Expert: Auto Industry Needs Deeper Supply Chain Visibility to Respond to UFLPA

The Automotive Industry Action Group, a forum for auto industry companies to collaborate on supply chain and corporate responsibility issues, is vetting service providers that say they can provide visibility deep into supply chains, as well as educating companies that may not realize how urgent it is to uncover whether any of their suppliers' suppliers have a nexus to Uyghur labor in China.

Tanya Bolden, AIAG vice president of supply chain and corporate responsibility, products and services, said that detentions of goods have already touched companies, even though the number of detentions has been small. In the combined automotive and aerospace sectors, through Dec. 4, of the 59 shipments detained, 42 were denied entry, three released, and the rest are under review. Roughly $4 million worth of goods have been detained.

In comparison, in just November, about $207 million worth of auto parts were imported from China. Only one Uyghur Forced Labor Prevention Act automotive detention was outside China, with about $200,000 worth of Thai goods detained.

Although detentions haven't been increasing yet (see 2309210025), Bolden said the industry expects they will.

"We’re not resting on our laurels, because we feel CBP is going to ramp that up," she said in a telephone interview. She said that solar panels weren't on CBP's radar until a Sheffield Hallam University report about polysilicon. Now the category that includes solar panels is by value the highest category of detentions.

Bolden said the British university produced "a very scathing report" on the auto sector's ties to Uyghur labor.

The auto industry has experience with tracing supply chains back to raw materials because of conflict minerals laws. As auto companies looked at where their parts suppliers sourced tungsten, tantalum tin or gold, they recognized "once a material is smelted or refined you don’t know where it’s coming from." So AIAG worked with smelters, encouraging them to participate with smelter audits, and employing "bagging and tagging schemes," making it possible to track gold to ensure it came from a mine that didn't include warlords.

Trying to find goods linked to Uyghur forced labor is even more challenging. China's anti-foreign-sanctions law forbids companies in that country from cooperating with any audit that aims to uncover Uyghur forced labor, which China says doesn't exist. Sheffield Hallam allegations of forced labor included a few dozen Uyghur workers sent to a factory in Eastern China to work on electronics or wire harnesses.

"That’s extremely challenging for a company" to detect, she said, especially because the good is in another part of the world, and further down in the supply chain.

The political sensitivity of Uyghur issues in China meant that when AIAG "wanted to talk about the issue, we knew that we could not to speak to it from a Uyghur standpoint because that’s a red flag. We looked to speak to it in broader terms. Is that successful necessarily? Not always," Bolden said.

She said some companies are having some success in learning more about Chinese companies' workforce and supply chains, depending on how they frame the issue.

"Industry has begun to get visibility to certain points, but we’ve got to go further," she said.

Large suppliers have delved into these compliance issues, but some companies in Mexico and Southeast Asia, or even 100-person shops in the U.S., don't think UFLPA touches them.

"There are certain companies that aren’t aware of the Uyghur situation, and the compliance required. There are certain companies that don’t understand they have a role in this. They may not understand why they’re getting the requests they are getting from their customers, or their customers’ customers, and aren't treating it with the urgency" it deserves, she said.

These sorts of companies may say to themselves: "Well, I know I don’t purchase from China, so I am not a problem," she said. But if those companies aren't thinking they're a problem, they can't say with confidence the same about their supplier's supplier. Or they may purchase components from a distribution center, and even though that center is local, they don't know where all the parts were made. Forced labor risk could be down in tier seven, she noted. "We know the tiered suppliers further into the supply chain is where we need to make sure we have that visibility."

"Going back to that small mom-and-pop shop," she said, it doesn't have dedicated resources for trade compliance, so companies are soliciting business from them, offering supply chain tracing.

AIAG, which has 5,000 members, many of them small to medium-sized suppliers, is telling its member companies what questions they should be asking, and what functionalities are necessary to provide the detail CBP would need to clear a detained shipment.

"We need to make sure these service providers aren’t forgetting them in this situation," she said, including pricing at a level that a small company can afford.

The group recommends NQC, and Bolden said she expects in the next few months, AIAG will have another one or two preferred providers for its membership.

In March, AIAG is holding an event in Michigan with a Perkins Coie attorney who will share case studies and other insights on UFLPA. Bolden said the attorney has had many clients -- not just in the auto sector -- whose goods have been detained and who have tried to show CBP that their goods didn't have a link to Uyghur labor.

Although the auto industry has some advantages others don't in preparing for UFLPA, with its International Material Data system, its experience with reporting on conflict minerals and its attention to the geopolitical risk of overconcentration in China of critical minerals, Bolden said that doesn't mean it has solved the challenge.

"We have some lessons learned and some best practices to build on," she said. "Is it enough to get us there? Not quite."

This differs from past efforts to ensure that supply chains didn't contribute to human rights or environmental violations. Bolden said that in 2006 there were allegations that leather that was manufactured in Brazil was damaging the rainforest, and was being made into seat covers for autos. "Years ago, it began with reputational risk, but it quickly moved over to compliance risk, and trade compliance risk. Companies had to better integrate their operations to address these risks," she said. "If you're focused on reputational risk, you’re looking to those functional areas within a company -- community affairs, marketing and communications. But once you get into a compliance issue where goods may be stopped at the border, it starts to touch several more functions at a company."

If goods are stopped, your bottom line is affected, and your relationship with your customers is strained. "It’s definitely a ripple effect," she said.

If a supplier had more than one supplier for a component it needed for production, disruption would be far less if one stream of imports were stopped due to suspicion of forced labor content. But, given the financial pressures on the auto industry with the transition to electric vehicles and the work on autonomous vehicles, plus the more generous labor contracts that were just agreed to, that's not likely, Bolden said.

"I was a buyer once upon a time, and dual sourcing was something that was often used years ago, but in the effort of efficiency, companies went single source," she said. "I have not heard of a concerted effort by our companies to dual source."

Creating a second set of tooling for another supplier is very expensive, plus the second supplier may be in a higher-cost location.

In addition to the industry's expectation that CBP will increase detentions for the sector's imports, the Senate Finance Committee questions regarding forced labor, which began 13 months ago, caused a stir, especially the second round of letters to Tier 1 suppliers (see 2303280069).

Automakers "are oftentimes called before Congress for various issues, but not so much the Tier 1s," she said. "They were definitely talking amongst themselves on how to shape the reply. I know some of the executives did actually go to Congress."