Statement on the Termination of the Business Relationship between Agron and PT Daejoo Leports Corporation

Herzogenaurach, 19 July 2004 - At various times in the past six weeks adidas-Salomon and Agron have come together to discuss the issues surrounding the closure of the PT Daejoo factory in Indonesia, and to critically review the business relationship with PT Daejoo's parent company, Daejoo Leports Corporation in Korea. Each time our review of the business relationship has considered and assessed the following key aspects.

• Daejoo's commitment and efforts to satisfactorily resolve the situation in Indonesia
• Daejoo's transparency and cooperation with adidas-Salomon and Agron, and
• Whether Daejoo are meeting our expectations, and our standards, with respect to the fair treatment of the workers.

Along the way, we have maintained regular communications with the Worker Rights Consortium (WRC), the PT Daejoo unions and other buyers and we have listened to the concerns being expressed by universities and student bodies worldwide regarding the closure of the factory.
 
From the very outset we delivered to Daejoo management a very clear message. The message was that we expected them to act responsibly and to enter into an open and honest communication with the unions regarding the factory closure and to treat the workers fairly. We backed this up with sanctions - a suspension of future orders to Daejoo's factory in China - and with a threat that we would end our business relationship if the outcome was unacceptable to us.
 
We fully accept that, as an independent contractor, Daejoo are at liberty to make their own decisions regarding the long term viability of their business in Indonesia. Neither adidas-Salomon, nor Agron, have the authority to stop this. All we can do, and have done, is make it clear that:

• Agron and adidas-Salomon have neither encouraged nor supported such a closure; and,
• As we have stated publicly, and have made it known to the unions, as long as the factory is able to meet Agron's operational requirements - quality, delivery, price and social and environmental compliance - then Agron would continue to place orders with PT Daejoo.

We have reached a point now where, despite our best efforts and intervention, the factory has closed. Those best efforts included offers of further orders being placed with PT Daejoo; offers which were declined by Daejoo Leports Corporation.
 
Following the formal announcement of the closure on 1st July, we asked Daejoo again whether there was any possibility that they would reconsider their decision. They advised us that their decision was "final and irrevocable".
 
Our central concern throughout this unhappy period has been the welfare of the workers, and with Daejoo proceeding to close the factory we turned our efforts and attention towards securing for the workers an acceptable severance package. We presented to Daejoo our expectations, namely:
 
Full legal severance, based on a 2x multiplier which applies to a regular factory closure, plus the minimum requirements of 3 months continued medical coverage under PT Daejoo's current scheme; 3 months hardship allowance for married couples; and 3 months job search allowance for all workers.
 
In stating these expectations we have relied on the principle that, were this an adidas' supplier and the process had been better managed by Daejoo management from the outset, we would have anticipated a phase-out period of at least 3 months. Workers have been denied this period to seek employment elsewhere and organise their lives accordingly.
 
Daejoo has indicated that they would be willing to pay the additional 3 months salary and extend medical cover, but wishes to apply a 1x multiplier to the severance pay. This is legally permissible, as Daejoo are following provisions laid down in the labour law for a factory closure due to "continuous losses". We have argued however that it would be more acceptable, given the circumstances surrounding the closure, to pay the larger sum.
 
We have considered Daejoo's response and we have critically reviewed their level of cooperation and transparency to date, as well as the deterioration in the compliance situation at PT Daejoo in the months leading up to the closure.
 
From April of this year, the positive remedial efforts previously reported by WRC at PT Daejoo went into reverse, as the local factory management permitted unauthorised subcontracting, excessive working hours and other breaches of our Standards of Engagement - adidas-Salomon's code of conduct. These issues were tracked and documented by WRC and our local compliance staff as they responded to complaints received from workers. It remains unclear whether the local management team, being aware of a pending closure, allowed matters to deteriorate, or whether this was more simply a case of mismanagement, but irrespective of the reason, the result was that workplace conditions at PT Daejoo were unacceptable.
 
Daejoo's lack of disclosure and engagement with the unions in the period leading up to the closure has also been unacceptable to us, as has been the inadequacy of their responses to our requests and generally poor communications.
 
On these grounds we have concluded that Daejoo is not a company we wish to do business with in the future, and adidas-Salomon and Agron have decided to terminate the relationship with Daejoo Leports Corporation, effective from 16th July 2004.
 
In reaching this decision, we have considered the impact on workers at Daejoo's China factory, which is currently manufacturing product for Agron. Agron orders currently represent, by value, less than 15% of the capacity of that facility and we do not believe that our actions will adversely affect the employment of the workers in that factory.