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Wal-Mart’s Ethical Sourcing Push in China

Wal-Mart Stores Inc.?s new plan to step up environmental and social compliance standards in China hit a fashion industry nerve.

Wal-Mart executives dominated WWD's annual compensation survey.

Wal-Mart Stores Inc.’s new plan to step up environmental and social compliance standards in China hit a fashion industry nerve.

This story first appeared in the October 23, 2008 issue of WWD.  Subscribe Today.

Some suppliers to the retail giant saw higher costs, as they are expected to make most of the changes, while ethical sourcing specialists on the frontlines saw bold leadership and the perennial critics said they’d believe it when they saw it.

Wal-Mart is insisting its suppliers demonstrate that they comply with local environmental laws, identify the factories they use and make sure they rate highly on ethical issues. Product safety and energy efficiency are also priorities.

The effort could be made all the more poignant by the slowing economy.

“The current economic background can provide for an opportunity for leadership or abuse since this is such a cost-driven market that we’re in,” said Marcela Manubens, senior vice president of global human rights and social responsibility at Phillips-Van Heusen Corp., a Wal-Mart supplier.

“The message of [H.] Lee Scott, as the [chief executive officer] of Wal-Mart, the largest retailer in the world, is not only very timely, but a phenomenal step,” Manubens said. “Until now, many people, even the leaders in our field, felt Wal-Mart had not quite yet stepped into its rightful role as a leader in this field. I welcome Wal-Mart’s sustainability efforts.”

Wal-Mart also got a thumbs-up from Wesley R. Card, president and ceo of Jones Apparel Group.

“We support Wal-Mart and any efforts our partners make to enhance their environmental and social stewardship around the world,” Card said. “Jones has a program in place to ensure that our factories are compliant with local laws and regulations, and is always looking at ways to enhance these policies.”

Wal-Mart officials detailed the new measures at a meeting in the Chinese capital on Wednesday, during a gathering of suppliers and government officials in Beijing.

The announcement came just two days after China released quarterly economic data showing the country’s slowest annual growth rate in five years, largely due to lower exports because of weakening demand for Chinese-made goods. While analysts said the slowed growth is due to a combination of factors, including rising costs and a sagging world economy, ongoing product safety scandals have hit China’s manufacturing industries.

“Sustainability is about building a better business,” Scott said in prepared remarks. “We think it is essential to our future success as a retailer — and to meeting the expectations of customers. Maintaining the trust of our customers, today and in the future, is tied hand in hand with improving the quality of our supplier factories and their products.

“I firmly believe that a company that cheats on overtime and on the age of its labor, that dumps its scraps and chemicals in our rivers, that does not pay its taxes or honor its contracts — will ultimately cheat on the quality of its products,” said Scott. “And cheating on the quality of products is the same as cheating on customers. We will not tolerate that at Wal-Mart.”

The company said it would require that its suppliers tell it the name and location of every factory they use, beginning in November for apparel.

“It will mean that, if you sell us tennis shoes, we expect you to know — and we expect you to tell us — not just where the tennis shoes were assembled, but which subcontractors played a role in making them,” said the company in an e-mail response to questions. “And if there is an issue with those shoes, we expect you to have the answers and to take ownership over getting to the root of the problem.

“Essentially, we expect you to ask the tough questions, to give us the answers and, if there’s a problem, to own the solution,” Wal-Mart said. “If we don’t pose these questions, our customers will. In the age of YouTube, social networks and bloggers, there is no trust without transparency and ownership.”

Some expect the program to ratchet up pressure on Wal-Mart’s suppliers, who have already embraced the company’s frugal ways and streamlined operations.

“Any cost increase will not be passed on to Wal-Mart. It will be absorbed by the factory and the supplier,” said one apparel executive at a Wal-Mart supplier who requested anonymity.

“Somehow, people are going to find a way to absorb the cost,” the executive said. “The vendors are going have to find a way, whether it’s branded or private label, because Wal-Mart is too big not to do business with.”

The new guidelines hold suppliers responsible for quality and other issues created by subcontractors — the group most often blamed for quality problems in the Chinese supply chain. The plan calls for suppliers to provide the name and address of every factory they use in the chain, creating greater transparency in sourcing.

In addition to safety and quality, starting with a two-year phase-in beginning in January, Wal-Mart will require suppliers and subcontractors to comply fully with Chinese environmental laws and regulations. Though experts agree that China has strong environmental laws on the books, slack adherence and ongoing enforcement issues have helped the country become an international poster child for industrial pollution as its economy has boomed. Wal-Mart also will start building more environmentally sustainable stores across China, the company pledged.

“I’m impressed with the integrated approach that they’ve taken toward social and environmental matters,” said Steven Jesseph, ceo of Worldwide Responsible Apparel Production, a nonprofit organization specializing in certification of ethically sourced goods. “Bringing the two together is a very enlightened approach. They’re taking a more holistic approach certainly than we’ve seen Wal-Mart take in the past.”

That points toward more sweeping change at the company and a self-reinforcing compliance program, he said.

“From a retailer standpoint, this puts Wal-Mart toward the lead on a global basis, taking their integrated approach and engaging with governments, [nongovernmental organizations] and their supply chain,” Jesseph said.

Critics, while cheering the sentiment, said the program might not be enough to get at the larger problem.

“There’s some important things that they’re making commitments to,” Bob Jeffcott, policy analyst at labor rights group Maquila Solidarity Network, said, citing steps to certify that factories conform to local laws and ensure contractors use facilities that rate highly on environmental and social practices.

In all, Jeffcott said the initiative would help the sweatshop cause, but not necessarily address the root problem.

“The limitation of what Wal-Mart is saying is that it’s demanding more responsibility from suppliers — which isn’t a bad thing — but I don’t think it’s taking responsibility itself,” he said. “Part of the responsibility has to do with the business model that it has not only promoted, but also in some ways imposed on the industry.”

Jeffcott wasn’t the only one to blame ethical sourcing issues on Wal-Mart’s business model, which pushes prices ever lower.

“We look upon things like this with some skepticism,” Eric Dirnbach, deputy director of the union UNITE HERE’s strategic affairs department, said. “We will believe Wal-Mart when we see the positive results, which time and again have just not been seen. Wal-Mart and all these other companies create their problem through these kinds of low-cost sourcing practices, and then announce social responsibility programs as a Band-Aid, which are inadequate to fix the problem.”

There were also some concerns that Wal-Mart’s ethical sourcing drive was more public relations than progress.

“Every few months, Wal-Mart gets publicity for supposedly cracking down on its foreign suppliers, yet we continually read stories about sweatshops and environmental abuses,” said David Nassar, executive director of Wal-Mart Watch. “It is encouraging that Lee Scott is setting real goals for the company’s sourcing, but whether or not they meet them is a different story.”