Date of publication: April 22, 2005
Source: Financial Times
By Lauren Foster and Alexandra Harney
Factory managers in China are becoming increasingly sophisticated at
falsifying worker time cards and payroll documents to disguise
irregularities including underpayment, excessive hours and inadequate health
and safety provision. Auditors estimate that more than half of factories
they see in China are forging some of their records - meaning that many of
the international companies that source from China are learning less about
the actual working conditions in the factories they use, even as they step
up efforts to monitor them.
The practices also mean that some western groups' assurances that they are
abiding by China's labour laws and their own codes of conduct are based on
faulty information. The widespread forging of records threatens to undermine
the aims of the corporate social responsibility movement, a response by
multinationals to the concerns of customers, non-governmental organisations
and trades unions about issues including human rights and the environment.
Even the biggest companies that source from China say they are confronted
with falsified records at Chinese factories. Beth Keck, director of
international affairs at Wal-Mart, says the world's largest retailer is
aware of the problem. Nike's 2004 corporate responsibility report, released
by the footwear maker this month, says of Chinese factories: "Falsification
of information by factories often related to wages and hours of work is
common. This extends to the practice of coaching of workers by factory
managers trying to deceive compliance auditors."
Daryl Brown, vice-president for ethics and business practices at Liz
Claiborne, the New York fashion group, describes the difficulties: "A few
years ago, we were able to detect when records were altered by simply
interviewing workers. Now, workers are coached. Good auditors can usually
tell when the workers have been coached and we also make periodic
un-announced audits to combat this. However, there are times when we need to
resort to interviewing workers off premises or to surveillance to find out
the truth. We also have our direct contact information posted at the
factories, which allows workers to contact us confidentially, and on
occasion they do."
Compliance executives say the problem occurs elsewhere, citing cases from
India, but add that Chinese operations are smartest in their deception.
Getting evidence of forgery is therefore difficult. Factory managers are
reluctant to explain their methods, while western companies that are trying
to persuade them to come clean fear publicity that would damage their
reputation. However, the Financial Times has obtained access to a large
garment factory that forges some of its documents. The circumstances of the
visit require that the name of the factory is withheld, but it is located in
the southern province of Guangdong, the industrial hub just north of Hong
Kong that produces a big portion of China's exports.
The factory manager said he had assigned a team of six employees to create a
paper trail of fake documents for foreign buyers. Some of these workers
punched fake time cards to give the impression that the stipulations of
buyers were being met. One was charged with creating matching payroll
records on the computer. "This is a perfect match for (the buyers')
requirement," the manager said on a recent afternoon, gesturing at forged
time cards and payroll records arrayed on the table next to the genuine
documents.
Most foreign companies who buy from him see the fake records, he said. The
forged documents, nearly indistinguishable from genuine ones, showed shorter
working hours, allowing the manager to hide violations of Chinese labour law
and western buyers' codes of conduct. "This is a way of surviving," he said.
"This is the way of Chinese factories."
Big US and European companies, particularly in the footwear and apparel
industries, send staff and third-party auditors to determine whether their
Chinese suppliers are complying with the multinationals' codes of conduct
and national labour laws - which for China stipulate a 40-hour working week
with a maximum of 36 hours of overtime a month. Auditors talk to factory
managers and examine records to check for working hours longer than the
legal limit and sweatshop conditions. They tour the factory, looking for
everything from under-age workers to exit doors and fire extinguishers to
the number of workers sharing factory dormitory rooms.
These audits are a chilling prospect for many Chinese factories. Failing an
audit means a potentially crippling loss of business but compliance often
requires a costly overhaul. When audits began, "we'd go to the factory, we'd
see they did not meet lots of standards", says Steve Li, executive director
of Hong Kong-listed Yue Yuen Industrial, the world's largest manufacturer of
branded footwear, for customers including Nike, Reebok, Adidas and New
Balance. Mr Li adds that improving social compliance is a continuing effort
at his factories. "This is a pretty long journey. It's not ended. There's
lots of room to improve."
