🏛️Case Study Low Cost at What Cost

Answer the following essay question with regard to the Case in this week's Module.

• Cases are short and intended to highlight a few key concepts from our Module.
• Your answer may be brief, a few sentences to a short paragraph.
• Your answer is graded, but answers may vary, use your own words, no need to revert back to the case.
• Once you submit your answer you can see a note outlining a general answer or a few takeaways.
• There is only 1 question.

Fast-Fashion and the Ethics of Low-Cost Labor

Who wants to wait six months for runway looks to hit the stores? In today’s fast-fashion world, six months is an eternity. Nearly extinct is the tradition of three luxurious fashion seasons per year (fall, spring, resort). Those seasons have been replaced by rock-bottom prices on 30 to 50 trend-driven cycles—per year. Consumers in the United States and Europe have embraced the entire fast-fashion approach—inexpensive apparel and high turnover of designs. In fact, their shopping behaviors have allowed companies like H&M and Zara to grow into international retailing behemoths.

The speed of fast-fashion goes beyond the production cycle. Europe’s fast-fashion chains have grown faster than the retail fashion industry as a whole, partly because the combination of low cost, fresh designs, and quick turnover is extremely successful in fueling consumer demand. Fast-fashion companies also boast higher margins that those reported by their traditional counterparts—an average 16% compared to an average of 7%. Undeniably, the application of planned obsolescence to fashion has been financially successful.

The fast-fashion approach is not without controversy, however, particularly when it comes to outsourcing production. Companies like Benetton, Walmart, and Disney place huge orders with offshore vendors who often cannot deliver the entire order without enlisting the help of additional subcontractors. Unauthorized subcontracting is the end result, and brands don’t always know who is producing their products or where. Phil Robertson, deputy director of Human Rights Watch’s Asia division, affirms this, saying, “I’ve talked to Thai workers who are three or four levels down from the original orders. If the brands don’t know, they should know. A lot of them are turning a blind eye to outsourcing.”

One country that has grown from outsourcing in the garment industry is Bangladesh. With labor rates averaging $40 per month, Bangladeshi garment workers are the cheapest around. (Compare that to approximately $120 per month on average for garment workers in China.) Those low labor costs have caused explosive growth in the size and scope of the country’s garment industry. In 2005, the country exported $6.9 billion worth of clothing. By 2011, that figure had risen to $19.9 billion, making the Bangladesh the world’s third largest exporter of clothing, behind China and Italy.

Makeshift garment factories have popped up all over Bangladesh. It now has roughly 4,500 garment factories, and disasters have ensued from the rapid growth. In November 2012, the fire at the Tazreen Fashion factory resulted in 112 deaths. In the subsequent five months, over 40 other fire-related accidents occurred in Bangladesh, and in April 2013, Rana Plaza, a building housing numerous garment factories, collapsed killing over 1,000 people.

Bangladesh isn’t the only country where concerns about subcontracting are growing. Vietnam, Indonesia, Thailand, and Cambodia also regularly face issues with multilayer outsourcing, and each of them could be next in line to wear the lowest-labor-cost title.

Subcontracting to vendors to produce garments at lower costs can be beneficial to companies in the following ways:

• Having access to a network of subcontracts provides companies with the flexibility they need to produce last-minute orders. In the same vein, relying on subcontractors allows companies to adapt their production schedules depending on consumer demand and keep fixed costs lower than if they built their own production infrastructures.
• Regularly moving manufacturing work to low-cost labor centers keeps labor costs low and allows companies to compete more ardently against each other.
• Garment work is often the only industry that poorer nations can attract as they develop into more robust economies. Threatening to revoke trade agreements or exit countries risks putting workers desperate for income out of work. One government official said off the record, “If they are really trying to help garment workers in Bangladesh, this is not really the way. These are people who need the work…What use is compassion if it takes away the livelihood of thousands of workers?”
• Using a network of subcontractors insulates brands from direct contact with unsavory work environments with unsafe working conditions.
• Using low-cost labor has created value for the consumer who benefits from lower prices in the store. Fewer household resources need to be spent on the same basket of apparel goods as a decade ago.

Despite the benefits, subcontracting to low-cost providers with unsafe working conditions has generated much controversy, not only in fast-fashion, but in the broader apparel and footwear industry as well:

• The European Union is considering revoking a favored trading status it had awarded to Bangladesh as a result of the series of workplace disasters that happened in that country in 2012 and 2013. The EU is Bangladesh’s larges trading partner. Women’s Wear Daily reported that EU trade commissioner Karel De Gucht told Belgian media, “The government of Bangladesh must change something. Otherwise, I am ready to launch an investigation, which may lead to the suspension of Bangladesh’s trade status with the EU.”
• According to an analysis by the Workers Rights Consortium, it would take roughly $3 billion and five years to upgrade Bangladesh’s garment factories to Western standards. However, because the relationships are based on short-term contracts, WRC director Scott Nova told The Atlantic, “Long-term commitments they don’t want to make.”
• Bangladeshi suppliers say Western companies put heavy pressure on prices, resulting in bad pay and unsafe conditions for workers. In fact, demands for ultralow prices and ultrafast turnaround times put extreme pressure on garment manufacturers throughout the developing world. Auret van Heerden, CEO of the Fair Labor Association, argues, “The manufacturing industry is running out of low-cost sourcing destinations, and it’s time to invest in making factories safer and better, rather than searching for cheaper labor.”
• Hopscotching throughout the developing world looking for the lowest labor costs ultimately threatens brands’ reputations. Even Helena Helmersson, head of sustainability for H&M, seems to agree. She told The Observer, “Remember that H&M does not own any factories itself. We are to some extent dependent on the suppliers—it is impossible to be in full control.”
• Sourcing practices have exposed sharp contrasts between fast-fashion and luxury designers and exposed hypocrisy among critics. Italian designer Miuccia Prada, who also holds a PhD in political science, told Women’s Wear Daily, “People who are intellectual leftists, they say I am expensive and horrible, ‘How can you sell clothes at that price?’ Simply, it’s the cost. If you pay people to do everything with the right system, things are expensive. And the same people who criticize the dangerous production environments, when it comes to cost, they like the inexpensive pieces because they think it’s more democratic.”

Do you agree with the EU’s threat to use trade agreements as a weapon in the fight against low-cost subcontracting? If governments were to regulate the number of subcontractors that can be involved in the production of a product, do you believe businesses that outsource their work would be more prone to respond ethically to catastrophes and to working conditions in general?