Happy Holidays and welcome to the final issue of APEC Currents for 2011. In this issue Study Centre Director Ken Waller summarizes discussion at, and conclusions from, a major conference held in November on issues facing the Australian economy.
China's importance to Australia was an important theme at the conference and it has now been 10 years since China became part of the World Trade Organization. Andrew Stoler, Director of the Institute for International Trade at the University of Adelaide, describes the changes that accession to the WTO has wrought in China and discusses their implications.
Roy Nixon, an investment and trade consultant, describes the growth of Sovereign Wealth Funds, their importance in the global economy, and the challenges posed by them for national investment regulators.
In 2006, APEC members placed sustainability of supply chains firmly on the agenda as part of their consideration of supply chain security issues. In this edition, Carol Kehoe, from the Network for Business Sustainability, reports on a review of 25 years' worth of academic and industry research on social and environmental issues in global supply chains, providing a practical blueprint for companies wanting to improve the sustainability of their supply chains.
The articles reflect the diversity of issues in the APEC agenda and should stimulate thought and contribute to policy development in the region. Feedback on the articles in this edition is welcome, as are suggestions for future articles of relevance to the APEC agenda.
– Errol Muir, editor
A Review of the APEC Study Centre Conference and APEC Lecture, 17 November 2011
By Ken Waller
Director of the Australia APEC Study Centre at RMIT University
The Australian APEC Study Centre at RMIT University convened a conference in Melbourne on 17th November around the theme "Is Australia Managing – The Impact of the Global Financial Crisis and the Outlook for Australia's Trade and Competitiveness." The Hon. Dr. Craig Emerson, the Minister for Trade, gave the 2011 APEC Study Centre Lecture.
Discussions ranged over major contemporary issues impacting on Australia's future, including the drivers of U.S. and global trade, the global financial crisis and its impact on minerals and commodity trade, China's overseas investment policies, and Australia's place in Asia in the 21st Century. "Australia is an East Asian economy but we don't yet think in those terms" was a sentiment that placed the future in a sharp context. And this on the day that President Obama outlined to the Australian Parliament his view of shared U.S. and Australian values and a reassertion of U.S. strategic commitments to the Asia Pacific region.
With the demise of the WTO Doha round, a number of speakers, including Minister Emerson, discussed initiatives to promote open trade and investment flows in the region. Australian initiatives to this end were well received at the recent APEC Leaders' talks in Honolulu. The fact that Japan has indicated its interest to participate in the talks on the Trans Pacific Partnership (TPP) is a most promising development, as were the expressions of interest in joining in the negotiations by Canada and Mexico. These developments at an APEC Leaders' meeting indicate the importance of the grouping in promoting the deepening of trade and investment flows in Asia Pacific.
The conference took note of a cautiously optimistic assessment that the European debt crisis would impel the Europeans to greater fiscal coordination and that the European Central Bank would find ways to support Italy and others. While the prospect of a protracted adjustment period would impact on European and world growth over the next two or three years or longer, global activity would be buoyed by growth in emerging markets. Discussants noted that markets are adjusting to developments in the Euro-zone and that, with the experiences gained in the 2007/08 global financial crisis, central banks better understood the range of measures available to them to handle a liquidity crisis.
The outlook for Australia was generally judged to be favourable over the period ahead, based on strong minerals and commodity prices and terms of trade , the quality of the financial regulatory system and the proximity to major markets for iron ore coal and primary commodities. That favourable outlook is tempered by uncertainties caused by the European debt crisis and the budget management impasse in the U.S.. Delays in resolving these deep-seated and far-reaching issues are damaging business confidence generally and creating a two-speed global economy, with slow growth in major western markets offset by higher rates of growth in emerging markets. However, continued uncertainty over the Euro-zone and U.S. debt could well impact adversely on emerging markets, China included, and Australia in the short- to medium-term.
Forecast growth in the number of international students provided a favourable outlook for educational services, Australia's third largest export earner. Managing the impact of the high $A is just one factor that universities have to contend with; others include visa requirements and reputational factors.
