Chemical safety, BYD's Achilles heel?

Produced | Tiger Sniff ESG Group

Author | Overnight sailing

Head figure | Visual China

This article is the 015th article in the #ESG Progress Watch#series

Keywords: corporate compliance, chemical safety, labor management, community relations

A few days ago, BYD had a compliance incident in Japan. Unable to solve the problem of hexavalent chromium, the Poncho Z EV, a small electric bus jointly developed by BYD and Hino Motor Co., Ltd. (Hino Motors), was shelved.

Meet the national standard and be stuck by the line standard

Let's start with the protagonist of this compliance incident, "hexavalent chromium".

Hexavalent chromium is the most toxic chromium, classified by the World Health Organization as a Class 1 carcinogen, skin contact can lead to allergies, more likely to cause genetic defects, inhalation may be carcinogenic, and has a lasting danger to the environment. Hexavalent chromium is mostly used in the automotive industry to electroplate parts to prevent rust and corrosion on metal surfaces.

According to the Review of Human Carcinogens, Volume 49 "Chromium, Nickel and Welding" published by IARC in 2012, workers exposed to hexavalent chromium are at increased risk of lung cancer, asthma, or nasal epithelial and skin damage. In July 2019, hexavalent chromium was included in the List of Toxic and Harmful Water Pollution (First Batch).

BYD did not deliberately "poison", but exported normally in accordance with national standards.

China and the European Union have imposed restrictions on the use and content control of hexavalent chromium. The "Requirements for the Management of Hazardous Substances and Recyclable Rates of Automobiles" issued by the Ministry of Industry and Information Technology in 2015 stipulates that the mass fraction of hexavalent chromium in automotive products shall not exceed 0.1%.

RoHS is a mandatory standard established by EU legislation, the full name of which is the "Directive on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment", and hexavalent chromium is one of the restrictions

Japan has not enacted a law banning the use of hexavalent chromium, but in 2008, the Japan Automobile Manufacturers Association voluntarily added hexavalent chromium to the list of banned substances.

Many people in the industry expressed their incredulity for BYD's encounter with the wall. Although according to the industry view, the toxicity of hexavalent chromium will only have a limited impact on workers when the electroplating line is still a solution, and there is no safety hazard in the finished product after electroplating. But hexavalent chromium is not new in Japan.

"How could BYD not know?"

As early as around 2005, Japanese automobile and parts companies began to voluntarily restrict the use of hexavalent chromium. After January 2008, the use of hexavalent chromium in Japanese automotive products was banned, and by 2020, all new models in Japan have completely eliminated hexavalent chromium.

Before the launch of the new car, Hino had already discovered the problem of six-valent chromium, and had explored with BYD the option of not using hexavalent chromium, but it reached an impasse, first postponing the listing to 2022, then postponing it to March 2023, and finally announcing the cancellation.

The compliance conflict stems from the fact that Hino Motors, BYD's partner in Japan, is a member of the Japan Automobile Manufacturers Association and must comply with the association's regulations. The cooperation method between the two parties is that BYD will supply Hino as an OEM (OEM production).

Industry standards must first comply with national standards, and can only be higher than national standards, and only constitute constraints on industry or association members. That's why BYD, which is not a member of the association, can sell products containing six-valent chromium in Japan, but Hino still wants to cancel the launch of new cars in cooperation with BYD.

In fact, some of BYD's pure electric buses using hexavalent chromium have begun to be popularized in Japan, and 80 units have been sold at this stage, accounting for 70% of the Japanese electric bus market.

BYD Japan later stated that although the relevant parts did use hexavalent chromium, it would not affect the human body and the environment under daily operating conditions, and would be disinfected accordingly when recycling was discarded, and would not pollute the environment. At the same time, BYD promised that the new J6 and K8 pure electric bus models launched by the end of 2023 will no longer use six-valent chromium. This shows that it is not impossible to use hexavalent chromium in the process. It is unclear what the specific reasons for the deadlock in the exploration between the two sides are, but it is clear that BYD underestimated the impact of Japanese industry regulations on association members and underestimated the Japanese automotive industry's stringent requirements for chemical safety.

At present, in addition to Hino Motors, which has clearly shelved its cooperation with BYD, the impact of this matter is still fermenting, and some other bus operating companies have also stopped operating electric buses manufactured by BYD. Seibu Bus cancelled the launch event for BYD's all-electric buses, which was scheduled for February 22, temporarily suspended operations and launched an investigation. The following day, Keihan Bus suspended the operation of four BYD-made electric buses and changed them to diesel buses, and is discussing measures such as future operation. Iyotetsu Bus, which was originally scheduled to introduce the Poncho Z EV, also said that it plans to purchase other pure electric buses in FY 2023.

