Operations Management

ournal of Business Ethics Education 4: 135-146. © 2007, Senate Hall Academic Publishing.

Attacking the Roots: Shiraishi Garments Company and an Evolving Thicket of Business Ethics in China Bin Jiang and Patrick J. Murphy Kellstadt Graduate School of Business, DePaul University, USA

Abstract. This case examines management underpinnings of conducting socially purposeful business in contexts where the labor conditions and ethics are questionable. Shiraishi Garments Company was a Japanese entrepreneurial venture in the clothing industry that evolved into a highly successsful multinational company. After its supply chain had extended into China, some ethical labor issues emerged. The decision point is focused squarely on the company’s CEO, who must deal with conflicting forces stemming from his personal values and professional responsibilities. In exploring the issues, the case illustrates business risks of superficial standards auditing of international operations. The case also describes how multinational firms are often part of the problem and the solution when it comes to ethical labor issues. On these grounds, the case study reveals some alternative approaches to the audit model based on more meaningful partnerships. Implications pertain to successful and ethical supply chain relationships between foreign entrepreneurial firms and the developing economic systems they enter.

Keywords: operations, entrepreneurship, supply chain, international, China, labor conditions, safety.

1. Introduction

Takashi Shiraishi stared out his office window, watching reflections of a hazy afternoon sun shining on Tokyo Bay. The date was February 9, 2005. Since early the year prior, Shiraishi Garments Co. (SGC) had begun outsourcing its whole production capacity to China in order to dramatically increase its profit margins. As SGC’s President, Takashi saw the immediate benefit of such outsourcing to his bottom line. But operations were vastly different in China. Some ethical issues had emerged related to the health and safety of Chinese workers. Some disturbing accidents had occurred in the manufacturing facilities. These events had long concerned Takashi for reasons that were personal. But now the reasons were also becoming business-related. As a consumer products company dealing in clothing and apparel, SGC needed to maintain its positive reputation: business success depended on its brand. Takashi was increasingly certain he was going to have to make a tough strategic management decision to resolve the tradeoff between ethical business operations and being a highly profitable multinational company.

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136 Attacking the Roots

Japanese firms had wrestled with public trust for several years, especially since the Snow Brand milk poisoning episode in 2000. That was when over 13,000 consumers became seriously ill. Cheap labor, albeit domestic, was reported as the reason. Yet, Japanese companies were still moving operations into other countries for more cheap labor, which was also increasing the level of domestic Japanese unemployment. Some of these companies were taking steps to demonstrate concern for international employees with a strong commitment to corporate citizenship. SGC also worked hard to improve labor conditions in its Chinese supply chain. For instance, when local suppliers were reluctant to make the financial investments for first aid training in factories, SGC paid for the initial sessions. Soon thereafter, the Chinese partners saw less time lost due to injuries and began to embrace first aid training. Later, two major suppliers also began to use the same first aid training and noted the same benefits. Although the direct costs were absorbed by SGC’s bottom line, Takashi undertook additional similar initiatives, such as the production of a first aid handbook and posters with information about hazardous substances. But it never seemed to be enough. The entire issue was like an evolving thicket of conflicting forces. Takashi realized he was going have to do more than just trim the branches.

2. Finding the Roots

As Takashi gazed at the setting sun, he pondered some more ideas to boost healthier workplace practices. For example, reducing the long working hours and increasing worker compensation throughout its Chinese operations. But such an initiative would seriously affect SGC’s bottom line. Quite simply, outputs would reduce drastically because less hours were worked per employee. Although focusing on health and safety might help SGC’s reputation, lower revenues did not make business sense, especially in the short term. But accepting the status quo was not necessarily less risky either: SGC’s supply chain was showing cracks due to Chinese labor force dynamics. For example, he considered the Chinese workers churning out lady’s brassieres for Ginza, the famous shopping district in Tokyo. Those employees were growing miserable while working in factories where security guards kept them behind locked gates and taking a bathroom break for longer than a minute was fineable offense. Employee turnover rates in two of these particular suppliers exceeded 100%. It was becoming impossible to recruit enough employees to maintain production. As a result, SGC orders were increasingly not being filled on time. Takashi found it unbelievable that production demands were so great that a labor shortage was emerging in the world’s most populous nation.

Another option, suggested by SGC’s Board of Directors, was to withdraw operations from China. SGC could enter other Southeast Asian countries such as Vietnam and Laos, where more cheap labor was available and there was not a

Journal of Business Ethics Education 4 137

growing emphasis on labor conditions. Takashi rejected that option. He was a staunch proponent of the Japanese ideal of Kyosei, which had been embraced by international bodies such as the Caux Roundtable.1 Just as the Kyosei ideal emphasizes economic and social development, Takashi believed economic survival was not the true goal of SGC. Rather, he wanted SGC to play a role in improving the lives of its customers, shareholders, and employees. In the case of China, therefore, he wanted SGC to contribute to the human rights, welfare, and education of Chinese people.

