00:00:00: Welcome to shaping sustainable Supply chains a new podcast where we dig deeper into the social dilemmas arising from Global Supply chains.

00:00:11: And where we provide evidence-based Solutions on how to make Supply chains more sustainable I'm Nicholas Martin and I will be your host for today's episode,

00:00:20: thank you for joining us.

00:00:22: Music.

00:00:34: In this episode we talk about the biggest risk for Supply chains which chances might also derive from the corona pandemic to create added value that is more socially responsible and environmentally friendly.

00:01:00: The German development Institute hello Tillman thanks for being with us,

00:01:04: it's my pleasure and Gary giraffy the so-called Godfather of value Chang theory is with us from Durham North Carolina in the US where he is a professor for sociology and director

00:01:17: of the global value chain Center at Duke University.

00:01:20: Welcome Gary good to have you with us thank you Nico and hello Tillman this is the first episode of shaping sustainable Global Supply chains Tillman,

00:01:29: you are one of the organizers of a research network with the same name sustainable Global Supply chains which brings together 60 to 70 leading researchers from around the globe and is hosted by for German Institutes.

00:01:44: You have also initiated this podcast why do you think policymakers and researchers should focus more on sustainable Supply chains all thank you Nico firstly,

00:01:54: I think globalization today happens in value chains firms around the world no longer produced first and then look for customers what we see instead is,

00:02:04: big firms H and M for fashion for example or Panasonic for electronics.

00:02:11: Placing orders and exactly telling suppliers what to produce went to deliver and also what kind of Social and environmental standards they have to adhere to.

00:02:23: And we are living in a very unequal world so if we want opportunities for small firms for firms in developing countries,

00:02:31: for people excluded from the labor market then we need to influence the conditions how the big firm source.

00:02:40: And second we see a lot of political interest arising in supply chain issues it's no longer it technical issue.

00:02:48: For supply chain managers in firms are for economists.

00:02:52: Societies are caring about these things about how Cobalt for car batteries is produced in Congo.

00:03:00: About working conditions and clothing companies about where our medical supplies come from in the corona epidemic,

00:03:08: and he did see a heated debate about laws regulating Supply chains we see ambitious Plans by the European commission to,

00:03:17: establish circular economies and all these topics are very complex and they require research,

00:03:23: so if you want to have balanced policy solutions that take all the potential effects into account then research is needed to inform policymaking

00:03:31: on this podcast we will be talking from now on regularly with leading experts today we are very happy to have Gary giraffy with us

00:03:39: Gary once one starts searching for the word to well you change your name is everywhere how do you feel with being called The Godfather of the value chain,

00:03:48: well I take it as a great compliment but also as a tribute to a community of researchers that over the last,

00:03:57: twenty-five years have really been building this framework and as Tillman mentioned it's a framework that is now far beyond the academic Community but is linking very much into practitioners,

00:04:11: Business Leaders activists and international policy networks so I'm very happy we've been able to build this kind of a bridge that everybody can link up to.

00:04:22: You just mentioned your theory the so-called Global value chain framework.

00:04:26: In a few words and I have to put emphasis on a few what is the global value chain framework,

00:04:33: the global value chain framework is an approach to economic globalization that focuses on global Industries multinational companies and their supply chains and it's the industry Focus,

00:04:44: the global industry Focus that I think is unique in the framework we have two main Concepts there's.

00:04:50: How these Global value chains are governed by the top companies around the world so we call that the governance Theory and I think 25 years ago.

00:04:59: Was a key article that began to introduce,

00:05:03: the idea that manufacturers are one set of leading companies but big retailers and brands are very different sets so that created this sense of a governance structure,

00:05:14: and the other key concept bottom up is what we call upgrading looking at it from the country point of view countries are all tied into different Global Industries.

00:05:23: But they're trying to find out how to move up technology ladders how to create more jobs how to make their Industries more sustainable so I think that the global value chains Theory which really started around 2001.

