two to three years will be painful for many small textile manufacturers but also vital for the sector as a whole. The changing regulatory landscape clearly will have impacts on the business landscape.
2. Equipment upgrade also mandatory - nearly three quarters of textile wastewater not recycled
Water use is another issue. Textile manufacturing currently accounts for about 7% of total industrial water use. 80% of this is used in the dyeing & finishing process, which is also the main contributor of textile wastewater. According to Hu Kehua, deputy Director of CSR office of the China National Textile and Apparel Council, only 26.9% of water in dyeing & finishing is recycled. Thus, there is a lot of room to improve water reuse along the whole textile production line.
The new ‘Water Ten Plan’ also sets targets for water recycling and reuse in the textile industry:
- By 2020, water use in the textile and other six water-intensive industries (power, iron & steel, chemicals, paper & pulp, petroleum and food & fermentation) should meet the advance levels of industrial water quota standards; and
- Textile dyeing & finishing and leather, along with four other industries (iron & steel, chemicals, paper & pulp and non-ferrous metals) will need to recycle their wastewater. For factories in the textile dyeing & finishing located in water scarce regions, they are required to fully reuse their water to be able to access new Water Use Permits.
MIIT & MWR set water efficiency benchmarks indicating increase investment in equipment in the next 2-3 years
On 26 January 2015, Ministry of Industry & Information Technology (MIIT) and Ministry of Water Resources (MWR) jointly listed 12 factories including 3 textile ones from Shandong and Zhejiang, as the first batch meeting national benchmarks on water use efficiency. For instance, for cotton, the water use of a factory should be 0.88m3 per 100m of product produced.
To achieve these targets, equipment upgrades are mandatory. MIIT has issued a list of water-intensive processes, technologies and equipment that are not to be used in textile & dyeing factories. Six types of dyeing machines made the list and elimination deadlines were set for December 2017 or 2018; this indicated investment in new equipment in the next two to three years.
3. Only 2 years to comply for water challenged regions where >80% of yarn and cloth are made
Around 80% of yarn, 89% of cloth and 89% of chemical fibre in China was produced in water challenged regions (Dry 11 and At Risk 9).
At the provincial level, textile manufacturing is heavily concentrated in Zhejiang, Guangdong, Jiangsu and Shandong. These four provinces accounted for around 45.2% of yarn, 63.1% of cloth and 79.2% of chemical fibre production in 2013 (see charts below). This is 1.5%, 1.5% and 2.3% respectively less compared to that in 2012.
Four key textile provinces are all highly developed but also face water challenges
These four provinces are located at the deltas of the Yangtze, the Yellow or the Pearl Rivers. They are also amongst the richest provinces in China with high urbanization rates, but all face water challenges. According to the new Water Ten Plan, future production will likely be limited in these provinces:
- Textile dyeing & finishing and chemical fibres are amongst industries that will be strictly controlled along the seven key rivers including the Yangtze, Pearl, Yellow Rivers and four others; and
- Textile dyeing & finishing is also amongst industries that will be gradually removed or shutdown in urban areas.
4. Centralized treatment eases SMEs’ cost pressure but will shift risks “beyond the wall”
For different processes within textile manufacturing, the government has set specific industrial wastewater discharge standards, such as the ‘Discharge Standard of Water Pollutants for Dyeing and Finishing of Textile Industry’. In these kinds of standards, different discharge limits are set for so-called ‘direct discharge’ and ‘indirect discharge’:
- ‘Direct discharge’ refers to the case that a company discharges wastewater directly to the environment such as soil or natural water bodies. In this case, the company needs to meet a stricter discharge limit indicated in the industrial standard; and
- ‘Indirect discharge’ refers to the case that a company discharges wastewater into public sewage treatment systems. In this case, a less strict limit is often set.
