Ethical practices in China: outsourcing responsibility doesn’t work

By Chandran Nair

This column by Chandran Nair appears in the September 2007 issue of the Ethical Corporation magazine.

US companies have rushed to blame China for recent product health cares. But the fault could lie with their low-cost outsourcing, argues Chandran Nair.

The frenzied media lurch at China’s jugular over recent food, medicine and product export scares raises just one question: why is this so surprising?

Press pundits have demanded China clean up its act. Some want China to take responsibility for its carbon dioxide emissions, now apparently higher by volume than those of the US, although still a fraction in per-capita terms. Some commentators have gone as far as claiming that the country risks ruin if it fails to meet higher standards on product quality and the environment as buyers and markets shun the exports driving its “economic miracle”.

Seeing this as a one-way blame game is typical of some influential parts of the west’s media and corporations. It is also predictably blinkered.

China cannot avoid blame, but surely responsibility for these latest supply chain scandals must be shared. Cut-throat outsourcing, at the core of so many problems in China’s “factory to the world” phenomenon, is arguably the culprit here, too.

The way many Chinese companies are structured – to manufacture low-cost, relative low-value but often highly sophisticated products – affords them cost as their only competitive avenue, according to a background paper, “Chinese Enterprise Development and the Challenge of Global Integration”, for a World Bank study, “Innovative East Asia: The Future of Growth”.

Multinational corporations take brutal advantage of this fact to benefit from the power that commanding one third of all world exports brings. Their Chinese partners and wholly owned Chinese firms are also drawn by low labour costs, and lax enforcement of worker and environmental regulations. In China, from 1994 to 2003, outsourcing to affiliates accounted for 65% of exports.

At the same time, ethically minded consumers have played an unwitting role in eating into Chinese suppliers’ already razor-thin margins. As international firms have come under growing domestic pressure to ensure their products are “ethical”, they assure western consumers that they are imposing standards on overseas contractors and auditing workers’ conditions and the environment. “The price [corporations pay] never increases one penny, but compliance with labour codes definitely raises costs,” one supplier says.

Cost against quality
As price-cut demands from customer companies bring about cut-throat price competition among suppliers further down the supply chain, how can business leaders, lawmakers, activists, or commentators reasonably expect high quality? How can they not reasonably expect that something will fail? Workers’ conditions, the environment and product quality – all are jeopardised.

And multinationals have fought to keep costs as low as possible – perpetuating the cut-throat environment. Earlier this year, US-based and EU-based global corporations opposed reforms to China’s labour contract law designed to improve workers’ conditions by establishing stronger employment contracts and giving worker committees more influence.

Foreign chambers of commerce have since praised the much stronger law since passed, although most remain sceptical its provisions will be enforced.

It would be naïve to suggest the consequences of extreme outsourcing – not least quality – have not occurred to the contract negotiators of multinationals seeking the cheapest supplier; or that Chinese contractors have not felt the injustice of a system imposed on them.

The situation presents challenges with a strong moral core that rests on individuals and companies doing the right thing.

Since transparency is being championed so enthusiastically, multinationals and leading Chinese companies might consider publicly naming their suppliers. This simple, powerful move would not only show their open-handedness, but also would also invite comment and prompt big brands and suppliers to self-monitor.

Such lists invite partnerships that pave the way for full, open co-operation on labour, environment and business issues.

China’s business leaders must take the initiative, taking outspoken positions on shoddy practices, instead of talking only technology and production. Here, Chinese companies have a real responsibility and opportunity.