Prasad Ajay Prasad Professor Heyman Introduction to Globalization April 30, 2009

THE GARMENT INDUSTRY: A CASE STUDY OF POLO RAPLH LAUREN CORPORATION Introduction In this paper, the state of the global apparel industry is explored from the perspectives of one firm, Polo Ralph Corporation. In the following sections, the production chain of the firm is explored, followed by an examination of its labor policies in its own facilities and in its outsourced contract manufacturing facilities. Next, information related to any activism surrounding the firm is presented. Concluding comments summarize the findings related to the firm. For the purposes of this research, I selected the Polo Ralph Loren Corporation (RL). The firm is based in New York, and is 481 on the list of Fortune 500 public companies. Its corporate address is: 650 Madison Avenue, New York, NY. The firm is primarily owned by Mr. Ralph Lauren (Corporate Annual Report, 2008). The Production Chain RL has three major divisions. It basically designs and markets apparel and accessories, home furnishings, and fragrances. The firm has 3 business segments: wholesale (57% of total 2008 revenues), retail (39%), and licensing (4%). 25% of their revenues were earned in international regions outside of the US and Canada. As of March

Prasad 29, 2008, it operated 155 full price retail stores, including 80 Ralph Lauren stores, 65

Club Monaco stores, and 10 Rugby stores; and 158 factory stores. The company offerings of apparel products include a collection of mens, womens, and childrens clothing; accessories comprising footwear, eyewear, jewelry, hats, belts, and leather goods, such as handbags and luggage; home furnishing products consisting of bedding and bath products, furniture, fabric and wallpaper, paints, broadloom, tabletop, and giftware; and fragrance products. Their brand names include Polo by Ralph Loren, Ralph Loren Purple Label, Ralph Loren Collection, Black Label, and Blue Label. The firms full price and factory retail stores are located primarily in the US, Canada, and Europe, but also in South America and Asia. They also sell through their retail internet sites (at www.Ralph.Lauren.com, and www.Rugby.com) (Corporate Annual Report, op. cit, 2008). The firm does not own or operate any production facilities. They also source their finished products (manufactured and fully assembled products) and their raw materials that include fabric, buttons, and other trim. They hire independent contractors for the manufacture of their products. In 2008, they hired over 400 different manufacturers to produce their products, and generally shipped to their warehouse located in the US and Europe. In 2008, less of 2% of dollar volume were produced in the US. Their products were primarily produced in Asia, mostly in China, Hong Kong, Indonesia, Macau, Philippines, and Sri Lanka. Their production by independent manufactures is closely supervised by personnel at their global manufacturing division and buying agents to ensure that the firm high quality standards (they adopt vendor certification and compliance programs to ensure their standards) are maintained. Their production and

Prasad quality control staff ensure that any quality problems are corrected and handled prior to shipment to the warehouse. (Corporate Annual Report, op. cit). The firm sources most of its production from China, Hong Kong, Macau, Indonesia, Philippines and Sri Lanka. Although scant information was available, it seems logical that most of the raw materials are secured locally or from nearby Asian countries. Furthermore, the firm directly imports the raw materials it needs (fabric, buttons, and other trim) from the same countries it imports the finished apparel.

The wholesale segment sells to major department stores, specialty stores and golf and professional shops located throughout the U.S., Europe and Asia. The retail segment sells directly to consumers through full-price and factory retail stores located throughout the U.S., Canada, Europe, South America and Asia, and through their retail internet sites located at www.RalphLauren.com and www.Rugby.com. The licensing segment consists of royalty-based arrangements under which they license the right to third parties to use our various trademarks in connection with the manufacture and sale of designated products, such as apparel, eyewear and fragrances, in specified geographical areas for specified periods. (Corporate Annual Report, op. cit). The firm buys its fabrics from its suppliers, and checks them for quality control. Although the firm does not provide information on its cost structure, the most important cost of producing apparel is the cost of materials (66%), labor costs (16%), and overhead and other costs (16%).(REF?????) Manufactures therefore constantly attempt to relocate to countries where the cost of materials and labor is lower, and where the location harbors troubled labor practices.

