CHEAP LABOR INDUSTRIES IN ASIA

LABOR AND CHEAP LABOR IN ASIA

Cheap, hardworking labor has been a driving force in the economies of Asia. One analyst told Time magazine: "In most of Asia, factory workers put in long hours for low wages. That, in fact, is why U.S. firms have moved in.” On top of that Asia receives about $78 billion a year from workers working abroad. Analysts have said that if it wasn't for export quota from individual countries, companies that rely on cheap labor would all be in China rather than spread out in Southeast Asia.

In August 2011, the Asian Development Bank said that Asia needs to develop more high-quality jobs if he region is to sustain economic growth that it has been experiencing the last two decades. ADB chief economist Changyong Rhee said,”Asia has outstripped other regions in growth and employment creation since 1990.” But “Asia still remains home to most of the world’s poor...I don’t want to downplay the importance of economic growth, but on the quality job front, progress has been less impressive.” [Source: Reuters, August 21, 2011]

Reuters reported: “Citing figures compiled by the Manila-based development bank, Rhee said the two-thirds of workers in developing Asia, which excludes Japan, were employed in the informal sector in 2008, little changed from 1990. In India, the proportion of informal workers rose to 82 percent of the workforce, from 80 percent between 1991 and 2008. However, Thailand's percentage of informal workers dropped to 54 percent in 2008 from 70 percent in 1990, while Malaysia saw a drop to 22 percent from 31 percent over the same period.In contrast, informal workers made up 12 percent of the workforce in developing Europe in 2008, and 33 percent in Latin America and the Caribbean region. ADB said informal work is usually a sign of underemployment and lower incomes as well as the absence of social safety nets.

“The bank urged low-income Asian countries to make it easier for workers to move from rural to urban areas in search of higher-paying jobs, as well as support activities to increase productivity in the rural non-farm sector. It also recommended extending basic levels of social protection to informal workers.

Cheap Labor Industries

Japan's economic ascension had three distinct stages. The first stage was guided by the "priority production system" of the 1950s that stressed increasing coal and steel output and developing heavy industries like shipbuilding and timber making. In the second stage in the 1960s and 70s Japan focused on producing consumer products and automobiles for export markets. The third stage was the development of knowledge-based products like computers and electronics. [Source: Ian Buruma, Newsweek]

The Japanese went through a stage similar to the one that China is going through now in terms of copying and piracy. In the early stages of their development Japanese companies copied many American and European products. These companies and the Japanese government became more concerned with intellectual property concerns when Japanese companies needed laws to protect their patents and copyrights.

Japan’s talent for monozukuri (“thing making”) has been a key to its success. Many businesses got their start in one room neighborhood factories, relying on cheap labor, that made textiles, toys, tools and cheap electronic items. The first Sony portable transistor radio appeared in 1955 and the first Barbie dolls were produced in Japan in 1959.

Reliance on labor-intensive industry is sort like a stage that developing economies go through. In the 1980s, South Korea was leading manufacture of sports shoes and cheap textiles. These products are now made in China, Thailand and Indonesia while South Korea is a leading manufacturer of semiconductors and other high tech products. China is making more and more high tech products all the time.

Cheap labor can be viewed as an impediment to development rather than a boon. When the United States was growing there were labor shortages and this encouraged innovators to come of with labor saving device like the cotton gin and assembly line that increased productivity and efficiency. There is little incentive in China to be innovative because labor is so cheap and there supply sometimes seems unlimited.

Shoes and Textile Industries

Shoe manufacturing and textiles were among first industries to come to Asia and among the first to move on when wages rose. In some cases these industries got their start in Japan and then South Korea and then moved on to Indonesia and Vietnam and China. Nike was at the vangaurd of this process.

Wherever Nike went they raised wages and living standards. While they were accused of exploiting labor and damaging the environment in the United States and Europe they were welcomed in the countries they operated in as engines for growth. Other companies in search of cheap labor came. They mainly produced goods to be exported back to the country where the company was from, namely the United States. Investors sought profits. Their goal was not to improve the living standard of their workers. As workers skills improved, their wages rose and they begin to buy consumer goods for themselves. A middle class was generated.

The textile industry is major provider of jobs and foreign currency in many Asia countries. Textile companies tend to locate where labor is cheapest and growth has sometimes hindered by quotas in developed countries. The global industry went through a major upheaval in 2005 when a complicated global system of quotas was dropped and everyone was worried that the industry would en masse to China where economies of scale make huge cheap factories possible.

The system of quotas--originally put in place in 1974 to regulate a $350 billion-a-year global industry--limits the number of shirts, towels and other textiles any country can export annually to the U.S. and the European Union. As a result buyers couldn’t buy exclusively from the countries that make them most efficiently and cheaply, such as China, but must also order from less competitive places, such as Burma and Swaziland. One buyer said, "It's crazy: 80 percent of our clothing comes from 20 percent of the countries," says Joshi. "But we need to go to all these places because of the quota system." On December 21, 2004 all the craziness will come to an end. That's when a 1995 trade pact called the Agreement on Textiles and Clothing, signed by members of the World Trade Organization (WTO), stipulates an end to quotas.

