Fashion brands struggle to balance profit and principle in China

Fash­ion brands love to pro­mote their com­mit­ment to sus­tain­abil­i­ty. But when the industry’s links to forced labour in China’s Xin­jiang region has come up on recent earn­ings calls, appar­el exec­u­tives have been ret­i­cent. 

“With regard to Chi­na, the sit­u­a­tion remains com­plex,” said H&M CEO Hele­na Helmers­son on a July 1 con­fer­ence call on the company’s lat­est quar­ter­ly results. 

Such terse com­ments con­trast with fash­ion brands’ oth­er­wise high-pro­file embrace of envi­ron­men­tal, sus­tain­abil­i­ty and gov­er­nance (ESG) val­ues, reflect­ing the chal­lenge they face in uphold­ing their own human rights pledges and inter­na­tion­al stan­dards with­out jeop­ar­dis­ing a cru­cial growth mar­ket. 

That dilem­ma is height­ened by the broad­er trade and human rights ten­sions roil­ing rela­tions between Chi­na and the West. 

“They’re caught in between two big mar­kets. So they have to make a deci­sion about how they con­tin­ue to bal­ance, by say­ing one thing and doing anoth­er, or by say­ing one thing and not doing any­thing,” says Sarosh Kuruvil­la, a pro­fes­sor at Cor­nell University’s School of Indus­tri­al and Labor Rela­tions and the author of a recent book on cor­po­rate self-reg­u­la­tion in world sup­ply chains.  

Trying to serve two masters

The chal­lenge was evi­dent ear­li­er this year when brands includ­ing H&M and Nike became the tar­gets of a Chi­nese boy­cott over months-old state­ments express­ing con­cern about alleged forced labour by the Uyghur Mus­lim minor­i­ty in cot­ton pro­duc­tion in Xin­jiang. 

Reports have tied many of the world’s best-known cloth­ing brands to Xin­jiang cot­ton through their sup­ply chains or to forced Uyghur labour else­where when work­ers have been sent to tex­tile fac­to­ries around Chi­na.

The whole lux­u­ry mar­ket is going to be very depen­dent on Chi­na. It’s high­ly depen­dent now, but it’s going to be more and more in the next five-plus years

The Chi­nese back­lash against H&M, which includ­ed the com­pa­ny being dropped from major e‑commerce sites like JD.com and Tmall, led the Swedish fash­ion giant to issue a state­ment say­ing it was “ded­i­cat­ed to regain­ing the trust and con­fi­dence of our cus­tomers, col­leagues, and busi­ness part­ners in Chi­na”. 

Con­verse­ly, Indi­tex, par­ent of fast-fash­ion retail­er Zara, came under fire from West­ern activists in March after qui­et­ly remov­ing a state­ment from its site about forced labour in Xin­jiang. The activists urged the com­pa­ny to reaf­firm that none of its fab­rics use cot­ton from the region.

Seizing the China opportunity

Caught between both sides, it’s per­haps not sur­pris­ing that top appar­el exec­u­tives have turned tight-lipped on the forced labor issue. At the same time, they’ve not been shy when it comes to dis­cussing China’s mar­ket poten­tial.

“Chi­na is a pri­ma­ry focus for us. It will con­tin­ue to be. We think we can cre­ate enor­mous val­ue out of that mar­ket,” said Burber­ry CEO Mar­co Gob­bet­ti dur­ing the lux­u­ry brand’s fis­cal fourth-quar­ter earn­ings pre­sen­ta­tion in May. Its over­all 32% year-on-year gain in com­pa­ra­ble store sales was buoyed by a 50% sales jump in main­land Chi­na.

Like­wise, Ger­man fash­ion house Hugo Boss said it almost dou­bled sales in Chi­na dur­ing the first three months of 2021. CFO Yves Müller talked up the company’s plans to expand its pres­ence in Asia, espe­cial­ly Chi­na, while scal­ing back in Europe and the US in the com­ing years. 

China’s rel­a­tive­ly quick recov­ery from Covid-19 has made it all the more appeal­ing for retail­ers hard hit by the pan­dem­ic. That’s espe­cial­ly true for lux­u­ry brands, which have long cul­ti­vat­ed the nation’s surg­ing base of afflu­ent shop­pers.

“The whole lux­u­ry mar­ket is going to be very depen­dent on Chi­na. It’s high­ly depen­dent now, but it’s going to be more and more in the next five-plus years,” says David Swartz, an ana­lyst cov­er­ing the appar­el indus­try for US-based invest­ment research firm Morn­ingstar. 

Con­sult­ing firm Bain & Com­pa­ny projects Chi­na will make up 46% of the world­wide lux­u­ry goods mar­ket by 2025, up from 35% in 2019. Against this back­drop, Swartz sug­gests appar­el brands have more to lose by irk­ing the Chi­nese gov­ern­ment or con­sumers than run­ning afoul of ESG-focused investors or activists in the US and Europe. 