00:05:36: Has really been trying to link those two levels of governance Theory and upgrading analysis,

00:05:41: in a more systematic way with studies on all different sectors from manufacturing and agriculture into services,

00:05:49: and the new digital economy since we know that the value chain upgrading is a central part of you Theory we have prepared a little voice sir let us have a quick look at what value chain upgrading means,

00:06:02: production nowadays is often a quite complex process with different steps in different countries.

00:06:09: Some steps are very profitable and others are not cocoa farmers get paid little whereas chocolate production and marketing can be very profitable.

00:06:18: Clothing electronics and toys for example a quite labor-intensive products they're often produced in the global South where wages are lower.

00:06:27: When we talk about upgrading it means that developing countries try to earn more money by moving into those production steps that yield higher value-added.

00:06:35: From assembling Electronics to developing own products or establishing own brands for example.

00:06:42: So China is obviously one of the countries that managed to climb up the value chain letter and Gary do you have examples of other countries that reached value chain upgrading absolutely I think one of the most successful.

00:06:54: Countries actually in this post-war era I mean first really was Japan it was a leading industrial power became a major exporter and so part of globalization was how countries.

00:07:06: Developed export-oriented strategies of growth South Korea,

00:07:11: is probably the most successful emerging economy in terms of having its own multinational companies its own technology development,

00:07:22: and very extensive Supply chains India and certain areas like Pharmaceuticals and offshore services.

00:07:29: Is a big player in terms of creating technology and moving up Supply chains so what I see is that different countries including Brazil and agriculture Mexico and Manufacturing.

00:07:41: Pick different key industries that they use,

00:07:44: as a way to move into these value chains and the key is moving up that technology ladder and and eventually creating their own Brands their own,

00:07:54: jobs and introducing new kinds of Innovations into the global economy Tillman you want to add on that I think that's a very good description and.

00:08:04: Of course we have been working on a number of countries for example comparing,

00:08:10: how Costa Rica moved from simple clothing assembly,

00:08:16: upwards to now working with Intel and other electronic companies and moving from employing badly paid female workers to now employing engineers in a much more sophisticated

00:08:29: industry and seeing how this happened in Costa Rica,

00:08:33: but then seeing that the same industry in Honduras is still stagnating at the same level since 30 years without any sign of upgrading that shows how different.

00:08:42: Trajectories can be shaped by smart policy making in this podcast we want to focus on sustainability in Supply chains.

00:08:49: Gary how can you theory help to make Supply chains more sustainable I think a key for sustainability is one good.

00:08:58: Economic policy and planning so industrial policy smart industrial policy is a key.

00:09:04: And then I think sustainability is also moving more towards issues of environmental upgrading.

00:09:12: And social upgrading and coupling that with economic upgrading and I think that's one of the biggest changes in GVC Theory.

00:09:19: Is expanding the concept of upgrading from just being a better exporter or creating more jobs,

00:09:26: into linking that with social advances and especially the sustainability goals connected to environmental upgrade.

00:09:35: You also talk about devel you chain governance you just mentioned that big companies have the power to change their supply chains,

00:09:42: and those of their suppliers what could be their incentives to make their added value more sustainable part of what companies are trying to do the,

00:09:52: the big branded companies and Multinational manufacturers is there they're being responsive to the kinds of pressures they're seeing.

00:10:01: Towards more sustainable development and they're focusing on using less packaging materials a great example is Walmart,

00:10:08: which supplies very heavily out of China.

00:10:12: And a company like Walmart the world's largest retailer told its Chinese suppliers that within one year they have to reduce their packaging materials by 25%.

00:10:23: Because Walmart has such Market power globally they're able to get first-tier suppliers to make those changes whereas often government policy pushing in the same direction.

00:10:34: Or nongovernmental organizations ngos don't have the same degree of success so part of what we've been seeing in global value chains is how big companies can be pulled into these.

00:10:47: Upgrading initiatives social environmental or economic.

00:10:51: And and move in some ways more quickly and more effectively in terms of their broad supply chain then policymakers can Tillman you are observing the social impacts of Supply chains from a perspective of developing countries.

00:11:05: If we take a step back and look at today's Paradigm of Supply chains from outside how sustainable are Supply chains.

