CSR in the Supply Chain

1
CSR in the Supply Chain

• Overview of Drivers and Trends in European
  Sourcing from China
• Paul Wenman, SourceAsia
• June 18th, IED/LEAD CSR Roundtable, Beijing, China

2
Scope of Session
The story So Far
Drivers of CSR in Europe
Drivers of CSR in the Supply Chain with China
Trade Barrier or Market Behaviour?
Where Next?
3
The Story So Far

• Major multinationals and brands that source
  products and components from China now have
  regional operations there and are increasingly
  outsourcing manufacture through joint ventures or
  wholly owned factories.
• They are placing increasing pressure on their
  suppliers to demonstrate acceptable behaviour
  and performance in relation to CSR issues,
  particularly labour conditions.
• This has resulted in a range of requirements to
  qualify as preferred suppliers, including
• compliance with international or corporate codes
  of conduct
• participation in audit programmes and sector
  initiatives (e.g. ETI)
• implementation of training programmes and
  management systems
• certification to standards (e.g. SA8000).
• This process is repeating the experience in
  Europe in relation to environmental management in
  the supply chain and represents an extension of
  European CSR programmes from European operations
  into the global supply chain
• WHY?

4
Drivers of CSR in Europe

• General trends
• Exploding communications, media networks and
  transparency nowhere to hide
• Growing awareness and concern over global
  environmental degradation and international
  social injustice NIMBY (Not In My Back Yard)
  losing meaning
• Stakeholder activism becoming mainstream
• Decreasing confidence in corporate ethics and
  governments no trust
• Increasing importance of brand value in global
  marketplace who are we buying from?
• Market drivers
• Continuously improve eco-efficiency
• Maintain customer loyalty
• Build corporate integrity and protect public
  reputation
• Maintain investor confidence
• Recruit premier staff and retain good employees
• Satisfy government and stock-market regulators
• Specific Mechanisms
• Manufacturers - operational performance standards
• Retailer standards for goods - products and
  suppliers
• Civil society - corporate assurance and public
  reporting systems

5
Drivers of CSR in the Supply Chain with China

• Chinese Export Growth.
• Chinas economy is growing rapidly, it is fast
  becoming the major source of consumer goods
  imported into Europe and its entry to the WTO
  will accelerate this trend. Cheap labour provides
  a new opportunity for profits for both western
  and Chinese companies. The prospect of higher
  wages and management costs associated with
  western levels of employee welfare are perceived
  as a threat to this new economic dynamic by some
  but the markets are nevertheless sensitive to
  this issue.
• Western Consumer Concerns.
• Western consumers are placing ever-increasing
  pressure on retailers and manufacturers to design
  and source products and components responsibly,
  e.g. organic food and natural products (Body
  Shop), the fair trade movement (Cafe Direct),
  animal welfare and the exploitation of rare
  species, sustainable forestry and biodiversity,
  energy and the environment, and now also with
  regard to the labour force.
• Pressure Group Activism and Transparency.
• Groups like Amnesty, CAFOD, the ILO, and many
  smaller NGOs are linking with watchdogs in China
  and using the internet and western media to
  publicise the issues and target multinational
  brands, such as Nike, ToysRus, MacDonalds, etc
• Business Risks.
• Consumer pressure and emerging corporate
  governance legislation is creating a web of risks
  for business, including reputational and brand
  damage, loss of customer loyalty and investor
  confidence, business interruption, capital risks
  and liabilities.

6
CSR Assurance

• CSR is essentially about companies managing their
  responsibilities, in a balanced and sustainable
  way, towards all stakeholders who have a concern
  with and/or are impacted by its activities and
  products/services.
• The big question is how do you create
  stakeholder trust and deliver assurance to
  satisfy their concerns?
• The lesson of European and US business over 25
  years is that setting high standards (in
  legislation or voluntarily codes of practice) are
  not enough stakeholders require reasonable
  evidence that the standards are being achieved,
  i.e. legislation is being complied with, codes
  are being followed.
• The European and US brands have being drawn down
  a path from
• Trust Me (theres no need to worry) to
• Tell Me (that you are meeting standards and
  doing the right thing) to
• Show Me (what you are doing and how it meets
  my expectations)
• In this regard, European consumers are fast
  becoming a major stakeholder group for Chinese
  manufacturers who are dependent on it in any
  significant way, i.e. by selling into the
  European market or by seeking investment.
• In a world where reputations take 10years to
  create and 10 mins to destroy, the challenge for
  Chinese manufacturers and their customers is how
  to deliver assurance to the European market place
  on CSR issues so as to create trust in the
  east-west supply chain.

7
CSR In the Supply Chain
United Nations
World Health Organisation
International Labour Organisation
OECD
Investors
Employees
Brands
Factories
Supply Chain
Retailers
Importers
Exporters
Manufacturers
Consumers
Manufacturers
Government
Civil Society
Ethical Trade Initiative
Government
SA8000
Fair Labour Organistion
ISO14001
Clean Clothes Campaign
8
Trade Barrier or Market Behaviour?

• Is the market sensitive to CSR issues?
• Yes, particularly where corporate greed and
  arrogance are suspected
• For many European citizens, there has been a
  fundamental breakdown of trust in society
• Reputation is more easily lost than made on CSR
  issues
• Is there market demand for responsible sourcing
  or products?
• Yes, to some extent, particularly amongst the
  educated middle classes
• An emotive issue, where food, toys, clothing and
  leisure items have received more attention than
  others
• But price and quality are still king for most
• Do Governments see CSR standards as a way of
  protecting western manufacturing?
• Not so long as they see China as a potential
  export and investment market
• Governments have been de-regulating and focusing
  on a market support role
• Trade unions claim that low CSR standards allow
  cheap labour to undercut home products
• But the trend has been for governments to let the
  market decide, beyond compliance with the law
  WTO will test this as on environmental issues.

9
Where Next?

• A hierarchy is emerging
• Wholly owned manufacturing of European and US
  multinationals - where corporate standards are
  expected and enforced
• Chinese owned outsourced manufacturing facilities
  - where support and encouragement is provided to
  continuously improve performance
• Preferred suppliers of goods and components
  where audits against common standards have
  demonstrated acceptable performance and behaviour
  in line with codes of conduct (e.g. ILO, ETI,
  SA8000)
• Mainstream manufacturers whose performance varies
  widely and about whom little is known
• An opportunity is growing
• For progressive Chinese companies to demonstrate
  their credentials to rapidly growing
  international markets and to gain competitive
  edge
• For these companies to attract inward investment
  from international financial markets which are
  concerned with capital protection and
  sustainable, socially responsible investments
• For these companies to establish a platform for
  creating international brands and competing in
  western retail markets
• The market will decide
• In response to societal trends and consumer and
  investor pressures
• In the context of government-backed initiatives
  to protect consumers and investors from corporate
  irresponsibility