EU "Green" Directives Cast Challenge to China's Electronics Industry

EU "Green" Directives Cast Challenge to China's Electronics Industry

b y Zijun Li, China Watch

22th February 2006

European reaction to an ever-growing mountain of discarded cell phones, computers, televisions, MP3 players, and other electronics equipment has put companies in China and elsewhere in a scramble to respond.

Two recent European Union (EU) directives aim to boost recycling of old electronics, curtail use of hazardous substances in manufacturing, and improve the environmental performance of producers. But these tough "green" regulations could serve as trade barriers to electronics exports from China, the world's third-largest trading country.

The new EU directives apply to virtually every type of electronics product on the market, from household appliances and computer and telecommunications equipment to medical products and toys. The Waste Electrical and Electronic Equipment (WEEE) directive, which took effect in August 2005, calls for product end-of-life management, eco-friendly design, and life-cycle thinking. Meanwhile, the Restriction of Hazardous Substances (RoHS) directive, scheduled to take effect this July, prohibits the use of six hazardous substances—including mercury, lead, cadmium, hexavalent chromium, and brominated flame retardants—in all electronics exported to the EU.

China already suffers an annual loss of tens of billions of dollars in global exports due to standard non-tariff barriers, according to the World Trade Organization's 2005 World Trade Report. Chinese electronics exports to the EU amounted to US$380 billion in 2005, or roughly 30 percent of the country's total exports, reports Xinhua News. It is estimated that once both new EU directives are in force, they will affect $5.6 billion worth of Chinese exports to the region, causing a loss in foreign trade to the tune of $37 billion.

The RoHS regulation applies specifically to producers in the supply chain, requiring them to reevaluate the chemicals used in every component, product, and process. It is expected to have huge industry-wide effects, leading to higher material, equipment, and unit costs and to a need for increased worker training. Industry insiders estimate that the directive will lead to a 10 percent rise in production costs in China's electronics industry.

Together, the two directives will affect more than 6,800 Chinese electronics companies, though the most immediate effects will be felt by the small- and medium-sized enterprises at the bottom of the supply chain, which account for 30 percent of China's electronic product lines and already face pressure from multinational companies and larger domestic enterprises upstream. Guangzhou AC Panasonic recently announced that one-quarter of its 208 suppliers, which provide a total of 7,268 different assembly parts, would be unable to meet the standards imposed by the EU directives. Unless they can alter their technologies in time, these suppliers could rapidly lose their market share.

Despite the short-term downsides, over the longer term the EU electronics standards will undoubtedly play an active role in encouraging Chinese companies to pursue more sustainable product development. And since China isn't the only developing country affected by the directives, it has the opportunity to get ahead of the game by complying more quickly and enhancing its competitiveness in the EU market.

Statistics from China's Ministry of Commerce show that joint ventures and large domestic enterprises produce roughly 75 percent of the country's electronics exports. Since many of these companies have already begun integrating environment and health considerations into their operations, they will have an easier time complying. Many firms, including Phillip, Skyworth, Haier, and TCL, are making full preparations for the new directives, with some even implementing stricter requirements than WEEE and RoHS require. A recent Global Sources" RoHS Compliance Readiness survey indicated that 93 percent of electronics manufacturers in mainland China, Taiwan, Hong Kong, and South Korea expect to comply with the RoHS directive by the looming July 1 deadline.

On the legislative side, recognizing that such regulations will have a growing effect on its export trade, China has begun participating in international standards discussions. To date, it has developed 6,500 national product standards in line with international standards, or 40 percent of the national total. So far, however, only 20 or so standards have been approved by the International Organization for Standardization's International Electronic Commission, which oversees more than 17,000 standards worldwide.

Moreover, in correspondence with the European RoHS directive, the Chinese government is developing its own China RoHS law, which is likely to be broader in scope and even more comprehensive than the EU directive. The new legislation will apply to every participant in the electronics supply chain, from manufacturers and distributors to importers and retailers. And unlike the EU's "self-certification" approach, the new law will require every product to be tested before it is allowed entry into China. All products sold in China or imported to the country will be required to comply with the law as of January 2007.

Globally, the negative impacts of the high-tech industry are felt most keenly during the manufacturing and disposal of products.

According to the Worldwatch Institute's Vital Signs 2003 report, the total weight of fossil fuels and chemicals used to produce just one 2-gram memory chip is 630 times the weight of the chip itself. And today's consumers dispose of old computers every two years on average, compared with 4-5 years in the past. In the face of these challenges, more companies are trying to reduce their waste and emissions while also redesigning goods and production processes to be less resource-intensive—in a push to be not just eco-efficient but also "eco-effective," reports researcher Erik Assadourian in the March/April 2006 issue of World Watch.

Chinese companies aren't the only ones scrambling to adapt to the new RoHS climate in Europe. Communications and electronics manufacturers in the United States, Canada, and Japan are also seeking to make more reliable and environmentally sound products, an effort that should ripple along their supply chains. On February 7, Japanese manufacturer Toshiba introduced the Tecra M5, a notebook computer that is fully compatible with the new EU RoHS directive. A week later, U.S.-based Ample Communications, a provider of communications silicon for network systems, introduced RoHS compliant, lead-free MACs (Message Authentication Codes), components used in text messaging systems.