Hitting the Wall: Nike and International Labor Practices

Synopsis of The Situation
Based in Beaverton, Oregon, Nike had been a corporate success story for more than three decades. It was a sneaker company, but one armed with an inimitable attitude, phenomenal growth, and the apparent ability to dictate fashion trends to some of the world’s most influential consumer. Selling a combination of basic footwear and street-smart athleticism, Nike pushed its revenues from a 1972 level of $62,000 to a starting $49 million in just 10 years. In the 1980s and 1990s, Nike had been plagued by a series of labor incidents and public relations nightmares; underage workers in Indonesian plants, allegations of coerced overtime in China, dangerous working conditions in Vietnam. For a while, the stories had been largely confined to labor circles and activist publications, until a young female worker had died in a Nike contracting factory in 1997, the labor conditions at Nike had hit the mainstream. While the marketing of Nike’s products was based on selling a high profile fashion item to affluent Americans, the manufacture of these sneakers was based as an arms-length and often-uneasy relationship with low paid, non-American workers.
Key Issues
Nike's strategy of shaving costs caused ethical dilemmas that ultimately damaged its reputation. Nike outsources all of its manufacturing. This approach has provided Nike with huge profits, from a 1972 level of $60,000 to a startling $49 million in just 10 years. Production is now globalized, with different countries concentrating on different parts of the process depending on what they are good at, or what they can do most efficiently or cheaply. Poorer countries get the less lucrative activities such as lowly paid semi-skilled or unskilled production or assembly. This approach also allows Nike to keep an arms-length arrangement with its subcontractors, stating that, it is not they who employ cheap labor, but their contracted suppliers, hence the responsibility lies with the latter.
Define the Problem
Nike has a difficult situation to resolve. Its strategy to use celebrity endorsements to develop a strong brand identity had the result that Nike became by the 1990s one of the world's best known brands, as well as a global symbol of athleticism and urban cool. This situation began to change by 1998, when currency woes in Asia along with the damage to its image resulted in Nike experiencing a loss for the first time in 13 years. This strategy resulted in Nike requiring steep wage concessions from its subcontractors to continue its intense growth patterns. Nike has always paid the lowest possible wages in Indonesia, claiming year after year that it could not afford even to pay the country's minimum wage. Each year, Nike contractors in Indonesia refused to pay minimum wage raises of a few cents a day. Thanks to a corrupt and inefficient government, they usually got away with it. Adding to this problem was the issue of child labor. Nike went into Pakistan, knowing full well that child labor is an ages-old practice there and taking no precautions whatsoever to prevent the use of child labor in the production of its soccer balls. We have to conclude that Nike expected to profit from its Pakistani contractors' known usage of bonded child labor. Nike further tarnished its reputation by attempting to dilute information that had come to the attention of the general public regarding its practices, resulting in a lawsuit. Mike Kasky is suing Nike, Inc. Under California laws regulating unfair competition and false advertising. Kasky claims that when an internal audit was leaked to the press that revealed illegal employment practices in Nike's factories in China, Vietnam, and Indonesia, Nike responded by issuing to the press numerous statements it knew to be false. The California courts ruled last year that Nike's PR effort was meant to bolster its image and improve its sales - so indeed, it did amount to advertising, and, as such, it needed to be truthful.