It was now past dusk. The running lights of cargo ships headed out to sea through the Uraga Channel were visible, and the Tokyo Aqua-line bridge was illuminated. Takashi resolved to make the right strategic decision for SGC before the month of March, in just 19 days. But he did not know where to start. He did not want to lose the competitive advantage of outsourcing to China, and he refused to exploit the labor force. He wanted SGC to maintain the reputation of a company that cared about its employees. This puzzle of how to keep making money in China while emphasizing more ethical business operations was driving him mad. Takashi knew he was not going to solve this puzzle by looking out the window. He vowed to act as quickly as possible. He strode to his desk and picked up the telephone.

3. SGC’s Background

Japan has one of the biggest and most sophisticated apparel industries. When it comes to fashion, the Japanese taste in clothing is among the most particular in the world. For centuries, the most cherished possessions of Japanese women have not been silver, gold or any kinds of precious stones. Instead, it has always been the lush rich colors and the perfect fit of their kimonos. Much more than other cultures, clothing signifies worldviews, personal tastes, and sensibilities in Japan. Although many contemporary Japanese live in plain apartments, most have a strong willingness to spend considerable sums of money on fashionable, stylish clothing. This aspect of the market environment underlies SGC’s niche.

Takashi Shiraishi established SGC in 1978 after watching a news report on television. The oil crisis was hitting the economny hard that year, leading the Japanese government to announce and publicize the “energy suit”. The energy suit was a short-sleeved safari outfit designed to allow companies to save expenses on air conditioning. The idea was a total failure however, because although a few ministers wore energy suits for a week or two, nobody would dare to wear one to the office. Takashi’s recognized his entrepreneurial opportunity when the news reporter said,

1. The Caux Roundtable Principles were developed in 1994 by business leaders interested in ethical and responsible corporate behavior as a foundation for business worldwide. See www.cauxroundtable.org

138 Attacking the Roots

The businessman puts on the darkest suit he owns, a white shirt, sober tie, and that is what he wears in Japan, no matter what the temperature is outside. The Japanese find this rigidity comforting, as it eliminates the nerve-racking necessity of making choices.

A recent art school graduate, Takashi believed such conservative dressing habits created a real venture opportunity: introducing customization into the drab business attire market. He believed differences in taste, preference, and lifestyle mattered significantly to customers, even to those in the same age demographic. Thus, the purchasing patterns were diversified. He eventually opened a men’s clothing shop in a Tokyo department store. Even though the small shop offered products in conservative colors such blue, gray, brown and black, there were other options besides drab suits and neckties. Based on skin color, hair style, and other characteristics, Takashi helped customers select colors, accessories, styles, and shapes for tie knots. He became a master at making customers feel special and important. Such personal attention made all the difference. Customers absolutely enjoyed that SGC took such interest in their appearance.

4. The Growth of SGC

As SGC grew, the clothing designs were transferred to sewing subcontractors in the Tokyo suburbs. SGC usually ordered smaller quantities with more designs whereas other retailers ordered larger quantities and fewer designs. Although it was easier to fill orders for other retailers, the subcontractors were more interested in SGC. As all the retailers wanted low prices and high quality from sewers, business relationships changed frequently because of price wars. Yet, the relation SGC had with its sewing subcontractors remained strong. SGC made detailed reports on defects and also gave advice about how to improve quality and production. SGC shared customer comments and fashion forecasts, too, so subcontractors and suppliers could keep pace with the market.

On average, within two weeks of an order customers would receive customized garments from SGC. The clothes arrived at the customer’s home, and sometimes delivery personnel even showed customers how to wear the clothing correctly. Then they would visit the customer ten days later to see if everything was going well. Customers thus felt sense of obligation to SGC, which would always be there should the clothing require service or repair.

The customer-oriented strategy combined with supplier relationship management were successful and good for business. SGC’s garments were only 15% higher than ready-made ones, but with SGC consumers were able to choose from more than 10,000 unique style permutations. The SGC brand quickly became synonymous with quality and prestige. During the 1980s, when the Japanese economy was booming, SGC was a medium-sized but prestigious brand.

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However, by 1991, its annual sales for eleven retail outlets had skyrocketed to exceed 22 billion yen.

