Stakeholders and Wal-Mart, an analysis

1. Wal-Mart, a history of success.

In 1962, Sam Walton expanded his retail career by opening the first Wal-Mart Discount City Store in Arkansas. Walton had had significant success with a discount shop he called “Walton’s Five and Dime Store” in Bentonville by putting sales volume before prices. Accepting a slightly lower margin, he had managed to drive out the competition and achieve an image of low prices without compromising quality. Walton continued the growth of his Bentonville store at accelerated pace and soon expanded to 24 stores across Arkansas, reaching $12.6 million in sales.

The company was incorporated as Wal-Mart Stores, Inc. on October 31, 1969. In 1970, it opened a home office and first distribution center in Bentonville. It had 38 stores operating with 1,500 employees and sales of $44.2 million. It began trading stock as a publicly-held company on October 1, 1972, and was soon listed on the New York Stock Exchange. The first stock split occurred in May 1971 at a market price of $47. By this time, Wal-Mart was operating in five states: Arkansas, Kansas, Louisiana, Missouri, and Oklahoma; it entered Tennessee in 1973 and Kentucky and Mississippi in 1974. As it moved into Texas in 1975, there were 125 stores with 7,500 employees and total sales of $340.3 million.

The growth continued, indicating that Wal-Mart’s strategy was solid. In 1987 there were 1,198 stores with sales of $15.9 billion and 200,000 associates. In 2006, Wal-Mart was 67th most profitable corporation (profits divided by total revenue), behind retailers Home Depot, Dell, and Target, and ahead of Costco and Kroger. Today Wal-Mart employs more than 2 million associates worldwide, including more than 1.4 million in the United States with over $374 billion in sales worldwide for the fiscal year ending Jan. 31, 2008

With success often come concerns over the way this is achieved. Labor unions, religious organizations and environmental groups have criticized Wal-Mart for its policies and business practices. Other areas of criticism include the corporation's foreign product sourcing, treatment of product suppliers, environmental practices, the use of public subsidies, and the company's security policies . Wal-Mart has also been criticized for some of the products that it carries. Diverse groups have accused Wal-Mart of selling anti-Semitic, anti-black, anti-Christian or other objectionable materials or of not selling products like “The Daily Show's America (The Book)” that depicted a US Supreme Court judge nude, calling it censorship.

Despite the criticism, Wal-Mart seems to stick to the core strategies that carry its success.


2. Wal-Mart strategies and their impact.

The way that Wal-Mart Stores Inc. creates growth is summarized by the company’s new slogan:

“Save money, Live better”

When Sam Walton created Wal-Mart, he declared that three policy goals would define his business: respect for the individual, service to customers, and striving for excellence. By choosing clearly identifiable strategies and sticking with them, Wal-Mart has achieved de-facto cost leadership and sustainable value for the company’s shareholders.

Wal-Mart achieves Cost Leadership by four main strategic goals .

1. Dominate the Retail Market wherever Wal-Mart has a presence.
2. Growth by expansion in the US and Internationally.
3. Create widespread name recognition and customer satisfaction with the Wal-Mart brand, and associate the retailer with the reputation of offering the best prices.
4. Branching out into new sectors of retailing such as pharmacies, automotive repair, and grocery sales.

Wal-Mart management strategy emphasizes its workforce and its corporate culture. It wants to create an image of a morally conservative, religious, and family-oriented business. Wal-Mart emphasizes how it listens to the needs of its workforce as stated in the “factsheets” on the corporate website. Store employees are called “associates” and are treated part of the Wal-Mart family. Wal-Mart states that “Unlike the employees of many of our retail competitors, Wal-Mart associates – both full and part-time – can become eligible for health benefits”. However; the bulk of Wal-Mart's employee base that work at Wal-Mart stores are part time workers who are paid the local minimum wage. Most employees are not entitled to any benefits, as it takes a part-time employee over five years to become eligible for benefits, profit-sharing, or other such compensation . On April 17, 2006, Wal-Mart announced it was making a health care plan available to part-time workers after 1 year of service, instead of the prior 2 year requirement.
Wal-Mart's corporate management strategy involves selling high quality and brand name products at the lowest price. To keep costs low, Wal-Mart negotiates deals for merchandise directly from manufacturers, eliminating the middleman. This often leads to accusation that Wal-Mart misuses its market power to deliberately underpay its suppliers. In Walton’s philosophy, the essence of successful discount retailing is to cut the price on an item as much as possible, lowering the markup, and earn profit on the increased volume of sales. However, when the markup is as low as the company can bear, the burden is often transferred to the supplier, who is depended on Wal-Mart to sell his products. In a modern globalized society, Wal-Mart no longer buys its products on the domestic market but in low-wage countries with often questionable labor practices. More than 70% of the goods sold in Wal-Mart are manufactured in China .

3. What are the stake holder groups and what are their expectations?

A large company like Wal-Mart has a diversity of stake holders, each with their own agenda. Like any commercial entity, the first group is most important for the company’s survival. Stakeholder groups can be divided into internal and external stakeholders:

1. Internal stakeholder interests:

1.1 Shareholders.

As a listed company, Wal-Mart is accountable to its shareholders. Despite growing revenue, share price development has been trailing over the years, only recently picking up. Shareholders are most interested in profit generation and dividend, although in recent times there have been calls for more transparency. Wal-Mart donates generously to political causes without detailing exactly who they are donating to, or how much. Wal-Mart says that full disclosure is already required in many states, but the proponents for this resolution would prefer a centralized source for determining Wal-Mart's state-based political contribution levels. However, as long as the share price of Wal-Mart has a positive trend, shareholders remain upbeat.

1.2 Employees

Wal-Mart’s strategy in keeping prices low translates into an effective “low as possible” wage strategy. Associates at Wal-Mart have often little education, work part-time and have little or no alternative job perspective. Labor conditions and wage are for most an important factor. Recently Wal-Mart has faced issues on both which has led to criticism by labor unions and other external stakeholder group. By the end of 2005, Wal-Mart had launched the website Working Families for Wal-Mart to counter criticisms. Additional efforts to counter criticism include launching a public relations campaign. In reality, the core issues haven’t been addressed yet since they can impact Wal-Marts bottom line severely. Wal-Mart claims to listen to its employees but doesn’t seem to engage their staff.

1.2 Management

Although management is part of a company’s employee corps they can have different interests and priorities. In 2007 when Wal-Marts growth seemed to come to a halt, the company re-organized its top management layers rigorously. It is this groups responsibility to turn the core strategies into practice while at the same time balancing stakeholder interests.

1.3 Suppliers

Suppliers are often seen as external stakeholders. In the case of Wal-Mart, the connection between suppliers and the company is so close that they can be considered internal. Wal-Mart’s cost leadership strategy means that the company will offer only a minimal margin to its suppliers. For a lot of suppliers, Wal-Mart is their major, if not only, customer. As mentioned before, Wal-Mart buys the majority of its products in China. The US labor market just can’t compete with the low wages and large workforce available. Suppliers often use questionable local labor practices to be able to offer the lowest possible price to Wal-Mart. Wal-Mart has been accused of using market power to force its suppliers into self-defeating practices. For example, it is argued that Wal-Mart's constant demand for lower prices caused Kraft Foods to "shut down thirty-nine plants, to let go [of] 13,500 workers, and to eliminate a quarter of its products ”.

2. External stakeholders.

2.1 Customers and the community

Suppliers and customers are both defined as product market stakeholders. In Sam Walton’s eyes, the customer is the most important stakeholder for the company. The demands and priorities of Wal-Marts customers are conflicting creating the largest and potentially most important issues. In an economic downturn, the results of Wal-Mart improve showing that customers shop at Wal-Mart because of the low prices. To maintain low prices, Wal-Mart needs scale, which means opening large stores in small places. This results in a perceived negative impact on communities. Additional, Wal-Mart is often seen as an unfair competitor because local stores can’t compete against the company’s low prices. The recent media attention has focused on the negative aspects although a recent study has shown that the impact of Wal-Mart on small local stores is less than is assumed. It is suggested that Wal-Mart even has a positive impact on small business. A study conducted in 2006 argued that while Wal-Mart's low prices caused some existing businesses to close, the chain also created new opportunities for other small business, and so "the process of creative destruction unleashed by Wal-Mart has no statistically significant impact on the overall size of the small business sector in the United States. "

2.2 Unions and NGO’s

Wal-Mart has been criticized for its policies against labor unions. Other nongovernmental organizations have accused Wal-Mart of using sweatshops and child labor in low wage countries. Wal-Mart's anti-union policies also extend beyond the United States. The documentary Wal-Mart: The High Cost of Low Price, shows one successful unionization of a Wal-Mart store in Jonquière, Quebec (Canada) in 2004. Wal-Mart closed the store five months later because the store had become unprofitable due to the costs of union demands. The priorities of unions are sometimes conflicting. If Wal-Mart fires employees and closes a store it will result in un-employment and loss of benefits. However if they insist on higher wages and better benefits, the result will be unprofitability, causing the store to close.

4. How does Wal-Mart manage stakeholder issues and expectations?

After Wal-Mart’s labor and supplier issues became publicized the company hired public relations firm Edelman to interact with the press and respond to negative or biased media reports. It has used TV commercials emphasizing the health benefits of Wal-Mart associates. Wal-Marts efforts are mainly focused on the positive affect the company can have. In October 2005, Wal-Mart announced it would implement several environmental measures to increase energy efficiency. After Hurricane Katrina struck, Wal-Mart gave $20 million in cash donations, 1,500 truckloads of free merchandise, food for 100,000 meals and the promise of a job for every one of its displaced workers.