A low-risk investment?

Morn­ingstar unit Sus­tain­a­lyt­ics analy­ses the invest­ment risk of com­pa­nies across 42 indus­tries on ESG issues. It gen­er­al­ly rates com­pa­nies in the apparel/textile sec­tor as low-to-medi­um risk. 

Giv­en the industry’s long asso­ci­a­tion with poor work­ing con­di­tions and low wages, as well as tragedies like the Rana Plaza col­lapse in 2013, that might seem strange. But the invest­ment risk is min­imised by a lack of reg­u­la­tion, espe­cial­ly around sup­ply chains, “and the fact that many peo­ple still con­sume these prod­ucts despite their neg­a­tive impact on peo­ple and the plan­et”, explains Jes­si­ca Grant, a senior researcher for Sus­tain­a­lyt­ics. 

There are excep­tions. Grant points to the con­tro­ver­sy that arose last year over alle­ga­tions of mod­ern slav­ery at UK-based online retail­er Boohoo Group. A Sun­day Times inves­ti­ga­tion revealed evi­dence of ille­gal­ly low wages and abu­sive work­ing con­di­tions among its Leices­ter-based sup­pli­ers.

Because of sub­se­quent actions tak­en against Boohoo, such as divest­ment by Aberdeen Stan­dard Invest­ments, one of the company’s largest investors, Sus­tain­a­lyt­ics down­grad­ed Boohoo’s over­all risk score. It’s now tee­ter­ing on the cusp of “high risk”, Grant says.

A Boohoo spokesper­son says the com­pa­ny is mak­ing “great progress” on its ‘Agen­da for Change’ pro­gramme under­tak­en last year. “We are also work­ing col­lab­o­ra­tive­ly with gov­ern­ment agen­cies, NGOs and many more to dri­ve long- term mean­ing­ful change which will make a pos­i­tive dif­fer­ence  to the sec­tor and those employed in it.”

Government action heats up

To ratch­et up reg­u­la­to­ry pres­sure, West­ern gov­ern­ments have begun tak­ing steps to address Uyghur forced labour. US Cus­toms and Bor­der Pro­tec­tion (CBP) has ramped up enforce­ment of orders to stop imports of cot­ton and oth­er prod­ucts from Xin­jiang, accord­ing to a Wall Street Jour­nal report last month. 

Japan­ese retail­er Uniq­lo is among the com­pa­nies whose ship­ments were detained because they con­tained goods sus­pect­ed of being pro­duced at least part­ly by slave labour in Xin­jiang. 

Sep­a­rate­ly, the US Sen­ate in July passed the Uyghur Forced Labor Pre­ven­tion Act. The bipar­ti­san bill would ban imports from Xin­jiang on the pre­sump­tion that goods man­u­fac­tured in the region are made with forced labour, unless deemed oth­er­wise. 

They have to make a deci­sion about how they con­tin­ue to bal­ance, by say­ing one thing and doing anoth­er, or by say­ing one thing and not doing any­thing

Europe is push­ing new mea­sures as well. The EU in March intro­duced leg­is­la­tion that would require com­pa­nies in mem­ber coun­tries to con­duct due dili­gence to ensure against human rights vio­la­tions in their sup­ply chains. Nor­way passed its own human rights due dili­gence law in April, with Ger­many fol­low­ing suit in June. 

And while the UK’s Mod­ern Slav­ery Act of 2015 already tar­gets forced labour and human traf­fick­ing, advo­ca­cy groups are push­ing Par­lia­ment to pass a manda­to­ry due dili­gence law to bol­ster the exist­ing leg­is­la­tion. 

Relying on private regulation 

Appar­el com­pa­nies have long con­duct­ed vol­un­tary social audits of their oper­a­tions, but experts say this sys­tem of pri­vate reg­u­la­tion often falls short. 

In par­tic­u­lar, efforts to mon­i­tor and pre­vent labour vio­la­tions typ­i­cal­ly focus on the facil­i­ties where the final prod­uct is made. But busi­ness­es strug­gle to extend their audit­ing over­sight to ear­li­er parts of the sup­ply chain, like spin­ning mills and cot­ton farms, where forced labour is more like­ly to be per­va­sive. 

In its lat­est report on the appar­el indus­try, the non­prof­it KnowTheChain – which tracks cor­po­rate sup­ply chain prac­tices – found that just 19% of the 37 com­pa­nies it stud­ied dis­closed labour risks across the tiers of their sup­ply chains. 

Some com­pa­nies have made sig­nif­i­cant progress. For exam­ple, Boohoo announced in June that it will grow its own cot­ton in Pak­istan. Still, there is much more to do across the sec­tor as a whole.

“The sup­ply chain trace­abil­i­ty prob­lem is not some­thing that the appar­el com­pa­nies have solved,” says Kuruvil­la.  

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