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BMW, Mercedes-Benz, and Volkswagen have come under scrutiny for potentially violating Germany’s new supply chain act. On Tuesday, June 20, the European Center for Constitutional and Human Rights (ECCHR) accused these German carmakers of having ties to forced labor in the Xinjiang region of China. The complaint was filed under The German Supply Chain Due Diligence Act (SCDDA)—a defining environment, social, and governance (ESG) act that aims to make German organizations responsible for human rights throughout their global supply chains.
Read on to learn more about The German Supply Chain Due Diligence Act and about what comes next for these major automakers. We’ll also look at what other automakers can do to protect their supply chains from ties to forced labor.
What is the Difference Between UFLPA and SCDDA?
The SCDDA is similar to the recent American ESG law, The Uyghur Forced Labor Prevention Act (UFLPA), which also targets forced labor. UFLPA specifically looks for companies that have ties to forced labor in the Xinjiang Uygur Autonomous Region (XUAR) of China. Several industries—including automotive—have been affected by UFLPA.
The SCDDA, on the other hand, has a broader scope. Starting January 1, 2023, the German government can investigate the supply chain of any company based in Germany with more than 3,000 employees for human rights violations (and not just violations from the XUAR—this act penalized forced labor from anywhere). By 2024, more German companies will have to adapt to SCCDA, as the employee threshold will change from 3,000 to 1,000 employees.
While these laws are quite different, they set strict requirements for manufacturers—and penalties. Under the SCDDA, companies can be fined up to €800,000 or 2% of the average annual global turnover for companies that earn over €400 million. Companies can also be fined recurring or periodic penalty payments of up to €50,000 and can be excluded from public contracts for up to three years. BMW, Mercedes-Benz, and Volkswagen may face these fines if unable to prove due diligence.
Why BMW, Mercedes-Benz, and Volkswagen?
According to the complaint filed by EECHR, “the companies have not presented supporting documents proving that they are adequately responding to the risk of forced labor in supplier factories in the Xinjiang Autonomous Uyghur Region (Uyghur Region).”
The complaint cites the report “Driving Force” by the UK’s Sheffield Hallam University and NomoGaia—a nonprofit research organization dedicated to helping multinational companies respect human rights. This report alleges that these companies maintain supplier relationships with factories in the XUAR. For key insights on the report, check out Resilinc’s special report: Leading Automakers Probed for Potential Ties to Forced Labor.
It’s true—Volkswagen’s factory in Xinjiang is currently under scrutiny from human rights protesters. Following pressures from rights groups, Volkswagen has agreed to audit the Xinjiang plant. While BMW and Mercedes-Benz do not have factories in the XUAR, the report documents links to suppliers and companies that operate in or near the region. According to the Financial Times, Mercedes-Benz commented that “whenever concerns are raised, we push suppliers for clarification.” BMW notes that the company “continuously” monitors suppliers’ compliance and “consistently” investigates areas that may be of concern.
What Can Automakers Do About Forced Labor in Supply Chains?
Currently, these automakers have not received any fines or penalties. Next, the German Federal Office of Economics and Export Control (BAFA)—the monitoring authority for SCDDA—must validate the information in the complaint and provide the car companies with recommendations. If the recommendations are not followed, it’s possible that BAFA may sanction companies.
While it is uncertain what recommendations BAFA will make, Resilinc has a few recommendations for automakers who are worried about forced labor in their supply chains.
First, automakers must map their supply chains multiple tiers deep. Most companies do not have visibility into their tier-2 suppliers and lower—creating a greater risk of hidden forced labor in the supply chain. Using Resilinc’s Multi-Tier Mapping solution, which has over 12 years of supplier-validated data, companies can harness the power of sub-tier visibility. In fact, Resilinc has already mapped 65% of the automotive, industrial, and heavy machinery supply chain!
Next, companies should look carefully at the bill of materials for all merchandise, goods, and parts to see how deep the supply chain goes. Finally, automakers should gather documents from suppliers of all tiers regarding customs entry, documents for finished goods, proof of payment documents, and transportation documents. Read more about Resilinc’s recommendations for how to prepare here: Forced Labor in the Automotive Supply Chain: What Car Companies Can Do.
Growing Concerns About Forced Labor
The automotive industry isn’t alone. Many countries are passing legislation to bring visibility to supply chains across different industries in an effort to prevent forced labor. Laws like UFLPA and SCDDA are two major examples causing huge shifts in the world of supply chains.
Under these acts, ESG and due diligence has become top of mind for many companies, as a single violation or compliance issue can lead to serious supply chain disruptions and fines. Factory shutdowns, revoked licenses, or materials held at customs are all real potential outcomes if companies do not prepare for the increased pressure of proving due diligence.
We break it all down in our Quarterly Spotlight on Supply Chain Legislation—sharing exclusive data and insights on supply chain disruptions due to labor violations and best practices for how to prepare your supply chain and mitigate risk. Download the Quarterly Spotlight report here: Spotlight on Supply Chain Legislation.
