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Nike in Asia – Just do it

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  • John Hendry 2000 1

    Nike in Asia Just do it! This case, which is based on published sources, was prepared by John Hendry with the assistance of MBA student Toshiaki

    Fujikawa. It draws heavily on two earlier cases: P.M. Rosenzweig, International sourcing in athletic footwear (HBS 9-

    394-1489) and T. Wheelen, M.H. Abdelsamad, S.E. Fieber and J.D.Smith, Reebok International Ltd (1995): The Nike

    Challenge from T.L.Wheelen & J.D. Hunger, Strategic Management. 6th edition. Addison Wesley, 1998. The case is

    intended to provide a basis for class discussion and not to illustrate either effective or ineffective handling of an

    administrative situation.

    Nike Inc. needs little introduction. With revenues of nearly $10 billion in 1998 and a

    dominant position in the worldwide athletic shoe and sports leisure wear industries it owns

    one of the worlds most famous brands and most instantly recognisable logos. In purely

    economic terms, the story of Oregon-based Nike since its creation by Philip Knight in the

    1960s has been one of almost continuous success, but since 1991 the corporation has also

    attracted attention for another reason. This case reviews some of the criticisms that have been

    made of Nike on ethical grounds and the corporations responses to them, in the context of

    the competitive pressures of the industry in which it operates.

    Nike and the athletic footwear industry

    When Nike was founded in 1964 the athletic footwear industry was a relatively small,

    specialist industry with a pure sports orientation, dominated by the German companies

    Adidas and Puma. In the 1980s and 1990s, however, the industry has grown rapidly as,

    beginning in the USA and subsequently throughout the world sporting activities have become

    increasingly fashionable and sportswear, in particular the ubiquitous trainer, has come to

    dominate leisurewear fashions even for those not engaged in active sports.

    By the early 1990s, Nike had held the number one position in the American athletic footwear

    market for over a decade and held over 30% of that market. It was also firmly established as

    number one in the global market with a market share of over 20%. Both revenues and profits

    were growing steadily at between 20% and 30% per annum (see Exhibits 1 to 4 for financial

    and market share data). But while these results were very satisfactory there was no room for

    complacency. Nikes lead over its main competitor, the Anglo-American company Reebok,

    was a very narrow one, and both Reebok and a resurgent Adidas were stronger than Nike

  • John Hendry 2000 2

    outside the USA, and especially in the economies of Western Europe that were expected to be

    critical for future market growth. While the public appetite for athletic footwear as leisure

    fashion continued to grow there was also the ever-present danger of a dramatic change in

    fashions back to the traditional leisure shoe, a change that could also be expected to hit

    Nikes non-footwear products such as baseball caps and sweatshirts.

    The primary focus of competition in the modern athletic footwear industry is marketing, with

    the leading players spending around 10% of their revues to promote their brands through

    advertising and endorsements. Nike, Reebok and Adidas all follow classic differentiation

    strategies, seeking to sell their products on quality and image at a premium price rather than

    to compete with each other or with their smaller competitors on the basis of low prices. Their

    production costs are still significant, however, and minimising these costs has always been

    very important. (Exhibit 5 gives a typical cost breakdown.)

    Nikes production strategy

    Neither Nike nor its main competitor Reebok manufacture their own shoes, both corporations

    relying on Far Eastern subcontractors. In the 1980s, most of the shoes were sourced from

    companies in Taiwan and South Korea, but as wages in both these countries rose sharply in

    the second half of the decade, rising two and a half times between 1986 and 1990, these

    companies came under strong pressure from Nike and Reebok to shift production to lower

    wage countries. By tying future, guaranteed orders to significant cost improvements they

    encouraged the companies to invest heavily in new plant in China and Indonesia. By 1990,

    Nike was already sourcing from six factories in Indonesia, four of which were owned by its

    established South Korean suppliers while the other two were locally owned. Together they

    employed 24,000 workers and accounted for 8% of Nikes global volume. Over the next three

    years, the number of people employed overall in the South Korean and Taiwanese shoe

    industries fell dramatically (from nearly 500,000 to just 120,000 in South Korea). By 1992

    the majority of Nikes shoes (and the majority of Reeboks too) were being sourced from

    South Korean owned factories in Indonesia and Taiwanese owned factories in China.