The favourable outlook for the minerals sector arises in part from close proximity to major markets and China's increasing demand to expand its infrastructure. Benefits from the mining sector are broadly spread within the Australian community, creating demands for services and employment in the non-mining sector; local content spending by mining companies is nearly 90% of expenditure by the sector. These factors offset to some extent the concept of a two speed domestic economy. Miners argued that the carbon tax would put the sector at a competitive disadvantage with other suppliers.
A rapidly expanding global population and the proximity of Australia to major regional population growth areas in Asia will be of long-term benefit to Australia's primary producers. Water management in the Murray Darling basin will continue as key issue and in Asia there is a high correlation between population growth intensity and (limited) water availability. This presents a major regional and global challenge. On the agricultural trade front, while subsidies generally are reducing, some countries still retain high levels of subsidy. To meet future challenges, productivity and research in agriculture will be critical. Funding for research has been on the decline. It needs to be reversed.
Australia's manufacturers noted the adverse impact of the appreciating Australian dollar and the carbon tax; there are deep concerns that some exporters into the Australian market are not playing by the 'rules of the game'. "Free trade is supported but it has to be fair trade" and Australia's anti dumping policies are matters of concern. A focus on direct measures to improve energy efficiency and to reduce carbon emissions – through, for example, improved standards for home insulation – would be beneficial. Smaller manufacturers in the "green goods" sector that do not qualify for exemption from the carbon tax would be disadvantaged by imports of green goods. The appreciating currency is a factor for all sectors – with advantages and disadvantages – and essentially a cost management issue.
While some trade unions strongly endorse policy reforms to promote growth and returns to society there are deep concerns that the high terms of trade based on the minerals boom are not being evenly spread across the community. The government ought to take note of concerns arising from the loss of jobs in the industrial sector and the cost in human terms to communities and families. In trade policy, Australia did do the heavy lifting but China and other countries need to agree to, and implement, the rules that underpin the concept of free trade and the WTO. Australia is not a price maker in international trade in steel and can't compete at current values of the $A.
China's currency policies were specifically noted as damaging to efforts to promote balance between major debtor and creditor countries and to international trade policies generally. Obligations go with membership of the global community. Transparency in China's pricing structures, for example, in the pricing of power, would contribute to fair assessments of anti-dumping and relevant to improving trade and economic relationships between China and its trading partners, including Australia.
The costs of transacting international business in Australia are excessive compared to major competitors in the region. These costs have flow through impacts across the community generally. While financial services are efficient and innovative in supporting business, new measures are needed to further integrate Australia with the Asian region. The Asian Regional Funds Passport would be an innovative means of mobilizing savings and capital in productive uses in regional economies.
Australia's policy of promoting integration with the region and globally should focus on the concept of removing barriers in supply chains; work is being undertaken within APEC on how this could be achieved and the application of technology to give effect to it.
Infrastructure should be seen in a holistic way to support community needs, not just in a project by project sense, but through a systemic approach to understanding how infrastructure can provide the services that communities need and how infrastructure can contribute to raising productivity.
Total factor productivity in Australia has slowed although productivity varies among economic sectors; the Productivity Commission is working on disaggregating sector data to get a better understanding on factors impacting on growth and on the measurement of growth. A major difference between inputs into the mining sector and outputs, and lags before output rises, may explain lower productivity growth at this time. There should be some questioning of the value of some investments in the sector if there is not a positive output and productivity response.
China's current financial environment includes a private property bubble and massive rate of fixed investment. Public debt is growing and China's authorities have trouble in assessing the actual figure. Many special purpose vehicles have been established to release state owned enterprises from their debt burden and when these are taken into account, the level of public debt is likely to be much higher than official figures currently show. Banks continue as the major funding mechanism of the state and they have been required to support the state in financing activities to maintain growth. While inflation has been a recent problem, a slow-down in activity – to curb inflation and as a consequence of the global outlook - could pose problems in the property sector and increase the number of non-performing loans in the banking system. The change in China's leadership next year may also slow reforms.
Despite the generally favourable outlook for Australia, arising from proximity to East Asian markets and current high terns of trade, many challenges confront the government, policy makers, business, and the community generally, and these include exposure to external events in Europe and in the U.S..
