The 2023 German Supply Chain Due Diligence Act prioritises sustainable criteria in global supply chains. Prof. Andreas Stoffers, country director of FNF Vietnam, and Huyen Nhu Lanh, coordinator of the project at the Delegation of German Industry and Commerce in Vietnam spoke with VIR’s Luu Huong on the opportunities and challenges the new law provides for Vietnam.
How can German companies ensure sustainability under the German Supply Chain Due Diligence Act, and how should Vietnamese businesses adapt?
Lanh: The German Supply Chain Due Diligence Act (LkSG), in effect since 2023 and extending to companies with 1,000 employees in 2024, mandates risk and violation management related to human rights and the environment in global supply chains.
The law emphasises a “duty of effort” approach over strict standards. To comply, businesses must assess region and industry-specific risks, adjust contracts, and support suppliers in meeting international standards.
Many German firms demand such standards in their Code of Conduct, which can overwhelm small and medium-sized enterprises.
Vietnamese businesses should focus on compliance checks and prompt action in the case of violations. Complying is challenging and costly for both German and Vietnamese businesses, risking supply chain exclusion. However, adaptable companies that build trust can benefit, making Vietnam an attractive investment destination.
The supply chain law offers long-term advantages, including curbing violations and pollution, enhancing reputation, reducing costs, and expanding into new markets. Despite challenges like expenses and complexity, Vietnamese companies should prepare to seize these opportunities, bolstering Vietnam’s economic attractiveness and resilience.
How do you view the dual nature of the new developments, posing challenges and opportunities for Vietnamese businesses?
Stoffers: Compliance with this act presents significant challenges and costs for both German and Vietnamese businesses. There’s also the risk of supply chain exclusion for Vietnamese companies. However, it offers an opportunity for adaptable businesses to build trust and become an attractive investment destination.
In my perspective, the supply chain law can yield long-term benefits by curbing violations and pollution, enhancing reputation, reducing costs, and expanding into new markets. Despite challenges such as expenses and complexity, Vietnamese companies should prepare to seize these opportunities, boosting Vietnam’s economic attractiveness and resilience.
In what ways can the Vietnamese economy capitalise on this act?
Stoffers: The act opens several avenues for Vietnamese companies to thrive.
Firstly, it underscores the importance of human rights and environmental due diligence. Ignoring these risks can damage reputation, legitimacy, and stakeholder loyalty, potentially leading to exclusion from supply chains. By embracing the provisions of the LkSG, Vietnamese firms can position themselves as pioneers in supply chain diversification, a strategy known as “China + 1.” This is particularly relevant as Vietnam garners attention from global customers.
Secondly, this act ensures legal certainty and equal rules for all, including both German and Vietnamese entities. Currently, companies may hesitate to invest in monitoring labour, social, and environmental standards due to the reluctance of competitors. However, the LkSG obliges them to embrace these standards, reducing the practice of free-riding. While the obligations under the LkSG don’t bind Vietnamese firms, they make sense from a risk management perspective.
Thirdly, this act yields developmental benefits for Vietnam. By adhering to social and environmental standards, companies can improve working conditions and worker income, contributing to economic growth.
Fourthly, local businesses can enhance their resilience. Recent Organisation for Economic Co-operation and Development findings demonstrate that socially and environmentally responsible companies are better equipped to weather crises, fostering long-term benefits.
Lastly, Vietnamese enterprises can incubate their competitiveness by early adoption of supply chain law mandates. In the coming years, similar regulations will become more prevalent, especially in connection with the Sustainable Development Goals. Companies that prepare optimally will gain a competitive edge on the global stage and enhance their corporate reputation.
What have you observed regarding businesses’ reactions to social and environmental standards requirements?
Lanh: I’ve had the privilege of engaging with numerous Vietnamese businesses through training sessions, on-site visits, and discussions on these topics.
My impression is that tier-1 companies generally exhibit a heightened awareness of compliance, with some actively seeking solutions to bolster their adherence, while a few rely solely on certifications for validation. In contrast, tier-2 and subsequent tiers often respond with phrases like, “Social responsibility and environmental protection? It’s a great and meaningful topic, but we just can’t manage it.”
It’s evident that businesses have diverse needs, influenced by factors such as their size, objectives, existing management systems as well as the volume of orders they currently handle. Some may need a fundamental shift in their mindset towards sustainable and responsible business practices, while others may benefit from technical support to integrate these criteria into their management systems.
Additionally, some may require financial assistance to elevate their standards to the desired level, possibly starting with securing stable orders. Companies from the Global North cannot expect that, despite low purchase prices, adequate wages will be paid, working hours will remain within legal limits, and labour and environmental standards will be adhered to.
