Can global brands create just supply chains?

To do so, the public will need to hold companies like Apple and Nike accountable for fair labor standards

Topics: Boston Review, Labor, Apple, Nike, factories, Global Labor and Human Rights, Regulation, , ,

Can global brands create just supply chains?Workers are seen inside a Foxconn factory in the township of Longhua in the southern Guangdong province. (Credit: Reuters/Bobby Yip)
This article leads the Boston Review forum, “Can Global Brands Create Just Supply Chains?”

Boston ReviewWhen Jia Jingchuan, a 27-year-old electronics worker in Suzhou, China, sought compensation for the chemical poisoning he suffered at work, he appealed neither to his employer nor to his government. Instead, he addressed the global brand that purchased the product he was working on. “We hope Apple will heed to its corporate social responsibility.”

In the past, his appeal would probably have fallen on deaf ears. But today, throughout the world, buyers in many industries have acknowledged a degree of responsibility for workplace conditions in supplier factories and pledged to ensure that the goods they eventually market are not made under abusive, dangerous, environmentally degrading, or otherwise unethical conditions. These businesses have committed to using private, voluntary regulation to address labor issues traditionally regulated by government or unions. And for the most part, the companies have acted on these commitments.

But have these private efforts improved labor standards? Not by much. Despite many good faith efforts over the past fifteen years, private regulation has had limited impact. Child labor, hazardous working conditions, excessive hours, and poor wages continue to plague many workplaces in the developing world, creating scandal and embarrassment for the global companies that source from these factories and farms.

That is my reluctant conclusion after a decade studying this issue. Before I turned my attention to global labor standards, I was a student of labor and politics in Western Europe and the United States. I came to the idea of private regulation with the hope that it might be a new, suppler way of ensuring workers fair compensation, healthy and safe conditions, and rights of association.

To test that hope, I began studying Nike because I was impressed with its commitment to labor standards. After several years of effort, with many conversations and visits to corporate headquarters, I convinced the company to share its factory audit reports and facilitate visits to its suppliers. Eventually my case study evolved into a full-fledged research project involving the collection, coding, and analysis of thousands of factory audit reports; more than 700 interviews with company managers, factory directors, NGO representatives, and government labor inspectors; and field research in 120 factories in fourteen different countries. What began as a study of one company (Nike) in a particular industry (athletic footwear) grew to include several global corporations competing in different industries, with different supply chain dynamics, operating across numerous national boundaries.



But what started in hope ended in disappointment. While I continue to think that companies have a large responsibility for ensuring good labor standards, I also have a renewed appreciation for the older idea that ensuring fair treatment for workers—including real rights of association—is a public responsibility.

Private, Voluntary Regulation
The challenge of improving global labor standards begins with the complexity of today’s supply chains.

Consider the production of consumer electronics. Raw materials for electronic components are extracted, often under harsh working conditions, from mines in Asia and Africa. These materials are refined and processed in Asia and then sold to Western and Asian companies that manufacture component parts such as computer chips, batteries, cameras, and circuit boards. These parts are then assembled, primarily in China, in large factory complexes that employ hundreds of thousands of workers. The final products are shipped back to consumer markets that are located principally in developed economies. The shelf life of these devices is relatively short, and the e-waste generated by consumers who dispose of their phones and other portable devices in exchange for newer models is, in turn, shipped back to Asia and Africa.

These new supply chains reflect a shift both in the geography of global manufacturing—from the advanced industrial states to developing countries—and in the organization of production. In the past, most brands relied on manufacturers and suppliers located within their home countries or else were vertically integrated multinational corporations that owned their subsidiaries in foreign markets. Today, lead firms are coordinating the production of thousands of independent suppliers located for the most part in developing countries.

Such changes have had profound implications for labor regulation. For most of the 20th century, labor standards were regulated largely on a national basis, through a mixture of laws, union-management negotiations, and company policies. Internationally, the conventions and technical services of the International Labour Organization (ILO) provided an additional source of moral authority and advice, though the ILO lacked significant enforcement power. The emergence of global supply chains stretching across national borders, from richer to poorer countries, presented a forceful challenge to this model of regulation.

I began studying Nike because I was impressed with their commitment to labor standards. But their efforts ultimately fell short.

In many cases, the governments of the developing countries hosting these new factories lacked the institutional capacity to regulate labor, health, safety, and environmental standards. Moreover, they often intentionally overlooked their own laws for fear of driving up costs and thereby repelling foreign investment, jobs, and tax revenues.

