shopping for sustainability at the canton...

T H E U N I V E R S I T Y O F B R I T I S H C O L U M B I A

6 4 7 6 N W M A R I N E D R I V E

V A N C O U V E R B C C A N A D A V 6 T 1 Z 2

w w w . l i g i . u b c . c a

Authored by:

Jane Lister, MBA, PhD Genevieve LeBaron, PhD

July 2012

Working Paper No. 12-001

W O R K I N G P A P E R S E R I E S

Shopping for Sustainability at the Canton Fair The Political Economy of Transnational Retail Governance in China

ii


InformationtoReadersLiuInstituteWorkingPaper12-001JaneLister,MBA,PhDLiuInstituteforGlobalIssuesGenevieveLeBaron,PhDLiuInstituteforGlobalIssuesCopyright©2012byLiuInstituteforGlobalIssues

AllrightsreservedunderInternationalandPan-AmericanCopyrightConventions.Nopartofthisreportmaybereproducedinanyformorbyanymeanswithoutpermissioninwritingfromthepublisher: LiuInstituteforGlobalIssues TheUniversityofBritishColumbia 6476NWMarineDrive Vancouver,BritishColumbiaCANADAV6T1Z2MoreinformationontheLiuInstituteanditsprogramsmaybefoundonlineat www.ligi.ubc.ca.Formoreinformationortocommentonthisreport,pleasecontact:Dr.JaneListerSeniorResearchFellow Tel 604/822-8061Fax 604/822-6966Email [email protected]:JaneListerandGenevieveLeBaron,ShoppingforSustainabilityattheCantonFair:ThePoliticalEconomyofTransnationalRetailGovernanceinChina,LiuInstituteforGlobalIssuesWorkingPaperSeriesNo.12-001,UniversityofBritishColumbia,Vancouver,2012.

Disclaimer

Publicationasa'WorkingPaper'isintendedtofacilitatesubsequentpublicationinscholarlyjournalsorbooksby

providingauthorswithvaluable feedbackfromreaders.

iii


TABLE OF CONTENTS LISTOFILLUSTRATIONSACKNOWLEDGEMENTSACRONYMNS1 INTRODUCTION………………………………………….…………. 1

ProjectGoalsStudyOverview

2THECANTONFAIR……………………………….…....…………… 4

BackgroundAWindowintoChina’sPoliticalEconomySustainabilityattheFair

3THEDYNAMICSOFMANUFACTURINGINCHINA…………………….. 11

GlobalEconomicInstabilityShiftingDomesticConditionsTheGrowingSustainabilityImperative

4BRANDRETAILSUSTAINABILITYGOVERNANCE……………….….… 26

BigBrandsRacingtoZeroSupplyChainSustainabilityToolsEvaluatingSupplierPerformance

5CSRPERFORMANCEINCHINA……………………………………… 32

GainingTractionMurkyTransparencyUnintendedImpacts

6GOINGBEYONDCOMPLIANCE……………………..……………….……36

IncrementalBusinessPracticeImprovementTransformationalChangeFutureResearch

REFERENCES………………………………………………………….. 42APPENDIXA:SUPPLIERQUESTIONSAPPENDIXB:INTERVIEWS

iv


LIST OF ILLUSTRATIONS LISTOFFIGURES1-1 ChinaResearchInterviews,April2012 3 1-2 CantonFairVendorInterviewSample 3 2-1 RiseinChinaGDP 6 2-2 BusinessTurnoverattheCantonFair 6 3-1 China’sPlannedEnergyTransition(2010,2015) 16 3-2 CapturingValueAddedthroughUpgrading 18 LISTOFTABLES2-1 BuyerAttendanceattheCantonFair,April2012 7 3-1 TheShiftinChina’sExportingProvinces 17 3-2 BrandCompanySupplierCommunicationinChina 25 4-1 BigBrandSustainabilityCommitments 26 4-2 BigBrandSustainabilityConsortia 27 4-3 SupplyChainSustainabilityTools 28 4-4 Walmart’sComplianceAuditRatingSystem 30 TEXTBOXES3-1 LocalPoliticsGoInternational:Beijing’sAirPollutionControversy 21 3-2 China’sGreenCoalitionAllianceSupplyChainSustainabilityProject 24 6-1 TransportLogisticsBestPracticesPilotStudy 37

v


ACKNOWLEDGEMENTS WeareverygratefulforthefundingsupportandprojectguidanceprovidedbyDr.PeterDauvergne,DirectoroftheLiuInstituteforGlobalIssuesunderhisSocialSciencesandHumanitiesResearchCouncilofCanadagrant.WearethankfulfortheassistanceoftheLiuInstitutestaff:PattyGallivan,TimShew,SallyReayandJulieWagemakersforcoordinatingthelogisticsofourtrip.Aswell,weareveryappreciativeofseveralindividualswhovolunteeredhelpandinsightsinpreparationforourfieldvisittoChinaincluding,inparticular:DeniseTaschereau(CEO,Fairware);CoroStrandberg(Principal,StrandbergConsulting);EstherSpeck(VPofBusinessSustainabilityandCommunity,MountainEquipmentCoop);Dr.ClaudeComtois(UniversityofMontreal);Dr.PaulEvans(Director,InstituteofAsianResearch,UBC);MackieChase(FormerDirector,UBCCentreforInterculturalCommunication);andespecially,GregFoweraker(ManagingDirector,InnateGear)andhiscompanyteaminVancouver:RobynGibson(VPSales)andSandraTschauner(SupplyChainManager).

vi


ACRONYMNS BC BritishColumbia BMP BestManagementPractice BPA BisphenolA BSCI BusinessSocialComplianceInitiative BSR BusinessforSocialResponsibility CPC CommunistPartyofChina CSR CorporateSocialResponsibility ENGO EnvironmentalNon-GovernmentalOrganization FSC ForestStewardshipCouncil FSSC FoodSafetySystemCertification GCA GreenCoalitionAlliance GDP GrossDomesticProduct GMG GlobalMarketGroup GMPC GoodManagementPracticeCompany GRI GlobalReportingInitiative IMF InternationalMonetaryFund IPE InstituteofPolicyandEnvironmentalAffairs IPR IntellectualPropertyRights ISO InternationalOrganizationforStandardization ICT InformationandCommunicationsTechnology JUCCCE JointUS-ChinaCollaborationonCleanEnergy KPI KeyPerformanceIndicator LCA LifeCycleAssessment NGO Non-GovernmentalOrganization OHSAS OccupationalHealthandSafetyAssessmentScheme PEFC ProgrammefortheEndorsementofForestCertification PRC People’sRepublicofChina QMI QualityManagementInstitute RMB Renminbi SGS SociétéGeneraledeSurveillance SME SmallandMedium-SizedEnterprise UL UnderwritersLaboratories USITC UnitedStatesInternationalTradeCommission WBCSD WorldBusinessCouncilforSustainableDevelopment WTO WorldTradeOrganization


1 INTRODUCTION Inrecentyears,bigbrandcompanieshavecompetedtoadoptfar-reachingsustainabilitygoals.Theyarenowracingtodrivethesecommitmentsintotheircoreoperationsaswellasthroughtheirglobalsupplychains.ThisreportanalyzestheissuesandimpactofthisacceleratingtrendontheenvironmentalandsocialpracticesofconsumergoodsmanufacturersinChina.Itoffersrecommendationsforbuyerstoimprovevendorpracticesbeyondcodesofpractice.Anditidentifiesinformationgapsforfutureresearch.ProjectgoalsTheoverallgoalsoftheprojectarethree-fold:

• Tounderstandtheextenttowhichbrandcompaniesare“walkingthetalk”intermsofimplementingglobalsupplychainsustainabilitygoals.Whatbenchmarksaretheysettingandhowaretheyguidingandensuringsuppliercompliance?

• TodeterminehowmanufacturersinChinaarebalancingrisingbrandcompanysustainabilitydemandswithcontractualrequirementsforlow-pricedproduction.Islabourpayingthepriceforenvironmentalimprovements?

• Toevaluatehowlocalinstitutionalandinfrastructureconditions(e.g.stateregulations,energysupplyconstraints,transportlogistics,etc.)areshapingmanufacturersustainabilityresponse.Whatarethecriticalbarrierstocorporatesustainabilityimprovementsandlabourcompliance?

Thisstudydrawsonanextensiveliteraturereviewofcorporatesocialresponsibility(CSR)inChina,aswellasafieldvisittoGuangdongprovinceandtheCantonFairinApril2012thatincludedover50interviews(SeeAppendixA).ThisstudyispartofanoverallglobalsupplychainprojectattheLiuInstituteinvestigatingtheglobalenvironmentalpoliticsoftransnationalretailgovernance.Thereportisdividedintosixsections. Section1 Introduction

Section2 TheCantonFairSection3 ManufacturingChallengesforChineseSuppliersSection4 BrandSupplyChainSustainabilityEfforts

Section5 CSRPerformanceinChinaSection6 Recommendations


StudyOverviewTheobjectivesofthestudyinclude:

• ExploretheroleandinfluenceofbigbrandretailsustainablesupplychaininitiativesonChinesemanufacturers.

• DocumentchallengesfacingsuppliersinChina.• Offerrecommendationsforimprovingvendorpracticesthroughretail-drivensupplychainsustainabilityinitiatives.

• Identifyopportunitiesforfutureresearch.

ApproachDr.JaneListerandDr.GenevieveLeBaron–bothResearchFellowsattheLiuInstituteforGlobalIssuesatUBC–conductedthefieldresearchinGuangdongprovinceduringweek2oftheCantonFairinApril2012.Dr.PeterDauvergne,DirectoroftheLiuInstituteprovidedfundingandprojectoversight.ThefieldvisitfocusedwithinthePearlRiverDeltaareaofGuangdongprovince(oftenreferredtoasthe‘world’sfactory’).Wegathereddatathroughinterviewswithconsumergoodsvendorsandserviceprovidersduringweek2attheCantonFairinGuangzhou,April23-27,2012.WealsointerviewedBCgovernmenttradeofficialsinGuangzhou,andvisitedafactory(ChunWoHoCoLtd)inneighbouringShenzhen(thefastestgrowingandlargestmigrantcityinChina).QuestionsattheFair:Overall,wewerecurioustofindoutfromthevendors:

- Whethertheyincorporatedanyenvironmentalandsocialconsiderationsintotheirproductdesignandproductionprocesses.- Whytheyincludedthese.Didbrandretailcustomersplayarole?- Whetherthecriteriahadchangedoverthepastfewyears,andifsohowandwhy.- Whattheyanticipatedwouldbethefuturesustainabilityrequirements.- Didtheydoanythingtoensuretheirsub-contractorswerealsocompliant.

Wetookaninformalratherthanastructuredsurveyapproachthatincludedarangeofquestions(seeAppendixA).InterviewSampleWeconductedatotalof52interviews(Figure1-1).31ofthesewerewithsuppliersattheFair.Theother21werewithshippingcompanies,auditors,consultants,buyers(bothinVancouver


andattheFair),theBCprovincialgovernmenttradeofficeinGuangzhou,theCantonFairorganizingcommittee,andamaterialssub-contractorfactoryinShenzhen.Figure1-1:ChinaResearchInterviews,Apri l 2012

SupplierCategoryBreakdownOurfocusattheFairwason4consumer-goodscategories.Theseincluded:kitchenware(plasticmoulds,plates,pans,cups,etc.),personalcare(diapers,toiletpaper,toothbrushes),furniture(woodenframes,boxes,indoorandoutdoorchairs,tables,decking),andhouseholdgoods(toys,petproducts,cleaningproducts).Figure1-2:CantonFairVendor In terviewSample(byindustrycategory)


2 THE CANTON FAIR BackgroundTheChinaImportandExportFair(“TheCantonFair”)isChina’soldesttradefairandthebiggestintheworld.Establishedin1957,ithasservedasamajorportalandvehicleforthegrowthofChina’scommercewithforeignbuyersandtheopeningofChinatotheWest.1TheFairgroundsstretchoveranareaof1.1millionm2(equivalenttoapproximately160soccerfields).Ittakesplacetwiceayear(springandfall)overathree-weekperiod.Week1iselectronicsandbuildingmaterial;week2isconsumergoods;andweek3isapparelandfood.Around25,000vendorsattendeachoftheFallandSpringsessions.TheCantonFairislocatedinGuangzhou,thecapitalofGuangdongprovince(formerlyCantonasnamedbyPortuguesetraders).ThefirststopupthePearlRiverfromHongKong,GuangzhouhasbeenahubfortradewithChinaforover500yearsandwasatthecentreoftheBritishopiumtradeinthenineteenthcentury.Withrapidindustrialization,thecityhasbecomeamajorglobalmanufacturingcentrewiththehighestconcentrationoffactoriesintheworldandamigrantworkerpopulationofover30million.Thisisinadditiontoaresidentpopulation(withlegalpermits)ofmorethan12million.Thecitycontinuestogrow.In2005,thelocalgovernmentcommitted$32billiontoupgradingthecity’sinfrastructuretosupporttheexpandingpopulationandcommerce.GuangzhouisinGuangdongprovince,whichaccountsforaround25%ofChina’stotalexports.75%oftheseexportsgotoEuropeanandNorthAmericanmarkets.TheCantonFairisamajorfacilitatorofChina’stradeactivity.TheChinaForeignTradeCentre(aninstitutewiththeMinistryofCommerceofPRC)conductstheCantonFairincooperationwiththePeople’sGovernmentofGuangdongProvinceandtheGuangzhoumunicipality.TheFairhasservedasavehiclefortheCommunistpartytocontrolinvestmentandtradeintothecountryandtoconveytotheParty’seconomicpoliciesandpropagandamessages.Atthefirstfairin1957,1,200buyersattendedfrom19countries.Now,55yearslater,over200,000buyersfromover200countriesandregionsattend.Currently,justoverhalfofthebuyers(54%)arefromAsia.35%arenewbuyersand65%arereturningwith20%ofthesebuyersattendingtheFairmorethan15times.BigbrandretailcompaniesattendtheFair.AttheApril2012session,83oftheworld’stopretailcompanieswereinattendance.ThisincludesWalmart,Carrefour,TescoandMetro(4ofthetop10globalretailers).Themajorityaresmallerbuyersthoughwithmuchsmallerorders. 1TheFairisprimarilyaboutexportdevelopmentbutrecentlyFairorganizershaveaddedanInternationalPaviliontoencourageimporttradeactivity.