China's laws - which also require workers to be paid at least 1.5 times the
normal wage for overtime - are more stringent than in some countries. But
factory managers' often cozy relationships with local officials and the
rapidly rising number of plants make them easy to disregard. "We rarely find factories that can actually meet the local labour law in terms of hours,"
says Daniella Gould, China country director for Impactt, a London-based
consultancy that helps companies improve labour standards in their supply
chains.
Because of the long working hours, most workers do not receive the legal
minimum wage, according to auditors and non-governmental organisations that
inspect Chinese factories - although some staff want to work beyond legal
limits. "In China, it is common for the actual wage to amount to as little
as half the legal minimum wage, particularly in industries involving very
detailed work, such as handbags and beaded accessories, where workers are
paid piece rates," Sanchita Saxena and Franck Wiebe, respectively assistant
director and director of the Asia Foundation's economic reform and
development programme, wrote in a report published by the foundation in
January on the end of the Multi-Fibre Arrangement, the system that until
this year governed the textile trade.
Faced with a choice between losing the business from international buyers or
paying the cost of complying, many factories instead cook the books. Ms
Gould estimates that a majority of factories in southern China have prepared
some forged documents. Gary Beadell, managing director of Level Works, a
social compliance auditing group working in China, says that "over 90 per
cent" of the factories he sees falsify at least some of their records.
Double bookkeeping is common, say buyers and independent monitors. One Hong
Kong-owned toy factory even assigned workers to rubbing falsified time cards
in dirt to make them look genuine, according to Parry Leung, a researcher at
the Hong Kong Chris-tian Industrial Committee, a non- governmental
organisation. Workers who give auditors the impression that a facility is
compliant may be rewarded by managers with bonuses, he adds.
Some factories coach their employees ahead of auditors' visits on how to
answer their questions. One sign posted in a footwear factory in Guangzhou,
the capital of Guangdong province, and obtained by an auditor reminds
managers of the various weekly working hours required by different buyers.
"Please educate the workers well to avoid telling the client the truth," it
says.
A document used in October 2003 to coach workers at a factory in Huizhou,
another city in Guangdong, warned staff that the factory had received notice
that Liz Claiborne representatives would be coming for an audit the
following Tuesday. "All departments and all work places should organise a
training for workers to prepare for this," it said, warning that "workers
should not be allowed to let the buyers know that we have given prior
training to workers based on the specifics of the workers' interview".
"The falsification of records is a problem, especially in China," says Liz
Claiborne's Mr Brown. "When conducting a payroll audit, we become suspicious
if the working hours are low. There still seem to be a few places where you
can get a feel for the true working hours, such as reviewing
production-related records. However, in some cases, the factory knows to
doctor them too. Just being aware of this practice gives us an advantage. We
do not necessarily find all of the problems, but we do find a lot." hile
persuading most auditors that his records were genuine was not hard, said
the Guangdong factory manager observed by the FT, workers were harder to
control. "I just stand outside the door and pray to God" during worker
interviews, the manager added.
In order to ensure a successful audit, some factories also offer auditors
bribes. Ms Keck, at Wal-Mart, says the retailer has fired several employees
in China in recent years for requesting or receiving bribes during an audit.
More auditing has not helped the problem. Big companies that buy a lot from
China rely on both internal and outside auditors, in order to inspect more
of the facilities they use and to show that independent observers had come
to their own conclusions about the factories. As the social compliance
auditing industry has grown in response to increased demand it has left many
auditors with less time to spend at each factory. "I tell auditors that I
cannot tell them the truth in relation to some of their questions. They
smile and move on to something else," a manager at one large garment factory
in Dongguan told CSR Asia, a Hong Kong-based research group. "They are
complicit in the deception."
There is no doubt that increased surveillance by foreign buyers has improved
working conditions at many factories in China. The best plants now have
basketball courts, libraries and internet access for workers. But factory
managers and compliance executives say privately that the increasing forgery
of records partly reflects the complexity of the challenge facing Chinese
plants that supply international companies: meet the customer's requirements
for social compliance, pricing and delivery time or lose the business.
"We are under enormous stress, customers place late orders, they change
their orders part way through manufacturing and they pay their bills late.