For smaller developing countries that depend heavily on textile manufacturing, the end of quotas could be a dire economic blow. In 2002, for example, quotas on some items, including gloves and negligees, were lifted by the U.S. By 2003, Chinese exports of those goods had leaped nearly 200 percent from their 2001 levels, while Sri Lanka's exports had dropped more than 50 percent and Bangladesh's had fallen 46 percent. But the ending of quotas in 2005 “overall resulted in expansion and increased market shares” in places like Indonesia and Bangladesh as competition from China weeded out the strong from the weak and made made the strong companies more efficient and productive.

Limits of Cheap Asian Labor

Junichi Abe wrote in the Yomiuri Shimbun, “Unlike the way Japanese companies have set up production facilities in North America and Europe primarily to mitigate trade frictions, production facilities in Asia have been aimed at taking advantage of lower labor costs found there. The very premise of cheap and competent labor in other Asian countries, however, has begun to be questioned. Vietnam is one example. Vietnam is often said to be the top choice for Japanese firms in the so-called China-plus-one strategy, which focuses on the booming Chinese economy while also securing production facilities in other parts of Asia to spread out investment risks. The Japan Business Association in Vietnam said it had 124 member companies in March 2002. There were 243 as of February 2007.[Source: Junichi Abe, Yomiuri Shimbun March 14, 2007]

Kazuto Yachi, the general director of HAL Vietnam Co., the only overseas production arm of Hiroshima Aluminum Industry Co., put it this way: "As a result of the influx of Japanese companies into Vietnam, there has been fierce competition among them for excellent personnel. Although there are no major problems yet with securing workers here, it's getting increasingly difficult for us to get skilled technicians.”

HAL Vietnam was established in December 2002 in Hanoi's Thang Long Industrial Park. The factory has just over 300 workers, who, Yachi said, are "ready to leave us if they find jobs with wages higher than ours--even very slightly." Yearly turnover at the factory is about one-third of all workers, Yachi said. The companies also have to compete with their South Korean and Taiwanese rivals in attracting workers. According to a recent survey by the Hanoi Center of the Japan External Trade Organization, the top problem regarding labor management for Japanese companies in Vietnam is "wage increases" for their employees, which was cited by 75.9 percent of respondents. That was followed by "difficulties in securing mid-level managers" at 59 percent and "difficulties in securing technicians" at 50.6 percent.

Rising wages are also a source of trouble for Japanese firms operating in Jakarta, where companies began branching out earlier than in other parts of Asia. Takashi Aso, president of Pt. Metbelosa, an affiliate of Osaki Electric Co., said, "As the minimum wage was increased 10 percent recently, labor costs have been a major cause of rising production cost."Labor costs are affected by not only competition among businesses, but also labor policies of local governments. Given that wages in most of Asia are bound to rise with economic growth, Japanese companies, in expanding production there, can no longer take it for granted they will find "low-priced, excellent" labor.

In light of this, Toyota Motor Co.'s personnel management in Indonesia may serve as a guiding light. With Indonesia as its production pivot in Asia, Toyota, in collaboration with such parts manufacturers from Japan as Denso Corp. and Aisin Seiki Co., has a network of automobile parts suppliers throughout Southeast Asia. Toyota's local procurement rate of automobile parts in the Association of Southeast Asian Nations region has now reached 95 percent, earning Toyota a reputation as an "ASEAN-based" enterprise. Regarding wage increases in Indonesia, Hidematsu Ibaragi, president of Pt. Toyota Motor Manufacturing, Indonesia, said the average pay at his company for factory workers is "a little higher" than other companies in that country.

Although it is often said the quality of labor is relatively low in Indonesia, it is primarily because many Japanese companies have only used Indonesian workers for unskilled jobs, Ibaragi pointed out. "If we systematically train them, Indonesian workers would surely show a strong willingness to work, as well as a considerably high level of problem-solving capabilities," he said. Toyota's idea is to foster excellent workers on the strength of the Toyota formula of job training, instead of simply pinning hopes on getting cheap labor.

Chinese Cheap Labor Model

The Chinese manufacturing model goes something like this: 1) find a suitable product, often a component for a larger product; 2) build a factory in a new development zone with one’s life savings; 3) steal skilled labor from competitors and hire cheap labor to do unskilled tasks; and 4) move factory if expenses get too high. [Source: National Geographic]

Cheap labor isn’t the only reason for the success of Chinese factories. They Chinese also build large factories to reduce costs through economies of scale and then take this a step further by employing a strategy called clustering, Established through a mix of central government commands and free market entrepreneurship, clustering means that companies that make similar things like socks, bras or cigarette lighters, group together making it cheap to supply raw materials and distribute goods, reducing costs further. Many cities attract industry by claiming a large plot of land for a factory zone and offering the land at low prices along with tax breaks and other incentives.

Long supply chains with multiple contractors and subcontractors are common in China. Often they only thing that hold them together is trust which leaves open the possibility for fraud, and contaminated goods. When the process breaks down or there is some problem it is often difficult to ascertain clearly who as fault.