UnlikeneighbouringTaiwan,SouthKoreaorJapanthathavehadconsolidationandtheemergenceoflargemanufacturingcompanies,Chinaremainsveryfragmentedwithover42millionsmalltomediumsizedsuppliers.ManyattendtheFairbecausetheyareunabletoaffordinternationalmarketingtoattractaforeignbuyerandideallyinthebestofallworlds,acovetedhighvolumebrandbuyer.19%ofthevendorsattheFairarelarger,morewellestablishedbrandedChinesecompanies.Theaverageordertheyline-upattheFairisjustunder$9million.Thisisalmost6timesbiggerthanthetransactionsthattakeplacewithnon-brandedvendors.Thesmallernon-brandedvendorsarelessdifferentiatedandthereforeattainlowerpricesandprofitmargins.AWindowintoChina’sPolit ica lEconomyCreatingtheWorld’sFactoryAlthoughtherearenowspecializedtradeshowsinChina,aswellaslargecompetingfairsinBeijingandShanghai,theCantonFairisthelargestandcontinuestoplayakeyroleintheexpansionanddevelopmentoftheChineseeconomy.WhatgoesonattheFaircontinuestoprovidevaluablesignalsonChina’spolicies,positioning,andrapidlyshiftingroleintheglobaleconomy.Intheearly1970s,followingUSPresidentNixon’svisitin1972,theFairopenedforthefirsttimetotheUnitedStates.AcademicDanielTretiakobservedatthetime(intheChinaQuarterlyjournal)thattheCantonFairofferedan“interestingglimpseintotheday-to-dayworkingsofChineseforeigntradeprocessandtrendsinChineseforeignpolicygenerally”andservedas“anindicatorofhowChina’spoliticalrelationsarefaringwiththerestoftheworld.”2Aroundthesametime,BrunnerandTaokaalsowroteareflectivepieceontheFair,astutelyforecastingtheriseinChinesebusinessandexports:“wemightexpectanincreaseinimportsoflaborintensiveproductssuchashandicrafts,textiles,lightindustrialgoods,andothermanufacturedproducts…theChinesearebecomingmoreflexibleintheirnegotiationsandaresincerelyinterestedinexpandingtradewiththeUnitedStates…AmericanbusinessmenshouldfindincreasingbusinessopportunitieswiththePeople’sRepublicofChina.”3ActivityattheFairhasmirroredChina’srapidgrowth(Figures2-1and2-2).In1999,China’sexportswerejust1/3ascomparedtoU.Sexportvalues.Asof2009,itisthelargestexportingnationintheworldaccountingfor10%oftotalglobalexportsbyvalue.Initsfirstyears,theFairgeneratedaround$250millionannually.In2011,exportdealstotaledjustunder$75billion.The25,000vendorsateachsessionoftheFairaresmallandmediumsizedprivately-owned

2D.Tretiak,“TheCantonFair:AnAcademicPerspective,”TheChinaQuarterly56,1973,p.746.3J.Brunner&G.Taoka,“MarketingandNegotiationinthePeople’sRepublicofChina:PerceptionsofAmericanBusinessmenwhoAttendedthe1975CantonFair,”JournalofInternationalBusinessStudies,8(2),1977,p.77.


enterprises(SMEs).China’sSMEsaccountfor70%ofthecountry’sexports.4ParallelingtheChineseeconomy,therateofbusinessgrowthattheFairhasslowedsincetheglobalfinancialcrisisin2008.Figure2-1:RiseinChinaGDP

Figure2-2:BusinessTurnoverattheCantonFair

Source:InternationalMonetaryFund

Source:CantonImport&ExportFair

RespondingtoShiftingGlobalDemandInthewakeofthe2008globalfinancialcrisis,demandandattendancefromEuropeanandNorthAmericanbuyershasdroppedoff.Comparedwith2011,transactionswithUSbuyersweredown8%anddown5.6%withtheEU.“Wearefacingdecliningexportsduetoweakdemandfrombuyersfromtraditionalmarkets,”LiuJianjun,aspokesmanfortheCantonFairexplainedinapressreleasepostedontheofficialCantonFairwebsite.TheEUisChina’slargesttradingpartnerandtheU.S.isitssecond.WithinGuangdongprovince,arecentsurveybylocaltradeofficialsof302companiesrevealedthat42.5%hadnotlinedupsufficientordersin2012sofar.Althoughstillmuchsmallerintermsoftotaldemand,buyersfromemergingeconomiessuchasIndia,Brazil,Russia,theMiddleEast,aswellasSoutheastAsiaaregraduallyrisingtofillthisgap(Table2-1).TransactionswithBRICswereup4%intradevolume.TradevolumewithAfricaalonewasup13.5%in2011versusflatgrowthratesintraditionaldevelopedmarkets.

4AnSMEinChinaisdefinedbylessthan2,000employees,revenuesunder300millionRMB,andtotalassetslessthan400millionRMB.


Table2-1:Buyer Attendanceat theCantonFair,Apri l 2012 BuyerAttendance Change(2010->2011) 1.Asia 112,993(54%) -0.3% 2.Europe 38,125(18%) -11% 3.U.S. 34,232(16%) +9% 4.Africa 16,896(8%) +13% 5.Oceania 7,398(3.5%) +11%

Total 209,644(100%)

Source:ChinaImport&ExportFairTheriseinemergingeconomybuyersattheFairmirrorstheoverallshiftsinChina’slightindustrialproductssector.Overthepastyear,exportstoAfrica,Oceania,Asia,andLatinAmericaincreased26%,29%,30%,and36%respectively.ActivityattheFairdemonstratestheshiftingglobaldemand.CompanieslikeXiamenNatureCaringProductsLtdandZhejiangHuaxingGroupexplainedtousthatoverthepasttwoyearstheyhavestartedsellingtheirpersonalcareproductsanddiaperstoAfricaandBrazil.GuangzhouEuroAsiaAerosolandHouseholdproductsManufacturingCoLtd.alsonotedthatasoflastyeartheyhavenewbuyersfortheircleaningproductsfromCambodiaandBeirut.SeveralothersnotedgrowingsalestoIndiaaswellasplaceslikeDubaiandtodomesticChinesebuyers.CommunicatingNationalPrioritiesInthe1970s,theChinesegovernment’seconomicfocuswasonincreasingexportsquicklysoastooffsettheincreasinglevelofimports(equipment,technology,Boeingjets,food-grains,telecommunicationsequipmentetc.)Now,thegovernment’sfocusison“stabilizingexports;openingupthedomesticmarket;promotingpublicawarenessofhighqualityChineseexportbrandsinthedomesticmarket;expandingdomesticsaleschannels;spurringdomesticconsumption;and‘goingglobal’byexpandingimport”.AstheIMFreports,theseprioritiesareexpectedtohave“significanteffectsontheglobalsupplychain,particularlyasChina’simportsriseanditsproductionbecomesmoredomesticallyoriented.”5TheseprioritieswereevidentintheactivityattheFair.Forexample,thereisnowanInternationalPavilionforforeignmanufacturerstoselltheirproductstoChina.AndorganizersalsosetupanAmericanPavilionandheldaUS-SinotradedevelopmentforumforthefirsttimeintheFall2011toencourageAmericancompaniesparticularlyinhightech,manufacturing,culturalandeducationalindustriestodobusinesswithChina.

5InternationalMonetaryFund,People’sRepublicofChina:2011SpilloverReport,CountryReport11/193,Washington,DC,July2011,p.11.


SustainabilityattheFairOntheshuttlebustothefaironthefirstday,wesatnexttoanolderGermanbuyerwhowelearnedhadbeenattendingtheFairfor27years.HewascurioustoknowwhathadbroughtustotheFair.Whenweexplainedwewantedtoaskvendorsabouttheirsustainabilitycommitmentstheentirebuseruptedinlaughter.“Oye,youwon’tfindthat,”theAustraliansintheseatsatthebackofthebuspipedup.TheGermanexplainedthatthebusinessenvironmentinChinaisverydifficulttocontrol.“IamprohibitedfromgoingtoseepartsofcompanieseventhoughtheyaresupplyingtomeandIamamajorbuyer,”heexplained.Headdedthatwewerenotlikelytofindahighlevelofsustainabilityknowledge.Forexample,theGermangovernmentnowrequires“greendot”eco-certificationwithformsforsupplierstosignofftoindicatetheyhavereadandunderstoodtherequirements.Whenhetriedtogothroughtheformsandexplainwastereductionetc.tohisChinesesupplierstheyhad“noclueandjustsimplysigned.”AttheFair,amongthe24,644exhibitors,webeganbytargetingthosethathadanysortofevidenceofgreenmarketingawarenessandpromotioneitherinthenameofthecompanyorwithpostersattheboothadvertisingcomplianceaudits,certifications,orusinglanguagesuchas“eco-friendly,”“green,”“natural,”“nopollution,”“lowcarbon,”etc.Wethenpairedtheseinterviewswithvendorswithsimilarproductsbutwithnosustainabilitymarketingtotrytounderstandthedifferences.ExtrapolatingourobservationsandfindingsfromtheFairtoquestionsregardingsustainabilityinChinaandtheimpactofglobalbrandbuyers,ourinvestigationhighlightedseveraloverallinsights:• LowSustainabilityProfile

Thereisgrowingsustainabilityawarenessamongvendorsbutitisstillfarfromanimportantcompetitiveissue.Lessthan5%ofvendorsdisplayedanysortofgreenmarketing.Whenweaskedthevendorswithoutsustainabilitymarketingquestionsaboutsustainability,theyeitherhadlittleknowledgeorstatedclearlythatitwasnotanimportantissuefortheircustomers.TherewerewoodfurniturecompaniesunawareofFSCcertificationandshippingcompaniesthatwerenotawareofortrackingtheircarbon.

• LimitedAwareness

BrandbuyersareincreasingthesustainabilityawarenessoftheirChinesesuppliersbutthelevelofsupplierknowledgeisuneven.Ofthosevendorswithgreenmarketing,almostwithoutexception,theyallhadabrandcompanycustomerinatraditionaldevelopedmarket.ThesevendorshadpostersstatingtheywereSGSaudited;hadcertificateslikeISO9000,ISO14000,andBSCI;andhadpassedcomplianceauditsforadisplayedlistofbrandcustomerslikeDisney,Walmart,Safeway,Kmart,PetSmart,Carrefour,etc.Afewofthevendorswereinformedabouttheircompany’ssustainabilitygoalsandcommitments;howtheyarecontinuallyimproving;andindicatorstheyare


trackingandreporting,etc.Onevendor,forexample,explainedindetailhowWalmartrequiredthemtoreducetheirproducttoxicitybyusingfood-gradeink,andbyshiftingawayfromusingsolventsintheirplasticproducts.Anothertalkedaboutthewatertreatmentprotocoltheirbrandbuyerwantedthemtoimplementsothatthebrandcompanycould“reduceitswaterfootprint.”However,overallvendorslackeddetailsonkeyperformanceindicatorsanddidnothaveavailableanyreportsordataabouttheirsustainabilityperformance.Aswell,vendorslackedanyinformationaboutthesustainabilityeffortsoftheirsub-contractedsuppliers.Severalnotedthattheydidnotdoanyauditsorproducttestingofthesesmallersuppliers.

• FalseClaims

Greenwashisoccurringtomeetbrandcomplianceexpectations.Whiletherewerevendorsmakinglegitimatesustainabilityclaims(particularlythelargerbrandedvendors),thereweremanyvendorsmakingclearlyfalseorillegitimateclaims.Onepetstoresupplierstateddirectlythattheirclaimof“allnatural”ontheirproductswasstrictlyformarketingpurposes.Theyhadnospecialprocurementorsustainabilitydesignrequirementsfortheproducts.Anothervendorwaspromotingthebiodegradabilityoftheir“recycledbynature”productthatinfact,wasnotdegradable.AfurnituresuppliertoShangriLahotelswasadvertisingtheirpiecesas“greenfurniture”buthadneverheardofFSCcertification.Inanotherinstance,afurnituresupplierexplainedthattheyhadhadFSCcertificationandcouldsimply“getitback”ifitwasneededforanorder.Otherexamplesincluded:

o Claimingcertificationbutnoofficialcertificationformdisplayed(e.g.ISO14000averycommonclaimbutnonameofauditororcertificatenumber)

o Claimingcertificationtoapaidconsultant’sservice(e.g.GMG,AAA,SGS)o Claimingcertificationtoanambiguousstandard(e.g.GMPC)

• WorkerOvertime

Toincreaseproductivityandmaintaincompetitivenessinthefaceofrisingwagesandlabourshortages,vendorsarereducingtheirlabourand“replacingworkerswithautomation.”Itwasuncleartheextenttowhichincreasedworkerovertimewasalsoastrategytomaintaintheirbrandcontracts.Whenweaskedquestionsaboutthis,somedeniedit.Oneofthefurniturevendorsclaimedthatallhispieceswerehandmade,andyetdespitethelabourintensityclaimedthattheydidn’tuseovertime.“Wesimplytellourbuyerstheyneedtogivemoretimetocompletetheorder.”Othervendorstalkedabouttheimportanceofpayingworkersbypieceratesothat“lazyworkersgetless.”Manyvendorsdeflectedthequestionbyinformingusabouthowmuchthecompanyhadincreasedwagestoitsworkers.Aplasticskitchenwarevendorexplainedhowthediningfacilitiesandairqualityathisfactorywereverygoodsohisworkerswerehappy.Onevendorgloatedthatevenwithonly100workershecouldhandleverylargeordersof50containersamonth.Whenweaskedhow,hereplieddirectly,“overtime.”Lowpieceratewagesmakeworkersdependentonovertimeformostoftheirpay.Manyworkers,weweretold,expectovertimeandworkthreeshiftsinarow.ThebasesalaryforChinese


workersisaround500-800RMBpermonthandtotalwagesarearound2000RMBpermonth($315USD).

• PowerDisruptions

Energyisacriticalcompetitiveissue.ThereareenergyshortagesandthepowergridinChinasuffersfromcorruption.Brownoutsarefrequent,particularlyinpeaksummermonths.Factoriesuselow-gradedieselgeneratorstosupplementtheirpower.Everyvendorwasacutelyawareoftheirenergyconsumptionandprovidedunpromptedverydetailedinformationabouttheirmonthlypowerusage.Onevendorofferedthattheyhad“privileged”accesstothegridandhaddesignedtheirnewfactorytoreducepowerconsumption.Theextentoftheimpactofpowerdisruptionsonworkerovertimewasunclear.

• FinancialBarrierstoSustainabilityCompliance

Brandcomplianceauditsaredifferentforeverycustomer,andareexpensiveandtimeconsuming.Thispresentsacostbarrierformanyvendors.Oneofthelargerbrandedvendorsnotedthattheyhadafulltimepersondedicatedtomanagingbrandaudits.ThefactorywetouredinShenzhenhadspent$1millioninupgradestomeettheBluesignstandard.Mostvendorsaresmallerandproducingforcustomersthatwanthighvolumeandverycheapprices.Theytalkedabouthowtheirmotivationwasstrictlyfinancial–moresalesequalsmoreprofit.WhenwesuggestedthattheycouldaccesshighervaluemarketsandmakemoreprofitbypassingaWalmartgreenlightaudit,onevendorexplainedthat,“ourcurrentbusinessmodelisworkingbutwemayconsiderthisinthefuture.”

• DualStandards

Sustainabilityexpectationsfromdevelopingcountrybuyersaremuchlowerthanfrombuyersindevelopednations.Severalvendorsshowedustwosamplesofthesameproduct–oneforAfrica,Asian,SouthAmericanandMiddleEasternmarkets;andtheother‘eco-friendly’versionforNorthAmericanandEuropeanbuyers.Forexample,diaperswithorganicmaterials,recycledcontent,BPA-freeplasticcontainers,bamboocompostableplatesandcups,‘allnatural’petproducts,andeco-certifieddeckingandfurniturewereallboundforNorthAmericanandEuropeanbuyers.Buyersfromdevelopingcountriesjustcareaboutprice.“Producingcheapforthesemarketsisthepriority,”vendorsexplained.SeveralvendorsalsomentionedthataportionoftheirmanufacturinghadmovedtocheaperlocationsoutsideofChinainSouthEastAsiaandthatthesefactoriesarenotauditedasthevolumesaresmall–“Chinastillgetsthebigorders.”ThemovementofChineseexportsandproductiontodevelopingcountrieswherestandardsarelowerhasuncertain,potentiallysignificantimplicationsforachievingsustainabilityimprovementsamongChinesesuppliers.


