Controversy over the sourcing of cotton from the Xinjiang Uyghur Autonomous Region (XUAR) of China is just the latest in a long list of ethical and environmental scandals related to supply chains originating in the country.
A coalition of human rights groups has accused the Chinese authorities of a state-sponsored system of detention and forced-labour affecting up to 1.8 million Uyghur and other Muslim people. It has been estimated that a fifth of all cotton products manufactured in the world is someway connected to the region, potentially implicating many global brands.
The widespread condemnation of the practices allegedly being employed in the region led many manufacturers to undertake audits of their supply chains to find out if they were affected. Where there was evidence of even indirect supply, some companies severed links. However, although this went some way towards pleasing many lobbyists, it meant that the Western companies involved fell foul of the Chinese authorities who consequently orchestrated a political campaign against them. This resulted in Chinese e-commerce companies, including Alibaba and JD.com, removing some international labels from their platforms; Chinese celebrities denouncing the brands which they had previously worked for and walk outs by Chinese workers from the stores of their employers. Other brands affected were Adidas, Nike, Burberry and Gap, all of which had condemned the practice of forced labour.
Nike’s response is fairly typical of many other Western manufacturers. In a statement, the company said, ‘Nike is committed to ethical and responsible manufacturing and we uphold international labor standards. We are concerned about reports of forced labor in, and connected to, the Xinjiang Uyghur Autonomous Region (XUAR). Nike takes very seriously any reports about forced labor and we have been engaging with multi-stakeholder working groups to assess collective solutions that will help preserve the integrity of our global supply chains.’
However, not all manufacturers and retailers have followed suit. According to the New York Times, some companies continued to source from the region, mindful of the impact of being forced out of such an important market. Chinese brands which have no compunction in supporting the Chinese government line are already profiting from the situation in XUAR.
The issue raises a number of important points for international manufacturers and retailers.
First, it is critical to ensure that they have complete visibility of their supply chains, even down to raw material level. This is possible, but only at a cost.
Second, the decision to source from alternative regions and suppliers (‘optionalization’) also comes at a cost, but this is essential unless the company wants to tarnish its brand or lose sales in Western markets.
Third, Western lobbyists, investors and consumers have demonstrated that they have the power to influence sourcing decisions and this is likely to become an important additional factor in the future.
Fourth, China’s policy of encouraging anti-global brand sentiment may eventually force Western companies into making a binary choice. They won’t be allowed to continue serving the huge Chinese market whilst boycotting a certain region or criticizing certain policies. This is a sign of confidence by the Chinese government and a thorny problem for international companies. Ignoring the Chinese market is not an option for many due to its size and growth, as well as the fact that the value of their share price is to an extent predicated on the access to this lucrative market. If they are forced out of the market then, as was seen in the Uyghur example, Chinese rivals with their nascent brands will move in. However, if global manufacturers and retailers continue to source from China, accepting (or at least turning a blind eye to) ethical and environmental issues, they will face sustained criticism from Western consumers, governments, lobbyists and ethical investors.
In effect, the Chinese government response to the Uyghur controversy is a statement of intent which could lead to a de facto ‘Sinofication’ of some supply chains. It is another sign of the potential bifurcation of global supply chains, a process already underway in high tech sectors where Western governments are eliminating the use of Chinese components in infrastructure such as that related to the 5G roll out for security reasons.
In the case of the Uyghurs, however, it is China which is taking the public policy decisions rather then the US or Europe. The result may be the same: one set of supply chains serving the West and another, with a different values and priorities, serving China’s sphere of interest in Asia and throughout the countries involved in its Belt & Road Initiative.
Although obviously the treatment of the Uyghurs has important implications for supply chains in its own right, the likelihood is that the fall out will be contained. However, it has set an important precedent. There are many issues which could well have bigger ramifications, such as the political situation in Hong Kong or even China’s relationship with Taiwan. Likewise, companies may even be required by shareholders and investors to make a stand on environmental matters such as China’s program of constructing coal fired power stations. Strengthening sentiment on both sides could lead eventually to a transformation in supply chain architecture over the next two decades.
An ethical approach to global sourcing is fundamental to the future supply chain management strategies of global manufacturers and retailers. However, there may be opposition to what could be seen as the imposition of Western ethics on cultures and economies which work to a different set of practices and values. China certainly believes that it has done nothing wrong in the way it has treated the Uyghur community and that opposition from Western governments and companies has been politically motivated.
The progress that has been made over recent years in improving the conditions of workers in global supply chains should not be under-estimated. Indeed, this has brought about important societal benefits in developing countries. There may be limits, however, on the pressure which Western lobbyists, businesses and governments can exert before the pressure becomes regarded as undue and unwelcome political interference. If this is the case, then ultimately there is a risk that the blurring of ethical policies with international politics could result in the splintering of established global supply chain structures. This, in economic terms at least, would mean the development of sub-optimal distribution channels; costly to build and maintain. Whether the out-come would be positive for either workers, consumers or for international relations will depend to a large degree on perspective.
Source: Transport Intelligence, June 22, 2021
Author: John Manners-Bell