At the same time they ask us to provide better training for our staff,
better health and safety and better accommodation. We just cannot do it
all," the Dongguan manager told CSR Asia.
One executive at a European retailer says falsification of records is the
result of common interest between buyers and factories: guaranteeing
delivery of goods on tight schedules. "We are sometimes putting them in an
impossible situation," the executive says. But Wal-Mart's Ms Keck denies
that pressure on prices is a factor. "If we have this kind of contentious
relationship (with factories), they're not going to have stability in their
workforce to produce good quality goods. What we're looking for is cost
efficiency. We're not looking for the lowest cost."
As China continues to increase its share of global manufacturing, however,
some observers fear the evasion of labour standards will only get worse. The
elimination of the global quota system on textiles is expected to drive a
growing share of the world's clothing production to Chinese factories.
"We're rewarding factories that are falsifying records," says one compliance
executive. "We are creating a disincentive to really play by the rules and
comply."
Groups such as Nike, Levi Strauss, Wal-Mart and Gap are trying to build on
the auditing of labour standards at their supplier factories by introducing
programmes to train workers and managers - an initiative known as "capacity
building". Others have stationed full-time compliance executives in
important factories or are looking for alternatives to the cat-and-mouse
monitoring game.
Though they declined to be identified for fear of damage to their
reputation, some companies are trying to persuade Chinese factories to show
their real records and sign on to a programme of continuous improvement -
even if that means knowingly buying from factories that violate the labour
law and the company's compliance code.
"US businesses are more concerned about China's labour conditions because
they are sourcing there even more than before," says Mila Rosenthal,
director of Amnesty International USA's business and human rights programme.
"The lifting of (textile) quotas has raised the profile of the labour issue
and made companies more aware of risk in terms of potential reputational
damage. At the same time, they are also consolidating their supply chain."
Others are trying to work together. The National Retail Federation of the
US, the Retail Council of Canada and Reebok, the US shoe company, in January
created the Fair Factories Clearinghouse for companies to share information
on factory audits. The FFC is testing a centralised "ethical sourcing"
system based on software Reebok uses to monitor its own factories in Asia.
World Monitors, a human rights and business consultancy, obtained a grant
from the US State Department to help develop the FFC. Its goal, says Scott
Greathead, chief executive of World Monitors, is to "eliminate the
inefficiencies and duplication of effort that have made workplace monitoring
less effective".
Pilot FFC software is being tested ahead of a launch expected next week. "It
is necessary for us to collaborate with other companies if we are to make
the progress we want to make," says Peter Burrows, Reebok's chief
information officer. "If you care about protecting your brand and doing the
right thing for human rights, the FFC . . . isa very cost-effective
solution."
Elliot Schrage, a senior fellow at the Council on Foreign Relations and an
adjunct professor at Columbia Business School, says: "The frustration over
deceptive labour practices is fuelling greater collaboration between brands
... Instead of several companies spending relatively small sums for isolated
snapshots of factory conditions, co-operation lets them pool their resources
to fund a more comprehensive X-ray."
However, the FFC project has not yet gained the support of other industry
heavyweights such as Nike and Gap. The FFC "only assists brands in sharing
their snapshots of factory conditions; it does little to ensure the
snapshots are based on the same standards or have been taken with the level
of rigour necessary to uncover possible abuses", says Mr Schrage, who
oversaw Gap's factory monitoring programme in 2000 and 2001.
Auret van Heerden, president of the Fair Labor Association, a US-based
monitoring network, says the main issue is how companies address the root
causes of abuse. "Sharing the list of problems, while it helps and hopefully
reduces some duplication, only gives us a job list. That is when the real
work starts and where we need the collaboration."
Industry pressure has come from Nike, which in the 1990s endured withering
criticism of its labour practices. Last week Nike published its 2004
corporate responsibility report, which for the first time included a list of
more than 700 suppliers around the world. "We hope that full disclosure, if
also followed by other companies, will lead to more sharing of industry
monitoring," says Hannah Jones, Nike's vice-president of corporate
responsibility. "The current system has to evolve fundamentally to create
broad, sustainable change for factory workers. No one company can solve
these issues that are endemic to our industry."