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Transparency Law Creates Unease in Asia

Maybe it’s good that spring is almost over. If you had to name the big stories in Asian manufacturing over the past few months, it would mostly be bad news.

The manufacturing crisis that followed Japan’s tsunami and the growing insecurity over labor — both its cost, and the treatment of workers — in China have dominated industry discussions. A year that began with triumphant announcements about skyrocketing tablet sales and smartphones is quickly becoming a year of discontent. So, with summer arriving, it’s worth asking where those themes go next. Looking ahead, it’s not hard to realize that the issue of the summer, and maybe the year, is no longer innovation. It’s transparency.

Compared with the laptop-vs.-tablet debate, talking about transparency is decidedly unsexy. But it may be the issue that underlies the unease in Asian electronics. We simply don’t know, for example, how much of various OEMs' retail delays are legitimately blamed on unavoidable tsunami-related disruption, and how much represents bad calls or bad analysis a year ago. Similarly, the still-unclear case of three deaths at {complink 2125|Foxconn Electronics Inc.} last month has highlighted how little we know about conditions inside some assembly facilities.

What’s new to the story is a little-noticed law passed last year in California — home to hundreds, if not thousands, of Silicon Valley companies with Asian supply chains in place. The California Transparency in Supply Chains Act goes into effect in less than a year, and companies are currently racing to update their auditing mechanisms to make sure they comply. The law applies to companies doing at least $100 million in gross receipts, and it requires them to regularly report the specific steps being taken to assure their supply chains do not include contractors involved in illegal labor practices.

The language isn’t subtle: Audit preparation consultants working on the law speak of the need to inspect assembly facilities for signs of “forced labor” or “modern-day slavery.” The real day-to-day application of the law is likely to apply to cases more subtle than anything fitting those sorts of horrific definitions.

Rather, what’s really going on is that electronics manufacturers with supply chain operations in Asia (which is, let’s be honest, most of them) are going to have to be far more rigorous in their reporting of workplace conditions. That means they’re going to be looking much more closely when calculating which Asia-based companies are — and are not — worth taking on as a supplier. It also means indigenous Asian companies, including giants like {complink 500|AsusTek Computer Inc.} or {complink 9284|Lenovo Group Ltd.}, will have to comply with similar reporting in some cases, to do business with retail partners at the far end of the supply line.

What’s the cost of not doing so? Getting fined; being taken to court and dragged through the press. Ultimately, it potentially means losing business partners.

What this overlooked law really means is that in a business where supply contracts of 20 or 30 weeks are common, the electronics industry has only 40 weeks or so to become more transparent in a US state central to much of the world’s electronics industry.

Whether this means stockholders will be able to feel more confident in how companies are forecasting their orders, or whether supply partners will have a better sense of the conditions under which their parts are being assembled, we’ll know in 2012. But most would agree that in the case of transparency, if we’ve learned anything this spring, it’s that more is better. Soon, even more will be required.

8 comments on “Transparency Law Creates Unease in Asia

  1. SunitaT
    June 11, 2011

    California Transparency in Supply Chains Act is a  step in the right direction. I am sure this act will help reduce illegal labor practices.Just wondering if this act applies to only California state ?

  2. Daniel
    June 13, 2011

    Marc, when we look in social aspects view, I think the bill is in right direction. Because, there should be always a watch dog eye from government otherwise fraud things can always at any time. Due to certain reasons like export/ import of banned items under different names, not paying taxes to federal govt. etc, government may ban some companies. But as you pointed out labour conditions in most of the Asian countries are not in good health. Child labours, under paid labour etc are some of the issues with most of the Asian counties. Moreover, different counties defined different standards based on the internal living standards of citizens. So I strongly believe that there should be some normalizing scale, for comparing the labour standards across different countries. That could be the better and easy  way to compare

  3. prabhakar_deosthali
    June 13, 2011

    Does this law also covers the outsourced software services. If not then that also should be covered by this law. Many of the Software services companies in Asia force  their software professionals to work more than 12 hours a day ( sometimes no weekends) in the name of meeting the tight project schedules given by the overseas companies. These highly qualified professionals are left with no personal life of theirs by the demanding nature of their jobs.

  4. Taimoor Zubar
    June 13, 2011

    “What’s the cost of not doing so? Getting fined; being taken to court and dragged through the press. Ultimately, it potentially means losing business partners.”

    While the cost of not complying is high, the cost of adhering to the standards and changing the processes to comply with the requirements is also pretty high. The major savings in costs for OEMs are only possible because of cheap manufacturing costs in Asian countries. If these manufacturers will have to comply with standards, it will essentially increase their production costs which will roll back up to the OEMs and ultimately to consumers in the form of higher prices.

  5. Barbara Jorgensen
    June 13, 2011

    Thanks for bringing this to our attention. My take: great idea, wrong forum. The state of California should not be the “watchdog” or oversight organization for something that is well beyond a state issue. There is also the usual problem of the state (CA) or even the US government requiring transparency when the local or national transparency practices are so abyssmal. It's good to hear that Asian companies are actually taking this seriously, but CA needs to clean up its own house before requiring others to do so.

  6. Marc Herman
    June 13, 2011

    That's a surprising reaction to me, insofar as California isn't just any state. It's the hub of much of the information industry, and even in its moment of crisis, still one of the world's massive economies. As it happens, I was raised in Southern California, and was pretty pleased to see the state government taking the initiative to say that if you want to do business there, you have to comply with stringent laws on an issue that most of humanity was pretty much in agreement about a cool 200 years ago. That's not to say I disagree entirely; it's an issue for a national government. But to me it's a bit like the auto makers and emissions controls: California has some of the world's most stringent emissions regs, and they can do that because they have a market that the world's automakers can't ignore. And, surprise, not only is LA's air a lot better today than it was when I was a kid there, but the rest of the world is slowly taking CA's lead. That feels to me less like meddling than leading, but that's just one Californian's opinion.

  7. Barbara Jorgensen
    June 13, 2011

    That's a good point. I certainly don't disagree CA has been a leader in many initiatives that have set an example for the rest of the country and parts of the world. I guess it's the idea that many states–indeed, the entire US– wouldn't stand up to the same scrutiny if the roles were reversed. Imagine if China closed its market to any business that hired undocumented workers? 

  8. mfbertozzi
    June 14, 2011

    I've have experienced that usually, it is a matter of culture or in other way, how long a given country has started an organized economy in terms of international market – manufacturing processes, supply chain, sales and post-sales operations.  Most of emerging countries are playing in a worldwide economy very recently and, from my point of view, the process to align any steps to transparency rules will take a few years (at least).

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