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What the China-US trade war means for corporate sustainability

For Chinese companies, 40 years of hard fought market gains are at risk as the trade war with the US intensifies. Here’s how sustainability can help.

In 2018, business in China was turned on its head by the downturn in US and China trade relations. It was not so long ago that the global markets were roaring and the US President had returned from his ‘state visit plus’ in Beijing.

A lot has changed since, and it’s worth thinking about China’s new landscape for international trade and what this means for corporate sustainability. In other words, is there now a new and more urgent driver for corporate sustainability?

The question is: can doubling down on sustainability create a new narrative that helps to shore up business relations between Chinese companies and their international customers?

This is a difficult question because it will require many Chinese companies to think about sustainability over and above their current compliance-only driven perceptions, and consider their corporate values and long-term interests.

To try and answer the question, we need to examine the state of China’s current trade relationships, the prospects for corporate sustainability in China over the next few years. How should companies respond?

The trade war is providing Chinese companies with a full understanding of how vulnerable they currently are in overseas markets and the extent to which they could sustain further disruption should trading conditions remain unchanged (or even decouple with the US).

Sustainability can be the framework for Chinese companies to demonstrate their values.

There is cause for optimism though, because overseas customers want Chinese products. Chinese goods are high-quality and well-priced. Overseas customers don’t want to change to more expensive suppliers and everything else that entails, especially during times of economic uncertainty. Yet they are under public pressure to justify their engagement with China’s supply chain, especially those in strategically sensitive industries, such as technology and telecommunications.

Opportunity in adversity

I believe that the trade problem presents corporate China with tremendous opportunity: bold actions and messages in support of global sustainable development will mobilise customer sentiment. Major announcements from companies on sustainability would take their industries by storm and provide international customers with a compelling, new narrative for engaging their Chinese vendors.

It would also send a clear signal to the world soon after the 40th anniversary of the Chinese economy’s “reform and opening up” that Chinese companies are serious and responsible stakeholders, drawing a powerful contrast in the face of America’s withdrawal from global environmental leadership.

Furthermore, serious action, accompanied by the underlying message of new partnerships between foreign customers and Chinese companies supports China’s broader economic interests: economic growth, market-driven innovation, more international champions, and a green economy.

Fire is the test of gold

The current situation provides opportunity—namely, to bring about a new wave of Chinese corporate innovation by opening its companies to deeper customer engagement in foreign markets. Chinese companies are often criticised for failing to localise adequately. Sustainability can be the framework for Chinese companies to demonstrate their values, innovate their products and reinforce their partnerships in overseas markets by embracing the growing global demand for a more sustainable world.

China’s business leaders have long understood that the future demands they build more responsive and responsible organisations and not repeat yesterday’s inefficient, low-cost manufacturing models that accrue debt, environmental costs, and reputational risk. They recognise the strategic importance of introducing new market disciplines for business decision-making for the future. In other words, sustainability can support these broader strategic business goals and help craft more nimble businesses for the future.

We have yet to see Chinese companies truly engage with the SDGs.

Rigorous integration of sustainability will therefore be a way of improving business efficiency as well as inspiring international customers with greener goods. This differs from previous approaches which minimised corporate sustainability to a passive, compliance-only approach to allow simple market entry. This reluctant, follow-the-leader approach is now out-of-date and will not help protect the hard fought business relationships and markets Chinese companies have won over the past four decades.

A top down approach is needed

What is needed is to fundamentally shake up corporate China’s attitude to sustainability from the top down, by introducing large-scale programmes across the breadth of their organisations in order to draw sufficient public attention.

There are numerous sustainability initiatives that could be deployed to achieve these goals if they are fully grasped and owned by senior management.

For example, the Business and Sustainable Development Commission established at Davos in 2016 identified $12 trillion of market opportunities in food and agriculture, cities, energy and materials, and health sectors for solutions that address the UN’s sustainable development goals (SDGs). With perhaps one or two exceptions, we have yet to see Chinese companies truly engage with the SDGs, even though these are opportunities where Chinese technology and infrastructure could play a decisive and welcome role around the world. 

On-going restrictions on hazardous chemicals and improved energy efficiency of Chinese products is one thing, but wider circular economy reforms driven by overseas regulations are now forthcoming. In 2015, the EU issued its Circular Economy Action Plan, which continues to be implemented through a stream of new regulations and measures that in turn have resulted in new corporate commitments by European companies. Wider reforms to promote circularity in China are now on their way to China’s somewhat beleaguered and under-resourced sustainability teams. Getting out in front of these trends will enable Chinese companies to engage their overseas customers to re-invent new products, infrastructure and services that bind them more tightly together through the constant circular exchange of goods. In other words, circularity can be a new customer loyalty programme that can have a transformative impact on customer relations as well as provide tremendous benefit to society.

Beyond these measures, there should be major announcements from company leadership that articulate their company’s purpose in a way that opens a new and sustained narrative that inspires its customers and re-assures government and regulators. In other words, companies must answer these questions:

What do we stand for?

Why should other countries accept us and our products?

How can we demonstrate that our values are aligned with those of our customers?

How can we contribute to society in a profound way?

The new narrative

The key to success is the extent to which China’s corporate leaders are able to embrace a new narrative - and back it up with action - that explains how they are positive partners able to contribute to society.

It is a tough challenge given that over the last few decades, most corporate leader’s centre of gravity has lain elsewhere, namely, in seeking to urgently build out their manufacturing and sales operations and fight fires along the way. Nonetheless, they now face an encounter with a new reality, which is that sustainable development, purpose, and reputation really matter. When this change occurs it may turn out to be a formative period of new innovation and leadership for Chinese companies.  

There are domestic pressures for such changes to occur. Residents in northern China will have witnessed China’s progress in its war on air pollution. In 2017, it was estimated that 40 percent of all China’s factories were shut down at some point in order to be inspected by environmental officials. Many observers have noted that China is in the midst of a major environmental policy redirection and President Xi Jinping continues to draw attention to his view that good business is green business (绿水青山就是金山银山).

Further, these changes in my view shouldn’t just be tailored towards a particular market or customer, but instead should be implemented throughout a company’s business dealings. Only in this way would action be compelling enough to catch people’s attention and convince them that Chinese companies are a global force for good.

This represents an opportunity for China’s companies to champion global and sustainable free trade and to play their part in arresting the global trend toward protectionism that currently threatens their business as well as the global economy.

Robert Hansor is director of sustainability and climate change at Deloitte China. 

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