Zombie Supply Chains, The Wire China, July 16, 2023.
By Nithin Coca
Thanks to the Chinese market, unsustainable supply chains in Southeast Asia just won't go away.
Sukanto Tanoto beamed as he shook Xi Jinping’s hand. It was 2015, and the fact that Tanoto — an Indonesian billionaire who was born to Chinese immigrants — had been invited to attend the conference in Hainan, China, was something of an honor. Only two other overseas Chinese entrepreneurs were reportedly included in the discussion, which centered on regional economic integration and financial cooperation around the then-novel Belt and Road Initiative.
Tanoto had worked hard for his invite. It was the culmination of years of relationship building in his heritage country, and a testament to the growing heft of his company, Royal Golden Eagle (RGE), which, at that time, was worth an estimated $10 billion and focused mostly on pulp and paper exporting.
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But the handshake signaled RGE’s next act. Since that 2015 trip, China has become integral to RGE. Paper pulp from two RGE subsidiaries, APRIL and Toba Pulp Lestari (TPL), are turned into viscose (also called rayon) at Chinese factories run by two other RGE subsidiaries, Asia Pacific Rayon and Sateri. And RGE’s palm oil subsidiaries, Apical and Asian Agri, are among the top exporters of palm oil to China, where it is used in noodles, cosmetics and other consumer goods. Today, RGE is worth an estimated $30 billion and has dozens of known subsidiaries and offices in Jakarta, Singapore, Hong Kong, Beijing and Nanjing. Tanoto’s own wealth has more than doubled, to an estimated $2.8 billion.
The fact that RGE is thriving is an unfortunate surprise to many observers in the West. Over the past decade, RGE has been targeted by dozens of global non-profits and journalists for its links to social and environmental harms in its Indonesian supply chains. Indeed, thanks to growing consumer pressure, civil society and stricter regulations, RGE is a black sheep in Western markets, known for its connections to deforestation, labor abuses, illegal land grabs from local communities in Sumatra, and even allegations of money laundering and tax evasion. Global brands like H&M, Adidas, Lush, Zara, and retailers like Walmart and Target have committed to not sourcing products using paper pulp from RGE or any companies linked to it — an ensemble that, on the surface, seems like a victory for environmental, social and governance (ESG) advocates.
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“RGE’s business is based on large-scale deforestation, and they’ve left a trail of destroyed land and social conflicts,” says Sergio Baffoni, with the non-profit Environmental Paper Network (EPN). Baffoni is proud that, together with its NGO partners, EPN has successfully pushed many European and American brands to stop buying products and commodities linked to RGE, but he worries it’s not enough. “Because of Chinese demand, the production of pulp in Southeast Asia is still growing,” he says.
Indeed, the impact of campaigns against RGE, which is the largest producer of viscose in the world, has been minimal, with RGE’s business still growing both in China and with China.
According to WireScreen, RGE has at least four Chinese subsidiaries, one of which is a port in Jiangxi and a 2020 joint venture with the local government. And environmental watchdogs say the company is ramping up production in Indonesia to meet growing Chinese demand. China now accounts for 52 percent of global imports for dissolving wood pulp (DWP), the raw material for viscose fiber production, and since 2017, RGE has dramatically increased its paper pulp and palm oil exports to China. The company is also currently building two new factories: one in Sumatra, Tanoto’s birthplace, and another in North Kalimantan province.
According to a recent NGO report, RGE is using shell companies to disguise its involvement in one of the new factories, because it will expand production of paper pulp in one of Indonesia’s last forested regions in Borneo and Papua — all to feed its Chinese factories.
“We know that Tanoto is part of the Chinese diaspora in Indonesia and has a good connection with China,” says Syahrul Fitra, a campaigner with Greenpeace Indonesia, who co-wrote the report. “They are not transparent to the public about their supply chain, and we estimate that 600,000 hectares of forests could be converted to supply their new mill.”
RGE did not respond to requests for comment, but it has denied any links to the companies listed in the report. On its website, the company insists it is committed to “sustainable development in all locations where we operate.”
“Our goal is to be a good and responsible neighbor…by protecting the environment and respecting human rights,” it says.
Environmentalists fear that RGE could be just one of many Southeast Asian companies bypassing western due diligence requirements. Many producers of Malaysian palm oil and Thai rubber, for instance, have also failed to meet Western sustainability and labor rights standards and have been successfully targeted by ESG advocates. Yet instead of slowing down, both supply chains are increasingly finding new life in the Chinese market.
