Supply Chain Integrity: Essential Insights for Multinational Automotive Companies

The U.S. government has increasingly emphasized the importance of supply chain integrity, particularly in relation to eliminating forced labor. U.S. policymakers are actively passing legislation, including the Uyghur Forced Labor Prevention Act (UFLPA), which targets goods sourced from the Xinjiang Uyghur Autonomous Region (XUAR) in China or that use parts and components from that region. Automotive companies must understand these new expectations and be prepared for the developing regulatory landscape aimed at curbing labor exploitation in the supply chain.

The UFLPA is designed to safeguard supply chains from exploitative practices relating to forced labor in the XUAR by creating a presumption that any goods from the XUAR are the product of forced labor practices unless the importer can demonstrate otherwise. Further, UFLPA came about in an era of generally increased attention to forced labor and human trafficking issues. For example, the Office of Foreign Assets Control (OFAC) has brought enforcement actions against companies sourcing from sanctioned countries with poor labor practices, like North Korea. Customs and Border Protection (CBP) also has sharply increased the frequency with which it detains goods suspected to be made with forced labor.

These developments particularly impact the automotive industry, which relies on complex, global supply networks. As the U.S. Senate Finance Committee concluded in its May 2024 investigation report, “Insufficient Diligence: Car Makers Complicit with CCP Forced Labor,” many major automakers have failed to adequately vet their supply chains for Chinese components made with forced labor.[1] This finding prompted Finance Committee Chair Ron Wyden to declare that “automakers’ self-policing is clearly not doing the job” and urge the CBP to “supercharge enforcement and crack down on companies that fuel the shameful use of forced labor in China.”[2] Further, because the focus on supply chain integrity (particularly as it relates to China) is a bipartisan concern, these concerns will continue into the new administration.

CBP appears to be listening. In July and August 2024 alone, the CBP seized more than 120 shipments, worth roughly $18 million, related to the automotive and aerospace industries for potentially violating the UFLPA.[3] The message from the U.S. government is simple: automakers that source from abroad need to take full responsibility for ethical sourcing throughout their supply chains. Further, with all imported goods subject to the scrutiny of CBP—which now has enhanced enforcement resources to find, detain, and reject noncompliant goods—automakers must understand the new enforcement paradigm and fully comprehend their products’ supply chains, right down to the last sub-supplier.

A well-designed supply chain integrity program will address all elements of supply chain risk, including forced labor, human trafficking, UFLPA, transparency, conflict minerals, sanctioned countries, and other supply chain integrity regulations. Regulators expect that automakers will: (i) conduct systematic, regular due diligence; (ii) adopt appropriate risk-based compliance measures and internal controls; (iii) reinforce these compliance requirements and internal controls through regular training; and (iv) proactively gather and maintain information demonstrating compliance with forced labor regulations.

To aid automotive companies in complying with these new expectations, we have created a six-step program for managing supply chain integrity risk. While the steps that make sense for any given importer will vary, companies across the automotive industry should consider the following fundamental compliance and due diligence items:

Step 1: Map Your Supply Chain

Map out your supply chain, including sub-suppliers (and their sub-suppliers), to ensure that you have identified risk points relating to potential sourcing from the XUAR, the use of forced labor, or human trafficking. The review should cover the imported goods origin and any raw materials or components used to manufacture the goods.

When mapping your supply chain, you should identify the identities and locations of suppliers, their sub-suppliers, and their business relationships. You also should identify transactions among entities along the supply chain tied to the specific imported goods.

Use publicly available resources to estimate the probability that raw materials or components originated in the XUAR or that indicate a likelihood that a supplier is using forced labor.

Be cognizant of warning signs that could indicate the use of unauthorized sub-suppliers, such as raw material sourcing, components not from the stated location, or inputs from countries known to lack production capacity.

Ensure that suppliers regularly update you whenever they onboard a new sub-supplier so that you can keep your supply chain map current.

Step 2: Conduct Due Diligence on Key Suppliers

Due diligence is a key component of supply chain compliance. Your supply-chain due diligence strategy should include detailed descriptions of the supply chains for imported goods and their components, including ties to the supply chain maps.

Due diligence should include evidence identifying: (i) how the imported goods were made from raw materials to finished goods; (ii) what entities manufactured the goods and where, including all in-house manufacturing, sub-assembly, and outsourced production operations; (iii) the roles of the entities involved at each stage of the supply chain; and (iv) the relationship between the entities, including whether a supplier also is a manufacturer.

Conduct due diligence for goods originating in China or that rely on Chinese parts and components, which are at higher risk, to verify that there are no links to the XUAR, companies on the UFLPA Entity List, or other forced labor practices associated with the XUAR.

