ETHICAL SUPPLY CHAINS AND PROBLEMS WITH CHEAP LABOR INDUSTRIES IN CHINA

PROBLEMS FOR CHEAP LABOR INDUSTRIES IN CHINA

20111122-amazon factory Girls 2.jpg
Factory Girls, the book
Cheap labor industries in China are having to deal more with higher costs for raw ,materials, shipping and labor and new laws that require employers to pay overtime and contribute to social and pension funds. High land, labor and housing costs has forced many manufacturer to relocate from the coastal cities to the inland cities such as Wuhan, Changsha and Jinan.

Manufacturing centers in Guangdong Province have been squeezed as their materials costs have risen and their labor costs have increased 70 to 100 percent but have been unable to raise their prices because Toys “R” Us, Home Depot and Wal-Mart have said they will not tolerate price rises. Many factories have scrimped on materials and stiffed their suppliers to survive. Others have gone out of business.

Cheap labor factories have also suffered from new laws that require companies to give insurance and severance pay (See Labor), the weak dollar, and weak global demand.

Poornima Gupta and Edwin Chan of Reuters wrote: Foreign companies have long grappled with conditions at supplier factories in China, dubbed the world's factory because of its low wages and high-metabolism transport and shipping infrastructure. While that manufacturing prowess presents an attractive business proposition, consumer concerns about allegedly brutal working conditions in China have caused headaches for foreign brands. Global protests against Apple swelled after reports spread in 2010 of a string or suicides at Foxconn's plants in southern China, blamed on inhumane working conditions and the alienation that migrant laborers, often from impoverished provinces, face in a bustling metropolis like Shenzhen, where two of the three factories the FLA inspected are located. In months past, protesters have shown up at Apple events - the rollout of the new iPad, the iPhone 4GS and its annual shareholders' meeting - holding up placards urging the $500 billion corporation to make "ethical" devices. [Source: Poornima Gupta and Edwin Chan, Reuters, March 29, 2012]

Pressures on China’s Cheap-Labor Industries

Keith B. Richburg wrote in the Washington Post, “Small manufacturers in China have been hit by increased shipping charges, rising energy fees and higher costs for labor. After a series of factory strikes by low-paid workers last spring, and with fear of more labor unrest, local governments recently raised the minimum wage - including here in Zhejiang province, which now has one of the highest minimum wages in China. [Source: Keith B. Richburg, Washington Post, November 1, 2010]

"With the raw materials, the labor costs, the cargo fees going up and now the renminbi appreciation, it's really hard to do business," said Huang Hongying, 50, who runs a company with her husband making plastic products such as inflatable backyard pools, pool toys and rafts. In the past, Huang said, her profit margin on each product was around 5 to 6 percent. Now, she said, it's less than 2 percent. "I hope the American government doesn't put too much pressure on China," said another manufacturer, Tyrone Tian, 40, whose company sells rafts and inflatable boats.

Cheap-Labor Industries, Christmas and Currency Pressures in China

Keith B. Richburg wrote in the Washington Post, producers of “plastic Santas, artificial trees and brightly painted bulbs are fretting this holiday season over falling profits - and worried that next year could bring even worse tidings. The concern, they say, is the exchange rate between the U.S. dollar and the Chinese currency. But the small-scale manufacturers and wholesalers who bring Christmas to U.S. department stores and shopping malls say the currency has already shifted too much. And their concerns are at the heart of Beijing's reluctance to take more dramatic action. [Source: Keith B. Richburg, Washington Post, November 1, 2010]

"If the renminbi keeps appreciating, our prices have no more room to drop," said Cai Qin Liang, 38, who has been making Christmas ornaments and handicrafts for more than a decade. It is small manufacturers such as these that the Chinese government says it is worried about as it resists calls for a larger and more rapid appreciation of the currency. Officials in Beijing have consistently said that any reform of the yuan must be gradual to avoid widespread disruption - meaning they fear small-scale producers might be put out of business.

"The price is not very high, so we make up for it in quantity," Gong Yue Quan, 41, told the Washington Post. His company makes and sells small, do-it-yourself toy parts such as tiny colored pompoms and pipe-cleaner stems. He said it now costs about 4.5 renminbi (about 68 cents) to make a bag of pompoms that might sell in the United States for as little as $5. "It's impossible to keep dropping the price," Gong said. "We just want some stability between the dollar and the renminbi," Tian said. Any further appreciation, he said, "will be a disaster for Chinese exporters."

Sun Lijian, an economist with Fudan University in Shanghai, said he thinks the recent appreciation of the Chinese currency means that its value is already reaching a breaking point for many small companies. If the renminbi appreciates above 6.5 renminbi to the dollar, Sun said, "they will have zero profit and they'll go bankrupt.''

Troubles for Coastal Factory Towns in China

A survey released in March 2007, found that many industries in coastal China were losing their competitive edge as thousands of manufacturers moving from the coastal industrial hubs to inland cities or other countries, such as Vietnam and India, where labor and other costs are lower. Companies surveyed in the Guangzhou area said their labor costs were rising about 10 percent a year and the cost for raw materials was also rising. High oil costs increased the costs of sending a shipping container full of goods from China to the United States from $3,000 in 2000 to about $8,000 in 2008.

Foxconn, China's biggest manufacturer with a million workers churning out gadgets including iPhones and iPads for Apple, has started to shift production inland with a few giant new factories, taking entire supply chains with them.

With increased competition from factories in the interior, factories in the coastal industrial centers have to offer incentives to get workers to travel long distances from their home to work. In 2008 around 20,000 factories closed in Guangdong Province. Credit Suisse estimates that by 2011, 60,000 export-oriented factories---nearly a third of all those operating Guangdong---will have closed down

Chinese Cheap-Labor Industry Lobby

These manufacturers have a powerful ally in the Ministry of Commerce, which represents their interests inside the central government. It has constantly and publicly taken a harder line in arguing that the value of the renminbi is just right, as opposed to the Central Bank, which has pushed for an appreciation. [Source: Keith B. Richburg, Washington Post, November 1, 2010]

To help make their case in the United States, Chinese leaders and economists have also warned that U.S. consumers could suffer if Chinese manufacturing plants are forced out of business. Cai, also vice chair of the local Christmas-accessories merchants association, agreed. "The renminbi appreciation is a double-edged sword," he said. "It won't just affect the Chinese manufacturers. It will also affect the customers, more importantly. They'll have to pay more for the same stuff."

”Better Work” and Difficulties in Monitoring Factory Work Conditions

In March 2012, 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.

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.

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.

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.”

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.

“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.

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.

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.

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.

”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.

”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.

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.

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.

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.

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.

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.

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.

Image Sources: 1) Wikicommons 3, 5, 7) China Labor Watch; 2, 6, 8) Nolls China website http://www.paulnoll.com/China/index.html ; 4) University of Chicago

Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, National Geographic, The New Yorker, Time, Newsweek, Reuters, AP, Lonely Planet Guides, Compton’s Encyclopedia and various books and other publications.

Last updated April 2012


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