Endangering social and economic sustainability ...

Endangering social and economic sustainability: supplier management in the automobile industry

Prof. Dr. Michael S. Aßländer Plansecur-Endowed Chair for Business Ethics, Ethics and Economics University Kassel Department of Economics Nora-Platiel-Str. 4-6 (K 33) 34109 Kassel Germany Phone: ++49 / (0)561 / 804-3857 Fax: ++49 / (0)561 / 804-2818 Mail: [email protected]

Dr. Julia Roloff Associate Professor ESC Rennes School of Business Management and Organisation Department 2, rue Robert d’Arbrissel 35065 Rennes France Phone: ++33-(0)2 99 33 48 30 Fax: ++33-(0)2 99 33 08 24 Mail: [email protected]

Endangering social and economic sustainability: supplier management in the automobile industry Abstract During the last ten years, the automobile industry compensated its economic deficiencies by outsourcing costs towards suppliers. A case study on a German automotive supplier illustrates to what extent the focus on low costs limits the supplier’s corporate autonomy, in particular its ability to run its business according to its own rules, and reveals how an increasing loss of independency in buyer-supplier-relationships endangers the suppliers’ contribution to social and economic sustainability. Current layoffs and bankruptcy in the automotive supply industry are not only caused by world economic crisis but also a direct result of unsustainable sourcing policy of the big car manufacturers employing problematic and illegitimate practices.

Key Words Sustainability, supply chain management, automobile industry, corporate autonomy.

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Introduction The automobile industry struggles with meeting the combination of economic, social and environmental challenges such as rising oil prices, a greater public awareness of climate change as a man-made problem and changing consumer behavior (Stoffler, 2008; Tschang, 2008; Corporate Europe Observatory 2007). The recent economic crisis has aggravated the situation dramatically and car manufacturers all over the world feared for their survival. In the US and in Europe, some companies were rescued with massive government subventions aiming at securing employment, but also protecting brands such as Chrysler and General Motors for the Americans or Mercedes-Benz and BMW for the Germans as national symbols (Welch and Kiley 2008; Seils, 2008). Despite subsidies, car manufacturers face a double challenge of becoming more innovative and more cost effective in order to remain competitive. This article investigates the question why automobile companies failed so far to reach a sufficient level of innovation and effectiveness. We suggest that one reason for the failure is a supplier management practice in which risks and costs are outsourced towards suppliers without leaving them the financial and managerial scope to develop their own strategies on how to meet the challenges.

This article analyzes how economic and social sustainability at suppliers is affected by supplier management practices at a German medium-sized automotive supplier who works for major German, French and American car manufacturers. The company encounters purchasing practices which systematically undermine the development of reliable buyer-supplier relationships, aim at reducing costs by all means and outsourcing risks to the largest possible extent. We argue that such practices endanger the social and economical sustainability of the current supply chain and violate the suppliers’ autonomy hindering them to develop and diversify their business. We will present the concept of corporate autonomy as a mediating

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factor which influences the chances that buyer-supplier relationships leave room for economic, social and environmental innovations benefiting both partners. The objective of the article is to develop some propositions describing how the concept of corporate autonomy and sustainability are linked at the supplier level. For this purpose, we start our argumentation with defining both concepts. Afterwards, we introduce the case with a description of the supplier-buyer relationships in the automobile industry and detailed analysis of the case study. We conclude with a discussion on how the concept of corporate autonomy can contribute to the study of sustainability of companies.

The concept of sustainability The Brundtland Commission defined sustainable development broadly as meeting “the needs of the present without compromising the ability of future generations to meet their own needs” (World Commission on Environment and Development, 1987: From One Earth to One World, §27). The commission’s report pointed out that sustainability can only be achieved when environmental, social and economic developments are well balanced (World Commission on Environment and Development, 1987). Thus, sustainability “refers to the long-term maintenance of systems according to environmental, economic and social considerations” (Crane and Matten, 2007, p.23).

In Europe, the Brundtland definition has been adapted by many companies and shaped their policies of corporate social responsibility (CSR). The Commission of the European Communities defines corporate responsibility as “reconciling interests of various stakeholders in an overall approach of quality and sustainability” (Commission of the European Communities, 2001, p.3). In this conception economic, ecological and social sustainability – expressed in the so called “triple bottom-line” (Elkington, 1999; Elkington, 2004) – ought to

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be integrated in companies’ core business and strategic orientation. Dyllick and Hockerts (2002) use the term corporate sustainability which aims at the “longevity of rent generation” (Dentchev, 2009, p. 27) opposed to maximising economic rents. Accordingly, this approach encompasses the effective management of natural resources as well as the development of a corporate strategy that ensures the long term survival of the firm. Furthermore, corporate policies should ensure social justice and respect the needs of the firm’s stakeholders (Crane and Matten, 2007; Carroll and Buchholtz, 2006; Bowie and Werhane, 2005).

