“Glocal” Solutions to Standards and Monitoring
Randy Kritkausky, President of ECOLOGIA
The Problem of Scalability
ECOLOGIA has worked with a broad range of partners on the implementation of standards: small and medium-sized enterprises (SMEs); large multinational corporations; local, regional, and national policy makers; non-governmental organizations; and international standards making bodies such as the International Organization for Standardization (ISO). At every level, we see standards implementers struggling with the problem of scalability. Global and national standards that look good on paper often collide with economic and management realities found in the local workplace or regulatory system. Big ambitions don’t easily scale down to local conditions. Conversely, solutions that are tailored to the local level are often difficult to scale up to systems that link effectively and consistently with national or global demands. The gap between national and global standards and local implementers has become an abyss into which individual Chinese companies, sectors of whole industries, and the “Made in China” brand name are falling. The problem of scalability is more than a problem for policy makers, supply chains, and consumers. It has become a national economic security issue for China.
Variations on the Theme of a Regulatory System
International demand for more standards, higher standards, more standards enforcement, supply chain traceability, more standards compliance monitoring, and more product testing has increased in direct proportion to daily reports of new safety and health concerns associated with Chinese products. While stronger national and global regulatory systems could be part of the solution to problems in China’s supply chain, regulatory solutions will succeed only to the degree that they are supported by market incentives and networks of local social, political, and moral reinforcement.
The bad news is that the Chinese government does not have the components of such a regulatory system in place and does not have the financial or bureaucratic resources to create such a system immediately. Further, the product monitoring and standards compliance systems of the European Union and North America, the most developed on Earth, have proven unable to catch more than a small percentage of imported defective Chinese products.
The good news is that many of the components of a “regulatory system” do exist across China. They could be assembled into a highly efficient and cost-effective system for improved standards implementation and product monitoring in short order. The challenge is to combine currently existing components of a global standards system with emerging local elements of a social-political-moral rewards system. This solution would be “glocal”. By glocal we mean a combination and harmonization of global standards implemented locally, with sensitivity to unique local conditions.
Public - Private Partnerships in Standards Compliance Monitoring
Because so much of China’s economic growth is driven by the global market economy, much of its manufacturing infrastructure is already plugged into an international “regulatory” network. This network is partly governmental; for example, Chinese products must conform with European Union standards, various national standards, and even State of California standards. But it is also corporate and market driven; giant multinationals demand compliance with governmental standards and with their own corporate codes of conduct throughout their supply chains as a requirement for doing business. While numerous monitoring and compliance failures of this system are the subject of global media attention, the fact that the system works well most of the time is not widely discussed. ECOLOGIA advocates increasing our understanding of the success stories, developing a deeper understanding of the drivers for the production of safe and socially responsible products, and strengthening these drivers.
For example, we understand that the number of auditors and inspectors paid by multinationals to visit Chinese factories may equal or surpass the number of Chinese inspectors visiting factories. In many ways, these foreign inspectors have more powerful compliance sanctions, both negative and positive. Local inspectors are often caught in a conflict of interest over issues of negotiating fines and pollution permits, upon which their agencies depend for income, while having to answer to local officials for the economic impacts of their regulatory decisions. By contrast, foreign inspectors can and do deliver ultimatums about compliance with labor, environmental, and product safety codes, many of which are more strict than Chinese national standards. In cases of non-compliance they often work with the Chinese manufacturer to improve conditions. When this fails, they have a powerful negative sanction: termination of the contract.
Another example of potential “glocal” collaboration would be to share compliance information in order to provide local manufacturers with “regulatory relief”. Filing reports and monitoring are considerable operational expenses for many businesses. In the European Union and North America, discussions about standards compliance have focused on “regulatory relief” as a mechanism for reducing duplicate or excessive reporting. Companies making a credible case of voluntary standards compliance, such as independent third party certification to the ISO 14001 environmental management system, have been allowed to reduce the frequency and amount of expensive testing and reporting. They have also been provided with some leeway in deciding how to best invest in pollution reduction technology and management. The result can be a more rational allocation of scarce environmental management and pollution reduction resources based on intimate knowledge of local realities and needs rather than mere compliance with distant policies that may be disconnected from local realities.
We are certainly not suggesting that China’s regulatory system be privatized or outsourced to foreign customers of local manufacturers. However, it behooves Chinese governmental officials to explore new and innovative partnerships with foreign and corporate regulators who often embed requirements for compliance with national regulations and global standards in their contracts. Chinese regulators should not attempt to substitute global standards and enforcement efforts for their own initiatives, but rather should find ways of making them compatible and mutually reinforcing. Perhaps some Chinese regulatory requirements could be met by supplying data and compliance audits from third party verifiers. In this way, Chinese regulators could work with market forces of supply chain driven compliance.