In the 1990s, in an initial effort to fill the regulatory void, NGOs and others pushed to include “social clauses” within global trade agreements. These same groups sought to mobilize consumers in developed countries who would in turn pressure developing countries to enforce labor laws. These efforts failed: they were blocked by developing-country governments, which argued that such standards were protectionism with a moral face. Efforts by the ILO and the United Nations to promote core labor standards through the establishment of Decent Work Conventions (2008) and the Global Compact (2000) also had limited impact because they too lacked enforcement powers.

In the absence of an enforceable system of global justice, private, voluntary regulation became the dominant approach, promoted by labor rights NGOs and global corporations alike.

Private, voluntary regulation comes in many forms. The most familiar is a corporate code of conduct. A global brand—Nike, HP, Apple—develops standards for working conditions, wages, hours, and health and safety and requires that its suppliers accept those standards. Private audits are then used to assess factories for compliance with those codes of conduct. In some cases, outside certifiers label products “sweat free” or “fair trade,” thus signaling to consumers that the products are made under fair or sustainable conditions.

Heated debates have raged over the specifics of these programs: which standards should be included in codes of conduct; how factory auditors are trained and selected; how information generated from factory audits is shared. Yet regardless of the mission, good will, leadership, organizational design, and even resources underlying private initiatives, they have all produced limited or mixed results.

Consider Nike. A series of public relations nightmares in the 1990s—involving underpaid workers in Indonesia, child labor in Cambodia and Pakistan, and poor working conditions in China and Vietnam—tarnished Nike’s image. At first, Nike managers took a defensive position, insisting that they were not the employers of the abused workers. But by 1992 Nike formulated its code of conduct, requiring its suppliers to observe some basic labor standards. After initial efforts fell short, Nike substantially expanded its compliance staff, invested heavily in the training of its own staff and that of its suppliers, developed more rigorous auditing protocols, internalized much of the auditing process, worked with third-party social auditing companies to double check its own internal audits, and spent millions of dollars to improve working conditions at its supplier factories. My research collaborators and I found Nike auditors and compliance staff to be serious, hardworking, and moved by genuine concern for workers and their rights.

Given all that Nike invested in staff, time, and resources, one might expect that conditions at their supplier factories improved significantly. But while some factories appear to have been substantially or fully compliant with Nike’s code of conduct, others have suffered from persistent problems with wages, work hours, and employee health and safety.

Such disappointing results are common all over the world, in every industry.

“Capability Building”: Promise and Peril
As the shortcomings of the compliance model grew increasingly apparent, analysts and practitioners began to embrace an alternative approach built around the concept of capability building.

The capability-building model starts with the observation that factories throughout the developing world often lack the resources, technical expertise, and management systems necessary to address the root causes of compliance failures. Whereas the compliance model sought to deter violations by policing and penalizing factories, capability building aims to prevent violations by providing the skills, technology, and organizational skills that enable factories to enforce labor standards on their own. By providing suppliers with the technical know-how and management systems required to run more efficient businesses, this approach aims to improve these firms’ financial situations, thus allowing them to invest in higher wages and better working conditions. At the same time, to keep these factories running “high-performance” operations, management must also train shop-floor workers to help identify persistent quality problems.

Capability-building programs envision a mutually reinforcing cycle in which more efficient plants invest in their workers, who, in turn, promote improvement throughout the factory, rendering these facilities yet more efficient and thus capable of producing high-quality goods on time and at cost while also respecting corporate codes of conduct.

According to proponents of this model, the “good” factory auditor behaves very much like the “good cop”: tough but sensitive to specific situations, using his or her discretion to promote problem solving and rehabilitation rather than focusing on coercion and punishment.

These initiatives represent some of the most innovative practices taking place in the arena of private governance. Yet the capability-building model has also generated very mixed results that raise serious questions about the extent to which it can lead to sustained and broadly diffused improvements of working conditions and labor rights.

Some of the inconsistent results can be explained simply by the way capability-building programs have been implemented. Programs that involve frequent interactions between buyers and suppliers as well as a buyer’s commitment to invest in long-term, mutually beneficial relations with suppliers work better than those that entail limited interactions, one-shot training sessions, and no sense among the suppliers of long-term commitment.

