In the 1990s, US-based Nike Inc., the largest athletic shoe company in the world, was accused by labour and human rights activists of operating sweatshops in Indonesia, Vietnam and China. Nike initially viewed such accusations as public relations problems, but finally changed its defensive tactics to a more proactive approach after serious damage was inflicted to its reputation in the late 1990s.
In the new millennium, Nike has tried to distance itself from its tainted image associated with worker exploitation, by monitoring its contractors more closely, integrating its supply chain through lean manufacturing and pushing for consistent global standards in the apparel industry. Ultimately, Nike had to learn the lesson of corporate social responsibility in a very hard way.
History and Nike’s business model
Nike started as a venture in 1964 between Phil Knight, an undergraduate and athlete at the University of Oregon, and Bill Bowerman, his track coach at the same university. They identified a need for high-quality running shoes at a time when Adidas and Puma dominated the American market. Phil Knight went on to do his MBA at Stanford, where he realized that he could combine inexpensive Japanese labour and American distributors to sell cheap but high-quality track shoes in the US, thereby ending the European dominance of the market. In 1964, Knight and Bowerman founded the Blue Ribbon Sports Company, which was re-named Nike in 1971.
Nike’s business model had three major components. First, Nike would outsource all manufacturing to low-cost areas in the world. The money thus saved would be invested in the two other components of the business model: research and development of innovative new products on the upstream side, and marketing to promote these products on the downstream side. In its marketing, Nike went beyond conventional celebrity endorsements and actually named Nike shoes after famous athletes such as Michael Jordan and Tiger Woods. These celebrities further strengthened Nike’s image.
This business model worked very well. In the early 1980s, Nike became the leading athletic shoe company in the US. In 1991, Nike became the first sports company to surpass yearly sales of US $3 billion. During this time, Nike shifted its contract manufacturing locations, first from Japan to South Korea and Taiwan, and then later to Indonesia, Vietnam and China, always taking advantage of the cheapest labour in the new emerging economies.
Labour rights in Indonesia and Nike’s initial response to criticisms
By 1990, Indonesia had become a key location for Nike. Labour costs in Indonesia were only 4 per cent of those prevailing in the US. Moreover, Indonesia had a population of 180 million, with a high unemployment rate and weak employment legislation. To Nike, that meant millions of people willing to work for low wages. Six of Nike’s contract manufacturers were located in Indonesia, together employing around 24,000 workers and producing 8 per cent of Nike’s global output.
In the late 1980s and early 1990s, Indonesia started to experience labour unrest. The number of strikes reported by the Indonesian government rose from 19 in 1989 to 122 in 1991, and Indonesian newspapers also documented some labour abuses by Indonesian factories. An NGO called the Asian-American Free Labor Institute (AAFLI) produced a report on working conditions at Indonesian factories in 1991, based on research by Jeff Ballinger, a labour activist assigned to be the Indonesian branch leader of the AAFLI in 1988.
Ballinger found that his criticism of Indonesia in general did not draw worldwide attention to labour rights abuses in Indonesia. The criticism lacked focus, and it was unclear what sympathetic people in developed countries could do to help the situation. Then Nike emerged as the perfect target for Ballinger: Nike contractors paid their workers less than US $1 a day; Nike contractors hired children in Indonesia; and moral outrage could be capitalized upon to tarnish Nike’s brand names and image. Applying the more focused ‘one country-one company’ strategy, Ballinger started to publish reports and distribute newsletters specifically about labour issues at Nike’s contractors in Indonesia.
In January 1992, as a result of criticism from activists like Ballinger, the Indonesian government increased the minimum daily wage to 2500 rupiah (US $1.24). Nike was aware of the labour conditions at its Indonesian contractors, but it believed that such issues were its contractors’ responsibility, as Nike did not own any manufacturing facilities itself. Firm in its stance, Nike did draft a Code of Conduct in 1992, addressing issues of child labour, forced labour, compensation, benefits, hours of work/overtime, environment, safety and health.
Until that point, criticism of Nike’s Indonesian operations came almost exclusively from Indonesia itself.
Criticism spreads to the US: Nike’s hot seat
However, it didn’t take long before Nike was criticized in the US media too. In 1992, Harper’s Magazine published an article by Ballinger, famously demonstrating that it would take an Indonesian factory worker 44,492 years to earn Michael Jordan’s endorsement fee at Nike.[ii] In the same year, a prominent newspaper in Oregon (Nike’s home state) also published articles criticizing Nike’s Indonesian operations. In 1993, a CBS report revealed that Indonesian workers at a Nike contractor’s factory were paid only 19 cents an hour, and that women employees could only leave their on-site dormitory on Sundays and with written management permission.
