Out of the Scrapyard: How Foreign Involvement Can Help Solve China’s e-Waste Crisis

July 8, 2016 Posted by China Briefing Reading Time: 8 minutes

Late last month, the United States Congress introduced a new bill aimed at stemming the country’s regular flow of electronic waste to China. The US is one of many foreign countries that exports huge amounts of e-waste to the Middle Kingdom – albeit often unintentionally – contributing to the numerous health and environmental problems that such waste creates, and leading to e-waste becoming a source of Chinese counterfeit electronic goods that are fed back into the global market.

But China’s status as a dumping ground for the world’s e-waste is only a part of the problem, and increasingly a comparatively smaller one. China has in place a blanket ban on all e-waste imports, and although several loopholes exist that illicit exporters continue to exploit, the country is now producing greater amounts of e-waste domestically. Government programs and general recycling efforts to tackle the issue have proven either ineffective or outright dangerous, raising the question of whether foreign involvement can form a part of China’s e-waste solution.

Market overview

Largely as a result of rising per capita income levels and technological engagement, the amount of discarded electronics in China has been steadily growing since the turn of the century. While exact current figures are unavailable, the country is estimated to be increasing its domestically generated e-waste by 20 percent a year. With 3.62 million tons recorded being thrown away in 2011, the current levels of e-waste produced in China are undeniably huge.

The problem is further exacerbated by China’s import of e-waste, still prevalent despite the trans-boundary controls that it now has in place. Shipments from the U.S., Europe, and developed Asian economies such as Japan and South Korea continue to pour into the country to help meet its demand for second-hand electronic resources, prompting the U.S. to pass its bill last month. Exporters are able to avert the country’s ban on such imports by either mixing it with legal waste or firstly importing through another Asian jurisdiction – usually Hong Kong.

The consequences of the proliferation of e-waste 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 reportedly experience respiratory ailments. And while e-waste itself poses no immediate risk to the environment, the dismantling of it can. The burning of e-waste, for example – common in its recycling process in China – can release hydrocarbons, brominated dioxins, and other toxic particles that can be spread further afield by the country’s wind patterns.

Current legislation and efforts to tackle e-waste

China doesn’t lack for legislation aimed at reducing and recycling its e-waste. In addition to banning all e-waste imports in 2000, the government has introduced various policies to mixed success. The “Home Appliance Old for New Rebate Program”, which incentivized the buying and subsequent recycling of 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 reportedly collected in 2011, but the plan’s limited scope – piloted in only economically developed provinces – was at odds with China’s wider economic development, which has penetrated the country’s lower tier cities and more rural areas. The government also stopped funding the program at the end of 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, mainly aim to regulate which enterprises and individuals can qualify for recycling e-waste, requiring that 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 – has shown that these policies have been largely ineffective. Moreover, the policies’ five primary types of e-waste omit important categories of electronics, such as mobile phones and tablets, and enterprises and individuals that do qualify for treatment licenses often do not possess the capabilities and technology needed to properly recycle such waste. This is due quite simply to the fact that China’s domestic e-recycling industry is still at a very early stage of development.

Prospects for foreign involvement

The ineffectiveness of China’s domestic e-waste policies has therefore created space in the market that foreign involvement is well placed to fill. Below, we look at three different models that 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, allowing foreign companies to establish wholly-foreign owned enterprises (WFOEs) in the industry. There are also several preferential tax schemes that foreign companies in the industry can qualify for. China’s corporate income tax law (CIT) (企业所得税法), 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 could qualify for subject to approval from the Ministry of Science and Technology (MOST), the Ministry of Commerce (MOFCOM), and the State Administration of Taxation (SAT).

With such incentives in place, qualified electronic recyclers can potentially make substantial profits from China’s vast amounts of e-waste. While the industry is traditionally difficult to make money from 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 either sell those metals directly or use them in their own manufacturing. Attero Recyling, an e-waste recycling firm in India, is a good example of this type of business model. As of 2013, Attero was collecting and processing around 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 further gain from the country’s attractive incentive framework.

Franchising agreements and partnerships

One of the main areas in which China’s e-waste recycling industry lags behind is technology. Foreign e-waste companies unwilling or unable to directly invest in the industry also have the option of franchising their technology and expertise to the Chinese market – a model that has paid dividends to several companies over the past few years. In 2013, for example, E-Waste Systems, Inc. signed a franchising agreement with a Chinese enterprise that saw it receive an initial 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 various instances of 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), with one of its purposes being 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 an e-waste management project can be a means to pass their corporate social responsibility (CSR) in the country. There are several companies that can help facilitate this, such as Netspring, a social enterprise based out of 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, comments that “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. The list of industries that China is reliant on the West for has been continuously shrinking over the past few decades, but the need for foreign expertise and technology in e-waste recycling will remain great 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 both make an impact on China’s e-waste problem and establish a viable business in the process.

In the longer term, China will need to improve its legal system relating to e-waste management, intensify law enforcement, and more comprehensively fund its recycling system. Targets set in China’s recently released 13^th Five Year Plan indicate that the government will be working towards 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 can affect. This suggests that China’s market landscape for different forms of foreign investment in e-waste will continue to evolve in the future.

About Us

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 china@dezshira.com or visit www.dezshira.com.

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