The claims made by companies that they strive for economical, social and environmental sustainability has found its critics. Banerjee (2007) pointed out that the definition of sustainability remains vague. Thus, companies can claim to be responsible by referring to a list of activities that potentially improve their sustainability. Whether the activities alone and in combination truly contribute to a more sustainable development is difficult to evaluate, because of the vagueness of the concept and a lack of research (Pullman et al., 2009). In addition, the impression has been created that ‘sustainability’ can be achieved by most companies simply by implementing some activities and processes such as an environmental management system. To what extent and under what circumstances a company can be equally economically, socially and environmentally sustainable remains to be determined. An additional problem is posed by habit of academics and practitioners alike to use the terms corporate responsibility and sustainable development interchangeably (Dentchev, 2009; Montiel, 2006; Ebner and Baumgartner, 2006).

For the purpose of this paper, we interpret sustainability from a managerial point of view (Bansal, 2005). From this perspective, economic sustainability of a business means that the company works in a manner that makes its long-term existence likely (Dentchev, 2009). This

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implies, for example, that it earns enough money to invest in innovations that are necessary to keep up with new developments on the market. In a similar manner, we use the term social sustainability to describe a situation in which social conflicts are handled in a constructive manner (Gladwin et al., 1995). For example, this implies avoiding escalation of conflicts in the form of violations of human and workers’ rights. Ecological sustainability from a managerial point of view is reached when a business is independent from non-renewable resources and consumes renewable resources only to an extent that allows their substitution and does not impede other actors from accessing these resources according to their needs. For the purpose of our argumentation, we will constrain our analysis to the social and economic dimensions of sustainability. We believe that a company needs a certain level of autonomy in order to organise itself in a manner that ensures long-term economic survival and allows it to manage social conflicts constructively.

A company needs autonomy to make major corporate decisions for two reasons: First, its management and staff understand the mechanics of their business and its immediate environment and this know-how is essential for developing strategies that are both feasible and sustainable. Second, according to the European understanding of CSR, companies need to contribute substantially to sustainable development by adopting more socially responsive and environmental friendly practices. If they are forced to comply with such practices without having the chance to shape them, the companies’ commitment to the process may be compromised. By contrast, it can be also argued that a lack of external pressure may lead to decisions compromising sustainability, since such a company would feel little or no stakeholder control. Empirical evidence suggests a bell-shaped relationship between trust in corporate networks and innovation implying that both a lack of trust and too much of it have a negative impact on a company’s capability to innovate (Molina-Morales and Martínez-

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Fernández, 2009). In a similar manner, we investigate the question whether the best supplierclient relationship is one which is based on cooperation, but preserves each company’s autonomy. In the following section, we describe what we understand by corporate autonomy and how it can be preserved in corporate partnerships.

The concept of corporate autonomy The usage of the term autonomy has undergone a lot of changes in history. In the antique, it was used to describe a community’s ability of self-legislation and was supplemented with the term autarky referring to economic independency. During the Enlightenment, autonomy – defined by Immanuel Kant (1999) as a person’s ability of self-determination according to rules that have the potential to be binding for everybody – became a central terminus in moral philosophy. According to Kant, an autonomous person is not necessarily a person that is empirically free from constraints. It is a person that is bound only by rules that she would have chosen for herself in a rational reflection of her free will. As Paton (1971, p.181) points out: “By force and threats I can be compelled to actions which are directed as means to certain ends; but I can never be compelled by others to make anything my end. If I make anything my end, I do so of my own free will […]”. Kant’s conception of autonomy has also influenced recent research in organisational studies. For example, autonomy is used to describe a form of administrative independence achieved by decentralizing decision-making and administration (Verschuere, 2006), or refers to the number of decisions a manager is allowed to make without consulting superiors (Brock, 2003).

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In contrast to this research tradition, we discuss not the autonomy of organizational members or units but the autonomy of the company itself. For this purpose, we need a definition of autonomy that can be applied to collective actors such as a company opposed to Kant’s definition which is solely suitable for individuals, since he refers self-determination and selfrealization as central aspects of autonomy. In order to define the autonomy of a collective actor, we turn to the concept of sovereignty. In his Doctrine of Right, Kant explains that the sovereignty of a state depends on its government’s ability of rational rule setting. The objective of sovereign states – defined by their legislative, judicial and executive power – is to encompass a state of perfect conformity between constitution and common principles of law. Kant concludes: “There are thus three distinctive authorities (potestas legislatoria, execitoria, iudiciaria) by which a state (civitas) has its autonomy, that is, by which it forms and preserves itself in accordance with laws of freedom” (Kant, 2006, p.94 [6:318]). Hegel developed his idea of governmental sovereignty in a similar manner as consisting of “self-determination”, “judicial and executive power” (Hegel, 1999, §§279, 287).