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The net effect is a series of zombie supply chains — ones that are threatening the planet with increasing urgency.
All of these agricultural commodities — palm oil, rubber and paper pulp — contribute to tropical deforestation, which environmentalists realized only relatively recently is significantly more damaging than nontropical deforestation. For starters, in contrast to the temperate landscapes that make up much of Europe, the U.S. and China, tropical landscapes host immense biodiversity.
They also play an important role in climate, with tropical wetlands alone holding twice as much carbon underground as all the world’s forests. When these wetlands are drained or destroyed for palm oil, rubber or paper pulp production, they emit massive amounts of greenhouse gas emissions. In fact, according to the Intergovernmental Panel on Climate Change, “land-use change, primarily deforestation” accounts for as much as 21 percent of global greenhouse gas emissions — similar to the entire transportation sector.
If a company from Europe or the U.S. is saying, ‘We won’t buy from you if you have deforestation,’ but you’ve got someone in China saying, ‘We’ll buy from you and you can continue doing it,’ there’s no incentive to change.
These emissions are seen as easier to mitigate than those in electricity generation or transportation, which necessitate widespread technological and infrastructure changes. For many years, NGOs believed they could all but solve the environmental harms of tropical deforestation simply by raising awareness and exposing the link with climate change. Campaigns were fairly simple to build, especially since human rights issues often dovetailed with environmental damage.
In 2013, for example, the Rainforest Action Network (RAN) released a report showing how 20 American, European and Japanese consumer goods brands were sourcing palm oil from sources linked to human rights abuses in Indonesia and Malaysia; 17 of the 20 companies updated and adopted stronger palm oil sourcing policies.
But the concern now is that it could all be for naught: China, which doesn’t have the same ESG standards, has now grown to be the largest trading partner with many tropical developing countries. Regulations and campaigns in the U.S. and Europe seem to have little impact.
“If a company from Europe or the U.S. is saying, ‘We won’t buy from you if you have deforestation,’ but you’ve got someone in China saying, ‘We’ll buy from you and you can continue doing it,’ there’s no incentive to change,” says Christopher Wiggs, a Jakarta-based program director at the non-profit AidEnvironment. “The leakage undermines the whole methodology behind the policies and how NGOs have used them to target companies.”
DIVERT AND DENY
In late 2020, the U.S. Customs and Border Protection agency (CBP) sent shockwaves through the palm oil industry when they issued a withhold release order (WRO) for all products containing palm oil produced by the Malaysian conglomerate Sime Darby, one of the largest producers in the world.
Palm oil, the most consumed food oil in the world, is a key ingredient in many consumer goods products, including packaged snacks, instant noodles, and shampoo, and millions of dollars worth of products were affected by CBP’s order, which requires listed products to be denied entry or detained at all U.S. ports of entry.
The reason? A legal non-profit, Liberty Shared, sent a petition to CBP about forced labor of migrant workers on Sime Darby’s plantations. Global brands, including General Mills, Cargill and Ferrero, announced they would stop using Sime Darby palm oil in their products. In the end, it took the company more than two years to address the allegations and get the withhold release order removed.
The U.S. has used tools like WROs aggressively in the fight against unsustainable supply chains; blocked shipments are up 38,000 percent in just five years. Meanwhile, the European Parliament just passed strict, mandatory environmental due diligence supply chain requirements that will force companies to ensure the products they import are not connected to deforestation. Considering the rapid growth of large, mono-culture plantations is often linked to human rights abuses, including labor violations and even the killing of indigenous people in places like Malaysia and Brazil, the EU is debating similar regulations for human rights, too.
“The [EU] regulations will have a great impact on international trade,” says Florencia Sarmiento, a policy analyst at the International Institute for Sustainable Development. “They will require changes in the value chain operations while at the same time opening the market for sustainable production.”
But will they stop companies like Sime Darby? Since 2008, the Malaysian company has been focusing on the Chinese market, expanding processing facilities there and, in 2018, signing a deal with COFCO, China’s largest and state-owned food processor. The Chinese government hasn’t imposed any restrictions on Sime Darby imports, and during the latest controversy, no Chinese brand cut off purchases.