Some SMEs cannot afford to comply with ‘indirect discharge’ so, the textile standard was revised to ease the pressure & lower costs
However, some SMEs cannot even afford to comply with ‘indirect discharge’ limits which are less strict. The government acknowledged these difficulties and hence proposed a revision to the ‘Discharge Standard of Water Pollutants for Dyeing and Finishing of Textile Industry’ (GB 4287-2012) refining the boundary of a factory for ‘indirect discharge’. On 7 April 2015, the approved amendments were finally released, which primarily include:
- Wastewater discharge into urban wastewater treatment plant or through urban sewage pipelines are clearly categorized as ‘direct discharges’ and should meet the direct discharge limit (stricter);
- For ‘indirect discharge’, it loosened the CODcr limit from “200mg/L” to “500/200mg/L”:
- The “500mg/L” limit applies to textile dyeing and finishing factories located in industrial parks, development zones and industrial clusters with centralized treatment facilities. The centralized treatment facilities should be able to collect and then conduct pre-treatment (not mixing with other sources of wastewater);
- For the centralized treatment facilities, the discharge after pre-treatment should meet the “200mg/L” limit; and
- The ‘200mg/L” limit applies to situations other than those described above.
Industrial parks now allowed to collectively treat wastewater to meet ‘indirect discharge’ limit
In line with our previous analysis, the revision allows a qualified industrial park to act as a collective to comply with the ‘indirect discharge’ limit previously set for an individual factory; meanwhile, factories within this industrial park can discharge their wastewater into the collective treatment facility at a looser limit. Such arrangement still ensures the quality of wastewater discharged into the public wastewater system, but greatly reduces land use, CAPEX and OPEX required by individual companies to comply with standards. However, the Institute of Public & Environmental Affairs (IPE) worried that under the current situation between factories and wastewater treatment plants, “centralised treatment brings centralised pollution”.
It is worth noting that as companies move into industrial parks or clusters and adopt centralized treatment, they may face other rising costs. For instance, if the company previously withdrew water directly from a river or a well, it will have to switch to water from a public supply system and pay a higher industrial water tariff. Some industrial parks also require companies to use clean energies. Factories which cannot afford such changes may have to shutdown.
5. Investment in water efficiency gains can be profitable
From the revision of the textile dyeing and finishing standard, we can see that the government is “pro-business”, as long as it is not at the expense of the environment. Meanwhile, a few industrial programmes led by NGOs and/or brands have been set up to help selected companies improve their water management:
- HSBC’s Water Programme for Industrial Water Management provides technical support to selected factories to find opportunities to increase water efficiency; and
- NRDC’s ‘Clean by Design’ initiative and Solidaridad’s ‘Best Mills Initiative’ show that it is possible to bring down both water and energy consumption through technological upgrades with relatively short payback period.
Financing initiatives, such as IPE’s ‘Blue Loan’, are available for SMEs
For companies who are not part of the above initiatives, but short of cash for investing in technological upgrades, some on-the-ground financing initiatives are also emerging. One example is IPE’s & CreditEase (a Beijing-based financial services firm) new initiative called ‘Blue Loan (蔚蓝贷)‘. It aims to provide financial support to companies with good records of environmental information disclosure to continue their clean-up and recycling efforts.
6. Consolidation inevitable – big OEMs will likely be the winners
Consolidation of the textile industry is inevitable – we have already seen it happening. According to the latest statistics, as of March 2015 there were 37,517 textile-related factories (textile manufacturing, garment and chemical fibres with principal revenue over RMB20 million), which means almost 1,500 factories shut their doors over the last year or 3.8% lower than that recorded in March 2014. Meanwhile, textile manufacturing had the biggest fall at 4.35%.
Industry consolidation ongoing – almost 1,500 textile factories closed down over the last year though total profits went up
However, the total profit of textile manufacturing during January-April 2015 increased by 6.6% from the same period in the previous year. Although the closing down of factories was largely to do with slowdown of China’s overall economy and falling textile exports, the increased total profit indicates that the tougher environmental regulation rooted out less profitable companies that were unable to survive rising pollution treatment costs and violation fines. Clearly, there will be fewer companies.