00:11:13: Well the depends of course we are talking about very different Supply chains and whether we talk about agriculture or the automotive industry or what Gary just mentioned the sourcing of Supermarket chains or

00:11:26: Electronics or whatever industry so the sustainability problems are different in different industries of course.

00:11:33: Many are clearly becoming more sustainable especially in the rich countries.

00:11:38: As consumers and policymakers press companies to improve their practices and report on their sustainability programs for example the example that Gary just mentioned about Walmart this is probably mainly because they are,

00:11:52: company with a face to the customers so they want to show their customers that they are environmentally conscious so basically then they develop high standards within their company and pass it on through the supply chains.

00:12:05: And then thereby triggering change for example in China.

00:12:09: But of course then there are also problematic hotspots I mean for example the labor rights and the Garment industry in China or Vietnam or Bangladesh.

00:12:19: And the environmental conditions and and Corruption the oil and Mining Industries,

00:12:26: all of the use of dangerous pesticides on farms where even children work and cotton farming for example or Horticultural for export.

00:12:35: These are still things that we can't really tolerate and that's of course especially the case in developing countries where.

00:12:44: Legal enforcement is weak.

00:12:46: But even in the rich countries and Germany for example working in health conditions are sometimes incredibly bad for example in subcontracting firms and their construction industry.

00:12:59: Or for example labor conditions in the slaughterhouses that has been a big topic now and in the corona crisis.

00:13:06: So even here we do have that that kind of hot spots mmm but if we look at sustainability as such its cleaner production its social responsible jobs but we also want to have thriving companies and,

00:13:19: let's say good jobs for everyone and cheaper consumer goods is this all possible at the same time Tillman.

00:13:25: There are of course difficult trade-offs if you want to become more competitive,

00:13:30: then it may come at the expense of Labor conditions countries met,

00:13:35: try to become kind of to lower prices lower costs for example of production,

00:13:42: thereby externalizing environmental costs and that means basically polluting because they don't have to pay for it so if you raise environmental standards it can of course

00:13:52: affect your competitiveness if for example other countries other governments don't enforce the same standards.

00:13:59: But on the other hand as Gary said in the beginning though the big challenge is also to bring the green perspective decarbonization circular economy and those.

00:14:09: Actives into the hole,

00:14:10: supply chain discussion and we are doing a lot of research on where there are win-wins so so that you can reduce your environmental footprint become a kind of green company and at the same time make that a competitive advantage,

00:14:23: you already mentioned challenges a challenge for Supply chains could be the slow shift from linear production to rather circular production.

00:14:32: Let's have a listen the current model of our economy is mostly based on the extraction of resources.

00:14:39: They use for products and services and their disposal as waste.

00:14:44: The circle I economy aims to change that if we talk about circular economy we talked about how to minimize material inputs and minimize waste.

00:14:53: Way to achieve this goal is by working with a resource saving product design.

00:14:58: Products and material can be reused or recycled the switch to a circular economy will have an impact on Supply chains.

00:15:06: For example by reducing the need for Virgin materials but also by creating new opportunities for production steps and value-added.

00:15:14: Tillman the supply chains of the future with the clean environmental footprint can you give us a concrete example of how this circular economy,

00:15:22: will affect the role of developing countries firstly our current economic system is based on extracting natural resources processing them using them and then throwing them away.

00:15:34: From the field or from the from the copper mind the landfill.

00:15:39: And that model is clearly unsustainable we're using too many resources.

00:15:44: And so we clearly need to move towards a system where less materials are used where resource efficiency is higher,

00:15:53: where more things are reused and more things are recycled and the linear supply chain needs to be become a closed loop.

00:16:01: And that's well of course change economies in many ways.

00:16:05: It's an opportunity because reusing sharing reselling repairing recycling are all very.

00:16:13: So for developing countries where labor costs are low it may make sense rather than importing freshly produced things with Virgin inputs putting more emphasis in these kind of labor-intensive,

00:16:27: uses.

00:16:29: So it can become a big generator of employment especially in low-cost countries but will of course mean that fewer resources are extracted.

