DONGGUAN, CHINA - Last summer, Chinese government investigators crawled through a hole in the concrete wall that surrounds the Fuan Textile Mill in southern China and launched a surprise inspection of the plant. What they found caused alarm at dozens of American retailers, including Wal-Mart Stores Inc. and Lands’ End Inc., that use the company’s fabric in their clothes.
Villagers had complained that the factory, majority owned by Hong Kong-based Fountain Set Holdings Ltd., had turned their river water dark red. Authorities discovered a pipe buried underneath the factory floor that was dumping roughly 22,000 tons of water contaminated from its dyeing operations each day into a nearby river, according to local environmental-protection officials.
In the two decades since U.S. companies began turning to Chinese factories to churn out the inexpensive T-shirts, jeans and sneakers that millions of Americans wear daily, China’s air, land and water have paid a heavy price. China has faced harsh criticism in recent months over the safety of exports ranging from tainted toothpaste to toxic toys. But environmental activists and the Chinese government are increasingly pointing to the flip side of the problem: the role multinational companies play in China’s growing pollution by demanding ever-lower prices for Chinese products.
For instance, prices on fabric and clothing imports to the U.S. have fallen 25 percent since 1995, partly due to the downward pricing pressure brought by discount retail chains. One way China’s factories historically have kept costs down is by dumping wastewater directly into rivers. Treating contaminated water costs about 13 cents per metric ton, so large factories can save hundreds of thousands of dollars a year by sending wastewater directly to rivers, in violation of China’s water- pollution laws.
“Prices in the U.S. are artificially low,”says Andy Xie, former chief economist for Morgan Stanley Asia, who now works independently. “You’re not paying the costs of pollution, and that is why China is an environmental catastrophe.”
Toxic runoff from China’s booming textile industry is one reason many of the nation’s largest rivers resemble open sewers and 300 million people lack access to clean drinking water. Now, U.S. retailers are scrambling to prevent environmental issues from creating the same kind of consumer backlash as the anti-sweatshop campaigns of the past decade.
Fountain Set hasn’t lost any major customers since the government crackdown, but some U.S. retailers sent inspectors to the Fuan plant and tightened oversight of the company.
“After labor issues, the environment is the new frontier,” says Daryl Brown, vice president for ethics and compliance at Liz Claiborne Inc., which uses Fountain Set cotton in some of its products. ’We certainly don’t want to be associated with a company that’s polluting the waters.’
A dyeing industry
The textile industry is one of China’s dirtiest. In addition to heavy metals and various carcinogens, fabric dyes may contain high levels of organic materials, and thread is often dipped in starch before it is woven into fabric. The breakdown of large amounts of these organic compounds can suck all the oxygen out of a river, killing fish and turning the water into stagnant sludge.the oxygen out of a river, killing fish and turning the water into stagnant sludge.
Fountain Set’s Fuan factory campus here produces a huge volume of cotton fabric that winds up in Americans’ closets. The company is the largest knit-cotton manufacturer in the world, and its factories are responsible for about 6 percent of the global supply of knit cotton, according to Eddie Lau, an analyst at Citigroup Inc. in Hong Kong.
The company’s main product is the stretchy soft cotton found in T-shirts and sweatshirts sold by companies including Gap Inc., Target Corp. and Eddie Bauer Holdings Inc. Fountain Set also markets a range of eco-friendly fabrics, including organic cotton. The company, listed on the Hong Kong stock exchange, has 20,000 employees. Annual sales topped $900 million last year.
Since the inspection in June of last year, Fountain Set has paid roughly $1.5 million in penalties and spent $2.7 million to upgrade its water-treatment facilities.
“What’s happened has happened,” says Gordon Yen, executive director of Fountain Set and a native of Hong Kong who studied at Boston University. ’What’s important is what we did as a company when this was drawn to our attention. ... When a problem arises, we try to fix it as properly as we can.’
The company points out that its other two large Chinese mills haven’t had similar problems, and the company was in the process of upgrading the Fuan factory wastewater-treatment facilities before the government inspection.
Many apparel companies distance themselves from Fountain Set, saying they aren’t direct customers even though they use its fabric. Large retailers typically work directly with Fountain Set to set colors and fabric styles each season, but they ultimately may purchase Fountain Set’s products through a third-party supplier that sews the finished goods.
Companies including Target and Liz Claiborne say they have “no contractual relationship” with Fountain Set, but acknowledge they use its products. Kohl’s Corp. said in a statement that the company is “not a Fountain Set Holdings client.” Fountain Set regularly lists Kohl’s as a customer. Kohl’s declined to answer questions about whether it uses Fountain Set products in its clothes.
