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Response to report "Sector-Wide Solutions for the sports shoe and apparel industry in Indonesia"

April 25, 2008

Herzogenaurach, 25 April 2008 - The adidas Group places great importance on transparency and on addressing the concerns of its stakeholders.
In recent weeks we have received a number of letters and emails from the general public in Australia and countries in Europe voicing support for the Oxfam Australia and Clean Clothes Campaign report ‘Sector-Wide Solutions for the sports shoe and apparel industry in Indonesia’. As one of our key sourcing countries in Asia, we have witnessed steady progress and improvement in the workplace conditions in Indonesia. Nevertheless, we acknowledge and accept that our suppliers continue to face challenges as they strive to meet our Standards as well as international NGO expectations.
We have considered and assessed the recommendations set out in the report (some of which have also been raised and responded to in the past) and offer the following comments.

1. Freedom of Association (FOA), the Right to Organise and Bargain Collectively

The adidas Group ‘Workplace Standards’ are derived from ILO conventions. As such, FOA and the right to form and join unions is a right that we seek to promote and protect. It is also a key performance measure for our suppliers.
In Indonesia, trade union organisations are protected by law and have continued to grow in number, size and influence. They also have strong ties to the local and national political scene, as well as direct engagement with international NGOs. At the enterprise level FOA and other trade union rights are being closely monitored by our Social & Environmental Affairs team. Where we see breaches to this right by our business partners, we do take direct action. However, before doing so, we first look to the relevant government authorities and in particular Indonesia’s Manpower department, to take the necessary steps to enforce their own labour laws.
As part of our ongoing efforts to promote understanding and respect for FOA we have, over the past several years, partnered with the ILO, the Manpower department and local industrial relation experts to provide training to workers, union officials and factory managers.
With respect to the recommendations set out in the report, we would comment as follows:

  • We support and are in broad agreement with the need for our suppliers to fully respect FOA. This is consistent with our requirements under our Workplace Standards. To support this we are continuing with our efforts to partner with experts who are able to provide education and capacity building on FOA principles for our suppliers. As mentioned earlier, we are also rigorously monitoring the implementation of this right at an enterprise level.

  • The independence of trade unions is guaranteed by law, and as such, any involvement by a 3rd party to a union’s internal affairs, such as membership verification, must have the full consent from the related union/s. In the case of PT Panarub we have made extensive efforts over many years to support the union membership verification process, but we have seen the process consistently fail. Why? Because the existing trade unions have no desire to work together and reach consensus on a way forward. Whilst we can exert some level of influence over our business partner to be fully cooperative, we hold no such role with the trade union movement.

  • Our manufacturing agreements require our business partners to comply with the adidas Group Workplace Standards, which include FOA and collective bargaining principles.

  • Where labour unions are established we would expect them to fully exercise their right to collectively bargain with their employers, i.e. our suppliers. As a 3rd party, the adidas Group cannot be involved, or become a party, to this process. The SEA team will ensure that our suppliers act fairly and lawfully in this process, to comply with our Workplace Standards’ requirements. In the process of collective bargaining, our suppliers are free to disclose to the unions their operating income and costs as well as information on the productivity, in order to explain the economic realities of their operation. However, there is well established regulatory guidance on the information that can and cannot be supplied to a union during collective bargaining. Cost data on individual products that impact on trade and trade practices is normally considered as restricted information and is not disclosed to unions or any other 3rd parties for that matter.

Given the above, we see no necessity to change our confidentiality agreements with respect to pricing information.

2. Short-Term Contract Labour

For many years the adidas Group’s SEA team has actively encouraged our suppliers to reduce the use of temporary workers in favour of employing workers on longer term contracts. In Indonesia, we have run several training sessions for our suppliers to communicate this policy which we first introduced in 2001.
Set out below are our comments on the recommendations given on short-term contracts:

  • Since the new labour law (Act no 13/2003) was introduced, our team in Indonesia has paid special attention to the implementation of the Specific Period Employment Agreement (i.e. contract labour system). We have obtained direct advice from the Manpower department on the application of the law and sought their help in providing training to our suppliers. We have closely monitored the implementation of the contract labour system, with any breach being considered a serious non-compliance under our Workplace Standards. There have been several cases where we found such breaches and in each case we have required our suppliers to change the employment of the workers to permanent status. This remedial action has been non-negotiable. Furthermore, our internal factory approval systems for new suppliers disqualify any factory found to have systematically violated or abused the contract labour system.