Both Kant and Hegel assume that autonomy and sovereignty imply that each actor who claims to be autonomous or sovereign has the duty to recognize the sovereignty and autonomy of other actors. Thus, autonomy and sovereignty imply a certain quality of relationships between autonomous and sovereign actors. Sovereignty is described as not being the result of external ascription, but as originating from the ability (potestas) of the national body itself. Simultaneously, any sovereign nation state must respect the sovereignty of other nation states, because this is a precondition for its own claim for sovereignty or as Hegel (1999) terms it a duty resulting from sovereignty. Hegel differentiates in this context between internal and external sovereignty: the first refers to the internal order guaranteed by government and its

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institutions; the latter describes the acceptance of autonomy concerning the dealings of sovereign states among each other (Hegel, 1999: §§ 260-329, 321-340).

Transferring these ideas to organizations, corporate autonomy (CA) can be defined as a company’s ability (1) to establish its internal and external decision rules (potestas legislatoria), (2) its freedom to act according to its own rules (potestas executoria) and (3) its power to sanction non-conformist behaviour in its sphere of influence (potestas iudiciaria) as guaranteed by national and international law (see figure 1).

*********************************************************** Insert figure 1 about here ***********************************************************

Thus, corporations must be able to define their own rules for corporate behaviour, they must be able to implement their rules and they possess supervising authority that allows them to control their employees’ behaviour. Limitations that restrict one or more of this constitutive principles result in a loss of autonomy.

Similar to the autonomy of an individual, we assume that companies can consent to give up some parts of their autonomy, such as when cooperating with other companies. In other situations, autonomy might be violated by actors who interfere with a company’s function without its consent. When a company’s autonomy is strongly compromised, its ability to make and enforce decisions adequate to its situation is likely to be compromised as well. This is problematic for achieving sustainability, since we lack a selection of sufficiently tested and approved sustainable business concepts. Becoming a more sustainable company implies developing more sustainable practices and processes individually and in cooperation with

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stakeholders such as social and ecological activists, business associations, research institutions and public institutions. These practices and processes have to be evaluated regularly in order to ensure that they are contributing to social, ecological and economical sustainability. Such a complex and interactive process of developing, implementing, evaluating, improving or ending processes is difficult to imagine in a company that lacks the ability to set rules, implement them and control their adherence.

Supplier management in the automobile industry The case we selected to investigate the relationship between sustainability and corporate autonomy is a German supplier in the automotive industry. The automotive industry was chosen, because two types of buyer-supplier relationships can be found: arms-length relationships in which a large number of suppliers compete for each contract and nonadversarial, collaborative relationships (Cox et al., 2003). The second includes practices such as lean manufacturing and supplier integration which aim at reducing costs and at fostering the collaborative development of innovations and has been successfully employed by Toyota (Liker, 2003; Womack, Jones and Roos, 1991; Womack and Jones, 1996; Lee-Mortimer, 1994; Brown, Boyett and Robinson, 1994; Kannan and Tan, 2004; Muthusamy and White, 2005; Wagner, 2006; Theodorakioglou, Gotzamani and Tsiolvas, 2006; Williams 2007). The key is to allow the specialists at the supplier and the buyer to work closely together and to share information, such as on product quality, in order to improve products and processes (Carter and Ellram, 1994, Theodorakioglou, Gotzamani & Tsiolvas, 2006). Since this kind of cooperation depends on investments by the supplier and the buyer, buying companies tend to reduce their number of suppliers and become thus more dependent on them, while suppliers become more dependent due to the fact that they tailor their products and processes to their

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client’s needs (Wei and Chen, 2008; Szwejczewski, Goffin, Lemke, Pfeiffer and Lohmüller, 2001; Womack and Jones, 1996).

Research suggests that American and European companies have been less successful in adopting this approach; in particular, they build less reliable relationships than their Japanese counterparts (Dyer and Chu, 2000). Often, not only production but also costs and risks are outsourced to suppliers. Part of the cost reduction is achieved by moving production to low cost countries and partly by demanding lower prices from local suppliers which in turn had to work more cost efficient. While academic research has addressed risks and uncertainties related to dealing with foreign partners, less attention was paid to the challenges Western suppliers encounter due to these developments (Agndal and Nilsson, 2008).

Suppliers in the automotive sector tend to be highly dependent on their clients as a result of oligopolistic market structures and the need to customize products and processes to the individual needs of the manufacturer. This dependency makes suppliers vulnerable to illegitimate and illegal practices of large purchasers (Meinig and Mallad, 2009). The German Automotive Research Institute has documented that purchasers frequently demand “quick savings” on new contracts and “savings on current account” of 3 to 5 percent of the sales prices regardless the margins achieved by the supplier with its original price (VDI, 2006, p.2). In particular suppliers who already optimized their process to a high degree and shared efficiency gains with their clients suffer from continuous demands for further price cuts.

