Case Study

Case Study: Nike Sweatshop Scandal

 

Enobong Houston; Onyimowoh Idoko ;Heather Jacobs; Nicole Johnson

Department of Business, Houston Baptist University 

MGMT 6392: Transformational Leadership and Business Ethics 

Dr. Richard Swersey 

May 12, 2022

 

Introduction

 

History

Nike is a major US footwear, clothing and sportswear supplier based in Beaverton, Oregon. The company currently operates or sells their products in 170 countries and employs over 73,300 employees worldwide. As of February 28, 2022 their quarter revenue was $10.871 Billion and their 12-month revenue was $46.820 Billion up 4.96% and 21.59% from last year. As of fiscal year, ending May 2021 total shareholder equity was $12.8 Billion [ CITATION Sta l 1033 ]. Nike is considered one of the world’s largest and most famous brands who have seen more than one controversy or scandal since their beginnings. 

The company was originally founded in 1964 as Blue Ribbon Sports by Bill Bowerman and Phil Knight. Phil Knight was a track star for the University of Oregon and was introduced to Bill Bowerman who customized a pair of running shoes for Knight which was essentially the first pair of NIke shoes. Otis Davis used these shoes to ultimately win Olympic Gold in the 400 meter dash in the 1960 Olympic Games and started Nike’s first scandal by saying the shoes were originally designed for him not Knight [ CITATION Nik l 1033 ]. 

Nike originally started out as a distributor for Onitsuka Tiger, a Japanese shoe maker and sold mainly out of Knight’s vehicle. In 1966 Blue Ribbon Sports opened their first retail location in Santa Monica, California. In 1971 Blue Ribbon Sports and Tiger split ways and Blue Ribbon Sports rebranded as Nike. They reached out to a design student at Portland State University, Caroly Davis who ultimately created the now famous Swoosh design. The new company’s first self-manufactured shoe Bowerman’s waffle design that became extremely popular with runners due to their waffle-type nubs for traction but were lighter in weight than traditional running shoes. 1979 Nike Air technology was launched and in 1982 after starting to cooperate with Portland-based agency Wiednen+Kennedy the agency’s co-founder eventually designed Nike’s famous slogan still used “Just Do It” in 1988.

Production started in Germany but moved to Japan before being moved to South Korea, China and Taiwan for cheaper labor cost. Production was moved again for lower labor cost to China, Indonesia and Vietnam where 96% of the company’s products are currently being produced. Nike has a long history of controversy over its labor practices and in 1991 Jeff Ballinger published a report documenting the poor working conditions of Nike’s operations across Indonesia. After which Harper’s Magazine printed an article about the Indonesian workers earning only 14 cents an hour.

LABOR LAWS

“Labor law primarily concerns the rights and responsibilities of unionized employees. Some groups of employees find unions beneficial, since employees have a lot more power when they negotiate as a group rather than individually. Unions can negotiate for better pay, more convenient hours, and increased workplace safety. However, unions do not have limitless power. Leaders must treat all union members fairly and refrain from restricting union members’ rights to speech, assembly, and voting powers. Employers also must follow specific rules when dealing with union members. For example, employers may only negotiate with designated union representatives and must carefully consider any agreement between the union and the employer. States are allowed to make their own laws concerning labor relations, but all of these laws must comply with the federal statute, known as the National Labor Relations Act.” (Schonrock, 2016)

 

Currently, in the United States labor laws are firmer to protect citizens and businesses alike. In comparison to other countries, the labor laws in some areas are non-existent, or not a main focal point for those particular countries. However, in according to the areas Nike has chosen to use factories- the labor laws have become increasingly competitive to those of the United States given some of the events that have taken place in the factories due to the unpopular working conditions.

What are Human Rights? Human rights are:  rights inherited to all human beings at the time of birth. These rights are regardless of race, sex, nationality, ethnicity, language, religion, or any other status. Human rights include the right to life and liberty, freedom from slavery/torture, freedom of opinion/expression, the right to work and education, and many more others not disclosed.  Everyone is entitled to these rights, without any discrimination.