3 THE DYNAMICS OF MANUFACTURING IN CHINA Globaleconomicinstability,shiftingdomesticconditions,andmountingsustainabilitypressuresarere-shapingthemanufacturingenvironmentinChinaandsignallinganeweraofbusinesssourcingfromChina.UnderstandingthesedynamicsisimportantforinterpretinghowandwhybuyersupplychainsustainabilityeffortswillsucceedorfailamongChinesesuppliers.GlobalEconomicInstabil ityHeavyExportRelianceChinahasexperiencedveryfastgrowthof10%ayearonaverageoverthepast30years(4timesfasterthanEuropeandNorthAmerica).Thisgrowthhasbeenfuelledbyhugeexportsofcheapgoodsonthebackofcheaplabour.Analysts,includingChina’sMinistryofCommerceofficialsstressthatChina’sheavyrelianceonexportsleavesthecountry’seconomyvulnerable,andareprojectingChina’sgrowthratewillsoonfallduetolackoforders,risingcostsandincreasingtradefrictions.6TheglobalfinancialcrisisresultedinmanyChinesefactoriesgoingbankruptaswellashugelay-offsofmillionsofworkers.ByoneaccountfromtheBCtradeofficeinGuangzhou,weweretoldthataroundhalfofthemanufacturingbusinessesinthePearlRiverDeltaareawentbankrupt,movedormergedandproductiondroppedby1/3to½in2008asaconsequenceoftheglobaleconomicrecession.TradeFrictionsChina’smassivetradesurplusisnotjustcreatingvulnerabilities.Itisalsocausingtradefrictions.ThisincludesaccusationsthatChinaisdumpingproductsaswellasartificiallykeepingtheircurrencyundervalued(throughshorttermdepreciationpolicies)soastokeeptheirexportscompetitiveinthefaceofrisingcosts.In2011alone,12anti-dumpingcaseswerefiledagainstChineselightindustrialgoodswortharound$422million.7InarecentcaseinMay2012,theUnitedStatesInternationalTradeCommissionimposeda31%dutyonsolarpanelsfromChina.Aswell,ChinesemanufacturersoftowersforwindturbinesfacedutiesintheUSrangingfrom13.7%to26%.8ChinainturnhassoughtouttheWTOtoappealUScountervailingdutieson22products(includingsteelandsolarpanels)thataffectover$7billionofChineseexports.

6ChinaMinistryofCommerce,2012ForeignTradeReport,Beijing,Spring,2012.7ChinaImportandExportFair(2012),ChinaImportandExportFairBulletin,Spring2012,p.26.8Inthepast6years,Chinahasbecomethegloballeaderinsolarmanufacturingwith5ofthetop10manufacturers,andhasthelargestinstalledwindpowerfacilitiesintheworld.AmericanimportsofChinesewindtowersarewortharound$222million.


Consumption-LedRe-balancingTostabilizeitseconomyandsmoothitstraderelations,Chinaisaimingtorebalanceitseconomytowardconsumption-ledgrowthratherthanheavyrelianceonexportsandfixedassetinvestment(whichanalystsargueareineffectivelyallocated).InternationaleconomicorganizationsliketheWorldEconomicForumlabelChina’slevelofdomesticconsumption“anaemic.”AsapercentageofitsGDP,China’sdomesticconsumptionisjust35%ascomparedto71%intheUS.EventheemergingeconomiesBrazilandIndiahavedomesticconsumptionlevelsof68%and54%ofGDPrespectively.ThegapforChinatoaddressislarge.Thecentralgovernmenthasannouncedarangeofprioritiesthroughitslatest5YearPlan(2011-2015)torestructurethedomesticeconomytomoreequitablydistributeincomeandincreasethespendingpowerofits1.3billioncitizens.Asthenextsectionexplains,policiescomingoutofthisaregoingtoaffecteverythingfromlabourratesandsocialbenefits,toenvironmentalpenaltiesandincentives,intellectualpropertyprotection,andfactorylocations.Shift ingDomesticConditionsCorruption&PiratedGoods“Intoday’sChina,businessdealsarehardlyevercarriedoutfairly.Mostlyit’samatterofwhoyouknow,orwhoyoupayoff,andthentheproceedsaredivviedupanddownthechainofcorruption...notasinglepersoninChinacancompletelybreakfreefromcorruption,andnotasingleroadisstraight,”writesChineseauthorHaoQun(pennameMurongXuecun)intheNewYorkTimes.9AttendeesattheFairechoedthissentiment,withoneexplainingthat,“everyonedoingbusinesshereinChinahasdirtundertheirfingernails.It’sunavoidable.”Othersweinterviewedtalkedaboutthecultureofguanxithatemphasizesrelationshipsmorethanrulesandcontracts.RecognizingtheproblemsinherentwithChinalackinganindependentjudiciary,Quncontinues,“untilChinahasanewsystembasedonruleoflaw,anyanti-corruptioncampaignwouldbesimplyforshow.”AcommonsayingaboutbringingintellectualpropertytoChinais“ifyoucan’taffordtoloseit,don’tbringit.”10Product“knock-offs”anddesignpiracyarecommonplaceinChineseproduction.AccordingtotheEuropeanCommission,50%oftheglobaltradeincounterfeitgoodsisfromChinaandjustunder65%oftheirIPR-infringementseizuresin2009werefromChina.11TheUnitedStatesInternationalTradeCommission(USITC)estimatesthattheUSeconomylost

9MurongXuecun,“NoRoadsareStraightHere”TheNewYorkTimes,May08,2012.10TheEconomistIntelligenceUnit,MultinationalCompaniesandChina:WhatFuture?TheEconomistAnEconomistIntelligenceUnitReport,London,Nov2011,p.39.11EuropeanCommission,ReportonEUCustomsEnforcementofIntellectualPropertyRights:ResultsattheEUBorder2010,EuropeanCommissionTaxationandCustomsUnion,Brussels,2010,2.


around$48billionin2009(theequivalentof1millionUSjobs)duetoinfringementofintellectualpropertyrightsbyChina.12China’sshareofthevalueofIPRseizuresintheUSwashighestforfootwear(90%)followedbyapparel(75%),consumerelectronics(64%)andhandbagsandwallets(62%).Byanotherestimate,illicitphonesfromChinaaccountfor40%ofChineseproductionand13%ofglobalproduction(over145millioncounterfeitphones).13WithinChina,storesareopeningwithbrandnamesandlogosthatcloselyresembleglobalbrandslike,“Buckstarcoffee,”“KFG”chicken,“Borio”cookies,“Neki”shoes,and“DolceandBanana”apparel.Theproblemofpiracyissopervasivethat,astheEconomistIntelligenceUnitreports,“fakeApplestoreshavebeencreatedwhereemployeesthoughttheyactuallyworkedforApple.”14Inresponse,theCentralgovernmenthasidentifiedthestrengtheningofIPRprotectionasapriorityunderthecurrent5YearPlan.IPRisnowapriorityaswellasChinaintroducesandtriestoprotectitsownbrands.TheproblemofintellectualpropertyrightsabuseswherevendorsarecaughtwithillegallyreplicatedproductswasevidentattheFair.TheCantonFairorganizershighlightthatoneoftheirmainprioritiesisto“safeguardthenormalorderforbusinessdeals”inordertohelpprotectIPR.15Thisincludespublicizingregulationsandcomplainingmethodsandhelpingtofacilitateandsupportboothinspectionstoensureexhibitorcompliance.ThereweregovernmentbannersalongthemainthoroughfaresoftheFairwiththemessages,“Combatshoddygoods”and“Protectintellectualproperty.”

AspecialComplaintOfficehasbeensetupattheFairtomediatedisputes.ThemediationsarehandledjointlybystaffmembersoftheChinaForeignTradeCentreandtheChinaInternationalEconomicandTradeArbitrationCommittee(CIETAC)SouthChina.CIETAChandlesfinalarbitrations.Overthepastsessionthenumberofcomplaints(546)andconfirmedcases(398)wasdownfrompreviousyearsbutthecomplexityofthecasesincreased.Forexample,reportedlythereareincreasingincidentswherebothpartiesclaimthattheycanproducelegitimateIPRdocumentation.WhiletheChinesegovernmentrecognizesthatprotectingintellectualpropertyrightsiscriticaltocompetitiveness,Fairorganizersreportthatbusinessesarealsoincreasingtheirknowledgeandcapacityonhowtogetaroundthenewrules.

AttheFair,wetouredaisleafteraislewithonebuyerashesystematicallycheckedeveryboothforknock-offsofhisproducts.Hefoundoneandcommentedjokinglytothevendorthatitwashisdesignandthatthequalityoftheirproductwasnotsogood.Whenweaskedifthevendor

12UnitedStatesInternationalTradeCommission,China:EffectsofIntellectualPropertyInfringementandIndigenousInnovationPoliciesontheU.S.Economy,USITCPublication4226,UnitedStatesInternationalTradeCommission,(Washington,DC,May2011,p.2‐4.13AsreportedbyTheEconomistIntelligenceUnit(November2011:18),“grey‐market”manufacturerscopyandevenaddsomeoftheirowninnovationtoproductsanddevicestheyarecounterfeiting.CellphonesinGhanacanreceivetelevisionbroadcastsandthereisapopularsellingoneintheGulfStatesintheshapeofadagger.14TheEconomistIntelligenceUnit,Nov2011,p.18.15CantonBulletin,2012,p.27.


wasintrouble,heresponded,“thatone’snotthatimportant.Ijustwantedtogivethemabitofahardtime”andcontinuedhisfast-pacedmethodicalinspection.Inequality&RisingCostsBetween1980and2008,theworkforceinChinagrewby145million.16Averysmallportionhasbecomeveryrich,buthugeincomedisparitiesremainbetweenurbanandruralpopulations.Thisiscausingmountingsocialunrestinruralareas.30%ofpeopleinChinastillliveonlessthan$2aday.17Tocombatinequities,thegovernmenthasannouncedintentionstoraisewagesby40%by2015(13%ayear).Already,wagesarereportedlyup15%overthepast3years.Thereisalsoareported20-30%shortageoflabourinthecities.18VendorsattheFairechoedthis.Overthepast5years,awoodproducthandicraftmakerclaimedthewagesofhis2500workershadgonefrom700RMBto2500RMBpermonth.Apetproductvendorclaimedhis100factoryworkersarepaid1000RMBmorepermonthnowversus5yearsago.Manufacturersarecopingwiththerisingcostsbylookingforefficiencieswhichincludesplantmanagementchanges,hiringfewerworkers,forcingmoreovertime,andinvestinginplantautomation.Whileautomationwillimproveefficiencybyloweringlabourcosts,someanalystsarguethatChinamayinsteadlosesomeofitscompetitiveadvantagewiththismove.TheyhighlighthowproductioninChinaisnotsomuchaboutproducingcheaperasproducingfaster.FactoriesthatwouldbeheavilyautomatedintheUShaveheavy“hands-on”labourinChina.Thismakestheplantinefficientintermsoflabourcostperunitofoutputbutalsomakesthefactorymuchfastertoadapttochangesindemand.It’smucheasiertogivenewinstructionstoworkersthanre-toolequipmentonafactoryline.19Labourcostsareupby15%asarerawmaterialcosts,andpricelevelsinChinareflecttherisingcostsofproduction.AsreportedbyFairorganizers,“pricenegationsattheFairaredynamicandpriceshavebeenrising.”Thepriceofshoesis16%higher.Jewelleryincreased61%andsuitcasesandbagsareup124%.Thehistoricreasonsthatvendorsprovidetoexplainthecontinuingpriceriseisrevealing.In2008,thereasonwastheBeijingOlympicsandtherelocationoffactoriesinland;In2009,vendorstalkedaboutfloodsandpowershortages;In2010,labourcostsandnewregulations;

16Economist,PedalingProsperity,SpecialReport,May26th,2012,p.4.17SeeWorldBankstatisticsaccessedJuly03,2012athttp://data.worldbank.org/indicator/SI.POV.2DAY.18CantonBulletin,2012,p.26.19SeeJamesFallows,“ChinaMakes,theWorldTakes”TheAtlantic,July/August2007,p.11.


andin2011,labourshortagesinadditiontocommoditypriceincreases,andtheincreasingcostofcredit.20AsignificantimpactofrisingpricesisonthelengthofcontractssignedattheFair.Whenpricesarevolatile,ordersgetshorter.85%ofthedealsmadeattheFairintherecentsessionshavebeenshort-termorders(within6months).Aconsequenceofshorter-termordersisincreasedovertimeforworkers.EnergyShortagesChina’senergydemandsincreasedby130percentbetween2000-2010,makingittheworld’slargestenergyconsumer.EnergydemandsinChinaarefurtherincreasingwithindustrializationandwithrisingconsumerdemandsforcars,appliancesandelectronics,aswellas,homeheatingandairconditioning.Aswell,thegovernment’sinfrastructureprojectstoencourageandsupportdomesticconsumptionrequirelargeenergyinputs.TherearemajorweaknesseswiththecapacityofthepowergridinChinatosupportthegrowingdemands.Powershortagesandbrownoutsarecommon.EnergyshortagesarecompoundedbyenergyintensitytargetssetbytheCPC.Thisispromptinglocalgovernmentstoforcebrown-outssothattheycanmeettheCentralgovernment’stargets.”21Thebrownoutscausecompaniestohavetoshutdownwhichresultsingreaterworkerovertime.22Aswell,manycompanieshaveinvestedinbackupgeneratorsthatrunondiesel.Thishasbecomeamajorcontributortoairpollution.Chinareliesheavilyoncoaltomeet70%ofitsenergyneeds.Thecountryconsumesabout½ofthecoalproducedintheworld.Thereare11,000coalcompaniesinChinaandanewcoalplanthasbeenopeningeveryweek.23However,thegovernmenthasconsolidationplans.Thetargetistohave8to10companiesproducing2/3ofthecountry’scoalby2015.Withitsrapidgrowthandrelianceoncoal,Chinahasalsobecometheworld'sgreatestsourceofgreenhousegasemissions.Itrepresents22%oftheworld’senergy-relatedC02emissions,and80%ofChina’sGHGemissionscomefromcoal.24

20TheEconomist,“TheCantonFair:TheChinaPrice”TheEconomist,April28,2011.21APCO,China’s12thFive‐YearPlan:Howitactuallyworksandwhat’sinstoreforthenextfiveyearsAPCOworldwide,10December,2010,p.2.22Haers(plasticandstainlesssteelfoodandbeveragecontainers)–anestablishedChinesebrandcompany‐‐explainedthatthey“receivedpreferentialtreatmentfromthepowergrid”andthatthiswasofstrategicimportancebecauseithelpedthemlowertheamountofovertimerequiredbytheworkers(tomakeupfordowntimeduringbrownouts).23See:JUCCCEathttp://www.juccce.com/about_us/our_goals.24SergeyPaltseve,JenniferMorris,YongxiaCai,ValerieKarplus,andHenryJacoby,“TheRoleofChinainMitigatingClimateChange”EnergyEconomics,doi:10.1016/j.eneco.2012.04.007.