Despite those drawbacks, close collaboration between suppliers and buyers has the potential to be beneficial for each partner involved provided that both partners are willing to give up some of their independence and limit their autonomy to a certain extent. In practice, buyers

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and suppliers are likely to take advantage, when they have more leverage than their partner (Cox et al., 2004). Brown, Boyett and Robinson (1994) describe this problem in their analysis of partnerships in four different industries and conclude: “it was observed by most suppliers that the partnership that they had entered into was an unequal one, and that by revealing information on costs and relying so heavily on one purchaser they were potentially open to exploitation” (Brown, Boyett and Robinson, 1994, p.16).

Introduction to the case study Case selection and data collection The supplier which we call in this paper “Firma” faces a situation as described above. In Germany, this is regarded as a common problem in the automotive sector and called the “Lopez-Effect” describing the abuse of buyer’s power aiming at cost cutting and the outsourcing of financial risks (Kraus, 2009). Although industry associations and unions address this issue in Germany, few companies are willing to discuss it in order not to compromise their own business-relationships. The German supplier Firma deals with buyers who are seeking the lowest possible prices, good quality and contracts that give them the flexibility to buy only the number of parts needed at a certain point of time. Often buyers renegotiate contracts during the contract period and demand lower prices than earlier agreed upon or adjust the size of the order to their changed needs. The sales director of Firma feels that his company is not always treated fairly in this process and thus volunteered to participate in a case study on the subject. Since a lot of details and names of clients were disclosed during the interview, this case study is presented anonymously.

The data collection took place in November 2008 during an on-site visit of the researchers to Firma’s headquarters. During this visit, the sales director made a formal presentation of

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Firma, the researchers visited the production site and a semi-structured interview was conducted. Altogether, 6 hours and 50 minutes of information exchange were recorded of which one hour and 53 minutes represent the semi-structured interview. The recorded dialogs were transcribed in a summarized form concentrating on aspects related to sustainability and autonomy. The researchers also received published and internal documents about the Firma such as its leaflet and drafts for buyer-supplier contracts and framework agreements.

Firma’s position on the automotive market Founded in 1938, Firma is today a medium-sized automotive supplier with its headquarters situated in Germany and production sites on four continents in proximity to its buyers (Brochure of Firma, 2008; Presentation of Firma, 2008). The different production sites are organised as individual companies under the umbrella of a holding company. In 2007, Firma employed 2652 persons and had an annual turnover of 577 Million Euro. Compared to 80 percent of German automotive suppliers which employ less than 1000 workers, Firma is fairly large (VDA, 2008, p.83). Firma generates 61 percent of its turnover as a second tier supplier and delivers 38 percent directly to car manufacturers; one percent is sold to other costumers (Presentation of Firma, 2008). The relatively high rate of second tier suppliers results from the practice among car manufacturers to outsource parts of their production to smaller companies. Many of these first tier suppliers are fully owned by the manufacturer (Interview, WS310004). So for example, Daimler AG in 2008 had 338 fully owned subsidiaries solely in Germany, 621 in Europe and 1218 worldwide (D&B, 2008a). Firma’s clients are mainly wellknown European and American car manufacturers and their component suppliers. Due to its size and experience, Firma is neither a powerful nor a powerless supplier vis-à-vis its clients. As a result, buyers are often surprised when Firma tries to negotiate changes to the contract

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wording which is commonly accepted by smaller suppliers, but lacks the leverage of larger component suppliers.

Firma’s strategy is to specialise on highly complex products that are needed in large quantities (Interview, WS310004; WS310007). In order to remain competitive, Firma permanently invests in automation and was able to double its labour productivity during the last decade. Today, at the visited production site, only approximately 20 percent of the production costs are labour costs even if overhead costs for the administration of the holding and other nonproductive areas such as research and development are included in the calculation (Interview, WS310004). Sixty percent of the manufacturing equipment production capacity is used which represents a high rate for this type of automats (Interview, WS310004). As a result, Firma is able to produce at lower costs than some less experienced firms in Eastern Europe and China, despite the comparable high salaries in Germany. The key to Firma’s competitiveness is to develop continuously new products to compensate the decreasing profit margins of its established product portfolio (Interview, WS310006).