Continuing shortcomings in chemical safety

This is a compliance incident based on chemical safety. Coincidentally, BYD's ESG rating has always been assigned a red code in terms of chemical safety.

MSCI's ESG rating of BYD was upgraded from A to AA in November last year, which is quite an outstanding sustainability achievement. But when it comes to key topics, you'll find some interesting details.

BYD's ESG rating was upgraded to AA in November 2022, unchanged but trailing a new "community relationship," source: MSCI

In this rating upgrade, BYD's key issues of industry leadership have not changed, and it still performs well in product safety and quality, cleantech opportunities, and remains at the industry average in terms of corporate governance, corporate behavior and product carbon footprint. There are changes in the lagging issues, and "community relations" has been added to the original chemical safety and labor management.

"Community relations" is an issue that requires enterprises to properly handle their relations with residents in nearby communities, which is embodied in respecting their rights and interests, properly handling differences, and sharing the results of enterprise development with them. Many companies are keen to share in their social responsibility reports the case of supporting the community with charity activities that respect the elderly and love the young, which can be said to be one of the most superficial actions in the initiative to improve community relations.

BYD has included public welfare projects such as assisting the devastating flood in Zhengzhou, targeted poverty alleviation in Shaanxi and Guangxi, supporting rural education in Yunnan and Sichuan, continuing to care for children with cerebral palsy, and organizing volunteer services in its social responsibility report as measures to give back to society.

But these palliative, but not cured charity activities cannot solve BYD's fundamental community relations dilemma. In BYD's case, the downgrading of community relations can be seen as directly related to chemical safety, the same as labor management being assigned a red code, and whether BYD can protect workers and residents of surrounding communities from hazardous chemicals. In other words, the backwardness of the new "community relations" exposes BYD's persistent shortcomings in "chemical safety".

The reason why MSCI includes community relations on backward issues is most likely because of the BYD Changsha exhaust gas incident that caused a lot of noise last year.

In May 2022, a number of residents in Yuhua District, Changsha, Hunan Province, said that the pungent smell of exhaust gas emitted from the BYD factory near the community caused many children in the community to have nosebleeds, and once rushed to Weibo hot search. BYD responded through Weibo that night: the park's emissions comply with relevant national regulations and standards, and "nosebleeds caused by excessive emissions" are malicious fabrications.

Once again, the familiar compliance with national standards has appeared. In the Changsha waste discharge incident, the owners of the community have questioned whether the detection time avoided the wee hours of the morning, when the smell was heaviest. Follow-up investigation progress shows that BYD admitted that it only did water spinning paint mist dust removal for spraying exhaust gas, which is equivalent to tacitly acknowledging that volatile organic pollutants are directly discharged and did not take treatment measures in accordance with regulations. It is basically consistent with the news that "in order to reduce costs, the waste gas treatment link of the factory will reduce the steps at night".

It is a fact that BYD took a loss in the Changsha exhaust gas incident, but it is worth investigating that in the face of the negative social impact caused by chemical safety, BYD first used "meeting national standards" as a shield.

Everyone in the industry knows that the national standard is the minimum standard and the bottom line. Especially according to the industry engaged in painting work, the monitoring link is easy to cheat, and the exhaust outlet can be circumvented by moving the position.

Compliance with national standards does not equal harmless discharge. If the standards of hazardous waste management are only focused on compliance, the health of employees and residents who have been exposed to low concentrations of hazardous elements for a long time will still be affected. This may also be the reason why the Japan Automobile Manufacturers Association spontaneously complies with industry regulations and demands 0 hexavalent chromium.

As a pioneer of cleantech opportunities, how can chemical safety only linger on BYD?

Wei Xiaoli, a domestic innovative practitioner of new energy vehicles and a new force in car manufacturing, is highly praised by MSCI in terms of clean technology opportunities, but Wei Xiaoli is not bothered by the red code of chemical safety, and even the yellow code is not involved.

Why is chemical safety only in BYD? The main thing is that it is a ride on the dust production capacity and extensive governance.

As of December 31, 2022, Xpeng Motors has delivered a total of 258,700 electric vehicles throughout the year, making it the best of the three Wei Xiaoli families. Li Auto delivered 133,200 units in 2022, which is still a welcome increase of 47.2% year-on-year. NIO delivered 122,500 new vehicles in 2022, up 34% y/y.

