How SMEs can contribute to a due diligence in value chains

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network.

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No one wants an abuse of human rights – neither citizens nor companies. When producing in Tunisia, purchasing from companies in India or cooperating with third countries such as the United States, the protection of human rights needs to be guaranteed. However, the question arises: how can this be controlled? And who is responsible when things go wrong?

The European Commission is working on an EU law that will require companies to identify, prevent and monitor risks to human rights and the environment. How realistic is this approach? Are small and medium businesses capable of controlling their operations in such detail?

Respect for human rights

For mechanical engineering companies in Germany and Europe, respecting and protecting human rights along supply chains are a mandate and an obligation. We fully support the goal of the upcoming EU legislation.

This is why many companies already have international codes of conduct and supplier contracts in which they commit themselves and their partners to respect and honour human rights. Do these existing mechanisms solve all human rights problems? That would be too much to ask from any company, but it certainly makes an important contribution.

SMEs cannot take over government responsibilities

I own a company that co-operates with more than 460 suppliers which, in turn, provide more than 8,000 components in 17 countries. This business model is typical for the engineering industry in Europe. We are globally connected and we are export champions.

This is our successful business model. When my employees and I visit suppliers in South-east Asia, for example, we get good insights about a company, its processes and its culture.

But if we see misbehaviour, can we guarantee that after we leave, no further harm is done and that no children are working in the factory? Definitely not. No manager and no SME could control that.

Human rights violations must first be tackled on a political level. No company can be held responsible for something it cannot control, especially when there are different laws in each country we deal with – concerning, for example, the right to set up unions or works committees. Therefore, an EU law on due diligence in supply chains has to consider the limitations of businesses.

In my view, as an entrepreneur and representative of one of the largest industry associations in Europe, I firmly believe that states and their governments are primarily responsible for upholding human rights. Abuse of human rights is often caused by weak governance. This is an issue that a company cannot solve. Policy-makers, on the other hand, certainly can.

Therefore, the responsibility of the state must not be transferred to companies. However, this does not mean that companies cannot do anything. They can, and they do.

Know your customer and value chains

When discussing corporate governance, I often hear the allegation that entrepreneurs do not know their suppliers and value chains. Or that they ignore untenable conditions. But, to the contrary, in the mechanical engineering industry we know our suppliers quite well.

That is because machines are not mass products nor consumers goods but rather unique products tailored to the specific need of a customer. So we have to make sure that hundreds, sometimes thousands, of components are of the best quality.

But due to the great variety of products, machine-building companies typically have many suppliers – sometimes hundreds – from all over the world. Fully monitoring all of them – and their sub-contractors – is impossible, especially for medium-sized companies.

In my company – a typical SME that exports – I employ a staff of six in procurement. Before the pandemic, we would travel frequently to visit our suppliers and strengthen the trade relationships.

If we were to visit each of the 460 suppliers in 17 countries, we would need several years. And even then, it would be one visit per year only, and I would have no influence on what is happening until my next visit.

Therefore, I favour a more realistic approach. Due diligence can only be extended to what SMEs can control and where there is an evident risk in the supply chain. Then we can have an impact and make a difference.

An option would be to limit the scope to tier 1 suppliers of the upstream supply chain with whom there is an established commercial relationship and those supply chains that involve evident risks. Furthermore, a white list provided by the EU would help entrepreneurs identify “good” countries and regions.

Establish and maintain fair trade relations with third countries

One argument is often being neglected in the discussion and that is the importance of trade relations with third countries. The business models of export-orientated mechanical engineering companies are heavily dependent on EU free trade agreements and open markets in countries all around the world.

Our activities in third countries often lead to well-paid and highly qualified jobs there. Mechanical engineering is a complex industry with complex products that need highly specialised and skilled workers. It is essential to maintain these trade relations. These business models are not based on violations of human rights or child labour.

I want to be absolutely clear: We fully support a European approach to protect human rights and stop child labour! An EU framework on due diligence is definitely better than a patchwork of national laws of the 27 EU member states.

However, for SMEs to contribute successfully, such legislation needs to be realistic. We need clear criteria, definitions and standards. But most of all, we need realistic and manageable processes which take into account the slim possibilities of influence, especially for SMEs.

About the author: Bertram Kawlath is Managing Partner of the Schubert & Salzer Group of companies in Bavaria and Thuringia and Vice-President of the German Mechanical Engineering Industry Association (VDMA). VDMA represents about 3,300 German and European companies in the mechanical engineering and plant manufacturing industry. The industry stands for innovation, export orientation, medium-sized companies and employs around four million people in Europe, more than one million of them in Germany.

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