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How Local Watchdog Groups, Not Western Companies, Are Shaping Business Practices in China

Forbes |  By Amy Westervelt | December, 06 2011 |  Share  | Source Article

Back in the early 1990s when the first wave of concern about labor practices in China emerged and photos of factory conditions spurred the creation of what we now call Corporate Social Responsibility (CSR), Chinese manufacturers cleaned up their act and largely did what their Western buyers wanted. They couldn't afford to lose the business.

Fast forward 20 years and it's as though 1990 has dawned again. Every week seems to bring some story or another of a Western company caught with a Chinese supplier that's dumping chemicals or infringing on worker rights. Despite the vast improvements to supply chain management over the past decades, companies are still being surprised by suppliers behaving in a way that doesn't exactly jive with their annual sustainability reports. So what's going on: Did those early efforts just scratch the surface? Is China tired of the West telling it how to conduct business? Is supply chain management so complex that few companies can truly sort it out? Given that much of the news these days centers around tech and electronics companies, is it more to do with the clandestine nature of those industries? Or are we just hearing more about it now because it's tougher to get away with labor and environmental violations for long before someone snaps a pic on their smartphone and it becomes a big news story?

As with most complex issues, it's a little bit of everything. "China is definitely a different animal - we bring in Western expectations and they just play by different rules," says Michael Saracini, CEO of Aravo Solutions, a leading supply chain management company based in San Francisco. "Five to seven years ago Chinese companies were a little more concerned because China was an emerging economy, but now they're a major super power and they just don't care as much."

That's not at all to say that to operate in China is to accept that your suppliers will go rogue. In fact the primary concern facing global companies today is not necessarily any particular country's work culture, but the fact that, globally, we are living in the era of the watchdog. Ironically, the same portable electronics being built in all those Chinese factories are the tools being used to expose practices there.

But just as Chinese suppliers may be less beholden to their Western customers these days, so Chinese companies today are less cowed by the threat of a massive Greenpeace campaign. Instead it is the work of small, local NGOs and watchdog groups bringing labor infractions to light. A few months ago when Apple was being spanked by everyone from The New York Times to the Financial Times for using toxics in its products and unnecessarily exposing workers to harmful chemicals and dangerous working conditions, it wasn't the Greenpeace report on the company's products that was cited most often, butreports produced by a coalition of local Chinese NGOs that had been on the ground gathering intel.

Because these local groups can more easily infiltrate factories, and because they are not open to accusations of imposing Western ideals on Chinese work culture, their investigative work may be far more effective than that of their Western counterparts when it comes to shifting the way China does business.

Last year, KYE Systems, a Taiwan-based manufacturer of computer peripherals, with factories in China, got a big wake-up call in the form of a report by the National Labor Committee (now the Institute for Global Labour & Human Rights) based on research from a local watchdog group, which alleged long hours and underage workers at KYE's factories. Although KYE is prohibited by non-disclosure agreements from telling anyone who their customers are, they are a known supplier to Microsoft. The fallout from the report was what you might expect - several customers threatened to move their business and immediately deployed auditors to KYE's facilities.

But then KYE did something perhaps not all that expected: Allotted meaningful resources toward developing a robust CSR program. The company's Chinese factories had been audited annually since 2006 by various auditors from its Western customers, according to Terry Chen, deputy plant manager and CSR program coordinator for KYE Systems.

"The audited items are very close to the EICC code," Chen says. "Through these audits, our customers seek to continuously help KYE to improve our factory.  We have learned a lot from our customers; they have led us to produce completely lead-free and RoHS (restriction of hazardous substance)-compliant products."

Unfortunately, outside audits were not enough to prevent KYE from becoming the target of a local labor expose. The company realized it needed to do a better job of keeping tabs on its factories itself. First it established a CSR team, backed by the company president and comprised of managers both at KYE's Taipei headquarters and on-site at its factories in China. Then it implemented a policy against hiring student workers and paying wages to third parties (a common practice in the Guangdong province), and established an electronic system to better keep track of overtime hours and vacation time. The company also established a Worker's Congress to give factory workers a voice and improve the sense of community at its factories. The effort not only helped KYE weather the aftermath of the NLC report, it also helped the company to find its own ways to improve operations.

"During the CSR process, we found out that creating communication channels between employees and the management team is a bigger issue than what we first expected," Chen says. "This was not pointed out by the NLC, but through our own CSR process."

Chen notes that around eighty percent of complaints from employees were not work related, but more to do with friendship and family.  Many of the company's factory workers are from rural areas and they often feel isolated and alone in the factory life. To help address this issue, KYE set up a third-party hotline for workers looking for someone to talk to about their private as well as work related issues. The company also remodeled its free dorm, increased the variety of options on the menu at its onsite restaurant, and provided the option for employees to live outside the factory area.

It wasn't easy to address KYE's various CSR issues quickly, Chen says. "Operations and monitoring is not as easy as policy and planning," he says. "Our management team realizes the urgency and the importance of embracing CSR.  But, it is easy to set the target, and it will take time and experience to implement all the plans."

Chen also says that the three-month waiting period to join the EICC (Electronics Industry Code of Conduct) came at a large cost. During the waiting period, KYE was not able to close any new accounts or launch any new projects with customers.

Nonetheless, just a year after what could have been a major hit to the company's bottom line, KYE is a CSR success story. "All the effort that we spend on CSR causes higher costs, but it also distinguishes our factory from our competitors," Chen says. "It helps us attract a better customer base."

The fact that the change was prompted by local outrage, and that the process has enabled the company to make its own improvements, without mandates from its customers, also makes it both more stable and, paradoxically, more attractive to Western companies. It's increasingly looking as though the next wave of CSR in China will be led not by sustainability directors at Western companies, but by a combination of Chinese NGOs and local CSR managers.