Nike's Offshore Operations: Exploiting Workers for Profit

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Introduction:

Throughout history, there has been a persistent issue of poor working conditions that only receive attention and action after a catastrophic event forces the public to advocate for workers' rights. This pattern was especially noticeable in the United States during the Industrial Revolution and continued until the late 20th century. Although these conditions have mostly been eliminated within the United States, except for specific cases in agriculture, they still exist internationally, particularly in impoverished third world nations. To avoid strict labor regulations in the United States, major American corporations have moved a significant portion of their factories to foreign countries.

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Vietnam, China, South Korea, and Taiwan are examples of these third world nations that provide abundant and cheap labor. As a result, these corporations can take advantage of the American consumer market while minimizing production costs through offshore operations.

The media has brought public attention to the unethical practices of well-known corporations, specifically highlighting Nike. It has been exposed that Nike's factories in foreign countries were substandard in various important aspects and there was a necessity to establish minimum standards for all workers.

This report will investigate how Nike exploited workers in Asia for financial gain. Initially, there was limited awareness about Nike's factories and little concern, but once the news became public, the company faced continuous criticism and received strict recommendations for improving conditions. This paper will delve into why Nike chose to relocate its factories, the initial recommendations made, how Nike responded to these demands, and what improvements can be anticipated in the future.

Moving Factories:

Before we explore the problems at the overseas sites, it is important to understand why Nike decided to move the majority of its production away from its headquarters in Beaverton, Oregon. The untapped global markets provided several advantages. One significant aspect was the availability of cheap labor, allowing the production of shoes and clothing at a much lower cost compared to the United States. Additionally, expanding into China, the world's most populous country, provided a valuable opportunity to enter the entire Asian market. While Adidas focused on growth in Eastern Europe and the Soviet Union, Nike aimed to seize the advantage of clothing the nearly 2 billion people in China alone. (Swoosh, pg. 405) This decision was made in 1975, and today China's population is even larger and rapidly expanding. Overall, the corporation seemed to thrive, with stockholders and managers enjoying substantial dividends and the public receiving high-quality products. However, since 1991, Nike's offshore practices have faced consistent criticism from the media.

The reports questioned the labor conditions in Chinese and Indonesian factories. They compared the pay scales of Asian line workers and famous athletes. Nike was accused of abandoning the American shoe manufacturing industry, although it was never a significant part of it (Just Do It, pg. 166). On May 12, 1998, Nike Chairman and CEO Phil Knight addressed these allegations and discussed the company's new labor initiatives to address them. He explained why Nike moved its factories from the United States to mainly third world countries in Asia. Here are some excerpts from his lecture. Some have claimed that Nike has deliberately lowered human rights standards to maximize profits. Nike products have been associated with low wages, forced overtime, and unfair treatment. One columnist even stated that Nike represents everything wrong not only with sports but also with the world.

In 1964, Nike began as an importer and distributor of Japanese track shoes by Onitsuka Company, Ltd. We collaborated with two manufacturers in Japan, one located in Hiroshima and the other in Kurume near Fukuoka. We were grateful that they produced shoes based on our designs and had no intention to impose our vision of a shoe factory. However, after 26 years, it is evident that Nike shoe factories today are significantly superior to those in Japan during that time.

After the Nixon administration decided to abandon the yen dollar exchange rate that had been in place since the end of World War II, virtually all shoemakers in Japan stopped producing shoes.

The text discusses the history of Nike's shoe production, highlighting their initial foray into manufacturing in Taiwan and Korea. In 1977, they took a bold step by establishing two facilities in Maine and New Hampshire, which contributed up to 15% of their shoe products. Despite achieving success during a severe recession in the United States, the factories started losing workers to other industries. Consequently, the unprofitable state led to their closure in 1984, resulting in a write-off of $10 million. Since then, shoemaking has predominantly shifted to Southeast Asia due to the robustness of the US economy. Although many inquire about bringing back shoemaking to the US, studies demonstrate that it would significantly increase the average cost at retail. Utilizing the same production techniques, Nike's shoes would see a retail price surge of $100. With the current average retail price range being $70-75, the new cost would rise to $170 or $175. Similarly, Air Jordans, priced at approximately $150, would escalate to $250.

There are two possible methods for bringing shoe production back to the United States: either through the development of advanced automation (which is still distant) or by implementing tariffs and quotas that require shoes to be manufactured within the country.