Prasad The firm locates production in some periphery countries and some semi periphery countries. For example, some of the countries (Macau, Sri Lanka, Indonesia, and Philippines) belong to the periphery group of countries, characterized by low levels of technology, and low wages. However, Hong Kong and China belong to the semi periphery group, since their industry provide both core (manufacturing and other core type industries characterized by relatively higher levels of technologies) and periphery (for example, the apparel industry) type outputs. Since the firm outsources its production to periphery and semi periphery

countries, it does not have direct control over the labor and environmental practices of the manufacturers. They do, however, periodically visit the manufacturing facilities to monitor operations. As a matter of policy, they require that the supplier firms operate in compliance with local and international labor laws. Any known violation of labor laws and licensing agreements would result in forthright termination of manufacturing contracts. However, the firm acknowledges that publicity of such violations can materially impact its reputation and its financials. (Corporate Annual Report, op. cit). Extensive internet research did not reveal any information related to whether there were any complaints filed against the firm with respect to any labor or environmental violations. However, there were 3 distinct lawsuits by a total of 15 employees filed in California courts against the firm for alleged violations of California wage and hour laws. The firm was charged with not providing compensation to employees for overtime work, for not providing meal and rest breaks, and for being forced to work off the clock. (Corporate Annual Report, op. cit).

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Although the firm does not provide specific information related to working hours, the Bureau of Labor Statistics (BLS) offers some insights into the working conditions in the industry. It suggests that some factories run for 24 hours a day, with evening and weekend shifts. Rotating schedules in the industry can induce sleep disorders and constant stress. Overtime is common for line workers. Management work a typical 8 hour a day schedule for 5 days a week. Management related travel is common since production is generally outsourced to many Asian countries (Bureau of Labor Statistics, 2008). The firm does not take any special steps to protect the employees working for firms where production is outsourced. Instead, it relies on its manufacturing partners to obey local laws, and take care of its employees. The firm, however, under a collective bargaining agreement, allows its employees to belong to a union. However, not all of its US based employees are unionized. The firm reports that 36 of their workers in the United States belong to UNITE HERE, which is a union of Needle, Industrial and Textile employees. The firm contributes towards a union based pension plan, although it does not manage these plans. They indicate a cordial relationship with both their unionized and non- unionized employees. The firm participates in the Employee Retirement Income Security Act of 1974 plan for all its employees (Corporate Annual Report, op. cit). Working Conditions at Contract Manufacturing Sites In this section, the working conditions in some of the countries where contract management facilities of Polo Ralph Lauren are located will be discussed. Worker Conditions and Rights in China The rapid growth of China can be attributed to the presence of foreign multinational corporations seeking low cost labor in China. More importantly, given

Prasad Chinas significantly large population, the access to cheap Chinese labor places downward pressure on global wages and labor costs. Multinationals pit one low wage country against another, and as a result, the race to the bottom emerges.

Although no specific information is provided, it is reasonable to assume that Polo Ralph Lauren would have selected manufacturers in one of Chinas free trade zones (Walton 2003). The quality of workers and hence the quality of manufactured products would be higher if manufactured in such zones, but not significantly so from the rural areas. Nevertheless, hourly compensation rates remained about 3% of rates in the United States, about $ 0.67 per hour in 2004 (Lett and Bannister 2006). These wages reflect a slight increase from 2002 levels. In addition to low wages, the average Chinese workers did not enjoy rights enjoyed in core countries. For instance, they had little or no health benefits, no unemployment and retirement benefits. In 2006, however, the Chinese government made significant efforts to improve the conditions of Chinese workers by enacting a new law called the Draft Labor Contract Law (Costello, Smith and Brecher 2006). This law attempts to improve the compensation, the health, safety, and the working conditions of Chinese workers. However, it does not allow workers to unionize or to strike. Interestingly, many American Fortune 500 firms (of which Polo Ralph Lauren is a member), vehemently opposed the passage of this law. These developments have global repercussions in periphery countries, since passage of this law would have strengthened the bargaining advantage of other countries in the apparel industry supply chain This situation clearly illustrates the hypocrisy of multinationals on the one hand, they claim that they want to improve the social welfare of workers in periphery countries;

