Apparel Sourcing Intelligence - Worldwide

UK makes supply chain transparency mandatory for almost all businesses. Wherever they are

In our view, the UK government’s Modern Slavery Act has profound implications for virtually all major garment buyers, sellers and manufacturers – however small their UK sales are.

The UK government announced on July 29 that all businesses operating in Britain with global sales over £36 mn ($56 mn) will need to make an annual public statement of its plans to eradicate slavery and human trafficking throughout their supply chain. The requirement covers all subcontractors to virtually all worldwide apparel retailers – and to many other players in the industry..

The UK Modern Slavery Act requires all businesses with sales over £36 mn and any operations in Britain to prepare an annual report outlining the steps it has taken to eradicate slavery and human trafficking from the whole of its supply chain. The requirement is substantially more sweeping than any other supply chain disclosure requirement anywhere else in four ways:

  • It affects  any business operating in Britain with global sales over £36 mn. This includes any business (like AliBaba) quoted on a UK stock exchange and certainly includes virtually any retailer with internet operations aimed at the UK. It remains uncertain whether it includes foreign retailers with only mail order businesses delivering to the UK – but practically all apparel retailers, however small their UK operations, are covered by the Act.
  • It includes suppliers of both goods and services. So it covers working conditions in a credit card company’s Bangalore call centre, for example.
  • It covers the whole of a supply chain. For all apparel retailers, for example, that includes how cotton is harvested in Uzbekistan: for all retailers, it includes suppliers like credit card companies and freight businesses – and as a result, employment policies in call centres, docks and haulage companies many layers down from a New York or Tokyo head office.
  • “Operating in Britain” does not just mean sales in Britain.  A UK stock market listing, a European regional office in London, a buying office or a sales office constitute “operating in Britain”. The Act affects Amazon, Ali Baba, Macy’s, Li & Fung and China’s Dishang Cherry: possibly the world’s largest garment maker, but subject to Britain’s Modern Slavery Act because of its Yorkshire sales office.

Though the Act comes into force on July 31, the supply chain disclosure requirements do not require immediate report-writing. In our view, though, they do require any apparel-related business with global sales over £36 mn to review its sourcing and disclosure strategies now. The practicalities are:

  • All liable businesses must contain a prominent link on their website to the supply chain declaration.
  • The disclosure requirement begins to be effective from October 2015. The date from which a published statement needs to be made has not yet been announced: most commentators think that firms with April-March financial years will need to make a disclosure statement with the publication of their F 2015/16 final accounts. It is not yet clear whether a statement will be needed for the financial year ending December 2015 – but they will be needed for years ending after early 2016
  • It will be perfectly legal to announce that no steps have been taken to eliminate slavery. The UK government’s belief is that the PR effect of such an announcement for most major retailers would be commercially devastating, and we broadly agree.
  • The government has also hinted that it will not expect immediate minutely detailed supply chain analysis. Activists may be less forgiving.
  • But publishing inaccurate or misleading declarations will be a criminal offence.

So practically every substantial apparel retailer – even businesses like Ali Baba with almost no sales in the UK, or like Macy’s, still testing the waters with a site pricing in GBP – will need to decide how to handle this.

It is important to stress that there is no ingenious way out of the problem. Any business with direct sales over £36mn, or with subsidiaries’ sales adding up to £36 mn, is affected if it does business in Britain.  Pulling out of Britain – in theory an option for Li & Fung, Dishang Cherry or Ali Baba – would now be an implicit public admission of an unsupervised supply chain, and an immediate invitation for persecution by activist groups.

Nor, we suspect, is PR waffle likely to help.

The only realistic options, in our view, are to install credible supply chain auditing (if a business hasn’t already) or to admit there isn’t any yet, but that there is a realistic timetable for developing one. By mid-2016, there are likely to be a significant number of public admissions of not-quite-perfect supply chain auditing, so most medium-sized businesses with limited UK visibility are unlikely to attract much hostility if theirs is among them.

Businesses most vulnerable are likely to be those liable to underestimate the problem. Among multi-billion businesses in apparel, the complete supply chains of Amazon, Li & Fung, Dishang Cherry and Ali Baba/Taobao (and their suppliers) are now subject to legal scrutiny in the UK on a scale they have never before been exposed to. For conventional large retailers like Walmart, Primark or Macy’s, though, the Act mandates little more than they do already.

Amazon, Li & Fung, Dishang Cherry and Ali Baba/Taobao could, in theory, publish a “we don’t know” statement – but it is impossible to imagine they could survive it.

Activists are particularly keen on persecuting Li & Fung (which they believe brands use to disguise shady manufacturers) and Amazon (which they see as a hard core tax-dodger)  – but will relish the opportunity to make Dishang Cherry and Ali Baba/Taobao liable to human rights requirements activists think they evade.

The Act may or may not reduce modern slavery. But it opens virtually every serious operator in the apparel industry to scrutiny at a previously unprecedented level. And subjects fringe players to the costs of serious supply chain audit they have so far left to mainstream retailers.