Such criticism drew national attention, but Nike’s stance was still firm. Nike argued that it had provided job opportunities and contributed to local economic development. Phil Knight, Nike’s CEO, dismissed any criticism, stating “I’m proud of our activities.”[iii] He argued that, taken in context, Nike was benefiting Indonesia: “A country like Indonesia is converting from farm labour to semiskilled – an industrial transition that has occurred throughout history. There’s no question in my mind that we’re giving these people hope.”[iv]
Further, Nike responded to the above criticism by hiring Ernst & Young, the accounting and consulting firm, to audit Nike’s foreign factories, but the objectivity of the auditing was questioned by activists.
In the next several years, criticism directed towards Nike continued to rise. In April 1996, Kathie Lee Gifford, a popular daytime talk show host at CBS, had learnt from human rights activists that a line of Wal-Mart clothing endorsed by her had been manufactured by child labour in Honduras. She soon apologized on national television, spurring a wave of media coverage on labour issues in developing countries associated with other Western companies. In July 1996, Life magazine published an article about child labour at Nike’s contractors in Pakistan. Then, on 17 October 1996, CBS News ran a 48 Hours programme focusing on Nike’s shoe manufacturing plants in Vietnam, reporting low wages, physical violence inflicted on employees and sexual abuses of several women workers. The programme informed US viewers that temporary workers were paid only 20 cents an hour. On 14 March 1997, Reuters reported physical abuses of workers at Nike contractors’ factories in Vietnam. As a result of such widespread negative news coverage, Nike gradually emerged as a symbol of worker exploitation.
Such news coverage also drew the attention of political leaders to look for legislative solutions. In 1996, Robert Reich, the US labour secretary, launched a campaign to “eradicate sweatshops from the American garment industry and erase the word entirely from the American lexicon”.[v] Even President Clinton convened a presidential task force on sweatshops and called for industry leaders to develop acceptable labour standards in foreign factories.[vi]
To quell the above criticisms, Nike tried to build credibility in two main ways. First, Nike established a Labour Practices Department in October 1996 and a Corporate Responsibility Department in 1998, to deal formally with worker issues in its supply chain. Second, in 1997, Nike hired Andrew Young, a former UN ambassador and civil rights leader, to review Nike’s Far Eastern factories. However, Andrew Young’s conclusion from his 10-day visit to China, Vietnam and Indonesia that Nike was doing a good job was publicly challenged at the time and later shown to be flawed.[vii]
Changing to managing responsibility
Pressures continued to rise. In May 1997, Doonesbury, the popular comic stri p, focused several times on Nike’s labour issues. Millions of readers read the stri p, making hurling stones at Nike so popular that a media critic commented, “It’s sort of like getting in Jay Leno’s monologue. It means your perceived flaws have reached a critical mass, and everyone feels free to pick on you.”[viii] Later in 1997, an internal report prepared for Nike by Ernst & Young was made public by the Transnational Resource and Action Center. The report found that workers at a Nike factory in Vietnam worked in unsafe conditions, were forced to work 65 hours a week and were paid only US $10 a week.
Around this time, Nike realized that it had made a big mistake. Phil Knight noted in 1998 that “The Nike product has become synonymous with slave wages, forced overtime and arbitrary abuse.”[ix] Nike’s sales, financial performance and stock prices slumped in 1998 as a result of its tarnished image, its failure to follow shifting consumer preferences and the Asian financial crisis.
On 13 May 1998, Nike finally bowed to “pressure from critics who have tried to turn its famous shoe brand into a synonym for exploitation”.[x] Nike, Inc. promised to allow human rights activists and independent auditors to investigate the working conditions in Nike contractors’ factories in Asia, and to increase the minimum age for new hires at shoe factories to 18 and the minimum age for new hires at other factories to 16.
Nike did not address the below-subsistence wage issue, one of the key human rights problems in Nike’s overseas factories. Nike paid workers in China and Vietnam less than US $2 a day and workers in Indonesia less than US $1 a day, much lower than the US $3 a day required to reach adequate living standards. However, Nike’s promises did elicit positive comments from several organizations.