With China’s overall strength in manufacturing, textile manufacturing will not move away from China in the short term. Surviving Chinese OEMs will therefore have more bargaining power and be more profitable. However, such this is not good news for international brands who source from China.
7. Chinese government wants the sector to go circular
The water regulatory landscape in China is changing and becoming more stringent. Chinese textile companies should see this as an opportunity rather than a risk. It is a chance to revamp the current “dirty” business model and become cleaner and more sustainable, which should mean continued future operations. Plus, if you do, the government is on your side, which always makes it easier to prosper.
Ultimately, as envisioned by the State Council, the textile industry needs to move to circular economy (see diagram on the right – click to enlarge). This is not simply a CSR exercise, but to really look into opportunities to reduce resource consumption, recycle along the value chain and reuse across sectors (more on circular economy here).
We have seen efforts being made by companies that have realised water scarcity will be a constraint for future business expansion. Recently, as reported by the Wall Street Journal, the Esquel Group – one of the world’s largest producers of cotton shirts – is investing heavily to recycle their wastewater even though the cost is 5x of that to buy the same amount of water.
Moreover, initiatives, such as Redress’s EcoChic Design Award, are encouraging designers to use sustainable design techniques to close the loop on textile waste.
‘Made in China 2025′ plan will help Chinese textiles upgrade along the supply chain
The message from government policies is also clear. In addition to the circular economy plan, State Council’s new ‘Made in China 2025’ Action Plan issued on 19 May 2015, expects to transform China into a leading manufacturing power (read more on ten key industries promoted by the new plan here). Such upgrading will also transform the entire supply chain of textiles from cotton plantation to textile manufacturing to global shipping.
Some regions are trying to be the first “crab eater” with bold plans to adopt new technologies. As early as February 2015, Zhejiang province issued a Development Plan for High-end Equipment Manufacturing (2014-2020). The plan promotes 10 key industries including smart textile dyeing & finishing equipment, which are expected to be energy efficient and environmental-friendly. Following that, two major textile districts in Zhejiang have also come out with more specific strategies:
- Xiaoshan: a district under Hangzhou, which accounted for about 18% of national total chemical fiber production in 2013. The district government issued a plan in March 2015 to promote robots in all textile production lines by 2017 and increase productivity by 20%;
- Keqiao: a district under Shaoxing, which accounted for about one third of national dyeing production capacity. The district government issued a document to further push for clustering and upgrading of dyeing factories: by 2017, all dyeing factories will be moved into industrial clusters and half of them will operate with internationally advanced equipment with lower unit energy and water consumption.
8. The future is bright for OEMs but fashion could still be blindsided
For companies who leap during this transition, the future is bright. And the government wants those lean and mean OEMs to go abroad. On 16 May 2015, the State Council issued a new policy to encourage domestic companies to go abroad:
- Either to establish raw material production factories using local agriculture and livestock resources; or
- To set up textile manufacturing factories in countries with abundant labour and relatively low production costs.
Moreover, Chinese companies are also encouraged to form textile manufacturing clusters covering the entire supply chain in overseas industrial parks. It is estimated that by the end of 2014, more than 2,600 Chinese textile companies established manufacturing factories or trade offices in over 100 countries.
Chinese manufacturers going abroad fits into “One Road, One Belt” strategy but beware shifting of water risks
This trend fits well into China’s ‘One Road, One Belt’ strategy: “….traditional advantageous industries such as light industry, textile and building materials should be led to invest overseas and set up local plants so as to be close to the markets and upgrade industries…”, says Gao Hucheng, Minister of Commerce.