Firma has achieved a certain degree of independence due to three factors: Firstly, it is specialized in mass production manufactured with elaborate production technologies (Interview, WS310006). Firma’s products are partly used by first tier suppliers for the production of system components and partly directly delivered to the car manufacturers. As a result Firma works for more clients than suppliers that deliver system components to a small number of car manufacturers. Secondly, Firma faces only a few competitors that are able to offer the same range and quality of products thanks to its high degree of specialisation. There have been cases where a car manufacturer was unable to match the quality and the price of Firma, when it tried to produce an item developed in collaboration with Firma. Third,

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although Firma is only a medium-sized company, it attained some market power leading to a healthy financial situation. Firma is not dependent on a single customer as smaller companies in this sector tend to be. Also, it has accumulated capital reserves that enable Firma to be more selective regarding the contracts it agrees to (Interview, WS310007).

The client is the king: Analysis of buyer-supplier interactions In the following section, the interviews and documents were analysed focussing on the question whether the buyer-supplier relationship had an impact on the supplier’s corporate autonomy and on its ability to pursue economical and social sustainability in its strategy and actions. We structure the analysis by focussing in each section on one dimension of autonomy and discussing its impact on Firma’s economic and social sustainability.

Rule Autonomy We defined rule autonomy as the ability to set rules in accordance with the company’s objectives. Most companies aim at economic sustainability and many try to achieve social sustainability by handling social conflicts in a constructive manner. External influences such as laws and regulations as well as contracts and interactions with clients, suppliers and other stakeholders can support or disrupt a company’s engagement to become economically and socially sustainable. Below, we discuss to what extent Firma is enabled or hindered by its clients in its ability to set objectives and to define processes leading to economic and social sustainability.

The main problem is that contracts are frequently changed and that suppliers tend not to be contractually protected from resulting negative effects. The sales director explains that the clients ignore the agreed terms of payment, change quantity and delivery time at short notice

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and make unfounded complaints in order to get price reductions (Interview, WS310006; WS310007). The clients are protected by general terms and framework agreements which contain clauses that allow the client to change most aspects of the contract “at any time for any reasons” while the supplier is not allowed to make any changes or to end the contract under any circumstances (Interview, WS310006; WS310007; General Terms and Conditions, 2008; Framework Agreement, 2008). An American client demands for example in the General Terms and Conditions the following: “Buyer reserves the right at any time to direct changes, or cause Seller to make changes, to drawings and specifications of the goods or to otherwise change the scope of the work covered by this contract including work with respect to such matters as inspection, testing or quality control, and Seller agrees to promptly make such changes” (General Terms and Conditions, 2008). “This contract may only be modified by a contract amendment issued by Buyer” (General Terms and Conditions, 2008). As a rule, Firma demands that their right to cancel the contract is included in the document. The sales director points out that most clients are reluctant to omit any paragraph and argue that the majority of the suppliers sign such contracts without negotiating the terms (Interview, WS310004). Some contracts allow the supplier to terminate the contract under the condition that he finds a new and cheaper supplier for the client. If the supplier found is more expensive than Firma, but Firma wants nonetheless to cancel the contract, Firma has to pay the pricedifference (Interview, WS310006). It is also not unusual that purchasers demand for a “mostfavoured-company-clause” that assures that no other client can negotiate better prices for the same product (Interview, WS310006). Other purchasers ask for contracts in which the delivery of spare parts for a fixed price is guaranteed for decades (Interview, WS310007).

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Another common practice is to renegotiate prices during production. When the prices for steel fell on the world market, a client demanded a lower price. Although Firma had negotiated a long-term contract with the steel works at fixed prices, the client demanded to break the contract with the supplier in order to obtain a price reduction (Interview, WS310006). By contrast, when prices for raw materials increase, the supplier is expected to deal with the situation on its own (Interview, WS310006). Thus, the pressure of lower prices is transferred from one tier in the supply chain to the next which substantially affects economic sustainability of the suppliers. The German Association of Automobile Industry (VDA) has developed specific “principles for settling material prices” with German manufacturers and their suppliers to address the problem. However, the association is not optimistic that its members have the willingness “to share the pain” when faced with fierce competition and concludes that “it must be left to the respective bilateral negotiations to decide who ultimately has to bear what pain“ (VDA, 2008, p.75). As a result, fair treatment remains a question of bargaining power.

The sales director describes that the tone of negotiations has become tougher over the years and that the clients’ buying personnel is facing pressure to reduce costs in order to meet – at times unrealistic – objectives set for their department (Interview, WS310004). Although the individual buyer may know that the price offered by Firma is already the best possible offer, he or she is usually not allowed to negotiate a compromise without the – unlikely – permission of his department (Interview, WS310006). Therefore, some buyers cheat; e.g. they provide extra payments for “tools” or for the “maintenance of production capacities”. When such costs are excluded from the calculation, the resulting price is small enough to fit into the client’s sourcing objectives (Interview, WS310006). The German Automotive Research Institute claims that differences in purchasing practices are the result of the purchaser’s

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professional background either in accounting/controlling or in engineering with the latter being more interested in quality and the former focussing on prices (VDI, 2006).