Underthe12th5YearPlan,theCPCisencouraginggreentechnologyandhassetenergyconservationtargetsandacapondomesticcoalproduction.Recentlytheyhaveannouncedapilotcap-and-tradeprogramthattheywilltestinafewmajorcitiesin2013,withtheintentiontomaketheprogramnationalby2015.Theplanistomaintainrelianceoncoalwhilegraduallyincreasingrenewableslikewind,solarandbiofuelsaswellasnuclearpower(Figure3-1).Thegovernmentisprovidingsubsidiesandtaxbreaksaswellasinvestinginsmartgridtechnologytoimprovetheoperationofthepowergrid(manywindfarmsarenotyetconnectedtothegrid).Toreducerelianceonfossilfuels,thegovernmenthasallocated$15.7billionfordevelopmentofthegreen-vehiclesectorandsetatargetof1millionelectricvehicles(includinghybrid-electricandbattery-powered)tobeproducedinChinaby2015.Figure3-1:China’sPlannedEnergyTransi tion(2010,2015)

Source:APCO,China’s12thFive-YearPlan:Howitactuallyworksandwhat’sinstoreforthenextfiveyears,APCOworldwide,10December,2010,p.6


IndustrialRestructuringTodealwithrisingcosts,labourshortages,andthewideninggapbetweenruralandurbanincomelevels,theCPCisencouragingmajordomesticindustrialrestructuring.Thisincludespoliciesto:- Relocatefactoriesfromthecoasttoinlandareas;- Upgrademanufacturingtohighervalueadded;and- DevelopChina’sserviceeconomy.ManyChinesebusinessesarealreadymovingfromthePearlRiverDeltaareatoinlandChina.AsabuyerattheFairexplained,“Thestateismakingaregulatoryshift,allowingmorefactoriesinland.ThishastamperedwiththeoriginalShenzhen-Guangzhoucorridoroffactoriesandspecialeconomiczones.Thisiscreatinglabourshortagesaswageshavegoneup,andworkersaremovingtowardsautoandelectronicsfactories,andcannotfillthelower-wagedhandicraftsandgiftsjobs.”AsshowninTable3-1,thelargestexportingprovincescontinuetobeontheCoastbuttheareasofbiggestgrowthareintheinteriorincludingNingxiaandChongquingwithgrowthratesoverthepastyearof227%and282%respectively.Table3-1:TheShif t inChina’sExpor tingProvincesLargestExpor ters Fastest GrowingExpor ters

(2010-2011) 1.Guangdong2.Zhenjiang3.Jiangsu4.Fujian5.Shandong6.Shanghai

1.Chongquing(+282%)2.Ningxia(+227%)3.Jiangxi(+90%)4.Hubei(+84%)5.Xinjiang(+41%)

Source:CantonImport&ExportFairBulletin,2012,p.25.Localgovernmentsarehelpingtofacilitatethisinlandre-locationwithlandre-zoningandsubsidiestomanufacturersthatmove.Overthe4-yearperiodfrom2006to2010,localauthoritiesopenedup22,000km2ofruralland(anareatwicethesizeofNewJersey).Furthermore,theshareoffixedassetinvestmentsininlandprovincesexceededcoastalinvestmentsforthefirsttimein2010.25AmongthebiggermanufacturersinChina,theyarenotonlyre-locatinginlandtoreducecostsbutarealsomovingsomeproductionoutsideofChinatocheaperdevelopingcountrieslikeVietnam,Malaysia,Indonesia,Thailand,BangladeshandCambodia. 25TheEconomist,PedalingProsperity,SpecialReport,May26th,2012:4,6.


AlllevelsofgovernmentinChinaarelookingto“addvaluetoChina’sindustrialoutput”throughgreaterinnovationandmanufacturingquality,andbyupgradingintohighervalueindustrieslikeinformationandcommunicationstechnologysectors(likeJapan,TaiwanandSouthKoreadid).Businesses,asencouragedbythegovernment,arelookingtocapturegreatermarginsbyexpandingtheirmanufacturingrolefurtherintothesupplychainintothedesignandretailingofdomesticbrands(Figure3-2).Chinaisalsolookingtoreduceitsrelativerelianceonmanufacturingthroughdevelopmentofitsserviceindustry(e.g.,construction,banking,telecommunications,transport,tourism,professionalservices,environmental,energy,health,education,etc.).AsreportedbytheWTO,“servicesrepresentthefastestgrowingsectoroftheglobaleconomyandaccountfortwothirdsofglobaloutput,onethirdofglobalemploymentandnearly20%ofglobaltrade.”Chinaistheworld’stopexporterofmanufacturedproductsbutiscurrently4thinservicetradevolume.Itsratioofservice-tradetototaleconomicoutputis43%comparedtoaround70%indevelopedeconomies,sothecountryexpectslargegrowthinthissector(aimingfor47%by2015toapproximately$1.5trillion–anannualgrowthrateof11%).Tofacilitatedevelopment,onMay21,2012,China’sPremierWenJiabaolaunchedthecountry’sfirstservice-orientedtradefair–TheBeijingInternationalFairforTradeinService.Initsfirstyear,22,000serviceprovidersfrom82countriesattended.Figure3-2: CapturingValueAddedthroughUpgrading

Branding Manufacturing Retail

Profit Margin

Stage of Production

Upgrading


TheGrowingSustainabilityImperative

“ForthebusinessesthatseektosourcefromChinainthecomingyear,wemustbeawarethatthereisachangeinthewater.Withthehighestechelonsofgovernmentfocusingongreeningtheeconomy,itwillonlybeamatteroftimebeforetheseregulationstrickledown,affectingwhichfactorieswechooseforpartnershipdowntothemethodsofprocurement…”26

Pollution&SocialJusticeAccordingtotheWorldBank,pollutioniscostingtheChineseeconomyaround6%ofitsGDPannually($100billionperyear).2720outof30oftheworld’smostpollutedcitiesareinChina.50%ofChina’smajorcitiesdon’tevenmeetthecountry’sminimalairqualitystandards(SeeBox3-1).70-80%oftheriversandlakesarepollutedand90%oftheurbangroundwateriscontaminated.Airpollutionfrom16millioncarsandcoalburningaswellaspoorindoorairqualityinbuildingsandfactoriesisresponsibleforaround1.3milliondeathsayear.28And“cancervillages”whereindustrialtoxicshavedamagedthehealthoflocalpeoplepopulatethecountrysideandhaveforcedevacuations.Growingdemandforfood,waterandenergyisdrivingcontinuallyincreasingenvironmentalconsequences.Toquellthegrowingstormofproblems,sustainabilityisnowoneofthemainprioritiesinthegovernment’s5Yearplan.

Socialjusticeproblemsgohand-in-glovewithmountingenvironmentalconcerns.Evenbasicneedsarenotbeingmet.Approximately160millionpeopleinruralareaslackaccesstocleanwater,adequatehealthcareandeducation.140millionaremalnourished.Withinthecities,despitelabourlaws,workerconditionsinmostfactoriesaredeplorablewithlonghours,poorsafety,andunsanitaryconditions.GovernmentPolitics&PolicyIngeneral,thelegislationinChinaonenvironmentalprotectionandlabourstandardsdoesn’tdifferthatmuchfromEuropeorNorthAmerica.Forexample,thereareover100environmentallawsandregulationsinChina,andthe1995PRCLabourLawiscomprehensive.Theproblemisthatimplementationandenforcementareweak.“Theprovinceswantthemoney,”weweretold,sotherearenoguaranteesthatthecentralgovernment’srecommendationsarebeingimplemented.TheMinistryofEnvironmentalProtectionattheNationallevelholdstheprimaryresponsibilityforenvironmentalprotectioninChina.Thereare2500localEnvironmentalProtectionBureausacrossthe31provincesthatarefundedbylocalgovernmenttooverseelocalenvironmental

26DerekPaylor(2011)“CPCCentralCommittee’sGreenProposalsforthe12thFiveYearProject”ChinaSourcer,Issue8,April2011,19‐20.27WorldBank,CostofPollutioninChina,Washington,DC,WorldBank,July2007.28ChinaGreentechInitiative,TheChinaGreenTechReport2011,HongKong,April2011,p.12.


protection.However,theircapacityisgenerallypoor(i.e.lackstaffandinspectionequipmentetc.)andcorruptioncanbecommon.Forexample,therearecaseswhereBureauemployeeskeepfactoryfinestosupplementtheirwages.ThispracticethencreatesperverseincentivesfortheBureaustoactuallyencourageongoingpollution.29InOctober2010,theCommunistPartyofChina’sannounceditsFive-YearPlanforNationalEconomicandSocialDevelopment(2011-2015).Theplanincludesthreemainpriorities:rebalancingtheeconomy,reducingsocialinequality,andprotectingtheenvironment.UnderthePlan,itisnolongerindustrialdevelopmentatanycost(themantrathatfuelledChina’srapideconomicgrowthoverthepast2decades).Instead,newpropagandasuchas,“stabilizinggrowth,adjustingstructureandpromotingbalance”andsloganslike,“inclusivegrowth”and“lowcarbonlife”areguidingdevelopmentthatisfocusedonachievinga“harmonioussociety”–onethatbalanceseconomicgrowthwithdistributionalandecologicalconcernsthroughanincreasedfocusonqualitymorethanrateofgrowth.Morespecifically,theCPChasannouncedacommitmentofover3trillionRMBtowarditsenvironmentalprotectionindustryoverthenext5years.Ithasalsosetenvironmentalqualitytargetsthatwillholdlocalgovernmentsaccountableforgreenindicators(e.g.waterconsumptionperunitofGDP;proportionofGDPinvestedinenvironmentalprotection,etc).Itisalsoencouraginggreentechnologyandhasintroducedbindinggoalsincludingreducingcarbonintensityandestablishinga“recyclingeconomy”toreducewasteandprotecttheenvironment.

Chinahasthepotentialtomovequicklyongreenprojectsbutoftenthereisalackoftechnicalknow-howatthelocallevel.Non-governmentalorganizationslikeJUCCCE(JointUS-ChinaCollaborationonCleanEnergy)arehelpingtobuildthisknowledgethroughtrainingandtechnologicalexchangeonhowtofinanceanddeploycleanenergysolutions.Forexample,JUCCCEisfacilitatingaprogramwherebymayorsinChinaareparticipatingingreentechcoursesandcooperatingwithUSmayorstotakeactiontowardsadoptinggreentechandenergymanagementintheircities.Sofar,150Chinesemayorsareparticipating.Theprogramishelpingtodriveproactivesustainabilitygovernance.AsaparticipantexplainsontheJUCCCEwebsitevideo,anessentialvalueoftheprogramis“toavoidthecrookedpathof‘developmentfirst,solvelater’thatcitiesineasternChinahavetaken.”

29ElizabethEconomy,TheRiverRunsBlack:TheEnvironmentalChallengetoChina’sFuture(Ithaca:CornellUniversityPress,2004).


Box3-1:LocalPol i t icsGoInternational:Bei j ing’sAirPol lut ionControversyControversyoverairpollutionreportinginChinaheightenedinearlyJune2012withtheChinesegovernmenttellingForeignEmbassiestostopairpollutionmonitoringandreportinginChina’smajorcities.AgovernmentofficialinShanghaitoldthemediathatU.S.consulate’sairqualityfeedontwitterwas“illegal.”Theissuehasbeenfocused,however,aroundtheU.S.embassyinBeijing.TheChinesegovernmentmonitorsandreportsdailyairqualityreadingsinBeijing.In2011,thegovernmentclaimedtheyhad286“blueskydays”(over78%oftheyear).(A‘blueskyday’achievesthehighestgrade1or2airqualityratingona5pointscale.)TheU.S.embassyinBeijingalsotakesdailyreadingsandreportsthemontheirwebsiteandonaTwitterfeed.Theembassyreportsmuchpoorerairqualityandmanymoredaysofconcern.Thereportsweren’taddingupandlocalcitizensbeganpushingbackontheChinesegovernmenttoimprovetheirairqualitystandards,monitoringandreporting.Beijingrespondedandcancelledtheir“bluesky”reportingprogram(inexistencesince1998),andinearly2012began(inBeijing)tomonitorthesmaller,moreharmfulPM2.5“fine”particlesthatcancausepermanentlungdamageandlungcancer.PriortothistheywereonlymeasuringthelargerPM10particles.TheyalsosetarequirementforothercitiestostartmonitoringPM2.5startinginOctober2012.TheongoingissueisthatChina’sPM2.5standardismuchmorelenientthantheUS.Standard.TheChinesestandardforPM2.5is75mg/m2-two-timeslowerthantheUSEPAstandardof35mg/m2.“Goodairquality”daysfortheBeijinggovernmentarereportedas“unhealthyforsensitivegroups”bytheU.S.embassy.TheChinesegovernmentwantstheUStostoptheirairqualityreportingbecauseoftheconfusionoverthedualreadingsandstandards.TheyarguethatChina’sairqualitystandardismorelenientbecauseitreflectsChina’searlierrelativestageofindustrialdevelopment.Sources:AssociatedPress,“ChinaescalatesobjectiontoUSembassydisclosingBeijing’sair

pollutionviaTwitter”TheWashingtonPost,June4,2012.AsiaNewsNetwork,“Beijingnolongercounting‘blueskydays’”TheJakartaPost,June

6,2012.


AdvocacyOversightFactoriesinChinaarefacingincreasedscrutinyoftheirenvironmentalandsocialpracticesfromaconcernedChinesepublic,analarmedinternationalaudience,andagrowingactivistcommunity.Problemslikemelamineinbabymilkthataffectedthehealthof50,000children;evacuationsoftownsaftertoxicslikeleadhavebeenfoundtobepoisoningchildren;andsuicidesatfactorydormitoriesaredrawingglobalattentionandmultinationalcompanyresponse.

Bysomeestimates,environment-relatedconcernshave increased30%peryearsince2002.30Thereare increasingprotests,demonstrations,complaints,anddisputesagainst factoriesandharmful pollution and increasing social unrest threatening central government authority. TherecentOscar-nominatedfilm“WarriorsofQiugang”(2010)depicts theriseofprotestand localactivism. Tracingover3years(2007-2010) the filmshowsthe localcommunityprotest in thetownofQiugangintheprovinceofAnhuioverthehealthandenvironmentaldamagetotheair,waterandsoilfromthechemicalplantintown(producingpesticidesanddyes).

