Saturday, June 12, 2010

Differentiated Products, the Global Supply Chain and Enriching Bad Guys in the Developing World

Can "sunshine laws" that expose the true supply chain for a product set off a virtuous wave that helps to mitigate global inequality and unfairness? I hope so. Stanford offers us a case study. As detailed in this article , there is a discussion of the Stanford Student's plan; "On Thursday, a committee of Stanford’s trustees considered a resolution to create a new proxy voting guideline for the university’s investments. The guideline would support shareholders’ efforts to make companies trace the supply chain of the minerals used in their products."

The students are worried about cases such as this one; "In the Democratic Republic of Congo, armed groups force villagers to mine minerals like wolframite and cassiterite. Metals processed from such minerals are used in consumer electronics products, including laptop computers, MP3 players, cellphones and digital cameras.

UPDATE (I have rewritten part of this blog post to correct mistakes in my original post)

So, the students want the Stanford endowment to use its muscle to nudge high tech firms to reveal their global supply chains. This "full information" would be a good thing! Does the CEO of some of these firms not know where the raw ingredients for her product come from? Is ignorance bliss?

Now, my question here is the following; once the CEO is made aware that a key part of her company's product is produced by "bad guys" (and the CEO knows that everyone else knows this); what happens next? The corporate social responsibility school would say that consumers will boycott this product. But will they? Is this boycott credible? What will they substitute to? If there is a perfect substitute product that doesn't use such nasty supply chains then maybe.

Ideally, the firm will seek out "nicer" input suppliers --(those who can provide the input in a socially responsible way) --- but will they? These input providers are likely to charge more.

If the company is a public company, will shareholders start selling the stock? Maybe? will the company's share price fall? There are plenty of international investors willing to hold "sin companies".

So, while I respect the Stanford effort at information disclosure ---- I am a practical person --- I want the Stanford Students to explain how this information discovery will help them achieve their worthy goal of improving the quality of life poor people in these developing nations.

While the Stanford students aren't currently advocating a full fledged disinvestment from the endowment portfolio of "blood diamond" firms, this may be their next step. Again, if all the rich universities boycotted such firms would that be sufficient portfolio shift to lead the CEOs of the cellphone makers to shift their global supply chains and substitute to "nicer" mineral suppliers or to designs that require less of these minerals?

This is the old question of whether boycotts can work? The problem for the Stanford students is that there is always someone at the margin who doesn't feel as strongly about punishing the Congo's armed groups as much as they do; this "marginal stock buyer" will get a "good deal" if Stanford and Harvard boycott certain stocks and this will make the marginal buyer more likely to buy. Now, if all the world's investors refused to buy the shares of companies that purchased inputs that would be a different story.

As I blogged about in my last post about supply chains in the case of the Shrek glasses --- it is interesting in this age of globalization what do consumers know or care about in the supply chain. Most consumers would frankly say; "I want a cheap product and I don't care how this was made." If more consumers wanted products that were genuinely "corporately socially responsible" then the boycott would be more likely to work; so the key issue here is taste heterogeneity and what % of consumers are of each type? A boycott won't work if most consumers simply want the cheapest product (holding quality constant).

So, how can major universities change the world? I would say through comparative advantage; through training the next generation of leaders and conducting basic research that leads to discoveries that can be transferred to developing countries to improve health care, the environment and day to day quality of life.

No comments :