00:16:38: And that means that prices of many resources mineral resources for example will fall

00:16:43: which then may affect many countries negatively whose exports depend on for example on minerals

00:16:50: one of the central challenges for Supply chains is obviously the corona pandemic that has changed a lot lockdowns and availability problems have questioned.

00:17:00: Whether supply chain still do their job.

00:17:03: Gary looking at the global Supply chains do you think we will go back to the Paradigm of pre Corona times or do you expect a substantial change in how Supply chains are structured my own sense is,

00:17:16: Supply chains have actually begun to respond reasonably well but with a key lag,

00:17:23: sometimes 6-8 weeks and and then a pandemic that has an exponential curve that's too long that's created many many human problems but when we go post pandemic I think some of the,

00:17:37: a scale up strategies that have worked especially in terms of government policies that have tried to get.

00:17:43: Local suppliers to even partner across Industries to produce these Goods.

00:17:49: Those Solutions aren't sustainable longer-term and so I think as we move into this post pandemic period we're not going to go back.

00:17:58: To the pre Coronavirus,

00:18:01: normal we're going to have to have a new configuration of Supply chains and it's going to involve some elements of reshoring Supply chains that had been.

00:18:13: Externally oriented often with very heavy emphasis in Asian countries which are the largest scale lowest-cost supplier so some restoring is going to occur but I think that.

00:18:24: Companies in the US and in Europe often.

00:18:28: View the basic products that are needed like medical supplies as not particularly profitable,

00:18:34: and a global economy so I think we're going to have to be very countries are going to have to be very strategic and what you would try to,

00:18:41: research short to Germany or to the United States or to Japan for that matter I think another option that's going to come out as Regional sourcing or so-called nearshoring.

00:18:53: You're going to be building up Regional ecosystems around these key Industries and I think that's going to become more important but there's no doubt that,

00:19:03: that National policies are seeing the security risks,

00:19:08: of broadly extended and vulnerable supply chain linkages as something that has to be changed and so I think there's going to be a sort of a new normal that's created were these Supply chains have to be,

00:19:22: resilient but they also have to continue to be efficient and there are then trade-offs as Tillman mentioned.

00:19:28: Between security but also long-term efficiency and I think.

00:19:32: We're starting to see how some of that could emerge and that is a really critical role for the research Community to be in dialogue with the policy community over what these changes might look like going forward.

00:19:45: When we look at the working conditions in Supply chains we are far from having an equitable distribution of wealth especially in the raw materials sector but also in the textile industry and many others.

00:19:57: The wages are low shifts are long and unfortunately this is old news,

00:20:03: Tillman would you say that the pandemic has affected the working conditions as well yes it definitely has due to the global recession many many orders had to be canceled.

00:20:15: The fashion industry suffered a lot many industry workers in the clothing industry for example in Vietnam or Myanmar have been kind of displaced.

00:20:25: People are buying less flowers so export of cut flowers from Kenya Ethiopia declined a lot and,

00:20:32: and I mean there are signs of recession everywhere of course I mean that's in the global recession,

00:20:37: what's particularly problematic is that many of the suppliers are no weak bargaining position so for example if a big,

00:20:46: clothing companies sees its sales declining then it's an easy way basically tool cut off a subcontracting arrangement with the firm in Bangladesh for example,

00:20:58: and there should be kind of a better more Equitable risk sharing among these these companies Gary mentioned the word nearshoring

00:21:07: could the pandemic not also be a chance for some developing countries for instance being alternative production location I mean many Western countries are talking about diversification of their production.

00:21:21: In addition to China why not producing an African country instead for example well some big firms.

00:21:28: May want to diversify their risks as Gary said and Source from more countries.

00:21:34: So yes some big clothing companies already started kind of,

00:21:40: Africa procurement initiatives to become more independent from China for example that was already before the pandemic.

00:21:47: Then the trade war between the US and China has reinforced these trends.

00:21:52: And and the pain dabbing May of course be an additional reason to diversify on the other hand sourcing from Africa is generally considered more risky.