And while Australia has benefitted from three decades of reforms in opening the economy up to global competition and the efficiencies those reforms have produced, more concerted efforts are needed to improve productivity growth and to ensure Australia is globally competitive. The quality of Australian public sector institutions, including the Productivity Commission and the Reserve Bank, are prized assets in promoting reform, stability and growth.
Australia's role as thought leader in APEC is contributing to a region where growth in trade and investment is generating major opportunities and also creating the settings for sustained growth and development. Policies aimed at building on the gains that have been generated from domestic reforms and aimed at promoting open trade and investment in the region and globally, to increase productivity and to share the gains across the community, will be central to the realization of the opportunities which the 21st Asian century offers. But in the short and medium term, key external threats to stability and growth persist.
Presentations from the conference and the conference program are available from the APEC Study Centre website at http://www.apec.org.au/event2.asp?event=77.
Sovereign Wealth Funds
||By Roy Nixon
Sessional lecturer for APEC Study Centre courses
Convenor of the APEC Investment Experts Group from 2005-2009.
This article reviews the emergence in recent years of sovereign wealth funds (SWF) as a source of capital in international capital markets, and seeks to address a number of important public policy issues from the point of view of APEC's developing economies, many of which have large SWFs.
There is no universally agreed upon definition of SWFs. At its broadest level, the term sovereign wealth fund (SWF) refers to any government-controlled fund that manages and invests government savings, regardless of the revenue source. A narrower definition focuses on government investment vehicles which are funded by foreign exchange assets, but which manage those assets separately from official reserves (e.g. U.S. Treasury).
Sovereign wealth funds do not seek to become directly involved in the operation of a business or project in which they are investing. They are more likely to pursue portfolio investment opportunities. State-owned enterprises (SOEs) are defined as business entities 'established' by governments, and whose 'supervisory officials' are often from government. State-owned enterprises tend to be involved in direct investments and therefore have a closer direct interest in the management and operation of enterprises. Investment proposals from SOEs are likely to be based on a medium- to longer term time horizon.
While the term "Sovereign Wealth Fund" was coined only recently, SWFs have a more than 50-year history, with the first fund established by Kuwait in 1953 as a means to help stabilize the economy from fluctuating oil prices. The first major wave of SWFs occurred in the 1970s in the wake of the oil shock. The most recent wave began in 1990 with the Norway Government Pension Fund-Global and continues to this day. In the last 5 years, funds have been established by China, Iran, Russia, Qatar and the United Arab Emirates. The recent growth of SWFs is a consequence of rapid growth in emerging market reserves driven by (1) the impact of rising oil prices for Middle Eastern economies and (2) large trade surpluses, net foreign direct investment flows, and high savings rates among Asian economies. Reserve accumulation has occurred in many emerging market economies. It has been especially sharp among oil producers and Asian countries that have large trade-surpluses with the United States and other developed countries. In these countries, reserves have swelled to levels far in excess of the amount needed for balance of payments support, thus presenting an opportunity for foreign exchange reserve managers to maximize returns.
SWFs are generally of two main types:
Other sovereign investment vehicles do exist such as reserve investment corporations which may have more aggressive investment strategies or fixed funding priorities such as infrastructure projects.
- Stabilization funds – Volatile international market prices are a primary concern for resource- and commodity-intensive economies. Some commodities face price fluctuations of an average of 20% - 25% per year. To mitigate this volatility, several countries have established funds to sterilize capital inflows and stabilize fiscal revenues.
- Savings funds – intended to share wealth across generations. For countries rich in natural resources, savings funds convert non-renewable natural resources into a diversified portfolio of international financial assets to provide for future generations or other long-term objectives.
Stabilization funds serve a more immediate function than long-term savings funds; they tend to be more conservative in their investment decisions, focusing on fixed income rather than equity investments. Examples include the Stabilization Fund of the Russian Federation and Kazakhstan's National Oil Fund. Savings funds have longer investment horizons than pure stabilization funds; they invest in a broader range of assets, including bonds and equities, as well as other forms of alternative investments, such as real estate, private equity, hedge funds, and commodities. Examples include the Abu Dhabi Investment Authority, Kuwait Investment Authority, Singapore's Government Investment Corporation, and the China Investment Corporation.