But, those differences aside, some of the limitations appear deeply rooted in assumptions of the model itself.

One key assumption is that technical upgrading automatically leads to better working conditions. Perhaps because industrial upgrading can at times lead to skill development, supply chain observers often believe such upgrades also yield better wages and working conditions for factory employees.

Some developing-country governments overlook their own regulations for fear of driving away foreign investment.

Yet there are two fundamental problems with this assumption. First, little empirical evidence suggests that it is true. In their 2010 study of global production networks in India, Anne Posthuma and Dev Nathan found that economic upgrading has not improved conditions for lower-tier workers and may reduce job security.

Second, this assumption overlooks the fact that the enforcement of some labor standards may have little to do with the profitability or technical sophistication of suppliers, but instead hinges on other social and political factors. For instance, standards regarding freedom of association have less to do with suppliers’ policies than with workers’ political rights. Such standards therefore cannot be enforced effectively one factory at a time, no matter how well managed or technically sophisticated these factories are.

A second assumption of the capability-building model has to do with its simplistic notion of actor interests. Many capability-building initiatives fail to register the divergent (and at times competing) interests of the players involved.

Consider the global brands and buyers. They want high-quality products delivered as quickly and cheaply as possible. They also fear that harsh working conditions could, if discovered, create scandal and hence risk to their reputation. Yet because they are competing with one another, they are unwilling to pay extra for improved working conditions, which could lead to price increases that threaten market share.

Even when individual buyers or brands invest in “supplier responsibility” programs—and many of them do—some of their upstream business practices drive their suppliers into production schemes that undermine these very same corporate responsibility efforts.

Global brands and buyers pressure their suppliers to reduce costs, manufacture on shorter deadlines, and produce a greater variety of products in smaller batches. Suppliers respond to these demands by paying their workers low wages, limiting their benefits, and insisting on excessive work hours.

Workers and developing country governments also express contradictory interests. Governments have an interest in asserting their sovereignty and protecting the rights and welfare of their citizens. But even those with the institutional capacities to enforce their own laws often refuse to do so, or they grant manufacturers regulatory exemptions in order to create more hospitable business environments. And workers, preferring factory jobs to whatever work was available in their home villages, are often willing to toil long hours under stressful conditions. At the same time, they want to be treated fairly, to be paid for their overtime, and to avoid situations that threaten their safety and health.

The capability-building models assume a win-win scenario in which improvements in some part of the supply chain—say, increased efficiencies at supplier factories—will translate into gains for all actors involved. But these gains rarely are evenly distributed; they often accumulate to the most powerful link in a particular supply chain.

A third assumption of many capability-building programs is that management techniques produce consistent outcomes regardless of the local context. This ignores how initiatives are shaped by social, historical, and cultural legacies.

These assumptions have led in many cases to an overly technocratic approach to capability building, with poor results. Investments in production, work organization, and management can translate into some improvements in working conditions. But, as HP’s Focused Improvement Supplier Initiative illustrates, when suppliers are not convinced that investments in capability building will deliver concrete economic gains, their commitment. Some suppliers involved in the Initiative could not even recall the content of their training workshops. Vietnamese suppliers who took part in the ILO’s Factory Improvement Program cherry picked components of the trainings they were interested in (productivity and quality) and ignored the rest (workplace relations).

A Tale of Two Factories 
If there is a role for capability-building programs in improving labor conditions in global supply chains, clarifying how their costs and gains are distributed among workers, suppliers, and brands is key. We must also ask whose capabilities—and which ones—are most in need of development.

The story of two Mexican Nike suppliers is instructive. The two factories—which, owing to nondisclosure agreements, cannot be named—have many similarities. Both operate in the same political and economic environment and are subject to the same labor regulations; both make apparel; both produce more or less the same products for Nike and other brands; both are subject to the same code of conduct; both interface with the same Nike office in Mexico City, which is responsible for coordinating orders and compliance visits to the factories; and both employ unionized labor.

The two factories received comparable scores when audited by Nike’s compliance staff. However, they pursued very different approaches under Nike’s capability-building plan. One factory, let’s call it Plant A, empowered shop-floor workers by giving them voice. The other, Plant B, aimed to reduce worker voice and discretion. At Plant A, management invested in training and allowed employees to work in autonomous cells. These workers often took initiative to solve production-related problems. “We want people here to feel important,” factory owners reported during our interviews. In contrast, at Plant B, workers were seen as an “input” to be controlled, a “cost” to be reduced. When we asked the head of operations at Plant B what would happen if he could not continue to lower labor costs in the factory, he replied, “In that case we will move back to Asia.”

