Questions and Answers - Footwear Factories in Indonesia are declared Bankrupt - Update

Herzogenaurach, 2 May 2007 - At the end of 2006 three suppliers producing footwear primarily for Reebok ceased operations and closed. The three factories are:

• P.T. Dong Joe Indonesia (DJI), located in Tangerang on the outskirts of Jakarta,

• PT Spotec, a sister company of DJI, and

• P.T. Tong Yang Indonesia (TYI), based in Bekasi, close to Jakarta.

Together, the three factories employed some 18,500 workers.
 
The adidas Group is deeply concerned about the situation facing the workers and their families and have prepared this Q&A to explain the reasons for these closures and the steps we have taken to manage the current situation.

Factory Situation

1. What is the current status of these closures?
Material suppliers and other creditors have filed for bankruptcy against each of these factories. By mid December 2006 both DJI and PT Spotec had been declared bankrupt by the Indonesia’s Commercial Court. On 15 January 2007 TYI was also declared bankrupt. DJI and TYI have both challenged the court ruling and following meetings with their creditors have had the bankruptcy overturned. TYI and DJI are proceeding with their financial and business restructuring efforts and are seeking new buyers to place orders in each of their factory.
 

2. When did the adidas Group first learn of the financial difficulties of these factories?
In the first half of 2006, the adidas Group reviewed the status of all suppliers that were being integrated into its business following the acquisition of Reebok. We were concerned to see that all three factories which supplied athletic footwear to Reebok were heavily in debt, financially insecure and experiencing serious cash-flow problems. We raised our concerns with the respective management teams and asked that as a matter of urgency they develop a financial restructuring plan to stabilise their business.

3. From a business perspective what did the adidas Group do to help the three suppliers?
Up until the point the factories closed, we assisted them by making direct payments to material suppliers and we continued to place orders so that they could generate cash flow. Our priority was to help the factory management settle wages owed to their workers, and to pay holiday bonuses as the factories approached Idul Fitri, the main religious holiday in Indonesia.

4. So why did the factories close?
Despite our support, the financial and credit issues facing these suppliers was such that they could no longer remain in business. At DJI the owners left the country, effectively abandoning their business. Their whereabouts is not known. In the case of Spotec and Tong Yong their material suppliers refused credit. Without materials the businesses simply could not operate.

5. Who is affected by the factory closure?
Our first concern at all three factories is for the workers and their families. These closures will affect the jobs of 18,500 workers. The closures also impact sub-contractors, material suppliers and other creditors, i.e. those who financed the operations of the three suppliers. TYI is continuing its efforts to restructure its financial and organisational restructure, and we hoping that all 8000 workers could work again.

adidas Group Actions

1. What is the adidas Group doing to support the workers who have been made redundant by the closure?
As has been stated, we are deeply concerned about the situation facing the workers and their families of all factories involved. We have raised our concerns directly with the Indonesian government and the footwear and employer associations and are in discussions with the various factory unions.

As a result of those discussions, we have agreed with the unions to help fund medical cover for the workers and their families.

We are also helping with job placement and approached our other suppliers to ask them to consider applicants from these closed factories wherever there are job openings. Up to now some 500 workers have found new employment in other adidas Group factories.

Lastly, the adidas Group continued to press each factory to meet their obligations, to act transparently and to pay workers outstanding back wages, where these were owed, as well as legally mandated severance pay.

2. What is the adidas Group’s legal obligation to the workers?
The adidas Group is not the employer and has no direct legal obligation for the workers who have been made redundant. However, given the scale of these closures, and the hardship and insecurity being faced by the workers and their families, we have taken steps to help.

Our humanitarian efforts include funding medical cover for workers and their families. We have also requested that Government institute emergency measures to help the workers. They have responded by establishing a multi-party task force.

3. Has the adidas Group met with the unions?
The adidas Group has been in regular contact with the unions and factory staff associations, listening to their concerns and obtaining feedback on the situation facing the workers. In past months, we have liaised with these unions and coordinated the delivery of a medical care programme for the factory workers. We are also working with the unions to secure employment for the redundant workers of other adidas Group supplier partners in Indonesia.

4. Has the adidas Group met with NGOs?
The adidas Group has met with several local NGOs to seek their views, advice and support on possible humanitarian measures for the workers. With respect to the closure of PT Spotec, we have also met with Oxfam Australia, who have raised their concerns regarding the closure of this specific factory and the impact on the workers.

5. What steps have the factories taken?
As the factories have been declared officially bankrupt, the Indonesian court has appointed financial managers, to manage the disposal of assets and settle debts. These court-appointed curators are responsible for the payment of back wages and severance owed to the workers.

Sourcing Strategies

1. adidas Group acquired Reebok and is consolidating factories, is this closure a result of that policy?
No. The factories have closed due to their financial situation, not due to any act of consolidation on the part of the adidas Group.
 
2. Is it true that the three factories closed due to Reebok pricing strategies or because the factories were asked to build infrastructure for the adidas Group?
No, this is not true. The factories were paid competitive prices by Reebok, which were in line with industry norms. At no time did the adidas Group ask any of the factories to undertake building works. Construction was undertaken at TYI and Spotec, but at the initiative of the factory management not at the request of the adidas Group.
 
3. How important is Indonesia as a sourcing country to the adidas Group?
Indonesia remains a key sourcing country for the adidas Group. It is second largest by value and was our fastest growing footwear source country in 2006, experiencing substantial growth. We continue to be dedicated to building strong and successful partnerships with our remaining suppliers in Indonesia.
 
4. Would the adidas Group consider placing future orders in any of these factories?
Given the current circumstances, no we would not. One of the three factories has been declared bankrupt, whilst TYI and DJI are continuing in their effort to restructure and refinance.