Although CBP primarily detains products under the UFLPA, due diligence should also focus on general indicators of forced labor—including intimidation and threats, movement restriction, isolation, abusive living and/or working conditions, and excessive hours—to ensure that they do not exist or are fully remediated. Such evidence for your due diligence may include:

• The aforementioned supply chain map.
• Information relating to hours worked.
• Information demonstrating how each supplier and sub-supplier pays wages and to whom.
• Information confirming workers’ residency statuses and whether they are from the XUAR.
• Information demonstrating that production of the goods is consistent with the documented workers, including their numbers, materials produced, and output.
• Information showing the supplier and sub-suppliers have controls in place to ensure all workers are recruited voluntarily.
• Information demonstrating that every worker from the XUAR is working voluntarily. This can include evidence that each worker was:
  • Working without coercion.
  • Recruited to work voluntarily.
  • Recruited free of any forced labor indicators, including threatened or actual detention of themselves or their loved ones or forced transfers of land to the government.
  • Transported from the XUAR and transferred to the entity voluntarily and without any forced labor indicators, including government surveillance or movement control.
  • Living and working in conditions free of any forced labor indicators, including government surveillance, government reporting, movement restrictions, or mandatory indoctrination activities such as political, language, or cultural classes.

Step 3: Ensure Due Diligence and Compliance Extend to Sub-Suppliers

Because sub-supplier activity can expose automakers to liability under the UFLPA and other forced labor regulations, it is essential to identify the origins of every component within your products’ supply chains.

Supply-chain mapping should include everything up to the last sub-supplier. This requires working with suppliers to identify sub-suppliers who might not be known to your company.

When possible, use unique identifiers to track raw materials and other inputs through the supply chain. This may require using tracking methodologies to deal with potentially comingled inputs from different suppliers.

Step 4: Develop Legal Protections

Proper forced labor and UFLPA risk management requires a layered approach to compliance. Developing appropriate legal protection is one of the critical layers.

A key first step to establishing adequate legal protection is developing a vendor code of conduct that lays out the legal obligations governing the supplier relationships and requires compliance with all ethical sourcing contractual provisions. You should incorporate the code of conduct into all supplier contracts, whether through explicit contractual provisions or by reference.

The code of conduct should (i) require suppliers to comply with forced labor and UFLPA regulations, (ii) require suppliers to grant auditors and verification organizations necessary access to facilities, (iii) prohibit suppliers from working with any companies on the UFLPA Entity List, and (iv) address the risk of using government labor schemes, such as pairing assistance, poverty alleviation, or other labor transfer programs that involve potential violations of the ULFPA.

Your agreements with suppliers should require that they flow down all forced labor, human trafficking, and UFLPA compliance requirements to their sub-suppliers. The flow-down requirements should mirror the strength of your own code of conduct and should require that your direct supplier (i) ensure that sub-suppliers train employees on detecting forced labor, (ii) conduct self-audits or obtain independent audits (including regarding recruitment of workers and use of government labor programs), (iii) track and report on their performance of these compliance requirements, and (iv) require and monitor subcontractor adherence to the code of conduct.

Step 5: Communicate and Train Across the Supply Chain

Communicate the applicable legal and contractual requirements to suppliers at all tiers of the supply chain.

Provide training to all key suppliers—and sub-suppliers—regarding forced labor, human trafficking, and UFLPA issues or require such training from your own suppliers.

Provide training to employees or agents responsible for selecting suppliers on (i) conducting forced labor/UFLPA risk assessments, (ii) legal restrictions and consequences of importing goods produced with forced labor into the U.S., (iii) the presumption that goods made in the XUAR or by Entity List companies are made using forced labor, (iv) the risks posed by products that incorporate goods using forced or UFLPA labor, (v) the risks of suppliers being included on future additions to the UFLPA Entity List, and (vi) the requirements of the company’s code of conduct.

Step 6: Monitor Compliance & Remediate Compliance Missteps

Monitor supplier compliance with the code of conduct and all legal and contractual provisions requiring supply chain compliance.

Remediate any forced labor conditions or UFLPA violations and terminate the supplier relationship if remediation is not possible or is untimely.

If indicators signifying the presence of forced labor in the supply chain or violations of the UFLPA are identified in a supplier, stop importing impacted goods before remediation. If you intend to continue sourcing inputs from the supplier, you must develop a corrective action plan that specifically addresses all indicators of forced labor or the UFLPA concerns. Consider using, on a risk-adjusted basis, independent third-party verification regarding the effectiveness of an importer’s due diligence system.

* * * * *

The consequences for automakers importing vehicles or components tainted by forced labor or human trafficking, or that violate the UFLPA, can be severe. Companies can have their goods detained at the border, experience production shutdowns due to missing critical components, incur large penalties, suffer reputational damage, and even lose or limit their ability to import products. Accordingly, paying attention to supply chain risks is essential to a company’s regulatory risk management. By working through the six compliance and due diligence steps outlined above, automakers can identify potential risk points, mitigate supply chain integrity risks, and be prepared for any governmental inquiries.  It is only by taking full responsibility of the entire supply chain—right down to the last sub-supplier—that importers can ensure the integrity and smooth functioning of their critical supply chains.

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[1] See U.S. Senate Committee on Finance, “Automakers Shipped Cars and Parts Made by Chinese Company Banned for Forced Labor to the United States; Car Companies Are Failing to Police Their Supply Chains For Chinese Components Made with Forced Labor, Finance Committee Majority Staff Investigation Finds,” (May 20, 2024); available here.

[2] Id.

[3] See U.S. Customs & Border Protection, “Uyghur Forced Labor Prevention Act Statistics;” available at here.