Spanish companies within the supply chain of German manufacturers – Focus on automotive suppliers and agricultural producers

published on 15 September 2022 | reading time approx. 3 minutes

The entry into force on 1 January 2023 of the German Supply Chain Act (LkSG) is expected to coincide in the other EU countries – and therefore also in Spain – with the revival of the public debate on the European Commission's proposal for a directive "on corporate due diligence with regard to sustainability", which was published on 23 February 2022. As is well known, the provisions envisaged in this draft go beyond the German LkSG in many respects, starting with the fact that they affect a larger number of companies.

The transition from "soft law" to mandatory law in the area of human rights compliance and corporate sustainability behaviour will thus not only dominate the German discussion.

At first glance, the German LkSG does not generally represent a reason for Spanish companies to prepare specific reactions. However, the fact that an even "stricter" European regulation could soon be a reality should at least encourage those companies aiming for an advanced "compliance culture" to make themselves familiar with both its principles and the new specific obligations and measures.

How and to what extent will the LkSG concretely affect Spanish companies that are part of the supply chain of one or more German manufacturers?

As part of the EU and a signatory to all of the international conventions listed in the annex to the LkSG, there is in principle no particular reason for concern in Spain with regard to compliance with the human rights obser­vance provisions or sustainability obligations contained therein.

However, we would like to draw attention to two specific sectors of the Spanish economy that are likely to be more directly affected by the new due diligence requirements of the LkSG, namely the auto parts industry and agricultural production.

Spain is home to more than 1,000 auto parts suppliers and many of these work primarily (if not exclusively) for one or more of the three production sites currently operated by the two German car manufacturers established here. In addition, many Spanish car parts manufacturers supply to other car parts suppliers based in Germany. In principle, all of these companies fall under the term of "direct" or "indirect" supplier within the manufacturing chain of the German producers.

The other economic sector that could be more directly affected by the LkSG in Spain is, in our opinion, agricultural production, especially because of the labour and environmental risks often associated with this activity. Although the professionalisation and modernisation of Spanish agricultural businesses has been widely recognised in recent decades, blatant cases of abuse continue to surface in the media every year, with very common reports of the employment of illegal immigrant labour in inhumane conditions or of polluting emissions stemming from agricultural activity. Spanish agricultural companies are known to be suppliers of many German companies, especially food manufacturers and supermarket chains.

This in turn means that the Spanishbased car supplier or agricultural producers must be included in the "due diligence and compliance concept" to be introduced by the manufacturer under the LkSG. Specifically, this includes at least the following:

The Spanish supplier should be covered by the general risk management of the manufacturer, as well as by the risk analysis to be carried out on a regular basis.

The Spanish auto supplier or agricultural producer should be familiar with the producer's mandatory "policy statement", as well as its preventive measures.

The Spanish company should be involved in the complaint procedure to be introduced by the producer.

In particular, the Spanish contractor is likely to be directly affected by the "contractual representations" regarding compliance with human rights and environmental obligations, as well as the "training" and "education" required to enforce them.

Most, if not all, of the Spanish auto suppliers and agricultural producers working for German business partners are, of course, already accustomed to meeting high quality standards. The specific features of the obligations introduced by the LkSG will nevertheless probably require a considerable effort from these companies. In any case, we believe that constant communication and consultation with business partners established in Germany will be essential.

Conclusion

The approach we recommend for Spanish companies in this area would undoubtedly be to adopt a proactive and determined attitude. Instead of just preparing to struggle with the new "paperwork", we are convinced that both the future EU directive and the LkSG (the latter only for the companies concerned), beyond the company's own ethical values, offer an excellent chance to demonstrate to current and potential business partners (especially German ones) the company's commitment to respecting human rights and protecting the environ­ment, to approach German manufacturers proactively and, after consultation, to make proposals on how the Spanish supplier could be integrated into the risk management and prevention measures of the German business partner. This proactivity and anticipation would give the Spanish company – which, according to EU law, will itself sooner or later be the direct main addressee – a big head start, as it would allow it to adapt to the new reality most quickly.

In conclusion, it can be said that it is highly advisable for Spanish companies within German supply chains, whether they are direct or indirect suppliers, to implement appropriate measures in their business processes (e.g. compliance and sustainability departments, as well as supply chain management) in order to make themselves familiar with the matter before the regulations from Germany and the EU come into force and to become experts in their own country ex post. In this context, close exchange – especially with the immediate supplier – is extremely important, as processes can be coordinated, divided up and implemented more efficiently in this way.