29 July 2021

German Supply Chain Act (GSCA) – Implications for Chinese companies

What is GSCA?

GSCA requires German companies to analyze and report compliance with certain human rights and environmental standards along their supply chain.

GSCA does not intend to implement German social standards world-wide but aims to ensure compliance within the supply chain with minimum international standards (i.e. no child labor or forced labor or meeting basic environmental protection requirements).

Why is this relevant for Chinese companies?

GSCA will come into force on 1 January 2023 and initially applies to companies that employ more than 3,000 employees in Germany. From 2024 it will extend to companies with more than 1,000 employees in Germany. However, we expect smaller German companies sourcing from China will follow on a voluntary basis as recommended by the German Chamber of Commerce in China.

Chinese suppliers will be impacted by extra scrutiny from their German (or more broadly European) customers. German customers will need to assess whether Chinese suppliers meet GSCA requirements. 

Therefore, Chinese companies are well-advised to prepare in advance and be ready to show their German customers that they meet respective requirements and are a valuable business partner.

What will happen?

Non-compliance with GSCA could have serious consequences for German companies. Fines of up to EUR 800,000 or, for companies with an annual turnover exceeding EUR 400 million, of up to 2% of their worldwide annual turnover may be imposed. Perhaps, more seriously a fine exceeding EUR 175,000 will result in the affected company being banned from participating in public tenders. 

In order to comply with GSCA, German companies will therefore set up a risk management system, appoint a person in charge and conduct regular risk analysis on their suppliers. This will include a complaint mechanism to report violations of the standards required by the GSCA. 

German companies or subsidiaries of German companies in China will not only have to comply with the standards themselves but will also approach their suppliers to scrutinize whether such suppliers meet the requirements of the GSCA. There will be annual reviews and reviews on certain occasions (e.g., launch of new products). German companies or their subsidiaries in China will ask direct suppliers to confirm compliance with relevant standards and implement control mechanisms in the supply contracts.

In a longer run, the level of compliance with the standards set by the GSCA will influence the choice of the suppliers so that compliance with the standards is a competitive advantage when dealing with German customers.

Compliance will be monitored by the Federal Office of Economics and Export Control (BAFA). Although, any fine will be imposed against the German company, these fines indicate that German companies will take their obligations under the GSCA seriously. In addition, trade unions and NGOs will also have standing to initiate litigation in Germany in case of serious violations. These organizations will often have agendas to bring Chinese suppliers or practices into disrepute. 

What Standards are to be Met?

Suppliers to German companies are expected to meet certain core human rights and specific environmental standards

Core human-rights related standards:

  • No child labor

  • No slavery

  • No forced labor

  • Compliance with minimum standards regarding safety of work

  • Trade union freedom

  • No discrimination 

  • Adequate payment to employees (i.e. meet local minimum wage requirements)

  • No serious environmental law violations

  • No forced eviction or unlawful seizure of land 

  • No use of unethical security services (i.e. no torture)

Specific environmental standards:

  • No production, use and divesture of mercury and certain other chemicals prohibited by Minamata or Stockholm Convention

  • Waste disposal in line with Stockholm Convention

  • No export or import of waste in violation of Basel Convention

What needs to be done?

The vast majority of Chinese suppliers will be compliant with the requirements of GSCA. However, despite this, Chinese suppliers will need to be prepared and proactive in dealing with the consequences of this new law. 

Actions to be taken include:

  • Review and analyze your business and the business of your suppliers (which are indirect suppliers to the German customer) to ensure compliance with GSCA standards can be evidenced.

  • Consider approaching your German customers to discuss how to best comply with their requirements under this new law – this may head off German customers making additional demands or if you have many German customers, you may be able to have your solution used for each of them. 

  • Prepare a GSCA compliance paper tailored to your German customers. We can support you to prepare your own paper that is supported by our law firm’s confirmation. As a law firm that is fully licensed in both China and Germany, we believe that our confirmation will support quick acceptance by your German customers and also allow them to show BAFA that a serious, independent review was undertaken. 

  • Prepare a paper as to how you ensure compliance with GSCA standards that is regularly updated for German customers or potential German customers. In this way GSCA can be used as a market advantage against other less organized competitors.

Our German and Chinese colleagues from King & Wood Mallesons are ready to assist you!

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A Guide to Doing Business in China

We explore the key issues being considered by clients looking to unlock investment opportunities in the People’s Republic of China.

Doing Business in China
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