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Keeping out the Rogue Producers

Purchasing managers tend to steer clear of materials made by producers that pollute

March 1, 2004 | A version of this story appeared in Volume 82, Issue 9

I t's a claim that indian and chinese firms have been denying for years. But many people in Europe and North America believe that fine chemicals imported from China and India are largely made by producers that compete unfairly by paying mere lip service to environmental protection and the safety of their employees.

Indian authorities are cracking down on heavily polluting chemical plants. These photos were taken downstream from a dye plant in Vapi, India, in the spring of 2000.
Indian authorities are cracking down on heavily polluting chemical plants. These photos were taken downstream from a dye plant in Vapi, India, in the spring of 2000.

DIRTY DYE Indian authorities are cracking down on heavily polluting chemical plants. These photos were taken downstream from a dye plant in Vapi, India, in the spring of 2000.
India and China may be home to unsafe and polluting production facilities, but it is only if the materials made by these rogue producers find buyers in North America and Europe that unfair competition actually occurs. Either because it's unethical, or because doing so would bring disrepute to their companies, purchasing managers in Europe or North America prefer to avoid buying materials--and even products that include such materials--from questionable producers.

If a purchasing manager in North America is ever caught buying from a rogue producer, "he or she could plead ignorance," says Michiel R. Leenders, a professor at Richard Ivey School of Business at the University of Western Ontario and an authority on purchasing.

Pleading ignorance is most easily done when products are sourced through a trading company. "But a company like Wal-Mart, if somewhere in its supply chain--even suppliers of suppliers of suppliers--someone is not doing things properly, they would really be hit hard in the press," Leenders says. Therefore, a lot of pressure is placed on purchasing managers to thoroughly investigate the practices of manufacturers throughout the supply chain.

Were it common for Asian chemicals made in subpar facilities to be exported to Western countries, it would be easy to find out about it, Leenders contends, noting that Western companies facing this competition would not keep the matter quiet and would likely inform journalists. "The press is stronger than the law," he explains.

At BASF, Mark Volmer, director of purchasing, Asia Pacific, appears surprised--almost offended--by the notion that firms should avoid buying from rogue producers just to avoid bad publicity. Such purchasing is inconceivable for him, he says, because it would contradict his personal and his company's beliefs. "I work for a chemical company, and I want to be proud to work for a chemical company," Volmer says. Unethical purchasing practices are at odds with this goal, he adds.

Still, the idea that some of the chemicals exported by China and India to North America and Europe are made in subpar facilities makes intuitive sense. After all, the two countries are the source of many reports of industrial pollution and accidents.

The New York Times reported last fall that managers of Hisun Pharmaceutical, a U.S. Food & Drug Administration-approved supplier to Eli Lilly based in China's Zhejiang province, had killed two workers by sending them to clean up illegally stored toxic waste. In 2000, C&EN published photos of a multicolored river downstream from a dye factory in Vapi, India (C&EN, May 15, 2000, page 27). Also in 2000, a manager at a European manufacturer of phosgene-based products warned C&EN of the danger posed by unspecified Chinese firms that export triphosgene, a compound that turns into toxic phosgene if exposed to dampness.

But on closer inspection, concrete examples of chemicals made by questionable companies that have found their way onto the U.S. or European market are difficult to confirm. Several days of research failed to reveal any evidence that triphosgene was leaving China or transiting through Hong Kong, the major transshipment port for Chinese products.

At Eli Lilly, spokesman Edward G. Sagebiel disputes his company's portrayal in the New York Times report. He says Lilly has not been sourcing from Hisun. Rather, the two firms have been discussing the possibility of transferring to Hisun--as part of a philanthropic initiative--Lilly technology for making drugs that fight multidrug-resistant tuberculosis. "As part of this project, we hope to be able to encourage appropriate environmental, health, and safety practices," Sagebiel says. He adds that Lilly was unable to convince the Times to publish a correction.

IT'S PUZZLING that an FDA-approved plant could treat its workers as Hisun reportedly has done. Hardy W. Chan, executive vice president at Taiwan-based pharmaceutical ingredients producer ScinoPharm, explains that FDA inspections focus on whether a manufacturer observes practices consistent with the supply of high-quality products. These inspections are product-specific and do not cover health, safety, and environmental (HSE) practices.

Chan adds that FDA inspections abroad tend to be less thorough than those performed in the U.S. However, large foreign buyers of pharmaceutical ingredients and intermediates conduct thorough HSE investigations of their own in order to avoid potential corporate liabilities, he says.

Indeed, it is common for purchasing managers to go to great lengths to avoid buying from producers with questionable HSE practices. For example, BASF's Volmer says that there is a certifying process that any prospective supplier to BASF must go through.

BASF's vetting process involves on-site inspections by several BASF experts, including purchasing and HSE professionals. Getting one's act together for a one-day audit sounds relatively easy. "I am aware of some Chinese plants that put a few thousand people to work cleaning and painting an entire facility just before an FDA inspection," Chan says. But Volmer says a plant that pollutes all year cannot hide lax environmental practices--pollution leaves traces. Moreover, he says, experts can tell during an audit whether managers appear to be hiding something.