Profits margins for Chinese labor-intensive industries are very slim. If factories raise prices too high customers will seek producers in places where prices are cheaper such as Vietnam, Indonesia or Bangladesh. The rising value of the yuan has put a squeeze on factories who have to keep prices low to kept customers. They are trying to improve efficiency.

Chinese Factory Towns

“The evolution of factory in China is pretty such the same regardless of where it is,” Peter Hessler wrote in National Geographic. “The first to show up are the construction workers...most of them unskilled migrants from rural villages, and the small-time vendors and entrepreneurs that sell them meals and grocers. Next to arrive are stores that sell construction supplies and shops that sell cell phones, most of them with prepaid phone cards. [Source: Peter Hessler, National Geographic, May 2008]

“When the factories are up and running, female workers show up to work in them. To meet their needs are clothing and shoes shops. Sometimes it months later when the garbage is finally collected and bus service starts. In many cases man holes are left uncovered out of concern they will be stolen. Once the factories settle in, training schools open up that teach English, computer programing and other skills so workers can improve themselves and make themselves more marketable.”

“There is a surprisingly lack of institutional and government support. In the y early stages there are few policemen. Once the town is up and going there are few libraries schools, hospitals or even government offices, Most everything is oriented towards business. The local government is looking for ways to make money not provide public services.”

Nike, Reebok, Adidas and Poor Working Conditions in Asia

Nikes are manufactured in Vietnam, China, Indonesia and Thailand. It has been criticized for hiring underage workers, paying subsistence wages, hiring abusive managed and exposing employees to dangerously high levels of toxic chemicals. As of 2001, Nike produced 78 million shoes a year from contract manufacturers in China and about 160,000 workers in China relied Nike for jobs. Nike says the labor cost for a $85 shoe are about $2.50. If materials are included the cost is $16. If administrative labor is excluded the labor cost are only about $1.

Some Nike factories have been described as "little more than prison labor camps." Employees work 72 hour weeks and can be fired for refusing over time. One study found that workers at factories that make Nikes and Reeboks, monitored in 1995 and 1997, earned as little as 10 cents an hour and toiled for up to 17 hours a day. In response to criticisms, Nike asserts it doesn't make shoes, it subcontract the work.

Responding the criticism Nike promised to raise the age of employment to 18, improve safety use water-based rather solvent-based glues and use machines that do cause serious injuries. Some factories offer free day car and health checks and provide continuing education for their employees. In 1998, Tim Larimer of Time wrote: "Nike's factories in the region are above average...[We] found them to be clean, brightly lit and well-ventilated. Where the employees have to use foul-smelling glues, there are plenty of fans to carry the fumes.”

Adidas has been accused of using slave labor to make soccer balls. According to a lawsuit brought on behalf of dissident Baso Get, political prisoners in China "were coerced into waxing, stitching, and sewing Adidas soccer balls 14-18 hours a day in inhumane conditions" to make soccer balls for the 1998 World Cup.

Sweat Shops

Sweatshops are small factories that produce things like garments and shoes and light assembly plants that produce things like toys and cheap electronics. Stereotyped ones are hot, stuffy places, hence the name, where workers put in long hours, often working under harsh conditions, for low pay.

Most poor Asians would like to see more sweatshops rather less of them. They provide scarce jobs for people who otherwise wouldn’t have jobs. Even salaries as low of two ro three dollars a day, which seem minuscule by Western standards, are a lot of money for people living on sustenance level in agricultural villages.

Jeffrey Sachs of Harvard and Columbia and Paul Krugman of Massachusetts Institute of Technology, say that sweatshops are the first step taken by developing countries on the road to becoming developed ones. The economies of Japan, Hong Kong, Singapore, Taiwan and South Korea all got started with sweatshops. Responding to critics of sweatshops, Krugman told the New York Times, "A policy of good jobs in principle, but no jobs in practice, might assuage our consciences but it is no favor to its alleged beneficiaries.”

The biggest worry that many workers have is getting hurt on the job. In many cases the can't afford proper hospital care and their company won’t pay for their medical costs. Many end up getting help from a local healer and suffer injuries that prevent them from working at the factories again.

The Asian financial crisis in 1998 slow reforms to improve conditions at sweatshops. Owners wee unable to make improvements when they were struggling to cut cost to stay afloat.

Disney Workers in China

Workers at a Disney factory Disney has been criticized for the poor labor conditions at some of the factories that produce its merchandise. Attention was brought to the issue after workers who put in 15-hour days at a factory that produced Mickey Mouse, Donald Duck and Snow White statuettes sued their employers for back pay and compensation and won. The workers were often only given one day off a month, and were not given any overtime. Disney claimed the problem was not their fault, but was the problem of the company that Disney licensed to produce the statues.

Factories that produce Disney products have been charged with employing forced overtime, mandatory seven-day workweeks, paying salaries as low as 16 ½ cents an hour, housing workers in cramped, fetid dormitories and imposing steep fines for minor infractions such as showing up five minutes late for work. There have also been reports of beatings and verbal abuse and workers vomiting at their work station from breathing in chemical and paint fumes in poorly ventilated faculties

Describing a worker who get paid $65 a months for a 55-hour work week, assembling a Disney Mini Touch “n Crawl Minnie dolls, Abigail Goldman wrote in the Los Angeles Times: “Li moves with lightning speed---glueing the pink bottom, screwing it into place, getting the rest of the casting to adhere, tamping it down with a special hammer. Pulling the battery cover through its slats, soldering where she glues, testing to make sure the leg joints on the side still work, then sending it down the line...The entire process takes 21 seconds.”