The real issue however is that Wal-Mart’s cost leadership strategy doesn’t leave room for higher than minimal wages or excellent labor conditions. Wal-Mart argues that it provides millions with jobs and passes on the saving to millions more.

5. What can Wal-Mart do to improve?

Like many large and not-so-large companies, Wal-Mart has been caught by its own success. As employer and supplier of millions it is open to criticism and needs to be aware of that. By engaging stake holders early and by being transparent in its actions many issues can be prevented. Modern consumers and other stakeholders need to be taken seriously. This doesn’t mean cater to every whim but major problems can’t be covered up anymore in the internet age. Customers on the other hand need to be aware that higher wages, better benefits and labor conditions mean higher prices because Wal-Mart’s margin is already minimal. So far, there hasn’t been a competitor that leveraged on an ethical way of business and cost leadership. Wal-Mart can leverage its market advantage to divert a fraction of the savings it now passes on to the consumer to improve the outstanding issues as long as it can explain to the customer why it is doing so.

Nike and the third world.

This paper is based on the business case “Hitting the wall: Nike and International Labor Practices." It analyses the labor issues that Nike faced in the late 90’s and the companies’ response to accusations of child labor and inhumane working conditions in its factories. Was Nike’s response to widespread criticism sufficient? As an example, the Nike’s wage policy in Vietnam will be discussed.

History.

In 1964, Phil Knight, a track athlete founded a running shoe distributor named Blue Ribbon Sports . The company initially operated as a distributor for Japanese shoe maker Onitsuka Tiger, making most sales at track meets out of its founder’s car. In 1966 BRS opened its first retail shop in Oregon, when the relationship with Onitsuka Tiger neared to an end. To continue business, BRS designed the first line of footwear that would contain the soon-to-be-famous swoosh. The name of the shoe would be “Nike” after the Greek goddess of victory. In 1978, BRS, Inc. officially renamed itself to Nike, Inc .

By 1980, Nike had reached a 50% market share in the United States athletic shoe market, and the company went public in December of that year. Nike has been manufacturing throughout the Asian region for over twenty-five years, and there are over 500,000 people today directly engaged in the production of Nike products. The company utilizes an outsourcing strategy, using only subcontractors. Nike has more than 700 locations around the world and offices located in 45 countries outside the United States. Most of the factories are located in Asia, including Indonesia, China, Taiwan, India, Thailand, Vietnam, Pakistan, Philippines, Malaysia, and Republic of Korea. The factories are 100% owned by subcontractors, with the majority of output consisting solely of Nike products. Currently, Nike employs a team of four expatriates in China, Indonesia and Vietnam, focusing on both quality of product and quality of working conditions. Nike’s manufacturing model is based on a minimal cost strategy. This strategy takes direct, short term cost heavily into account when considering a manufacturing location. Nike’s practice of contracting third parties to manufacture the shoes and other apparel made the selection process less complicated because most of the whole supply and manufacturing chain would be managed out-of-house leaving Nike with the only decision to choose the lowest bidder.

It wasn’t until the early 1990 when an activist named Jeff Ballinger focused consumers attention on the conditions under which Nike let its products be manufactured. Ballinger’s argument was that by removing direct responsibility for manufacturing, Nike was encouraging local manufacturers to abuse and mistreat workers to maximize their own margins. Only by offering the lowest possible price could a contract from the Oregon company be obtained. This meant that laborers were paid below minimum wage, factory conditions were often below standard and working hours were long. Ballinger knew exactly how to use Nike’s fame and image against the company when campaigning for better working conditions in Indonesia. As a Country Program Director for the Asian-American Free Labor Institute (now the AFL-CIO's American Center for International Labor Solidarity) he wrote the first expose of Nike’s labor policies, coinciding with Indonesia’s political turmoil and sweeping strikes of the early 1990’s.

In 1992 Indonesia had increased the minimum wage in a response to pressure from the unions and other political factions. Local contractors however largely ignored the legislation or petitioned for exemptions, which would be easy to obtain due to Indonesia’s rampant corruption. Seeing the potential damage that an anti Nike campaign could cause, Nike drafted a series of regulations that each contractor had to adhere to. It refrained from taking any substantial action to directly address the labor issues, leaving responsibility with the local contractors.

Countering Jeff Ballinger’s arguments.

Despite the undeniable facts that Ballinger brought against Nike’s practices, there are a few counter arguments that Nike could have used. In countries where Nike products were made, the wages were earned not to sustain families but to supplement household income. The fact that workers were paid below minimum wage therefore should have led to a shortage of workers, as they left the company for better paying jobs. Comparisons with workers in the West that are paid many times the amount of the average Indonesian worker are often unfair, since local prices are much lower. Even the argument that children as young as 14 years work for Nike ignores the fact that these children would otherwise have to work on the land or in the family business to help sustain the family. This has been a practice for hundreds of years and can’t be changed by the practices of one company.

Nike’s response.

Nike’s response against Ballinger was less than convincing. First it ignored the wage issue. Later it stated that it couldn’t be held responsible because it didn’t control the factories. The workers weren’t on the Nike payroll but were paid by the subcontractors. For consumers and activists these arguments were largely semantic. The contractors for all intents and purposes acted as wholly owned subsidiaries and as such any blame on them would be blame on Nike Inc. To distance the company from the issues would prove to be impossible. With the large difference between the wages paid to make a Nike shoe and the price of the product it would be hard to convince the average Nike consumer that the company can’t influence the way it makes its products. Reports of physical and sexual abuse make the matter even worse.

Nike and the press.

When the issues in Indonesia hit the mainstream, Nike began to realize that a negative image could seriously damage its revenues. Nike had always seen itself foremost as a sports apparel manufacturer but in reality a large portion of Nike’s sales came from fashion conscious teenagers and students. The issues that plagued Nike in Indonesia now became apparent in other countries like Pakistan, Vietnam and China. In April 1997, 10,000 Indonesian workers went on strike over wage violation. In the same month, 1,300 workers in Vietnam went on strike demanding a one cent per hour raise and last year 3,000 workers in China went on strike to protest not only low wages, but hazardous working conditions .

Nike contracted Andrew Young to write a report on Nike’s labor practices. Young was largely positive but concluded that Nike could and should do better. The media however condemned the report for the fact that the writer had been paid by Nike and therefore couldn’t have been impartial. This gave rise to the word “Nike-writing ”

On May 12, 1998, Phillip Knight spoke at the National Press Club in Washington, DC and made what were, in his words, "some fairly significant announcements" regarding Nike's policies on working conditions in its supplier factories.

Knight made six commitments:

1. All Nike shoe factories will meet the U.S. Occupational Safety and Health Administration's (OSHA) standards in indoor air quality.
2. The minimum age for Nike factory workers will be raised to 18 for footwear factories and 16 for apparel factories.
3. Nike will include non-government organizations in its factory monitoring, with summaries of that monitoring released to the public.
4. Nike will expand its worker education program, making free high school equivalency courses available to all workers in Nike footwear factories.
5. Nike will expand its micro-enterprise loan program to benefit four thousand families in Vietnam, Indonesia, Pakistan, and Thailand.
6. Funding university research and open forums on responsible business practices, including programs at four universities in the 1998-99 academic year.

The commitments, although at face value impressive, still failed to appease the ever growing criticism that Nike treated the matter as a public relations rather than a human rights issue. “The promises made by Phillip Knight in his May 1998 speech were an attempt by the company to switch the media focus to issues it was willing to address while avoiding the key problems of subsistence wages, forced overtime and suppression of workers' right to freedom of association. ”


What does Nike do wrong?

Nike failed to realize that the consumers that buy Nike gear are mostly well educated, socially active and outspoken. Instead of immediately going to the heart of the matter, Nike played the issues down, thereby not only underestimating the issue but far worse, underestimating the intelligence of its customers. Reebok and adidas, which had similar issues have responded in force, mainly by improving wages and working conditions but also by taking its critics seriously, providing open and transparent communication. Nike on the other hand is still unwilling to disclose which contractors are responsible for its manufacturing process. Its code of conduct that is now distributed to every factory worker contains a statement that “full and fair compensation” will be paid but does not say how much this would be. Nike also refuses unannounced inspections from outside organizations.

Fair wage in Vietnam.

President Franklin D. Roosevelt declared in 1937, "All but the hopeless reactionary will agree that to conserve our primary resources of manpower, government must have some control over maximum hours, minimum wages, the evil of child labor, and the exploitation of unorganized labor."

In the US, the Fair Labor Standards Act of 1938 established a national minimum wage, guaranteed time and a half for overtime in certain jobs, and prohibited most employment of minors in "oppressive child labor," a term defined in the statute. When a worker puts in 40 hours per week, the worker should be able to pay the minimal bills to survive. That, and health benefits, are the definition of the "living wage."

At the end of 1994, Nike had shifted part of its production from South Korea and Taiwan to Vietnam in an effort to control cost. In Vietnam, minimum salaries for unskilled and manual laborers in FIEs in all three labor zones are $55 USD monthly in urban Hanoi and Ho Chi Minh City, $50 in suburbs of those cities and within many of Vietnam’s major cities and ports, and $45 in all other areas . From the moment contractors started producing; Nike has been accused of paying below minimum wage, thereby circumventing local labor laws. Workers at VN Nike shoe manufacturing plants make on average 20 cents per hour. Team Leaders at VN Nike plants make only $42 per month, below the Vietnam minimum wage. Regular workers make even less.