00:22:02: Because of political instability for example if you look at what's happening in Ethiopia right now which had just been building up and clothing export industry which is now of course,

00:22:13: off the global map and overall I expect that firms will rely more on automation.

00:22:20: To become less dependent on the human factor I mean a robot can produce regardless of Corona and regardless of lockdowns and so on,

00:22:29: and then firms will consider producing at home or near Shoring for example buying from clothes from Turkey rather than from from East Asia and in the case of European companies.

00:22:43: Well producing at home in an automated way or sourcing for example from China where automation is already very much Advanced and that's of course bad news for the rest of developing countries

00:22:54: Gary what do you think how will automation affect Supply chains automation is a problem,

00:23:00: both for developed and developing countries but I think it's often not as far Advanced as.

00:23:08: We would think I recently did a study on the athletic footwear industry with an emphasis on Adidas and Nike and Adidas has been a leader,

00:23:17: and trying to automate Footwear production and create factories in Germany and in the United States.

00:23:24: In order to respond more quickly to domestic demand and what they discovered was that the production hubs that were primarily in.

00:23:33: Asia China Vietnam Indonesia were very difficult to move into Germany because you could not get the,

00:23:42: different components even for a relatively simple product like athletic footwear and in the end,

00:23:48: they closed down their speed factories and Germany and Atlanta in the US,

00:23:53: and basically have returned to the Asian sourcing model but trying to encourage encourage some of the Asian suppliers to introduce some automation so I think automation is a reality it's coming

00:24:06: but it's much more likely and industries like electronics and Automobiles,

00:24:12: much more difficult to introduce in some of the labor-intensive industries like Footwear or garments.

00:24:21: So we talked about the effect that the corona pandemic had and still has on Global Supply chains how a circular economy will affect the Paradigm of how automation might create pressure on developing countries.

00:24:33: By the way on each of these three aspects we will have a deeper look and the upcoming episodes of this podcast.

00:24:40: But now we want to look at Solutions what can policymakers do to improve the social outcome of Supply chains in developing countries,

00:24:49: there is a specific debate on the European level but also in Germany in the Netherlands for example as well about due diligence.

00:24:59: Due diligence laws that might come into effect soon.

00:25:02: In this scenario companies would be held accountable for their supply chains but what is due diligence.

00:25:10: Due diligence means that all business partners in a supply chain comply with certain standards standards which can be checked.

00:25:18: Due diligence can foster human rights and protect the environment.

00:25:22: Is large companies are often criticized for buying products from suppliers that do not ensure good practices especially in poor countries.

00:25:30: Only very few cooperations voluntarily apply due diligence.

00:25:35: The European Parliament and several European governments there for preparing legal initiatives to make it mandatory France already has such a law.

00:25:44: Tillman where do you see the advantages and disadvantages of due diligence laws survey by the German government showed that most foreign invested firms did not care much about,

00:25:55: this to diligence or the basics checks in the supply chains so basically what they do is outsourcing kind of Social and environmental risks in the in the supply chain.

00:26:07: The idea of office supply chain law is to make you diligence mandatory I mean many countries have voluntary do tillage ins procedures but only some,

00:26:17: and by making it mandatory one would kind of basically ensure that all foreign investment firms look at their supply chains,

00:26:26: and that's a good thing.

00:26:28: But of course the devil is in the detail the law must make sure that it does not create a bureaucratic monster for medium sized firms.

00:26:38: And then show that void that companies say okay,

00:26:41: if I buy coke or from a small farmer family in Africa then I cannot avoid child work.

00:26:48: Because children work in African family Enterprises so then I may be taken to court for this and then I better by Coco from a big Plantation,

00:26:59: I don't Source from Bangladesh or if he Opia but rather Source from from turkey or so because it's too unsure and I don't want to be taken to court so we shouldn't have this kind of unintended consequences,

00:27:12: but other than that I think it's due diligence law makes a lot of sense.

00:27:17: Gary what is your position on that do stronger supply chain laws regulations and tougher standards make sense I think they make sense and I think they can be.

00:27:27: Enforced better in some countries than others but the concern I would have is that the way Supply chains are structured.