Since 2000, SWF assets under management have grown from just over U.S.$1 trillion to a record U.S.$ 4.2 trillion in 2010 (Chart 1). There was also an additional $6.8 trillion held in other sovereign investment vehicles, such as pension reserve funds and development funds. Estimates of the size of this market differ widely with different definitions of SWFs and limited disclosure and lack of transparency of a number of SWFs, particularly some from the Middle East.
Asian and Middle Eastern countries each accounted for close to 40% of SWF assets. Europe accounted for most of the remaining funds. China had the largest individual country share with over a quarter of the global total. Countries from the Middle East are very prominent in individual country rankings with United Arab Emirates accounting for 17% of the global total and Saudi Arabia 11%. Norway is also an important centre with 12% of global assets.
Largest SWFs are the Abu Dhabi Investment Authority, Norway Government Pension Fund, SAMA Foreign Holdings, SAFE Investment Company and China Investment Corporation (Chart 2). Estimates of holdings of some SWFs vary widely due to limited disclosure and transparency. This is particularly the case with a number of Middle Eastern funds.
There are substantial differences in risk-return profiles, investment horizons, asset allocation, eligible instruments, risk tolerances, and constraints among funds. SWFs have considerable freedom in their asset allocation decisions and are usually not constrained to certain asset classes or currency exposures, in contrast to some institutional investment managers such as pension funds. Because each fund is different and has varying goals and objectives, it is difficult to generalize about the investment strategies of SWFs as a class.
Few SWFs publish information regarding their asset holdings and little is known about their investment strategies and other aspects of their operational structures like risk management and corporate governance processes. Notably, the lack of public disclosure serves to exacerbate broader concerns regarding SWFs.
Much attention on SWFs has focused on two broad areas, namely (1) the lack of SWF transparency and (2) the potential use of SWF capital for strategic or political (i.e., non-commercial) purposes. These concerns as applied to specific SWFs are mapped Chart 3. The X axis illustrates fund transparency, or levels of disclosure. The Y axis measures the active, or strategic, nature of their stated (or perceived) investment philosophy. For example, the funds of Norway, Australia, and Ireland, are conventionally invested in a wide range of investments and are highly transparent. Singapore's Temasek, while also highly transparent, pursues a more strategic approach to its investments, targeting various industries that are of interest to their respective governments. The funds in the upper-left quadrant and upper middle are of most concern to policy makers. These are the funds that disclose the least information about their funds and are the most strategic in their investment philosophy.
|(Source: Sovereign Wealth Fund Institute, updated 24 January 2011)
Minimal SWF transparency masks SWF investment activity and can obscure governance and risk-management problems within the funds. This can have distressing consequences for policy makers. First, without insight into SWF activity, it is difficult to assess systemic risks or to determine whether SWFs are in fact pursuing strategic, non-commercial investment strategies. Second, limited disclosure makes it difficult to assess the management and governance of the funds and therefore difficult to identify mismanagement or corruption by fund managers. Conflating this problem, many of these SWFs are established in countries that currently lack the underpinnings for good SWF governance or SWF oversight. This is of concern to policy makers, because sizable failures due to poor management, particularly if concentrated within certain sectors, could affect national or global markets.
While the ostensible goal of SWF investment is long-term value creation, government control could mean that a SWF may be motivated by non-commercial considerations in its investment decisions. Many global policy makers are concerned that countries will use SWFs to support so-called "state capitalism," using government-controlled assets to secure strategic stakes around the world in areas such as telecommunications, energy resources, and financial services, among other sectors. High profile deals in the energy and finance sector suggest that securing access to natural resources and developing domestic financial markets appear to be the two primary SWF strategic objectives.
