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CSR expert: Economic incentives key to ‘responsible’ China supply chains

In an interview with Global Sources, Richard Brubaker, founder of Collective Responsibility and Visiting Professor of Sustainability at the China Europe International Business School, explains why economics plays an important role in CSR adoption among China manufacturers.

He also discusses the challenges large retailers face in their attempts to develop “more responsible” supply chains.

Over the next five years, CSR is not something that will directly create a competitive advantage, Brubaker said. But it will develop as a core component of how leading manufacturers operate.

Collective Responsibility acts as a catalyst to drive sustainability into the core of business. Working with government, corporate, academic and non-profit stakeholders, the organization brings together knowledge, teams and tools that develop and execute their business case for sustainability.

Corporate social responsibility (CSR) is broadly defined as the impact a business has on society, but we commonly hear terms such as sustainability, corporate citizenship, "green" company or building, cleantech and supplier compliance. Which of these concepts are important and relevant for manufacturers in China and international importers sourcing from China?

This will depend largely on the industry that they are operating in, with concerns over labor standards, environmental emissions and energy intensity touching nearly every manufacturer that operates in China.

As time goes on and the problems in each area grow worse, companies will move away from CSR and toward business models that are simply "more responsible."

What is the difference between CSR and being "responsible"?

Traditionally, CSR is seen as something that is separate from the business model and is program-based. Being responsible is strategic and systemic.

Companies will become more efficient as resource costs increase. They will become more compliant to regulations as transparency increases. They will be more concerned about labor welfare when they are having issues attracting or retaining line workers.

Large retailers are increasing pressure on their suppliers for social compliance and have even dropped suppliers that do not comply. What are the key challenges these large companies face in China as they try to make their supply chains more responsible? And what more should they be doing to enforce compliance?

One of the key challenges will be to develop the internal capacity for change. Working with companies of similar size and complexity, one of the most difficult issues the China organization faces is taking a global framework and putting that into practice.

There is often a period where the local business units look to understand how serious HQ is about sustainability, what the local impact will be and then what resources will be made available from global HQ to carry out the strategy. Then, through a process that often involves multiple parts of the organization, they must begin engaging their suppliers, often with the help of third parties who specialize in sustainability, labor, EHS, etc.

At times, the issue will be one of education and engagement, while economics will always loom large as the supplier will typically be unwilling to bear the full costs while at the same time be forced to reduce pricing.

Enforcement is ultimately about investment and as we have seen with Apple, Yum and Mattel, failures are often the result of the inability to invest in the infrastructure that is necessary to effectively supervise and correct problems before they become mission critical issues.

Outsourcing (all or part) of a supply chain increases risk, and the only way to minimize that risk is to invest in systems that ensure the integrity of the supply chain is not compromised. It requires money. It requires people. It requires making smart decisions about whom to work with.

Why do you think manufacturers in China are not adopting CSR?

Economics is a large part of it, as is the fact that smaller manufacturers tend to have a poor understanding of efficiency and have a different short-term value proposition for environmental or social concerns.

But there is a larger niche in textiles where labor concerns are understood and addressed as part of the business model.

Esquel's Xinjiang cotton cooperatives are perhaps one of the best examples to date of a family-owned company (SME by some measures) that sees a long-term strategic value to responsibility. It took several years of planning with trial and error, but it is now supporting their core business.

There are outliers that are trying to do the “right thing” by creating smart employee development programs, and they are often companies that have a measure of scale or brand, but compliance is already a difficult goal for many to attain.

This is true in many parts of the world, using Bangladesh and Cambodia as examples where issues of labor standards have been a topic of discussion.

What are the strategic benefits for manufacturers to do the "right thing"?

Ultimately there needs to be an economic value proposition to do “good” and for some manufacturers that will mean higher profitability over the long term as their buyers undergo a "cleanup."

Strategic benefits are both external and internal.

Internally, lower staff turnover leads to cost savings, and investment in greener or cleaner processes also leads to reduced costs related to wasted resources.

Externally, the opportunities to develop and expand business as the manufacturer selects best performers are perhaps the most compelling. Similarly, being ahead of the regulatory curve can also be of benefit over the long term.

Do you see more importers seeking responsible suppliers?