TheCPCmanagesandcontrolsNGOsthrougharegistrythatitestablishedin1994(promptedbytheIOCandBeijing’sbidfortheOlympics).31Thatyear,theFriendsofNaturewasthefirstnon-profittobelegallyestablishedinChinaundertheregistry.Therearenowover2000registeredenvironmentalgroupsandmanymoreinformalones(around1500).32TheWWFwasthefirstWesternENGOinChinaasdocumentedinGeorgeSchaller’smemoir,TheLastPanda(1993).TheInstituteofPolicyandEnvironmentalAffairs(IPE)inBeijinghasestablishedacoalitionof41NGOs(TheGreenChoiceAlliance-GCA)whoareworkingtogethertopromoteaglobalgreensupplychain.TheyarepushingbrandbuyerstoimprovetheenvironmentalperformanceofChinesefactoriesandareencouraginggreatertransparencyandlocalstakeholderparticipationintosupplychainmanagementsystems.Specifically,since2004,theIPEthroughtheGCAhaslaunchedaprojectthatissystematically

30CarinZissisandJayshreeBajoria,China’sEnvironmentalCrisis,CouncilonForeignRelations,NewYork,August,2008.31TimothyHildebrandt,“ThePoliticalEconomyofSocialOrganizationRegistrationinChina”TheChinaQuarterly,208,2011,970‐989.Seealsothewebsite:http://factsanddetails.com/china.php?itemid=388&catid=10&subcatid=66.32“SocialmovementgroupsinChinaaredividedintosixcategories:registeredNGOs,sometimesalsoreferredtoas"government‐organizedNGOs"orGONGOs;non‐profitenterprises,whicharerunasnon‐profitorganizationswhileofficiallyregisteredasbusinessenterprises;unregisteredgroups;web‐basedgroups,whichmostlyfunctionthroughtheinternetwhileremainingunregistered;studentenvironmentalassociationswhichareregisteredonuniversitycampuses;anduniversityresearchinstitutes,orNGOsthatoperateundertheumbrellaofauniversity.Chineseofficialnewssourcesestimatethatthereareroughly3,500environmentalNGOsinChina,includinginternationalgroups.Approximately2000areofficiallyregistered,whiletheremaining1500areeitherunregisteredorregisteredascommercialenterprises.”Quotedfrom:http://asiacatalyst.org/blog/2010/04/chinas‐environmental‐ngos‐an‐overview.html.


mappingpollutionviolationsoffactoriesthroughoutthecountryandconnectingthedotsoftheseplantsthroughthesupplychaintoglobalbrandcompanies.Theyhavesentletterstothebrandcompanieslettingthemknowoftheirvarioussuspectedsuppliersandaskingforaresponseonwhattheyplantodotoaddressthesuspectedproblems.(Foxconnwasincludedinthiscampaigneventhoughthey'renotabrandbuyer.)Therangeofresponses/orlackofresponsesfromthebrandcompaniesisverytellingaboutthecultureandcommitmentofthesecompaniesto'walkthetalk'withrespecttoimprovingsustainabilityintheirsupplychains(SeeBox3-2).

ReviewingthedataontheIPEwebsite(for their campaigntoencouragegreatersupplychaintransparency and accountability among brand apparel and ICT companies) is interesting fornoting a difference between supply chain leaders like Nike and the GAP (who see it as asupplementalriskmgttooltohelpidentifyandimprovetheirenvironmentalsourcingpracticesinChina and are lending support and encouragement to the NGOs) versus Marks & Spencer(deflectingtheNGOquestions)versusCarrefour(completelyignoringtheNGOrequests).

AswellasthegrowingcapacityofdomesticNGOs,InternationalNGOslikeGreenpeacearealsoplayinganincreasingroleininvestigatingandcallingglobalattentiontoharmfulpollutionviolationsandillegalactivities.The2011Greenpeacereport“DirtyLaundry,”forexample,documentedthelinkbetweenwell-knownclothingbrandcompanieslikeNike,LacosteandAdidasandfashionretailerslikeH&Mtotoxic,riverpollutingtextilesuppliersinChina,promptinginternationalattentionandfollow-upactionfromthebrandcompanies.Nike,AdidasandPuma,forexamplehavecommittedtoeliminateallhazardouschemicalsacrosstheirentiresupply-chains,andtheirentireproductlifecycleby2020;andH&Mcommittedtotransparentreportingonthechemicalreleasesfromitssupplierfactories.Li-NingandC&Ahavejoinedthesecompaniestodevelopa“Jointroadmaptowardszerodischargeofhazardouschemicals.”33TheMinistryofCivilAffairsstilltightlycontrolsNGOactivity.“AccordingtoaspecialreportabouttheU.S.NGOsinChinapublishedonMarch30thbytheChinaCharityandDonationInformationCenter,thereareabout1,000NGOsfromtheU.S.workinginChinaandonlylessthan3%ofthemhavegainedlegalstatus.”34GovernmentsinChinaaregraduallyfacilitatinganenvironmentthatisrelativelysomewhatmoreconducivetogreaterNGOengagement.Forexample,inNovember2011,theGuangzhougovernmentintroducedregulatorychangesto“promotethespiritanddevelopmentofthesocialmovement”byreducingthecontrolsandregistrationrequirementsforestablishinganNGO(a‘privatenon-enterpriseunit’).Atthesametime,howevertheyarebeatingandjailingcivilrightsactivistslikeChenGuangcheng.

33FordetailsseetheGreenpeacecampaignwebsiteavailableat:http://www.greenpeace.org/international/en/campaigns/toxics/water/detox/intro/.34SeeHarvard’sHauserCenterforNonprofitOrganizationsat:http://hausercenter.org/chinanpo/2012/04/less‐than‐3‐of‐ngos‐from‐the‐u‐s‐are‐legally‐registered‐in‐china/.


Box3-2:China’sGreenCoal i t ionAl l ianceSupplyChainSustainabi l i tyProjectRecognizingthattheGCAdataisasnapshotintimeandrevealsonlythecompany’sefforttorespondtotheNGO’sunsolicitedletter,thefindingsareneverthelessinteresting.AssummarizedinTable3-2below,theresultsoftheGreenCoalitionProjecttodate(June06,2012)revealahigherlevelofinformationandcommunicationstechnology(ICT)companycooperationversusapparelcompaniesparticularlywithrespecttosendingaletterofresponsetotheIPEsurveyandcheckinguponthenotedsupplierviolations.ICTcompaniesalsoappeartobedoingabetterjobinusingpublicinformationtoidentifyandcontinuallyimprovetheirenvironmentalperformance.Neithersectorcommunicatesahighlevelofaccountabilityregardingprovidingcorrectiveactionexplanationsortransparencyindisclosingdischargedata.Bothsectorsarefailingtocommunicateanyoftheireffortstoeitherengagemainsuppliersorencouragesub-tiersupplierresponsibility.Diggingdeeperintotheprojectdatarevealssomeconfirmingandsurprisingindividualbrandcompanyindicatorswithrespecttotheirlevelsofsupplychainsustainabilitycommitment.Amongtheapparelcompanies,itisnotsurprisingtoseethatNikeistheonlyonetocommunicatethatitispushingitsmainsuppliersforgreatersecondtiersupplierresponsibility.H&Malsostandsoutasaleaderastheonlycompanytoreportsthatitregularlydisclosesitsdischargedata.SupplychainleadersintheICTsectorareNokiaandPhilipswhoarepushingtheirmainsuppliers,andVodafonewhoisencouragingsecondtiersuppliersustainabilityengagement.SurprisinglaggardsintheapparelsectorappeartobetheGapandC&A(theworld’sbiggestclothingdepartmentchain),andDell,IBM,andAppleintheICTsector–nonerespondedtoIPEwithcorrectiveactionexplanations.Laggingevenfurther,Carrefour(the2ndlargestretailerintheworld)hasfailedtorespondtoanyIPEcommunication.Marks&Spencer(M&S),withitsaimtobecometheworld’sgreenestretailerstandsoutinparticularforfailingtorespondtoanyoftheIPEconcerns.IntheirresponseofApril30th,2012totheIPE,M&SdidprovidesomeinformationontheirenvironmentaleffortsinChinabutfailedtoaddressanyoftheissuesorquestionaboutthesuspectedviolationsoftheirsuppliers.IPEsentanotherletteronMay4th,2012tothecompanytorequestmoreinformationandexplainedthatotherbrandshadbeenmuchmoretransparentandaccountableintheirengagementwithIPE.M&S’lackofengagementcomparestobrandleaderslikeNike,thatrespondedbyindicatingtheirsupportforIPE’sworkandtheirenthusiasmtosignuptothejointroadmapprojecttoeliminatehazardouschemicaldischargeby2020.Aswell,NikerespondeddirectlytoquestionsabouttheirsuspectedsuppliersandencouragedIPEtokeeptheminformedofanyadditionalinformationtheyuncovered.35

35ForsummariesoftheGreenCoalition’scommunicationwiththebrandcompaniessee:http://www.ipe.org.cn/En/alliance/new01.aspx.


Table3-2:BrandCompanySupplier CommunicationinChina BrandApparel

Companies(48) BrandICTCompanies(33)

RepliedtoNGOletter 50% 97% Checkeduponsupplierviolations 42% 97% Usepublicinfoforcontinuousimprovement 25% 76% Providedacorrectiveactionexplanation 17% 33% Regularlydisclosedischargedata 2% 0% Directlyextendenvironmentalmanagementtomainsuppliers

0% 6%

Pushmainsupplierstomanagesecondarysuppliers 2% 6%

Source:CompiledfromIPEprojectdataavailableathttp://www.ipe.org.cn/En/alliance/new01.aspx(accessedJune06,2012).BrandRetailComplianceItisnotjustthemountingcostofpollution,labourproblems,advocacypressure,andnewgovernmentpoliciesthatarepressuringChinesesupplierstoadoptsustainabilityconsiderations.Asthenextsectionoutlines,theyarealsofacingincreasedtransparencyandaccountabilityrequirementsfrombrandbuyerswhowanttomanageproductqualityaswellasmitigatetheriskofreputationdamagefrompoorenvironmentalandsocialpracticesofdirecttier1suppliersaswellassub-contractedlower-tiersuppliers.


4 BRAND RETAIL SUSTAINABILITY GOVERNANCE BigBrandsRacingtoZero Sincethe1990s,brandretailcompanieshavebeendevelopingcodesofconductandconductingsocialandenvironmentalauditsoftheiroffshoresupplierstominimizeriskandprotecttheirbrandreputations.Inthepastfiveyears,therehasbeenadramaticriseinsustainabilitycommitmentsthatgodeeperthanjustreputationassurance(Table4-1).Thebigbrandsareadoptingsustainabilityprogramsanddrivingthemthroughtheircorebusinessandacrosstheirglobalsupplychainsforbusinessvalue.Table4-1:BigBrandSustainabil i tyCommitmentsCompany Sustainabi l i ty

Program YearLaunched

Promises/Goals

McDonald’s SustainableLandManagementCommitment

2011 EnsurethefoodservedinMcDonald’srestaurantsissourcedfromcertifiedsustainablesources.

Procter&Gamble

SustainabilityVision

2010 Designproductsthatmaximizetheconservationofresources.

Unilever

SustainableLivingPlan

2010 Decouplebusinessgrowthfromenvironmentalimpact.

PepsiCo PerformancewithPurpose

2009 Deliversustainablegrowth.

FedEx EarthSmart 2009 Extendthedepthandbreadthofhowsustainabilityisintegratedintothecompany.

Nike ConsideredDesign 2008 Performancewithoutcompromisingsustainability.

IBM

SmarterPlanet 2008 Applysmarttechnologysystemstosustainabilitysolutions.

Starbucks SharedPlanet 2008 Aspiretoenvironmentalstewardship,ethicalsourcing,andcommunityinvolvement.

Marks&Spencer

PlanA 2007 Becometheworld’smostsustainableretailerby2015.

Coca-Cola LivePositively 2007 Makeapositivedifferenceintheworld. Johnson&Johnson

HealthyPlanet

2006 Safeguardthehealthofpeopleandtheplanet.

Walmart SustainabilityCommitment

2005 Committozerowaste,100%renewableenergy,andsustainablesourcing.

GeneralElectric

Ecomagination 2005 Growthroughcleanenergy,cleanwater,andcleantechnologies.

Source:Adaptedfrom:PeterDauvergneandJaneLister,Eco-Business(Cambridge,MA:TheMITPress,InPress).


Theseemergingbig-brandsustainabilitygovernanceprogramsareanchoredinunprecedentedaspirationalcommitmentsto“purpose-driven”growthandsupplychain“greening.”Astheauthorofthetriplebottomlineconcept,JohnElkingtonexplainsinhisnewbook,TheZeronauts,companiesarenowclaimingtobecompetinginaracetowardszeroimpactgrowthbyadoptinggoalssuchaszerowaste,zerocarbon,zerofossilfuelreliance;zerotoxics,andzerodeforestation.36Companiesadmittheyarealongwaysoffbutareoptimisticabouttheprospects.AsarepresentativefromDupontexplainedtousattheFair,theircompanyusedtonotwanttocommunicatetheirsustainabilityeffortsoutoffearofcriticism.Now,theyaresettingbiggoalsandreportingtheirprogressalongtheway.“WearenowtellingthestoryofDupont’sjourney,”theDupontrepresentativeremarked.“Thereisgoodnewshereeventhoughwe’renotallthewaythere.”Recognizingthattheycan’treachtheirgoalsontheirown,brandcompaniesarecollaborating.ThisincludessharingintellectualpropertylikedesignandprocesspatentsthroughmechanismsliketheGreenXchange.Aswell,tostandardizeandscale-upsustainabilitywithintheirindustriesandglobalsupplychainstheyareestablishingsustainabilityconsortia(Table4-2).Competitorsnowsitinthesameroom,actingcooperativelythroughtheseconsortiatoshareinformationaboutmaterials,metrics,andsupplierstofacilitatethedevelopmentandimplementationofbusinesstoolstoadvancesustainabilityimprovements.Table4-2BigBrandSustainabil i ty Consor tiaConsort ia Formed StatedPurpose

SustainableApparelCoalition 2011 Encouragesustainablemanufacturingandinformconsumersoftheecologicalimpactofclothing.

ConsumerGoodsForum 2009 Developandpromotetheimplementationofresponsibilitystandardsalongconsumergoodssupplychains.

TheSustainabilityConsortium 2009 Encouragemoresustainableproductsthroughscientificresearch,innovativetechnology,andstandards.

OutdoorIndustryAssociationSustainabilityWorkingGroup

2007 Improvethesocialandenvironmentalimpactofoutdoorequipment,clothingandfootwear.

BeverageIndustryEnvironmentalRoundtable

2006 Defineacommonframeworkanddrivecontinuousimprovementinbeverageindustryenvironmentalstewardship.

ElectronicsIndustryCitizenshipCoalition

2004 Improveworkingandenvironmentalconditionsinelectronicssupplychains.

Source:Adaptedfrom:PeterDauvergneandJaneLister,Eco-Business(Cambridge,MA:TheMITPress,InPress).

36JohnElkington,TheZeronauts:BreakingtheSustainabilityBarrier,Routeledge,2012.


BrandsarealsocollaboratingwithNGOs.Nike,WalmartandUnileverarecooperatingwiththeGreenChoiceAllianceprojecttomappollutersinChinaandareusingthisinformationtostrategicallytargetandimprovesupplierpracticesandsustainabilityperformance.SupplyChainSustainabilityToolsCompaniesvaryintheirapproachestosustainability.However,businesstoolstoimprovesupplychainenvironmentalsustainabilityperformancearebecomingincreasinglystandardized.Amongtheinstrumentsbrandcompaniesareemployinginclude:lifecycleassessments,supplierscorecards,eco-indices,eco-certification,complianceaudits,andkeyperformanceindicator(KPI)reporting(Table4-3).Table4-3:SupplyChainSustainabil i tyTools

Function BestPracticeExamples LifeCycleAssessment

Identifiesandassessestheenvironmentalimpactsofmaterial,processesandproductsalongthesupplychain.

- ISO14040standard- SustainabilityConsortium- GlobalPackagingProject- WBCSD- LevisLCA

Eco-metrics&SustainabilityIndices

Measuresandprovidesaggregatedscoringofsustainabilityperformancetoenablebestpracticesbenchmarking.

- Nikeconsideredindex- OIAEco-index- SustainableApparelCoalition- WalmartSustainabilityIndex- TheSustainabilityConsortiumMetrics

SupplierScorecards Asimplifiedframeworkfor

recordingandevaluatingasupplier’soverallsustainabilityperformance.

- Walmart- ConsumerGoodsForum

SupplierCodesofPractice

Requirementsforguidingsuppliersustainability.

- HewlettPackard

ProcurementPolicies

Sustainablepurchasingcommitmentsandrequirements.