    Thailand, the Philippines and, later in the decade, Vietnam, were the other main sources of

    production.

    The main attraction of countries like Indonesia and China was their low labour costs, which

    were less than 10% of those in Taiwan and South Korea and around 4% of those in the USA

    (see Exhibit 6). Indonesia, which was to be the main focus of Nikes critics, had a population

    of 180 million, a rapidly growing workforce and very high unemployment. Employment

    legislation was weak and the government, which was desperately keen to encourage foreign

    manufacturers, did not appear too worried about enforcing what laws there were. From an

    economic point of view, for a company such as Nike, it was heaven.

    Criticisms and responses

    It was not, however, heaven for the Indonesian people, and from 1991 onwards Nike came

    under repeated attack for what, it was claimed, were seriously unethical aspects of its

  • John Hendry 2000 3

    sourcing policy. The first criticisms came in two 1991 reports, one from the Indonesian

    Institut Teknology Bandung and the other from the Asian-American Free Labor Institute,

    which accused Nikes subcontractors of violating child labour laws, failing to respect special

    work rules for women, forcing people to work overtime and paying less than the minimum

    wage, which at the equivalent of US$1 a day was itself not enough even to feed an individual.

    (Even after the minimum wage was raised to the equivalent of US$1.20 in 1992 it was

    reported that, at prevailing food prices, this could purchase only 70% of an individuals

    minimum calorific needs.) The AAFLI report claimed that young women employees

    complained of an atmosphere of fear, with South Korean managers shouting at and

    threatening them.

    Nike responded to these criticisms in two ways. Externally, the corporation argued that the

    problems lay with its subcontractors, for whom it should not be held responsible. As the Nike

    general manager in Jakarta responded: They are subcontractors: its not within our scope to

    investigate. The Nike vice-president for Asia was similarly reported as saying that we dont

    know the first thing about manufacturing. We are marketers and designers. Anyway, he

    added, regardless of the criticisms Nike was bringing great benefits to Indonesia: Weve

    come in here and given jobs to thousands of people who wouldnt be working otherwise.

    Internally, however, Nike drew up a Memorandum of Understanding (Exhibit 7) to act as the

    basis for its subcontractor and supplier relationships and protect it from future criticisms. This

    required subcontractors not only to comply with local legislation but also to maintain on file

    evidence of such compliance. It also required them to adhere to Nikes own environmental

    and equal opportunities practices.

    The Memorandum of Understanding was drawn up in 1992 and adopted formally in 1993,

    but it did not protect the corporation from further criticism. A CBS report on a Nike

    subcontractors Indonesian factory in the summer of 1993 drew attention to continuing low

    wages and to a system in which women employees lived in on-site company barracks which

    they were only allowed to leave on Sundays, and then only with written management

    permission. This report sparked off a constant stream of criticism, which had barely subsided

    when, three years later in October 1996, another CBS program, this time on a Nike

    subcontractors factory in Vietnam, reported the use of physical violence on employees. You

    have to meet the quota before you can go home, said one woman, [The supervisor] hit all

    15 team leaders in turn from the first to the fifteenth. Another added: The physical pain

    didnt last long, but the pain I feel in my heart will never disappear.

    The 1996 CBS program led to a barrage of criticisms from the media and human rights

    groups, followed by boycott campaigns on college campuses and by consumer activist

    groups. The criticisms were applied generally, to all of Nikes Asian subcontracted

    operations, and focused on six points.

    Low wages. Although Nike claimed that the median wage paid to employees

    in Indonesian factories was over double the legal minimum wage, human

    rights groups found that the majority of workers were paid at the minimum

    wage. Because of very high unemployment and the absence of a welfare

    system, people were prepared, even eager to work at this

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