Women Factory Workers in China

Many of the employees that work in the toy, textile and shoe factories that produce goods for Mattel, Nike, Reebok and Levis are young peasant girls in their late teens and early 20s. Many workers live in "three-in-one" facilities with production, warehouses and living quarters. These facilities are illegal, in part because flammable material are often stored near where people sleep.

In most cases the girls work six days a week from around 7:30am to 6:00pm, with an hour off for lunch and maybe 30 minutes break for dinner Overtime begin at 6:00om and runs past midnight during the busy season. One their days off workers often wander around in their uniforms with their ID badges. Some work seven days a week so they can take a week or two off to go to their hometowns during the Chinese New Year.

Depending on the experience and overtime young women factory workers get paid between $70 and $250 a month. From this fees are deducted for housing and meals. Sometimes workers are fined for things like spending more than the allotted five minutes in the toilet. Workers often work even when they are sick and have managers standing over their shoulders, telling them to work fast. To keep workers from quitting factories often delay paying salaries so workers worry they will lose several months pay if they quit.

A worker promised a $120 a month salary, regarded as good pay, may be forced to sign a contract with a basic salary of $24 minus $13 for room and board. To reach a $120 they must fulfill quotas that are almost impossible to fulfill even with incredibly long hours. Many contracts demand that workers pay $58 to their bosses if they didn’t complete their contract. If they “steal intellectual property--- by taking a job with a competitor they have to pay $2,400. Kathie Lee Gifford handbags, sold at Wal Mart, were made at a Chinese factory that beat workers and deducted up to 70 percent of their pay for food and lodging. [Source: New York Times]

Factory bosses like young female workers because they are regarded as more hard working and manageable than young men. Some girls remain for years in their dead end jobs; others advance in the company or leave and start their own businesses. Some want to marry their hometown sweethearts. Others date only city guys.

The work is hard but the experience in an adventure and an opportunity that offers infinitely more possibilities than village life back home. As bad as thing are, these women are often looked upon with envy when they return to their villages and view themselves as more worldly and sophisticated than other villagers.

Female Workers at a Chinese Barbie Factory

In toy factories in China, young female workers often work assembly line style, performing the same task again and again, with runners bringing them parts and taking away the products. A typical worker at the Barbie factory in Guangdong province near Hong Kong is an unmarried woman between 18 and 23 from Sichuan province who works at the factory for between two to five years or until she earns enough money to return home with a dowry. Many of the girls are younger children of families that already have a son. [Source: Anita Chen, Wall Street Journal, October 29, 1996]

The young women are housed in drab dormitories that hold thousands of migrant laborers. Twelve girls are crammed into a narrow room with a concrete floor, a single fluorescent bulb and a tiny bathroom. Kathy Chen wrote in the Wall Street Journal, "Cold water sputters on for a few hours twice a day, while the meat served is too tough to swallow and has hair in it." Many of the girl's don't mind the housing, because it is better than what they are used of back home.

Meals are subsidized and medical care is provided In other factories there is only one bathroom for more than a hundred workers and fights sometime break out in the long lines to get in. Some workers get meat or fish or only twice a month. In their free time many of the girls dress in pretty clothes and stay in their rooms. One girl told Mike Edwards of National Geographic, "It's very hard of have contact with town people. We don't speak Cantonese. The town and the workers are different communities."

Chen took bus journey with a young girl who left her village in the Sichuan province for a job at a Barbie factory in Guangdong. The young girl suffered from homesickness, sleepless night, cold and nausea during the four-day trip on the crowded, smelly bus. The only food that the girl could keep down were some sugar cane, oranges, peanuts and salted duck eggs her mother packed for her. After arriving she attend a battery of lectures and medical check-ups. Among other things shw as told that if she misses one day of work money will be taken from her salary and if she misses three days in a row, she’s fired. After her ID and papers were checked to make sure she wasn’t married she signed a contract. Girls that were promised 350 yuan a month end up with a starting salary of 200 yuan ($24) a month.

The popular Bratz dolls are made in factory in Shenzhen in southern China where workers are forced to toil up to 94 hours a week. Workers are paid the equivalent of 17 cents for each doll, which retails for at least $16 a piece in the United States.

Female Workers at Sport Shoe Factories in China

Conditions are similar in the Taiwan-run You Yuan shoe factory in Dongguan (near Hong Kong) that makes 12 brands of shoes including Nike and Reebok. The factory employs 40,000 workers, 70 percent of the female, in the 1990s. [Source: Anita Chan, Washington Post, November 3, 1996]

"You Yan is run in a decidedly military style," wrote Anita Chan in Washington Post. "New recruits are given three days of 'training.' The first day, according to one of them, is largely spent marching around the compound, barked at by a drill sergeants. At 6:30 pm commands could clearly be heard in the background: 'Left! Right! Left! Right! About Turn! March!'" Later they have run 1.5 kilometers mile and do as many push-ups as they can within a minute.

