Herzogenaurach, 22 February 2005 - A great deal of concern has been expressed about the end of MFA and its potential impact on developing countries, where the garment industry has, in large part, grown and been sustained by market intervention in the form of garment quotas. It is a subject we have actively discussed and debated with stakeholder groups, especially with labour rights organisations and the financial community. See for example the independent report on our November 2004 Stakeholder Dialogue in Hong Kong posted on the adidas-Salomon webpage.
There will be countries which will benefit from the removal of quota but also countries which will be affected adversely. Winners are likely to be China and, to a lesser extent, India. Those countries likely to be adversely affected have an industrial base which has been heavily dependent on quota-based garment and textile exports, such as Cambodia, Sri Lanka and Thailand. Unless manufacturers in the quota-dependent countries hold other competitive advantages, the garment industries in these countries will enter a sustained period of decline. This will result in factory downsizing or closures, and job losses. Campaign groups have been targeting the international brands, including adidas-Salomon, asking them not to 'cut and run' and not to allow production to shift from the quota-dependent countries to other countries. This is of particular concern if production is to be relocated to China where, according to such groups, workplace standards are poorer and worker rights - especially the right to form independent trade unions - are restricted. This view is widely held by a diverse group of interested parties, including NGO's, trade unionists, China analysts and academics, and financial and social institutions. We recognise that the end of quota is a time of transition for the garment industry - one which needs to be carefully managed, both from a social and business perspective.
How has adidas-Salomon responded?
These are the steps we have taken to manage these changes in a socially responsible way.
1. Application of the Standards of Engagement ("SOE"), the adidas-Salomon Group's Code of Conduct
The SOE is based on the International Labour Organisation ("ILO") conventions and follows the model code of conduct of the World Federation of the Sporting Goods Industry ("WFSGI"). The SOE contains clear requirements regarding environmentally sound manufacturing practices, safe and healthy working conditions, the provision of fair wages and the right to freedom of association, and protection against excessive overtime, forced and child labour, and discrimination.
We apply these standards in every country where we source products, and all suppliers and factories are expected to comply with the SOE. Our expectations are clearly defined in the manufacturing agreement executed with each supplier. A team of internal experts, from the company's Social and Environmental Affairs ("SEA") Department, monitors compliance with the SOE through factory inspections, and develops remediation plans for, and provides training to, factory management to promote sustainable compliance. In addition to monitoring conducted by the SEA Team, we commission independent monitoring by third parties. In 1999 we joined the Fair Labor Association ("FLA") in the United States, a tripartite organisation that monitors the results of company inspections, our internal compliance programme, and verifies compliance activities within our supply chain. The organisation publishes an annual report that includes a transparent evaluation of the efforts of participating companies. By taking these steps, we believe we have created a level playing field for our suppliers. All suppliers are treated equally and all are expected to comply with the SOE, irrespective of their location.
2. Sourcing Strategy
Three years ago adidas-Salomon implemented a sourcing strategy that seeks to balance security, with flexibility and growth. We believe that the maturity of the sourcing strategy and its focus on long-term relationships with strategic supplier partnerships minimises the impact from the end of the MFA. Export production for the company is produced by a balanced portfolio of long-term, strategic business partners located in five key countries: China, Indonesia, Vietnam, Thailand and Turkey, with a sixth - India - offering future sourcing opportunities.
Our business model seeks operational excellence in terms of innovation, performance, quality, customer satisfaction and sustainable compliance with the SOE in all parts of the supply chain. To complement our relationships with strategic suppliers, we have continued to source from other developing countries which will be affected by the end of garment quotas, namely Cambodia and the Philippines. The execution of our consolidation strategy supports our work with suppliers on key initiatives such as boosting efficiency, enhancing management systems and enhancing delivery programmes, but has also resulted in the decline of production orders to suppliers operating in Europe.