In certain niche categories, I do. Green and organic products have seen increased interest lately. But on a wider scale, I have seen a trend in entrepreneurs moving away from their positions at brands to start their own businesses to do things "the right way".

My favorite example being the founders of Wobabybasics and Bambu who worked in multinational corporations, saw a better way and built their companies around products that have a sustainable story.

Both based in China, they have proven that one can build a profitable manufacturing complex there while respecting a balance of social, environmental and economic sustainability.

What questions should importers ask potential suppliers to understand their level of sustainability?

Realistically, as we have seen in a number of supply-based examples, for a company to understand the level of responsibility its suppliers are adhering to (or striving for), it requires more than asking questions.

Sure, you can send a list and they can check the boxes. But that will likely only fulfill a legal requirement.

It is an investment in time, and perhaps money, to understand the methods of suppliers in the areas of labor and environmental practices, product quality, and governance. For companies that make the investment, the return is not just a moral one as it often allows for higher product quality with fewer failures. It is an investment in the long-term brand. An investment that should not be viewed as cost.

What are the first steps and priorities for small or midsize manufacturers that want to be more responsible?

The first step is a value chain assessment to understand where the manufacturer is exposed to risk, or where a commercial opportunity exists.

For many companies that are leveraging third-party suppliers, risks will be found at every stage, requiring them to assess, prioritize and focus efforts on the greatest risks.

Next would be the development of a vision and/or strategy for where the manufacturer needs to recalibrate or expand, which would be followed up by an alignment of stakeholders on the actions to be taken.

Rolling out would ideally begin with a pilot, and after an assessment of the pilot’s impact, scale would be programmed into the system.

What more should the China government do to encourage sustainable production?

There are three areas that I feel are vital when it comes to the role of the Chinese government to promote CSR and sustainability.

At the highest levels, China's planners are looking to make improvements through the five-year plans that will aim to move China away from an economy whose manufacturing sector is reliant on the production of low-end, inefficient, resource-intensive goods and services.

The goal ultimately will be to increase the quality of its manufacturing sector, with special attention paid to reducing the overall intensity of its economy.

The second is enforcement of laws, an area where China is arguably struggling, with environmental protection and food safety being the most relevant examples of how the government will have to act as the enforcer. We are already seeing this role being put to use more and more as factories are being fined and/or shut down for violating laws that were once overlooked.

The third is going to be the role the government plays as one that incentivizes companies to clean up or scale out solutions as a part of their offensive strategy to stabilize the balance between economy, environment and society. This is perhaps going to be the most interesting role and there has been a lot of activity here lately as China sees this as part of a process to move up the value chain.

Where do you see CSR in China five years from now?

CSR is not something that will create directly a competitive advantage, but over the next five years, I see CSR as a core component of how leading companies operate.

It will happen as part of a risk-mitigation strategy, reducing the company’s exposure to the various issues that exist while also acting offensively as an engagement tool that stabilizes staff, reduces failure on the manufacturing floor, and builds social capital externally.

How can your company help China businesses with CSR?

Collective Responsibility is focused on looking at the client’s value chain and developing a customized solution that will align the core business mission with the environmental, social and economic dynamics that exist in the market.

For some, the programs are focused on mitigating the external risks through executive awareness and stakeholder engagement, but more and more we are working with companies that are looking to strategically recalibrate their business models in an offensive manner. To move their business models beyond business as usual to become solution providers in a market that is facing environmental, social and economic challenges.

Click here to read the complete article on Global Sources.


Note: This article "CSR expert: Economic incentives key to ‘responsible’ China supply chains" was originally published by Global Sources, a leading business-to-business media company and a primary facilitator of trade with China manufacturers and India suppliers, providing essential sourcing information to volume buyers through e-magazines and trade shows.

All price quotes in this report are in US dollars unless otherwise specified. FOB prices were provided by the companies interviewed only as reference prices at the time of interview and may have changed.

Disclaimer: All product images are provided by the companies interviewed and are for reference purposes only. Those product images featuring products with trademarks, brand names or logos are not intended for sale. We, our affiliates, and our affiliates' respective directors, officers, employees, representatives, agents or contractors, do not accept and will not have any responsibility or liability for product images (or any part thereof) which infringe on any intellectual property or other rights of a third party.

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