Manufacturing shoes is generally a three step process: 1) first one group cuts the pieces rubber foam and fabric; 2) another group sews and glues the pieces together; and 3) a third group glues the sole to the shoe.

Most of the work at You Yuan entails sewing pieces of shoe together with industrial sewing machines. Many workers put in 12 hour days and get one day off every two weeks. During busy period, worker have to work from dawn until 11:00 p.m. For this the workers get paid about 25 cents an hour. The turnover rate at the factory is 7 percent a month. Girls who quit before their contract is through loose two weeks pay.

The companies provide meals and living quarters. At meal time, the girls only have 10 to 15 minutes to eat and they can only start eating when a bell rings. Girls on their way to the cafeteria file up one set of stair while girl on their way you go down another. Workers who are late are penalized a half day's pay. In the evening, sometimes the girls gather for rallies in a factory courtyard shouting, "Be respectful toward my work! Be loyal! Be creative! Be of Service!"

”Better Work” and Difficulties in Monitoring Factory Work Conditions

On outside monitoring groups taking action to improve conditions at sweat shop factories, Rachel Louise Snyder wrote in the Washington Post: “Monitoring, when done effectively, takes a lot of time, from two days to a week. It’s not simply a matter of walking around a factory checking ventilation systems, light bulbs and fire exits; it’s painstakingly comparing export records with buyers’ contracts and calendars (to make sure that work is not happening on a Sunday, say) and sometimes even weather reports. If multiple groups are auditing a factory annually, it can spend weeks out of each season just working with them. One factory I visited in China had an entire department devoted solely to working with the many monitors who came through. On top of that, third-party monitoring is very expensive. The International Labor Organization puts the cost at $1,500 to $3,000 per audit, and many factories are audited five or six times in one month, though the frequency varies greatly. [Source: Rachel Louise Snyder, Washington Post, March 30, 2012]

“Underage employees are often weeded out by auditors simply walking around attempting to spot young-looking workers---most often girls---or thumbing through employee records. I interviewed dozens of workers in the course of writing a book about the global manufacturing industry, and every one told me that she would help hide underage co-workers if need be, because the families of these girls must be in dire straits to send their daughters to work. [Ibid]

“There is, though, a better way. Cambodia has proved it. In the late 1990s, the country negotiated a deal with the Clinton administration that linked good factory conditions to increased access to the U.S. market. Cambodia brought in the International Labor Organization to oversee factory monitoring and create unions, among other things, and in less than a decade, garments became the country’s primary export---more than 95 percent of all goods exported, in fact. Eventually, the ILO turned over administration of the program to local authorities. And while there were factories that fell out of compliance, and mistakes were made, by and large it was a successful experiment. [Ibid]

“Today, federal law guarantees the garment workers of Cambodia breast-feeding breaks, 43 paid vacation days annually, medical clinics on site and 90-day paid maternity leave, among other things. The program, called Better Factories Cambodia, has become a model for many other countries. That program, now called Better Work, is used in Haiti, Lesotho, Jordan, Nicaragua, Indonesia and Vietnam. It is a partnership among the ILO, the World Bank’s International Finance Corporation, international brands, local factories, local governments and nongovernmental organizations. It costs $7 million to $10 million over the course of five years to establish the program---though in a country the size of China, it would be much more. Half the money so far has come from development grants, and the other half from fees shared by factories, international buyers, unions and local governments. While it might sound like a lot of money, it is far more economical than the ad hoc system of third-party monitoring. The ILO estimates that Better Work will ultimately cost just $2,000 per factory annually. [Ibid]

“The program also streamlines many of the economic, cultural and political issues surrounding international brands and third-party auditors working in foreign arenas. “Factories don’t live in isolation,” one ILO official told me several years ago. “They live in the context of laws and the country. Say your factory is great, but outside the factory there’s no rule of law. It creates fear in the community. All of us are realizing we have to have a way to move forward at the enterprise level, but it’s got to be broader than that. You?ve got to build the nations’ ability to run good labor standards and industrial relations.” [Ibid]

“Apple, admittedly, is in a tight spot. China does not allow formal labor unions (apart from the government’s own union), and labor laws are generally set by prefecture rather than at the federal level. Allowable overtime, for example, might differ from one area to another. To get around this, one factory I visited in China had created its own worker-led union to advocate for workers with management. The reality is that Apple has the influence, economically and otherwise, to flex a little muscle. The company has long been visionary when it comes to technology that enhances the lives of privileged Westerners. Now let’s see if it can take on the moral and ethical challenge of improving the lives of its overseas workers. [Ibid]

”Ethical Supply Chain” Movement

According to The Economist: Any big company that makes things in poor countries faces scrutiny of its supply chain. Campaigners against harsh working conditions (and unions back home that hate competition from low-wage countries) will pounce on any hint of scandal. Horrified headlines can tarnish a brand. Companies need to pay heed. Wages for factory workers in China have been soaring at double-digit rates for years, for reasons that have little if anything to do with Western activists and a lot to do with productivity improvements. But some workers are abused, as even Apple admits. [Source: The Economist, March 31, 2012 ]