  • In conjunction with the Indonesia labour law, our internal policies require our suppliers to provide contract labourers with the same legally mandated benefits that are available to permanent workers, that is, the same salary, overtime rate, social and medical insurance, leave and any other applicable allowances or benefits. Again, any infringement to this standard is considered a serious non-compliance and requires immediate corrective action.

  • The adidas Group does not tolerate discrimination, or intimidation, of union members or union officials. This applies whether the individual affected is a permanent or contract worker. A breach to this standard would trigger enforcement action by SEA.

3. Factory Closure, Severance and Back Pay

The adidas Group has strategies in place to monitor closures and relocations, and we have been active in our engagement with, and support for, unions and workers where suppliers have sought to downsize or close factories. Our strategies are aligned with a number of the recommendations offered in the report. Whenever closures occur, we examine every case based on the specific circumstances and consider the supplier’s obligations under the local labour law, as well as bankruptcy laws, where these apply.
Below are our general comments on the recommendations stated in the report:

  • We maintain regular contact with our large-scale suppliers and are normally kept informed of their medium to long-term business plans, including the plans for opening new facilities and for downsizing, or closing, facilities and the reasons for doing so. Knowing their plans at an early stage helps us evaluate and advise on the steps needed to minimise the social impact of factory closures or layoffs.

  • Providing workers with legally mandated social and medical insurance is a basic requirement under the law in Indonesia. We require our suppliers to enrol all workers in the local social and medical insurance scheme as per the ‘Jamsostek’ regulation. If our suppliers fail to fully pay those insurances, then the SEA team will require the management to calculate the balance and make back payment accordingly.

  • In the case of retrenchments, the adidas Group requires suppliers to have in place a viable plan to manage worker severance pay and benefits. We actively encourage our suppliers to go beyond meeting legal minimums and to develop other support measures to assist workers who are being laid off.

  • Where there are layoffs or closures, we request our suppliers to inform and keep updated all key stakeholders, including labour unions, government and other interested 3rd parties. We have clear expectations that any layoff is managed in an open, fair and transparent way.

  • In many jurisdictions, including Indonesia, factory closure and/or bankruptcy is governed by specific laws and regulations. Where a closure or layoffs take place, the party bound by law is the employer, i.e. the supplier, not the buyer. In exceptional cases (for example, when three Reebok footwear factories closed in quick succession in late 2006) the adidas Group has recognised that workers were facing special hardship and we stepped in to provide humanitarian aid to the workers and their families.

  • In previous communications with Oxfam Australia we have fully explained the background and reasons for the closures of PT Dong Joe, PT Tong Yang and PT Spotec. In addition to this, we have also posted statements on our adidas Group website concerning these closures.

  • Despite our very best efforts, the three factories closed. Those efforts included: continuing to place orders with the suppliers in order to secure for workers their bonus payments and committing to an open engagement with all key stakeholders, including the trade unions at the enterprise and federation level and with the Indonesian manufacturers association. Sadly, our positive engagement was not reflected in the factory managements’ own behaviour, with one of the owners fleeing the country and others refusing to hold meaningful dialogue with the unions, or the workers. In the aftermath of the closures we petitioned the Indonesian government to establish a task force to assist the redundant workers, and when the government failed to act we provided workers with direct support through a medical care programme. All three factories went through a complete or partial bankruptcy process, with the court-appointed Curator bearing responsibility for the settlement of the workers severance payment.

  • Despite there being no legal obligation to do so, the management of PT Ching Luh Indonesia has agreed to provide preferential employment to former Spotec workers. The adidas Group SEA team in Indonesia is working closely with the factory management and with a committee which has been formed by ex-Spotec union members, to monitor the hiring process. Not all has gone to plan with the factory start-up having been delayed by several months, due to the late receipt of government permits and the delivery of new equipment. In the first phase of hiring, more than 500 former Spotec workers were recruited, representing the majority of the recent hires. Several hundreds more are expected to be hired in the second phase, which is to take place in mid to late May. Meanwhile, the adidas Group SEA team continues to liaise with the factory management, monitoring the hiring process to ensure that the former Spotec workers are being fairly treated and that their applications are duly considered, as per PT Ching Luh’s hiring policy and procedures.

  • Over the past several years, there have been many factory closures and bankruptcies in Indonesia (not necessarily related to the adidas Group) in which the factory owners have failed to pay workers their proper severance and other benefits. As mentioned in the report, the Indonesia government, together with the Employer Association and Trade Union Federations, are currently in the process of negotiating a new regulation for severance pay, one which will include a mechanism to ensure that businesses maintain sufficient funds for such payments. We follow closely the development of this new regulation and once it is finalised, and officially applied, we will require all of our suppliers in Indonesia to abide by it.