The Highest Common Denominator
Some critics of China’s regulatory system see its failures as the result of a conscious attempt to create a lower cost and more economically competitive manufacturing environment. While there may be documented cases of this strategy being pursued as a policy at the local and regional level, this situation is more often an unanticipated consequence of regulatory failure than it is a national policy.
As American visitors, we have often been struck by the quality of Chinese products, which are manufactured to European Union standards and sold to European Union multi-national corporations. Rather than presenting examples of a “race to the bottom” and “the lowest common denominator”, the Chinese supply chain often represents a struggle to conform to “the highest common denominator” in the midst of conflicting standards and expectations. Imagine our shock when one manufacturer informed us that his more polluting and less safe products went to the USA, instead of to the European Union where product safety is more stringent! China can consistently produce safe products when customers demand it and when the value chain provides financial incentives.
We recommend that Chinese manufacturers develop marketing strategies that build brand names around the higher, if not the highest, standards in the marketplace, and that they negotiate more assertively for fair compensation for the creation of such products. A few additional cents per item may now appear to be a very acceptable investment in risk management and brand name protection for foreign manufacturers who have recently spent millions of dollars on product recalls. Market incentives and compliance with higher standards can be aligned.
Involving Local Stakeholders
The key to effective regulatory reform and “glocal” solutions is the involvement of local stakeholders, including community residents, workers and government officials. In exchange for their willingness to support consistently high standards compliance, workers and managers should have access to a share of the added value they help to create. This can be done through profit sharing and bonuses, and/or as community members benefiting from local projects supported by the company for which they work. In this manner, they will have a financial incentive to make certain that standards are consistently complied with throughout the entire manufacturing process. Chinese workers and managers will have to be re-trained to be more quality conscious on a daily basis, to break their traditional narrow roles and concepts of responsibility, and to begin encouraging more feedback across traditional lines of authority in the workplace.
Providing financial incentives is only part of the strategy for meaningful stakeholder involvement in standards implementation. Much of China’s manufacturing sector has been founded by entrepreneurs from rural towns and villages. Its managers and workforce are predominantly from this same traditional culture. Moral obligations involving kinship and social networks require that those with wealth share it with their native communities. These “tong”, or relational, obligations can become important tools for creating community based support networks for labor, environmental and safety standards implementation. This will happen if manufacturers and product customers encourage a sense of collective responsibility for the profitability of a company and link the company’s profitability to its consistent compliance with quality and safety standards.
Sharing wealth with one’s village and kin is a deep cultural value in China. We recommend that Chinese companies modeling compliance with high standards create community funds supported by part of their added value income. Local residents can play a role in deciding how the funds are to be allocated. These projects, supported by fair pricing policies, should then be made part of the product marketing of the foreign company. Retail customers can and should be educated to understand that what they pay supports schools, environmental, community and health projects as well as their own health and safety.
Local stakeholders can also be a valuable partner for local government regulators. Two decades of experience around the globe have shown us that local community residents have unique and valuable knowledge of local pollution and social impacts associated with manufacturing. These impacts are may not be visible to inspectors who often do not know that pollution equipment is only turned on for their yearly visit, or that manufacturing processes are temporarily altered for their benefit. Local residents know this. They also know where to find evidence of declines in fish stock caused by polluted water, or damage to trees and vegetation caused by air pollution. However, local stakeholders are more than unofficial enforcement officers. Local residents with specialized knowledge often have the ability to offer highly effective and creative low-cost solutions to problems and frequently provide resources, in the form of volunteer service, to implement them.
Closing the Supply Chain Loop
We can close the local-global gap in standards compliance if local workers, factory managers, regulators, and government officials understand that their efforts to produce safe and healthy products in an environmentally and socially responsible manner are benefiting them economically. They will confidently and consistently produce these products and comply with “foreign” and global standards when the connection is made to their welfare. Likewise, consumers living thousands of miles from Chinese factories will pay a few extra cents per product if they feel that this is an investment in their own health and safety. They will also be attracted to products that help to address global problems of poverty, health, and climate change when stories of positive local impacts are put on product labels or placed in stores.
Global policy makers, businesses and marketers need to think their actions back down to the local level if they want to be effective. Local entrepreneurs, workers and community members need to learn how to tell their stories in the global marketplace and negotiate their fair share of added value for environmentally friendly and safe products.
To provide feedback, please contact Randy Kritkausky at firstname.lastname@example.org