- HomeDepot- Staples- ConsumerGoodsForum:ZeroDeforestationPurchasing

Eco-certification Athird-partystandardfor

evaluatingandassuringthesustainabilityperformanceofbusinessoperationsandconsumerproducts.

OperationsISO14001(environment)ISO9001(quality)ISO50001(energy)OHSAS18001(health&safety)GlobalGap(foodsystems)


Function BestPracticeExamples FSSC/FS22000(foodsystems)ProductsBluesign(apparel)Organic(food,apparel)Fairtrade(food,apparel)FSCorPEFC(wood&paper)ENERGYSTAR(appliances)

ComplianceAudits Acheckonsupplierpracticesandproductsasperapre-definedsetofsustainabilitycriteria.

- IKEAIWAY- Walmart- UL,QMI,SGS

Reporting Adocumentedsummaryofsustainabilityprogressandperformance.

- GRI- Nike- VanCity- SustainabilityConsortiumMeasurement&ReportingSystem

SocialSustainabilityComplianceAudits

Standardstoassesscompliancewithrespecttolabourpracticesandcommunityengagement.

- SA8000- GlobalSocialComplianceProgram- AA1000

EvaluatingSupplierPerformanceMetrics&ReportingBrandsfaceincreasingexpectationstomanagethesustainabilityperformanceoftheirsupplychains.Inresponse,(undertheadage“whatgetsmeasured,getsmanaged”)theyaredefiningandimplementingsustainabilitykeyperformanceindicatormetricsandsupplierscorecards.Specifically,theyaresettingmeasurablegoalsandtargetsaroundenergy,water,waste,carbon,health&safety,andhumanrights.Thesearetranslatedintocodesofconductandcompliancerequirementsthatsuppliersareauditedagainst.Suppliersarealsorequiredtokeeprecordsandreportonthekeyperformanceindicators.Brandsthenuseauditresultsandsupplierrecordsandreportstomeasureandassesssupplierperformance.


AuditRating&Penalty/RewardSystemsAuditprogramsarenotconsistentbetweenbrandbuyers.Differentbrandshavedifferentauditmethodsandaudittodifferentstandardsandprotocols.Theyemploydifferentauditpassorfailratingsystems.Andtheyhavedifferentpenaltiesfornon-compliance.Asasupplierexplained,“Ifyoucheatandarecaught,Europewilldestroyallofthematerialsthatyou’veexportedforsale.TheUSdoesn’tdestroymaterials.Theysimplyissueasmallfine.”CarrefourhasaslidingscalethatgivescompliantsuppliersanA(compliancewiththecharterandimplementationofbestpractices)andtheworstperformersaD(criticalsituationrequiringtheimplementationofmajorcorrectiveactions).Walmartusesaprogressivered,orange,yellow,greenlightrankingsystem(Table4-4).Table4-4:Walmar t’sComplianceAudit RatingSystemAuditRating ViolationLevel AuditSchedule Green Low-risk Re-auditedafter2years Yellow Medium-risk Re-auditedafter1year Orange High-risk Re-auditedafter180days Reddisapproved Egregious BarredfrombusinesswithWalmartfor1year Redfailed Egregious PermanentlybarredfrombusinesswithWalmart Source:Walmart2011GlobalResponsibilityReportIntheeventofnon-compliance,Carrefour’ssuppliershavetoimplementacorrectiveactionplan.Ifasupplierisinseriousbreachofcompliance(aDrating)orrefusetofollow-uponauditcorrectiveactionsthentheyaredropped.Walmartstatesthattheywillworkwithsuppliersthatfailtocomply,but"ifafteraperiodoftime,thesupplierdoesnotimprove,wewillmoveourbusiness.”Theylacktransparency,however,ontheextenttowhichdroppingtheirsuppliersactuallyoccurs.SimilartoCarrefour,NikehasreliedonanAtoDratingsystemforitssuppliers.However,recognizingthattheywerenotachievingongoingcontinuousimprovementswiththeirsuppliers,theyrecently,inMay2012,announcedanewauditratingsystem.Companiesthatwereatthehighest“A”levelwillbecomebronzeandtwonewhigherlevelsofsliverandgoldcompliancehavebeenintroducedwithtougherrequirementsonlabourpracticesandsustainabilityimprovements.Nikehasannouncedthatitexpectsallofitssupplierstoachievebronze-levelby2020orrisklosingNike’sbusiness.Intermsofperformancereporting,Walmartusestheirratingsystemtoaggregateauditresultsandcommunicatetrends.Asof2011,93%oftheirsuppliersfromChinawereeitheryellowmediumororangehighrisk,andnonewerered.Thisisreportedlyanimprovementover2010where1.8%oftheirsupplierswere‘reddisapproved’;and1.6%were‘redfailed’.The


percentageofgreen-levellowrisksuppliersimprovedfromjustunder2%to7%ofWalmart’stotalauditedsuppliersfromtheregion.37Thereisalackofstandardizationofmetrics,codes,auditprotocols,andsupplierratingandpenaltysystems.Factoriescomplainoftheadministrativeburdenofpreparingforalargenumberandrangeofslightlydifferentbrandcustomeraudits.Thereareharmonizationopportunitiesandinitiativesassection6explains,particularlyforbrandssourcingfromthesamefactories.

37AconsultantweinterviewedinGuangzhouinformeduswhenweaskedwhichretailer’sfactorieswerethebestinChina,thatWalmart’sfactoriesarebetterthanChinesefactoriesthatproducefordomesticconsumptionbutworsethanotherfactoriesthatproduceforexport.


5 CSR PERFORMANCE IN CHINA GainingTractionCorporateresponsibilityhaslowprevalencebutisgainingsometractioninChina.38Numerouseventshavereinforcedexpectationsofgreatercorporateresponsibilityincluding:foodandproductsafetyscaresliketherecentdiscoveryoftoxicchromium-ladenpharmaceuticaldrugcapsules;labourscandalslikethesuicidesatFoxconn;environmentalchallengeslikeairandwaterpollution;naturaldisastersliketheearthquakeinSichuan;andheightenedworldmediaattentionwiththeBeijingOlympics.AndsustainabilityservicesaregrowingliketheGuangdongModernServicesTradingCentrethatfacilitatesthelinkingof40,000Guangdongmanufacturerswithbrandbuyersandistryingtogetfactoriesinterestedin“Lowcarbon.Betterlife”workshops.StillCSRuptakeremainslowanduneven.AccordingtoChina’s3rdannualCorporateSocialResponsibilityBlueBookreleasedbytheChineseAcademyofSocialSciences39inNovember2011,2/3ofthe100biggestcompaniesoperatinginChinaare“CSRbystanders.”TheydonotpromoteordisclosesufficientinformationaboutCSR,scoringonly19.7pointsonaverageoutof100.Ofthestate-owned,privateandforeigncompaniesevaluatedontheirmanagement,market,socialandenvironmentalresponsibility,thestate-ownedcompaniesscoredthehighestbuteventheirCSReffortswerefoundtobeverylow.Theworstweretheforeignfirms.19ofthemevenscoredzeroorlowerontheranking.Adidas,forexample,cameoutwithatotalof-4points.Thestudyfoundthatthecompanyhadn’tsufficientlycommunicatedtheirplansaboutCSRdevelopment,corruption,environmentalmanagement,energyconservation,pollutioncontroloremissionreduction.AmongtheSMEs,theworstlabourandenvironmentalabusessomebelievecomefromlowvaluemarkets(likehandmadethings)andarealsostronglycorrelatedwiththepresence/interferenceoftradingcompanies(thatlowermanufacturer’smargins).Industrieswiththeworstviolationsincludethosewithdyeandhandiwork,suchasthemakingofaccessorieslikebelts,wallets,bags,gifts,crafts,etc.WhileindividualcompaniesarelaggingintheirCSRcommitmentsandefforts,theCentralgovernmenthasrecognizedtheneedtoinvestinagreenereconomy.Chinaisalreadythegloballeaderingreentech,forexample,bypassingGermany,JapanandtheUSwhichweretopproducersin2005.Thegovernmentisbuildingevenfurtheronthiscapacity.Underthecurrent5YearPlan,theCPCCentralCommitteehasidentified7“strategicemergingindustries”–4ofwhichareinthe

38See,forexample,M.Jun,R.Cheung,W.Jingjing,andR.Quingyuan,GreeningSupplyChainsinChina:PracticalLessonsfromChina‐basedSuppliersinAchievingEnvironmentalPerformance,IPEandWorldResourcesInstitute,Washington,D.C.,2010;andGlobalSupplyChainCouncil,GreenSupplyChainChinaSurvey,GlobalSupplyChainCouncil,Shanghai,2010.39TheChineseAcademyofSocialSciencesisChina’stopthinktankwithclosetiestotheSateCouncil.


environmentalsectorincluding:biotechnology,energyconservation,environmentalprotection,andcleanenergyvehicles.Theyaimtosupportthesesectorswithincentives,taxbreaks,preferentialprocurementetc.Thegovernmenthasearmarked4trillionRMBinfinancialstimulusfortheseindustriesoverthenext5years.Aswell,theyhavesetspecifictargetstoguideandshapethedevelopmentofthesesectorsincludinganaimtoproduce1millionelectricvehiclesby2015;anobjectiveof15%ofdomesticenergysupplyfromnon-fossilfuelsby2020;andagoalof40-45%carbonreduction(perunitofGDP)alsoby2020.MurkyDisclosureIt’shardtoknowexactlywhatisgoingoninChina.Rulesandgoalpostschange.Thereisalackofconsistentstandards.Everyprovinceandcustomszone,forexamplehasdifferentexportcustomsregulations.Businesstransparencyandaccountabilityarealsolacking.Eventhepreparationofbasicfinancialdocumentsanddisclosureisnotconsistentpractice.Thereissomewhatofatrendtowardincreasedreportingandengagementbylargestate-ownedcompaniesbutoverallbusinesstransparencyamongthesmalltomedium-sizedbusinessesthatdefinethemanufacturinglandscaperemainshighlymurky.Tryingtoidentify,trackandmanagesuppliersinthisenvironmentisacolossalchallenge.Supplierssub-contractportionsoftheirmanufacturingwhichinturngetssub-contractedto3rdand4thtiersuppliers.40TransparencyissueswereevidentattheFair.Fairorganizerswerecommunicatingassurancesthatallofthevendorswereinfactmanufacturersandnottradingcompanies.Somevendorshadsignsthatproclaimed,“Weareamanufacturer.”Inmanycasesthevendorappearedtobemakingexaggeratedclaimsabouttheplantcapacity,labourflexibilityandcertificationofthefacilities.Atoneboothforexample,whenwepressedthevendorastowhetherthewoodfortheirfurniturealsocamefromRussia,BurmaorIndonesia,theanswerwas,“ourwoodcomesfromCanadaandSwedenandiscertified.Thisiswhatmymanagertoldmetotellyou.”Withoutactuallyseeingthefactory,itwasdifficulttoknowwhetherweweresimplybeingtolda“goldentale”andshowna“goldensample”thatdidnotconveyorreflectthecompany’sactualoperationsandproducts.However,evenafactorytouroraudit,wesubsequentlylearneddoesnotguaranteefulltransparency.Sinceitsproblemsinthe1990swhenchildlabourwasdiscoveredinitssupplychain,Nikehasbeenaleadingadvocateofsupplychaintransparencyandwasthefirstapparelcompanytodisclosethenamesofallofitssuppliersandtheirlocations.However,Nikehassincerealizedthattheircommitmenttosharinginformationaboutitssuppliersandtheirlevelofcompliancehashadsomewhatofaperverseunintendedeffectinencouragingsomeofitssuppliersto

40PeterLevesque,“BuildingResilienceandSustainabilityintotheChineseSupplyChain”InPeterLevesque(Ed.)TheShippingPoint:TheRiseofChinaandtheFutureofRetailSupplyChainManagement,JohnWiley&Sons,2011.


deviseprogressivelyadvancedtacticstoconcealratherthanrevealandimprovetheirbusinesspractices.41UnintendedImpactsBrandbuyersinvestincomplianceauditprogramsontheassumptionthatregularcheckswilldiscourageChinesesuppliersfromunethicalbehaviourandhelpguidethemtofixenvironmentalandlabourproblems.Furthermore,thehopeisthatinfollowing-uptofixauditfindings,thesupplierswillalsorealizecostsavingsfromimprovedoperationalefficienciesthatwillinturn,encourageongoingself-directedinnovationandcontinualimprovements.Whilethisisthecasewithsomeleadingsuppliers,inmanyinstances,unintendedconsequencesareoccurring.Forone,auditscanmotivatefalserecordkeeping.Asonesupplierexplained,althoughalotofbrandswantthesamestandards,“somemakeitveryeasytocheatsincetheyallowyoutoself-report.”Aswell,auditscandiscouragesupplierself-governanceasresearchersatStanfordfoundthroughanexperimentalmodel.Frequentauditstheydiscoveredcanturnsuppliersinto“free-riders”onthebrandbuyersauditprogramwheresuppliersessentiallybecomereliantontheauditprocessastheirmeanstodetectviolationsratherthantakingonanyproactivebehaviourthemselves.TheStanfordmodelalsoconfirmshowtherearesituationswhereauditsmayactuallyworkinaperversewaytoworsensuppliercompliancewith“highauditintensitymotivatingthesuppliertohideratherthancomply.”42Anotherunintendedconsequenceofauditprogramsisthatmanufacturersmayinterprettheidentificationofopportunitiesforefficiencyimprovementsasameansandjustificationforbuyerstoputfurtherdownwardpricepressure.So,eveniffactoriesseethepotentialtoimproveefficienciestheywillnotwanttorevealthistothebrandbuyerastheyfearthiswillonlycausethebuyertoreducetheirpricefurther.43Asoneintervieweeexplained,brandbuyerslikeWalmartwilloffer50/50onsavingsfromsustainabilityeffortsbuttheyaresqueezingsohardonpricethesupplierendsupnotmakinganything.Byignoringorobfuscatingfactoryimprovements,thefactorythenhasabetterchancetoguarditsprofitmargin.Andinaddition,atabroaderscale,brandauditshavesparkedanentireindustryofsmallcorruptauditcompaniesinChinawhereISO14001certificationsaregainedwithfalsedocumentationandpay-offs.44 41HauLee,EricaPlambeck&PamelaYatsko,“IncentivizingSustainabilityinYourSupplyChain,”TheEuropeanBusinessReview,2011,p.2.42Q.ZhangandE.Plambeck,Auditing,Hiding,andComplianceinSociallyResponsibleSupplyChainManagement,workingpaper,StanfordGraduateSchoolofBusiness,2011.4343RachelSherman,et.al.,ChinaSustainableRetailSupplyChainReport,EfficiencyExchangeLLC,February2012,p.9.44HauLee,EricaPlumbeck,andPamelaYatsko,“EmbracingGreeninChina…WithanNGONudge”SupplyChainManagementReview,March/April2012,p.42.


Brandbuyersfacetheconstantchallengeoftryingtobalanceandpushforgreatersuppliertransparencyandcontinuousself-motivatedCSRimprovementwhilepreventingunintendedworsebehaviour.Abuyersayingthattheywilldroporrefusetodobusinesswithanon-compliantfactorycanencouragegreaterdeceptionsothatthesupplierwon’tgetcaughtthenexttime.Evenincentivesintendedtoencouragesupplierstotakeonmoreproactivesustainabilitymeasures,canendupspurringfalserecordkeepingassuppliersvietowintherewards.IncreasedscrutinybycommunitiesandENGOs(liketheworkoftheIPE)ishelpingtosupplementauditprogramstoimprovesuppliertransparencyandaccountabilitybutthereisalsoopportunityforbrandbuyerstoconsidernewapproachesandefforts.