“After a bad press in the early 1990s, Nike is now one of the loudest advocates of improving working conditions. In 1992 it established a code of conduct for suppliers. In 1996 Nike helped create the Apparel Industry Partnership, which drew up a code of conduct for factories, and in 1999 evolved into the FLA. Having a code of conduct and being part of an industry initiative on workers’ rights has become standard practice for multinationals. But there are big differences in the toughness of codes, how rigorously compliance is monitored and how remedial action is taken. [Ibid]

“Factory audits also vary. Nike first published the overall results of its monitoring in 2000, but did not list details of all the factories in its supply chain until 2006. (Apple did not publish details of its supply chain until this year.) When Nike opened up it was a conscious effort to challenge industry norms. Clothing and shoe firms took it for granted that revealing which factories they used would put them at a competitive disadvantage. But Nike reckoned the downside was negligible and the lack of transparency hindered the monitoring process, says Hannah Jones, the firm’s head of corporate social responsibility. Secrecy led to some factories that worked for a variety of companies undergoing multiple audits. Other factories escaped entirely. [Ibid]

“Another challenge is preventing corruption, says Alan Hassenfeld, a former boss of Hasbro who is now the driving force behind the International Council of Toy Industries’ code, called ICTI Care. Factory managers sometimes bribe auditors. Some firms use fake books showing shorter hours and higher pay. Some workers collaborate in these violations more willingly than is assumed. Many migrants, for example, want to work long hours to save as much money as possible in a short time---and then go home. [Ibid]

Limitations of the “Ethical Supply Chain” Movement

“NGOs can be both a help and a hindrance, reckons Mr Hassenfeld. Some only campaign. Others work with firms to help put things right. Some do both. Campaigning NGOs can put pressure on a firm to do better, but they rarely support it when expelling a factory from its supply chain, which also hurts workers, says Mr Hassenfeld. “One of the things we need to do is be tougher with repeat offenders, to make an example of them,” he adds. [Ibid]

“Governments are not pulling their weight,” complains Aron Cramer of BSR, an NGO. He thinks there has been “too much outsourcing of enforcement to the private sector”. Individual firms may find enforcement difficult. Governments may do better, but few governments of emerging markets like to be bossed around. [Ibid]

“Nobody thinks this process is perfect, but we have made progress,” says Mr Hassenfeld. Mr Cramer agrees. At least for firms at the top of the supply chain, “the old problems of forced labour and child labour are largely gone,” he says. The worst abuses tend to be further down the supply chain, and in particular sectors, such as agriculture and mining. Nonetheless, there remains much to do even among first-tier suppliers on things like excessive hours and inadequate pay, says Mr Cramer. [Ibid]

Making Real Improvements to the “Ethical Supply Chain”

The Economist reported: Richard Locke of the Massachusetts Institute of Technology has taken a detailed look at how things really work. He persuaded four global firms regarded as leaders in ethical supply chains (Nike, Coca-Cola, HP and PVH, a big American producer of clothing) to let him analyse six years of data from their factory audits, starting in 2005. His research, to be published this year in a book, “Promoting Labour Rights in a Global Economy”, drew four conclusions. [Source: The Economist, March 31, 2012 ]

“First, codes of conduct, compliance programmes and audits “[do] not deliver sustained improvements in labour conditions over time,” he says. Rather, these things help gather information that highlights the problem without remedying it. At HP, for example, only seven of the 276 factories in its supply chain fully complied with its code of conduct at the last audit. At the factories he visited, Mr Locke typically found that many suppliers serving global brands drift in and out of compliance. [Ibid]

“Second, investing time and money in helping factories improve their managerial and technical capabilities did produce some benefit in improved working conditions. But his third conclusion found that for significant and sustained improvement to take place, the relationship between a company and its suppliers needed to change too. The relationship had to become more collaborative. In particular, gains from changes in the production process needed to be shared. [Ibid]

“Mr Locke’s fourth conclusion poses the toughest challenge. For firms trying to improve working conditions the fault may well be in their own business model. Just-in-time manufacturing has made supply chains leaner. Slimmer inventory cuts costs and allows firms to move more quickly. As products’ life-cycles shorten, this is a crucial competitive edge. But a last-minute design change or the launch of a new product can mean suppliers having to pull out all the stops to keep up---or face a stiff financial penalty. [Ibid]

“Timberland, a bootmaker and vocal supporter of ethical working practices, admitted as much in 2007 in a company report, noting that “some of our procedures were making it difficult for factories to control working hours”, including developing a huge number of new styles and the simultaneous launch of many new products. Nike has since said much the same. [Ibid]

“As part of his research, Mr Locke visited an inkjet-printer factory in Malaysia which, at its historic peak in 2007, produced 1 million products a month for HP. The factory, which made six to eight models a year with an average lifespan of less than nine months, experienced extreme demand volatility---with the result that it sometimes had to increase monthly output by 250 percent, then cut it again. This forces suppliers to ask their workers to put in vast amounts of overtime. Apple’s product launches presumably produce similar surges. [Ibid]