At the heart of Nike’s predicament lies the fact that workers that make Nike’s expensive running shoes according to consumers are not getting paid enough for the job. To justify spending $150 on a pair of sneakers, the average modern consumer needs to know that his money isn’t going to the pockets of greedy shareholders and overpaid executives but ends up, at least in part, to sustain the man or woman that made the product in the first place. The International Monetary Fund rates Vietnam at number 129 for Purchasing Power Parity per capita, only slightly higher than most African countries. The issue with PPP when considering “fair wage” however is that when workers get paid more, price inevitably go up, lowering PPP again.

Conclusion.

Nike should make its contractors accountable for their wage practices. Instead of a “lowest cost strategy” it should take the long term cost of image damage into account. With a transparent compensation policy the public can see for itself if a fair wage is paid. Most of all, an open dialogue with all stakeholders instead is crucial to understanding the issues. Without it, Nike is just guessing what the best policy would be and will lose out in the end.

Evolution of the Xbox supply chain.

History of computer gaming

Few industries have had such a meteoric and world-altering rise as the computer industry. From the number crunching military machines of the Second World War to the sophisticated miniature offices we keep in our pockets today, they all serve their purpose to make our lives safer and more convenient. Along with the design of serious applications came always the need of the mostly young engineers and programmers for relaxation and competition. In February 1951, Christopher Strachey tried to run a draughts program he had written for the NPL Pilot ACE. This became the first computer game ever written, even though the first version overloaded the computer’s memory banks.

Tennis for Two was the first computer action game. It was developed in 1958 by American physicist William Higinbotham and ran on an oscilloscope which simulated a game of tennis or ping pong.

The commercial success of video gaming came in the 1970. Although coin operated games were available as early as 1971 it wasn’t until Nolan Bushnell and Ted Dabney founded a company called Atari and released the VCS (later called 2600) system in 1977 that computer gaming entered the living room. The big names in the industry weren’t Microsoft or Sony but Intellivision and Colecovision. In 1977 the market had become over saturated, creating the first video game crash. Quality had become second to quantity which led to an overproduction of mediocre machines and questionable cartridges. Fairchild and RCA left the industry leaving Atari and Magnavox as the sole contenders.

The home computer market took off with the release of the Commodore 64, Sinclair ZX 81 and Spectrum and the late success of the Apple II computer. The driver behind the surging sales was the ability to play realistic games in color and with sound. Soon home computers had taken a big bite out of the console market, especially since adults now could buy a computer to “do work” on and play games besides. In 1984, the computer gaming market took over from the console market causing the second video game crash.

In 1985 one brand dared to enter the market with an 8-bit console. The Super Famicom, or NES as it was renamed in the US, was manufactured by the innovative Japanese company Nintendo. The Nintendo Entertainment System was one of the greatest successes in computer gaming history. The effective use of gaming icons like Mario made the games instantly recognizable and the Japanese sense of humor made a refreshing contrast to the often violent and serious games of its US counterparts. Nintendo is the only company from that era that is still active and successful in the computer gaming business. Atari has become all but extinct, the brand name changing hands frequently.

The PC industry has traditionally kept its focus on the professional market. Geared toward word processing power and number crunching, it never gained the popularity as a gaming device like the consoles did. In the 90’s however, dedicated graphics and sound chips meant that games could be played on PC’s as well. Microsoft was never very interested in the gaming market (although they made a very good Flight Simulator) but the release of third party software using Microsoft’s DOS operating system created a whole new genre of gaming. Three dimensional shooters like Castle Wolfenstein and Doom pulled the serious gamer away from “kiddy consoles” like the NES. The PC soon became the gaming platform of choice for immersive, time consuming games while the console was used for fast moving action gaming and Japanese style adventuring. Big names in the console industry were Sega, with their Master System and Megadrive and again Nintendo with the 16 bit Super NES, leveraging on the popularity of Mario, Zelda and other brand characters.

The fifth generation saw a new name emerging. Sony, the Japanese electronics giant, had an opportunity to conquer the gaming market with its PlayStation. The 16 bit system sported sophisticated 3D graphics and, more importantly, could also be used as a CD and Video CD player. The PlayStation was a huge success, committing Sony to the still expanding gaming market. In 2000 Sony had surpassed Nintendo as market leader and released the second incarnation of its gaming system, the PlayStation 2. Microsoft in the meantime had seen a whole industry grow on what was basically their business operating system and wanted to have a piece of the market. In 2001, the Xbox was launched.

Supply and demand.

The Xbox took off in a complicated and demanding market. In 2005 Sony was still the undisputed market leader with 5 PlayStations and 4 PlayStation 2s sold for every Xbox. Nintendo had lost much of its luster with much lower sales numbers for its 5th generation GameCube system. The Xbox was a first for Microsoft and many people thought that Gates and friends couldn’t pull it off. PC gaming had become very popular with gamers buying equipment that cost multiple times that of the Xbox. It was almost impossible to believe that a machine that was basically a PC in a different package with limited memory and no expansion slots could survive against a dedicated console like the PlayStation 2. Microsoft had delayed the launch of the Xbox to be able to provide the latest processor and graphics chips to directly compete with Sony’s flagship. To gain sufficient market share, Microsoft would almost certainly have to sell the Xbox console at a loss and try to make up with software licenses given out to third party game designers.

An additional challenge for Microsoft was that the manufacturing and distribution needed a completely different approach from the traditional software the company was used to. The machine was made out of hundreds of parts that needed to be supplied at just the right time to avoid bottlenecks at the manufacturing plants. Time to volume was the critical factor. There were only a few time windows, like the Holiday period, to successfully launch the machine.

Microsoft’s sought help in the supply chain management from Flextronics, a contract electronics maker which provides electronics manufacturing facilities to original equipment manufacturers (OEM). Together with Flextronics, Microsoft selected 40 major suppliers, negotiated continuity of supply agreements; ensured capacity was in place, established complex logistics channels, found software tools to automate some of its supply chain tasks. To keep transportation lines to the markets in the US and Europe short, the company decided to use “industrial parks” in Mexico and Hungary. Suppliers were invited to set up shop in the parks making supply both flexible and efficient. There was an average of 600 [engineering change orders] weekly across the supply chain in the early stages of the design so flexibility was very important.

Manufacturing in Asia would be cheaper but as Sony had experienced, long transportation lines can lead to shortages at critical moments. The higher cost meant that Microsoft’s entrance in the computer gaming market came at a price of $4.4 billion in operating losses in May 2005. The first generation of X-boxes were market driven and not cost driven since Microsoft could not afford supply shortages in stores. Later models had a less critical time to market factor, which led Flextronics to move manufacturing from Mexico to much less expensive Chinese factories. Microsoft is now sourcing components locally within different geographies, creating new logistics channels, and doubling supplier capacity to support manufacturing in new regions, like the Asian market .

The sixth generation of consoles was a culmination of everything the most demanding gamer could want from a console. At the same time, new market segments were being identified. The Sony Play Station 3 not only provided the power for next generation gaming but was also a weapon for expansion in the broader electronic entertainment market. The next generation of video content carriers was Blu-Ray and HD-DVD. Sony as one of the founders of the Blu-Ray standard saw an opportunity for leverage and included a Blu-Ray player in its next generation console. Microsoft had already made several attempts to distribute content online and decided not to include an expensive add-on, managing to keep the price of its next generation console, the Xbox 360 below its competitor.

Although Microsoft kept its main supply chain and manufacturing manager, Flextronics it decided to out-source some of the designs to cater to non-US markets. Instead of keeping production close to the end-user, the cost factor was a bigger issue this time. Xbox 360’s would be made in Chinese factories and shipped to the US and EU as readymade products. Sony’s delays in bringing out the competing PlayStation 3 meant that Microsoft had some time to build up a head start. The success of titles like Halo and Halo 2 meant that there was an established base of Xbox enthusiasts that almost certainly wouldn’t wait for the Sony product to come out. IBM designed and co-manufactured the custom microprocessor that powers the Xbox 360. The microprocessor is a triple-core PowerPC that runs at a frequency of 3.2GHz. At a cost of $106, this single part accounts for 20.2 percent of the total Bill-of-Materials cost for the Xbox 360. Factoring in costs for the hard disk, the DVD drive, enclosures, the Radio Frequency (RF) receiver board, power supply, wireless controller, cables, literature, and packaging – the total BOM cost for the Xbox 360 Premium reached $525, well above the retail price of $399 .

To keep decreasing cost, Microsoft would continually have to redesign the components which made centralized manufacturing critical. To change the supply chain now required changing only the plant in China instead of changing several links in different parts of the world.

Global launch.

One of the characterizing features of the video game industry is that the end-users don’t want to wait for the product. In Japan, gamers are known to wait for days in front of a store to be the first to buy a new game or console. When Microsoft decided to launch the Xbox 360 globally it took a big risk. If supply wouldn’t be able to keep up with demand, the potential for damage to the brand name were great. For the first time ever, Microsoft plotted the near-simultaneous rollout of Xbox 360 on three continents: November 22, 2006 in the U.S., December 2, 2006 in Europe and December 10, 2006 in Japan.

Microsoft had already started planning the supply chain with its logistics partners more than a year before. The goods moved by barge from the factories to Hong Kong, at which point Microsoft took nominal ownership. The shipper had chartered Boeing 747 freighters for transit to its main distribution centers in Memphis, Tenn., and Duren, Germany, about 37 miles from Cologne. The booking of high-security trucks, both in the U.S. and Europe, was coordinated with customs clearance to keep product from sitting idle between its release and movement inland. Once again, flexibility was the hallmark of Microsoft’s distribution strategy. Most shipments went to the major distribution centers, where they were processed by one of the company’s “distribution turnkey vendors,” or DTVs. Rail played an important role in North America. Railroads have come under criticism in recent years for severe delays and capacity constraints, Microsoft sidestepped the problem by shipping on dedicated stack trains moving directly from Los Angeles to Memphis, via the Burlington Northern Santa Fe .

