codeofconduct

The most efficient way to ensure safe and sound working conditions among your Chinese suppliers is to employ a Code of Conduct program monitored and enforced by third-party on-site inspections.

 

Despite soaring labor-wages, China has enduring strengths as a manufacturing base for Western companies and remains a very attractive place to do business. However, social responsible conduct among Chinese suppliers has not kept pace with the economic progress. Fact is that labor right violations is so common it can be assumed to be taking place if not proven otherwise. The solution: research shows that factories operated by Western companies that employ a Code of Conduct program tend to have few violations.

The benefits of its flexible work-force, well developed infrastructure and low cost manufacturing make China an attractive destination to outsource manufacturing and production. In 2013 alone, a record $117.6 billion in foreign direct investment (FDI) flowed into China. The growing Chinese domestic consumer base is also a mouth-watering target for many a Western executives. Yet in the frenzy of lowering production costs and outsourcing production to China, the fact remains that many Chinese suppliers offers less than substandard working conditions for its workers.

 

Causes and Scandals

China has a substantial labor law in place that promises workers a five-day, 40-hour work week, guarantee, a set minimum wage and overtime pay for working hours exceeding 44 hours a week, as well as restrictions on overtime to 32 hours a month. However, as long as the Chinese suppliers keep competing in price – and as Western buyers are pressured to find the quickest delivery times to the lowest cost – violations at the factories are bound to take place. In fact the non-compliance to the Chinese labor law in China is so widespread, it can be assumed to be taking place until proven otherwise. The situation is also in-part caused by the Hokou-system which excludes migrant workers from the urban welfare system when they move to other provinces (some 150 million workers were employed outside their rural or urban township as of 2009) – in effect creating a working class that is easy to abuse. This creates an environment where workers rights are far from a priority for the factory management. A notable example is the Iphone-manufacturer Foxconn, where the 70-hour workweek supervised by its Taiwanese military style regime led to 13 suicides among its workforce between 2009 and 2010.


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More information on Code of Conduct


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A 3d party Code of Conduct with regular audits and monitoring can efficiently counteract draconian management or substandard working conditions at your Chinese supplier's plants. The benefits bringing your suppliers to adequate social standards have a multitude of worthwhile benefits beyond the mere moral aspects.

 

Solution

Research shows that having a clear Code of Conduct program in place, adapted to be compatible with Chinese conditions can significantly improve working conditions among your supplier’s labor force. The benefits are many and are not merely moral benefits – suppliers who cannot comply with simple Code of Conduct requests are usually “bad apples” that can have a harmful effect on your entire chain of operations. If one of your suppliers cannot for instance place a proper fire exit sign by the emergency exit, what else will they give you trouble with down the line?

Codes of Conduct serve to weed out the high-risk suppliers and thus reduce the risk and fragility of your supply-chain in China. It also increases transparency and makes you more aware of the real state of your supplier’s operations. Suppliers that show a willingness and a capability to comply with a Code of Conduct are often also reliable in others aspects of its conduct – including producing goods on deadline and delivering adequate quality in a safe and sound way. The process of establishing the Code of Conduct program also serves to strengthen your relationship with the supplier. This has a number of benefits to ensure the long-term stability of your supply-chain out of China. If you are working in China for the long-term, a Code of Conduct is a small investment that can potentially save you millions in operating costs.

 

Scandic Sourcing’s Code of Conduct Program

Scandic Sourcing has developed a Code of Conduct program in accordance with ISO 14000 and the UN Global Compact that won the Swedish Chamber of Commerce 2012 award for innovation. It works to gradually bring your supplier pool up to the standard required by your home office. The program is adapted to not clash with Chinese local laws and regulations, and will be enforced by factory audits and monitoring systems. The starting point in Scandic Sourcing’s approach is that most factories are not violating international norms and Chinese laws deliberately, but rather from a lack of knowledge. Engagement, education and encouragement are key tools to raise awareness among such suppliers.

 

Read more about applying a Code of Conduct in China.