The ability to divert tainted palm oil to another market meant that the CBP’s withhold release order did not affect Sime Darby’s bottom line. In fact, its revenue and profits grew in 2021 and 2022.
For Tanoto and RGE, there’s even less to fear from a CBP withhold release order. In 2020, only about 48,000 tons of RGE’s palm oil went to the U.S., compared to 768,000 tons to China. And for environmentalists in the region, campaigning against Chinese supply chains is proving to be a completely different beast.
“In China, to be honest it’s very challenging for organizations to launch public campaigns, not only for sustainable palm oil, but also for other sustainability issues,” says Lifeng Fang, head of the Roundtable on Sustainable Palm Oil (RSPO) in China. “Increasing awareness will take some time.”
RSPO, for instance, has been operating in China since 2018 but has so far failed to meet its goals. Only 4–7 percent of palm oil imported into China is certified as sustainable — and most of that is for export to markets like Europe, which have stricter regulations.
Indeed, the contrast between advocacy timelines in developed economies versus China is striking. In 2019, the Global Platform for Sustainable Natural Rubber (GPSNR) was founded because the production of rubber from Thailand, Vietnam, and Indonesia has been linked to deforestation, biodiversity loss, and pollution, along with forced labor and corruption. And in just a few years, GPSNR has had remarkable success: Nearly all the major buyers in Europe, the U.S., Japan and Korea are on board.
“We now represent about 55 to 60 percent of global natural rubber volume with our members,” says Stefano Silva, the director of GPSNR.
But China is the largest importer of natural rubber — consuming 35-40 percent of global production — and only two Chinese importers of natural rubber (Shandong Linglong Tire Co. Ltd and Aeolus Tire Co. Ltd) have joined GPSNR. Several of the largest importing companies (including Hainan Haiken, Sinochem and Guangdong Guangken) have not.
“China is an absolutely critical country when it comes to the natural rubber industry, and there’s currently not enough of a conversation happening between Chinese companies and the GPSNR,” says Julian Oram, senior director for rubber at the U.S.-based non-profit Mighty Earth, one of the NGO members of GPSNR.
The question Oram and others don’t have an answer to, though, is how to engage these companies and how to address China’s central role in supply chains.
“We have little or no transparency about the Chinese companies who invest in Indonesia, and Chinese companies don’t respond to our requests for information,” says Zakki Amali, a research manager at Trend Asia, an Indonesian environmental NGO. “That makes doing advocacy much, much harder.”
CAMPAIGN CONUNDRUMS
Many of the NGOs that are working on China’s imports of tropical commodities were reluctant to speak on the record for this story. Several are part of the Tropical Forest Alliance (TFA), a coalition hosted by the World Economic Forum, which, notably, takes an explicitly non-confrontational, “forest positive” approach to their work, and sees government engagement as key.
“Government guidance is a key motivation for Chinese companies, and effective policies and incentives can help propel concrete action,” says Chunquan Zhu, head of nature initiatives for Greater China at the World Economic Forum. However, Zhu admits that the current regulations, which exist only for timber, are voluntary and thus unlikely “to be adopted across the board” in China.
The China offices of other TFA affiliates, including the World Resources Institute, The Nature Conservancy, Solidaridad, and the World Wild Fund for Nature (WWF), either did not respond or declined requests for interviews. Other organizations working in this space, including the Carbon Disclosure Project (CDP) and the China Council for International Cooperation on Environment and Development (CCICED), which has released several reports on green supply chains, also declined to speak with The Wire China.
The lack of response from typically vocal organizations is “not surprising, but worrying,” says Isaac Stone Fish, formally a China-based journalist and now CEO of Strategy Risks. “Environmental groups that have offices in China feel their ability to survive depends on them staying on the right side of the Chinese Communist Party. For a variety of reasons, environmental non-profits are greenwashing the Chinese government and Chinese companies.”
For Client Earth, an environmental law charity headquartered in London, operating in China means drawing up an entirely new advocacy playbook. In other parts of the world, Client Earth actively works on lawsuits that target governments or companies around their failure to meet environmental standards.
“We do not have the legal standing to bring up any lawsuits in China,” says Boya Jiang, a lawyer in Client Earth’s Beijing office. “So we have a different work approach, supervised by the Ministry of Ecology and Environment, who is also a key partner of most of our programs.”
