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Business trends

US puts Japan Inc. on edge over Xinjiang supply chain risks

Scrutiny grows over indirect suppliers in solar panel materials and apparel

Renewable energy materials, like polysilicon used in solar panels, join the list of industries where forced labor in China's Xinjiang region has been reported, the U.S. State Department alleges.

TOKYO/WASHINGTON -- From solar panel producers to apparel retail giant Uniqlo, Japanese businesses increasingly fear a backlash over potential human rights violations at their indirect partners as the U.S. renews its warning against companies linked to forced-labor allegations in China's Xinjiang region.

American businesses that fail to exit supply chains, ventures and investment in Xinjiang "run a high risk of violating U.S. law," the State Department and five other agencies warned in an updated advisory Tuesday, hinting that even indirect links to rights violations against the Uyghur ethnic minority in the region could bring penalties.

The advisory cites renewable energy materials, like polysilicon, as well as gloves among industries of concern, expanding the list to 20 from 17. Foreign companies dealing in American products also might run afoul of U.S. law by failing to address risks in Xinjiang.

The addition of polysilicon to the list poses a major challenge for related companies. Roughly 80% of the material, used in solar panels, is made in China, and half of that in Xinjiang.

Japanese silicon manufacturer Tokuyama said it sources no materials from Xinjiang directly, but acknowledged that it is "not currently able to track every single step goods go through before their delivery." The company is reviewing its second- and third-tier suppliers.

"The impact of the recent decision by the U.S. government is still unclear," the company said. But Tokuyama stressed it will make the utmost effort to address any issues identified in its review.

Sharp reviewed its supply chains for solar panels, but found no dealings in the Xinjiang region. Nintendo said it had no evidence of any use of forced labor in its supply chains.

Most Japanese businesses struggle to paint the full picture regarding their supply chains. In a Nikkei survey of roughly 140 companies, just 12% said they screened for human rights violations at indirect business partners.

Homebuilder Daiwa House Industry said none of its direct suppliers do business in Xinjiang, but that it "has not confirmed" whether this is true for second- and third-tier suppliers as well.

Screening indirect suppliers is no easy task.

"We handle many different products, so looking into the supply chains for each and every one of them is not a realistic option," said a leading clothing company that does business with a factory in Xinjiang. "Multi-layered production systems pose a major obstacle to such efforts."

But some companies already are taking action. Toshiba, which has a licensing contract with a business suspected of using forced labor in China, has said it will cancel this contract by the end of the year.

Risks abound even for companies that say they have no ties in Xinjiang.

"No Uniqlo product is manufactured in the Xinjiang region," brand operator Fast Retailing said last year, adding that "no Uniqlo production partners subcontract to fabric mills or spinning mills in the region." But a shipment of Uniqlo shirts was seized by U.S. customs earlier this year on suspicion they were made with forced labor.

Ryohin Keikaku, the company behind the Muji retail chain, has said it uses Xinjiang-grown cotton in its clothing but found no use of forced labor in the production process. The retailer said it will stop using Xinjiang cotton if it identifies any issues.

Condiment maker Kewpie also said it has confirmed with suppliers that Xinjiang-sourced materials were made with no forced labor.

The stronger warning by Washington "increases the risk of companies facing large fines, criminal charges and canceled contracts with U.S. partners," said Kunio Miyaoka, counsel at Tokyo-based law firm Mori Hamada & Matsumoto.

But Miyaoka also warned that Japanese companies must be careful to strike the right balance between the U.S. and China.

"If companies stop doing business [with Chinese operators] simply in response to U.S. demands, they could face retaliatory measures from Beijing," he said. "They will need to keep a close eye on regulations in both the U.S. and China."

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