Looking at BYD, according to its announcement on January 2, the cumulative sales volume for the whole year of 2022 was 1,863,494 units, a year-on-year increase of 208.64%, of which the sales of new energy vehicles in November alone reached 230,400 units, a year-on-year increase of 134.3%. One month's sales are almost catching up with Xpeng's one-year production capacity, and the performance is indeed amazing, and in terms of growth potential, it is a model for Chinese companies.

But behind such super-god performance is a typical development (pollution) and then treatment. Back to BYD's Changsha waste gas incident, it has been in operation for ten years, it is not newly built, why did it not fall into a pollution storm until recent years?

This is directly related to BYD's soaring sales. Previously, BYD did not produce so much, and its emissions were limited. After the discontinuation of fuel vehicle production in March 2022, the DM-i became BYD's fastest growing model, and the Changsha plant is the only production base for DM-i power core electrical components in China, bearing all the production capacity pressure. According to the observation of residents near the factory, BYD's Changsha factory is still brightly lit at three or four o'clock in the morning, working overtime to catch up with the schedule.

In terms of governance, although BYD has always claimed to assume social responsibility in environmental protection, charity and public welfare, and has continued to disclose relevant reports, it has established a "CSR Management Committee" (Corporate Social Responsibility Management Committee) since 2008, and has released annual social responsibility reports since 2010.

Wang Chuanfu, chairman and president of BYD, will deliver a speech in this report every year, and has repeatedly emphasized that "actively assuming social responsibility is the vitality and competitiveness of enterprises".

It has been 12 years now, BYD is still stuck in CSR reports and has never released ESG reports. This is already very telling.

The biggest difference between CSR reporting and ESG reporting is that CSR requires companies to tell stories, while ESG requires companies to quantify their efforts.

Quantitative efforts refer to improving the granularity of governance. In addition to easily quantifiable financial indicators, various indicators such as production safety, hazardous chemical risk management, and compliance management also need to be carefully managed.

In the "Three Wastes Management" section of BYD's CSR report, only the exhaust emissions of the Huizhou Park are disclosed in relative detail - after the upgrade, the concentration of volatile organic compounds (VOCs) in the Huizhou Park has decreased by 71%, and the total emissions have decreased by 0.285 tons per year.

The "2021 BYD Social Responsibility Report" only made relatively detailed disclosure of the exhaust emissions of the Huizhou plant

In fact, BYD has factories in more than 30 cities across the country, and only Huizhou with good performance for disclosure meets the requirements of CSR reporting to tell a good story, and does not meet the requirements of fine management of ESG reports. What's more, the key performance indicators pulled to the tail of the report show that BYD's annual VOCs emissions in 2021 were 233.22 tons, nearly three times more than the previous year. The 0.285 tonnes of emissions reduced in Huizhou alone is a drop in the bucket.

 List of key performance indicators of the 2021 BYD Social Responsibility Report

In other words, some of the data that should be included in the ESG report with analysis and actionable is the "negative information" that BYD has been unwilling to disclose for 12 years; A systematic and convincing accountability plan that should be included in ESG reports is a fundamental issue that BYD has been avoiding and is unwilling to face head-on.

For 12 years, BYD has been reporting good news and not bad news in CSR reports, using some grand and beautiful intentions to "decorate the façade", covering up the lack of actual measures and corresponding effects, not seeing specific data, and not clarifying environmental and social sustainability goals, let alone truly integrating sustainable development concepts and ESG concepts into corporate development and operation.

ESG and carbon reduction of new energy vehicle companies is not the only one

New energy vehicles have been labeled as low-carbon and environmentally friendly since their birth, but the ESG of new energy vehicle companies cannot only focus on carbon reduction.

Specific to the production and manufacturing of automobiles, every link is inevitably polluting and energy-consuming, such as the world's most recognized painting link with the largest emissions of three wastes, and new energy vehicles are not exempt. Taking off the gorgeous coat of low-carbon advantages, new energy vehicles are still standard manufacturing industries, and it is difficult to avoid traditional ESG problems in the manufacturing industry. Not to mention the heart of new energy vehicles - batteries, from the moment the raw materials are extracted from the ore, pollution has quietly occurred.

Therefore, when we talk about ESG of new energy vehicles, chemical safety is a key topic that cannot be ignored. When talking about chemical safety, just meeting compliance on national standards should not be the pursuit of AA students. What's more, when it comes to the global market going to sea, the national standard is often just a joke.

BYD continues to innovate in the fields of new energy vehicles, battery technology, automotive chips, and energy storage, not only shouldering the important mission of leading national independent innovation, but also has gratifying performance, bringing investors real and considerable returns. Such a light of domestic products, when moving to a bigger stage, do not let chemical safety become a deadly Achilles heel.