Social Compliance Audits in China: By Renaud Anjoran

Renaud Anjoran, the founder of Sofeast in Shenzhen, is a well-known expert in quality assurance and factory audits. In this article, Renaud shares his insights in a topic that is more relevant than ever to importers: Social Compliance. Keep reading, and learn more about the various Social Compliance Audit protocols and the situation differ between major industries – including Textiles, Electronics and Toys. In addition, he also explains why so many suppliers fail Social Compliance Audits. While many business owners assume that the main issue, and risk, is underage labour, that is not the case.

Why are Social Compliance Audits (SCA) necessary when doing business with Chinese manufacturers?

There are several reasons why Western importers need their suppliers’ factories to be audited for social compliance.

First, consumer brands are under intense media scrutiny. Journalists generally don’t investigate in what conditions certain products are made, but from time to time they surface some information that causes a scandal. Think Nike and child labor, or Apple and the suicides at Foxconn. The key here is to know about potential scandals and push suppliers to act.

Note: This is not only valid for multi-billion dollar brands, and it doesn’t only impact public relations ratings. Imagine a factory catches fire, killing tens of workers, and your brand’s labels are found among the debris. This blow might be fatal to your brand.

Second, more and more retailers ask for social compliance reports. If you purchase products from Chinese suppliers and sell them to retailers, the time might come soon, if it hasn’t already come, when they ask you to prove that production is taking place in responsible conditions.

Third, most importers in some industries, for example, luxury goods, use social compliance audits as records of their good social standing. It is a marketing advantage.

In any case, buyers can do the audits themselves or subcontract that work to specialized agencies, but they should not rely on their suppliers to self-declare the situations. From my experience, the result is even less accurate than asking for quality data.
My position is that social compliance audits can be a useful tool if importers have the right approach. More on this in the last question below.

Do you normally get requests from overseas buyers vetting new, potential, suppliers, or from Buyers who want to audit their existing ones?

The pattern I have observed is as follows: a small or midsize importer tends to book quality system audits, not a social compliance audit when selecting new suppliers, and worries about social compliance when one of their customers have new requirements in that regard.

Large importers often require a social compliance audit (SCA) for each new supplier. Generally speaking, only companies that worry about their brand will vet new suppliers based on an SCA.

Are Social Compliance Audits (SCAs) based on standardised protocols, or based on the Buyer’s own requirements?

We see both situations. But all social compliance audits have roughly the same scope.

A few large auditing agencies, such as Bureau Veritas, Intertek, UL, SGS, and a few others, are on the big retailers’ (or big brands’) lists of authorized auditing bodies. They typically conduct social compliance audits based on those big buyers’ proprietary standards.

The social compliance audits we perform are usually based on our own standard. Sometimes we conduct pre-audits (to show an importer what the real problems are before the retailer/brand sends auditors). In any case, there are differences between big retailers/brands’ checklists, but these differences are minor. They are all based on SA8000 and on local law. All auditors tend to focus on the same issues. Some have stricter requirements for some individual points. For example, Wal-Mart sees fire safety issues as very serious. The factory is automatically down-graded from green to orange even if they find a minor fire safety issue.

There are also third-party certifications. A manufacturer can apply to be certified as compliant to a certain standard. Their purpose is to demonstrate compliance and avoid being audited again and again by multiple customers. Here are a couple of examples:

• SA8000 – very tough. The result is passed or failed. A very small proportion of factories in China is SA8000 certified. (Read More)
• BSCI – they issue a report with a rating (A, B C, D, E, F). Some buyers accept a C, other accept a D. (Read More)

What do your auditors look for when carrying out a Social Compliance Audit?

First we need to check what processes are done internally, at least, some of the time, as compared to those subcontracted. In many cases, the exporting factory only adds little value – and most of the processing is done by sub-suppliers. This is fine but the importer needs to know what part of their supply chain is being audited. In some cases, the sub-suppliers also need to be audited.

Second, we follow a standard checklist based on the SA8000 standard. I listed below the main points it includes:

1. Underage workers.
2. Forced labor: For example, many textile products are made in prisons in China, and the ability to take a leave, no disciplinary penalties for workers, etc.
3. Compliance with local labor law: This includes many points. For example: are employees paid a higher rate for overtime, Sundays, and holidays? Do they work more than the total allowed number of hours in a week? Do they have sufficient rest days? Are employee benefits paid as per the law? This section can involve a significant amount of work depending on how much cross-checking (between production numbers, logged hours, payroll, etc.) needs to be done.
4. Fire safety: are there obvious fire hazards, is it easy to escape, do they conduct fire drills, is there the required equipment (extinguishers…)?
5. Personal safety: are employees adequately protected, are there obvious safety hazards, is training appropriate for operators handling machines, etc.

