Nike's New Game Plan for Sweatshops

SEPTEMBER 20, 2004(Business Week)

Unlike giants such as Wal-Mart, it now has a system to inspect -- and try to improve -- working conditions at supplier factories

For many years, Nike (NKE ) has been a lightning rod for criticism about sweatshop labor conditions in the low-wage countries that produce its sneakers. When Nike was getting pummeled on the subject in the 1990s, it typically responded with anger and panic. Executives would issue denials, lash out at critics, and rush someone to the offending supplier's factory to put out the fire before it spread.

Since then, Nike has constructed an elaborate program to deal with labor issues in the 900-odd supplier factories (none owned by Nike) that churn out its products in some 50 countries. Today, a staff of 97 inspects several hundred factories a year, grades them on labor standards, and works with managers to improve problems. Nike also allows random factory inspections by the Fair Labor Assn. (FLA), a monitoring outfit founded by human rights groups and companies such as Nike, Reebok (RBK ), and Liz Claiborne (LIZ ).

"DROP IN THE OCEAN." As a result, when most human rights groups and even student protesters find a problem at a Nike factory, they now deal with the company directly instead of pounding it with public demonstrations. That's one reason why you don't see Nike getting hit with ugly sweatshop publicity so much these days. "You haven't heard about us recently because we've had our head down doing it the hard way. Now, we have a system to deal with the labor issue, not a crisis mentality," says Maria S. Eitel, Nike's vice-president for corporate responsibility.

None of this means that Nike or any other businesses have come close to solving the sweatshop problem. Far from it. The monitoring systems set up by a Nike and handful of other Western outfits such as Mattel (MAT ) or Adidas have helped to address some of the more egregious problems at some factories, such as locked doors and unsafe chemicals, human rights experts say. But the inspections they do are limited and periodic and can't possibly catch all of even the most egregious problems.

In addition, only a handful of multinationals have serious monitoring efforts like Nike's in the first place. Most others, including retailers such as Wal-Mart (WMT ) and Target (TGT ), which have the most control over consumer prices, do virtually nothing, labor experts say. "What we do is a drop in the ocean out of the 90,000 or so factories that export to the U.S. from around the world," says FLA President Auret Van Heerden.

STILL UNDERPAID. What's more, even the best anti-sweatshop efforts like Nike's have done little to address the two most difficult issues in most cheap-labor countries: Low wages and unionization. The problem is only going to get worse next year, when the phase-out of U.S. textile quotas is expected to bring a massive global shift of production to China, where wages are the lowest and independent unions are illegal.

"Nike and others are making progress, but not on the harder things like underpayment of wages and freedom of association," says Heather White, the executive director of Verite, a nonprofit U.S. group that does extensive labor monitoring of companies around the globe.

Still, you have to give Nike some credit for trying. It has performed about 600 factory audits since it built up its in-house monitoring staff two years ago, including repeat visits to those with the most problems. Each inspected factory is given a score of 1 to 100 based on a wide variety of labor issues.

BROADER TESTS. The scores are used, along with interviews with management and other factors, to grade each factory. A relative few get an A, the best, or a D, a warning that Nike may yank production unless remediation efforts improve quickly. Most factories get a B, which means they have some problems, or C, which indicates that serious issues aren't being corrected fast enough.

This year, Nike plans to expand the grading process to include environmental safety and health issues. "Before, it was all anecdotal, but now we have a system to measure factory improvements," says Nike Compliance Vice-President Dusty Kidd, who heads its labor-compliance efforts. That may make for safer working conditions. But it won't help the wages of Chinese workers making only 20 cents an hour.