Updated Statement on the current situation at PT Panarub, Indonesia

Herzogenaurach, 28 June 2006 - On 23 May 2006, Oxfam International released its report, Offside! Labour rights and sportswear in Asia. The report included a case study on PT Panarub, a footwear manufacturer that is a business partner to adidas. Oxfam, together with the Worker Rights Consortium (WRC), have raised concerns regarding the protection of workers’ rights to freedom of association in this factory, where 30 workers have been dismissed following a strike. The grounds for the dismissals were supported by a decision from the Indonesia Manpower Department but were criticized by the international NGOs. The NGO community and local trade unions have also expressed their concerns that adidas has decided to reduce orders in this factory, noting that the planned order reduction will lead to layoffs in the workforce.

The following is an update to an earlier statement, posted by adidas on 26 May 2006. The previous statement contains important background information on this case.

Reinstatement of the Dismissed Workers

Following intensive discussions with adidas and joint meetings with WRC, the factory has committed to paying the dismissed workers a monthly hardship allowance, including medical insurance. PT Panarub has agreed to continue payments until the question over the dismissal reaches a satisfactory conclusion. To date, 27 of 28 workers who were offered this hardship allowance have accepted the factory’s offer. Two other workers have left the locality to find employment elsewhere.

Based on the findings of an independent investigation conducted by the Indonesian Human Rights Commission - Komnas HAM - adidas has called on PT Panarub to reinstatement the dismissed workers. The factory however contests the authority of the Commission and has argued that the workers should pursue their right of appeal to the Manpower decision through the courts. The NGO community has questioned whether an appeal is possible, given the uncertainties and flaws in the government system. Our own enquiries have indicated that there should be no impediment to the dismissed workers lodging an appeal to the Supreme Court.
Discussions have stalled, with the factory refusing to reinstate the workers and with important questions raised over:

• the viability and possibility of appeal, and

• the intent and authority of the Komnas HAM’s findings

To overcome this impasse, adidas has requested a high level meeting with the Director-General of the Ministry of Manpower. The meeting is scheduled to take place in early July. The Ministry will be asked to comment on the Komnas HAM recommendations, respond to questions over alleged flaws and inconsistencies in the Manpower Department’s industrial relations procedures, and confirm whether an appeal can proceed, and within what timeframe.

Other possible approaches have been discussed with the factory management and with WRC. These include the employment of an independent arbitrator, to re-examine the case. Arbitration would have to be accepted by all parties and at the time of writing this option had not been presented to Perbupas, the union representing the dismissed workers. Perbupas and PT Panarub have also considered a possible ‘out of court’ settlement for the dismissed workers. Again, this has not advanced beyond a preliminary discussion, although it is now actively being considered by the dismissed workers.

Reduction of Orders

The NGO community and the local trade unions have expressed concern over the adidas sourcing team’s decision to reduce orders at PT Panarub. This has resulted in speculation that adidas is reducing orders so as to (1) penalize the factory for ongoing industrial relations issue, stemming from the dismissal of the union leaders as mentioned earlier, or (2) that this is driven by a concern over costs, or (3) adidas is moving orders to other countries where freedom of association (FOA) is not guaranteed. None of these propositions apply.

Firstly, adidas does not penalize factories for non-compliances by reducing orders unless the orders placed with the factory are themselves the source of the non-compliance, for example where a factory has accepted orders beyond its capacity and the additional orders from adidas are generating working hour or overtime issues. Secondly, cost is not the main determinant in footwear sourcing decisions. Orders are being reduced at PT Panarub because of under performance in the areas of quality, delivery and leadership. adidas employs a comprehensive set of key performance indicators (KPIs) to measure factory performance and benchmarks its key suppliers against one another. The best performing suppliers are rewarded with the largest number of orders. Thirdly, over the past two year there has been a 40% increase in order volumes for footwear suppliers in Indonesia, where FOA is protected by law.

The planned reduction in orders at PT Panarub is to be phased in over a period of 6 months. It is acknowledged that the scaling back of orders will lead to layoffs as the factory downsizes its operations. With a current workforce of 11,000, PT Panarub has estimated that they will have to make redundant up to 2,000 workers. To manage this change, PT Panarub has consulted with the unions and has proposed a voluntary early retirement scheme. To date, some 700 workers have accepted an offer to take early retirement.

As part of an ongoing effort to foster transparency, adidas has met with WRC and with SPN (the main trade union in PT Panarub) to explain to them the reasons for the order reductions. adidas has disclosed to the union and the NGO the key performance data that formed the basis of the decision. adidas has also asked the management team in PT Panarub to post a notice in the factory to explain to the workers why adidas has decided to reduce orders.

Whilst orders are being reduced at PT Panarub, other local suppliers are receiving increased volumes and hence are growing their business and expanding their workforce. adidas has written to each of its key footwear suppliers in Indonesia to ask them to consider offering employment to any worker who is made redundant as a consequence of the downsizing of operations at PT Panarub.

adidas’ primary concern is that the workers which are being made redundant receive from their employer the full benefits afforded to them under the law. The adidas Social and Environmental Affairs (SEA) team will closely monitor the approach taken by PT Panarub to manage the proposed layoffs and will review all redundancy or retirement packages and the payments made to the workers.