Kwok Kiu Poon, a purchasing professional who is the president of the Hong Kong chapter of the U.S. Institute for Supply Management (ISM), says an audit enables a buyer to ascertain whether a prospective supplier has the capability to meet the standards spelled out in the supply agreement. He adds that for critical materials, he would set up a system that allows frequent inspections of the supplier.

There are limits to how close one can get to a Chinese supplier, notes Hiroyuki Honda, a manager at Beta-Chem, a Japanese contract manufacturer and supplier of intermediates and pharmaceutical ingredients that it buys from other companies.

"We cannot come into the manufacturing management system--we are outsiders," Honda acknowledges. Nonetheless, he says it is possible to check the background of a Chinese supplier by means other than inspections. "We are trying to work with manufacturers that are very reliable, and basically we do business with ones with whom we have daily contacts."

At the end of its qualifying process, BASF may grant a potential supplier a conditional approval and a list of things to improve. The vetting process can act as a powerful incentive for questionable suppliers to change their ways. If only for prestige, manufacturers want to count reputable companies like BASF as their customers.

Volmer recalls one case involving a Nanjing-based producer who had come short of BASF's requirements in the HSE area. He says he would have given up on this prospective supplier, except that the product in question was one of strategic importance to BASF, and the German firm had only one other supplier in the world.

Volmer therefore handed over to the prospective supplier a list of requirements so long that he expected the firm would take at least a year to meet them. He was surprised that the Chinese company made all the requested changes within three months. BASF gained a new supplier, but Volmer adds that "the biggest winners were the Chinese company's employees, who now work in much safer conditions."

Not all companies have purchasing standards as high as BASF's. Purchasing managers may occasionally agree to buy from questionable suppliers when the price is extremely attractive. Buyers are human, and there is often a gap between what people should do and their actual behavior, Leenders says.

ISM's Poon says buying from questionable suppliers is more likely in the case of one-time, nonrecurring purchases. It also depends on individual and corporate values. "The question of whether the corporate purchaser should focus on price at the expense of many other considerations is more or less dictated by corporate culture, corporate values, rather than by the profession," he says.

Many chemicals in the U.S. and Europe are bought by small companies that don't employ a purchasing manager. Unlike companies such as BASF or Wal-Mart, most of these smaller firms don't have a code of ethics and may be so small that they are not concerned about their reputation with the wider public.

But most small companies buy from distributors, Leenders says. And these distributors tend to abide by a code of ethics, such as that of the National Association of Chemical Distributors, which has a membership of 300 firms throughout the U.S.

Website-based chemical ordering services also provide some safeguards against buying from questionable producers., a subsidiary of South Korea's SK Corp., claims to give users access to chemicals from 3,000 Asian producers. But the most active suppliers are audited, according to executive Kitae Kim. "For products involved in long-term supply agreements, we send our quality assurance manager to the facilities in order to establish reasonable quality-control systems and to improve HSE standards," he says.

PURCHASERS ARGUE that imported chemicals can be both extremely cheap and produced in facilities with high HSE standards. Volmer expects that BASF will source an increasing amount of chemicals from China and India, and he says that the two countries' price advantage is mostly the result of lower labor costs. Chinese and Indian firms are competitive not in high-volume products like petrochemicals, but rather in labor-intensive chemicals made in batches. He adds that much of the manufacturing equipment to make chemicals in batches is comparatively low-tech and extremely competitive in China.

Chemical plants in China must treat their wastewater. To comply, Hengdian Group, a pharmaceutical chemicals company in Hengdian, Zhejiang province, built a new wastewater treatment plant.
Chemical plants in China must treat their wastewater. To comply, Hengdian Group, a pharmaceutical chemicals company in Hengdian, Zhejiang province, built a new wastewater treatment plant.

Ravi Raghavan, editor of India's Chemical Weekly magazine, says all Indian plants supplying pharmaceutical ingredients to the U.S.--there are more than 70 of them--are FDA-inspected and approved. Although FDA isn't looking specifically for HSE violations, "I don't think FDA would put up with lax environmental practices," Raghavan says.

He adds that a stronger case can be made concerning the unfair competitive advantage of dye producers in India's Gujarat region, which has poor environmental protection records. However, he notes that several highly polluting units were shut down by the government about four years ago, and some have never reopened.

One U.S. buyer of Chinese pharmaceutical ingredients who used to believe that the poor environmental practices of Chinese companies gave them an unfair advantage has since come to see this as a minor point. He now believes that many Chinese fine chemicals producers have gained greatly through the privatization of companies that were previously state-owned.

"Chinese governments are giving away pharmaceutical companies practically for free to entrepreneurs--some with strong ties to local government officials--who are willing to put in some personal money to upgrade the factories," he says. "As a result, the amortization is based on the new capital infused and not the true replacement value."

Government-subsidized plants do have an unfair competitive advantage. And unlike purchasing from polluting or dangerous producers, there are few ethical restraints against buying from subsidized producers.

But judging from the small number of known cases, ethics and fear of bad publicity have been relatively effective in reducing Western use of chemicals made by manufacturers that pollute or expose their employees to danger, Poon says. "If the buyer does not ask how the commodity is produced, how it is handled, how it is contained, and how it is transported, then it does no good to the buyer's institution."


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