German law to clean up supply chains triggers fears of industrial regression

The Supply Chain Act that took effect in Germany in January 2023, which requires companies to take due diligence procedures to monitor suppliers’ human rights practices and environmental standards, is putting pressure on small and medium enterprises struggling with bureaucratic burden

May 01, 2024 11:02 am | Updated 11:03 am IST - BERLIN

Germany’s logistics sector has protested that applying the law to companies that merely transport imported goods from ports within the country was unreasonable. File

Germany’s logistics sector has protested that applying the law to companies that merely transport imported goods from ports within the country was unreasonable. File | Photo Credit: Reuters

Many German small and medium enterprises (SMEs) said they have been struggling to meet the cost and bureaucratic burden of the Supply Chain Act that took effect in January 2023, adding that this harmed their global competitiveness.

German engineering company BAUCH makes machines and engine components out of materials mined in China, Africa or South America that pass through multiple hands and processes before they reach its factories in southern Germany and China. To comply with the Act, BAUCH, like other firms with more than 1,000 staff, must take due diligence procedures to monitor suppliers’ human rights practices and environmental protection standards — a task which CEO Manfred Bauch says is almost impossible and threatens to rip apart his supply chain.

Their experience signalled what industries throughout the European Union may soon face, after the European Parliament last week passed the Corporate Sustainability Due Diligence Directive that will require larger companies operating in the bloc to check if their supply chains use forced labour or cause environmental damage and take action if they do.

Supporters say the legislation will foster responsible corporate behaviour and anchor human rights and environmental considerations in their operations. Some also point out the law will support companies as investors and consumers demand more sustainability.

Rights group Amnesty International has called the EU directive — which EU countries will have to incorporate as a law in their own legislations — an opportunity to close a gap which allowed companies operating in the EU “to escape accountability for widespread rights abuses around the world.”

But some German companies with global supply chains, and long lists of input materials say it is a struggle to obtain accurate information, and issues such as workers’ rights are regulated by foreign laws outside of their control.

Strikingly, Germany failed to support the new EU law, as the pro-business Free Democrats (FDP), the smallest party in Germany’s three-way coalition, said it would burden business with excessive bureaucracy.

Lack of access

“It is almost impossible to access a mine in Asia or Africa from Europe,” Mr. Bauch said.

Whether a foreign mine has any information on sustainability or governance available depends on its owner, with London-listed mining companies for example providing more information than privately-owned mines in China.

BAUCH’s suppliers that deal with the mines directly don’t always have the information to pass on or the clout to demand it from the mines themselves, Mr. Bauch added.

More than 5,000 German companies now submit a due-diligence report to the Labour Ministry addressing issues such as workers’ rights, child labour, and environmental protections. They must identify problems and devise a policy to mitigate risk through the supply chain.

“Nothing unreasonable is expected of companies,” said a spokesperson for the German Labour Ministry in response.

“They do not have to guarantee that their supply chains are free from violations of human rights or environmental damage.” Rather, they must be able to show they have made checks. “If this is not legally or actually possible — despite reasonable endeavours — a company has nevertheless fulfilled its due diligence obligations,” the Ministry added.

As de-industrialisation fears grow, German manufacturers say the Supply Chain Act further weakens the position of Europe’s industrial powerhouse.

Industrial machinery manufacturer SMS group has 14,000 suppliers and has been preparing for the law for three years. Matthias Hedergott, Vice President Supply Chain Management, said the law leads to increased costs and a competitive disadvantage.

“Our non-European, Chinese or Indian competitors do not have these requirements” said Mr. Hedergott.

The logistics sector has protested that applying the law to companies that merely transport imported goods from ports within Germany was unreasonable.

“At the moment the economic situation is very tense ... Everyone is fighting for survival, and we have to do nonsense like this,” said Harry Seifert, chairman of Seifert Logistics GmbH, of the law.

Berlin estimated the compliance costs at 43.5 million euros per year, plus a one-off cost of 109.7 million euros, but business groups say they are much higher. A company violating the law could be fined up to 8 million euros or 2% of the company’s annual revenue.

Small firms hit

Some smaller German enterprises say they are indirectly affected by the law because bigger companies lean on them to meet the reporting requirements.

“There is a cascade effect,” said Achim Dercks, Deputy Chief Executive of the German Chamber of Commerce DIHK.

Some 82% of companies in Germany with more than 250 employees said they were indirectly affected by the law, a survey by the German economic institute IW Koeln showed. Among mid-sized enterprises of 50 to 249 employees, it was 72%.

Germany’s Federal Office of Economics and Export Control has said, “the law does not allow companies to pass on their obligations to small and medium suppliers.” But some SMEs say they feel forced to cooperate as they fear being replaced.

“SMEs cannot cope with the flood of different information requests,” said Mr. Dercks.

“This law came about because the Germans wanted to do something good for the employees in other countries,” Mr. Bauch said. “But this law is pure bureaucracy, completely pointless.”

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