However, as Chinese textile companies expand their operations globally, will associated water risks be shifted overseas? As early as in February 2013, the Ministry of Commerce issued the “Guidelines for Environmental Protection in Foreign Investment and Cooperation”. But, such guidelines are still mandatory, Chinese overseas investments are only restrained by environmental law and regulation in the destination country. No matter where the yarn and fabric are made, the water issues will persist and need to be on the radar of fashion brands.
Brands beware: changes in Chinese textiles will change fast fashion forever
As textile manufacturing changes, what will happen to fast fashion? What is happening in China and to Chinese textile OEMs will change the fashion business globally. Whether they can make this paradigm shift or not, will determine if they “Leap or Fall”.
Key water policy
- Made in China 2025: Are You On The List? - How does the new Made in China 2025 Action Plan fit with other ‘Future China’ plans? Are the ten industries in Made in China 2025 the same as the Circular Economy Ten? Find out why which list matters
- China’s Economy: Linear to Circular - After Germany and Japan, China is the third country globally that has enacted polices to move towards a circular economy. China Water Risk’s Thieriot on how and why China needs to make this transition. Which industries are affected, what is the role of industrial parks?
- Water Ten: Comply or Else – China’s new Water Ten Plan sets tough action on pollution prevention & control. While this is good for the water sector, less obvious is who or which sectors will be impacted. China Water Risk’s Tan on why China is serious about its fast & furious pollution reforms to propel China to a new norm
- China Water Risk’s 5 Trends for 2015 - As China moves to re-balance its economy and environment, Beijing will shepherd the nation towards water, food & energy security. For the Year of the Goat, it is better to be the surefooted goat than the sacrificial lamb so check out our top 5 trends in water for 2015
- 8 Game-Changing Policy Paths - There has been a fundamental shift in planning China’s future growth with changes in regulatory landscape due to multiple polices set & changes in law. Many come into full effect in 2015. Get on top of these policy shifts
- Pollution: It Doesn’t Pay to be Naughty - State Council wants to use the enforcement of law & regulation “to force the economy to transform and upgrade”. See how violation cost surges with daily fines, new standards & discharge permit trading in a bid to push China to go clean
Textile & fashion specific
- On Being Water Conscious in Textiles - Zhao Lin from Solidaridad expands on the Better Mill Initiative (BMI) and provides solid business cases in water savings for the textile sector. See how water & energy savings can result in sustainable & financially viable gains with short payback periods
- Clean by Design: Gaining Traction - Many factories look to MNCs to help address environmental issues that have arisen from textile production but there is scant on ground corporate engagement by brands. See how NRDC’s ‘Clean By Design’ textile mill programme in China has achieved stellar results despite this. NRDC’s Linda Greer expands
- Putting Waste Back Into Fashion - China is clamping down on textiles due to the heavy pollution & waste from the industry. With potential new revenues streams in recycling, hear from Redress CEO Christina Dean on how the EcoChic Design Award’s army of sustainable designers is closing the loop on textile waste
- Risks Shifting Beyond the Wall – In China’s printing & dyeing sector centralised wastewater treatment brings centralised pollution, Ma Yingying of the Institute of Environment & Public Affairs tells China Water Risk. Lax supervision & vague responsibilities between factories & treatment facilities leave brands exposed
- Dirty Thirsty Wars – Fashion Blindsided - CLSA report titled “Dirty Thirsty Fashion: Blindsided by China’s water wars”, examines how China’s water risks could blindside the US$1.7 trillion global fashion industry. Is this the end of fast fashion? Debra Tan expands
- OEM: Stuck in the Middle - China National Textile & Apparel Council’s Hu Kehua on challenges ahead for textile OEMs in meeting the new textile industry standards and brands’ product needs and why joint efforts all parties along all stages of the supply chain including design are needed to move towards a circular economy
- Brand Rankings Through A Chinese Lens - See how global and local brands rank across 8 sectors in terms of their supply chain’s environmental impact in this review of the new Corporate Information Transparency Index (CITI) report by IPE & NRDC