Low Cost Sourcing Grows Complex - Part I
o As sourcing from Low Cost Countries (LCCs) grows ubiquitous, it is also growing more complex for global corporations to handle.
Three major reasons account for this:
1. Regulatory complexities (on account of security and environmental concerns)
2. Rising Logistics costs (due to reasons which I'll cover in my next post), and
3. Rising incidences of disruption in global supply chains!
Regulatory Complexities: Security Concerns
o Security concerns have now firmly moved from 'countries of concern' towards threats from the 'end-users' of restricted technologies and products, since the experiences of the last few years have amply demonstrated that these threats could as easily originate even from friendly countries. This means that the restricted and denied party lists assume even greater importance for dealing with the low cost economies across the globe. This compliance risk applies equally to manufacturers, traders, retailers and logistics providers.
o Global conventions are being more strictly enforced across the globe. Of increasing importance - due to rising security concerns - is the Wassenaar Arrangement that seeks to control illegal diversion of munitions or other materials that can be used to build Weapons of Mass Destruction (WMD). While the 'munitions' list covered by the Waasennaar Arrangement is self-explanatory, the 'dual-use' goods list bears some words of explanation.
o Dual-use products and technologies refer to commercial civilian products with potential military or proliferation end-use: For example, if a certain commercial component exported out of the US could be used by manufacturers in China or Korea to create a product with a military end-use that would attract US export control regulations in its finished form, then such a commercial component could attract licensing norms under the 'dual use' technologies umbrella. This serves to increase the complexities of obtaining License approvals manifold even for some commonly used products!
o Then again, there are numerous other global conventions that enforce controls on exports and imports for various environmental and security reasons, such as CITES (wildlife conservation), the various Non-proliferation groups, the Montreal Protocol (controls exports of products that release Ozone-depleting substances into the environment), the Basel Convention (controls exports of hazardous waste), the Chemical Weapons Convention and so on.
o Global Conventions are International agreements or multilateral treaties between countries, which in the case of export controls, lay out the rights and obligations of member states vis-a-vis each other. So for example, the Chemical Weapons Convention (CWC) - which has 182 signatory members - seeks to limit the production, stockpiling and proliferation of chemical weapons in the wrong hands, and the signatory member states have agreed to prohibit the unlicensed export of commodities or technologies that can be used to produce such weapons. The members have also agreed to time-lines to destroy all existing chemical weapons in a phased manner.
o For exporters, the complexity arises in two different ways:
(a) When restricted products are used in the manufacture of commercial products, thus attracting the relevant licensing norms. For instance Triethanolamine which is used in the production of chemical weapons such as nitrogen mustard, is also used as a pH balancer in a wide range of shampoos, cosmetic lotions and gels, detergents, shaving foams and so on, besides being used by oil refineries to remove sulphur, and in formulations such as oil-drilling emulsions. Other common uses include usage in the manufacture of automotive coolants, waxes and polishes, cements and pharmaceutical products.
(b) The ratification of each convention by each signatory country is in accordance with their national procedures .... which means that each new country than a corporation begins trading with, brings in its own new set of regulatory compliance complexities!
o Coming to the Environmental front, the EU legislation restricting hazardous substances (RoHS) which has been effective since last July, primarily concerns itself with reducing the amount of waste electrical and electronic equipment (WEEE) that enters landfills, and then into our environment. Typical measures involve advocation of separate collection, reuse and recycling. Recycling in turn attracts regulations that seek to ensure that in the process of recycling the WEEE, its content of mercury, cadmium, lead, chromium VI, PBB and PBDE will not be allowed to leach into the environment or will not be allowed to cause other health or environmental hazards. The complexity here for manufacturers and retailers is that they could be held responsible for non-compliant acts committed by their business partners in the far-flung outreaches of their global supply chains!
o The not so welcome news for sourcing from or exporting to the Low Cost economies is that the complexities of Import & Export Regulations in Asian and South American economies are beginning to outstrip the complexities in American and European regulations. Evidently the Governments of developing countries are tightening up import and export controls on all these areas which they consider might have been misused in the past (or have the potential of misuse in the future).
o For instance, on the heels of the restrictions on hazardous substances (RoHS) legislated by the European Union effective last July, Korea is coming out with its version of such legislation this year. China has its own version of RoHS, while Japanese recycling laws are making it mandatory for manufacturers to begin phasing out lead and other hazardous substances such as cadmium, mercury, chromium, PBB and PBDE (the last two are found in certain flame-resistant plastics). So for example, the complexity for manufacturers and retailers could be that a product could be rejected as non-compliant even if its external plastic case has more than the permitted concentration of PBB!
Like I mentioned earlier these complexities are making regulatory compliance for global corporations an almost unmanageable task, and they need specialized professional help to ensure that they do not incur huge penalties and fines for non-compliance.
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