6 GOING BEYOND COMPLIANCE Auditprogramsencouragecompliancebutarenotassuccessfulatbringingaboutmorefundamentalsustainedchangesinbusinessattitudesandbehaviour.Typically,auditorsidentifyaproblemthatgetsfixedonlytohaveanotherariseinanendlesscat-and-mouseauditcycle.Audits,ontheirownfallshortofinstillingadeeperCSRcultureofcontinuousimprovement.Andassection5.3explained,deception,free-riding,andcorruptionareoftenunintendedauditconsequences.Brandcomplianceeffortsthatgobeyondauditingthereforehavethepotentialtoimprovesupplychainmanagementeffectiveness.Amongtheactionsbrandbuyerscantaketoencourageincrementalimprovementsinsupplierpracticesinclude:

- Communicateaclear,consistentvisionofthedesiredsustainabilityoutcomes.- Establishbenchmarksforbestmanagementpractices.- Providetraining,technicalguidanceandassistancetosuppliersonplanningandimplementingbestmanagementsustainabilityimprovements.

However,togobeyondincrementalimprovementstoachievetransformativechangeinChinesesupplierbehaviourandcommitmenttoenvironmentalandsocialresponsibilitywillrequiremorethaninformationsharingandtechnicalguidance.Itwillrequirebrandcompaniestoevaluatetheirownbusinesspractices.IncrementalBusinessPracticeImprovementCommunicatingClear&ConsistentGoalsMotivatingsuppliersustainabilityimprovementshingesonsuppliersunderstandingthebrandbuyers’goals,thejustificationsforpursuingthesegoals,andthebrandexpectationsofsuppliersinmeetingthesegoals.Divertingattentionfromthedriveforimmediateprofittolonger-termsustainabilityconsiderationsisinherentlydifficult.Asonemanufacturerexplained,“ItishardertogetcompaniesinChinatothinklonger-term.TheUSandEuropeexportedalloftheirpollutiontousfollowingWWII.Localgovernmentsdonotregulate.Somanycompaniesthinkshort-term.”Thelackofacleardefinitionofsustainabilityandtheconfusingarrayofcompliancerequirementsandauditapproachesamongthebrandcompaniescompoundsthedifficultyinengagingsuppliersinimplementingchanges.Greatercollaborationamongbrandcompaniestoharmonizedefinitions,goals,standardsandauditapproacheswouldhelpsignificantlytoestablishclearandconsistentdirectiontohelpmotivatesuppliers.


BenchmarkingBestPracticesIndustrybenchmarksthatdetailbestpracticeswithrespecttoinnovativeprocessesandoptimallevelsofperformancewithrespecttokeysustainabilityareassuchasenergy,carbon,water,waste,health&safetyandhumanrightscanservetoguidesuppliersaswellashelpbrandsestablishconsistenttargetsandgoals.Severalorganizationsaretakingleadershipinbenchmarkinginitiativesincluding:

- BSR’sinitiativeinChinatoidentifyenergymanagementBestPractices.- GRIG4supplychainbenchmarkindicators.- UNGlobalCompact’sSupplyChainSelf-assessmenttool.- SustainableApparelCoalitionLifeCyclemetricsApparelIndextool.- Walmart’ssupplierscorecardassessmenttool.

Bestpracticespilotprojectsandcasestudiescanalsohelptoidentifyinnovativewaystocutsupplychaincostsandproducesustainabilitybenefits.Transportationlogisticsisaparticularlyunderdevelopedarea(Box6-1).Box6-1:TransportLogist icsBestPracticesPi lotStudyArecentpilotstudyatamanufacturingfacility(supplyingtoWalmart)identifiedspecificlogisticsinitiativesthatwouldachievegreatertime,labourandenergyefficiencieswhilealsoreducingcostsandcarbonemissions.Thestudydividedthesupplychainintoallinternalmovementofmaterialswithinthefacilityandexternalmovementstoandfromtheplant.Theylookedatthecarbonfootprintandcostsofeachsuchas:rawmaterialsourcing,transportationfromsupplierstoplant,storage,palletdesignandstretchwrap.Theymappedeveryvendorthatsuppliedtheplantandweighedmaterialsandproductsandthedistancetheytraveledandthemodeoftransitinordertoevaluatealternatives.Recommendationsincludedswitchingtorailversustrucking.45Forkliftmovementsintheplantwerediscoveredtohaveanunexpectedlyhighcontributiontoemissions.Inparticular,forkliftidlingandwaitingwhilepalletswerebeingwrappedwasidentifiedasanon-valueaddedactivitythatcouldbeeliminated.Inseveralcases,itwasfoundthatmaterialscouldbesourcedfromvendorsincloserproximityandstoragecouldalsobere-locatedtobeonsitetoreducetraveldistances.Loadingrecyclablesonareturningtruckwasalsoidentifiedasanopportunitytocutcostsandgeneraterevenue.Fullimplementationoftherecommendationswasestimatedthatitwouldsavetheplant$1.2millioneveryyearandreduceitscarbonfootprintby3500tonnesannually.Source:A.Bayat,SSundararajan,H.Gustafson,E.Zimmers,“SustainabilityDrivenSupplyChains,”IndustrialEngineer,August2011,p.26-31.

45Atonoffreightisshipped2to4timesmoreefficientlybyrailthanbytruck.Railbecomesrelativelycosteffectivefortripsabove750miles.


Training&TechnicalGuidanceMostsuppliersinChinaaresmalltomedium-sizedbusinesseswithinsufficienttechnicalskillsandunderstandingtomeetsustainabilitycompliancerequirements.TheGlobalSupplyChainCouncil’srecentgreensurveyof145Chinesesuppliersidentified“lackofawarenessofenvironmentalissues”asthebiggestissuefacingcompaniesinChina.46Ratherthandroppingasupplierfora“redlight”rating,brandshaveanopportunitytoworkmoreeffectivelywithsuppliersthroughcooperationtobuildknowledgeandskills.Nikeisamongtheleaders.AsJasonMak,DirectoratChunWoHoexplained,“Manybrandssimplysendyouaquestionnaireandletyouaudityourself.Nike,however,hasextensivetrainingprograms.”Jasonhighlightedhowimportantthetrainingwas.HeattendedaNiketrainingsessioninHongKongandinturntookthisknowledgetotrainhisstaffonhowtosaveenergyintheplant.Henotedthatheneededtoimplementthesechangestomeethiscustomer’sexpectationsand“getintheBluesigngame.”Brandscanalsodomorethroughcollaboration.Nike,WalmartandGE,forexamplearecooperatinginsupportingenvironmentalhealth&safetyacademiesinGuangzhouandJiangsutotrainChinesepractitionerstoguidefactoriesinmeetingbrandcompanycompliancerequirements.47Aswell,WalmarthasbeenworkingtogetherwithBusinessforSocialResponsibilitysince2009tobuildsuppliercapacitytoimproveenergyefficiencybyofferingtrainingandguidance.48TransformationalChangeStrivingthroughbrandretailgovernancetoimprovethesustainabilityperformanceofChinesemanufacturersraisesbiggerquestions.Canbrandsengagetheirsuppliers(andsub-tiercontractors)atadeeperleveltoongoingsocialandenvironmentalresponsibility?CantheybuildtrustinsupplychainrelationshipsinChinasoastoachievemoretransformationalbehaviouralchangetowardCSR?Isthecomplianceauditcarrot-and-stickpenaltyandrewardsystemoptimalorareotherapproachespotentiallymoreeffective?AndatthemostfundamentallevelissupplychainsustainabilityachievableinChinawhenbuyersdemandenvironmental,socialandqualityimprovementsatthesametimeassqueezingoncontractduration,price,anddeliverytimes.HowcanChinesemanufacturersbalancealloftheseexpectationswhilemaintainingcompetitiveness?Somearguethatbuyerdemandsforthelow“Chinaprice”simplydrivesethicalChinesevendorsoutofthemarket.Onlycheaterscanwinthesupplycontractssoaself-perpetuatingsystemof

46GlobalSupplyChainCouncil,GreenSupplyChainChinaSurvey,GlobalSupplyChainCouncil,Shanghai,2010.47SeeInstituteforSustainableCommunitiesathttp://www.iscvt.org/where_we_work/china/.48BSR,UnlockingEnergyEfficiencyinChina:AGuidetoPartneringwithSuppliers,May2010.


corruptactorsiscreated.OneoftheconsultingfirmsweinterviewedinGuangzhouexplainedthattheCantonFairwasrepresentativeofthe“badactors”–thatbuyersattheFairareshoppingforcheap,short-termdealssothesustainabilityofvendorsislow.ThemajorityofsuppliersinChinaareSMEsalreadyoperatingontightmarginssoitisdifficultformanytofindobviouswaystocutcosts.Usuallytheylacktechnicalskillsandknowledgeandformost,anysortofequipmentupgradingiscostprohibitive.Short-termpurchasecontractsalsomakeinvestmentsinupgradeshighlyrisky.Payingafinecanbeacheaperoption.RatherthanimprovingCSR,manysuppliersthereforefindwaystocutcornerstomaintainthelow“Chinaprice”bysubstitutingincheapermaterialsoringredients,increasingworkerovertime,andpaying-offgovernmentofficials.49Wewereinformedonseveraloccasionsfromdifferentsourcesabout“redenvelope”factoryzonesinChinawherebribesarestandardbusinesspractice.Penaltiesorincentivescanmotivatesupplierstochangebutcanalsospurevenmorecheating.Neitherapproachguaranteescontinuousimprovement.AvoidingfailureispronouncedinChinawhereitiscloselyassociatedwiththestrongculturalmotivationof“savingface.”Alossoffacethroughfailurecanmeanseriousshameonfamily.Businessownersandemployeeswillthereforegotolengthstoavoidperceivedfailurebyconcealingproblems.Brandattemptstoforcesupplierstoexposeproblemsintheirfactorywillthereforemostlikelybeunsuccessful.InChina,deceptionisnotviewedasshameful.Gettingcaughtis.Totrytoencouragetransparency,discouragedeception,andbuildtrust,thereisopportunityforbrandstotakemoreflexibleapproaches–forexample,bymakingitcleartosuppliersthattheywillnotbegivenared-levelwarningforaproblemaslongastheyagreetoproducethecorrectrecordsi.e.givingsuppliersa“workingcompliance”graceperiodandavoidingthelabeloffailure.ButtomotivatedeeperbehaviouralchangeandinstilacultureofcontinuousimprovementamongChinesesupplierswillrequireevenmore.ThefundamentalbarriertosupplychainsustainabilityinChinawillneedtobeaddressed:aglobalretailbusinessmodelthathingesonrewardsfromcheaplabour,cheapgoods,lowpricesandshort-termpurchasecontracts.50Onlytrulyinnovativeself-reflectivebrandretailcompaniesthatunderstand,transform,andnavigatetheirownbusinessbehaviourbeyondthiswillprovetrulysuccessfulwiththeirsustainabilityeffortsinChina.

49AlexandraHarvey,TheChinaPrice:TheTrueCostofChineseCompetitiveAdvantage(London:PenguinPress,2008).50Theserecommendationsdrawonourinterviewfindingsandliteraturereviewincludinginparticular,theresearchofDr.EricaPlambeckandDr.HauLeeatStanfordGraduateSchoolofBusiness,andarecentstudyonretailsupplychainsinChinaconductedin2011byEfficiencyExchangeLLCincooperationwithTheGeorgeWashingtonUniversity’sInstituteofSustainability,BeijingUniversityHSBCBusinessSchool,andtheCenterforSocialValueCreationattheRobertH.SmithSchoolofBusinessattheUniversityofMaryland.SeeRachelSherman,et.al.,ChinaSustainableRetailSupplyChainReport,EfficiencyExchangeLLC,February2012.


FutureResearchThereareopportunitiestoaddressknowledgegapsinseveralareastoimprovebrandsupplychainsustainabilitytools,approaches,andeffectiveness:• TransportationLogistics

Keyperformancesustainabilityindicatorsandbestmanagementpracticesareunderdevelopedwithrespecttothedeliveryofmaterialstofactories,movementswithintheplant,andtheshippingoutofproducts.Thereisopportunitytoidentify,summarizeandcompareleadingeffortsacrosssectorslikethoseoftheSustainableApparelCoalitionandOutdoorIndustryAssociationtoestablishbenchmarksindicatorsaroundinboundandoutboundfreighttransport,packaging,carrierselection,andtransparency.

• TheBusinessCaseforSocialCompliance

AsJasonMak,DirectoratChunWoHoexplained,“therearecostincentivesforenvironmentalreformsbutnorealcostincentivetoincreasehealthandsafetyorlabourconditionsmorebroadly.”Thereisopportunitytofillthisknowledgegapandhelpbuildthebusinesscaseforsocialcompliancebyidentifyingsuppliersthataresuccessfullyimplementingimprovementsandcommunicatingthesebestpracticeexamples.

• MotivatingContinuousImprovement

Thereisvarianceinhowbrandretailersareevaluatingperformanceandrewardingorpenalizingsuppliersfortheirlevelofcompliance.Thereisaknowledgegapintermsofunderstandingtherangeofapproachesacrosssectors;whythereisvariance;andtheimpactsandeffectivenessinmotivatingsuppliercomplianceandcontinuous.Acomparativestudytoexaminetheprosandconsofcarrotandstickmethodswouldassistbrandcompaniesindeterminingoptimalapproaches.

• LoweringBarriersthroughHarmonization

Suppliersfacehighcostsinmanagingthegrowingnumberandfrequencyofauditsbydifferentbrandbuyersandtherangeofslightlydifferingperformancerequirementsanddatareportingrequests.Astudytodocumenttherangeofauditsandextentofvariationinperformanceandreportingexpectationsamongbrandretailerswouldprovideausefulbaselinetoidentifyandinitiateharmonizationopportunities.

• TheImpactofEconomicRe-organization

Therearelargeuncertaintieswithrespecttohowfactoryrelocationsfromthecoasttoinlandareas,andtheautomationofplantswillimpactlabourconditions.Aninvestigationofbusinessesundergoingthetransitionwouldprovidestrategicknowledgeforanticipatingandmanagingsupplychainriskandensuringcontinuingsuppliersustainabilityperformance.


• DualGlobalStandards

Buyersinhigh-incomecountriesdemandhighersustainabilitycompliancestandardsthanlower-incomecountries.AsChineseexportstodevelopingcountriesrise,theprogressofsustainabilitycomplianceamongChinesesuppliersmaysuffergiventhelackofcustomerinterestordemandforsustainabilityintheseregions.ThereisopportunitytostudythistrendinordertounderstandthefutureprospectsandchallengesforbroadersupplychainsustainabilityuptakeinChina.

***


REFERENCESThefollowingareselectreferencesdrawnfromourreviewofindustry,government,andNGOreports,aswellastheacademicliteratureontheCantonFair,CSR,supplychainsustainability,andthepoliticaleconomyofChina.THECANTONFAIRHISTORYBrunner,J.andTaoka,G.(1977).“MarketingandNegotiationinthePeople’sRepublicofChina:

PerceptionsofAmericanBusinessmenWhoAttendedthe1975CantonFair,”JournalofInternationalBusinessStudies.8(2),69-82.