International and global human rights law gives various governments guidelines on how to act in certain ways or to refrain from certain acts, in order to promote and protect human rights and fundamental freedoms of individuals and/or groups. This law was set into place to protect human beings from the retaliatory acts that could be suggestive by governmental groups that do not agree with a person’s decision or opinion in certain aspects. Currently there are 18 ratifications taking place to Human Rights treaties globally. The United Nations created a comprehensive body of human rights law. This law protects human’s universal and internationally and all nations can subscribe. The United Nations has adopted and created internationally accepted rights, which includes civil, cultural, economic, political and social rights. It has also established various aspects and dynamics to promote and protect those rights and to assist states in honoring their responsibilities.

In the year of 1976, The International Covenant on Economic, Social and Cultural Rights began. The rights that the Covenant applies to promote and protect include the right to work in just and favorable conditions, social protection, and adequate standard of living and to the highest attainable standards of physical and mental well-being, and the right to education and the enjoyment of benefits of cultural freedom and scientific progress. The Second Optional Protocol was updated in 1989. The addition of the Covenant deals with rights such as equality before the law, freedom of movement, the right to a fair trial, presumption of innocence, conscience and religion, freedom of thought and freedom of opinion and expression to name a few- there are far more coverages under the added second option of the covenant rights.

Working conditions in the United States in factories/manufactures are said to be improving with slow gradual changes, based on the most recent climate of events in the workplace, due to the pandemic. “In 2020, industrial businesses were forced to reassess their priorities on both a company and employee level. Employers learned the importance of sustaining a healthy workforce, both physically and mentally, and that without creating positive environments for all workers they will not be successful.” (Whittle, 2021) Employers of factory setting employment have now realized that the employee’s mental and emotional welfare is a huge compliance that allows and promotes loyalty within the workplace and for the company. Many employees over the past 2 years walked away from time and lifestyle demanding blue-collar jobs. Low pay, long hours, limited schedule changes, and expectations of great quantity workloads became overwhelming and overbearing that many workers became entrepreneurs or resigned to work within a less demanding industry, who chose quality of life over quantity. As far as technological advances, the factory industry is running behind on numerous updates, which alleviate the workload on its employees. “ The results of a survey by my company Parsable, a globally deployed software solution for industrial workers, suggests nearly 80% of frontline manufacturing workers still rely on paper to follow instructions and track their tasks.” (Whittle, 2021) Workers within the United States are still using blueprint instructions to put together many products and items that make it to the doors of consumers. This means that labor intensive skills are still being utilized daily, which then plays a factor on the physical well-being of the individual. Majority of these workers have been in these positions for numerous years, which also brings into consideration, “retirement”. In addition to strenuous work hours, not all states are required to give workers break times and meal times through-out the day to complete or refuel their bodies to produce quality work. How effective are you mentally and physically all day with little to no food or water intake?

The typical conditions within American factories are well-ventilated, well lighted, and spacious working conditions. On occasion, these normal amenities to the workplace can be compromised by improper management, or cheaply ran facilities to cut costs for the revenue of the company. Working conditions in other countries are terrible in most areas, due to the standards and expectations of the manufacturing company to save money. These terrible conditions include, but are not limited to improper/faulty machinery, non-disclosed directions; poor ventilation/no a/c or heating elements for weatherized conditions, low wages, long work hours, and low work culture/moral. In often times, employees have expectations for a quota by their management team, who also has a strategic deadline and quota to meet. There have been prior reports from anonymous employees who have found themselves on the brink of committing suicide at the workplace. “Li Ming, aged 31, jumped to his death from a building in the city of Zhengzhou, China, where he had been working for Foxconn” (Gonzalez, 2021)

In recent years, Nike has been under a harsh telescope for tolerating sweatshop mentality, to uphold quality and quota of demanding apparel and accessories industries. “Nike employees continue to face poverty, harassment, dismissal and violent intimidation despite its pledge three years ago to improve conditions for the 500,000-strong global workforce.” (Wazir, 2001) Nike and its board members have been made aware on numerous occasions that the factories they implement to create various products have specific immoral and degrading situations happening. These events have been gone un-noticed until a report of child labor had been used for creating the megabrands footballs. “In 1996 Nike was severely embarrassed when a US magazine featured a photograph of a young Pakistani boy sewing together a Nike football.” (Wazir, 2021) This one instance has been one of many incidents the popular American brand has been highlighted for. Another situation involved horrible working conditions within a Vietnam factory, which Nike contracted with and resulted in many workers in a non-ventilated working area who were exposed to toxic fumes past the legal Vietnam requirement. In another case, Honduran workers within a Nike factory were out of work with no notice, and Nike failed to take responsibility. The brand later reconsidered and paid 1.5 million to the employees due to lost wages over the period of unemployment.