Prasad yet, they are first in line to challenge any attempts to improve the working conditions of people in periphery countries. Worker Conditions and Rights in Sri Lanka Sri Lanka offers a literate employee base. In addition, the hourly compensation costs for manufacturing workers in Sri Lanka were approximately $ 0.46 in 1999 compare favorably with costs in China, but are higher than in many other South Asian countries (Bureau of International Labor Affairs and US Embassy, Colombo, 2003). However, and unlike in China, the government allows its workers to unionize, and 20% of its workers are unionized. It also enjoys a strong trade union, although labor in the 10 free trade zones (where apparel manufacturing industries serving foreign customers are located) are non unionized and are represented by worker councils (Bureau of

International Labor Affairs and US Embassy, Colombo, op. cit). Sri Lanka has ratified all of the International Labor Organization (ILO) core labor standards, including Standard 105, involving forced labor (Bureau of International Labor Affairs and US Embassy, Colombo, op. cit). Sri Lankan workers enjoy the right to strike, and other unionized benefits, although, these are low by core country standards. Most workers also benefit from the Termination of Employment Act, which prohibits firms from layoffs instigated by economic and other downturns. New laws allow firms to terminate employment for its workers, but force them to provide termination benefits appropriate for the length of service by the employee in the company (Bureau of International Labor Affairs and US Embassy, Colombo, op. cit).

Prasad Worker Conditions and Rights in Indonesia Indonesia has been a member of the ILO since 1950. Although Indonesia allows unionization, and has in principle provided benefits to its workers, the big problem is in enforcement of its laws. Recently, Nike ran into trouble in Indonesia because it was accused of providing sweatshop conditions in its contract manufacturing factories.

Although no negative evidence related to the practices followed by Polo Ralph Lauren in Indonesia was found, it can safely be inferred that global competition and competitor practices in Indonesia imply that they are follow similar practices. Indonesian workers also suffer from long working hours (sometimes twice the required 40 hours per week), have to strike to receive the mandated minimum wages of $ 2.50 per day, and other legally authorized benefits (Moberg 1997). Many Indonesian workers are women, who toil for subsistence-level wages. The big problem in Indonesia does not seem to be inadequate laws, but the inadequate enforcement of existing worker related laws, and the rampant corruption (Moberg op. cit). Worker Conditions and Rights in Philippines The Philippines has been a member of the ILO since 1948 (International Labor Organization 2009). Despite this membership, the problems in the Philippines are similar to those faced in Indonesia: labor laws on the books, similar to those in Indonesia, were not enforced. V.T. Fashions, a contract manufacturer of apparel (and one of the suppliers to Polo Ralph Lauren) was cited for extremely bad working conditions, and for the death of one of its workers. V.T. Fashions was accused of paying scant attention to the working conditions and the human rights of its employees. Most of the workers were women aged 17-30 years, and spent 14 hour work days earning a mandated minimum wage of $ 5.96

Prasad plus overtime. Although production was situated in Export Zones, V.T. Fashions subcontracted some production to manufactures outside the zones, where working conditions were even more appalling. Many working in the zones were also hired as

contractual workers (and not considered as regular workers), and hence were paid even less. There is no information on whether Polo Ralph Lauren subsequently terminated its contracts with V.T. Fashions (Scipes 1997).1 Global Actors Influencing Firm Activities The firm is a public company registered in the United States. It enjoys membership as one of the Fortune 500 companies. As such, its financial conduct is regulated by the Securities and Exchange Commission (SEC). The SEC requires public companies to fully and completely disclose meaningful financial and other information to the public to make meaningful conclusions about the financial well being of the company. Since they are outsourcing production to foreign producers, they need to import manufactured goods into the United States, and hence are subject to the US customs regulations. They are also subject to regulation from the Federal Trade Commission, the U.S. Fish and Wildlife Service and the Consumer Products Safety Commission (Corporate Annual Report, op. cit). Since it imports apparel, it is subject to the World Trade Organizations rules and regulations concerning imports and exports of textiles. They are also impacted by free trade agreements and regulations such as the North American Free Trade Agreement, the Central American Free Trade Agreement, and the Caribbean Basin Initiative, since they

This section draws heavily from Scipes 1997.

