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Germany: New supply chain law shakes suppliers in developing world

  • April 29, 2023

The new German Supply Chain Due Dilligence Act has been designed to ensure more environmental protection and better social and working conditions for suppliers. It especially targets poorer countries with little worker protection. But some companies in those countries feel they have little reason to celebrate because meeting the new rules their German customers’ demand is tough.

Since the new German law came into force in January, German companies are obliged to regularly control and monitor conditions in their supply chains abroad, and must undergo regular audits.

Germany has joined countries like France, Italy, Australia and Canada that have already passed such laws. The EU is also working on a draft supply chain law.

German lawmakers agree on supply chain bill

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Supply chain shakeout underway

Alexander Sandkamp of the Kiel Institute for the World Economy (IfW) sees a danger that stricter requirements will force small companies abroad out of German supply chains because it is simply too expensive for German importers to inspect them. He told DW that some of them might also “move production directly back to industrialized countries, where it’s easier to ensure human rights are respected.”

In France, where a due diligence law was already passed in 2017, a decline in imports from low-income countries has taken place, according to a study by the Institute of the German Economy (IW) to be published soon.

The basis of the study was an IW survey conducted in February 2022, which revealed that 18% of the German companies polled are planning to source their upstream products from countries that pay sufficient attention to compliance with human rights and environmental protection standards. Around 12% said they would withdraw from suppliers in developing and emerging countries.

Poor farmers fear for their livelihoods

Stefanie Simon, a German business consultant for the Chamber of Commerce in Western Ghana, says local partners that are part of western supply chains “are worried that they will be kicked out.” It is not easy for Ghanaian producers to obtain information about the German supply chain law, which is why so far only a few companies know about it, she told DW.

The situation is similar in Malaysia, confirms Napolean Anak Royal Ningkos, the managing director of Nasling Plantation, which supplies palm oil mainly to markets in Europe. “It’s a big burden for us smallholders because we can’t meet the requirements without financial support,” he told DW.

Ningkos, who is also the president of the Sarawak Dayak Oil Palm Planters Association, said he would like to see more workshops and educational programs for palm oil smallholders, educating them on topics such as sustainable business and agricultural diversification. Better communication between the EU and local farmers was also needed, he said.

Napolean Ningkos in the European Parliament
Ningkos told a hearing of EU lawmakers that he expects more support from the EU to meet the blocs new requirementsImage: Steven De Winter/Solidaridad

Many chambers of commerce and business associations are working on programs to support and educate the locals about the new German requirements. Stefanie Simon has started a project in Ghana. “Our goal is to teach suppliers about what the law entails, meaning how it works, how to do risk management, what will I be able to afford as a business in Ghana?”

One idea to make verification easier is standardized certificates, such as those proposed by the German Institute for Small and Medium Enterprises (DIKMU). Suppliers could use them to prove that they meet the German standards, thus saving themselves not only a lot of bureaucracy, but also winning the trust of controllers.

Poverty a cause of supply issues

Gert van der Bijl from nonprofit organization Solidaridad says his partners in the developing world see the law as “beneficial.” However, the practical implementation of due diligence is crucial, he said.

“The goal should be to fundamentally change the purchasing policy of large companies and not simply pass on requirements to suppliers,” he told DW. Tested mostly on a voluntary basis, the implementation of stricter standards hasn’t worked so far, he noted, making laws to this end an important step in obliging companies to produce more ethically.

Bijl argues most sustainability issues within supply chains have to do with the poverty of suppliers on the ground. “Farmers get very low prices for their products anyway. If you now encourage companies to impose additional burdens on suppliers, it’s unlikely to have a positive impact,” he said.

That’s why Bijl thinks the law must open up the possibility for what he calls a careful withdrawal, meaning companies must be given time to invest in suppliers and help them improve their standards over time.

In regards to the local farmers, Bijl advises them to be as transparent as possible about their products. “Companies will want to know where the product comes from and how it’s made, and that requires transparency with suppliers,” he said.

Finding a place in competitive markets

Despite initial problems in Ghana, Stefanie Simon is “cautiously optimistic” about the effects of the German law on local businesses. “What many companies in Europe underestimate is that most suppliers don’t even have to start from scratch,” she said, noting that quality certifications are nothing new to businesses in Ghana which will help them to compete under the new market conditions.

Workers sort clothes at a garment factory near the collapsed Rana Plaza building in Savar, Bangladesh
After a series of catastrophese, Bangladesh’s garment industry has improved working conditions making compliance easier Image: Reuters/A. Biraj

Mostafiz Uddin also supports the new requirements. The CEO of jeans manufacturer Denim Expert and founder of the Bangladesh Circular Economy Summit, expects, however, that in order to avoid falling foul of the due diligence laws, retailers may choose to work mainly with the “best in class” suppliers to mitigate their outsourcing risks. “This, in turn, would reward the suppliers who have invested heavily in social and environmental governance issues. In theory, social and environmental standards could be raised right across the board,” he wrote in the Bangladeshi English-language Daily Star newspaper. 

Günther Maihold from the German Institute for International and Security Affairs, believes that apart from well-positioned special suppliers, individual regions will benefit from the due diligence laws, as investment data from Latin America are showing.

“For the countries in the northern part of the continent, the law is an opportunity,” he told DW. Due to their proximity to the US market, they have already been forced to adopt stricter regulations, making them more attractive destinations for companies migrating from Asia.

This article was originally published in German.

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