The Supply Chain Act, which has been established in Germany at the beginning of the year, obliges companies to ensure that human rights are respected worldwide. With the planned EU Supply Chain Act, these obligations are to be significantly expanded; companies would then also be responsible for global compliance with environmental, labour or social standards. This is a Herculean task that will overwhelm small and medium-sized companies in particular.

Frankfurt, 20 February 2023 - More and more small and mid-sized companies in the mechanical and plant engineering sector feel abandoned by politicians and deprived of their competitiveness with regard to the German and European supply chain legislation, as the following statements from VDMA member companies of various sizes show. They also complain about a certain hypocrisy in the legislation. For example, politicians repeatedly claim that supply chain legislation only covers larger companies. But because these conglomerates immediately pass on the pressure and obligations to their suppliers, de facto companies with only a few employees must also guarantee the same standards in the depths of their supply chains, even in distant countries - or withdraw from many markets and leave them to competitors from countries with fewer due diligence obligations.

The development is further exacerbated by the due diligence obligations along the entire value chain that are being discussed at European level. Having to apply these standards to customers is even less realistic. Export business would then simply be impossible with many countries and European SMEs would be replaced by - often state-controlled - industrial enterprises from other regions of the world. The political goal of diversifying supply chains to make Europe more resilient would thus be reversed.

Federal government and MEPs called upon in the EU Council
The VDMA therefore urges the Federal Government and the Members of the European Parliament to exert their influence in Brussels on the ongoing procedure for the EU Supply Chain Act. "It cannot be that SMEs are always praised in Sunday speeches as a pillar for our prosperity and then are overburdened with bureaucratic requirements that noticeably weaken them in global competition," warns VDMA Executive Director Thilo Brodtmann. "The Berlin government must prevent the EU Parliament's plans from being implemented in the Council in the way they are currently being discussed, if it does not want to accept another heavy burden on industrial SMEs. The European regulation must under no circumstances go beyond the demands of the German Supply Chain Act!"

The following statements from VDMA member companies show just how much small and medium-sized companies are burdened by supply chain legislation:

• ESTA Apparatebau GmbH & Co. KG (Senden, Bavaria),
  Alexander Kulitz, member of the management and shareholder:
  "Of course, as a medium-sized family business, our customers expect us to maintain the documentation requirements prescribed by the Supply Chain Act for large companies. The bureaucratic effort involved is enormous, especially since we as suppliers are asked to adapt the documentation to the respective 'reporting systems' of the customers, which may well differ depending on the company. This additional burden is rarely compensated or can be priced in by the customer. In this respect, the political myth that the law only affects companies with more than 1000 employees is simply wrong.
  It is not primarily those who tolerate human rights violations or environmental sins in their supply chains who are punished with fines, but those companies that implement the documentation and bureaucratic obligations incorrectly, inadequately or not properly. A new wave of warnings against companies that use incorrect wording or insufficient documentation is therefore far more likely than the actual punishment of human rights violations, which will be lost in the supply chain bureaucracy.
  At a time when inflation, skills shortages, energy crises and supply chain congestion are massively challenging our economy, it is simply crazy to continue to build up the bureaucratic and anti-competitive hurdles. Small and medium-sized enterprises are praised for their sustainability and the convincing values of family entrepreneurship, but in the same moment they are dismantled piece by piece by further burdens with the next well-intentioned legislative initiative."
• HAHN Automation GmbH (Rheinböllen, Rhineland-Palatinate),
  Frank Konrad, CEO:
  "As a globally active special machinery manufacturer with both an international customer and supplier network, we will be directly affected by the EU Supply Chain Act from 2024. For us as a medium-sized company with more than 1,000 active suppliers, this means a considerable additional financial and personnel effort in order to be able to fulfil the prescribed due diligence obligations. In addition, we cannot assess whether all global suppliers can follow these required standards.
  Our success in recent years has been to be able to supply customers worldwide with production facilities of uniform quality standards. Due to the new global requirements, we will be asked to pursue continent-specific developments in the medium term, thus limiting our competitive advantage. Due to the points listed, we will have to restructure and significantly expand our supplier network worldwide, which will result in both delivery times and costs increasing."
• Pöttinger Landtechnik GmbH (Grieskirchen, Austria),
  Dr. Markus Baldinger, Managing Director:
  "As a medium-sized company in agricultural engineering, the European internal market is one of the most important sales markets for us. The biggest problem of the EU Supply Chain Act is the requirement of due diligence not only for direct suppliers (direct contractual partners) but also for indirect suppliers (suppliers of our suppliers and in turn their suppliers). It is very difficult to comply with this due diligence requirement because it is almost impossible to locate and influence all suppliers.
  Furthermore, it is imperative to prevent a European supply chain law from leading to a multitude of individual national legislations and the associated considerable additional work. Civil liability must also be completely removed from the draft law. In sum, the current planning of the EU supply chain law represents a substantial additional effort for companies, from risk analysis to bureaucratic and legal effort."
• RENK Group (Augsburg, Bavaria),
  Susanne Wiegand, CEO:
  "As a globally active company, we already place high ethical demands on our suppliers. Of course, we welcome all international initiatives to further improve the implementation of universal human rights. However, we see this goal as clearly unattainable with the Supply Chain Act. The legislator is imposing on companies tasks that can hardly be fulfilled in a blanket manner. It does not provide any clear requirements for ensuring this, but instead creates considerable legal uncertainty for companies. Unfortunately, the Supply Chain Act loses itself in abstract allocations and vague legal terms. A real perception of effective human rights responsibility will not work like this. This is particularly detrimental to small and medium-sized enterprises."
• Schulte Strathaus GmbH & Co. KG (Werl, Northrhine-Westfalia),
  Dr. Michael Schulte Strathaus, Managing Partner:
  "Our company is a manufacturer of spillage control components for conveyor systems for the international bulk goods sector. We are also dependent on chips and electronic components from the Asian region. Despite the fact that we have far fewer than 500 employees, we are forced to implement the supply chain act and its requirements, as the international plant manufacturers demand compliance in the supply contracts concluded with us. With the capacities available to us, it is impossible for us to guarantee complete control of our Asian supply sources. Either we would have to employ additional non-productive staff for this control work or hire external service providers. Both lead to an unsustainable cost burden. Moreover, these are actually sovereign tasks that a state would have to carry out itself through appropriate measures.
  In addition to the effects of the Supply Chain Act, family businesses also suffer from enormous over-bureaucratisation in the form of excessive reporting to public authorities. Complicated building regulations and construction procedures hamper or prevent investment. A catastrophic infrastructure, especially in the area of road and rail transport, also places an unreasonable burden on Germany as a business location."

WIWA Wilhelm Wagner GmbH & Co KG (Lahnau, Hessia),
Peter Turczak, Managing Partner:
"Even we as a company with less than 500 employees would be affected by the Supply Chain Act. A practical example: Among other things, we supply fire protection coating systems to large construction companies and their service providers. Such a system consists of about 1300 parts and raw materials that we purchase from more than 400 suppliers. We simply cannot take responsibility for all stages of pre-production. This would mean that we would have to employ a lot of staff in order just to proof the origins of all parts. As a family business with 140 employees, this is simply impossible.
We have been relying on local suppliers for years and pay fair prices for goods - even without legal requirements. Due to our size, we do not have the possibilities to put pressure on all suppliers to ensure the documentation of the required aspects."

Do you have questions to these companies with regards to the Supply Chain Act? We will be happy to put you in touch with them. Write us your request to: holger.paul@vdma.org