Klingenberg,M.(1972).TheCantonTradeFair:TheInitiationofUnitedStates-ChineseTrade,VirginiaJournalofInternationalLaw,13,63-76.

Tretiak,D.(1973)TheCantonFair:AnAcademicPerspective.TheChinaQuarterly.56,740-748.TRADEDEVELOPMENTEconomicsWeek(2011).“110thCantonFair:AWorldwideWindowforProgressiveChinaTrade,”

EconomicsWeek,October21,2011ChambersofCommerceandIndustrialAssociations(2012).ChinaImportandExportFairBulletin,

Guangzhou.ChinaImportandExportFair(2012),ChinaImportandExportFairBulletin,Spring2012.ChinaImportandExportFair,CantonFairStatistics.Availableat

http://www.cantonfair.org.cn/en/about/detail.aspx?oid=136.MEDIACOVERAGELiuXinlian(2012)“NoFunattheFair”BeijingReview,May14,2012.Availableat

http://www.bjreview.com/quotes/txt/2012-05/16/content_453062.htm.McLaughlin,K.E.(2009).“BuyerMixShiftsatCantonFair”WWD,May12,2009.AvailableatQingfen,D.(2009)“ExportersPraiseMassiveCantonFair”ChinaDaily,October26,2009.Availableat

http://www.chinadaily.com.cn/bw/2009-10/26/content_8846063.htm.Quanlin,Q.(2012).“OrdersatCantonFairSignalWeakExportOutlook”,ChinaDaily,April26,2012.Rahul,J.(2011).“CantonTradeFairDefiesEconomicGloom”FT.com.October30,2011.Availableat

http://www.ft.com/cms/s/0/58e19024-0114-11e1-8590-00144feabdc0.html#axzz1vYFSvy61.Tufel,G.(2008).“ChinaTradeFairCatchesCold”TradeshowWeek,November24,2008.Wen,Chen.(2011).“U.S.Chamber:CantonFairCan’tDisappoint”BeijingReview.com.en,June20,

2011.Zhiping,W.(2012).“NewStartingPoint,NewChallengesandNewOpportunitiesCreateaCantonFair

withMoreDistinctFeatures,HigherQualityandBiggerEffectiveness,”ChinaImportandExportFairBulletin,Spring2012.


THEPOLITICALECONOMYOFCHINAInternationalMonetaryFund(2011).People’sRepublicofChina:2011SpilloverReport,CountryReport

11/193,(Washington,DC:TheInternationalMonetaryFund,July2011).Nolan,Peter(2012).IsChinaBuyingtheWorld?(Cambridge,UK:Polity).People’sRepublicofChina,MinistryofCommerce(2012).ForeignTradeReport(Beijing:Ministryof

Commerce,PRC,April2012).UnitedStatesInternationalTradeCommission(2011).China:EffectsofIntellectualPropertyInfringement

andIndigenousInnovationontheU.S.Economy,USITCTradePublication4226(Washington,DC:TheUnitedStatesInternationalTradeCommission,May2011).

SUPPLYCHAINGREENINGINCHINABusinessforSocialResponsibility,(2010).UnlockingEnergyEfficiencyinChina:AGuidetoPartnering

withSuppliers,BusinessforSocialResponsibility,May2010.Cheung,R.,(2011).MakingGreenfromGreen–HowImprovingtheEnvironmentalPerformanceof

SupplyChainsCanbeaWin-WinforChinaandtheWorld,WoodrowWilsonInternationalCentreforScholars,Washington,DC.

GlobalSupplyChainCouncil,(2009).GreenSupplyChainSurvey,TheGlobalSupplyChainCouncil,Shanghai,2010.

Jun,M.,Cheung,R.,Jingjing,W.,andQuingyuan,R.(2010).GreeningSupplyChainsinChina:PracticalLessonsfromChina-basedSuppliersinAchievingEnvironmentalPerformance,WorldResourcesInstitute,Washington,D.C.

Lee,H.,Plambeck,E.,andYatsko,P.(2012)“IncentivizingSustainabilityinYourChineseSupplyChain”TheEuropeanBusinessReview

Plambeck,E.,Lee,H.L.,andYatsko,P.(2012).“ImprovingEnvironmentalPerformanceinYourChineseSupplyChain”MITSloanManagementReview,53(2),43-51.

Sherman,R.,Chen,K.,Terada,M.,Kawahara,R.,andIshimaru,K.(2012).ChinaSustainableRetailSupplyChainReport(Washington,DC:EfficiencyExchangeLLC).

Zhang,Q.andPlambeck,E.(2011).Auditing,Hiding,andComplianceinSociallyResponsibleSupplyChainManagement,Workingpaper,StanfordGraduateSchoolofBusiness.

SUSTAINABILITY INCHINAChineseAcademyofSocialSciences.(2011).2011CorporateSocialResponsibilityBlueBook(Beijing:

DepartmentofEconomics,ChineseAcademyofSocialSciences).Economy,E.(2010).TheRiverRunsBlack:TheEnvironmentalChallengetoChina’sFuture,2ndEdition

(Ithaca:CornellUniversityPress).TheGreentechInitiative.(2012)TheChinaGreentechReport2012(HongKong:GreentechNetworks

Ltd).Keeley,J.,andYisheng,Z.(eds.)(2011).GreenChina:ChineseInsightsonEnvironmentand

Development(London:InternationalInstituteforEnvironmentandDevelopment,2011).Reid-Brown,A.,Bardy,F.,andLewis,R.(2010).SustainabilityinAsia:ESGReportingUncovered,Asian

SustainabilityRating,September2010.Shapiro,J.(2012).China’sEnvironmentalChallenges(Cambridge,UK:Polity).


CHINACSRLITERATUREEtzioni,A.(2011).“IsChinaaResponsibleStakeholder”InternationalAffairs87(3),539-553.Hildebrandt,T.(2011).“ThePoliticalEconomyofSocialOrganizationRegistrationinChina”TheChina

Quarterly208,970-989.Ip,P.K.(2009).“TheChallengeofDevelopingaBusinessEthicsinChina”JournalofBusinessEthics88,

211-224.Kolk,A.,Hong,P.,andvanDolen,W.(2010).“CorporateSocialResponsibilityinChina:AnAnalysisof

DomesticandForeignRetailers’SustainabilityDimensions”BusinessStrategyandtheEnvironment19,289-303.

Lewis,J.(2009).“ClimateChangeandSecurity:ExaminingChina’sChallengesinaWarmingWorld”InternationalAffairs85(6),1195-1213.

Lockström,M.(2011).MakingSustainabilitySustainableinChina,CEIBS-SiemensCentreforSustainabilityandSupplyChainManagement(China:Ernst&Young).

Moon,J.,andShen,X.(2010).“CSRinChinaResearch:Salience,FocusandNature”JournalofBusinessEthics94,613-629.

US-ChinaBusinessCouncilStaff(2009).“CorporateSocialResponsibilityinChina:BestPractices”TheChinaBusinessReviewMay-June,2009.

Wang,H.,Applebaum,R.,Degiuli,F.,andLichtenstein,N.,(2009).“China’sNewLabourContractLaw:IsChinaMovingTowardsIncreasedPowerforWorkers?”ThirdWorldQuarterly30(3),485-501.

Wong,L.(2009).“CorporateSocialResponsibilityinChina:BetweentheMarketandtheSearchforaSustainableGrowthDevelopment”AsianBusiness&Management8(2),129-148.

CHINASUSTAINABILITYFORUMSCSR-Asia:http://www.csr-asia.com/index.php?linksid=9.ChinaCSR:http://www.chinacsr.com/en/.HauserCenterforNonprofitOrganizationsinChina,Harvard:http://hausercenter.org/chinanpo/CPCMinistryofEnvironmentalProtection:http://english.mep.gov.cn/ChinaEnvironmentForum,WorldBank:http://www.worldbank.org/en/country/china.


APPENDIX A: SUPPLIER QUESTIONS

CompanyName:_____________________________

Contact:_____________________________

1.Background

Employees: CompanySize

Large Medium Small

Revenue:

Products:

Volume/Facilities:

2.Markets %

sales Growingmarket?

Decreasingmarket?

Doyouselltoanybigbrandbuyers?Where?Who?

NorthAmerica

Europe

MiddleEast

Asia

Africa

Other

3.Doesyourcompanyhaveconcernsaboutenvironmentalsustainabi l i ty?Low Med High______________________________________________________________________________________4.Doyourproductshaveenvironmentaldesignconsiderations?YesNo5.Howdoesenvi ronmentcomparetoyourconcernsabout labourstandards,andtransportef f iciency (rank1most important;3 least)?

Environment 123Labour 123TransportLogistics 123


6.Whyisyourcompanyconcernedaboutsustainabi l i ty?Environment Labour Transport

Regulation Buyers Reputation Other



7.Doyourbuyersprovideyouwithbenchmarks/goals?YesNo8.Doyourbuyersprovideyouwithguidance/technicalassistanceonhowtomeetthebenchmarks? YesNo9.Doyourbuyersexpectyoutoauditcompliance?YesNo10.Whatsustainabi l i tyauditsdoyouconduct?

ISO14001

Bluesign

Other??

DiscussionQuestions• Whatmarketsdoyousellto?Dothesustainabilityrequirementsdiffer?How?• Doyousupplytoabigbrandcustomer?• Howdifficultisittogetaglobalbrandasabuyer?Whatdoyouhavetodo?Issustainabilitypartofthis?

• Areyoufacingincreasedsustainabilitydemandsfromyourbrandbuyers?What?• Oftheareasofsustainabilitymanagement,whataretheareasofbiggestincreasingdemands–environment,labour,logistics,other?

• Doyourdifferentbuyershavedifferentdemands?Howdoesthisvary?• Howaretheenvironment,labour,transportdemandschanging?Isthisbecauseyourmarketsareshifting?

• WehaveheardthatmarketsareshiftingtotheMiddleEastandthatthesebuyershavelessdemands–isthistrueandhowdoesitaffectyourbusiness?

• Dobrandbuyerssetsustainabilitycompliancebenchmarkgoals?Whatarethey?• Arebrandsustainabilityrequirementsmoreimportantthantheirlowpricerequirement?Howdoyoubalancethetwodemands?

• Dobrandbuyersprovideyouwithguidanceonmeetingtheirrequirements?What?Howcouldthisbeimproved?

• Whatmuchdoyoupayyourworkers?Hasthischanged?Howdoyoukeepthemhappy?• Howareyoukeepingyourcostsdowninthefaceofincreasingwages?• Isenergysupplyanissue?Howdoyoumanagethissoasnottointerruptproduction?Doyouuseadieselgenerator?Doyoucountthisinyourenergyconsumptionandemissions?

• Howdoyourbuyerscheckonyourcompliance?• Arethecertificationandauditrequirementsconsistentbetweenyourbuyers?Howaretheydifferent?


APPENDIX B: INTERVIEWS CHINA2012Date Name Posit ion Company 25-Apr LoisLi SalesDepartment SG 24-Apr Pan ViceSalesManager PetStarHangzhouTianyuanPet

ProductsFactory 24-Apr CharlesHung SeniorMerchandiser Lici 24-Apr Sophie SalesRepresentative HaixingPlasticRubberCo.Ltd. 24-Apr AliceQi SalesDepartment FontalZhejiangShengliPlastic

Co.Ltd. 25-Apr NateYang InternationalTrade

DepartmentManager Haers

25-Apr JayWang InternationalTradeDepartmentDeputyDirector

Haers

25-Apr CarolFang Shuntai 25-Apr VictorWang SalesManager Shuntai 25-Apr CassieXiao ChuaPlasticPackage,Shanghai

ShengmingfangPaper&PlasticProductsCo.Ltd.

24-Apr NatalyLiao ViceGeneralManager Everich 26-Apr Sue ExportDepartment

Manager GoBestZaozhuangGo-BestCrafts&ArtsCo,Ltd.

24-Apr LindaZhang InternationalTradeDepartmentRegionalManager

EuroAsia

24-Apr LouHuaping SalesManager RenaPet 26-Apr AmyZhang OverseasSalesEngineer Sil-Ware 26-Apr DongLan GreenBamboo 25-Apr JasonLuo SalesManager Simzo 25-Apr ChristaKaiser GlobalBusinessManager Dupont 24-Apr ShirleyWu InternationalSales

DepartmentManager Carefor

24-Apr MackyLin XiamenNatureCaringProductsCo.Ltd.

24-Apr CathyWang ViceGeneralManagerExportDirector

ZhejiangHuaxingGroup

24-Apr QinLing AhtechGroupFujianHanheSanitaryProductsltd.

24-Apr AlinaFeng ProductManager ShiftElectrics 24-Apr SophiaYang GeneralManager SofanGuangdongSeehePaper

ManufactureCo.Ltd. 25-Apr BrandaXu ConceptZhejiangLinan

ForeignTradeCorp 25-Apr RaymondLee SalesExecutive MoreFondArts&CraftsCo.Ltd


Date Name Posit ion Company 26-Apr ClaudiaWu Vice-GeneralManager JukaFurnishings 24-Apr WinterLiu ShandongLuYiCoLtd.

LuyiWoodenProductCo.Ltd. 25-Apr Lisa Sales NingboQIFAImp&ExpInc. 25-Apr KathrynHo SalesRepresentative GuangzhouHOYIOutdoor

FurnitureCo.Ltd 25-Apr AmaniHuang Manager ShantouJinaiIndustryCo.Ltd. 25-Apr Zalence Director ShanghaiEastBestInternational

BusinessDevelopmentCo.Ltd. 25-Apr Casper HKLong 24-Apr CathyQin SalesManager UL 24-Apr CiciChen AssistantGeneral

Manager SeaGlobalScmLtd.

26-Apr LadinChen GuangdongOrientalshipInternationalLogisticsCo.Ltd.

26-Apr MirandaLing SalesExecutiveHardgoodsLaboratory

SGS

25-Apr GregFoweraker ManagingDirector Innate 26-Apr Naresh FashionGex 23-Apr GermanBuyer 24-Apr DiannaYu ManagingDirector GuangdongModernServices

TrackingCenter(MSTC) 24-Apr WangDianDian AssttotheManaging

Director GuangdongModernServicesTrackingCenter(MSTC)

24-Apr LawYeePing Manager GuangdongModernServicesTrackingCenter(MSTC)

26-Apr SoniaChen ProjectManagerInternationalMarketingDepartment

GlobalMarketGroup

27-Apr EngHuiGan ExecFacilitatorIDHElectronicsProgram

InFact

27-Apr GraceYang ManagerofGZRepOffice

InFact

27-Apr DavidDeng EHSSpecialist InFact 26-Apr CathyYao ManagingDirector BCInternationalTradeand

InvestmentOfficeSouthChina 26-Apr TomWang ProgramAssistant BCInternationalTradeand

InvestmentOfficeSouthChina 26-Apr CantonFairrepresentatives CantonFair 27-Apr JasonMak Director ChunWoHo VANCOUVER2012Date Name Posit ion Company 06Feb DeniseTaschereau CEO Fairware 21Feb GregFoweraker ManagingDirector InnateGear


Date Name Posit ion Company 22Feb MackieChase FormerDirector UBCCentreforIntercultural

Communication 07March ClaudeComtois Professor UniversityofMontreal 29March EstherSpeck VPBusiness

Sustainability&Community

MountainEquipmentCoop

29March,April12

GregFowerakerRobynGibson,SandraTschauner

ManagingDirectorVPofSalesSupplyChainManager

InnateGear

shopping for sustainability at the canton...

Documents