00:27:36: Companies have been able to get around these laws by,

00:27:41: sourcing production elsewhere so I think we've had that classic sort of cat-and-mouse game of you try to regulate and you put in place,

00:27:50: important regulations and then companies try to escape them I I think that the due diligence regulations,

00:27:58: would have the greatest impact if in addition to National regulations or policies.

00:28:06: We use pressures coming from consumers and other civil society organizations by making it in the interest the self-interest of the leading companies,

00:28:18: to do these kinds of things rather than external regulation and I think one way this could start to happen.

00:28:24: Is that since we talked about Regional ecosystems I think since 2008 9 when we had the big financial crisis a lot of the larger economies are.

00:28:36: Are much more skeptical of export-oriented industrialization as a long-term growth model because you can't rely on,

00:28:44: trade along to develop economies and they're starting to turn inward you see that in China you see that in India Mexico and other large economies.

00:28:53: Inward to the domestic economy to the regional economy and I think first-tier suppliers not the big multinational companies but big domestic firms.

00:29:03: They're the ones that have to internalize a lot of these same objective so I think as Supply chains turn inward.

00:29:10: We have two that may be one of the key ways that these policies of due diligence will have more impact because the domestic economy itself is where you can create a lot of the incentives,

00:29:23: to follow these policies and.

00:29:26: You won't be able to escape by going to another country if your key markets are much more focused on domestic Supply or Regional Supply.

00:29:37: Gary the research you're doing how do you translate the results into public discussions and inform policymakers.

00:29:45: I think one of the the most important issues is to take what looked like bigger trends.

00:29:52: And make them very concrete and I think one of the ways to make these policy issues more tractable is to start up highlight that.

00:30:03: The trend as I see it in these in these value chains is too,

00:30:07: continue to reduce Geographic scale they've gone from being very Global in the 1990s and 2000's to being more Regional in the 2010s and I think in the 2020s what I'm seeing in a lot of the studies around the world,

00:30:21: is it value creation and value capture is becoming much more local,

00:30:26: cities and City governments or state and provincial governments are actually,

00:30:32: taking on the mantle of being policy innovators and if we can start to get some of these supply chain and policy Dynamics.

00:30:41: Recast at more local levels then I think we have a chance for very very exciting experimentation around sustainability around due diligence around,

00:30:53: new kinds of jobs and how the digital economy can create value so it to me.

00:30:58: If we can make the supply chain value chain conversations much more local.

00:31:04: We can actually have a bigger impact what about you Tillman how do you translate Research into public debate,

00:31:10: well this podcast is part of the newly-created research Network,

00:31:15: Global Supply chains and it's hosted by for institutes and the network of global researchers like Gary and and we are all close to policymakers we all research-based think tanks.

00:31:28: So we are undertaking and stimulating research where we see important knowledge gaps I think we have highlighted.

00:31:34: Many of the societal challenges today that are really important to investigate and we're policy Solutions are needed we organize conferences

00:31:43: sometimes workshops behind closed doors for policymakers we often work with with agencies like development Banks and Technical cooperation agencies.

00:31:53: And we write or we commission policy briefings or confidential reports to Ministries about for example how to design the supply-chain law.

00:32:03: We started a new blog will have an annual Flagship report starting in 2022 that condenses policy lessons derived from from research.

00:32:14: And we have this new series of podcasts of course as one of the media to to really engage with the wider public.

00:32:21: Supply chains a big issue and we will be following the debate around Supply chains here on this podcasts we will provide you with the leading experts on different aspects of Global Supply chains

00:32:32: so far thank you for joining us Gerry giraffy Godfather of the value chain Theory

00:32:37: and director of the global value chain Center at Duke University and Tillman Altenburg program head of the German development Institute,

00:32:44: thanks to our guests and all of you listening my name is Nicholas Martin and in the upcoming episode we talk in detail about how the pandemic changed Global division of labor,

00:32:55: and have a deeper discussion whether re-nationalization of production is a viable option for our future stay tuned and stay safe.

00:33:04: Music.