National governments—even in poor countries—are more able to impose their will on foreign investors than they think.

At Plant A, relations between management and Nike’s local staff were collaborative and open. Nike managers would visit Plant A about once a month, and the owners of Plant A were frequently spotted in Nike’s regional office. Nike staff and plant managers went out for dinner and played golf together. Whenever an issue related to workplace standards arose, Nike compliance specialists and Plant A management worked together to quickly remediate it.

Nike production and quality managers also were instrumental in supporting Plant A in its shift to lean manufacturing, a system of production that enhances productivity and quality by reorganizing the flow of work, reducing inventory and waste, and promoting worker skill and voice. Nike not only provided information and technical advice but also moral support in the form of an implicit agreement to continue sourcing from the plant as it struggled through its transition. In interviews, managers at Plant A indicated that they saw Nike as a partner with whom they could collaborate to improve both productivity and working conditions.

The relationship between Nike’s regional office and Plant B management was more formal and distant. Plant B received fewer visits to its facilities (which were farther from Mexico City) and thus much of the communication between the local Nike office and Plant B occurred over the phone or through email. Management at Plant B saw Nike as a buyer whose requirements and deadlines it needed to respect in order to receive future orders. Nike’s local staff, in turn, viewed Plant B as a technically excellent manufacturer whose commitment to labor standards was weak.

Conditions for workers varied significantly. At Plant A, workers averaged higher wages than at Plant B, reported a greater sense of participation in decisions affecting production goals, and described their work experience as more collaborative. And at Plant A, overtime was voluntary.

In their study of supplier-buyer relations in China, Stephen Frenkel and Duncan Scott found that brands develop two distinct types of compliance relationships with their suppliers: a hands-on, cooperative relationship or a less trusting, arm’s-length “compliance” relationship.

The arm’s-length relationship between Plant B and Nike is the more common variety. Brands and suppliers in compliance relationships are often locked in a low-trust trap in which suppliers claim that brands are sending them mixed messages, insisting on shorter deadlines, better quality, and lower prices while at the same time policing and admonishing them for poor working conditions. Brands, in turn, argue that problems associated with both production and labor standards are the result of their suppliers’ shortsightedness and lack of professionalism.

The experience at Plant A shows a way out of this trap. Plant A’s model promises benefits for everyone involved, including workers. But sustaining the model, let alone diffusing it, is a challenge. And that challenge has as much to do with the business practices of global buyers and large retailers as with supply chain dynamics. Until these broader practices are reformed, Plant A will remain the exception rather than the rule.

Retailer and Consumer Pressure
Focusing interventions on the suppliers’ factories ostensibly makes sense: this is where most labor standards violations occur. But many of those violations are in large part the result of policies and practices designed and implemented upstream by large retailers and global buyers. For example, an internal Nike report states:

One of the biggest root causes of excessive overtime in apparel manufacturing is the large number of styles factories produce. Every time a factory has to change a style, it reduces productivity and overall efficiency, adding to the total number of hours of work requested. Our analysis shows that, among the variables we have direct control over, asking factories to manufacture too many styles is one of the highest contributors to factory overtime in apparel.

Indeed, my colleagues and I often heard plant managers lament that several of their labor problems, especially excessive working hours and mandatory overtime, were due to late or changed orders from Nike.

This is not just a Nike problem. After years of analyzing audit reports, visiting factories, and interviewing hundreds of company managers, NGO leaders, local officials, and union leaders throughout the world, I have come to understand that poor working conditions and weak labor standards are not only—or even primarily—the result of misguided managerial practices and behavior in the plants. Rather, they stem from global buyers’ responses to dynamic market conditions.

The consumer electronics industry perhaps best illustrates the problem. These days, electronics brands primarily serve individual consumers rather than governments or institutional users, and keeping consumers interested is especially tough. Brands feel forced to constantly create new gadgets that will attract buyers, and the result has been dramatically shortened product life cycles.

In order to maximize market share over such short life cycles, large retailers engage in constant promotions that rapidly erode selling prices. Price erosion, along with pressure to carry a broad product assortment, means that retailers do not like to carry large inventories. Instead, they opt for more frequent shipments, often by air cargo, to meet consumer demand. This reduces costly inventory and keeps their shelves well stocked with successful, high-selling products.

