Egyptian cotton, it's time you met blockchain.
In the week since Indian textile maker Welspun was called out by Target for mislabeling sheets and pillow cases as premium Egyptian cotton products, the company's shares have collapsed. While Target has severed all ties and Wal-Mart and J.C. Penney have announced their own reviews, Bed Bath & Beyond has appointed an independent auditor.
A year ago, Welspun, one of the world's largest manufacturers of home textiles, was boasting of a durable competitive advantage over Chinese rivals. The latter, it claimed, had higher labor costs and were dependent on stockpiled Chinese fiber, which tended to lint.
Then again, in February, Welspun bragged about a new, DNA-based Egyptian cotton certification it had won for its bed linen, terry towels and bath rugs, with one of its senior executives claiming in an article by Home & Textiles Today that by next season, the supply chain would be cleaner.
That forecast, it seems, came true sooner than the company expected, and in ways it couldn't possibly have imagined. But Welspun's dirty linen getting washed in public may be an opportunity to raise an important question about integrity of supply chains. Rather than leave it to market forces, certifications, audits or whistle blowers, why not make enforcement of trust a technological challenge?
Distributed online ledgers -- or blockchains -- are being deployed to stamp out "blood diamonds," which are typically mined by forced labor and whose proceeds are used to finance violence, the Wall Street Journal reported last month. Ensuring the provenance of cotton should be no different. Using GPS and RFID tags on plastic wraps, Auscott, an Australian grower, tracks cotton bales from the field to the manufacturer. Extending the technology to all 250 bed sheets made with one bale might be more difficult and expensive, but not impossible.
Besides, what's the alternative? It's wishful thinking to believe that a corporation's reputation capital is enough to secure the integrity of complex supply chains. As scandals in the global automotive and financial industries have repeatedly underscored, management will pursue short-term profitability even if it means putting corporate survival at risk.
Welspun was probably no different. Its Ebitda margin of 30.5 percent in the June quarter was the highest in at least four years. For two years, no analyst tracked by Bloomberg rated the stock a sell. Investors got 4,300 percent returns over the past five years, in effect more than doubling their investment every 12 months.
For at least two of those five years, Target was paying Welspun for pure Egyptian cotton, and getting inferior quality stuff in return. Customers, whether individuals or companies, usually don't know enough, and the cost of finding out more may be prohibitively high, particularly for low-value items. Suppliers exploit this information asymmetry. Welspun's most recent earnings report proudly declares an award for responsible sourcing it received from none other than Target.
The sorry saga has shown once again that global retailers' current system of policing the supply chain is unreliable and accident prone. But if the ancient bale of cotton meets blockchain, there would be no need for a Target or Wal-Mart to look under the hood -- or the sheets.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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