By 2000, the anti-sweatshop movement’s efforts had forced several Western firms to improve working conditions. Knight noted that the movement’s efforts “probably speeded up some things that we might have done anyway … Basically, the workers in footwear factories, not just our factories, are better off today than two years ago.”[xi] In 2001, Nike released its first Corporate Responsibility Report, with one section dealing with its labour practices to explain how it monitored child labour and legal minimum wages at contractor factories.[xii]
Hard to be responsible: Adjusting Nike’s business model
Although Nike started to audit its approximately 900 suppliers in the late 1990s, the suppliers’ failure to respect Nike’s labour codes continued to be reported by the media. For example, the NGO Global Alliance uncovered a string of problems including verbal abuse and forced overtime after the Alliance surveyed 4,450 workers at nine Indonesian Nike factories.[xiii] In May 2001, a BBC documentary revealed that Nike and GAP contractors in Cambodia had broken their own strict anti-sweatshop codes of conduct.[xiv]
The frustrated Nike CEO convened a team to figure out why Nike was not able to implement its own codes of conduct. The team, led by Nike’s vice president for corporate responsibility, Maria Eitel, concluded that it was partially Nike’s business model that counteracted its efforts to improve working conditions at its suppliers.
The problematic component of Nike’s business model was the effort to minimize costs in its supply chain through outsourcing. Nike’s procurement teams chose suppliers based on price, quality and delivery times, and the core goal was to search for lower prices. Such a business model both encouraged Nike to switch to low-cost suppliers whenever possible, and pushed Nike’s contractors to push costs down to extremely low levels in order to win Nike’s orders. Moreover, the prevailing trade agreement in the apparel industry, the Multifiber Arrangement (MFA), set country-based import quotas for the US market. Thus, Nike had to search for spare quotas, hindering efforts to establish long-term relationships with suppliers. Finally, Nike managed inventory tightly. Whenever forecasting errors occurred, suppliers were pushed to meet delivery deadlines, thereby increasing the use of overtime in their factories.[xv]
Nike’s analysis suggested that it would have to change its business model to accommodate the new goal of improving worker conditions. After the MFA expired on 1 January 2005, Nike started to move towards lean manufacturing (i.e., a seamless supply chain, from purchasing inputs to serving the customer, with a focus on waste reduction, consistent quality and reliability), and towards establishing more stable relationships with its suppliers. Nike hoped that these changes would help its suppliers implement its code of conduct.
In its corporate responsibility report in 2004, Nike used a full section to explain its approach to labour conditions in contract factories.[xvi] As compared with the narrow first report from 2001, this second report in 2004 described a more detailed monitoring process, with Compliance Rating Criteria to assess a factory’s compliance on a wide variety of issues. Moreover, Nike started to build strategic relationshi ps with manufacturers for a more integrated supply chain. Nike realized that its influence on suppliers was dependent on the relationships it had with each subcontractor. These relationships varied substantially between shoe and apparel suppliers. The company’s contracts with shoe suppliers were typically long term and allowed Nike to have more influence on processes. Contracts with apparel suppliers were shorter term, which made it more difficult for Nike to influence behaviour. Finally, in 2005, a group of Nike factories opened their doors to research teams from MIT’s Sloan School to identify the root causes of problems, as Nike had found that monitoring could identify only problems – not underlying causes, much less solutions. The report stated that in spite of “significant efforts and investments by Nike … workplace conditions in almost 80% of its suppliers have either remained the same or worsened over time”.[xvii] The solution for Nike was to implement lean manufacturing in an attempt to provide more on the job training and organization. Nike hoped that the additional training would make suppliers more concerned about keeping their skilled employees and ultimately motivate managers to provide better work environments for their employees.
Collective responsibility: Nike won’t go it alone
Nike was afraid that adopting responsible practices could bring competitive disadvantage, if its competitors in the industry did not act accordingly. Therefore, since the late 1990s, Nike had been involved in creating mandatory global standards in the industry. It joined multi-stakeholder organizations such as the Fair Labor Association (FLA) and the Global Compact (an initiative by UN Secretary-General Kofi Annan) to harmonize global compliance standards. Nike substantially improved its corporate social responsibility practices, but it made sure it did not have to do so alone.
What happened in Indonesia?
In the new millennium, the shoe business has partially moved out of Indonesia to China and Vietnam. After Nike terminated its relationship with the Doson factory (a 7,000 employee factory where most of the workers were unionized), Indonesia accounted for only 24 per cent of Nike footwear production in 2011, a big drop from 38 per cent in 1996. However, Nike still employed, through its suppliers, 120,000 people in Indonesia, and it made the (disputed) claim that it had decided to terminate its business with the Doson factory not because of unionization, government regulations or wages in Indonesia, but because of the factory’s overall unsatisfactory performance as compared with other factories.[xviii]
Nike continues to manufacture shoes in 43 other Indonesian factories but still struggles to maintain optimal labour practices.[xix] A lawsuit was settled in January 2012 on overtime pay that was not distributed to employees in a factory over a two-year period. Nike agreed to pay US $1 million to cover payments and set up stronger grievance procedures to avoid repetition.