An initial concern was whether in fact investments by SWFs were actually captured by the foreign investment screening laws of many western countries. This led to some amendments to existing laws (e.g. the U.S. Congress in July 2007 passed the Foreign Investment Security Act of 2007 (P.L. 110-49), which among other things, enhanced the review process for non-U.S. acquisitions and added critical infrastructure and foreign government-controlled transactions to the factors for review. Or to clarifications of existing laws or policy guidelines (e.g. Australia released additional clarification of how it would screen foreign government investments in 2008). Other countries like Germany and France introduced new legislation covering national security screening.
In response to concerns that countries were potentially over-reacting and lurching towards protectionism, the G7 in October 2007 asked the IMF, World Bank and the OECD to explore best practices for SWFs in key areas such as institutional structure, risk management, transparency, and accountability with the aim of maintaining open investment policies in the best interests of the countries that have these funds and the countries in which they invest.
In response to these concerns, the International Working Group of Sovereign Wealth Funds (IWG) was formed in May 2008, with the IMF providing support in the form of a secretariat. In October 2008, the Group published a set of 24 voluntary Principles, the 'Generally Accepted Principles and Practices for Sovereign Wealth Funds', known as the Santiago Principles. Initial indications are that some SWFs have made progress in improving transparency, with more publishing annual reports and disclosing their assets under management. For example the Abu Dhabi Investment Authority published its first annual report and accounts in March 2010. But there remains a wide dispersion in the extent of transparency. Typically Asian SWFs achieved a higher rate of compliance while some Middle Eastern SWFs are lagging in initiatives to improve compliance. The IWG reached a consensus in April 2009 on the establishment of the International Forum of Sovereign Wealth Funds to follow up on the work undertaken in the context of the Santiago Principles. The Forum is a voluntary group of SWFs which meets at least once a year to exchange views on issues of common interest, facilitate an understanding of the Santiago Principles and SWFs activities, and encourage cooperation with investment recipient countries. Members of IFSWF are encouraged to undertake self assessments against the SP and many have done so.
China's Post-WTO Transformation
||By Andrew L. Stoler
Executive Director, Institute for International Trade
Senior Adviser to the Shanghai WTO Affairs Consultation Centre
former Deputy Director-General of the WTO
(Note: This article is condensed from a 19 November 2011 speech in Shanghai at the Shanghai WTO Affairs Consultation Centre's Conference on China and the Future of the Multilateral Trading System, commemorating the 10th anniversary of China's accession to the WTO.)
Ten years after accession but a quarter of a century in total since China started the process of negotiating its membership in the World Trade Organisation (WTO), there are now not too many left who remember what China's economy and participation in international trade looked like in 1987.
Chinese business people in 2011 and most foreign business people that trade with China would be surprised at some of the issues that figured prominently in the accession negotiations. Who today could imagine that Chinese authorities in the pre-WTO period placed strict limits on the very right to engage in international trade? Chinese authorities were so non-transparent that when the WTO working party first met, Chinese international trade statistics were considered to be a state secret.
A Tectonic Shift
China has changed so much over the past ten years that it is hard to measure the degree of change unless we briefly go back to the historical record of the WTO accession working party. What kind of issues did China's trading partners care about?
Pre-WTO Chinese laws, regulations and other trade measures were differently applied in different parts of the country. This made doing business very confusing and inherently unpredictable. It also opened up tremendous opportunities for corruption that took advantage of traders' uncertainty in the market.
Transparency was a problem. Even where rules and regulations were published – and sometimes they were not – it was difficult for traders to become acquainted with the rules because they were hard to find. Where an application for a license or some other permit was called for, there were no clear rules about how long the authorities would take to respond to the applicant.
When the working party was finishing up its work, the right to import and export goods from China was restricted to just 35,000 mainly state-owned Chinese enterprises. Those foreign-invested enterprises that had the right to trade were restricted to the importation of goods for their own production purposes.
A number of WTO members complained in the working party that judicial review procedures where they existed in China were inadequate and did not guarantee independence of the review body. Rights of appeal were seen as too limited to guarantee fair treatment. Working party members demanded non-discriminatory treatment in respect of the prices and availability of goods and services supplied by national and sub-national authorities and public or state enterprises, in areas including transportation, energy, basic telecommunications, other utilities and factors of production.