Finally, we also have a section about collaboration with the auditor. Some factories have very elaborate systems to pass this type of audit. If all the evidence presented looks good but we have suspicions that this evidence was fabricated, a common occurrence, we need to tell our client about it.

What is the general SCA ‘success rate’ when auditing the ‘average manufacturer’ in the Pearl River Delta?

We usually don’t talk about success/failure when it comes to these audits. Let’s break it down a bit further:

• Zero-tolerance issues, for example, child labor, slavery and prison labor, are very rare.
• Major issues, for example paying a salary under the local law’s requirement, giving penalties to employees and fire safety issues, are found more than 50% of the time.
• Minor issues, such as having operators work less than 60 hours a week but above the legal limit, are found in nearly 100% of cases

How does the SCA success rate differ between industries?

Highly automated industries such as electronics tend to fare better. Garments and furniture factories tend to be the worst because of the very manual processes.

Size also plays a role. Bigger factories tend to get better audit reports, for the simple reason that big orders originate from big customers, and these big companies have generally been performing audits and pushing their suppliers to improve for many years. Part of this is a real improvement, better skills in hiding the truth. On the contrary, many small factories have never cared about social compliance and tend to receive very low audit scores.

If a supplier fails to pass an SCA, is it worthwhile to support the supplier implementing work conditions and workplace safety?

Let’s say you work with a new factory. If the SCA audit report is very bad, better avoid this factory. There will be too much work for you down the road.

If you audit a regular supplier and the audit score is low, it can make sense to keep working with them if they are open to doing improvements and if they listen to you. More about this soon. In other words, don’t entertain any hope if the factory owner has a backward mentality and is very short-term focused, or if you purchase 0.5% of their annual capacity.

Is it your impression that work conditions and workplace safety are improving?

Yes, the situation is improving in China, due to three factors.

1. It is mostly driven by market forces. Demographics is changing and factories now have to persuade potential employees to join them.
2. New factory buildings need a permit from the government, so most new factories are in compliance with fire safety regulations. Sometimes the government forces factories to spend money and make changes in the building, for example, to open additional entrances.
3. The push from big customers for improvements in social compliance is also contributing to the improvement, but to a lesser extent. Unfortunately, many factory owners see social compliance as a cost of doing business. The logical response is to hide problems, show fake evidence, and bribe auditors.

Fortunately, other factory bosses see social compliance as a way to hire and retain employees more easily. The cost of replacing a production operator is about 3 months of his/her salary (in work hiring and training the new operator, lost production, and lost quality). So there is a business case to be made for better social compliance.

Local governments generally don’t interfere when it comes to the number of working hours. There is often a conflict: on the one hand, employees want to work overtime and earn more, on the other hand, China’s labor law puts a cap on the number of working hours. The good news is, many factories now have their operators work less than 60 hours a week. That was not common 10 years ago when only toy factories were known to do so. Again, market forces are giving more power to employees, and mentalities are changing slowly.

How can your company help importers carry out Social Compliance Audits in China?

Based on what I wrote above, the logical question is: do audits really work? Do they improve the workers’ situation? As often, the response is “it depends”.

Let’s describe a few different situations and let’s see how they play out. I am assuming you are the importer.

Situation 1: your board asks for a report on social compliance throughout your supply chain. They want to see numbers such as “78% of our key suppliers have rated at least 65%”, and these numbers are up every year. Either you use our standard checklist, or you give us your own set of weighted checkpoints. We can do the job, but in itself, it will do very little to improve your supply chain. You can also draft a code of conduct for your suppliers, but it won’t have much impact without significant on-site coaching.

Situation 2: you are about to get a big contract with a large retailer. You have never bothered about social compliance before. You say to your supplier: “if you pass their audits, you can get about 1 million USD a year in new business”. I would say you are not starting on the right foot. An agency like ours can help you do a pre-audit and evaluate the gap between the current situation and what the retailer demands. If that gap is wide, the factory will naturally try to cheat (many “consultants” can be found on the internet for helping them) rather than working on the fundamentals. Persuading the factory to take another path will be quite challenging.

Situation 3: same as situation 2, but the retailer says explicitly that progress over time is what they want, rather than a nice report on day 1. In this case, in addition to a pre-audit, the factory will need some coaching… as well as some regular visits from your side (to keep the pressure on).

Situation 4: based on your company’s values, you intend to work with socially responsible partners. In this case, the most important is to find factories that are willing to make progress and that will see you as a good customer. The key is to work on their fundamentals and increase their labor productivity through process improvements. A “light” annual audit will confirm there are improvements, but it should not be a goal in itself. Ideally, I would replace the SCA by a wider set of KPIs that include safety, quality, productivity, on-time delivery, staff morale, among others. Once a factory owner sees the levers that impact his profit, he will tend to be more socially responsible.