Nike — Is Using Cheap Overseas Labor Ethical?
Early into the new millennium, Nike became embroiled in a controversy over the use of sweatshop labor in developing countries to make its products more cheaply. Many companies were swept up in the same trend of outsourcing, but Nike became to focal point of criticism. It's suspected that it drew fire because, unlike Wal-Mart, it pocketed the surplus profit rather than discounting its product, and it was also derided for targeting low-income youth as consumers of expensive products.
Background
Nike was started by Phil Knight, whose goal was to produce a high-performance running shoe at a low cost. The shoe caught on with athletes, and found a broader consumer market as the general public became more health-conscious and the jogging trend caught fire.
The company outsourced manufacture from its very beginnings, though it's alleged that the impetus for this was quality rather than price controls - a believe that the Asian manufacturers could do for shoes what they did for television sets. The company continued to price its shoes at a premium, and the low cost of foreign labor magnified the company's profits. Knight made it to the Forbes' list of the richest Americans in less than a decade after going into business.
Demand for the shoes put Nike at the head of the market, surpassing Adidas, who had led the market for decades. In the 1980's the company faced serious challenge by Reebok, whose tactic was to get celebrity endorsement of its products.
Nike fought back by adopting the same strategy - by creating an "image" that extended beyond the practical qualities of the product. It began treating running shoes as a fashion item, and formed alliances with sports celebrities to pitch its shoes: Michel Jordan, Nolan Ryan, Deion Sanders, Carl Lewis, Bo Jackson, Charles Barkley, Serena Williams, and other high-profile athletes sponsored the product.
Also, Nike fought back through channels, forming a strategic alliance with Foot locker, the nation's largest seller of athletic footwear - whom Reebok had alienated by being too heavy-handed in its SCM practices. Nike gained the support of the retailer, and traded some of the profit margin with them in exchange for promotion.
Criticisms
In 1996, there was critical publicity over Nike's use of overseas sweatshops in Asia. Since the beginning the company had utilized independent subcontractors for manufacturing. Wal-Mart had suffered similar accusations (the Kathy lee Gifford incident), and the press attempted to publicly shame Michael Jordan over the same issue, but he failed to cooperate as they expected and his image was strong enough to withstand their accusations.
And so, the press went after the company itself, and did a number of exposes in primetime news magazine shows exposing the working conditions in their overseas plants. Nike played innocent - its suppliers were independent companies - and showed genuine concern in rectifying the problem, inviting the press to "bring us information we can use, and we'll do our best to correct any situations that are wrong" and participated in industry groups with other footwear and fashion firms to boycott suppliers who utilized sweatshop labor.
In the end, this had little impact on the company. Its consumer base (young men in various income brackets) were not terribly concerned, and the public furor had largely passed. Their landmark deal with Tiger Woods spiked sales of golf shoes and apparel, so any negative impact was snowed under.
To a lesser degree, there were some other issues the company had to deal with:
- Superstar athletes, whose sponsorship driove demand, were coming under fire for their conduct, both on and off the playing field
- The exercise fad was shifting from traditional sports to outdoor activities, where footwear was dominated by other firms
- Existing competitors (Adidas, Reebok, New Balance) were becoming more aggressive, and fashion labels (Hilfiger) were expanding their lines to include footwear.
- The personal fortune of Phil Knight was coming into the spotlight and under criticism
- Nike was at the center of public decry over the promotion of high-ticket items to low-income consumers as the cause of crime
Analysis
Ancillary issues aside, the core controversy is over the relationships between domestic firms and foreign suppliers, whose labor standards are far lower than domestic manufacturers. A company that utilizes such suppliers is accused of supporting, condoning, and perpetuating such practices in order to increase its own profits.
The counterargument is that, while the wages and conditions seem deplorable by American standards, they are actually considered quite good in the overseas markets, given the level of economic development and the even more deplorable conditions that are common.
Lessons Learned
A product's "image" can be a source of product differentiation. Nike began with a differentiated product (superior technology), but its competitors have closed the gap, and it is image alone that has differentiated the product. This comes with a caveat (that the image of the product is often married to the image of the sponsor), and there is some argument about using celebrity to influence youthful customers, but these are common advertising practices in the fashion industry, and isn't nearly as ethically questionable as using celebrity to sell medical services - but the practice still ahs its critics.
Public Image matters. In the case of Nike, the damage done to its public image was difficult to measure, largely because product diversification and market expansion covered any dip in revenue that may have occurred in the wake of the bad press about its use of sweatshops, though it is suggested that it was a larger problem for the company than the it let on.
Collaboration within an industry can be an effective tool in rectifying problems. Because the public backlash against sweatshop labor was not limited only to one company, Nike was able to participate in a collaborative effort with other firms, including its competitors. This was highly effective in both diffusing negative publicity (it's not a problem specific to Nike, but an industry-wide one) and addressing the cause of the problem (if all firms work together, they can have a greater impact than one who acts honorably, and eats higher production costs alone)