It is becoming critical for companies sourcing in China to research, develop and implement — in clearly defined steps — fair labor practices and environmental audits in Chinese factories that provide products for export.
Photo: Yann Layma
Rigorous attention to this process not only makes a company a responsible corporate citizen, it is a good defensive strategy and will also help test the viability of sourcing from China over the next three to five years.
Despite price pressures due to rising labor costs and the fluctuating renminbi, China is still a major source of product sourcing for most major global companies. Panasonic, for example, recently announced it will transfer its lithium battery production from Osaka, Japan, to China. Rising labor costs, better enforcement of environmental standards and domestic and international NGOs empowered with YouTube and Twitter create new manufacturing conditions and rising costs for products made in China.
The International Labour Organization has suggested that wage rates in China are 50% of their global counterparts. The Chinese government has committed to a minimum increase of 13%. The first question that companies should ask is whether they are morally exposed by sourcing from suppliers who are not paying reasonable wages. The second question is whether these suppliers can remain viable as wages increase. The answers to these questions will assist international companies in assessing whether they are risking being exposed to unfair sourcing practices, whether they need to work with Chinese suppliers to improve their processes or whether they need to move off-shore. There is also the value of doing something, as the late President Kennedy said, “because it is right.”
An environmental audit should seek to establish that the raw materials used in the production process are compliant to safety and health standards. But it should also determine whether the factory itself is environmentally compliant. This reduces the risk of brand exposure, brand damage and the social culpability of discovering that, for example, the paint factory that provides paint to your operation is not environmentally compliant. Thus, all raw materials and parts suppliers should be included in this review.
Brand image is what people in high-income markets in China and worldwide pay for. As Apple’s partnership with Foxconn has shown, consumers are keen to include their conscience in their buying practices. Competitors or good Samaritans armed with YouTube can expose a company worldwide when its pants are down. The time has come to commit in fully understanding from whom, how and what you are buying in China.
John Gruetzner is managing director of Intercedent, an advisory firm with offices in Beijing, Hong Kong, Singapore and Toronto. The firm executes cross-border trade and investment projects focused on Asia. Its clients include Fortune 500 firms, SMEs and government agencies. Based in Beijing, Mr. Gruetzner has lived and worked in China for more than 28 years.