The risks of the global launch were evident. The longer the supply chain, the more issues could occur. If the product wasn’t ready at the factory, the ships couldn’t sail which made the smooth transition from manufactured product to sold product difficult. The sheer size of the operation made it difficult to manage. There was however a hidden opportunity in the unprecedented scale. The “buzz” created by the anticipated launch of the Xbox360 meant that many more potential customers were ware of the new console. The global launch also meant that coordination was central and potential issues could be dealt with simultaneously. Despite the changes in supply chain management, the Xbox 360 was in short supply at its launch date , a fact that might have actually benefitted sales in the long run.

Multiple suppliers.

Microsoft used three suppliers to make the Xbox 360 instead of only one. Because the company owns the rights to all the component designs, it can switch to the lowest bidder at any time. Flextronics and Wistron stayed on as assembling partners, later joined by Celestica. The supply contracts specify that Microsoft can discontinue working with a partner at any moment and can have other partners join whenever needed. In 2007, Wistron phased out production for the console, ending a six year cooperation. With Microsoft dropping its selling price of the Xbox 360 console earlier this year, it tried to push the profit pressure onto its three OEMs. Wistron, seeing it’s gross margin drop to 5.49% in the third quarter of 2007 couldn’t cope with a lower margin. In 2008 Asustek picked up production for the Xbox 360, showing advantages of flexibility .

Using multiple suppliers has its limitations. The coordination and quality assurance control is more complicated. Using multiple suppliers hasn’t made Microsoft impervious to lack of supply. Quality issues with the DVD drive, heat problems and the dreaded “Red Rings of Death” have led to problems with 3 out of 10 Xboxes, setting Microsoft back $1.05 to $1.15 billion in the second calendar quarter of 2007 . Because there is not one “owner” of an issue it is hard to look for the root cause. Only after pressure from end-users did Microsoft admit there were problems, offering to repair the affected consoles for free “This problem has caused frustration for some of our customers and for that, we sincerely apologize," Microsoft's entertainment chief Robbie Bach said. "We value our community tremendously and look at this as an investment in our customer base."

Conclusion.

As an avid gamer I have owned almost every gaming console in existence since 1980. During my law studies I worked in one of the first computer gaming stores in The Netherlands and I have experienced the anticipation that a new console or game can bring from close by. The issues that companies like Microsoft, Sony and Nintendo are facing are different from most other products because the gaming market is a very personal and emotional market. The video game industry crashes of the 70’s and 80’ were caused by the lack of quality and the emphasis on quantity. The distance make supply chain management crucial for today’s complex consoles. Sony, Microsoft and Nintendo have all had supply issues and survived. Companies like Samy (too expensive), Sega (quality and margin loss), Atari and even Philips have been less fortunate. To survive a company needs to take the market very seriously and keep informing the customer of expected issue.

Update:

There's an interesting article on the pricing policy for the hard disk upgrade that is available for the X Box 360. You can find it at http://kotaku.com/387864/why-360-hdds-are-so-ridiculously-expensive

L’Oreal: Expansion into China

History

According to Yue-Sai Kan, a Chinese-American TV celebrity and founder of one of the most successful cosmetic brands in China, modern Chinese women didn’t wear much makeup until the early 1990. Although makeup is extensively used in Chinese opera and other performing arts, the use of color on nails and lips was more used to indicate social class then as a sign of beauty. Chinese people began to stain their fingernails with gum arabic, gelatin, beeswax and egg from around 3000 BCE. The colors used represented social class: Chou dynasty royals wore gold and silver; later royals wore black or red. The lower classes were forbidden to wear bright colors on their nails.

After Mao Ze Dong came to power, the use of makeup was considered decadent and anti-revolutionary. The aesthetic taste during the Cultural Revolution (1966-1976) advocated for a "revolutionary beauty" style like the gray Mao suit, army uniform and short hair, a unisex style which went hand in hand with Mao's advocating for women as the other half of the sky. "Growing up during the Cultural Revolution, I genuinely believed these were the only measurement for beauty and the uniform was the most beautiful thing on earth, that make-up and permed hair were a horror”, said Wang Ping who is now a university professor in Minnesota .

With the opening up of China in the early 1990, the interest for makeup increased and so did the interest of companies to access this largely untapped market. Yue-Sai , an American-Chinese started her own brand in 1992, leveraging on her fame as a television star and exclusively targeting Chinese women. Other entrepreneurs saw the growing cosmetics market as an investment opportunity. The Raystar Cosmetics Company was founded by Chinese investor Li Zhida who saw the potential of being one of the first mass market producers of brand makeup in China.

L’Oreal has a history going back to 1907 when Eugène Schueller, a young French chemist, developed an innovative hair-color formula he called Auréole . In 1909, Schueller registered his company, the Société Française de Teintures Inoffensives pour Cheveux ("Safe Hair Dye Company of France"), the future L’Oréal. The guiding principles of the company that would become L’Oréal were put into place from the start: research and innovation in the interest of beauty. Today, L’Oreal is the largest cosmetics and beauty company in the world with revenues of over 14 billion Euro and more than 52,000 employees. Although the company is listed, the founder’s daughter, Lilianne Bettencourt and the Swiss Nestlé company together own more than half of the shares and voting rights.

Growing the company, a sustainable strategy for L’Oreal.

Before planning to branch out in the Far East, L’Oreal always had a healthy growth. Like any successful company, its strategy is one of careful brand management and even more careful acquisitions. Competition in the cosmetics industry is fierce. Brands like Olay and Pond’s are brought in the market by giants like Procter and Gamble and Unilever, who have extensive experience managing brands for exact target groups. Even if they haven’t marketed cosmetics in a country before they can acquire practical knowledge of local culture before marketing more culturally sensitive products. Specialist brands like Avon and L‘Oreal may have knowledge of their respective products but can only enter a foreign market once.

By focusing on 10 global brands concentrated on hair color, hair care, skin care, color cosmetics, and fragrances, the company has turned into a global force by distilling the cultural cachet of different countries into its vials . Instead of doing exhaustive marketing research and running the risk of misreading their target group, they follow a strategy of acquisitions of local companies and established brands that already have that knowledge.

It was this strategy of “becoming a local brand” that led to the acquisition of the Mininurse brand from Raystar Cosmetics in 2003 and Yue-Sai in 2004. Having learned from their negative experience with the initial introduction of the Biotherm brand in the US, L’Oreal had set up only a modest amount of counters in Shanghai, Beijing and Guangzou and opened a plant in Suzhou in 1996. Despite being a latecomer to the Chinese market they still managed fast growth and an ever increasing market share.

L’Oreals strategy of managing global brands with local variations meant that they needed to become a “local” rather than a foreign company in China. The acquisition of the successful Mininurse brand and the Yue-Sai company fits exactly into this strategy. The group has three plants on the mainland, one in Shanghai and the others in East China's Jiangsu Province and Central China's Hubei Province, with their products exported to Japan, South Korea, Southeast Asia and Taiwan Province. This gives an exclusive “locally manufactured” feel to the products. "We are creating some formulas and products specifically for China and Asia and we will invest a lot to meet the different needs of customers in China", Thierry Prevot, managing director of the group's Asian operations said in an interview with China Daily .

L’Oreal’s brand portfolio, risks and opportunities.

L’Oreal markets 14 brands in China, including L'Oreal, Maybelline, Lancome, Biotherm, Helena Rubinstein, Shu Uemura, Matrix, Vichy, Garnier, and the local Mini Nurse and Yue-Sai. China is becoming increasingly important after sliding sales in the US due to the weakening economy . As mentioned, L’Oreal’s brand strategy is based on diversifying brands to fit local culture. While many companies seek to homogenize their brands to make them palatable in myriad cultures, L'Oreal's products embody their country of origin.

For example: in 1996, L'Oreal acquired the US cosmetics company Maybelline and began a complete makeover of the brand, including moving the headquarters from Memphis, Tennessee, to New York City to promote its U.S. origins. When L'Oreal marketers discovered that the moderately successful Maybelline Great Finish nail enamel dried in one minute, they changed the name to Express Finish—to be used by urban women on the go . Maybelline's share of the nail-enamel market in the U.S. has climbed from 3% to 15% since 1996.

By acquiring existing and successful brands in China L’Oreal took a risk. Each brand not only needs to have its own image, targeted towards its market group but also needs to stand out culturally. By marketing local brands, L’Oreal runs the risk of cannibalizing its existing “core” brands or estranging buyers who don’t recognize their “local” brand anymore. When differentiating brands, a company runs the risk of fragmenting, leaving the individual brands weaker as a whole. L’Oreal however has managed to keep its brands strong by realizing that its customers are individuals and that it should cater to individuals rather than a homogenous market.

L’Oreal’s future in China

The successful acquisition of two Chinese brands hasn’t ended L’Oreal’s ambitions in China. China is L'Oreal's largest market in Asia surpassing Japan in 2008, where the group saw a drop in sales. The company is now the second biggest cosmetics provider in China after Procter & Gamble which has operated in China for more than 20 years. Maybelline is the largest brand in China with 51.88% market share. In 2005 L'Oreal decided to launch its Chinese brand Yue-Sai globally “because of growing recognition of Chinese beauty”, completing the circle from localizing a global brand to globalizing a local brand.

