Legal Insights

Navigating the new German Supply Chain Act: Challenges for Businesses in Indonesia

German Supply Chain Act

Germany’s recently enacted Supply Chain Act (Lieferkettensorgfaltspflichtgesetz) marks a significant milestone in corporate responsibility and supply chain management. The law aims to ensure that human rights and environmental protection standards are observed in the supply chain of German companies. For Indonesian businesses which are integrated into these supply chains, the Act presents a set of complex challenges that require careful navigation. 

Understanding the Basic Principles of the Law 

The Supply Chain Act, which came into effect on January 1, 2023, mandates that German companies with over 3,000 employees must take responsibility for human rights and environmental violations within their global supply chain. The threshold was lowered to 1,000 employees on January 1, 2024. The law holds these companies accountable not only for their own actions but also for the actions of their suppliers and subcontractors, both domestically and internationally. Indonesian companies are not directly bound by the requirements of the law.

Nevertheless, Indonesian companies have to deal with the requirements of the law and have to implement them together with their German customers, because they will be held responsible for the misconduct of their Indonesian suppliers. 

The obligations of the law relate primarily to the following aspects, whereby the exact standards are mostly taken from international agreements: 

• Human rights: The Act seeks to prevent human rights abuses, including forced labour, child labour, and exploitation, throughout the supply chain.
• Labor standards: It aims to uphold fair labour practices, including safe working conditions, fair wages, and workers' rights.
• Environmental standards: The Act endeavours to mitigate environmental harm by committing to comply with, inter alia, responsible waste treatment and disposal and pollution regulations. 

Due Diligence Obligations 

Under the Supply Chain Act, German companies are required to conduct due diligence to identify, prevent, and mitigate human rights and environmental risks in their supply chains. This involves assessing suppliers, identifying potential risks, implementing measures to address these risks, and monitoring compliance throughout the supply chain. Since failure to meet these obligations can result in significant penalties, including fines and reputational damage, German companies will therefore pay particular attention to compliance. For the obligated companies from Germany, this requires close cooperation with their international suppliers. 

The Conflict Between Transparency and Secrecy 

Another challenge for Indonesian companies is the demand for increased supply chain transparency. German customers will demand comprehensive insight into the business activity of their Indonesian suppliers in order to ensure compliance with the legal provisions. This level of transparency may be difficult to achieve for Indonesian businesses, especially those operating in industries with complex supply chain structures. In addition, Indonesian companies should ensure that only necessary information is passed on and that data protection and confidentiality obligations are taken into account, for instance by the conclusion of non-disclosure agreements. 

Appropriate Collaboration and Cooperation 

Addressing the challenges posed by the Supply Chain Act will require collaboration and cooperation between German companies and their Indonesian business partners. Indonesian businesses must work closely with their German partners to ensure compliance with the law and implement effective due diligence measures throughout the supply chain. This may involve sharing information, conducting joint audits, and implementing common standards and practices. However, it should be noted that the law does not permit a blanket transfer of responsibility to suppliers. Therefore, no agreement should be signed that provides a blanket guarantee of freedom from risks and infringements. 

Sanctions, Opportunities and Risks 

The German Federal Office for Economic Affairs and Export Control (“BAFA”) monitors compliance with the Act. However, no direct obligations exist for Indonesian companies and no official communication is needed generally, because, as described above, only cooperation with the German customer is required. Accordingly, BAFA can not impose fines on Indonesian suppliers. Nonetheless, compliance is important for Indonesian companies because, firstly, the smooth continuation of existing business conditions depends on it and, secondly, there is a considerable competitive disadvantage if compliance cannot be established and communicated accordingly. In return, proven compliance with legal requirements facilitates the initiation of business relationships and represents an advantage in contract negotiations. 

Conclusion and Outlook 

The German Supply Chain Act represents a significant shift in corporate responsibility and supply chain management, with implications for businesses in Indonesia. While the law presents challenges, it also offers opportunities for companies to strengthen their supply chains, improve sustainability, and enhance their reputation. By understanding the requirements of the Act and collaborating with their German partners, Indonesian businesses can navigate these challenges and ensure their company is ensured for future success.