WTO membership meant change for China on a very large scale. More than thirty Chinese central ministries and departments were directed to change 2,300 laws and regulations – eliminating many of them – and 100,000 local laws and regulations at the provincial and autonomous region level.
China undertook to make large cuts in tariffs on over 7,000 tariff lines and bound all tariffs. Trade policy since accession has been administered in a uniform way across all Chinese regions. The right to engage in international trade is now open to everyone – Chinese and foreign. China granted improved access to its market for a wide range of services providers and opened up many services sectors to foreign competition and investment.
All of these reforms and liberalizing measures were good for Chinese trading partners but even more importantly, they were good for the Chinese economy and its development. China's growth and economic development have been facilitated by the country's participation in the multilateral trading system where, with just a few exceptions, Chinese exporters now enjoy the right to non-discriminatory treatment in international markets.
Transformed – Intellectual Property Protection
One area where tremendous progress has been realised since China acceded to the WTO in 2001 is that of protection of intellectual property rights.
Special intellectual property rights courts have been established within the Chinese judicial system and their workload has increased dramatically in recent years. The number of intellectual property-related civil cases before the courts was 5,265 in 2001, 10,000 in 2004, 20,000 in 2008 and 30,625 in 2009. Fifty-eight percent of cases involved copyright infringement, 26 percent dealt with trademark disputes and 16 percent involved patent infringements.
In 2008, China's Patent Office processed about 290,000 patent applications, 67 percent of which were filed by resident Chinese companies. This compares with 456,000 applications processed by American authorities, only 51 percent of which were filed by U.S. firms and 26,346 applications processed in Australia where just 11 percent were filed by Australian companies.
In the field of trademarks, China led the world in 2008, with 669,088 trademark applications, 88 percent of which were made by Chinese firms. The number of applications filed in China was 2.3 times the number filed that year in the U.S.A and 5.6 times the number filed in Japan.
China also led the world in 2008 with Industrial Design applications. 312,904 applications were processed that year, 95 percent of which were from resident Chinese companies. In contrast, only 56 percent of American trademark applications were from U.S. firms and 45 percent of Australian applications were from local firms. In total, the number of trademark applications processed by China in 2008 was more than 11 times the number processed in the U.S.A.
Insurance Against Protectionism
At least half – and perhaps as much as two-thirds – of China's trade with East and Southeast Asia is processing trade, with two-thirds of all finished products going to the United States and Europe. This means that the western consumer is, and will remain, far more important for regional economies than Asian consumers. For China, it means that until such time as economic growth in the country is based more on domestic consumption than it is today, economic growth still depends importantly on access to foreign markets and here there is some concern.
A report issued by the WTO on October 25, 2011, addressed to G-20 trade measures in the May to October 2011 period illustrates this concern. Notwithstanding the pledges made by G-20 member economies, the report notes "there is a growing perception that trade protectionism is gaining ground in some parts of the world as a political reaction to current local economic difficulties – difficulties that trade restrictions are very poorly equipped to resolve, such as the case of currency fluctuations and macroeconomic imbalances. There are various signs of a revival in the use of industrial policy to promote national champions and of import substitution measures to back up that policy."(WTO Report on G-20 Trade Measures, 25 October 2011).
Of the 108 new trade measures taken during the period covered by the report, 22 were European Union measures, 13 were American measures, but Brazil was responsible for 28 new trade measures, and India took 20 new trade measures. For its part, China introduced 8 new trade measures in the period.
Against this rather gloomy background, we should be glad that the situation with respect to protectionism is not far worse than it is. WTO rules and obligations have had a lot to do with this and there can be no doubt that China continues to greatly benefit from the "insurance policy" of membership in the Organization.
WTO's Transformation of China – Good or Bad?
In 1999, the representative of China told the WTO working party that Chinese GDP that year totaled U.S.$ 990 billion. In 2011, China's estimated GDP is U.S.$6,989 billion – a seven-fold increase in a very short time that roughly corresponds to China's membership in WTO.