Since then, and several allegations Nike has made a sustainability change to their hiring process of employees who create their products. These updates include but are not limited to:

The age requirement- Minimum age would be increased to 18 for workers within the Nike shoe factories and 16 years old for employees in clothing factories.

Nike would acquire non-governmental organizations in factory auditing and monitoring.

Make inspection results public for each factory of use.

Create a bigger employee educational system, and offer free secondary-school equivalent courses/GED courses.

 

On average in the United States a Nike retail employee on an hourly wage makes between $10- $16 dollars an hour. However, in other countries in a factory setting the employees make less than $400 a month and they typically work 10-hour days, 6 days a week. The rate of pay varies per factory, per order, per country. Usually, the cost of living in other countries tends to be lower than in the United States, but a poverty stricken living arrangement, based on the pay, is not acceptable.

Apparel companies work on a chain system, and this affects everyone who owns, purchases or shops at Nike or buys a Nike product. Often, many may not take into consideration the amount of effort it takes to place a single item on the shelf for purchase. There are several processes that take place before the store receives a product. On average, individuals do not think about the hands that actually took the time to create the item. Machines are not always the backing of how items are created, which leaves a false sense of technology advancement to the consumer. The Nike Scandal affects, the consumer, the brand, employees, stock market, shareholders, board members of Nike, CEO of Nike, auditors, PR, lawmakers, politics, and so on. The consumer is effected in terms of lower product availability when factories have to close, due to poor conditions. The brand will be majorly affected by the publicity and media attention it will receive due to neglectful nature of the responsiveness to an issue and the treatment and conditions of the workers. Not only will the brand be affected in that aspect, Nike would also be held accountable for their actions going forward, which could also contribute to a “cancel culture/brand” which has become widely acceptable within society these days. The cancel brand/culture is the banding or solidarity of individuals in mass who do not agree with a company’s views towards particular situations- the consumers than decide collectively to no longer support the brand in any capacity. That would then trickle down to the board members, CEO, retail associates, employees, and shareholders. This terrible situation would give governmental sanctions on auditing working conditions for workers within the manufacturing industries that would stream globally. Lastly, it would fuel lawmakers to create more laws and protections for those who are employed by such companies seeking to use factories for their goods to be created. Literally, any individual who supports Nike in any faucet will feel the effect of any negative or positive reflections on the brand.

 WHAT ARE THE ALLEGATIONS?

Over the years, there have been many allegations as to why Nike has been under the microscope for their various susceptible situations. Dated back to 1998, Nike was under fire for low-wages, slave type labor, and poor working conditions. Between 2000 and current, Nike has continuously been scrutinized for the same factual allegations from 1998, which have been proven true and new allegations of child labor laws in foreign countries, to name a few have been documented and investigated, which also were proven true in Pakistan. There have been several incidents where Nike has contracted factories that have children working in unfavorable conditions making little to no money for their time and efforts. This has stemmed down to children as young as five, in a factory setting around heavy machinery and equipment. Not to mention, some of the factories do not have proper ventilation, little to no restroom amenities, access to proper water, and other factors that are deemed unworkable or unfavorable conditions. Incidents of workers looking to commit suicide, due to overwhelming workload has been an epidemic within the manufacturing industry. The pressure of meeting a particular quota per person in the factory contributes to the suicide incidents along with poor over-all management.

HOW DOES SCANDAL AFFECT THE ORGANIZATION?

Nike controls 62% of athletic footwear brands in the US (Lutz, 2015). The brand is widely used by teens as their favorite clothing and footwear retailer. It is also popular among the older demographic who use it for running. The company faced public shame a while ago for abusive labor practices after outsourcing labor overseas because it was cheaper. There were reports of Indonesian workers earning as little as 14 cents an hour, and also reports of a Vietnamese sub-contractor who ran women outside until they collapsed because they failed to wear regulation shoes (Lutz, 2015). As a result of these scandals, customers staged a public protest at the 1992 Barcelona Olympics and at Nike stores. Customers began to boycott the brand and the idea that Nike abused its workers lasted for more than seven years. Nike became a global symbol of abuse in 1991 when Jeff Ballinger published an article detailing poor working conditions and low wages in Indonesia (Nisen, 2013). As a result of the boycott, Nike began to face low demand and more criticism. They were forced to layoff workers and soon began to realize their need for change. 