 

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Tina Damsgard is a Co-Founder of Little Mermaid; a Danish branch of the Danish hot-dog company “Trosborg Event”. The start-up company is currently working on establishing hot-dog shops in prime locations around Shanghai to build their brand on the Chinese market. Little Mermaid is currently using Scandic Sourcing’s Business Support Office to handle their administrative needs in the start-up process in China.

 

Why did you decide to go to China?

I wrote my master’s thesis about cost-efficient business solutions in China. I visited Beijing, Shanghai and Qingdao, and saw the potential of entering this booming consumer market.

 

Why did you choose Scandic Sourcing? 

I came into contact with Per Linden (the CEO of Scandic Sourcing) during an event in Shanghai and we started talking about my company and our start-up in China. He told me about Scandic Sourcing’s Business Support Office services and it seemed like a great solution to getting started fast in China. We found that it was the most cost-efficient solution for start-ups where you could get all the fundamental things our company needed for a fair price.


What services did Scandic Sourcing offer?

We use Scandic Sourcing’s Business Support Office service for HR services, Back Office, administration, office space and recruiting.

 

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How would you describe your experience with using Scandic Sourcing’s start-up services?

One of the best things was that when we arrived in Shanghai we immediately came to an office where there were people that we could ask about specific issues relating to China. Entering the Chinese market as a young entrepreneur can be a daunting task, and it was quite comforting to have other people around at an office to talk to and to ask questions and get advice. The expat community in Shanghai is very helpful; but you definitely need a base when you arrive to start from somewhere, and Scandic Sourcing provided that.


What is your advice to others who are thinking about going to China?

I guess you can read too much literature about China before coming here, and that can lead to making too many assumptions beforehand. I actually suffered from that a bit because I wrote my thesis about cost-efficient business solutions in China, so I studied a lot about Chinese business; also in terms of social behavior etc., so I was a little colored by my own presumptions before coming here. I think it’s good to have some basic knowledge of do’s and don’ts in China but still arrive here with an open mind and make up your own opinion rather than base it on sometimes subjective and outdated information.


Patience is also an important trait to have in China, because most things have a tendency to take a bit longer than what might be expected. It’s also important to be super clear with instructions and the use of wording; maybe words have a different significance in China than in the West – making too many assumptions and wording things abstractly could lead to misunderstandings.

 

Little Mermaid Website.

 


 

För mer information om Scandic Sourcing's start-up tjänster: Läs mer om vår Business Support Office.

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Shanghai. China's state council has amended the process for how companies disclose credit information via the Provisional Rules on Enterprise Information Disclosure act which took effect on October 1 this year. The new disclosure rules require all companies, foreign and domestic in the PRC to submit annual credit reports for public disclosure via the publicly available Enterprise Credit and Information Disclosure System which can be accessed on a real-time basis.

Companies are now required to submit annual reports which replace the former annual inspections. The annual reports which has to be submitted in Chinese, has to include liquidity status, equity investments, subscribed capital, among other things. Declaration of formerly required information such as work force, total assets and liabilities, operating revenue and profits is no longer mandatory under the new law, whereas in the past, companies where required to submit audited financial statements during the annual inspection. The companies themselves are responsible to submit the reports. Failure to submit these reports could lead to being put on a blacklist, which could severely restrict future business activities.

The Provisional Rules on Enterprise Information Disclosure is part of a bigger overhaul of the Company Law, which started last year when China's State Council issued the Plan on the Reform of the Registered Capital Registration System, where some of the major changes included elimination of minimum required capital requirements (with some exceptions) and other amendments aimed at liberalized capital contribution scheduling requirements. The overall goal with this latest legislation is to increase transparency and simplify public access to credit information.

- This is good news for anyone evaluating suppliers and potential business partners in China, says Per Linden, CEO of the consulting firm Scandic Sourcing, located in Shanghai, who is regularly identifying suitable suppliers for Western firms looking to outsource production to China. "One year ago, credit disclosure companies stopped getting access to tax reports, which made it difficult to make credit checks of Chinese companies. To get accurate info, we had to ask the companies themselves to disclose their annual audit reports, which they may or may not do. Now, the publicly available Credit and Information Disclosure System circumvents all that, and I think this is a big step towards simplifying credit checks in China.