The working party was told by the representative of China that, in 1998, GDP per capita in the country was roughly $260 per year for rural Chinese and $655 per year for urban Chinese. 2011 GDP per capita is estimated at an average across China of $5,184 – but higher at $8,394 if calculated on a PPP basis. Membership in the WTO and the insurance policy it provides for China's economic growth has helped to lift hundreds of millions of Chinese out of poverty.
WTO Director General Pascal Lamy was reported recently as remarking during a visit to Sichuan Province that China has delivered an "A+" performance since joining the WTO. Although I am a strong supporter of China in the WTO, I would not give China as high a grade as that marked by Mr. Lamy. China has – at times – not been able to resist trade actions inconsistent with its obligations under WTO. The WTO dispute concerned with Chinese restrictions on exports of rare earths is a good example of where China strayed from the path.
It has been a remarkable ten years for China and the world. Whether your viewpoint is from within China or from one of China's trading partners, we cannot escape the conclusion that membership in the WTO has transformed China and transformed the world economy. The transformation has been a good thing for all of us.
How sustainability can help strengthen a company's global supply chain
by Carol Kehoe
Director of Communications at the Network for Business Sustainability, Richard Ivey School of Business, Toronto, Canada
The increasing cross-border movement of goods and the emergence of global competitors have heightened business risk for companies reliant on production in different geographies. These risks can include everything from inconsistent or poor quality to supply disruptions. Developing new relationships that cross multiple national boundaries doesn't have to be fraught with worry, however: adopting a sustainable approach to global supply chain management can open up a world of opportunities.
The consumer products giant Unilever sources from 10,000 raw materials suppliers worldwide and up to 100,000 non-production suppliers, earning annual revenues of more than $50 billion from more than 400 brands. Securing supply is critical to sustaining Unilever's future business and growth, and it has discovered tangible business benefits through supply chain responsibility, championing working conditions, providing fair-wage incomes and managing environmental issues such as waste and climate change. "These benefits protect and enhance Unilever's reputation, help secure supply for our business over the long term, provide increased stability of operations and create cost efficiencies. Ultimately, they generate competitive advantage," notes John Coyne, Vice President, General Counsel, Unilever Canada Inc.
It turns out that there is plenty of research evidence to support this view. A substantial review of 25 years' worth of academic and industry research on social and environmental issues in global supply chains was commissioned by the Network for Business Sustainability, an independent research group based at the Richard Ivey School of Business that oversees research whose findings can be used by business to embrace sustainability. Conducted by Dr. Stephen Brammer, a professor at the Warwick Business School in the United Kingdom and Drs. Stefan Hoejmose and Andrew Millington of the University of Bath in Britain, the resulting report, Managing Sustainable Global Supply Chains: A Systematic Review of the Body of Knowledge, found that leading companies view these new risks in their supply chains as opportunities for competitive advantage. Those companies work proactively and collaboratively with suppliers to monitor their progress, helping them improve by taking into account a variety of cultural, legal, administrative, linguistic and political issues that come with a global network.
"Many companies today talk about developing 'sustainable' supply chains, but they're actually talking about managing risk and preventing public relations crises," Brammer has explained. Sustainability is about embedding responsible and responsive practices into your global supply chain in order to manage its complexity. "If supplier employees are experiencing high levels of injury," Brammer said, providing this example, "your company should send staff to do on-site training. If some suppliers are less productive than others, don't just drop them. Hold supplier conferences where the laggards can learn from the leaders and everyone can share best practices."
For companies that want productive and efficient supply chains, the research identified a range of factors that can influence your ability to succeed.
Ask yourself how your firm relates to its peers and to its supply chain partners. Here, the evidence suggests that coordinated industry action often plays a critical role in successfully developing sustainability throughout an international supply chain by developing a norm of compliance and excellence in sustainability. This creates a competitive level playing field through which incentives for unsustainable supply chain management are reduced. Therefore, a clear imperative for firms, wherever possible, is to engage in developing the capacity for action across an industry sector.
Looking internally, executives are encouraged to think about the big picture: what exactly is motivating change in your businesses? The drivers for addressing social and environmental issues in a supply chain, as cited by research: customers, compliance, costs, competitive advantage and conscience. Figure 1 lists in detail how each can influence a company's change in their supply chain operations.