“Nike’s Ms Jones says her company has taken this to heart by trying to incorporate the need to protect workers into the design of its production process. She is now jointly accountable for enforcing the code of conduct with the head of the supply chain, a change which she says has removed an “us-versus-them problem”. Members of Nike’s 140-strong corporate social responsibility team are now involved in all branches of the supply chain. The firm is thinking harder about how it schedules product launches. And it espouses a philosophy of continuous improvement by delegating more responsibility to workers. This will only work if they are treated well, says Ms Jones. [Ibid]

Shortage of Professionals and Skilled People in Asia

The Economist reported in 2007: “Asia has more than half the planet's inhabitants and is home to many of the world's fastest-growing economies. But some businesses are being forced to reconsider just how quickly they will be able to grow, because they cannot find enough people with the skills they need. In a recent survey, 600 chief executives of multinational companies with businesses across Asia said a shortage of qualified staff ranked as their biggest concern in China and South-East Asia. It was their second-biggest headache in Japan (after cultural differences) and the fourth-biggest in India (after problems with infrastructure, bureaucracy and wage inflation). Across almost every industry and sector it was the same. [Source: The Economist, August 18, 2007]

“Old Asia-hands may find it easy to understand why there is such concern. The region's rapid economic growth has fished out the pool of available talent, they would say. But there is also a failure of education. Recent growth in many parts of Asia has been so great that it has rapidly transformed the type of skills needed by businesses. Schools and universities have been unable to keep up. [Ibid]

“This is especially true for professional staff. Airlines are one example. With increasing deregulation, many new carriers are setting up and airlines are offering more services to meet demand. But there is a dreadful shortage of pilots. According to Alteon Training, the commercial-pilot training arm of Boeing, India has fewer than 3,000 pilots today but will need more than 12,000 by 2025. China will need to find an average of 2,200 new pilots a year just to keep up with the growth in air travel, which means it will need more than 40,000 pilots by 2025. In the meantime, with big international airlines training only a few hundred pilots a year, Asian airlines have taken to poaching them, often from each other. Philippine Airlines, for instance, lost 75 pilots to overseas airlines during the past three years. China has been trying to lure pilots from Brazil, among other places. [Ibid]

“Similar problems are bedevilling the legal profession, which is suffering from a grave shortage of lawyers and judges. This can cause a long backlog of cases and other complications in what are sometimes rudimentary legal systems. It can damage the way business is done, for instance in dealing with intellectual property or settling contract disputes. According to the All-China Lawyers Association, the country has only 122,000 lawyers. That is 70,000 fewer than California where the population is only 37m (against China's 1.3 billion). Many business people might argue that California is overlawyered, but there are parts of China without any lawyers at all. [Ibid]

“A report presented at the Chinese Party Congress in March by the Jiu San Society, a group of progressive Chinese intellectuals, stressed the shortage of doctors. There are only 4,000 general practitioners in China. But if the government is to achieve its ambition of establishing community hospitals for the country's 500m urban residents, it will need 160,000 doctors to staff them. There is a huge shortage of nursing staff as well. [Ibid]

“The scarcity of accountants is already having a regional impact. In order to list their shares in Hong Kong or Shanghai, many Chinese companies are busy preparing internationally acceptable accounts and statutory reports. With the country's own bean-counters trained in Communist-era systems---which never paid heed to capitalist ideas like profits or assets---accountants are being lured to the mainland from Hong Kong and the rest of the region. A senior manager at one of the big audit firms recently arrived in Hong Kong after a long stint in Russia, took one look at his firm's ambitious growth plans and asked: “How are we going to do this without enough staff?” [Ibid]

“Technical skills, particularly in information technology, are lacking in many parts of the region, even India. One of the main concerns is that there are not enough skilled graduates to fill all the jobs being created in a vibrant sector. Nasscom, which represents India's software companies, has estimated that there could be a shortfall of 500,000 IT professionals by 2010. This means companies recruiting at job fairs in India are having to make lucrative offers to capture the most promising students. Even a junior software-engineer can expect to take home $45,000 a year. [Ibid]

“There is also a severe shortage of good managers. A study by the McKinsey Global Institute predicts that 75,000 business leaders will be needed in China in the next ten years. It estimates the current stock at just 3,000 to 5,000. And that assessment could prove optimistic. The study, which covered a broad spectrum of businesses and surveyed more than 80 human-resources managers, found that less than “10 percent of Chinese job candidates, on average, were suitable for work in a foreign company.” In engineering, for example, graduates were criticised for being too immersed in theory and not enough in practice. It concluded that the available pool of engineering talent in China was no larger than that in Britain, which now has a mostly service economy. [Ibid]

“China is even suffering from something of a brain drain. In recent years the Chinese have been able to travel abroad more freely to study and acquire skills. But many do not return. A recent report by the Chinese Academy of Social Sciences found that between 1978 and 2006, just over 1m Chinese went to study overseas and some 70 percent of them did not go back. The brightest are often tempted to stay abroad by local employers, because the competition for jobs has become global. [Ibid]