Alternative Solutions
Nike must to enforce its own Code of Conduct with its subcontractors. This Code has been amended several times, but had been very general in its listing of business practices. Its current version stipulates many requirements that we take for granted, one of which is that a subcontractor certifies that it pays at least the minimum total compensation required by local law, including all mandated wages, allowances and benefits. Another option for Nike would be to contract with a U.S. shoe manufacturer. Although the benefit of having its suppliers overseas has been the low prices for the finished goods, Nike would gain an advantage by providing work for the people at home. Made in USA labels are very important to many Americans. Also, the combination of job creation and openness to providing equitable wages and benefits for its workers as required in this country could reduce the uproar about its labor practices, especially among the youth. In addition, Nike could incorporate at least one factory into a tourist attraction, providing visitors with the opportunity to tour the plant, learn the history of the company, and become more familiar with the products Nike produces, thus developing more customer loyalty. A third option for Nike would be to both enforce its Code of Conduct and invest at a high level in the countries where it has factories, and highly advertise those efforts. Regarding to Nike's web site, since 1997, Nike, with help from several of its key partners, has supported micro-enterprise ventures in Asia, playing a small but significant and direct role in building and expanding the number of locally-owned businesses in mostly rural areas throughout the region. Nike has funded micro loans and provided technical assistance in Thailand, Vietnam and Indonesia, working with the Population and Community Development Association (PDA), Vietnamese Women's Union and Opportunity International, respectively. The press has given faces to the people who have been affected by Nike's contractors' exploitation. Nike must rectify the damages by giving faces to the people who have been affected in a positive way by the loans and other assistance given to the local populations. This, coupled with Nike's firm stance on the treatment of those making its goods, would help regain its lost positive image. In addition, this option would forge a stronger relationship with the countries where the factories producing Nike's products are located. It would also help Nike's subcontractors to entice and retain the best local employees, thus ensuring higher quality products.
Selected Solutions to The Problem
This change in how Nike will handle its operations has significant drawbacks. Closely adhering to its Code of Conduct will be very expensive for Nike. Nike's success has been heavily driven by the aggressive stance it has taken on labor costs. In addition, Nike's subcontractors have used the freedom given to them to provide Nike the labor expense level they expect while also allowing themselves to profit as well. Nike will now be monitoring their subcontractors' workplaces and wage practices, which will place a strain on their relationship. This new focus for Nike will require the company to divert some of its attention from its main marketing focus to supervise the overseas operations.
Expected Results
An immediate benefit of this decision would be the good press it would generate that Nike would be willing to put pressure on its suppliers so that the people who produce its goods are treated fairly. Another benefit would be to align Nike's suppliers' actions with Nike's vision as listed on its web site www.nike.com to bring inspiration and innovation to every athlete in the world". This would include those employed by Nike because the company considers all people to be athletes. A third benefit would be to prevent work stoppage strikes that had previously affected the company in Indonesia.
Positive and Negative Results
This option would require Nike to make a major shift in its focus from having a limited, long-distance relationship with subcontractors to playing a more active role in the manufacture of its products due to the proximity of its suppliers. This significant change in how Nike does business would be very expensive, both in terms of the financial outlay and use of personnel. It would require a more direct involvement of the company in a portion of the business in which it has no first-hand experience, which would entail a considerable learning curve. This would result in major upheaval for the company, and a loss of confidence by investors. Nike would also lose the competitive edge of its competitors who have lower foreign wages. To reinstate the Nike image back to its earlier prominence, Nike would be wise to pursue the option to enforce its Code of Conduct, and invest in the countries in which its factories are located. The Code of Conduct should require unannounced audits of Nike's factories at random, frequent time intervals to ensure compliance to rules and regulations. Equipment should be inspected to meet higher safety standards than would be required in the host country. For example, if the factory is located in Indonesia, the equipment should be inspected to be compliant to United States' Occupational Safety and Health Association (OSHA) safety standards. Doing so is above-and-beyond what may be considered reasonable" and should shed positive light on Nike's effort. In addition, hiring documentation should be verified in the audits to assure that workers are of the appropriate age, and that children are not placed into the workforce. Subcontractors would be trained in cultural awareness and required to maintain consistent and reasonable management practices. This approach would be expensive for Nike. The company will also have to expend more energy to both monitor the manufacturing facilities and determine which small businesses to support, diverting its attention from the company's primary focus of marketing its products and making a profit. In addition, making investments in other countries will help Nike relate in more personal ways to their local environments. This will make it more difficult for Nike to direct its subcontractors to move to another country when local labor wages have become too expensive. However, there would probably be no lack of interest if movement to new countries became necessary with Nike's products so well known. It would ultimately hinder the company's ability to be competitive with the other shoe manufacturers who use Indonesian labor.

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