Figure 1: Drivers for Addressing Social and Environmental Issues in a Supply Chain
This analysis can also help to identify the levers that will increase a company's chances of success. The research shows seven levers that can facilitate or inhibit efforts to build a sustainable supply chain. Internal levers are
which range from leadership/management support (people) to clear policy statements/codes of conduct (policy).
- and people
External levers are
To implement improved sustainability practices in the supply chain the research shows companies should
- public policy
- and power.
These are baseline practices that all organizations should embrace, and reflect a "command and control" approach to supply chain management in which the lead buying company dictates most rules and processes. It's important to note there is no particular order to follow: different organizations may implement the practices in a different order.
- establish a code of conduct
- obtain third-party certifications
- select appropriate suppliers
- monitor supplier activity.
Because of the complexity of the global business environment, there are some shortcomings to this "baseline" framework including how codes of conduct are relatively static and unresponsive to new issues or changes in stakeholder expectation, for example, and how third-part certification imposes substantial costs on suppliers. But Figure 2 shows how introducing consultation, development and learning to business practice can mitigate the shortcomings. For example, to manage for sustainability in its supply chain, Unilever developed a Supplier Code which defines the company's responsible sourcing requirements. This Code is based on both local laws and internally accepted norms and helps create consistent expectations across the supplier network. Unilever requires not only that its direct suppliers adhere to the Code, but that direct suppliers ensure that their suppliers also comply with the Code's principles.
Figure 2: Mitigating Supply Chain Issues
By adding four "best practices" to their processes, businesses can build a sustainable supply chain: 1) creating meaningful expectations, 2) confirming suppliers and agreeing to targets, 3) evaluating and developing suppliers, and 4) learning and improving. See Figure 3.
Figure 3: Mitigating Issues, with Best Practices
Companies are encouraged to robustly scan the environment to anticipate new challenges and issues as they arise, as well as interact frequently with suppliers to encourage their participation in the development of a code of conduct, for example, as a way to create meaningful expectations. Mountain Equipment Co-op (MEC), an outdoor gear retailer, uses its Supplier Code as the standard to which all vendors must adhere. All suppliers are briefed on the standards and their obligation to meet them. Afterward, they must sign a Vendor Agreement formalizing their commitment. In return for their engagement, MEC works with factories to improve practices instead of walking away. Factories in turn must be willing to improve, and demonstrate positive results.
Focusing on supplier consultation and development rather than relying on the "tick box" criteria to determine supply chain partners is also advisable. By holding awareness seminars and developing detailed sets of key performance indicators across suppliers, for example, businesses can select appropriate suppliers that will agreeably work toward mutual targets.
Of course, evaluating progress made by suppliers is critical to supply chain improvement, and using probation periods and/or recognition reward programs are good examples of how to encourage suppliers meet expected targets. IKEA employs a "Staircase Model" which encourages continuous improvement from its suppliers by establishing four levels of progressive achievement. Auditors are required to "explain the IKEA philosophy and check that the supplier understands the key environmental impacts and has started to measure and follow up."
Finally, continually improving practices through iterative communication and measurement will help companies learn and improve as they go forward. Establishing a company task force composed of in-house professionals and external academic and NGO expertise to review performance evidence quarterly to identify patterns and explore possible solutions might be one way to ensure accountability and transparency in achievements and performance.
As the research suggests, a developmental, supportive and mutually trusting approach to managing sustainability issues in international supply chains may offer the most robust set of "best practices" by which firms can minimize their exposure to risks and at the same time exploit a range of opportunities for performance enhancement in the buyer-supplier relationship. While it is recognized that these "high commitment" practices require substantial engagement from lead procurers and that these practices may not be suited to every organizational context, the researchers conclude they stand as aspirational "best practices" by which companies can benchmark their own progress toward managing their international supply chains sustainably.
Read the full research report at http://nbs.net/knowledge/supply-chain/systematic-review/ for a detailed discussion of the best practices, case studies and implications for research and practice.