“The skills shortage comes in two forms: higher staff turnover and rising wage costs. Pay rates for senior staff in many parts of Asia already exceed those for similar staff in much of Europe. The going rate for a human-resources director working for a medium-to-large multinational in Shanghai is now $250,000 a year, and that is for “someone who has probably never even left China,” says Vanessa Moriel, the managing partner of Human Capital Partners, a Shanghai-based consulting firm. The chief executive of an international business based in India can expect to earn $400,000-500,000, with many earning well over $750,000, according to Korn/Ferry, a consultancy. For a chief finance officer the average pay is now $194,000 in China, $159,000 in Thailand, $157,000 in Malaysia and $73,000 in India. Wages for lower-level staff are also rising quickly, increasing by 14 percent in Indonesia last year, 11 percent in India and 8 percent in China---well above the rates of inflation in each country.

U.S. Losing High-Tech Manufacturing Jobs to Asia

Peter Whoriskey wrote in the Washington Post, “The United States lost more than a quarter of its high-tech manufacturing jobs during the past decade as U.S.-based multinational companies placed a growing percentage of their research-and-development operations overseas, the National Science Board reported. The rapid expansion of science and engineering capabilities in China and its neighbors pose a more formidable economic challenge to the United States, according to the group, with Asia rapidly boosting the number of engineering doctorates it produces and research dollars it spends. [Source: Peter Whoriskey, Washington Post, January 17, 2012]

“The National Science Board publication shows, vast government efforts in Asia are workingto attract and develop engineering outfits, and not just low-wage factories, have paid off. Since 2000: 1) Research-and-development expenditures in China and nine other Asian countries have risen to match that of the United States. 2) The number of doctoral degrees in engineering awarded in China has more than doubled, and now far exceeds the number awarded in the United States. 3) The number of research workers for U.S.-based multinationals working overseas has more than doubled. [Ibid]

“Over time, global science and technology capabilities have grown, nowhere more so than Asia,” according to the report. “In most broad aspects of science and technology activities, the United States continues to maintain a position of leadership. But it has experienced a gradual erosion of its position in many specific areas.” Although the long decline of manufacturing employment in the United States is often attributed to the cheaper wages in developing countries, China and developing countries in Asia have in recent years sought to lure more sophisticated manufacturing operations---and better jobs---by expanding their engineering prowess through government investment in education and research. [Ibid]

“Just as China and other Asian countries appear to be gaining in engineering, however, other factors at work are expected to give a boost to U.S. manufacturing by making it more competitive with China. Wages in China have been growing rapidly, lessening their advantage over those in the United States. Moreover, increasing automation in the United States is lowering labor costs. Finally, analysts said, U.S. workers are far more productive. Within five years, the cost gap between the United States and China to produce many goods consumed in North America will be virtually closed, according to a recent report from the Boston Consulting Group. “China’s overwhelming manufacturing cost advantage over the U.S. is shrinking fast,” the report said.

High Turnover Rates in China

The Economist reported: “A high staff-turnover rate helps to force up wage costs, and turnover-rates can exceed 30 percent a year in some places in Asia. Fiducia, a Hong Kong-based consultancy, reckons that the additional hiring and training costs of operating in Asia add a further 15 percent to the basic costs of employing someone. Factories in southern China now plan for a 4 percent loss of staff just in the week immediately after Chinese New Year, because people seem to like to start the new year with a new job. In middle management, the average retention period of an employee in Shanghai is just 1.8 years, with human-resources managers among the most difficult to keep. Some job applicants are known as “jumpers” because of their tendency to switch jobs every two years. [Source: The Economist, August 18, 2007]

“Struggling with high staff-turnover is harder still when many firms are also trying to expand. Last year Flextronics, a big electronics manufacturer, wanted to increase staff numbers in Shenzhen from 27,000 to 43,000. But to get a net increase of 16,000 people, it had to hire more than 20,000 because over the same period it had 4,000 employees leave. [Ibid]

“As well as excessive wage inflation there is also “title inflation” and “responsibility inflation”. Relatively inexperienced local managers are sometimes given ever-grander titles---much to the chagrin of their counterparts from Europe and America, who can find themselves sitting beside much less able and more junior colleagues described as “Senior Executive Vice President” or “Regional Chairman”. But these honours are handed out for a reason: many employers in Asia have found that awarding new titles to employees every 18 months or so can be a good way to keep them. [Ibid]

“Giving greater responsibility to staff is more troublesome. Yet many inexperienced managers in China are being given powerful regional roles or are promoted to positions where they lack sufficient knowledge or ability. Even though they may not seem ready for the job, it is often seen as the only way to keep them on the payroll. [Ibid]

Image Sources: Wikimedia Commons

Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, The Guardian, National Geographic, Smithsonian magazine, The New Yorker, Time, Newsweek, Reuters, AP, AFP, Wall Street Journal, The Atlantic Monthly, The Economist, Global Viewpoint (Christian Science Monitor), Foreign Policy, Wikipedia, BBC, CNN, NBC News, Fox News and various books and other publications.

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© 2008 Jeffrey Hays

Last updated November 2012

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