Supply Chain Matters highlights report that Volkswagen luxury branded vehicles were impounded by U.S. Customs because the vehicles contained a part made by a forced labor sanctioned supplier.

 

Background

Supply chain ethical and social responsibility, that which umbrellas ESG conformance, have increasingly become a concern for businesses, large and small, along with their procurement organizations.

Governments including Canada, Germany, and the United Kingdom have enacted special legislation in these areas. Regarding the United States, the Uyghur Forced Labor Protection Act (UFLPA) requires companies conduct diligence across respective supply chains in ensuring that product components along with a finished product, has not been subject to forced labor practices in producing a product.

The implications for non-conformance include not only legal jeopardy or added cost implications, but brand reputational risk dimensions.

New High Profile Incident- Volkswagen

Last week, U.S. Customs and Border Patrol reportedly impounded thousands of upscale Bentley, Porsche, and Audi branded vehicles at port of entry, allegedly because they contained a component produce by a listed China supplier appearing on a sanctions list for utilizing forced labor practices.

According to reporting by The Wall Street Journal (paid subscription), a VW spokesperson indicated that “only a tiny part” was involved.

These vehicles were in the process of being refitted for delivery to U.S. based dealers.  This spokesperson is further quoted as noting: “We really try, but this shows how challenging it is to really know everything that is happening in complex supply chains.”

According to the report, this development is related to VW’s in-country joint venture within China’s Xinjiang region, which has entered talks as to its future. The global automaker’s joint partner entity in China, SAIC Motor, had established the entity, SAIC Volkswagen Automotive, to originally produce vehicles in the region, but has since been winding down operations. The report indicates that the VW entity: “no longer produces vehicles, but only performs quality control and technical services for about 10,000 vehicles per year.”

Because of pressures from investors along with the governments of Germany and the United States, the automaker completed an audit of this facility in December, reportedly finding no evidence of human rights abuses.

 

Added Thoughts and Reader Takeaway

Such an incident involving a large global based automotive company serves as  another reminder that addressing and mitigating ethical and compliance risks applies to many businesses, large and otherwise. This includes not only supply networks that include areas of China, but other regions as well.

According to guideline commentary published by law firm Skadden, Arps, Meagher & Flom LLP,  the notion that UFLPA applies only to China imports is a myth.

That is because that the country of origin of goods is irrelevant since reportedly only 13 percent of shipments detained by customs officials were of China origin. Reportedly, the vast majority of detained goods were produced in either Malaysia, Vietnam or Thailand.

A further indicated misnomer is that ESG certifications from third-party certification entities should address and avoid forced labor risks. The authors observe they are not a substitute for supply chain due diligence actions.

This Volkswagen development further serves as a call to industry materials sourcing and procurement teams to consider their ongoing efforts in supply chain focused ESG identification, compliance and risk avoidance, across multiple supply network tiers.

As the VW spokesperson observed, a tiny part can trigger a customs enforcement action if a particular supplier’s products has been banned due to forced labor practices.

Maintaining and/or enhancing brand reputation is more than marketing and stated policy. It requires active ongoing assessment and due diligence.

As consumers seek to purchase a luxury car, consumer electrics item or any other product, brand reputation and loyalty has many dimensions, and that increasingly includes ESG focused actions.

 

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