• Despite increasing trade tensions between US and China, demand for quality inspection and supplier audits rose in the first half of 2018.
  • Chinese manufacturers received some of the lowest scores on waste management and pollution prevention – suggesting businesses rushing to clean up their supply chains in China before the next round of government inspections.
  • While fewer factories were found to have immediate critical risks threatening worker life and safety, the share of fully compliant ('Green') factories has hit a two-year low at less than 20%.
Chinas factories were found to be lagging behind the rest of Asia in terms of environmental compliance

China's factories were found to be lagging behind the rest of Asia in terms of environmental compliance

Despite ongoing fears of an escalation in trade conflict between the US and China, the latest data shows demand for quality inspection and supplier audits in the manufacturing giant are still on the rise.

What is also apparent, according to a new quarterly update from AsiaInspection (AI), is that China's factories are lagging behind the rest of Asia in terms of environmental compliance.

The trends for the second quarter of 2018 show China's half-year inspection volumes are up 8.3% year-on-year; while in Southeast Asia, Cambodia, Thailand and Taiwan have seen double-digit growth.

Meanwhile, in South Asia, Bangladesh is recovering from an earlier slump, with inspection volumes expanding 4.5% in the second quarter.

Environmental compliance

Even though overall ethical scores recorded by AI auditors in the three-month period remain higher than the average 2017 values, manufacturers have failed to maintain the previous quarter's improvement pace. Over a third of factories received 'Amber' rankings, indicating that improvements are required in the medium term to prevent further deterioration.

Notably, the latest data highlights a strong correlation between a factory's size and its sustainability profile. For instance, so far in 2018, small factories in Asia consistently fell behind during onsite audits compared to larger factories, scoring some 6.5% lower on social compliance criteria, and 14% lower on environmental issues.

In China in particular, smaller factories (employing 100 workers or less), while comprising less than half of all facilities audited for environmental compliance, accounted for more than two-thirds of major non-compliances in the first half 2018 – with waste management and pollution prevention being the most common issues by far.

That said, Chinese factories of all sizes lag behind the rest of Asia in terms of environmental compliance. During H1 2018, Chinese manufacturers received some of the lowest scores on waste management and pollution prevention, scoring on average 21% lower than their counterparts in the rest of Asia.

This data indicates that businesses rushing to clean up their supply chains in China before the next round of government inspections should be prepared for an uphill battle.

Meanwhile, ensuring safe working conditions remains another challenge for global supply chains, as seen from AI's latest structural audit data. While fewer factories were found to have immediate critical risks threatening worker life and safety in the second quarter, the share of fully compliant ('Green') factories has hit a two-year low at less than 20%.

This indicates that an overwhelming majority of factories require improvement in the medium term, and failure to remediate will exacerbate their structural risks over the following quarters, especially in parts of Asia affected by the monsoon season.

Textile sector lags on quality

In terms of quality, in-factory product inspections and lab testing during Q2 shows that while manufacturing quality slightly improved across the board, not all products did equally well in terms of chemical safety.

The textile sector remains the worst performer among the industries serviced by AI, with roughly a quarter of products failing onsite inspection.

An increased focus on product quality by brands and manufacturers is echoed in the improved rates of chemical compliance in lab. Failure rates due to excess amounts of lead and heavy metals continue to decline among products aimed at the US market.

Additionally, suppliers of toys and juvenile products to the US are doing a better job at complying with phthalates bans: so far in 2018, average failure rates in this category stand at 7%, compared to 10% in 2017. Notably, for other product categories, compliance with phthalate bans remains a challenge, with little improvement compared to last year.

There remains a difference between levels of chemical compliance of products intended for the US and the EU, as suppliers to the latter struggle to comply with regulatory thresholds for heavy metals. In Q2 2018, failure rates due to unacceptable amounts of lead, cadmium and other heavy metals reached 8% in products intended for the EU market. Additionally, failure rates due to nickel release exceeded 15% in the eyewear category.