However, just like the factories we established in Japan, the factories we established in Taiwan and Korea during the early days have been surpassed in terms of work conditions. In fact, they were better than the factories we had in Taiwan and Korea, and even better than the factories we had in the United States in the '70s and early '80s. When we entered these new factories in Southeast Asia, there was another advantage - we could build them from scratch. With Nike's experience, we were able to provide valuable input on the design of these factories.

We firmly believe that our physical facilities are the most advanced and superior in the world. Throughout the 1990s, our experiences have reinforced our belief in the advantages of global trade. These include uplifting impoverished individuals, providing improved value for consumers in industrialized nations, and fostering greater understanding among people from diverse cultures.

Every day, around 530,000 workers are employed in manufacturing Nike shoes and clothes. Incidents have happened before, and it is certain that more will happen in the future. The high number of workers and daily interactions, along with tensions based on nationality in Vietnam, make it challenging to prevent these incidents.

Nike was one of the first companies, along with Levi Strauss, to establish a code of conduct for factories in Asia in 1992. To ensure the credibility of this code, Nike had it audited by Ernst & Young in 1994. Despite criticism for paying for this review, it is important to note that the independence of a CPA firm is crucial to its credibility. If it were not independent, it would raise larger concerns beyond Nike's foreign factory relations. Through their manufacturing operations in various countries, Nike has observed an increase in wages and a decrease in poverty, which has been a significant lesson learned throughout this process.

These comments provided valuable insight that someone unfamiliar with the business world would not know or truly understand. It became apparent why the company chose to relocate its production base overseas. However, the criticism did not cease and the national media "picked up on the campaign, which included allegations of unfair wage scales and unfavorable working conditions faced by Nike workers abroad.” (Just Do It, pg. 166) Nike countered these claims by "highlighting that out of the over 300 American shoe factories that closed down during a mass exodus in the 1970s and 1980s, only two ever produced Nikes." (Just Do It, pg. 167) Nike faced criticism not only for its mistreatment of workers in Asia but also for taking jobs away from American workers.

Nike officials discredited the assault on the company, arguing that the majority of their American employees held valuable white-collar jobs in marketing, design, and computer-related fields. However, they acknowledged that the jobs filled by workers in China and Vietnam were not on par with the more skilled American counterparts. This overlooked point became significant during an economic slowdown in the early 1990s. Consequently, a rivalry for profit and welfare began to intensify, setting the stage for future business conflicts. Previous recommendations include:

Nike received constant criticism that it was unable to suppress. People had various opinions on how the company could address its labor practices. The media quickly spread news about the unfavorable conditions, even though Knight asserted that there were only a few instances. Nike faced intense scrutiny and acknowledged the need to alter its practices. It was believed that Nike was willing to implement these changes in order to avoid violating human rights. No official would dispute the significance of treating all workers with dignity and respect, just like any American worker. The laws safeguarding Americans' rights to life, liberty, and the pursuit of happiness should be applicable to all individuals.

The United States' laws extend beyond its borders to protect all nations and people. Hence, it was crucial for Nike, a company with significant impact on both cultural and business realms, to play a crucial role in enhancing human rights globally. Below are recommendations made in 1997 on how the company could utilize its extensive capacities to reform labor practices worldwide.

The first list focuses on the issues observed in China. • Ensure factories start adhering to the legal minimum wage and compensating workers who have been deceived of their rightful earnings. • Completely eradicate any instances of forced overtime, eliminate excessive overtime that violates the law, and pay the legally required overtime rate. • Mandate that all employees receive pay stubs detailing their wages, rates, and deductions. • Promptly refund all unlawfully acquired deposits from workers upon hiring. • Remove regulations that restrict workers from communicating with their colleagues. • Cease the obligatory requirement of morning calisthenics.

- Put an end to deducting disciplinary fines from workers' paychecks illegally. - Conduct investigations into any allegations of beatings and abusive treatment by security guards. - Stop terminating pregnant workers and provide them with legally required maternity benefits. - Ensure compliance with Chinese Labor Law by providing childcare, social security benefits, medical insurance, and bereavement leave. - Either eliminate or reduce the quota system to a manageable level for an 8-hour workday. - Carry out a thorough review of factories' health and safety conditions, including dust and noise pollution, heat, fumes, and congestion. Provide companies with a 6-month plan for improvement. - Publicly disclose a list of past accidents and work-related illnesses, along with preventive measures taken and compensation provided to workers. - Reinstate workers unfairly dismissed for participating in strikes or advocating for better factory conditions. Compensate them for lost wages. - Eradicate child labor by offering a stipend for education to workers under 16 and guaranteeing their jobs once they reach legal working age.

