Looking Ahead

Most experts seem convinced that in the end the central government will get its way, in part because the concerns of 1.3 billion people can't be ignored forever. "Obviously, over time the people will become more and more conscious of the fact that quality of living does include a clean and beautiful environment," says Pinney. As that shift occurs, manufacturers must watch closely. "You need to be quite active, quite involved in these things," says Michael. For example, companies may need to plan for longer turnaround times as the level of regulation grows. The pace of approvals is also likely to grow more uncertain, Michael adds. "The government's capacity to process these things is still developing."

Where the rules aren't clear, Michael suggests that it's better for companies to do too much instead of too little. "You certainly want to be compliant with all these regulations, but companies should worry about the environment for their own brand risk as well."

The concerns of companies with large, visible brands must extend beyond the environmental impact of their own production and include the impact of their suppliers and vendors. "The buyer has a lot of responsibility for developing suppliers so they are capable ... and making sure they comply with the rules," says David Lee, a partner and managing director in BCG's Beijing office. Major brands such as McDonald's and Adidas already have full quality compliance teams co-located among their vendors.

Foreign companies may need to be particularly careful if they lack the deep political connections of the local companies. One of the biggest concerns is "whether the rules are applied evenly or whether the foreign companies are given a particularly hard time," Michael adds. Pinney cautions that although there is a broad drive to make the government less corrupt and more transparent, local players often have more room to negotiate their way around pollution controls. "By contrast, multinationals have less wiggle room," he says.

Other BCG experts say that whatever home court advantage local players enjoy, it won't be enough to overcome the economic difficulty of being a low-margin company faced with the task of digesting a huge new cost. Many local players are already operating at such low margins that a major investment to clean up their processes could be extremely difficult. "This is beyond the reach of most Chinese players," says Victor Du, a principal in BCG's Shanghai office.

Others think that cleaner processes won't necessarily mean dramatically higher investments, since cleanliness can reduce waste and inefficiency. "It won't be cheaper; otherwise, people would have done it long ago," says Lee, but with some level of savings offsetting the costs, the price for compliance may not be prohibitive. Western companies that already operate within global standards or that have been pushed by investors and regulators in their home markets to maintain those standards abroad will have an advantage, particularly when expensive new technology must be brought in to clean up a problem. Others suggest that China may have a good share of low-hanging fruit to be picked when it comes to energy conservation. One example of this could be energy-recovery processes, which recycle much of the excess heat generated by industrial plants. New technologies in this area are helping to recover wasted energy and convert it into electricity and industrial steam that can be turned back to help power the pants. These recovery processes can cut energy use -- and costs -- by up to two-thirds and provide payback in less than five years.

But new challenges will likely emerge. For some industries viewed as polluters, the government may be less amenable than in the past to expansion proposals. Companies in historically high-polluting industries -- such as metal production or plating -- may have a harder time getting approvals, says Lee, or be unable to buy a new parcel of land. Since the Chinese government is the underlying titleholder of all land, which it typically "sells" under long-term leases, sales are sometimes leveraged as a tool of government planners.