Phillips-Van Heusen Corp., which owns brands including Calvin Klein, didn’t respond to inquiries. Eddie Bauer Holdings, Talbots Inc. and Tommy Hilfiger Corp. declined to comment for this article.
Fountain Set was founded in Hong Kong in 1969, just as U.S. companies were beginning to seek less-expensive production bases in Asia. The initial motive for outsourcing was lower-cost labor. But in the early 1970s, stricter environmental laws, such as the 1972 Federal Water Pollution Control Act Amendments, began driving up costs for U.S. fabric mills, accelerating the overseas shift.
Li Changlin, 51, owns a small shipping company along the banks of the Mao Zhou River in Dongguan, downstream from the site where Fountain Sets is accused of dumping.
“We used to eat fish and crayfish out of this river,” says Li, who has lived by the river all his life. “We swam in it. There were green plants on the banks and the water was clear. After 1989, the factories came and the water turned black.”
That was the year Fountain Set opened its factory in Dongguan, just as Hong Kong began cracking down on water pollution. Gap, one of the Fuan factory’s first American clients, began placing large orders for cotton polo shirt fabric. Throughout the 1990s, Fountain Set began working with dozens of major retailers and brands.
“Stressful time”
The rise of discount chain stores such as Wal-Mart and Target in the mid-1990s brought intense pressure on fabric mills to keep prices low, according to textile-industry executives. “The first thing they say when they sit down in a meeting is, How much discount do I get from last year?” says Bill Lam, former executive director of Fountain Set who is now executive director of a competitor, Pacific Textiles Holdings Ltd.
The crackdown on Fountain Set was part of an increasingly aggressive campaign by China’s central government to curb the environmental damage wrought by three decades of industrial expansion.
After environmental-protection officials launched their stealth inspection in June of last year, authorities accused the Guangdong factory of keeping fake books to hide its illegal discharge, and said the amount of dye in the factory’s waste water was 19.5 times the legal limit.
When Chinese newspapers began reporting on the findings, Fountain Set told customers over e-mail that “heavy rains” had led to a slight increase in water discharge, but the plant was operating normally. Several weeks later, the company informed customers that a fine had been issued by environmental-protection authorities. The company cooperated with the government and dialed back production at the plant to reduce its wastewater output.
Yen was bombarded with calls. Wal-Mart, which recently had launched a slew of initiatives in the U.S. to show its commitment to the environment, sent a team of inspectors to the plant and canceled all direct orders with the factory until the issues were resolved, according to the company. Lands’ End, one of Fountain Set’s major customers, says it sent inspectors to the plant and reduced its orders with the company. J.C. Penney says it shifted its orders to other Fountain Set factories. Abercrombie & Fitch held a meeting with management. Target says it began exploring alternative cotton suppliers.
Yen calls it a “very stressful time” but says the vast majority of the company’s customers ultimately stuck with the company.
The complexity of the textile-industry supply chain means fabric mills such as Fountain Set often escape tight scrutiny from apparel companies even though mills are the site of the industry’s heaviest environmental damage.
Gap, for example, employs a full-time social-responsibility staff of 93 people involved in monitoring 2,000 factories around the world for labor issues and environmental practices. But Fountain Set isn’t on the list because Gap’s monitoring program focuses on companies that sew fabric into clothes, rather than mills. Gap says it is exploring the possibility of extending its monitoring programs further back in the supply chain and already has begun examining the water-use practices at its denim laundries.
Apparel companies say they have the most influence over companies at the end of the supply who they work with directly. “We take the most aggressive action where we have the most leverage,” says William Anderson, head of Social and Environmental Affairs Asia Pacific at Adidas Group.
Many clothing companies say they are pleased to see the Chinese government taking action. Industry executives say the lack of regulatory enforcement in China has forced the apparel industry to become a police force, a job it is ill-equipped to handle.
Many companies defend their decision to stick with Fountain Set, saying it is typically better to work with a factory on improving standards, rather than ditching them when a violation occurs. L.L. Bean Inc. says it considered cutting ties with Fountain Set but was reassured that the company appeared to be cleaning up its act.
“If we felt like there was a better option, we would have left,” says Jim Ditzel, vice president of inventory. “It’s not a perfect world. Wherever you go, it’s probably going on elsewhere.”
Chinese activists are trying to make the textile supply chain more transparent by connecting the dots between Chinese factories and the multinational companies that buy their products. “We want them to know we’re watching from China,”says Ma Jun, a prominent Chinese water-pollution activist who has launched a Web site that aggregates data about polluting factories.
Fountain Set’s new wastewater-treatment facility was certified by the provincial authorities in January. Wal-Mart recently resumed placing orders.