• Provide materials and workshops for workers to learn about the companies’ Codes of Conduct. • Allow outside groups to provide education and awareness training on local labor regulations and workers' rights. Ensure workers who choose to attend such programs will not face punishment. • Set up a compensation fund for workers injured or killed on the job. • Ensure all chemicals used in factories are clearly labeled in the local language. • Pressure subcontractors and government officials to respect workers' rights to freely organize. (Nike China Report, September 1997) The second report addressed issues stemming from Nike's involvement in Vietnam. The report provided the following recommendations: 1.) Nike should cease the practice of paying workers below minimum wage or using training/probationary wages under the guise of technical/vocational training. Many Nike factory jobs do not qualify as technical vocations, and current Nike factories cannot be considered vocational schools. This approach to underpaying Nike workers is illegal and unethical.

The wages in Vietnam are currently at their lowest point, so Nike does not need to pay the workers any less than the $45 monthly minimum wage. Nike should prioritize the implementation of its Code of Conduct, even above quality and cost. Only once the situation improves, should Nike shift this priority. It is crucial for Nike to demand the dismissal of managers who use corporal punishment or engage in sexual harassment. The responsibility of maintaining a respectful factory environment should be placed on the general manager. If the Code of Conduct is violated three times, the general manager should be dismissed. The current approach of not having specific punishments for violating the Code creates the impression that the Code is not enforced effectively.

3.) To demonstrate its commitment to enforcing the Code of Conduct, Nike should impose a significant financial penalty on the contracting company whenever it breaches the rules. By not holding the subcontracting company accountable for their managers' treatment of workers, it will only encourage more violations. Severe monetary fines have proven effective in compelling companies to comply. Given the numerous repeated violations within just 18 months of operating in Vietnam, this is the only viable action remaining to show external stakeholders that Nike is serious about upholding its Code of Conduct. 4.) Nike must promptly implement the 60 hour work week as stipulated in the Code. The prevailing practice of imposing excessive and involuntary overtime (sometimes exceeding 70 hours per month) can be deemed as abusive by any measure.

5.) Nike needs to be a responsible corporate entity in Vietnam. It is not enough for Nike to simply create low paying jobs and assume that this is sufficient. The Vietnamese workers, along with their worldwide supporters, will not just be thankful for the job opportunities and overlook the exploitative labor practices in the factories. Additionally, it is unfair that Nike shareholders profit substantially from the low wages paid to these Vietnamese workers. Nike should allocate a portion of its profits earned from the labor of Vietnamese workers and invest in initiatives that uplift the lives of impoverished Vietnamese individuals.

6.) Nike should directly collaborate with the Vietnam General Confederation of Labor in order to address the grievances expressed by workers and engage in conversations with them outside of the factory premises. We discovered that workers are too afraid to speak up about their working conditions as long as they are within the confines of the factory. The Vietnam General Confederation of Labor, at both local and district levels, proved to be highly cooperative in organizing meetings with factory workers outside of their workplace. We believe that involving the Confederation can make a significant difference in Nike's endeavors to enhance its labor practices.

7.) Nike ought to consult with various Vietnamese experts who possess knowledge regarding shoe factories and how to establish improved labor practices.

Besides Nike factories, we had the opportunity to visit two other shoe factories in Vietnam - Thai Binh and Hiep Hung. These Vietnamese companies produce high-quality shoes for Western shoe brands like Reebok and Fila. The presidents of both companies expressed their willingness to advise Nike on how to improve the treatment of its Vietnamese workers. Despite being competitors, these managers are willing to assist in order to enhance the working conditions at Nike factories. Their sincerity and generosity in helping should be acknowledged, and Nike should accept their offer.

Nike should establish an independent monitoring board in Vietnam comprising representatives from neutral parties, including government labor officials, NGOs, and labor unions. There are numerous reputable organizations and individuals who are willing to serve on this board.

9.) It is recommended that Nike immediately implement all of the suggestions put forth by the Health Department of Vietnam in order to enhance the health and safety conditions at Nike factories.