The sourcing strategy is reinforced by regular SOE evaluations which rate the effectiveness of actions taken by management to remedy non-compliance. The factory compliance ratings (known as the '5C factory rating system') are determined through the monitoring process, and are communicated to colleagues in Sourcing for inclusion in the key performance indicators used to decide production allocation and factory site selections.
We use the 5C factory rating system to describe a supplier's ability to deliver fair, healthy and safe workplace conditions in an effective manner, 1C factories being the poorest in the supply chain, and 5C factories being the best SOE performers. To determine the rating for a factory, the SEA Team evaluates performance in five key areas, including human resources and health, safety & environmental management systems, worker-management communications, development and delivery of compliance training to employees, transparency, and SOE compliance performance. In the case of new factories proposed by Sourcing, an SOE Pre-Production Audit is completed, which the nominated factory must pass successfully, before orders can be placed there.
3. Managing Risk
From a risk management perspective, it would be unwise for an international business to depend entirely on production from a single country. To manage risk, adidas-Salomon sources from a balanced portfolio of suppliers, located in a number of countries.
China, although dominant in the apparel and accessories sector, and with huge growth potential, currently represents no more than 30% of the Group's global orders in this sector. Growth in China production will come as a result of increased market demand rather than the shifting of adidas production volumes from other countries, including those impacted by the end of quota.
To manage the MFA phase out, we will rely on existing, well-defined and tested, policies and protocols to ensure that any social impacts are properly considered in sourcing decisions. We work in accordance with a process of internal checks and balances. To reflect this, the SEA Department is independent of Sourcing within the organisation, and reports directly to the Board through the Legal Counsel. However, at an operational level, Sourcing maintains a regular dialogue with the SEA Team, obtaining feedback on the social implications of proposed sourcing strategies and decisions, to identify any risks to our business, the reputations of our suppliers, and the well-being of the workforce in the supply chain.
4. Production Efficiency
adidas-Salomon began three years ago to implement 'lean' manufacturing in its supply chain, to drive higher levels of efficiency and greater productivity. For the countries that are now transitioning to, and will soon be competing in, a quota-free market, we believe that increased productivity will help cushion the change.
Lean, we believe, offers a competitive advantage. It also offers potential benefits to workers enabling pay to be linked to productivity gains. The SEA Team has worked since 2003 to identify Lean benchmarks that measure changes in working conditions. The benchmark areas are wages, working hours, stress and fatigue, ergonomics, and workers right issues.
5. Managing Factory Closures
We have 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.
We request that our suppliers provide mid- and long-term business plans, including their plans for opening or closing production locations and reasons for doing so. Knowing their plans at an early stage allows us to evaluate the steps necessary to minimise the social impact of factory closures or lay-offs.
In the case of retrenchments, adidas-Salomon requires suppliers to have in place a viable financial plan to manage worker severance pay and benefits. We encourage our suppliers to go beyond meeting legal minimums, and to engage with unions and workers to ensure layoffs are managed in an open, fair and transparent way.
6. Transparency and Engagement with Stakeholders
We have listened to the concerns of governments, trade associations, unions, NGO's and the university community. For example, we have engaged the Thai Manufacturing Association on the subject of MFA and its impact on Thailand garment companies since 2003. In 2003, senior management from the SEA Team, together with executive management from Global Operations met with the international NGO, Oxfam to discuss the company's sourcing practices and strategies. In November 2004, we hosted a stakeholder dialogue with NGO's and unions in Hong Kong to discuss the end of MFA and the question of freedom of association in China. An independent report of this dialogue is posted on our website. In December 2004, we also participated in a dialogue with Indonesian trade unions on the impact of the end of MFA on Indonesian suppliers. This was in response to an invitation from the Workers Rights Consortium.
We will continue to engage in dialogue with organisations concerned about the end of quota. We are committed to pragmatic activities that will not only mitigate the adverse impact of the end of MFA, but will promote overall improvements in workplace conditions.