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Image couretsy of Reuters: Carlos Barria

During the 27th to the 29th of October, the Fourth Plenary Session of the 18th Party Congress was held in Beijing. The meeting addressed legal reform, and issued a number of policy changes in regards to strengthening the judicial system vis-à-vis local government in order to create a more predictable legal environment.  Some of the plenum’s proposals included removing the influence of local power-holders over courts and moving responsibility for court funding and personnel appointments away from the local government.

Furthermore, the plenum communiqué, issued last week, vaguely hinted at greater citizen participation in policymaking and also urged for the creation of greater review- and punishment mechanisms within administrative bodies. It also detailed establishing record reporting for “leading cadres’ interference with judicial activities”. These policy shifts, aimed at increasing government transparency, can be seen as steps towards a more pro-active approach to ensure stability in China, according to Malin Oud, an expert on human rights who was previously a UN consultant and head of the Raoul Wallenberg institute. For the past 30 years, GDP growth and stability has been the main focus but recent reform signals a move to address issues such as the environment, government transparency and the legal system to deflate public discontent, rather than dealing with it after the fact, Oud concludes.

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When locating specific suppliers in China, business clusters are usually a good place to start. A business cluster is defined as a geographical concentration of interrelated businesses which benefits from the co-location in a number of ways as well as a value added production chain. If you are looking for aluminum products, source in Nanhai, if you are looking for linen products, turn to Suihua in Heilongjiang, IT and circuit boards, source in Suzhou, etc. Knowing about these clusters is valuable knowledge when deciding about where to set up operations, outsource production or find suppliers in China.

 

Formation

Business clusters usually form spontaneously by the work of market forces, or develop out of pre-existing special economic zones, such as the information and technology clusters in Beijing and Shenzhou and the electronics and biotech clusters in Shanghai’s Pudong area. There are export driven clusters, resource-driven clusters, market driven clusters, and so forth, depending on their geographical location.

 

The tailors of Cixi

Regional specializations are nothing new to China. One interesting example is the tailoring center of Cixi in Ningbo which traditionally served as a major clothing manufacturer to Beijing from 1680’s to the 1930’s. When the local government looked for ways of growing their region, they looked back in history, and transformed factories producing military uniforms to instead produce more specialized garments, and gave support to local business owners. The Cixi cluster now produces around 5% of China’s total textile output.


Other notable specialized clusters are Datang in Sichuan province which produces some 6 billion pairs of socks each year, or the city of Dongguan in the Pearl River Delta which creates a third of the world’s supply of magnetic recording devices used in computer hard drives.

 

Differences between clusters and Special Economic Zones

Sometimes a specialized cluster develops out of China’s many Special Economic Zones (SEZs), but most of the time they do not, and a business cluster differs quite a bit from SEZs generally speaking, in that the SEZ usually receives more foreign direct investments, have stronger focus on export with closer links to the global markets, and usually have greater access to technology. Conversely, a business cluster tends to operate in more labor intense, low-tech environments where local government support isn’t quite as enthusiastic as in a SEZ.

 

Industrial Parks

In some cases, the local government supports the specialized cluster by establishing an industrial park, which in effect is a government entity. If you are establishing a factory in China, locating in an industrial park can offer some unique benefits, such as proximity to local officials, tax authorities, environmental inspectors, etc., who usually have offices in the industrial parks. This proximity can facilitate increased Guanxi with such officials, and offer unique advantages, as one well connected Chief Finance Officer said in an article in Asia magazine: “For other companies it will take three months to get one approval. For us, maybe three days”.

 

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Where to look

The vast majority of China’s industrial clusters are located near China’s east coast, where infrastructure is much more developed than in the west. A survey made in 2006 of 138 foreign and domestic logistics companies by real estate firm Jones Lang LaSalle, found that over 80% of their warehouses were located in just three different regions: the Yangtze River Delta, the Pearl River Delta and Greater Bohai Bay.


 

Dive deeper:

Finding Suppliers in China.