10.) In addition, it is advised that Nike implement all of the recommendations made by Ho Chi Minh City's General Confederation of Labor. These include providing workers with classes on labor rights, carrying out regular medical examinations, and establishing a fair pay scale that adheres to Vietnamese labor laws. This information is taken from the Nike Vietnam Report in March 1997. These recommendations were identified as essential areas requiring significant improvements. The particular issue that stands out from both lists is the urgent need for clean working conditions. Workers were subjected to polluted air and handled hazardous chemicals without any protective measures.

The workers were threatened with severe punishment if they tried to complain, which was emphasized in both lists. Moreover, workers were frequently compelled by management to work extra hours for negligible compensation. Both lists also highlighted the necessity of an investigative body to monitor corporations and factories and prevent the continuation of poor conditions. Although the recommendations were primarily aimed at Nike, they indirectly urged all corporations worldwide to implement these measures and enhance working conditions. The following section will examine the implementation of these recommendations by Nike and other multinational corporations that operate factories globally.

Nike's Response (Actions):

When presented with the 1997 reports on human rights and labor violations in their Asian factories, Phil Knight and other Nike officials recognized the urgent need to address the situation. It became evident that it was crucial for Nike, as a company selling an image rather than just shoes and clothing, to distance itself from sweatshops in Asia. The association between Nike and these sweatshops posed a significant threat to sales and reputation. Faced with declining sales and negative media portrayal, Nike had to take prompt action. On May 18, 1998, Phil Knight officially responded to his critics, after extensive internal discussions on the necessary steps to improve conditions in their overseas factories.

Several new regulations were established for Nike factories worldwide. The first rule was to ban the use of a toxic adhesive named toulene, which has been proven to be harmful to workers if they are not properly protected from its poison and fumes. Nike researchers developed a water-based adhesive as a safer alternative, although it may not be suitable for all types of shoes. However, Nike pledged to continue their research and ensure that all factories meet the air quality standards set by the United States Occupational Safety and Health Administration (OSHA) by the end of 1998. To achieve this, Nike will test the indoor air quality in all footwear factories and conduct follow-up tests as needed. An independent non-government organization (NGO) will compile a final report based on these tests. Factories will then have three months from the date of the final report to make any necessary corrections and meet the OSHA's air quality requirements. The second regulation raises the minimum age for workers in footwear factories to 18, and in apparel and equipment factories to 16.

Current workers of legal age in countries where the standard is lower than Nike’s new minimums were not to be affected. According to Knight, Nike has a strict policy against employing underage labor and has never had a problem with child labor in its history. Knight also stated that the issue of child labor is not widespread in the shoe industry overall (Knight Speech 5/12/98). In addition, Knight announced that education programs in Nike factories will be expanded. This includes offering middle and high school equivalency courses to all workers in Nike footwear factories. These classes will be provided free of charge during non-working hours, and workers who complete the program will receive a pay raise. By 2002, Nike will only place orders with footwear factories that provide after-hours education to qualified workers. Furthermore, Phil Knight mentioned that Nike will increase its support for the Micro Enterprise Loan Program. This program offers loans to women in Indonesia, Pakistan, Vietnam, and Thailand who want to start small businesses. The goal is to provide support for a thousand families in each of these countries.

Knight aimed to provide funding for over five thousand businesses by June 1999. The program's focus is on unemployed women who can operate small businesses, benefiting their families' economic well-being and contributing to overall community development. Nike's initiatives have been praised by human rights organizations as a significant triumph for workers globally and consumers who have mobilized against unfair labor practices (Global Exchange’s Public Response...). However, there are concerns about certain loopholes in the policies. Although groups like Global Exchange commended Nike for allowing non-governmental organizations to inspect factories and disclose their findings, they are skeptical about which NGOs Nike intends to grant access to.

Concerns were raised about the amount of information Nike will disclose in its "summaries." Global Exchange also criticized Nike's expansion of education programs, stating that they seemed to target office workers rather than factory workers. The low-paid workers, who face excessive overtime work and family obligations, have little time for classes and studying. Resolving the issue of overtime work is necessary for the successful implementation of these educational programs. The new Nike initiative on child labor regulation has been criticized as well. While it sets a minimum age of 16 in its factories, it does not impose any restrictions in countries where 14-year-olds are legally allowed to work. Many advocates for reform argue that even if it is legally permissible in certain nations, employing children at such a young age should not be supported or allowed in American corporations' factories.