The growth of L’Oreal has triggered a wave of consolidations and mergers in China making the already tough market even more competitive. In 2007 China sales rose 30 percent to 523 million Euro (777.4 U.S. million dollars) signaling that the Chinese markets is far from mature yet. L’Oreal is planning to set up the Giorgio Armani brand, starting with a boutique at Hong Kong International airport. Make-up and fragrance will be the focus, although a skincare offer is planned at some point in the future .

The growing economy and increase in spending power of Chinese women means that there is no end in sight for growing opportunities. L’Oreal’s unique approach sets it apart from competitors. The Chinese tradition of having a white skin has L’Oreal’s biochemists experimenting with Chinese herbs, roots, and flowers. Hua jiao, the flower of the prickly ash tree that adds tongue-scorching spice to Sichuan cuisine, is reputed to clear up acne and will be among them, as will traditional whitening agents such as ginkgo leaf, ginseng, and mulberry.

In contrast to its coastal cities, rural China is a largely untapped market for beauty products. Retailing and distribution is still badly managed in China's hinterlands therefore the companies that have the best strategies for reaching the women there, rather than the minority who shop for imports at department-store counters, ultimately will win the cosmetics race. L’Oreal may acquire more local brands but should be careful not to fragment the market too much. The R&D center in Pudong is part of L'Oréal's transition from the image its core brand it currently projects in China--its Chinese name, Oulaiya, means "elegance coming from Europe," and its ads feature pinkish colors on white faces--to something more recognizably Chinese.

Foreign Direct Investment in China

History

China’s experience with foreign direct investment has been a quite recent one. Although the Chinese traded with far away Europe as early as 114 BC, it were always the emissaries of the emperors who established contact and kept embassies in the countries along the famous “Silk Road” and the less well know “Porcelain Route”. The heyday of the Silk Road corresponds to that of the Byzantine Empire in its west end, Sassanid Empire Period to Il Khanate Period in the Nile-Oxus section and Three Kingdoms to Yuan Dynasty in the Sinitic zone in its east end. Trade between East and West also developed on the sea, between Alexandria in Egypt and Guangzhou in China, fostering the expansion of Roman trading posts in India .

During the Qing dynasty (1644-1912) China came under growing foreign pressure to
open up its borders to the Western seafaring powers. In 1535 Portuguese traders obtained the right to anchor ships in the harbor of Macao, a small island off the coast of mainland China. In 1557 the first walled settlement marked the earliest Direct Foreign Investment on Chinese soil. The island prospered under the new administration where the Portuguese acted as middlemen for traders on the route Guangzhou-Macau-Nagasaki, shipping silks from China to Japan and silver from Japan to China. Despite clashes with the Dutch, who were looking to establish trade colonies of their own, the Portuguese managed to hold on to their outpost (with a stint of independence in 1849) until the formal handover to China on December 20th 1999 .

Britain had its own reason for investing in the Middle Kingdom. In the early 19th century, British tea imports had taken such flight that a great trade imbalance between China and the British Empire existed. Although Britain exported commodities like silver, clocks and watches to China the market was too small to counter the local demand for tea. As a result, Britain started to export opium and soon established itself as the sole provider of the addictive drug. The Qing dynasty voiced their objections through the Chinese commissioner Lin Zexu to the British Queen Victoria but when the British Empire proved to be non responsive to Chinese complaints had to revert to military enforcement of its drug laws. During the resulting opium wars (from 1839 to 1842 and from 1856 to 1860) British victories forced the Chinese government to hand over Hong Kong which soon became the second foreign trade colony on Chinese territory.

After the Second World War, cheap labor and capital brought in by refugees from Mainland China transformed Hong Kong’s economy from a trade colony to a manufacturing and industrial hub. On July 1st 1997 sovereignty of Hong Kong was handed over to China which kept the former colonies capitalist system intact and created a Special Administrative Region (SAR) .

FDI in recent times

Foreign Direct Investment started when China’s Communist government decided to loosen the reigns of socialist dogma and allow China to become part of the world economic community. In 1980 the first Special Economic Zones were created in Shenzhen, Zhuhai and Shantou in Guangdong Province and Xiamen in Fujian Province as well as the entire province of Hainan. In addition, 15 free trade zones, 32 state-level economic and technological development zones, and 53 new- and high-tech industrial development zones have been established in large and medium-sized cities. The SEZ’s were driven by a “four principles” policy namely:

1. Construction primarily relies on attracting and utilizing foreign capital
2. Primary economic forms are sino-foreign joint ventures and partnerships as well as wholly foreign-owned enterprises
3. Products are primarily export-oriented
4. Economic activities are primarily driven by market forces

The results were astounding. In 1999, Shenzhen's new-and high-tech industry became one with best prospects, and the output value of new-and high-tech products reached 81.98 billion yuan, making up 40.5% of the city's total industrial output value. Nowadays, the city rivals Hong Kong in size and scope. Guang Dong Province has become a major hub for electronic and industrial manufacturing mainly geared towards exports. According to a report by DTZ, there are over a hundred Fortune 500 companies established in Shenzhen with a total of about 84,000 foreign expatriates. In terms of FDI, Shenzhen has maintained a high rate of growth in the last few years, with FDI in 2006 registering 10.6% higher than the year before.

China’s vast labor market, low wages, good infrastructure and relatively disciplined work ethics have led to the largest manufacturing engine in the world. Foreign Direct Investment is crucial to the building efforts of Chinese manufacturers as well as foreign companies establishing a presence in Mainland China. The development of local economies goes hand in hand with the establishment of Special Economic Zones and shows a strong relationship with FDI.

The role of FDI in the development of a country.

In colonial times, foreign investment was a matter of domination. When the Dutch established their trade colony in the East Indies, they didn’t come as partners but soon took the reins of government from the local rulers. In modern times, this has made countries like China and India weary of foreign investment. Wherever Western countries have economic interest, they want to establish political and legal authority as well. The efforts of the US to push for reforms in China’s legal and economic system are not inspired by bilateral equality but by US interests alone. Still the beneficial effects of FDI on China’s economy are so great that China’s government can’t disallow it without risking severe economic and political repercussions. However, the story of FDI in China is not quite as rosy as these summary sentences suggest. By all accounts, the policy environment for foreign direct investors in China is difficult, and much anecdotal evidence suggests that some of these investors are becoming discouraged by this environment while other potential investors have been deterred by it.

An explanation for the effect of FDI on a country’s development can be found in an analysis of the local economic situation. Countries like China, India, Brazil and Mexico have a vast population but a relatively low income level. Large families with a low income spend most of that income on food, clothing and housing, leaving little to buy the luxury items that the country produces for export. As long as local demand for domestic products is low, a country remains dependent on export which in turn means foreign investment.

Examples like Singapore and Japan show that as soon as the internal market starts developing the economy becomes more self sufficient and less dependent on FDI. Singapore’s Direct Investment Abroad (DIA) now constitutes more than 4 billion dollars while DIA is a little more than 3 billion. Singapore has a well developed service sector, excellent medical facilities and a robust internal economy. Despite the gap in income between Chinese middle class families living in Beijing, Shanghai or Shenzhen and families living in China’s rural provinces the growing prosperity is visible. According to the IMF, China’s GDP in 2007 was $3,248,522 versus a US GDP of $13,794,221. China has a population of 1,321,851,888 while the US has about a third of that number. This means that if the Chinese can raise the average wealth of the population, the internal market potential is enormous.

Has the Chinese government maximized the benefits of their FDI policy?

Despite the establishment of SEZ’s there still exist significant issues for foreign investors to enter the internal Chinese market. Despite the economic freedom enjoyed within the confines of the SEZ, China still remains a communist country. The policy of “one country, two systems” has allowed the Chinese government to benefit from the economic growth of the capitalist enclaves while keeping the old fashioned centralized communist rule intact. As shown recently by the hard handed suppression of the Tibet protests, the government isn’t willing to give up its power just yet. The FDI policy attracts companies because of the liberal tax and economic climate it creates but because of the relatively underdevelopment of the rural provinces most of these companies are export oriented. The increase in buying power for Mainland Chinese has mostly been confined to the SEZ themselves and the surrounding areas. The further you go away from the SEZ’s the lower the average income and the poorer the countryside.

As the name suggests, FDI allows for foreign investment, which does little for China’s local capital markets. China has one of the highest savings rate in the world and this money isn’t invested locally but instead exported to countries like the US. The result is that local manufacturers and other SME’s benefit little from the FDI policy and since they are not allowed to establish a presence inside the SEZ’s can’t compete with the foreign firms. The lack of domestic economic development will slow the development of the local market keeping China dependent on foreign investment down.

Another issue that isn’t addressed by the FDI policy is the lack of sharing of technological knowledge. US companies like Apple use cheap Chinese labor to make their iPods and Macs but don’t share the know-how behind the manufacturing. Concerns about protection of intellectual property keep most foreign investors from forming equal partnerships with local companies.

More liberalization of the FDI policy will attract more foreign investors. The question is if this will benefit China’s economy. The marginal value of additional investors will be less because China’s economy is already on the point of overheating. Extending the FDI regulations to (selected) local companies as well as stimulating domestic investment would be more beneficial.

Investing in China from a foreign perspective.

So far, the Chinese FDI policy has been a great success in attracting foreign capital. However there are severe issues for foreign investors to consider when investing in China. The lack of transparency and regulatory oversight makes investing beyond the SEZ’s let alone tapping the Chinese market a risky business.

Doing business in China isn’t a matter of quick in, quick out. Establishing relationships with government officials, suppliers and local business partners is very important and can take a long time. Networking is an aspect of doing business around the world, but it takes on added importance in a society with a complex bureaucracy and a weak legal system. A web of guanxi helps firms navigate China's bureaucratic and distribution challenges.

