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As U.S. companies accelerate their withdrawal from China, quality and procurement social responsibility are adversely affected
Global supply chain advances to new regions
With the new tariffs coming into effect on December 15, as US companies prepare for the next wave of tariffs on imports from China, product quality and sustainability are also facing dilemmas.
A survey of global companies with international supply chains in all major consumer groups in July last year found that nearly half of respondents had a pessimistic view of the outcome of the Us-China trade talks. In addition, more than two-thirds of respondents said their strategy for dealing with a new round of tariffs was to accelerate the diversification of procurement and strengthen their presence in new areas.
Nowadays, with a new round of U.S.-China tariffs looming and trade between the U.S. and the European Union escalating, data collected by Madeown in the third quarter of 2019 shows that these strategies are already being implemented and have a negative impact on the quality and sustainability of global supply chains.
Madeown's inspection and audit demand data for the third quarter of 2019 show that U.S. purchases from China are accelerating sharply: 17% year-on-year decline in the first three quarters of 2019 (compared with -13% in the first half of 2019). Madeown data shows that the full return to the United States is still a small phenomenon, the transfer of most of the business from China has entered third countries, including Mexico, Peru, Guatemala, Haiti and other nearby countries, other South American and Latin American countries said that the U.S. customer inspection and audit demand growth reached double digits.
In addition to near-shore countries, U.S. buyers are also looking at distant destinations: North Africa and the Middle East are experiencing an influx of new orders, and in 2019, Turkey, Egypt and Jordan
In Europe, the Mediterranean countries have also seen an increase in demand from European buyers, who, while less affected by the CHINA-US trade war, are seeking to reduce their dependence on China. Data from Madeown on EU customer inspection and audit needs show that Turkey, Morocco and Tunisia all saw double-digit expansions in 2019 compared with 2018.
What about China? The big buying nation is certainly not sitting on its hands, making up for falling demand in the US and the EU through customers in other regions, and growing interest in Chinese capacity is growing in Asia (up 58 per cent year-on-year), the Middle East (up 26 per cent year-on-year) and Latin America (up 6 per cent year-on-year).
Data collected by Madeown in the 2019 site inspection confirm that changes in the procurement area are having a negative impact on production quality. Specifically, textile and clothing manufacturers in several emerging sourcing regions are struggling to cope with the influx of new buyers. In the third quarter of 2019, Cambodia's inspection failure rate increased by 26% YoY, Jordan's 17% YoY, Sri Lanka's 13% YoY and Vietnam's 10% YoY. Even in mature textile markets such as Turkey, where it has previously handled an increase in purchases performed better than other countries, more than one third of the textiles inspected in the third quarter of 2019 did not meet acceptable quality limits (26 per cent in the second quarter of 2019).
The Results of the Madeown laboratory tests indicate that some quality problems in textiles and clothing may have originated from upstream of the supply chain. In the textile and clothing batches tested in the third quarter of 2019, more than 14% of nonconforming problems stem from a variety of fabric quality issues, in particular color fastness, wear resistance and yarn slip at seams.
At the same time, in the original quality performance of the electronic and electrical sector, non-compliant products continue to climb. Further observation shows that the decline in product quality is consistent with the increasing number of procurement sprees in the electronics and electrical sectors from China to new areas (Thailand, Pakistan and the Philippines), and that, so far, Madeown has inspected the electronic and electrical products batch in 2019. Between one-third and one half of the batches do not meet acceptable quality-qualified standards (21 per cent in China).
As social responsibility risks rise, there is a lack of attention to sustainability in the process of sourcing
Madeown's 2018 and 2019 annual surveys have found that companies are inevitably putting social responsibility and sustainability issues at the bottom of their many priorities when dealing with the multiple challenges facing regional transfers in procurement. The data collected by the Madeown auditors during the third quarter of 2019 also confirmed this view.
An analysis of the changes in social responsibility scores over the past two years shows that after an uneven but positive upward trend was observed in 2018, the sustainability performance in 2019 declined. Analysis based on historical data shows that responsibility performance tends to decline before the holidays, a trend that foreshadows a very real risk that the initial progress in socially responsible procurement last year may be gradually reversed.
After closer inspection of the data, it can be found that the proportion of factories classified as "red" due to major non-compliance issues is on the rise. In the third quarter of 2019, Madeown auditors rated nearly a quarter of the factories they audited as ineligible, with the most common major non-compliance issues related to work hours and pay, and health and safety issues. In addition, since the beginning of 2019, the proportion of major violations related to child labor has remained high. 3.2% of the factories audited by Madeown have this problem.
Although social responsibility performance is generally poor, purchasing regions that have just experienced increased buyer demand are particularly prominent. Compared with the first half of 2019, South and Southeast Asia's social responsibility scores fell by 3.5% and 5% in the third quarter of 2019, respectively.
At the same time, China has experienced a decline in social responsibility after a long-term improvement, a 2.4% drop from the average score of factories audited in the first half of 2019. Hours of work and wage violations are the main drivers of this downward trend, related to the surge in the use of temporary workers during the peak production season and poor management of overtime.
Key KPIs from Madeown Quarterly Report
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