Despite some minor issues that were easily resolved, two important aspects were missing from Nike's speech, causing significant controversy. The first omission was a commitment to paying workers a living wage based on their purchasing power. The company stated that it would adhere to the local minimum wage, which is often criticized for being set too low to attract foreign investors. Human rights organizations are urging Nike to follow the example of other US companies like Coca-Cola, Pepsi, Goodyear, and Gillette, who provide wages that enable workers to meet their basic needs, foster loyalty, and enhance productivity. The second major omission in Phil Knight's speech was the acknowledgment of the right to organize. In countries such as China, Indonesia, and Vietnam where Nike manufactures most of its shoes, workers are denied the fundamental right to form independent unions. These countries only have one government-sponsored union, and any attempts to establish independent unions are suppressed. Human rights groups hope that Nike will collaborate with them in pressuring local governments to release imprisoned labor leaders and reform labor laws and practices to align with internationally recognized labor rights.

In addition to Nike's own corporate initiatives, they played a significant role in the establishment of the Apparel Industry Partnership (AIP). The AIP was created in October 1996 by the Clinton administration under Labor Secretary Robert Reich. It included representatives from the apparel industry, human rights groups, and labor unions. Participants in the AIP included Nike, Liz Claiborne, Reebok, Phillips Van Heusen, Business for Social Responsibility, the Lawyers Committee for Human Rights, the National Consumers League, the International Labor Rights Fund, and the Robert F. Kennedy Memorial Center for Human Rights. Although not directly involved in negotiations, L.L. Bean, Patagonia, Nicole Miller, and Kathie Lee Gifford were affiliated with the organization. The formation of the AIP was a response to public outrage over media reports linking sweatshops to the production of Nike apparel and shoes, The Gap clothing, and Kathie Lee Gifford's clothing line sold at K-Mart. The Apparel Industry Partnership was hastily established for two primary reasons.

The apparel industry was concerned that Congress might pass legislation without consulting corporations. They were afraid that public hearings would expose abuses in sweatshop factories, which could harm their reputation. President Clinton, on the other hand, worried that this controversy would undermine his push for free trade. The public had grown skeptical of claims that increasing international trade would improve human rights. Clinton feared that this skepticism could make it harder to negotiate future deals like NAFTA. Both the corporations and the Clinton administration needed a swift response to mitigate the damage. Thus, the Anti-Sweatshop Industry Partnership (AIP) was formed. However, critics argue that the AIP's main goal was to protect corporate reputation and promote free trade, rather than protecting worker rights. In April 1997, the AIP released two reform papers: the "Workplace Code of Conduct" and the "Principles of Monitoring." These papers faced criticism from two different angles.

The primary concerns raised were twofold: firstly, doubts were cast on the extent of independence between factory monitors and the corporations themselves, and secondly, the pay standard was deemed inadequate as it merely met the legal minimum wage rather than accounting for workers' basic needs. As promised, the AIP entered into negotiations with the aim of reaching a final agreement within six months. However, after one and a half years had passed, only a subset of the taskforce agreed upon a document that the AIP eventually presented. Despite this, both unions involved in the Partnership (UNITE and the Retail, Wholesale and Department Store Union) along with the Interfaith Center on Corporate Responsibility, a human rights organization, declined to sign the "Preliminary Agreement" proposed by the subset. These dissenting parties believed that these documents demonstrated that companies like Nike were only participating in the AIP to improve their public image rather than making substantial changes to their practices. They felt that "Nike has boasted about its engagement in the AIP as proof of its ethical leadership, while simultaneously avoiding critical issues regarding its labor practices" (Sweatshop Agreement, Part 1).

The main issue raised by UNITE and other groups who did not sign the "Preliminary Agreement" relates to the monitoring process outlined by the AIP. They objected to the fact that companies can now select the same accounting firms as monitors that they have always used, even if these firms provide other services to the company. This raises concerns about conflicts of interest and the potential for manipulation of their reports by corporations. In response to this criticism, Phil Knight commented, "The only reason a CPA firm exists is its independence. If it is not independent, then we have a larger problem than just Nike's foreign factory relations. The entire New York Stock Exchange is based on fraud" (Knight Speech 5/12/98). Another argument against the AIP document is that it only requires as little as ten percent of a company's facilities to undergo an annual inspection in the initial three-year implementation period, and only five percent of factories per year thereafter. Furthermore, the corporations themselves are allowed to choose which facilities are inspected.

The Executive Director of the Association has the authority to make changes to the company's list, although there is a general presumption in favor of the Participating C.