Labor Issues Strike Overseas Supply Chains

Allegations of forced labor have surfaced in two different supply chains - apparel and solar

Allegations of forced labor have surfaced in two different supply chains - apparel and solar.

• H&M and Primark will stop sourcing from Myanmar due to forced labor allegations.

• Apparel imports from Myanmar have been volatile, down 34.9% year over year in Q2.

• First Solar revealed that an internal audit found forced labor in Malaysia.

• Imports of Malaysian solar panels (both assembled and parts) increased by 78.7% year over year in Q2.

• These instances highlight the need for strong supply chain due diligence, supplier transparency, and high quality international trade data.

Apparel

Fortune reports that H&M will stop producing garments in Myanmar after allegations of labor regulation violations. This comes after a release by the Business and Human Rights Resource Center that outlines wage theft, forced overtime, violence, and harassment of garment workers. U.S. Customs data shows that Apparel imports from the country increased over the last decade as the government liberalized, increasing by 23.2% and 21.1% year over year respectively in 2020 and 2022. Imports fell by 1.3% in 2021, likely due to the coup that took place in February that year.

Imports have fallen rapidly in the first half of 2023, down 0.7% in Q1 and 34.9% Q2 year over year. The bulk of this may be the larger slowdown in U.S. consumer activity which shows a 18.3% year over year decline in apparel imports in Q2'23. Myanmar's fall of nearly double the overall decline likely points to externalities starting to impact sourcing decisions.

The combination of the ongoing civil war and reports of forced labor in the country could have added that additional push to decrease activity. Companies may also be reserving order share for suppliers with longer relationships, with Myanmar's increases in 2022 likely representing new business. Myanmar factories being used as 'surge' capacity - especially by fast fashion brands that have proven nimble in their supply chains - may be a double edged sword if demand weakens.

Source: U.S. Customs Bureau

Primark provided a detailed response to the BHRRC's survey, noting that they had also decided to stop sourcing in Myanmar, and that the report outlines the "stark reality of sourcing from Myanmar in the current environment and the worrying impact on workers' rights and safety." Primark also addresses allegations at specific facilities, and data from the Open Supply Hub shows that at least of Primark's suppliers has been used by LIDL and Carrefour.

Walmart is facing a Canadian probe alleging the use of Uyghur labor, and an inquiry from the American Apparel and Footwear Association expressing strong concern that inmates at a Cambodian Women's prison were manufacturing goods. Data from Open Supply Hub show that nearby the prison is Prey Sor, home to factories used by Helly Hansenand Ralph Lauren among others. In the other direction, factories appear on vendor lists of VF Corporation and Tesco, and all companies that source from the area are likely to thoroughly audit their sources.

Note that we can see these company’s operations because of their supply chain transparency - something that should be applauded. IGTM Cambodia, a firm which was named in a previous prisoner labor letter, does not appear to have associated companies in Open Supply Hub records. Cambodian suppliers are likely facing some of the same pressures as their Myanmar counterparts as U.S. trade data shows that Cambodian imports fell by 32.6% year over year in Q2'23, and 32.5% year over year in Q1'23.

Solar Panels

Forced labor allegations have expanded, Reuters also reports, with First Solar operations in Malaysia. The disclosure came from First Solar themselves, who discovered reports of migrant worker abuse in an audit of their own supply chain. This reinforces the importance of supply chain diligence and delving deeper upstream when sourcing internationally.

U.S. Census data shows that imports of solar panels, both parts and assembled, have increased by 78.7% year over year in Q2'23. This implies a rapidly developing industry in servicing U.S. clients, but a fall in total proportion of U.S. imports in Q2'23, to 11.7% from 16.9% the year before, may have put pressure on suppliers to increase output. 

Overall imports of solar panels to the U.S. increased by 140.4% in Q2, driven by imports from Cambodia and India. Cambodia saw its share of imports increase from 7.4% in Q2'22 to 12.4% in Q2'23, while imports from India increased dramatically - only 0.2% of U.S. imports in Q2'22, they made up 10.5% in Q2'23. The growth of these sources has come, unsurprisingly, at the expense of Chinese suppliers, down to just .03% of U.S. solar imports in Q2'23, and Viennese suppliers, whose proportion of imports fell to 24.8% in Q2'23. 

Source: U.S. Customs Bureau

So What?

The examples outlined above are a testament to the importance of strong supplier due diligence and auditing. Knowing your suppliers needs to go beyond the surface, down to your supplier’s suppliers, and your supplier’s supplier’s suppliers - all the way to the raw material production. Allegations of slave, forced, or abusive labor in the building blocks of a product can taint the entire product, and companies need to be constantly vigilant in auditing their suppliers. Business conditions change, and a supplier that passes an initial audit may not be compliant years into the future. While the utopian ideal would be to never have any instances, companies should be applauded for disclosure and swift corrective action - high resolution trade data can make this a reality.

Companies should also consider combining site audits with constant vigilance of trade data and watchdog reporting in order to catch and resolve concerns before they become problematic. Transparency can help with this as well - companies that release ESP reports and supplier lists to the public are effectively outsourcing diligence work to the broader community, this combined with strong and decisive action as seen with Primark above can reduce the burden on internal operations.

Programing Note: P&H is back. Sort of. This is a soft launch for your corespondent - who is admittedly quite rusty - but is excited for what we can talk about in the intersection of supply chains, ESP, and global trade.

Disclaimer: This report is for information purposes only, not for legal, business, or financial decisions. It’s based on the latest available information on the publication date - that information may have changed by the time you read this report. Use it at your own risk.