Date of publication: February 15, 2006
Source: Phoenix Weekly
Liu Songjie, Special Correspondent, Shenzhen
Translated by China Labor Watch
Pressured by criticism worldwide, many international toy producers have announced through the International Council of Toy Industries (ICTI) that mainland Chinese toy companies must receive the ICTI Code of Business Practices certification before January 1, 2006.
Otherwise, they will cancel orders given to these companies. Yet until December 2005, only about 500 companies have applied for the ICTI certification across the world (most of whom were mainland Chinese toy companies). Approximately 200 of them have been certified. The majority of toy companies still hold a "wait-and- see" attitude towards the ICTI certification.
"What we need to do is to set up unified factory audit standards before NGOs make allegations against us," Alan Hassenfeld, the president of the CARE Foundation at the ICTI, told a report at a toy expo in 2005.
Mr. Hassenfeld has a different position as well: he is the chair of the board of directors at Hasbro, the world's second largest toy brand. His worries are not unreasonable. On October 12, 2005, China Youth Daily published "Toy Industry Sweatshop Investigation" by Li Qiang, the executive director of China Labor Watch. After investigating 11 toy factories in Dongguan, Guangdong Province, Li Qiang discovered, "Except for one factory that roughly complied with Chinese labor laws, the rest ten factories all engaged in labor rights violation." Violating conducts include forced overtime, wage payment below minimum standard, failure to provide social insurance, restriction of workers' personal freedom, etc.
In recent years, sweatshops in mainland China have drawn worldwide concern, among which toy factories are the focus of criticism from NGOs. Under the tremendous pressure from public opinion, international toy producers such as Mattel, Hasbro, Leapfrog, etc.
have made announcement through ICTI's website that requires their Chinese toy suppliers be certified by the ICTI Code of Business Practices by January 1, 2006. Otherwise, they would withdraw orders from these factories.
The ICTI Code of Business Practices is also called the CARE Process (Caring, Awareness, Responsibility and Ethics). Is it going to become the authoritative business standard in the toy industry that will turn toy factories into responsible "corporate citizens," or become another expensive public image project. As to this question, Mr. Hassenfeld firmly declared that, "Sweatshops are going to become history!" However, some scholars and experts do not share such an optimistic view.
The Making of the ICTI Code
In fact, the toy industry was not short of codes of conduct. In the 1980s, when the call for corporate social responsibilities arose in the west, all kinds of codes of business practices and self- disciplinary standards came along. To date, however, various codes and standards have not created a "cleaner" business environment for the mainland Chinese toy industry. On the contrary, because of the lack of a unified standard, toy factories suffered greatly from waste of resources due to repetitive inspections and evaluations. A well-known case in the toy industry is a mainland factory inspected over 50 times within one year.
In order to integrate multiple evaluations, ICTI formally put forth the ICTI Code of Business Practices in 2002 after seven years of preparation. Although it is only a voluntary code of conduct, more and more brand-name companies are requiring their manufacturing companies to receive the ICTI certification. According to the statistics provided by ICTI, until February 2005, over 150 brand- name companies in the world signed and acknowledged the ICTI certification, including Mattel, Hasbro, Leapfro, Lego, Toys 'R Us, and other top toy brands. Their orders exceeded 50% of the world toy market.
The ICTI Code of Business Practices upholds the principles that no underage, forced, or prison labor should be employed; that no one is denied a job because of gender, ethnic origin, religion, affiliation or association, and that factories comply with laws protecting the environment. Its examination covers eight aspects: child labor, prison/forced labor, working hours, wages and compensation, discrimination, working conditions, industrial safety, and EHS (environment, health and security).
People in the industry point out that the ICTI certification process has fundamental differences with audit conducted by brand-name companies in the past. Audit by the brand-name company is done by the second party (the buyer). Due to the mutual dependence between the brand-name company and the manufacturing company, the evaluation is sometimes very lax. During the investigation of toy factories in Pinghu Town, Longgang District, Shenzhen, the report discovered that even some of the large toy factories faked work conditions when brand-name companies came to inspect manufacturing sites. For instance, brand-name companies rarely found cases of overtime. A worker from an unidentified large toy factory told Phoenix Weekly, "The record only shows 3 hours of overtime everyday. The rest of the overtime has additional records, or is transferred to later months." Before brand-name companies came, factories would organize "training sessions" to coach workers how to answer the inspector's questions. Once inspectors left, everything went back to the original conditions.