In 2011, contract plants in Vietnam, China, Indonesia and India produced 39 per cent, 33 per cent, 24 per cent and 2 per cent of Nike brand footwear, respectively.[xx] Some commentators claim that labour leaders misread competitive conditions faced by Indonesian companies, and that these leaders actually jeopardized jobs in Indonesia.[xxi] Opinions differ as to whether the new labour environment – fewer jobs, but with better working conditions – is better for Indonesians.
Public movement pressures Nike
Although Nike is now strongly focused on corporate social responsibility, it continues to face pressure from the public. In 2009, Nike ended a contract with a factory in Honduras. Unfortunately, severance pay and unemployment benefits were not provided by the subcontractor. It did not take long for university students in the United States to pressure Nike to accept responsibility in this matter. The University of Wisconsin-Madison ended its contract with Nike and Cornell University threatened to follow suit if something wasn’t done. Although Nike reaffirmed that this was not the firm’s responsibility, the company adopted a different approach than before and provided support to the subcontractor’s employees. By July of 2009, Nike had set up a US $1.54 million worker relief fund for the affected employees, a measure reinforcing the suggestion that Nike had learned from its mistakes.[xxii]
“Never-ending challenge”[xxiii]
More than a decade after Nike decided to change its CSR practices, the public’s perception of the company has also changed, but the firm continues to face challenges.
Shifting the majority of its production to China and Vietnam has created a new environment of labour conditions for Nike to manage. With the added attention from the 2008 Beijing Summer Olympics, Nike was keen to exhibit transparent supply chain management in China. China is now one of Nike’s largest supplier countries, which has made the evolution of corporate social responsibility compliance statistics in that country very important in determining the progress of Nike’s initiatives. The results so far have been somewhat disappointing, though not unexpected. Nike stated in this context that “corporate responsibility is a relatively new, rapidly evolving business practice in China. Adoption and understanding vary widely.”[xxiv] Noncompliance occurs mainly due to false documentation, unpaid wages, lack of grievance processes and usage of underage workers.
To combat noncompliance, Nike has developed two methods to monitor Chinese factories. The first method, ‘management audit verification’, involves verifying the conditions associated with the individual employee, including hours worked, wage, benefits and complaints. The second method, ‘environment, safety and health audits’, monitors the conditions within the given factory.[xxv] Results from these tests revealed that Chinese factories, when compared to other international factories, often had poorer grievance systems, overtime tracking, and fire safety and health. Nike has suggested that improving the labour conditions in China is a priority, but government laws and regulations create obstacles. It has been argued that discrepancies between Chinese labour laws and guidelines set by the International Labour Organization create unfavourable conditions for Chinese workers.[xxvi]
Nike’s companywide corporate social responsibility team consists of 140 people aiming to implement better practices in all aspects of Nike’s businesses.[xxvii] Nike’s 2011 corporate responsibility report outlined the progress and challenges the firm continues to face. Unfortunately, Nike saw a decrease in the percentage of factories given an ‘A’ rating, down from 6 per cent in 2010 to just 4 per cent in 2011. Additionally, ‘B’ factories increased from 33 per cent in 2010 to 45 per cent in 2011. This prompted a strong message to all suppliers from Hannah Jones, VP of sustainable business and innovation, stating: “We will be moving away from companies that are not committed to putting workers and sustainability at the heart of their growth agendas.”[xxviii] The report outlined the goal that all suppliers must meet Nike’s standards by 2020.
CEO Mark Parker is proud of how far Nike has come, but realizes that CSR is “a never-ending challenge”.[xxix]
QUESTIONS
- What are Nike’s FSAs? What is Nike’s business model?
- What were Nike’s FDI motivations in Japan, Taiwan, Indonesia and Vietnam? What are the LAs of these countries in the context of Nike’s business?
- Nike tried to revise its business model to integrate its supply chain. How did Nike’s earlier business model affect its contractors’ behaviour? To what extent do you think the changes to Nike’s business model will improve contractors’ compliance with Nike’s codes of conduct? Could there be any drawback as a result of such business model changes?
