Is China ‘better the devil you know’ for sustainable procurement?
Supply Chain Risk Outlook
by Ryan Aherin,
Previously, we looked at the e-commerce surge increasing labour risks and why coffee and gold are rising up the reputational risk agenda. This week, we focus on Asia and the pockets where risk of labour violations is greatest.
The trade war with the US has made manufacturing in China a riskier proposition. As a result, companies have accelerated the relocation of their supply chains to new production hubs across Asia. However, moving to new, less familiar producing locations comes with a set of unique challenges and companies may inadvertently be increasing their exposure to labour violations that they were better positioned to navigate in China.
Our suite of labour rights risk indices tells us that workers in countries such as Bangladesh, Cambodia and Vietnam are more at risk than in China across a wide number of issues. Manufacturing in China is far from risk free and there is a solid argument to make that labour and social rights are regressing with the resurgence of state-sponsored forced labour in Xinjiang. But it is a well-trodden path and many companies have become adept at navigating the country’s potential ESG pitfalls, especially in relation to labour rights. Organisations taking the leap into new markets, therefore, need to do so with their eyes wide open to the potential reputational risks.
Lack of union protection in Asian markets creates cycle of labour abuses
While child labour and modern slavery are often the subject of high-profile media and NGO campaigns and tend to grab the headlines, they are not always the issues that pose the greatest risk for manufacturers in all sectors.
One of the key drivers for labour violations across Asia is the poor performance of most countries for freedom of association and collective bargaining. The lack of union protections manifests as a cycle of violations against workers’ rights, including decent wages and working time. Low wages put workers under pressure to work excessive overtime in order to earn a living wage; leaving them vulnerable to poor health as a result of exhaustion. Without adequate representation, workers are unable to bring these issues to light and request better working conditions.
The two worst performing Asian countries in our Freedom of Association Index are Bangladesh and Vietnam. Companies relocating supply chains to either country need to be aware that worker protections are very low. In Vietnam, unions are not independent and are often led by factory managers. Although the government has raised minimum wages nearly every year for the last decade, but many factories have struggled to pay them, resulting in a high occurrence of wage violations. This issue is particularly prevalent in the country’s garment sector, where inconsistent order volumes arising from seasonal market demands often result in wage arrears.
India is another case in point. It is one of the highest risk countries for freedom of association violations in the region and is also rated extreme risk in our Decent Wages and Decent Working Time indices. The risks to workers stem from the ineffectiveness of unions in the country, which are more interested in supporting the political parties they are aligned with, and from a lack of workforce participation. The protection of workers’ rights can be marginal and companies buying from the country should undertake thorough risk assessments of suppliers to understand which need auditing to ensure violations don’t take place under the umbrella of their brand.
Sustainable procurement issues vary widely across sectors
Overall, South East Asia should be considered high risk for labour violations, but the level of exposure for manufacturers in different industries varies depending on the issue. This is where industry specific risk data can add value to the evaluation of suppliers in the region and better inform the level of preventative action needed to address these issues.
The chart below illustrates how an electronics factory in Vietnam would have a similar risk exposure for wage violations as an apparel factory. However, an apparel retailer would need to place greater scrutiny on Vietnamese manufacturers to prevent association with child and forced labour, which would have a greater impact on their reputation and could also bring them afoul of regulations in the US and EU.
Poor working conditions drive exodus of skilled labour
As manufacturers move beyond China, they will also face another urgent reason to improve working conditions outside of the obvious reputational risks. Vietnam, perhaps South East Asia’s most advanced electronics manufacturing market benefitting from the China exodus, is already experiencing shortages of skilled labour needed to support the industry’s expansion.
As major electronics and mobile phone brands have moved flagship manufacturing operations into the country, the need for skilled workers has increased. However, poor working conditions have led many skilled workers to seek employment either outside of the country or in other sectors. The lack of a suitably skilled workforce is a growing issue and one that underscores the sound business reasoning for ensuring workers in the supply chain are looked after.
While the benefits of supply chain diversification are clear, shifting manufacturing out of China brings a new landscape of risks and opportunities. With limited budgets and resources, sustainable procurement teams just need to be sure they have the tools to identify and manage these issues, or taking the less trodden path could prove to be more perilous than staying put.