Entangled in China

Undercurrents in China and global supply chains collided last week. On Friday, Swedish fashion retailer Hennes & Mauritz AB (H&M) was ordered by Chinese officials in Shanghai to fix a “problematic” map on its website. The issue is believed to be related to its depiction of the South China Sea, an area where tensions run high between China and countries in Southeast Asia. After the company attempted to rectify the issue in China, it came under fire in Vietnam for infringing on its maritime sovereignty in the region.

Earlier in the week, H&M was also embroiled in controversy in China for expressing concern about reports of forced labor in Xinjiang. On Wednesday the company released a statement reaffirming its commitment to the country after a backlash in Chinese state media, Chinese e-commerce companies dropped the brand, its stores began disappearing from mapping apps, and landlords began closing stores. [1] The two stories collide as tensions escalate in the South China Sea and the E.U., U.S., U.K., and Canada impose sanctions against China over alleged human rights abuses in Xinjiang. The collision highlights the complex geopolitical and consumer landscape global brands must navigate, and the difficult choices they face if they want to sell their products in China.

The South China Sea is one of the world’s busiest shipping corridors. Approximately $3 trillion in goods and almost 40 percent of trade with China transit the waterway each year. [2] It is bordered by Vietnam, Malaysia, and Singapore to the west and the Philippines and Brunei to the east. China claims more than 80 percent of the waters based on a map from 1947 which shows a dotted line—the so-called “nine-dashed-line”—extending 1,100 miles south of Hainan Island, China’s southernmost point. Vietnam, the Philippines, and other countries in the region claim parts of the same waters and have been in talks with China under the United Nations Convention for the Law of the Sea (UNCLOS) for more than a decade. During that time China has built ports, lighthouses, runways, and military installations in the Spratly archipelago, a group of islands, rocks, and reefs centrally located in the South China Sea that is occupied by other countries in the region. [3]

Vietnam and the Philippines have been the most recent critics of China’s activities in the South China Sea. Vietnam also has laws that bar companies from using images that infringe on their sovereignty. In 2019, the country halted screenings of the movie “Abominable” which contained a map with the nine-dashed-line and fined Volkswagen for showcasing a car with a navigation app that had a similar map. [4] H&M was criticized in Vietnam this weekend after fixing a map on its website that Chinese authorities said violated Chinese laws and regulations, and compounded the company’s challenges in the region after coming under fire for its stance on reports of human rights abuses in Xinjiang, China.

Founded in 1947, H&M is one of the world’s largest fashion retail companies. Last year, it sold over $21 billion in products online and in almost 5,000 stores located in 74 markets. [5] Sustainability has become central to H&M’s brand and the company has made a concerted effort to infuse this value in its supply chain. Last year, over 64 percent of the materials the company used were from recycled or “more sustainable” sources. It also sourced 100 percent of its cotton from organic growers, recycled materials, or in a “more sustainable” way. While there are challenges with many of the materials used in fashion products, cotton has been a recent flashpoint in China.

Xinjiang, or the Uygur Autonomous Region of Xinjiang, is a border region in northwestern China. It was annexed by China in the 18th century Qing dynasty and is the country’s largest political unit. Its indigenous population of Uighur (also spelled “Uyghur”) are agriculturalists and pastoralists who inhabit the foothills surrounding the region’s mountain ranges or its vast arid plains. Following the Cultural Revolution (1966–76), Han (Chinese) from other parts of China began developing oil, natural gas, and other industrial operations in Xinjiang. The canals and reservoirs they built tripled the amount of arable land in the region making it one of the country’s leading producers of grains, fruits, and cotton. [6] Xinjiang is now connected to many global supply chains including almost half of the world’s supply of polysilicon used in solar panels and a fifth of the world’s cotton supply. [7]

Economic and political disparities between Han and Uighur in Xinjiang precipitated occasional protests and disturbances in the region. In 2017, reports of escalating abuse and repression of Uighur and other Muslim minorities began to surface. In 2019, a panel of UN experts warned that China’s counterterrorism law was being used to justify violations of basic human rights and freedoms in Xinjiang. [8] Early last year, the Australian Strategic Policy Institute (ASPI) released a report with evidence of a significant increase in the number of “re-education camps” in Xinjiang. Research and human rights groups believe these camps are run as a high-security prison system for control, indoctrination, and forced assimilation. The ASPI also found evidence of a labor transfer program in which at least 80,000 Uighur were sent to work in factories in other parts of China. These factories serve more than 80 well-known brands including Apple, Nike, BMW, and H&M. According to some estimates, more than 1 million Uighur and other minorities have been subjected to forced labor and other human rights abuses in Xinjiang. [9]

