German law to clean up supply chains triggers fears of industrial regression

German SMEs struggle with the Supply Chain Act, impacting global competitiveness and increasing costs, leading to compliance challenges.

Many German small and medium enterprises (SMEs) said they have been struggling to meet the cost and bureaucratic burden of the Supply Chain Act that took effect in January 2023, adding that this harmed their global competitiveness.

German engineering company BAUCH makes machines and engine components out of materials mined in China, Africa or South America that pass through multiple hands and processes before they reach its factories in southern Germany and China. To comply with the Act, BAUCH, like other firms with more than 1,000 staff, must take due diligence procedures to monitor suppliers’ human rights practices and environmental protection standards — a task which CEO Manfred Bauch says is almost impossible and threatens to rip apart his supply chain.

Their experience signalled what industries throughout the European Union may soon face, after the European Parliament last week passed the Corporate Sustainability Due Diligence Directive that will require larger companies operating in the bloc to check if their supply chains use forced labour or cause environmental damage and take action if they do.

Supporters say the legislation will foster responsible corporate behaviour and anchor human rights and environmental considerations in their operations. Some also point out the law will support companies as investors and consumers demand more sustainability.

Rights group Amnesty International has called the EU directive — which EU countries will have to incorporate as a law in their own legislations — an opportunity to close a gap which allowed companies operating in the EU “to escape accountability for widespread rights abuses around the world.”

But some German companies with global supply chains, and long lists of input materials say it is a struggle to obtain accurate information, and issues such as workers’ rights are regulated by foreign laws outside of their control.

Strikingly, Germany failed to support the new EU law, as the pro-business Free Democrats (FDP), the smallest party in Germany’s three-way coalition, said it would burden business with excessive bureaucracy.