Prasad 10 do business in these countries. Effective January 1, 2008, the firm is subject to the double surveillance licensing scheme for textile imports and exports between the European Union and China. The firm is subject to additional duties imposed by the US government for apparel imports from Vietnam (the Vietnam Import Monitoring Program). However, the firm only has minimal imports any apparel from Vietnam (Corporate Annual Report, op. cit). In terms of worker rights, they must obey their agreements with unionized employees (UNITE HERE). Since UNITE is a signatory to the Apparel Industry Partnership Agreement, Polo Ralph Lauren is bound indirectly (there is no evidence that it signed this agreement) to honor the principles of this agreement. This agreement mandates a strong workplace code of conduct for apparel firms and their contractors that guarantees (verifiable) workplace standards that include minimum wages, safety, health and welfare and other benefits (Corporate Annual Report, op. cit). Finally, the firm is headquartered in the United States. Since the United States is a member of the International Labor Organization (ILO), the firm is bound by the standards required by the ILO. These require minimum workplace standards for employees. The firm is also actively seeking global markets and production locations. For instance, it recently purchased assets in Canada and Japan. Many of the labor agencies (for example, the ILO) are actively seeking to standardized working conditions globally. All of the agencies mentioned above as be viewed as working actively on globalization issues related to this industry (Corporate Annual Report, op. cit).

Prasad 11 Conclusion RL seems to be a responsible Fortune 500 firm in the apparel industry. It has enjoyed superior earnings in recent years, despite economic downturns. Its production process (and chain) can be described as follows: It imports most of its products from contract manufactures in China, Macau, Indonesia, Philippines, Hong Kong and Sri Lanka, who generally establish in local free trade zones. It stores these products in two primary warehouses in Canada and the United States, distributes these products through wholesale and retail outlets, primarily in North America and Europe. Future expansion possibilities include established markets in Asia, and internet based sales. In the United States, it hires both unionized and non-unionized workers. It generally enjoys superior relationships with its employees, although there have been minor lawsuits in California involving workplace infractions. In foreign production locations, it basically relies on its contract manufacturers to obey local and international rules. The countries where it sources production have varied workplace standards, and significant differences in development. At one extreme, Indonesia and Philippines have excellent workplace standards, but provide lax enforcement. At the other extreme, Sri Lanka offers low cost and work related benefits to its workers. China is an enigma it has one of the lowest costs, a strong work force, but offers very weak benefits to its employees. Recent attempts to provide minimum level of benefits to workers met with stiff international resistance. RL has managed to stay out of the limelight insofar as negative publicity related to its international contract employees is concerned. This may partly be due to the success of its close monitoring program of its contract manufacturers.

Prasad 12 Works Cited Bureau of International Labor Affairs and US Embassy, Colombo. Foreign Labor Trends Sri Lanka. April 28, 2009. http://www.dol.gov/ILAB/media/reports/flt/sri-lanka-2003.htm#009. Bureau of Labor Statistics, U.S. Department of Labor. Career Guide to Industries, 2008 -09 Edition. Textile, Textile Product, and Apparel Manufacturing. 28 April 2008. http://www.bls.gov/oco/cg/cgs015.htm Corporate Annual Report. : 2008 Annual Reports. Polo Ralph Lauren Corporation. April 27, 2009. http://library.corporateir.net/library/65/659/65933/items/299215/RL_AR_Final.pdf Costello, Tim, Brendan Smith and Jeremy Brecher. Labor Rights in China. Foreign Policy in Focus, December 21, 2006. April 28, 2009. http://www.fpif.org/fpiftxt/3824. International Labor Organization. NATLEX. Indonesia.2009. April 29, 2009. http://www.ilo.org/dyn/natlex/country_profiles.basic?p_lang=en&p_country=IDN Lett, Erin and Judith Bannister. Labor Costs of Manufacturing Employees in China: an Update to 2003-04.Monthly Labor Review, November 2006, pp. 40-45. 28 April 2008. http://www.bls.gov/opub/mlr/2006/11/art4full.pdf Moberg, David. Just Doing It: Inside Nikes New Age Sweat Shop LA Weekly, June 19, 1997. April 29, 2009. http://www.clrlabor.org/alerts/1997/nike_indonesia.html Scipes, Kim. Codes of Conduct and Carmelita: The Real Gap Asia Monitor Resource Center. 13 June, 1997. April 29, 2009. http://www.hartfordhwp.com/archives/54a/044.html

Prasad 13 Walton, Julie. Zoning In: The Supply Chain. The China Business Review 2003. 28 April 2008. http://www.chinabusinessreview.com/public/0309/walton.html.