Aperio Intelligence’s webinar: Decoupling from China? Managing reputational and compliance risks in global supply chains

On 16^th June, Aperio Intelligence held a webinar to discuss how companies are managing reputational and compliance risks in their supply chains, against the backdrop of increased Sino – US  geopolitical tensions and the COVID-19 pandemic.

A recording of the webinar is available here.

The webinar was chaired by Vivien Li, Head of Aperio’s Asia Pacific practice. We are very grateful for our panelists’ participation.

Dr June Park, political economist

Jessica Bartlett, Barclays’ Global Head of Financial Crime Legal at Barclays and

Carlos Busquets, Senior Director of Public Policy at the Responsible Business Alliance

Background

Heightened Sino – US geopolitical tensions, coupled with the disruption caused by COVID-19, have pushed supply chain risk management high up the agenda for many corporate boards. More than ever before, businesses that have relied on finely tuned global supply chains for many decades now find themselves having to adjust to a new geopolitical reality, remain compliant with changing laws and sanctions regimes, while protecting their reputation among consumers.

Key points

In her presentation, Dr June Park highlighted the continuation of US efforts under the Biden administration to steer the US away from a supply chain dependent upon China for advanced technologies, in particular semiconductors, which are used in a variety of critical industries. In the wake of the White House’s recently-published 100-day review into supply chain vulnerabilities, the US is setting out to build a semiconductor supply chain with ‘like-minded partners’ – such as South Korea, Japan and Taiwan – who risk being hit with tariffs if they do not enter the US fold. This includes establishing manufacturing sites in the US, where South Korea has pledged USD 17 billion.

Dr Park warned of a toughening of measures from the US which would impact the artificial intelligence and 5G/6G technology sector.  She also noted the increased likelihood of confrontation between the US and China in sourcing rare earth elements, not only from Africa, but also Chile.

Jessica Bartlett noted that the existing trend of supply chain diversification away from China, for commercial reasons, had been accelerated by the imposition of tariffs during the Trump era and the impact of the COVID-19 pandemic. Against the backdrop of rising Sino – US tensions, Jessica noted that diversification efforts in South-East Asia are playing out in different ways. While some companies have de-risked their operations by diversifying away from US companies, others are steering away from China. However, most businesses ideally want exposure to both markets and are therefore having to navigate a complex risk environment. Furthermore, for products which require sophisticated manufacturing processes and have complex sourcing chains, the relocation of supply chains is not straight forward.

Jessica noted that the US has adopted a number of tools – including sanctions, import and export controls, and CFIUS restrictions – to oblige companies to pivot away from Chinese supply chains. Meanwhile, regulators are increasingly focused on effective risk management, which requires companies to take a holistic risk-based approach to risk that does away with internal silos and emphasises in-depth due diligence of supply chains.

Carlos Busquets noted that companies are under increased pressure to ensure responsible business conduct due to more sophisticated scrutiny of business supply chains, government interest in  regulating supply chain behaviour, and increased investor and consumer demands for action and accountability. This is occurring against the backdrop of an increasingly challenging environment characterized by growing protectionist sentiment and a lack of global cooperation, exacerbated by COVID-19. Carlos also drew attention to strong and growing anti-business civil society voices which are aiming to discredit CSR efforts and initiatives and demanding tough regulation.

Conclusion

Prevailing geopolitical risks and benefits associated with lower costs mean that both multinationals and Chinese domiciled companies are now looking to increase trade outside China. But as long as growth in China’s domestic market remains strong, businesses with an established presence will face some difficult choices and will require a sophisticated approach to risk management. As far as the tech industry is concerned, driven by the US’s push to “decouple” its economy from China and wider concerns over data security, the sector could end up having two separate supply chains — one for the Chinese market and one for much of the rest of the world. Some industry leaders appear to believe that such a shake-up is likely.

With regard to concerns about forced labour, China’s vast consumer market, significant geopolitical influence and dominance of global supply chains all work against western companies and investors imposing a blanket ban on Xinjiang suppliers. These factors increase pressure on companies, particularly in the apparel, technology, food and energy sectors, to trace their supply chains to origin and, to the extent possible, identify any associations between their sub-suppliers and human rights issues in Xinjiang or China more broadly. This is no easy task given government-imposed limits on access and a lack of freedom of speech for workers.