Indeed, another limitation is that NGOs, including WWF, have to register and get their yearly plans approved by a relevant Chinese government ministry every year, due to a 2017 law. Stone Fish says he worries “there is so much regulatory capture that environmental groups avoid criticizing Beijing, or Chinese companies, for the wrong reasons.”
NGOs in the U.S. and Europe have also worked alongside the government, of course, but they can utilize other levers to push for change, such as lobbying legislators, protests, shareholder activism, and public awareness campaigns. They can also criticize government officials, or connect relatively unknown companies like RGE with downstream American or European brands.
But China’s shrinking civil society over the past few years has all but eliminated any type of direct advocacy campaigning.
Alex Helan, a senior researcher at RAN, notes that their typical playbook — working with local groups who take a labor or human rights lens in their forests campaigning — is not possible in China. “We’re still trying to find out what our in would be,” he says. “At some point, China can’t be avoided.”
Given Chinese concerns about slowing growth and talk of the government implementing new stimulus measures, it is safe to assume that China would be glad to import unsustainable but cheaper commodities.
Southeast Asian civil society is also struggling to figure out how to approach these issues with China. When groups in Indonesia, for example, wanted to campaign on palm oil, rubber, or paper pulp deforestation linked to a U.S. brand, they could work with U.S.-based groups like RAN, Friends of the Earth U.S. or Mighty Earth. Recently, groups in the Indonesian region of Papua worked on a documentary about deforestation linked to South Korean brands with the Seoul-based non-profit Solutions for our Climate, while the Tokyo-based Japan Tropical Forest Action Network has played an active role on campaigns linking illegal timber exports to Japanese multinationals.
But no such partnerships exist in China. TFA, GPSNR, and the RSPO do not have any Chinese NGO partners, relying instead on international NGOs that are based in China — the same ones who face severe restrictions on their operations. One partner mentioned by several organizations, China Dialogue, a non-profit based in the United Kingdom, was, according to sources, forced to close its Beijing office in late 2022 after repeated threats from the police and ultra-nationalists.1
“If you are working in China as a foreign entity, it is considered espionage to, for example, define the treatment of Uyghurs as forced labor. This limits the amount of common ground to work with,” says Justin Dillon, the founder of FRDM, a supply chain due diligence tool.
It is also getting harder to even trace these links to China, due to less access to data. Over the past year, China’s biggest financial data film Wind Information Co blocked offshore users from accessing certain business and economic data, and Fujian province — a key import hub — curbed access to economic and demographic data. This follows moves in recent years to block access to shipping data — the same data that was used to track RGE exports of wood pulp to its Chinese subsidiaries.
“Chinese data laws are making it harder for NGOs to get accurate information about supply chains in China, especially about sensitive areas, and that includes high-risk commodities linked to deforestation,” says Stone Fish at Strategy Risks.
For those still working within China, the only thing left is to hope that the government will push through stronger regulations like those in Europe. But as RSPO’s Fang says, “Policy development is slow, and long term. Maybe in five years we’ll see a policy come out.”
Matthew Zimmer, director of governance research at Newday Impact Investing, worries that these intervening years could be disastrous for the planet as China’s economic conditions could make tropical deforestation even worse.
“China is more than willing to step in as a buyer of products shunned by others if it is in their own economic interests,” he says. “Given Chinese concerns about slowing growth and talk of the government implementing new stimulus measures, it is safe to assume that China would be glad to import unsustainable but cheaper commodities.”
Faced with such a harsh reality, many NGOs are making the choice to simply turn their attention elsewhere. Mighty Earth, for example, has refocused their natural rubber campaigns on Latin America and Africa, which export more to the U.S. and Europe, after finding working on Chinese rubber supply chains too challenging.
“Right now, China isn’t the best use of our funding,” says Oram. “We can make quicker progress elsewhere.”
In the meantime, companies like RGE will continue to double down. In April of this year, Tanoto returned to Hainan, attending the same event where he shook Xi’s hand eight years ago. During a roundtable, he highlighted how RGE has invested 10 billion CNY ($1.4 billion) into China in the past decade, and has expanded high-end paper pulp and fiber manufacturing. He also praised the BRI, and noted how it can help deal with “geopolitical challenges and uncertainties.”
If one of those challenges is NGO-driven, environmental and human rights due diligence requirements in the U.S. and Europe, then China has indeed proved invaluable — not only to Tanoto and RGE, but to companies around the region.