May Insight – Corporate Compliance

Intercedent advises that companies sourcing in China first research then develop and implement in clearly defined steps a fair labour practices and environmental audit and improvement of the operating conditions in factories that provide product for export from China.  

This process should be completed for a number of reasons including being a responsible corporate citizen, as a defensive strategy and as a financial planning exercise to test the viability of sourcing from China over the next three to five years.

Despite price pressures due to rising labour costs and shifting pricing of the RMB China is still a major source of internal and external product sourcing for most major global companies. It is also a source of lower priced labour intensive products. This month for example Panasonic announced that it will transfer its Lithium Battery Production from Osaka to China. Rising labour costs, better enforcement of environmental standards and domestic and international NGOs empowered with YouTube and Twitter will create new manufacturing conditions in China.

The International Labour Organization has suggested that wage rates in China are 50% of their global counterpart. 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 that are not paying reasonable wages. The second question is whether these suppliers can remain viable as wages increase.  The answers to these questions both assist buyers determine whether they can be exposed in the media or by shareholder’s to unfair sourcing practices; but also help predict if they need to work with suppliers to improve the automation level in China, move to the interior of China or move off-shore. There is also simply the value of doing something, as late President Kennedy, said because it is right.

An environmental audit should seek to establish whether or not the raw materials used in the production process are compliant to safety and health standards; but also made in factories that are environmentally compliant. This reduces brand exposure but also the brand damage and social culpability of discovering that 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. A key reason being that now that environmental regulations are being enforced the supply chain may be disrupted or priced at a higher level due to the cost of compliance.

Brand, more and more, as Apple’s partnership with Foxcom has exposed is what people in high income markets in China and worldwide pay for. Consumers are keen to include their conscience in their buying practices. Competitors and/or good Samaritans armed with YouTube can expose a company worldwide when its pants are down.  Therefore, the time is now to understand to invest in fully understanding from whom, how and what you are buying in China.

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