Purchasers also employ deceit in their negotiations. For example, they may pretend that they have found a cheaper supplier elsewhere, disregarding that the competitor cannot guarantee the quality and the quantity needed (Interview, WS310004). As a result of such practices, suppliers may accept to work for extremely small margins (Interview, WS310004; WS310007). Sometimes Firma accepts very small margins for usually older products in order to secure new contracts form the same client who other wise threatens to find another supplier. Similar practices have been reported for manufacturers of tyres which may deliver tyres to car manufacturers for a price below production costs (Kraus, 2009) in order to ensure that car owners will buy again their tyres when substituting older ones.

In sum, the uncertainty resulting from constant renegotiations, unfair contracts, at times arbitrary or deceitful client behaviour and a pressure to work with small margins make it difficult for suppliers to set their objectives and plan their internal processes correctly. Their rule autonomy is violated and their ability to plan on a medium- or long-term and to make investments addressing future rather than immediate needs is compromised. We predict that these factors have a negative effect on the firm’s capability to plan its long-term functioning and to address social conflicts in a meaningful manner. Accordingly, we formulate: Proposition 1: When a company’s rule autonomy is violated, its ability to operate in an economically and socially sustainable manner is compromised as well.

Executive autonomy

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Executive autonomy is the ability of a company to create a corporate identity and a corporate culture reflecting the corporation’s objectives. In terms of sustainability, the firm has to be able to introduce rules, habits and attitudes in its firm that allow it to work productively and in a manner that respects the stakeholders’ interests including that of the employees. In the automotive industry, such efforts are hindered by contract violations of clients and an ambition to gain direct influence on the supplier’s company policy to obtain price reduction.

Since the 1980s, Firma’s quality management is undertaken in cooperation with its clients. Today, their influence has outgrown the needs of quality control (Interview, WS310007). For example, Firma planned to move the production of a certain product from one of its factories to another. However, the buyer feared changes in the product’s quality, despite the fact that Firma had tested the new production line and guaranteed the same quality. Ultimately, Firma was prohibited to make this change. In other cases, buyers would allow changes regarding the production site in exchange for additional discounts arguing that the organizational improvements made by Firma led to productivity growth which should be shared (Interview, WS310007).

In general, clients influence all kinds of production details irrespective of their true implications for quality or timely delivery. This interferes with the supplier’s executive autonomy. While Firma fully accepts all activities connected to quality control, they feel that the client ought not to be allowed to dictate accounting principles and incentive systems or to gather data on specific production processes in order to pass them on to other suppliers. However, both happen (Interview, WS310007).

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The uncertainty resulting from the practice of changing or disregarding contracts can strongly impact on a company’s economic performance. Once, Firma was building a new production hall and production line designated for a specific order, which was cancelled at the last minute. Although the contract contained a penalty clause, the client refused to pay for the investments and threatened not to place further orders if Firma would insist on a payment (Interview, WS310004). This sort of behaviour occurs more often in economic crises, In 2009, many clients refused deliveries. In order to force Firma to stop contractually agreed deliveries, they threatened to send back the goods at Firma’s costs. Again, Firma was unable to get paid for goods it produced in good faith and decided against enforcing the penalty clause in its contracts, because its clients threatened to end the cooperation (Interview, WS310006). Once, Firma decided to enforce its contract after the purchaser of the client became so upset with the unfair behaviour of his superiors, that he advised the sales director of Firma to stop all deliveries in order to get his money (Interview, WS310004). However, this case is atypical. Without the conflict inside the client’s purchasing department, the risk of losing its good reputation with the client would have been too high from Firma’s point of view (Interview, WS310006).

In sum, reoccurring contract violations limit Firma’s executive autonomy significantly, since the supplier is hindered to do business in accordance with those rules it has agreed to by signing a contract. This endangers not only the firm’s economic sustainability but also the social peace. The latter was clearly the case, when a client demanded that an offer had to be fulfilled immediately. Firma’s employees worked overtime throughout the weekend to meet the deadline. Once the production was finished, the buyer neglected to pick up the goods for several days. Finally, the sales director called the purchaser and demanded him to get the products, because the workers started to complain about the mismanagement (Interview,

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WS310007). Such incidents undermine trust among management and employees and spoil the atmosphere at the workplace. Reflecting on the empirical evidence, we formulate: Proposition 2: When a company’s executive autonomy is violated, its ability to operate in an economically and socially sustainable manner is compromised as well.