China is a very diverse market with varying levels of development and regional industrial strengths. A mistake made by many investors is to consider the Chinese market as homogenous. Each region has its own consumer preferences and business needs. Some industries are spread all over the country, some are clustered, and others are heavily concentrated in one area.

The continuance of China’s FDI policy means that foreign investors are relatively sheltered from direct competition by local Chinese companies. If China decides to expand the SZE’s or allows economic freedom to extend beyond the zones, the effect on foreign investors can be profound. Local companies often have an established guangxi network, can benefit from an established presence and know the local market. If they can compete on equal footing and with equal access to foreign capital they have a head start in China’s local market. So far local capital is either locked up in savings accounts or has been invested abroad. If China changes or abolished it’s FDI policy in favor of more economic freedom this could lead to an influx of capital to boost local firms. Already domestic companies like Lenovo, China Mobile and Bosideng dominate the local markets. According to a survey conducted by the Business Brand Institute, International Advertising magazine and the Communication University of China Chinese consumers prefer local brands to foreign ones, with domestic products the top choice in 39 of 57 categories, or 68 percent. Foreign investors should take this into account when making a decision to invest directly or put their capital in local Chinese companies.

Remaining issues for direct foreign investors are labor and sustainability issues and their potential for reputation damage. So far, the low wages and willingness to work long hours under sweat shop conditions have given China’s workers the edge over their US and EU counterparts. As wages and prosperity increase so will the calls for better working conditions. The special tax and financial breaks that investors get through China’s FDI policy do not extend to domestic demands for a fair and equal working environment. US and EU regulations can apply to manufacturing conditions abroad which can negate the beneficial effects of the FDI policy.

The risk of growth in China

Working in Singapore for an international bank, it's easy to see the shifting of Asian economies from US domination towards China. The size of the Chinese internal market makes it hard to keep up with growing demand, as prosperity increases. The weakening dollar acts as an extra incentive to divert export from the US to China (and to a lesser extent India). The biggest issue with the Chinese economy is the lack of transparency and regulatory oversight. This could create bubbles that will create shockwaves of Enronian proportions when they collapse. Already the housing prices in cities like Shenzen and Shanghai are on the same level as Hong Kong and Singapore. Rising consumerism puts pressure on the lower-middle class to keep up and banks are not saying no. This could create whole new set of Asian sub prime- and credit crunches. Chinese do not have a tradition of living on borrowed money, like most Americans do and once used to easy credit, might lack the discipline to only buy on credit when absolutely neccesary. Rampant corruption and 'guanxi' (http://en.wikipedia.org/wiki/Guanxi) make it hard for foreign investors to invest in the country. Rising wages will also make investing less attractive in the long run. The best way for other Asian nations to become less dependend on Chinese export is to cooperate and develop their own economies, much the same way the EU are doing. The Asian Pacific Rim countries sshould look at non-Pacific regions as well. ASEAN is a good step towards this goal but there is still a lot of distrust and (again) corruption. The difference in size and development of countries like Singapore, Malaysia and Thailand compared to their poorer brothers Vietnam, Cambodia e.a. make integration a difficult task not to mention that in Birma there's no economic freedom at all.

China and its neighbours

China’s growth as a regional economic powerhouse has been rapid. However, the historic ties between the mainland Chinese manufacturers and the local Chinese traders go back for centuries. Already in the 15th century the “Straits Chinese” or Peranakan (土生華人) established a trading route between China and Malacca in Malaysia[1]. From there the influence of Chinese traders expanded to most of the South East Asian region, eventually taking over major parts of the local economies. In Indonesia, despite severe discrimination, 70-80% of the country’s economy is influenced if not owned by Chinese. Singapore has a population of 80% of Chinese origin, The Philippines, Vietnam, and most other SE Asian nations have an influential and economically powerful Chinese minority. It wasn’t until the economic reforms initiated by Deng Xiaoping in the late 70’s that China began to directly influence SE Asian - and to a lesser extend - Australian economies.
South East Asia countries have always looked at their big brother China with ambivalence. On the one hand China imports raw materials and agricultural products from countries like Burma (Myanmar), Indonesia and Thailand. On the other it exports silk, rice and in modern days electronics and heavy machinery to feed the booming Asian economies. It has not been until recently that the domestic market in China has developed to a point that domestic supply isn’t sufficient anymore. To complement their manufacturing capabilities China is now looking to develop services for their local financial, IT and administrative needs. China's software outsourcing revenue will more than double, to $5 billion, by 2005. Gartner Inc. predicts that by 2007 China will pull in $27 billion for IT services, including call centers and back-office work, matching India[2].
One of the major issues for China will be to keep up with demand. Local talent is scarce and mostly focused on manufacturing, the backbone of China’s booming growth. Local wages continue to rise making local Chinese companies increasingly look to opportunities abroad. One of the big 4 banks in China has established a call center in The Philippines where customers can inquire in Mandarin or Cantonese. Chinese clothing manufacturers are already looking to establish a presence closer to the US market by outsourcing to Mexico. Original brand manufacturing (OBM) is gaining penetration in China. Big electronics chain stores—Gome and Suning, for example—outsource both design and manufacturing of consumer electronics to top Chinese manufacturers. Assembly no longer takes place in China but has been off shored to Indonesia, where local wages are lower than even Chinese can accept.
The growing dependence of APAC economies on the Chinese domestic market means that if this market stops growing there will be no substitute unless these countries manage to get their own internal markets growing.

At home, China faces even bigger issues. To keep even with the population growth and the number of new workers entering the workforce each year, the Chinese economy has to grow by 7% a year. If it doesn’t, the resulting poverty will end domestic demand before it takes off. The resulting gap between the rich coastline cities and the poor inland provinces can cause major political and social disturbances, eventually ripping the country apart. When this happens, the end of China as the manufacturer of the world will be at hand. Despite the appearance, China is not one unified country but a collection of different peoples with as varied a background as any European country. Since the Chinese emperors and their communist successors, the union of China has been assured by central rule alone. If the Chinese government fails to hold the country together the resulting chaos will cause foreign companies to withdraw their assets which in turn can lead to China withdrawing their foreign investments, which are substantial. For instance, almost half of US State Bonds are owned by China, which recycles the US dollars it gets back into the US economy financing the US trade deficit. The result will be a collapse of the US economy which in a way has been financed by China all along[3].
In the APAC region, the result of a disappearing or severely shrinking Chinese market will be even more severe. In the scenario described above, the US market will be heavily affected by the collapse of the Chinese economy. The resulting downturn of the US market combined with the halt in Chinese investment means there is no way to fuel the domestic economy anymore.
The best way local governments can avert the worst effects of the China-US scenario is to create an independent, unified internal market. ASEAN, the Asian economic organization, is the first step towards this goal. There is still a long way to go though. The mistrust between the member states, combined with blatant corruption and local political issues make a unified market like the European Union has an option that is far away. Indonesia so far has failed to fully leverage its potential to create critical mass for its internal market. Like in The Philippines, there are issues with local corruption as well as a possible disruptive terrorist threat[4]. Inconsistency in foreign relation policies is a possible impediment for economic unity as well. For instance, Singapore was dependent on Indonesia for the supply of sand to support the real estate boom the small country is currently enjoying. Indonesia in an attempt to leverage this dependency to solve some long standing but unrelated political issues suddenly banned the export of sand to Singapore[5]. This halted Singaporean construction almost immediately causing real estate prices to rocket. Investing in local infrastructure, schooling and a fair and open wage policy is something all local governments should strive for. In ASEAN member state Myanmar, the very basics of democracy have been suppressed by a dictatorial government. Still, Myanmar ruling General Tan Shwe could freely travel to Singapore to receive treatment for an intestinal tumor[6].
Now China has become a member of the WTO it faces similar issues. Despite the name, The WTO is basically a US dominated body which brings the main issues of the US-Chino relationship to light. One of the issues is China’s record of human rights abuse. Despite the fact that the US presently is known one of the worst human rights abusers in the world China is constantly reminded that as a WTO member it should put human rights high on the agenda. In itself there’s nothing wrong with that as long as the criticism can go both ways.
A major issue is China’s shallow integration into the world economy. Its protective stance is not only limited to trade tariffs but also affects information services. Later this year the US and the EU will take China to the WTO over the fact that financial news companies are not allowed to interact directly with their customers. The companies are not allowed to have their own local branch but must act through the China Economic Information Service. The CEIS has its own vested interests as a news provider[7].
Most political issues China faces have to do with its obsessive control over its own population. One major problem however is its policy on Intellectual Property rights. The US film, music industry claim losses of billions of dollars because of pirated movies and CD’s. Branded clothing designers like Louis Vuitton don’t mind using Chinese sweatshops to add to their bottom line but resent the fact that the $5 knock offs available at Beijing’s local markets are virtually indistinguishable from the real thing. As long as a genuine copy of Microsoft Windows Vista costs the equivalent of 6 months of wage, this issue will not go away.

Mote Aquaculture Park - Sturgeon Project

Abstract

This paper is an analysis of a case study entitled “Mote Aquaculture Park – Sturgeon Project” (Ritchy & Michaels, 2005). The case study gave a detailed overview of the creation of an aquaculture fish farm for the production of sturgeon meat and caviar. It describes the setup of the plant and its administrative facilities, a history of domestic and international seafood production and a short description of the level of demand and supply of seafood in the US. This analysis will address economic, political-legal, technological and socio-cultural challenges and opportunities. Using Porter’s trade theory of National Competitive Advantage, the salient issues associated with cultivated seafood production are identified. Finally an advice on follow up actions based on this analysis will be given.


