By Samuel Wrest

This summer, the US Congress introduced a bill aimed at stemming the country’s regular flow of discarded electronics to China. The United States exports large amounts of e-waste to the Middle Kingdom—albeit often unintentionally—contributing to health and environmental problems and leading counterfeit electronic goods being fed back into the global market.

But China’s status as a dumping ground for the world’s discarded electronics is only a part of the problem. China banned all e-waste imports, but several loopholes still exist and the country produces large amounts of  e-waste domestically. Government programs and recycling efforts have proven ineffective, raising the question of whether foreign companies can solve China’s e-waste problem.

Market Overview

Largely a result of rising per capita income and technological engagement, the amount of discarded electronics in China has grown steadily. While exact figures are unavailable, it is estimated that domestically generated e-waste is growing by 20 percent a year. With 3.62 million tons discarded in 2011, the current level of e-waste produced in China is undeniably huge.

The problem is exacerbated by China’s import of e-waste, which is still prevalent despite trans-boundary controls. Shipments from the United States, Europe, and developed Asian economies such as Japan and South Korea continue to pour into the country to meet demand for second-hand electronic resources, prompting the United States to pass its bill last month. Exporters avert the country’s import ban by mixing e-waste with legal waste, or importing through another Asian jurisdictions first – usually Hong Kong.

The consequences of e-waste proliferation in China are most starkly portrayed in Guiyu, a town in Guangdong province. Widely seen as the largest e-waste dumping site in the world, the town’s residents have exhibited digestive, neurological, and bone problems, and 80 percent of its children experience respiratory ailments. Dismantling e-waste also poses an environmental risk.  For example, burning e-waste – a common recycling process in China – can release hydrocarbons, brominated dioxins, and other toxic particles that can spread further afield by the country’s wind patterns.

Current Legislation and Efforts to Tackle e-Waste

China doesn’t lack legislation aimed at reducing and recycling e-waste. In addition to banning all e-waste imports in 2000, the government introduced various policies to mixed success. The “Home Appliance Old for New Rebate Program,” which incentivized buying and recycling unwanted electrical appliances, was in force from June 2009 to December 2011 and had a tangible effect on e-waste amounts. 61.29 million home appliances were collected in 2011, but the plan’s limited scope – piloted in only economically developed provinces – conflicted with China’s wider economic development. The government also stopped funding the program in 2011, cutting off the subsidies on which its collectors depended.

Other recycling policies, such as the Administrative Measures on the Prevention and Control of Environmental Pollution by Electronic Waste and Regulations on the Administration of Recycling and Treatment of Waste Electric and Electronic Equipment,  regulate which enterprises and individuals can qualify for recycling e-waste, requiring they obtain a treatment license to handle any of the five “primary” types of electronics – televisions, refrigerators, washing machines, air conditioners, and computers. However, the existence of China’s “informal” e-recycling sector – visible in towns such as Guiyu – shows that these policies have been largely ineffective. The policies’ five primary types of e-waste omit important categories of electronics, such as mobile phones and tablets. Furthermore,enterprises and individuals that qualify for treatment licenses often do not possess the capabilities and technology needed to properly recycle such waste. This is due to the fact that China’s domestic e-recycling industry is still at an early stage of development.

Prospects for Foreign Involvement

China’s ineffective domestic e-waste policies created space in the market that foreign involvement is well placed to fill. Below, we look at three models foreign companies can use to enter the industry.

Foreign direct investment

China classifies the manufacturing of used electrical appliances and electromechanical waste, as well as the recycling of used electrical products and equipment, as encouraged areas of foreign investment. This classification allows foreign companies to establish wholly-foreign owned enterprises (WFOEs) in the industry. There are also several preferential tax schemes that foreign companies can qualify for. China’s corporate income tax law (CIT), for example, specifies that income derived from an environmental protection enterprise can be exempt from CIT for its first three years of operation, and have a 50 percent deduction for its fourth to fifth years. The country also offers a reduced CIT rate of 15 percent for high-tech enterprises, which used electronic manufacturers and recyclers can qualify for if they gain approval from the Ministry of Science and Technology (MOST), the Ministry of Commerce (MOFCOM), and the State Administration of Taxation (SAT).

Qualified electronic recyclers can make substantial profits from China’s vast amounts of e-waste. While it’s usually difficult to generate a profit  due to the complex nature of the recycling process, by collecting e-waste and properly extracting its various precious metals – such as platinum, gold, and selenium – companies can sell those metals directly or use them in their own manufacturing. Attero Recycling, an e-waste recycling firm in India, is a good example of this business model. As of 2013, Attero collected and processed about 1000 metric tons of e-waste a month in India, and saw its revenues quadruple over two years to US$15 million. Similar ventures are continually popping up in China, and stand to gain from the country’s attractive incentive framework.

Franchising agreements and partnerships

China’s e-waste recycling industry lags behind in technology. Foreign e-waste companies unwilling or unable to directly invest in the industry can franchise  their technology and expertise to the Chinese market – a model that has paid dividends to several companies over the past few years. In 2013, E-Waste Systems, Inc. signed a franchising agreement with a Chinese enterprise for US$0.8 million for the license of its recycling technology, and a portion of the subsequent sales made using that technology.

There have also been partnerships between foreign governments and China. In 2004, the Embassy of Switzerland in Beijing supported an e-waste project by Swiss Federal Laboratories for Materials Testing and Research (EMPA) to review and identify e-waste treatment technologies in the country. Several other projects between EMPA and the Chinese government have since followed, and there is still a strong appetite in China for knowledge sharing and cooperation in relation to e-waste solutions.

Corporate social responsibility

For foreign companies in China whose business model doesn’t involve recycling, being involved in e-waste management projects can be a means to pass their corporate social responsibility (CSR). There are several companies that help facilitate this, such as Netspring, a social enterprise based in Shanghai that helps foreign firms pass their CSR by recycling e-waste and setting up green IT classrooms in those firms’ names. Clotilde Pallier, General Manager of Netspring, says “the main idea of our program is to promote a circular economy, not just by recycling in an environmentally safe way, but also by extending the lifespan of electronic devices, which helps to reduce production. Computers that are no longer good enough for a company to use still help the digital inclusion of the under-privileged population that cannot afford new ones, such as rural children, migrants, and the handicapped.”

Looking Ahead

The gap for e-waste solutions in China will continue to widen in tandem with the country’s rising disposable income levels and growing appetite for electronic goods. While the list of industries China relies on the  West for has shrunk over the past few decades, the need for foreign expertise and technology in e-waste recycling will remain in the short to medium term, making it a potentially dynamic industry for foreign involvement. Companies with the right capabilities and entry strategy will be able to make an impact on China’s e-waste problem and establish a viable business in the process.

In the longer term, China needs to improve its legal system relating to e-waste management, intensify law enforcement, and comprehensively fund its recycling system. Targets set in China’s recently released 13th Five Year Plan indicate that the government will work on this. Under the plan, investment in environmental protection is estimated to reach US$1.37 trillion, of which about US$291 billion will be dedicated to water pollution control, US$248 billion to air, and US$831 billion to soil – all areas which e-waste affects. This suggests China’s market landscape for different forms of foreign investment in e-waste will continue to evolve in the future.

 

About the Author

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email [email protected] or visit www.dezshira.com.

Posted by Samuel Wrest