At the same time, however, this practice puts an enormous strain on contract manufacturers to deliver smaller, more customized batches of products as quickly and cheaply as possible. This balancing act is complicated by the concentration of electronics retail channels that has occurred in recent years. The top four U.S. consumer electronics and computer retailers control close to 75 percent of their respective markets. Concentrated buying power allows retailers to maintain margins, thus forcing price drops on the brands. Retailers also seek to differentiate their own products from their competitors’ in order to prevent consumers from shopping around for lower prices, a process facilitated by the Internet. Again, the pressure falls on suppliers and workers.

Public-Private Partnerships that Work
The limitations of private initiatives will come as no surprise to critics of voluntary regulation. Critics of private compliance and technocratic capability-building initiatives have long argued that they are designed not to protect labor rights or improve working conditions but rather to limit the liability of global brands and prevent damage to their reputations.

Some of these critics contend that private, voluntary regulation is not simply ineffective and self-serving but also pernicious, displacing and undermining more thorough government regulation. Former U.S. Secretary of Labor Robert Reich nicely summarizes this line of argument:

A declaration of corporate commitment to social virtue may . . . forestall government legislation or regulation in an area of public concern where one or more companies have behaved badly, such as transporting oil carelessly and causing a major oil spill or flagrantly failing to respect human rights abroad. The soothing promise of responsibility can deflect public attention from the need for stricter laws and regulations or convince the public that there’s no problem to begin with.

Improving global working conditions requires government action, since only the state has the authority and legitimacy to enforce labor legislation and to promote and protect citizens’ rights. Thus, even as manufacturing stretches across national borders, the fate of workers remains tied to their home countries’ institutions.

But private, voluntary regulatory efforts do not necessarily crowd out or undermine state enforcement of labor laws and employment standards. Under certain circumstances, private projects can complement and even enhance government enforcement. For instance, Nike’s private compliance program works best in countries with more developed labor inspection schemes and strong rule of law.

Other researchers working on both labor and environmental standards have found similar results. According to David Graham and Ngaire Woods, governments in developed and developing countries can enhance the effectiveness of corporate self-regulation by insisting upon—and perhaps even legislating—greater transparency and accountability among global buyers and their suppliers. Those governments can demand that the rights of workers to organize and mobilize be protected. Only in these circumstances can the promise of private, voluntary regulation be fulfilled.

Earlier I suggested that national governments, especially in developing countries, have declined to regulate labor standards as a consequence of competition for investment. However, recent research shows that national governments—even in poor countries with few natural resources—have far more ability to impose their will on foreign investors than was previously believed. Where buyers and suppliers have incentives to circumvent regulations that increase their costs, national governments are best positioned to prevent defections by individual firms and ensure that all producers within the same national or regional economy adhere to common standards. Yet how does one promote this type of government intervention in a world of global supply chains?

In explaining the features of what they call “experimentalist governance,” Charles Sabel and Jonathan Zeitlin describe a process in which government agencies collaborate with the private companies they regulate in order to develop broad goals and metrics. These goals and metrics are then used to promote responsiveness to variation in local circumstances, learning and diffusion of best practices across private and public actors, and ever-increasing compliance with government regulations. Using this framework, European governments have been able to foster enhanced environmental standards both within the European Union and among developing countries supplying forestry products to Europe.

Matthew Potoski and Aseem Prakash describe a similar process within the United States, in which innovative state-level policies, such as lenient penalties in exchange for transparency and self-disclosure, have encouraged private firms to enhance their compliance with environmental regulations. These sorts of innovations are not limited to the United States and Europe but have also emerged in several developing countries, including Argentina, Brazil, Cambodia, and India.

In each of these cases, national governments were able to promote labor and environmental standards by reconciling the competing interests of, and resolving the collective action problems among, offending private firms. This process involved not traditional command-and-control government regulation (deterrence) but rather a mix of carrots (capability building and technical assistance programs) and sticks (threatening sanctions and closing off “low road” options).

We need more analysis of innovative public regulation, but we already know that laws and government institutions are critical to the success of private initiatives seeking to improve labor conditions in global supply chains.

This essay is adapted from Richard Locke’s The Promise and Limits of Private Power: Promoting Labor Standards in a Global Economy, published this month.

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