Control autonomy Control autonomy is the ability to monitor internal rules and to sanction non-conformist behaviour, for example by establishing corporate governance structures. Here, the framework for rule execution is laid out. Without a certain degree of control, neither sustainability nor any other objective can be pursuit successfully. However, Firma’s ability to control what happens in its company and with its know-how is interfered with: clients demand the implementation of specific management tools, pass on confidential information to competitors and dictate where to source and to whom to sell.

Firma has been asked by clients to introduce their choice of tools for quality management, accounting and managing workers’ incentives. Since Firma works for several clients with this type of demand, meeting their expectations would mean to work parallel with several control and sanctioning systems – a practice more likely to result in confusion than in better management. The purpose of this demand is to receive easily comparable data regarding the supplier’s performance. For example, one client asked Firma to apply his formula to calculate the depreciation of their production equipment; another demanded full disclosure of the data used for the price calculation in order to recalculate them (Interview, WS310007). Although Firma agrees that clients have the right to get strongly involved in quality control, its managers reject interferences in human resource issues and on accounting (Interview,

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WS310004; WS310007). As a compromise to implementing their clients’ management tools, Firma offers customized data on process-technology etc. (Interview, WS310007).

Sharing data with clients can be risky, since some of them do not respect confidentiality agreements. It happened several times that clients passed on confidential information on production technology to Firma’s competitors. It happened, for example, that a buyer complained about Firma’s product. After inspecting the malfunctioning piece, Firma’s engineers had the impression that it had been produced by a competitor who failed to reach the quality standards. Suspicion was raised, because the client specifically wanted to learn how the fault could be repaired and avoided in production (Interview, WS310004). In another case, a buyer openly asked Firma to train the workers of a Chinese competitor who was chosen to take over the production of a part originally produced by Firma. Firma provided the training in order to keep this important client happy (Interview, WS310004). In order to ensure fair play, the German Association of Automotive Industry (VDA) has established “Basic Principles for the Mutual Protection of Intellectual Property” demanding that all “manufacturers and suppliers represented in the VDA have (…) to protect and keep secret intellectual property and confidential information received from each other” (VDA, 2006, p.2).

Firma’s ability to ensure the quality of its products has also been compromised by a client who demanded that the products would be sent for finishing to a contractor of his choice. Firma’s managers consider this practice as risky, since a small company was chosen to become the direct buyer of Firma’s products. Since small companies are more prone to illiquidity and insolvency, Firma was concerned about the risks it was taking as a result of this arrangement (Interview, WS310007).

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We conclude that Firma’s ability to control the use of its know-how is limited by illegitimate and illegal practices of their clients. Faced with its clients’ power, Firma neglects to enforce both its property rights and its right to chose its subcontractors which results in a reduction of its control autonomy. Both violations are a hazard to Firma’s economic sustainability. A link to social sustainability exists mainly in the worst case scenario of a supplier goes bankrupt and employees loose their jobs leading to a number of social problems and conflicts. Assuming that suppliers face the danger bankruptcy, we formulate: Proposition 3: When a company’s control autonomy is violated, its ability to operate in an economically and socially sustainable manner is compromised as well.

Summary of the results Figure 2 summarizes the analysis. The effects of autonomy loss on a company’s economic and social sustainability are strongly interrelated. When a company is not economically viable it cannot uphold the social peace. As a worst case scenario, bankruptcy results in job losses which have a negative impact on the society’s social equilibrium.

****************************************** Figure 2 about here ******************************************

As purchasers transfer financial and planning risks to their suppliers, they limit their ability to make long-term investment in production and product development. The example shows that purchasers interfere in almost all management areas of their suppliers: from production to product policy, pricing procedures, sourcing and sales policies. Ultimately, purchaser’s

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demands narrow the scope of their suppliers to develop their business in a sustainable manner. The suppliers’ corporate autonomy, their economic sustainability and their existence is endangered and a negative impact on social sustainability has to be expected.

One of the reasons why supplier management practices have been taken to an extreme which erodes the suppliers’ autonomy, especially in the spheres of rule setting and execution, lies with the way car manufacturers organize themselves. Firma’s managers observed that the purchasing and the production department of car manufacturers do not cooperate in defining their requirements for suppliers. Tayloristic management structures and the division of competences lead to contradictory demands and cause a dilemma for the supplier who has to fulfil both: cost targets set by the purchasing department and quality standards defined by the production function (Interview, WS310006). Over the years, the focus on cost-cutting has limited or destroyed the abilities of suppliers to enforce their rights vis-à-vis their clients. Suppliers face a situation that Karl Marx would call “doubled competition” (Marx, 1971: 395): On the one hand, they compete against each other and, on the other hand, they compete with the purchasers in price negotiations. This is similar to the situation, described by Marx, of proletarians fighting over jobs.