The ICTI certification, in contrast, requires third party audit.
ICTI designates six independent auditing agencies and adopts rigid auditing approaches: checking local laws, conducting on-site visit/inspection, and interviewing workers. In particular, inspectors interview workers in a separate room with no factory representative present and make sure to protect confidentiality of the interview. The audit especially emphasizes the inspection of the original record of documents. "That is to say, no mater how you claim your conducts are in perfect compliance with the rules, it does not matter without respective records," said Liu Yanfang, Secretary of General of the Toy Industry Association in Shenzhen.
The ICTI certification also designed special features in its auditing procedures. An ¡°audit checklist¡± in the Appendix II of the Code lists all the items to be evaluated. The factory fills out whether one particular item has been implemented or not in the "Yes/No" box; the inspector fills out how it is implemented in the "Comment" box. If there are disqualified items, the factory must take measures to improve the condition and be re-evaluated, until the auditing agency approves. After that, it also needs to be inspected by the ICTI Certification Technical Consulting Committee and confirmed by the ICTI (Asia) Co. Ltd. before the factory can receive certification. Furthermore, factories need to undergo evaluation on a yearly basis. Certification will be revoked if factories fail any evaluation. Toy factories' subsidiary factories and subcontracting factories must also undergo evaluation.
A medium-sized toy factory owner from Shenzhen spent hundreds of thousands of RMB to improve factory sites and equipment and obtained the ICTI certification. In fact he did not manufacture for big companies like Mattel or Hasbro, but only exported products to the European and American markets. What was his purpose? "[So that] when I approach toy companies, I can confidently tell them that I have the ICTI certification." It is known that ICTI has reached an agreement with the European Free Trade Association (FTA) and that all ICTI certified companies will be included in FTA's European retail distribution index. The information is available to big overseas brand-name companies, in order to facilitate trade deals with local factories.
The ICTI Code Has Not Become A Unified Industry Standard
Nevertheless, since its forthcoming in 2002, the promotion of the ICTI Code of Business Practices has not been smooth. The CEO of the CARE Foundation at ICTI, Christian Ewert, who is in charge of the promotion the ICTI Code of Business Practices, told Phoenix Weekly recently that, up to December 2005, about 500 companies across the world have applied for the ICTI certification (most of which were mainland Chinese toy companies), and only 200 of them or so were approved. Liu Yanfang said, however, "Based on ICTI's plan, at least 500 companies should have been certified by 2005."
China produces 75% of the world's toys. Shenzhen alone has around 1,200 toy factories. As to the ICTI Code of Business Practices, most factories chose to wait and see. In fact, those who were enthusiastic about the enactment and promotion of the code were international brand-name companies and a few large toy manufacturers. Yet the majority of the mainland Chinese toy industry consists of small-size factories of fewer than 1,000 workers.
According Liu Yanfang, large-size toy factories with over 5,000 workers constitute at most 20% of the total factories in Shenzhen.
Because of that, toy factories still hold different attitudes towards the ICTI Code, though the deadline of January 1, 2006 has passed. Large factories have scale advantage in competition and therefore are able to bear the costs of certification. They would like to have unified standards soon and eliminate the complexity of repetitive evaluations. For instance, Chen Yonglin, Chair of the Board of Directors of Yongqin Toy Company, participated in the drafting of the ICTI Code as a factory representative. Yongqin Toy Company was also one of the earliest factories to receive the ICTI certification in mainland China.
In comparison, among medium-size factories, some continued watching, some started learning about and preparing for the ICTI certification, while others hoped to be certified as soon as possible upon the request of their clients.
However, the cost of certification intimidated small-size factories.