Caviar is to dining what a sable coat is to a girl in evening dress.
~ Ludwig Bemelmans


Economic opportunities of cultivated sturgeon production.

Few types of food bring up images of affluence and decadence like the roe of the sturgeon, otherwise known as caviar. The word caviar originates from the Turkish khavyar, first appearing in English print in 1591. Once only served to royalty it was degraded to canteen food for construction workers during the early nineteenth century. As recently as the 1870s, a half-ton white sturgeon was selling for twenty-five cents at wholesale fish markets At that time the American rivers were so abundant with sturgeons that prices for domestic caviar dropped to near zero until the German immigrant Henry Schacht decided to export the eggs to Europe where it was sold as coveted “Russian caviar” which was considered a premium, fetching prices of more than a dollar per pound.

Serving and eating caviar has always been seen as a sign of affluence. To celebrate the birth of her son to the Grand Duke Paul, Catherine the Great of Russia gave a banquet of such magnificent proportions that the English Ambassador to the Russian Court made up a detailed report of the affair, saying that there were "... jewels and caviar..." on the banquet table to the amount of more than two million sterling. With supply dwindling and demand growing, the price of caviar has grown so high that cultivation of sturgeons becomes economically viable. It stands to reason that with a carefully maintained image the demand for caviar isn’t anywhere near its peak. At this moment most caviar is consumed in Russia and surrounding countries, Europe and Japan.

The economic rise of countries like India and traditionally fish loving China has resulted in an equal increase of the number of affluent and super-affluent individuals. These “new rich” like to show their wealth by driving expensive cars, wearing expensive clothes and eating expensive food. For instance, the consumption of abalone during Chinese New Year is ever increasing even though this shellfish is considered one of the most expensive. With careful marketing, caviar could be considered as an even larger display of wealth especially since it lends itself perfectly to Chinese versions of dishes like the Russian blini. Though less glamorous, sturgeon meat is considered a good source of amino acids and cultivation efforts for that purpose are well underway in China.

The status sensitive Chinese are well on their way to become the largest market for designer brands like Louis Vuitton while India’s largest conglomerate Tata has recently bought the Jaguar car brand from Ford, confirming India’s rise in the world economic ranks. Indian chefs are now serving caviar to their customers. "Earlier, mostly expats and hotels bought caviar; now people order it even for birthday parties. Demand has skyrocketed." Sripal Khanna of `All Things Nice,' an up market south Delhi grocery admits. With the continuing increase in economic wealth, the demand for luxury goods like caviar will keep rising as well.

Political/legal opportunities.

The overfishing of sturgeons to the point of extinction has caused concern, not only in the environmental protection community but with governments and regulators as well. The precarious position of the sturgeon was recognized in 1997 by the Standing Committee of CITES – the Convention on International Trade in Endangered Species of Wild Fauna and Flora – at their annual meeting. They decided to regulate the international trade in sturgeon, and included all 23 species of the Acipenseriformes (sturgeon and its cousin, the paddlefish) in Appendix II, the list of species “not necessarily threatened with extinction, but in which trade must be controlled in order to avoid utilization incompatible with their survival.” In 2000, the Committee recommended “the introduction of a universal system for caviar labeling to help identify legal caviar in trade” and curb poaching and illegal caviar trafficking. although until 1966, any fish roe that could be colored black could be called caviar. This ended when the Food and Drug Administration defined the product, and established rules for its labeling.

“The name ‘caviar’ unqualified may be applied only to the eggs of the sturgeon prepared by a special process. Fish roe prepared from the eggs of other varieties of fish and prepared by the special process for caviar must be labeled to show the name of the fish from which they are prepared, for example ‘whitefish caviar.’ All words in the name should be in type of substantially the same size and prominence. If the product contains an artificial color, it must be an approved color and its presence must be stated on the label conspicuously. No artificial color should be used which makes the product appear to be better or of greater value than it is. The label should bear a statement of ingredients listed by their common or usual names in descending order of predominance because no standard of identity has been established for any form of caviar.”

Curiously, caviar has always played a marked role on the international political stage. During the Cold War it was considered “unpatriotic” to serve Russian caviar at US state dinners. After the fall of the Iron Curtain, a new enemy was found in Iran, which plans to produce 50 tons per year by 2012. As tensions between the US and Iran rise, the export in Iranian caviar to the US, or other countries when paid in dollars, is banned even though “Cavear Emptor” an organization that creates awareness of the plight of the wild sturgeon, considers Iranian cultivated caviar production an example of sustainable farming.

For domestic aquaculture companies, the political and legal issues could be an advantage. Sustainable cultivation of sturgeons will change the image of caviar production being the cause of the extinction of sturgeons. Political tensions may cause domestic and foreign consumers to switch to US produced caviar. Finally trade restrictions can severely hinder the export of caviar from countries like Iran causing demand to switch to caviar produced in non restricted countries.

Technological opportunities .

The near extinction of wild sturgeons has led to an ever dwindling supply of its roe. Sturgeons are not the easiest kind of fish to cultivate and the quality of American cultivated caviar has never reached the level of Iranian Osetra or Russian Beluga. Technological breakthroughs in the use of sustainable aquaculture methods will give Mote’s sturgeon project an advantage. Traditional aquaculture as used by Iranian companies in the Caspian Sea use a combination of natural and planned production. Mote will use a completely controlled self contained system that allows for less water consumption and more importantly better quality control. Global warming is causing weather patterns to behave unpredictably and fish farms out at sea are much more vulnerable then aquaculture production plants on dry land. Cross breeding can produce sturdier sturgeons with higher egg production and better meat.

Socio cultural opportunities.

The new target markets India and China are steeped in tradition when it comes to food. Certain kinds of food are only eaten at certain occasions, other are eaten because of their wealth bringing qualities (like the abalone (bao yu, 鮑魚)). The medicinal qualities of caviar are not scientifically proven but there are hand creams containing the protein rich eggs and the beneficial properties of fish eggs in general have been studied by practitioners of Traditional Chinese Medicine (TCM). Care must be taken not to market caviar as a decadent Western food but as a traditional sign of wealth.

Economic threats of cultivated sturgeon production.

One of the biggest issues of producing cultivated caviar is that of image damage. The consumption of caviar is always linked to its price and its (perceived) rarity. Like diamonds and fur, caviar is seen as something refined and sophisticated. Both diamonds and fur have sustained damage to their image. Fur production will always have the stigma of dead and mistreated animals even when these animals are bred in sustainable ways. Diamond producers are heavily campaigning to retain the glamorous image of their product after it became known that civil wars in Africa are financed by so called “blood diamonds”. Diamond prices are strictly controlled by a system of site holders, diamond wholesalers who get their cue from one of three major mine holders, the largest of which is De Beers. Overproduction of caviar will influence the price which will in turn affect the exclusive image of the product.

The state of the US economy increases the risk of a worldwide economic depression. When this happens the demand for luxury items like caviar will be hit first. Decrease in demand will cause prices to drop with again an added risk of loosing the exclusive image of caviar.


Political/legal threats.

As described earlier, caviar production and -sales have become the subject of regulation. Although domestic production will guarantee a stable political environment, regulatory and liability risks are higher. Export may expose the company to trade barriers as countries move to protect their own domestic production. Caviar, once packed is a relatively simple product with few additives (although some countries use borax which is frowned upon by the FDA). Political threats could come from countries taking a reciprocative stance towards US trade barriers or boycotts.

Technological threats.

The use of advanced technology to cultivate sturgeons brings a dependence on that same technology. Patents ensure that this technology will not be used by competitors. In fact the cross breeding of sturgeons might result in a sub-species that can be patented itself, creating a competitive advantage. Sustainability and protection of the sturgeon as a species is one of the main concerns. Because the sturgeon’s habitat is self contained any contamination can have severe effects on the population. Contamination or a breakdown of the circulation system are also risks that have to be addressed.

Socio-cultural threats.

The image of caviar as a decadent product can work against it from a cultural point of view. Even common products like Pepsi Cola are seen as an attempt to dominate or even supplant native culture. If domestically produced caviar is seen as an exclusive American product there might be resistance in Middle Eastern and other Muslim dominated countries.


Competitive advantage.

According to the theory of National Competitive Advantage, a nation attains a competitive advantage if its firms are competitive. Firms become competitive through innovation. Innovation can include technical improvements to the product or to the production process.

In the case of caviar production, the first attribute of Porters “Diamond” comprises the availability of land to build the production facility, the availability of skilled workers to operate the facility and the availability of infrastructure to transport the product. The US has these factors in abundance. As an industry, aquaculture farms need to be innovative because of environmental concerns. Porter’s stand is that lack of resources forces a firm to become innovative. In the case of Mote, the lack of resources can result in more efficient ways to grow, maintain and harvest the fish, create fish that have higher roe production and/or are more resistant to disease.

The second attribute in the “diamond” is demand. Caviar has always been a niche product and needs to keep the image of exclusivity and luxury. This may cause a slow market growth but since demand is still outpacing supply, it shouldn’t be an issue. Quality should be a primary concern since the target group for caviar tends to be sophisticated and well informed. Competition with Iranian- and other high quality caviar producers will force Mote to sell a consistently high quality product.

The third attribute, related and supporting industries doesn’t play a large role in caviar production. Apart from suppliers of fish food and the initial setup of the plant there are no supplies needed, the fish do most of the work.