NIKE’S JOURNEY TO SUCCESS

Production rates in early years

Nike has always used outsourcing as a marketing strategy and used the money it saved on aggressive marketing campaigns. This business model was developed by Phil Knight and Bill Bowerman. Emerging from being an importer of Japanese specialty running shoes to now the world leader in marketing, design and distribution. The purpose of outsourcing was to undersell their competitors and break into the athletic footwear industry. As a result, the company began to import high-tech sports shoes from Japan. As sales increased to almost $2million in the early 1079s, they parted ways with the manufacturer in Japan and began to subcontract their own line of shoes. As the cost of production increased in Japan in the 1970s, Nike began to search for lower cost alternatives. 

Production rates in late years

Nike witnessed gigantic demand in the first quarter of its 2022 fiscal year ending on Aug. 31 2021. Their total revenue grew by 16%, and digital sales was up by 29%, wholesales increased by 5% and retail sales up by 28%. This increase was amid supply chain complications that even the athletic wear giant could not avoid. CEO John Donahoe mentioned some of the global supply chain issues and how they as a company are doing their best to navigate it. Since the pandemic, shipping costs and times have worsened. Ports remain overloaded and shipping containers have doubled in price. The wait time for products to arrive from factories has since doubled to 80 days from 40 days (Glossy, 2021). Nike’s production has also been affected by the lockdown in Vietnam and Indonesia, forcing many Nike factories in these places to close as well. The factory in Indonesia has however resumed production, and is also trying to make up for the time lost in lockdown. 

Profit margins throughout the years

Profit margin as we all know, is the percentage of earnings that a company retains as income after deducting expenses. As of Feb 28, 2022, Nike’s net profit margin is 13.06%, operating margin was 15.21%, and gross margin was 46.20% compared to 8.90%, 10.87% and 43.26% as of feb. 28, 2021 respectively (Macrotrends. (n.d.), 2022). These higher margins were driven primarily by lower promotional activity in the Nike direct business as a result of limited for sale available inventory as a result of supply chain constraints compared to higher promotional activity in the prior year as they managed the impact from Covid-19, increasing gross margin approximately 140 basis points. 

Nike is known as one of the most profitable brands of footwear on the market.  Its partnership with Michael Jordan secures Nike’s brand position as number one in the industry year after year.  Nike controls 1/5 of the athletic market.  Assessing Nike’s finances and reviewing their profit margin growth over the last 10 years, Nike’s profit margin boasts at an average of  13% which is significantly high considering Nike’s direct and indirect competition.   The method used for assigning Nike’s valuation and profit margin calculation consists of net income over ratio, times 100.  

            As investors are looking into deciding whether Nike is a probable investment, they can leverage this data in their decision making.   This quantitative approach gives risk intolerant investors the assurance that is needed to arrive at a decision about investing.  The data is clear that Nike’s valuation isn’t volatile and the have significant control over their finances.  Nike’s financial statements over time confirms the company’s growth and probability of its price appreciation.   Nike’s balance on price swings suggests that Nike has a solid backing and has had steady growth over the last 10 years. 

            Nike’s manufacturing process and the question of ethics have had its fair share of conversation in headlines.  Majority of Nike’s products are manufactured outside of the United States, primarily in China, Indonesia, Viet Nam and Thailand.   Given the varied difference in labor laws, especially around child labor, questions of concern will continue to rise.  Nike currently has 785 factories and over one million factory workers.  Although Nike’s products are made in third world countries, Nike is known to produce a quality product as Nike institutes a brand quality standard that each product must pass to hit downstream markets.

            With Nike’s 1 million factory workers and products being produced in 785 factories, none of these factories are owned by Nike and the factory workers are not considered employees of the company.  They are third party staff augmented resources.  Operating in this model, the company reduces cost significantly.  Consider the cost of ownership if they owned the factory and had to assume all liability for workman safety.  By leveraging a contractor heavy factory base, Nike does not have to commit to developing or investing in the worker’s growth. 

            Aside from questionable work conditions and violations of other standards, Nike has been accused of a barrage of human rights violations.  Since then, the company has grown in leaps and bounds to ensure its social responsibility to the countries that its products are developed in.  Nike’s scrutiny put them at risk for losing contracts with major universities and corporations and they have since instituted measures to validate the conditions of the factories that they operate in.  With great demand from universities, Nike did respond to demands of request to publicly disclose the names of factories they operate in.  Providing this level of transparency builds a level of trust with partners and helps Nike to protect their brand reputation.  This doesn’t maintain that Nike is free from scandal, but what it does is assert that Nike is bringing the public in, and it doesn’t look like they have anything to hide. 