The application and certification fees alone only cost around several thousands of US dollars. But because most of these factories have manufacturing buildings over 20 years old and obsolete equipment, they will have to pour in "huge" amount of money to qualify for the requirements of the Code, which most small factories cannot afford. Small factories are at the lowest end of the production chain with very limited profit margin. In recent years, toy factories' production costs increased significantly due to the price raise of materials. "Even if I spend a lot of money in getting certified, I may not be able to receive orders from those big brand-name companies," one factory owner said to the reporter.
As a result, most small factories are waiting for changes to come about. In case product orders are withdrawn after the deadline, with the advantage of being small and therefore more flexible, they can shift their orders to Japan or other countries. Although Japanese clients stress product quality highly, they do not specifically require the ICTI certification. If this does not work out, they can still produce for other clients.
Another factor that causes difficulty for the promotion of the ICTI Code is the conflict between the Code and Chinese laws, mostly in the areas of working hours and social insurance. One feature of the toy industry is that its production is very seasonal. The busy season is between May and October. Overtime is inevitable during the busy season. Considering the peculiar character of the industry, ICTI¡¯s rule for working hours is 72 hours/week maximum, while the Labor Law of China stipulates 40 hours/week with maximum overtime of 36 hours/month. The Labor Law of China requires employers to purchase social insurance for employees. However, workers in the toy industry move around a lot. In addition, the payment for social insurance is based upon the average wage in the province, while toy factory workers' wages are among the lowest bracket (typically constitute 20%-30% of standard wage). Therefore, more workers are canceling than purchasing insurance.
How to Walk Out of the "Corporate Citizen" Dilemma
Some experts point out, the elimination of sweatshops in mainland China cannot be done single-handedly nor can a code of conduct bring about immediate transformation.
To interpret the "sweatshop" phenomenon from the perspective of economic globalization, we can find a chain connecting one actor with another: transnational retailers, brand-name companies, brand/sales agents, toy factories and subcontracting factories' workers. In addition to this chain, there are two other critical
actors: local governments and NGOs.
In Christian Ewert's view, the root to the problem of sweatshops lies in factory owners. Hence, the goal of the ICTI Code is to "guarantee that no supplier in the global toy industry operates so- called sweatshops." Christian pointed out that "the sweatshop phenomenon" is apparently the fruit of greed.
However, Li Qiang, the executive director of China Labor Watch, targeted his criticism at multinational companies. He believes that the globalized world economy has formed a pyramid-like, multi-layer system of business contracts. Multinational retailers and producers (international purchasers) are on top of the pyramid and hold the ultimate right to command. They suppress the buying price as much as possible. In order to avoid risks and pursue cheap labor, they contract manufacturing orders to developing countries.
"Multinational companies went after this system because it can reduce their investment risks and more importantly shift the moral and legal responsibilities of labor rights violations committed in those factories," said Li.
Dr. Liu Kaiming from Shenzhen Contemporary Social Monitoring and Research Institute thinks that codes of conduct are only effective to certain extent. The ultimate resolution of the sweatshop phenomenon lies in industry upgrading and social economic transition. And during the transition process, the role of the government is most critical.
According to the data provided by the Shenzhen Toy Association, most Shenzhen toy factories process materials provided by clients, and over 90% of their products are for export. The production model of OEM (Original Equipment Manufacturer) labeling results in low profit rates in these factories as well as inhibiting the incentive to actively develop new products.
Dr. Liu suggests that China learn from Korea's successful experience. The Korean government played a very important role in the transitional process of Korea. In the 1960s, four fifth of the Korean population was rural. Because there was unlimited labor supply, peasants did not have bargaining power and hence capitalists did not invest in labor training. Instead, the government financed the training of migrant workers and developed a large number of skilled workers, which formed the foundation for Korea's industrial transition in the late 1980s. On the other hand, Korea did not have control of residence registration. The government encouraged rural residents to move to cities and industrial regions. Between the mid- 1960s and the mid-1980s, approximately 11 million Korean peasants migrated into cities, which constituted 60% of the rural population.
Through this process, Korea underwent urbanization and developed into a middle-class based society.
Source: Phoenix Weekly, Vol. 4, 2006 (Issue No. 209)