Cotton is where Xinjiang and H&M converge. Most of the cotton from the region is used in China where it is spun and mixed with cotton from other areas to make yarn, textiles, and apparel. These intermediary products are woven into final products in Vietnam, Bangladesh, and Honduras for the global fashion industry. [10] In September, H&M and other brands expressed concern with the reports of human rights abuse in Xinjiang and committed to severing ties with suppliers that source cotton from the region. [11] The U.S. Congress also began debating legislation that would prohibit certain imports from Xinjiang and impose sanctions on those responsible for human rights violations there. [12] Several companies—including Apple, Nike, and Coca-Cola—came under fire after a report on their lobbying efforts to water down the bill in Congress. [13] By December, a BBC report found evidence that hundreds of thousands of Uighur and other minorities were forced into hard, manual labor in Xinjiang’s cotton fields. [14]

The international response to reports of human rights abuse in Xinjiang reached a tipping point last month when the E.U., U.S., U.K., and Canada officially imposed sanctions against Chinese individuals and entities “in connection with serious human rights abuses against ethnic minorities” in Xinjiang. [15] China’s reaction to the sanctions was swift, imposing its own sanctions against E.U. individuals and entities. [16] H&M and other brands also faced a backlash in Chinese state media, e-commerce platforms, and mapping apps hurting their business in one of their most important markets. Chinese officials also ordered H&M to fix a map on the company’s website entangling the company in forced labor in Xinjiang and tensions in the South China Sea.

For global brands like H&M, the economic and social responsibility friction in China presents a new challenge. With the internet and technologies like DNA tracing and chemical analysis, supply chains are becoming more transparent—whether brands want them to or not. At the same time, China has taken a firm stance on issues like Xinjiang forcing brands to make a choice: accept the way it chooses to run its economy and sell products in one of the biggest markets, or support social (and environmental) responsibility for the products in the global market and face challenges trying to sell in China. [17] Recent tensions with Xinjiang and the South China Sea are merely the prologue of a debate that will have profound implications for corporate environmental, social, and governance (ESG) responsibility in the coming decade.


Have thoughts or feedback? Anything I missed this week? Email me at kellen@supplychainweekly.com. You also can reach me on LinkedIn and Twitter.

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References

[1] https://www.bloomberg.com/news/articles/2021-04-04/h-m-s-troubles-in-asia-compound-over-problematic-map-of-region

[2] https://chinapower.csis.org/much-trade-transits-south-china-sea/

[3] https://www.bloomberg.com/news/articles/2020-06-02/why-the-south-china-sea-fuels-u-s-china-tensions-quicktake

[4] https://www.bloomberg.com/news/articles/2019-11-05/volkswagen-punished-by-vietnam-for-car-with-disputed-china-map

[5] https://hmgroup.com/about-us/h-m-group-at-a-glance/

[6] https://www.britannica.com/place/Xinjiang

[7] https://www.bloomberg.com/news/articles/2021-02-10/why-it-s-so-hard-for-the-solar-industry-to-quit-xinjiang; https://www.bbc.co.uk/news/extra/nz0g306v8c/china-tainted-cotton

[8] https://www.ohchr.org/Documents/Issues/Terrorism/SR/OL_CHN_18_2019.pdf

[9] https://www.csis.org/features/combatting-human-rights-abuses-xinjiang

[10] https://www.csis.org/features/combatting-human-rights-abuses-xinjiang

[11] https://www.ft.com/content/7d1943b0-07f0-4c46-979a-9d1294886ea3

[12] https://www.congress.gov/bill/116th-congress/house-bill/6210; https://www.congress.gov/bill/117th-congress/senate-bill/65

[13] https://www.nytimes.com/2020/11/29/business/economy/nike-coca-cola-xinjiang-forced-labor-bill.html

[14] https://www.bbc.co.uk/news/extra/nz0g306v8c/china-tainted-cotton

[15] https://www.bloomberg.com/news/articles/2021-03-22/eu-imposes-sanctions-against-china-over-human-rights-abuses

[16] https://www.bloomberg.com/news/articles/2021-03-23/china-lashes-out-at-u-s-allies-in-bid-to-thwart-biden-strategy

[17] https://www.ft.com/content/00fc4301-8613-408c-8011-6d6e1067f40e