            Patrons of the company see Nike’s step toward full transparency as admirable and view them as leaders in the industry, hoping other companies will follow suit.  Nike continues to oversee its supply chain with more supervision to ensure it maintains its commitment to ethical standards.  As of now, Nike’s efforts have been consistent, and its reputation and image has shifted more for the positive in recent years. 

References

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Lutz, A. (2015, June 6). How Nike shed its sweatshop image to dominate the shoe industry. Business Insider. Retrieved May 3, 2022, from https://www.businessinsider.com/how-nike-fixed-its-sweatshop-image-2015-6 

Nike lost 10 weeks of production to Vietnamese and Indonesian factory shutdowns. Glossy. (2021, September 27). Retrieved May 9, 2022, from https://www.glossy.co/fashion/nike-lost-10-weeks-of-production-to-vietnam-indonesia-factory-shutdowns/amp/ 

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Teaching Notes 

Nike Sweatshop Scandal

The moral dilemma in this case is whether Nike is providing employment for these workers or if they are causing mayhem. Also, sweatshops fail to comply with labor and wage laws due to subpar environments which they operate in.  Sweatshop Scandals must be blamed on Corporate Social Responsibility (CSR) strategies that have failed to protect and respect the dignity and fundamental rights of these workers that have to continuously work in these bad conditions Now, the debate is geared towards vague and unenforceable corporate codes of conduct.  

Employment opportunities in third world or developing countries come in the form of factory work. Big companies in developed countries take advantage of outsourcing as a marketing strategy to cut production costs as the cost of labor in these countries are extremely low. Economists argue that outsourcing is a good way to provide jobs for these underdeveloped countries. The argument is, morally, are these companies providing jobs or just taking advantage of the unemployment situation in these countries and their citizens. Sweatshop laborers consist mostly of women and kids working in exploitative and hazardous conditions, having to deal with harsh bosses and unjustifiable punishment, and even suffer death threats whenever they file complaints or unionize. 

To put an end to sweatshops and fast fashion, CEOs of these organizations must think from a deontological and utilitarian ethical perspective. Sweatshops can be defended through a utilitarian perspective but its applicability can be criticized from a deontological perspective. Sweatshops are deontologically wrong due to their violation of the law. “Deontology is a normative ethical theory that argues that the rightness or wrongness of an action should be determined by whether or not the action is right or wrong under a set of rules or duties” (College, 2019). In the case of Nike sweatshop scandal, gauging the moral value would involve an investigation of the existing laws that govern the athletic gear industry or fashion industry in general, in countries where sweatshops are heavily operated, as well as government duty to ensure economic development and the responsibility of the average citizen to be a productive member of society. Since this case is viewed from a deontological perspective, Nike has a social obligation to manufacture athletic and casual clothing for consumption. Deontology would not oppose the establishment of sweatshops if they were primarily used to provide consumers with clothing since clothing is a basic necessity and therefore, obligates Nike to cater to this need. Since Nike has a duty to respect the human rights of sweatshop workers, they are deontologically criticized for failing to meet those needs through sweatshop operations. It is fair to include that employing a deontological approach appears to lead to moral impasse where the duties of Nike are internally conflicted with their end goal. We all know that the duty of every business is to make profit. In Nike’s case, their duty to make profit and meet high demand for running and casual shoes contrasts and their obligation to comply with national laws contrast with the firm’s duty to maintain acceptable working conditions in sweatshops.

Consumers are more focused on sustainability now, so there is a wave where unethical manufacturers will be highlighted and subject to bad press like Nike. There is no dispute that there is a systematic exploitation of labor due to fast fashion, but these large fashion companies such as Nike, Zara and H&M employ over 100,000 people worldwide (College, 2019) and to put them out of business would lead to massive unemployment. So instead of completely doing away with fast fashion, we must focus on sustainable, ethical practices that will be beneficial to all parties involved. 

Reference

College, E. J. (2019, July 16). The ethical concerns of sweatshops. Eudaimonia. Retrieved May 11, 2022, from https://ejceudaimonia.com/2019/06/11/the-ethical-concerns-of-sweatshops/