- Why did Nike push for a global labour standard in the apparel industry?
- Nike was afraid of competitive disadvantage as a result of its own socially responsible behaviour. Would competitive disadvantage be likely?
- Can you provide an update on Nike’s responses to human rights complaints, using materials available on the Web?
Notes
[i] Donna Everatt and Kathleen Slaughter, ‘Nike Inc.: developing an effective public relations strategy’, Richard Ivey School of Business Case 9A99C034 (1999); John Hendry and Toshiaki Fujikawa, ‘Nike in Asia – Just do it’, The University of Cambridge Case 300–069–1 (2000); Debora L. Spar, ‘Hitting the wall: Nike and international labor practices’, Harvard Business School case 9–700–047 (2002); Debora L. Spar and Lane T. La Mure, ‘The power of activism: assessing the impact of NGOs on global business’, California Management Review 45 (2003), 78–101; Simon Zadek, ‘The path to corporate responsibility’, Harvard Business Review 82 (2004), 125–32.
[ii] Jeffrey Ballinger, ‘The new free-trade heel’, Harper’s Magazine 285 (August 1992), 46–7.
[iii] Nena Baker, ‘The hidden hand of Nike series: Nike’s world power & profits’, Portland Oregonian (9 August 1992), A1.
[iv] Donald Katz, ‘Triumph of the Swoosh’, Sports Illustrated (16 August 1993), 64.
[v] Olessia Smotrova, ‘US takes up arms against sweatshops’, Financial Times (15 July 1996), 4.
[vi] Aaron Bernstein, ‘A floor under foreign factories?’, Business Week (2 November 1998), 126–30.
[vii] Bob Herbert, ‘Mr. Young gets it wrong’, New York Times (27 June 1997), A.29; Thuyen Nguyen, ‘Report on Nike work force glossed over issues’, New York Times (30 June 1997), A.10.
[viii] Jeff Mannings, ‘Doonesbury could put legs on Nike controversy’, The Oregonian (25 May 1997), Do1.
[ix] John H. Cushman Jr, ‘Nike pledges to end child labor and apply U.S. rules abroad’, New York Times (13 May 1998), 5.
[x] Ibid.
[xi] Steven Greenhouse, ‘Anti-sweatshop movement is achieving gains overseas’, New York Times (26 January 2000), A.10.
[xii] Nike, ‘Corporate responsibility report 2001’ (2001).
[xiii] Daniel Akst, ‘Nike in Indonesia, through a different lens’, New York Times (4 March 2001), 3.4.
[xiv] Paul Kenyon, ‘Gap and Nike: no sweat?’ BBC (15 October 2000), http://news.bbc.co.uk/2/ hi/programmes/panorama/archive/970385.stm.
[xv] Zadek, ‘The path to corporate responsibility’, 125–32.
[xvi] Nike, ‘Corporate responsibility report 2004’ (2004).
[xvii] Ibid.
[xviii] Sadanand Dhume and Maureen Tkacik, ‘Footwear is fleeing Indonesia – output drop by Nike, others has implications for key export model’, Wall Street Journal (Eastern Edition) (9 September 2002), A.12.
[xix] ‘Nike contractor to pay workers for overtime’, Wall Street Journal (Online) (12 January 2012),.
[xx] Nike, ‘2011 Annual report’ (2012), 5.
[xxi] Timothy Mapes, ‘Newly aggressive labor groups pressure companies in Indonesia’, Wall Street Journal (Eastern Edition) (14 August 2002), A.1.
[xxii] Elizabeth Murphy, ‘Nike finally just does it’, Dollars and Sense 290 (September/October 2010), 3–4.
[xxiii] Eugenia Levenson, ‘Citizen Nike’, Fortune 158 (10) (24 November 2008), 165–170.
[xxiv] ‘Nike report cites continuing problems in China’, Wall Street Journal (Eastern Edition) (15 March 2008), A.7.
[xxv] The Economist Intelligence Unit Limited, ‘Just doing it’, Business China (31 March 2008).
[xxvi] Tom Mitchell, ‘Nike sees ’gaps’ in China labour law’, Financial Times (10 March 2008), 3.
[xxvii] ‘When the job inspector calls, working conditions in factories’, The Economist 402 (8778) (31 March 2012), 73.
[xxviii] Matt Townsend, ‘Nike raises factory labor and sustainability standards’, Bloomberg (3 May 2012).
[xxix] Eugenia Levenson, ‘Citizen Nike’, Fortune 158 (10) (24 November 2008), 165–170.