Summary and Discussion In order to operate in a sustainable manner, companies need to be able to evaluate their objectives and processes regularly and to adjust them when changes in the firms’ economic, social and ecological environment make this necessary. The case study of a German automobile supplier demonstrated that three kinds of abilities contribute to this process: the ability to set rules, to implement them and to control their execution. We argue that these abilities can be interpreted as dimensions of corporate autonomy, distinguished in rule

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autonomy, executive autonomy and control autonomy. We propose that a certain degree of corporate autonomy is necessary for a company to responsibly make decisions and to contribute towards sustainable development. Our case study demonstrates that a too large restriction of corporate autonomy hinders such a contribution.

In addition, respecting a partner’s right to autonomy ought to be a duty in business relationships. Mirroring Hegel’s argumentation regarding the sovereignty of states, it can be argued that a company’s claim for autonomous rights implies its acceptance of other companies’ autonomous rights. Also, in buyer-supplier relationships, any collaboration ought to be a voluntary act whereby both parties are free to decide to what extent they refrain from their autonomous rights. It can be argued that autonomy and self-determination are fundamental for responsibility and accountability. Kant (1999) distinguishes between a person acting from duty or in accordance with duty (Kant, 1999). An actor, who solely complies with rules which are imposed on her, disregarding her own conviction, is not autonomous. In the case of collective actors, we propose that the ability to set and act according to rules decided by the collective is fundamental for autonomy. Accordingly, we distinguish between companies who comply with rules that are imposed on them and companies that either set their own rules or chose to comply with existing norms.

Since there is no defined set of actions and rules that lead at any time and in any situation to sustainability, it can be argued that some degree of flexibility, analysis and diagnosis are necessary to achieve it. Autonomous collective actors are more likely to do so successfully than those whose autonomy is restricted and who have to comply with rules which they are not permitted to adjust on their own in order to fit to their situation. Consequently, a

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restriction of corporate autonomy is likely to result in diminished capacities to act in a sustainable and responsible manner. To summarize this argument we formulate: Proposition 4: Restrictions to a company’s autonomy reduce its ability to contribute to sustainable development.

Since this study only investigated a single case regarding the link between corporate autonomy and sustainability, future research should address the question whether in supply chains with dominant suppliers, for example monopolistic energy suppliers, similar problems occur. Another limitation of our study is that we did not investigate Firma’s contribution to environmental sustainability due to the difficulty in measuring this contribution in a meaningful way. Despite the limitations of our empirical evidence, we recommend considering the notion that a certain degree of autonomy is necessary to achieve the level of critical self-evaluation and constant development needed for becoming and remaining a sustainable and responsible company when studying sustainability at the company level.

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Documents from the supplier Brochure of Firma (2008) Description of the Firma for Public Relation Purposes. Framework Agreement (2008) Contract template proposed by clients of Firma. General Terms and Conditions (2008) Contract template proposed by clients of Firma. Interviews: WS310004, WS310005, WS310006, WS310007. Presentation of Firma (2008) Power point presentation made by the sales director.

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Figure 1: THE CONCEPT OF CORPORATE AUTONOMY

Corporate Autonomy

Rule Autonomy (potestas legislatoria)

Executive Autonomy (potestas executoria)

Control Autonomy (potestas iudiciaria)

Ability to set rules in accordance with the corporation’s objectives, e.g. production standards and codes of conduct

Ability to create a corporate identity and a corporate culture reflecting the corporation’s objectives

Ability to monitor internal rules and to sanction non-conformist behaviour by establishing corporate governance structures

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Figure 2: SUMMARY OF THE ANALYSIS OF FIRMA

Rule Autonomy

Practices endangering economical sustainability

Practices endangering social sustainability

Power difference is used to negotiate unfair contracts and to lower prices constantly.

As a result low margins are common limiting the scope for investments.

Price pressure is handed down the supply chain pressuring: Supplier is expected to renegotiate prices with suppliers of raw material despite existing contracts. As a result, suppliers at all tiers are pressured to cut costs, e.g. by paying lower salaries or by cutting jobs.

Frequent contract violations destroy trust, disrupt business and hinder long-term planning.

Unnecessary overtime work impacts the management-worker relations negatively.

Clients interfere with decisions on production sites limiting the scope for innovation and growth.

The constant lowering of margins endangers investments in human capital.

When different quality management and accounting systems are implemented meeting clients’ demands, a loss of productivity and effective control is likely.

The abuse of confidential data leads to a loss of trust between business partners and is the seed for future defective behaviour.

Competition is supported or faked in order to cut prices.

Executive Autonomy

Control Autonomy

Information gathered through quality management tools is used by clients to cut prices and given to competitors. Has to work with subcontractors/ buyers that are chosen by a larger client resulting in higher financial risks and a loss of control.

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In a worst case scenario, financial risks can translate in job loss and resulting social problems.