Firm strategy, structure and rivalry, the fourth attribute defines the position that Mote as a US caviar producing company has on the international market. There are few competitors in the industry but the some of them are owned or heavily backed by governments. Kazakhstan sees the production of caviar as a matter of national pride and would do anything to back its wild- and cultivated caviar industry. A ban on Kazakh caviar has left the market with one main competitor, Iran which already faces sanctions on its own.


Actions.

The trade barriers for Iranian and Kazakh caviar has left the US domestic market open for domestic product. Left without the large US market however, both producers can concentrate on exporting to the markets that Mote is aiming for. Establishing a high quality brand name should be the first thing Mote should do. The cultivated fish eggs should be able to compete with the finest the competition can offer. Because of its luxurious image, the target market group should be high net-worth individuals and the group just below. Because Mote is a production company, it should hire a marketing company to successfully position its product in China and India. Connection with local food culture is crucial in these countries. In China this can be achieved by emphasizing the wealth and health bringing qualities of caviar. In India it should be seen as a rare luxury to be given to business associates and family as a sign of affluence.

Mote should take care to protect its intellectual property rights and patent breeding methods, technology and production. Especially when entering the Chinese market, the risk of “copycats” producing an inferior product is large.

Rise, demise and change of Lesotho’s textile industry

Clothes make the man. Naked people have little or no influence on society. ~Mark Twain

Abstract

This weeks’ paper will give an analysis of the textile industry of Lesotho. The case study “The market and the mountain kingdom; changes in Lesotho’s textile industry” (Rawi Abdelal cs. )
provides a description of the rise, demise and change of textile companies in the small African kingdom. Chinese and Taiwanese investors as well as the influence of changes in the global textile market have had a profound influence on the country’s economy. This paper will give a closer look at the reasons behind the creation of an labor and resource intensive industry in a country with limited infrastructure. It will place the role of textile manufacturing in a larger context, focusing on the role of international regulation. Finally it will analyze the role of government, labor organizations and foreign investors in the lifecycle of Lesotho’s textile manufacturing.


1. The emperor’s clothes; why textile is big in Maseru.

Lesotho, formerly known as Basutoland is a small kingdom that gained its independence from the UK in 1966. Surrounded by South Africa, the country was ruled by the Basuto National Party for the first 20 years. After a short but violent period from 1990 to 1993, during which king Moshoeshoe was exiled, constitutional government was restored. In 1998 elections resulted in violent protests culminating in an intervention by South African and Botswanan military forces. Since 2002 the country has been relatively peaceful although elections are often hotly contested and demonstrations are common[i].

The story of textile manufacturing in Lesotho doesn’t begin in the small African kingdom but starts with its larger brother South Africa and with Chinese entrepreneurs that have been present in most of Africa for centuries. As early as 1980, South African textile companies opened factories in Lesotho to circumvent sanctions on South African products because of the country’s strict apartheid policy[ii]. Most of the textile manufacturing plants were owned and run by Chinese and Taiwanese immigrants, who had come over in search of trade opportunities and found the less discriminating policy of Lesotho preferable to the racist apartheid laws in neighboring South Africa. After the end of apartheid the influence of China became even larger. The primarily agricultural economy of the mountain state was transformed when outside investors like the Taiwanese Formosa Mills started hiring more than 50,000 workers (mostly women) to man the cutting tables and sewing machines under sweat shop conditions. In 2005 the average wages was $38 per week working long hours on often unheated factory halls[iii]. Under the Multi Fiber Agreement and later under the Agreement on Textile and Clothing, Lesotho’s garments enjoyed preferential treatment over cheaper Chinese products in both the US and European markets. The effect the MFA treaty had on local manufacturers became even more apparent when it ended in 2005 abolishing quotas for Chinese made garments. For the Chinese and Taiwanese factory owners it made more economical sense to relocate to mainland China where labor cost was much lower and productivity higher than in Maseru. The results for the Lesothon industry were disastrous.

2. AGOA and the rescue of Lesothon textiles .

After the expiration of the MFA, Lesotho could still export to the EU market where it enjoyed a duty free status as least developed economy. In 1998 this status ended, leaving the industry in a serious predicament. Overnight, factories were closed, leaving the workers without pay let alone a severance package. Most of the factory workers had no warning of their employer’s intentions. Returning from a Christmas holiday they found the doors closed, the investors had left the country. Since only 11 percent of the kingdom's textiles industry was held in local hands it was easy to just close up shop and leave. Taiwan was by far the single largest foreign investor with a 65 percent share, followed by Hong Kong (13 percent), South Africa (five percent), Singapore (three percent) and Israel (three percent)[iv]. After the expiration of the MFA, little was left of this investment.

In 2000, the African Growth and Opportunity Act (AGOA) was passed. Drafted by Jim McDermott, a Democratic congressman, it was signed into law on May 18, 2000 as Title 1 of The Trade and Development Act of 2000. The Act offers tangible incentives for African countries to continue their efforts to open their economies and build free markets[v]. AGOA provides trade preferences for quota and duty-free entry into the United States for certain goods, expanding the benefits under the Generalized System of Preferences (GSP) program. Notably, AGOA expanded market access for textile and apparel goods into the United States for eligible countries.
The reasons for adopting this liberal stance towards potential competing countries on the textile market were more political then economical. As a democrat, McDermott saw the liberation of African countries out of the poverty trap as one of paramount importance. As the world’s largest export market, the US could help struggling economies like that of Lesotho attain a better standard of living. AGOA also appealed to Republican politicians because it granted economical freedom and allowed developing countries to enhance their position on the global market. The fact that AGOA could be used as a carrot and a stick at the same time should however not be underestimated. US policy in Africa after the cold war had decreased significantly. AGOA would boost US economic interest in Africa and would make African economies dependent on US import.
To benefit, African countries must convince Washington that they are not engaged in gross human rights violations and are making continual progress toward establishing a market-based economy. The latter provision effectively requires African countries to comply with structural adjustment programs (SAPs) and protect foreign investors and intellectual property rights. Civil society organizations in the US and in Africa have opposed such criteria as favoring multinational companies at the expense of poor Africans.
“This is less about African growth and more about American opportunity”, Dorothy Keet of the University of Western Cape told. The so-called market access that they are giving us, they are actually going to have to give to everybody over the next 10 years under the (World Trade Organization). But for a very minimal offer, they are extracting very heavy quid pro quos from us[vi]. For the eligible countries however, the results were more important than the “hidden” costs.
Under the AGOA, more specifically under the “Special Rule”, garments from Lesotho were granted duty free entry to the US market. The Special Rule provided this access as long as exports were below 3% (later 7%) of overall US garment exports. The results for the faltering garment industry were spectacular. By 2004 employment had almost reached its pre-MFA expiration numbers. Wages and conditions for factory workers had not improved however, most of the benefits were for the importing companies like Levy’s and GAP who could now import at lower cost.

3. Governments, Unions and Investors response.

The reaction of the Lesothon government has been almost completely passive. Their role in attracting investment and securing better conditions for its citizens, laboring long hours for minimum compensation has been very small. Companies were attracted to the small mountain state because it didn’t have the racist apartheid regime of South Africa and therefore could export without the sanction impediments placed upon its larger brother. There were little or no legal obstacles to build a factory, nor were there any repercussions when the owner decided to leave the country, leaving the workers often destitute. "Taiwanese companies together with ministers in our government, who are shareholders, are running the companies. It is very difficult to enforce the law", said Billy Macaefa of the Lesotho Clothing & Allied Workers Union[vii]. Like mentioned above, governments that did influence Lesotho often did so for political reasons not out of idealism. The US and EU governments are primarily concerned with protection of their domestic industries. As long as Lesotho doesn’t pose a viable threat and does what its foreign economic masters tell it to do, Lesotho will continue to be treated as a favored country.

The militant stance of the labor union has shied away a number of foreign investors. When China became Lesotho’s biggest competitor on the textile market, it became clear that even the low wages that Lesothon workers earned couldn’t compete with Chinese salaries. Exploitation of workers became an important point on the agenda of the LCAWU. Despite limited results, the Union represented a threat to the Chinese employers, who didn’t have to deal with their influence if they would relocate to China. The union claimed companies arbitrarily dismissed workers and many refused to recognize trade unions.
Investor’s response to the changing economic climate in Lesotho has been predictable. AGOA has created more opportunities for American companies to invest in Lesotho. Even China, faced with rising labor cost is re-outsourcing to Africa again.

To remain competitive, a company needs to keep cost down in the entire manufacturing chain. The original plants used readymade fabric from as far away as South East Asia to produce their garments. This made the transportation cost a major factor. Because Lesotho is an enclave, there are no cheap ways to provide large quantities of materials by ship. All materials were trucked in or transported by rail, and manually unloaded. To cut costs manufacturers have started to install weaving machines to produce fabric from cotton. The shorter supply chain allows easier management and lower inventory. High transportation cost remains an issue though.
A new response from investors is a result of the rising interest in “ethical” clothing. According to the ComMark Trust, a group working to develop Lesotho's textile industry, British shoppers spent almost $50 billion on ethical goods and services in 2005 - a high percentage of which was on clothing. Julia Hawkins, of the London-based Ethical Trading Initiative, says the demand in the US is just as high[viii]. The sweat shop conditions and low wages that attracted many investors before are now slowly replaced by alternative smaller scale plants that produce at higher cost but can be bought guilt free. Edun introduced the ONE Campaign T-shirt, made at its Lesotho factory, advertising that $10 of the $40 price tag would go to a new program that brings HIV testing and treatment to Lesotho's textile workers, an estimated one third of whom are HIV positive, another issue that remains unresolved. More than 30,000 shirts have been sold since they were introduced.


Sources:

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