5. SGC Tightens Its Belt

As the 1990s progressed, economic globalization and an aging population dramatically changed the Japanese apparel industry. Rather than purchasing completely designed garments, the new generation purchased items from several different shops, mixing them freely to match their flighty sensitivities. Young shoppers displayed a strong tendency to buy clothes at select shops near railway stations and fashion-specific commercial districts rather than conventional department stores, which were more sophisticated but also more traditional. There was also a new casual style trend for male consumers. Perhaps a general disillusionment with the “salary man” lifestyle made a more laid-back attitude seem attractive. Simultaneously, the Japanese economy entered its “ten lost years” once the real estate and stock market bubbles burst in 1990. Japanese consumers lowered spending on clothing by making fewer purchases and preferring lower-priced items. As such, from 1991 to 2004 the percentage of household clothing expenditures decreased every single year.

The Japanese male clothing market was becoming more fashion-oriented but commodity-driven. SGC’s customized business attire did not meet this trend well. Since the late 1990s SGC had been struggling with shrinking sales and profit margins, as shown in Table 1. At some point, Takashi recognized that he had to cut costs to survive. That point, in 2004, was when Takashi took steps to outsource SGC’s sewing operations to Chinese companies.

Table 1: Shiraishi Garments Company. Financial Highlights (yen, in millions)

Source: SGC internal documents

March 31year-end 2000 2001 2002 2003 2004

Sales 236,225 232,819 221,781 215,822 189,313

Operating income 17,661 14,032 15,275 12,910 12,872

Net income 7,266 6,026 5,049 4,567 4,347

140 Attacking the Roots

6. Chinese Allures and Challenges

In 2004 the whole business world was already watching the Chinese economy. The reality of 1.3 billion potential consumers and low labor costs were attractive to American, European, and Japanese companies. Shelves around the world were stacked with low-cost goods churned out by China: the world’s workshop and fourth largest economy. Its highest volume products were clothes, toys, and technology appliances (e.g., DVD players). The national minimum wage had increased by 30%. In the poor inland areas, where most migrant laborers come from, more young people could find jobs near their hometowns. As a result, when exporters near the coast had poor working conditions, migrant labors would be less likely to go there for work. Unbeknownst to foreign companies, labor conditions wer emerging as an important factor in the national labor market. Once China joined the World Trade Organization (WTO) in 2001, its attractiveness as a manufacturing center increased further. The World Bank then estimated that China would account for half of world textile manufacturing by 2010.

Takashi had conducted his own research in the China as a production solution for his business. Table 2 shows Takashi’s 2004 data, which revealed that China was not the cheapest place to outsource. However, Takashi believed personally that the criteria for the best place to manufacture were not so straightforward. Right now, the place was China because of low labor costs as well as the tremendous foreign direct investments in its textile and apparel manufacturing industries. Indeed, those industries were growing fast, and the rising productivity of Chinese high-tech sewing facilities were outpacing anything else the world had ever seen. Takashi visited several “supply chain cities” and was utterly impressed that everything needed to manufacture garments existed in a single location. Many Chinese vendors were located within the supply chain cities. Factories were located near textile mills and other suppliers of various components. From a business perspective, ahen considering the factories, political climate, time, fabric availability, human resources, infrastructure and speed to the Japanese market, Takashi was sure China was preferable to other Asian countries. He wanted to play a role in the positive development of China. From a personal perspective, and based on the historical context of Japanese and Chinese culture in southeast Asia, he saw a particular opportunity with China. His personal interest in making a contributions to innovation, trust, and world community called for him to embrace an ethical leadership role that might be especially appreciate by Chinese manufacturers.

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Table 2: Hourly rates for sewing laborers in Asian urban regions

Source: Cal Safety Compliance Corporation (CSCC)

7. Chinese Manufacturing Practices

Takashi noticed the salary rate in Chinese coastal areas was four times higher than in China western regions. Many labors thus had left rural poverty in the countryside for the new factories along the coast. As the 2004 Chinese New Year approached, Takashi was surprised to see that up to 120 million migrant laborers filled roads and railways to reunite with families in countryside. This large migration helped keep wages low. Migrant laborers were a cheap and compliant work force who had attracted much foreign direct investment and ensured the viability of millions of domestic businesses. However, Chinese prosperity had been achieved through their exploitation. In the Pearl River Delta, for example, one local vendor in SGC’s new supply chain told Takashi, “There are many girls with good eyes and strong hands. If we run out of workers who will accept our current wages, we will go deeper into the hinterland and recruit new workers.” In that vendor’s factory workers were earning basic monthly wages of $37 and worked 16 hours per day, seven days per week. These realities troubled Takashi.

Low wages and poor labor conditions were the dark side of cheap labor costs. Domestic China policy had not yet addressed them effectively as of 2004. Takashi saw that state-owned enterprises, although not productive or profitable, treated workers fairly well. At the same time, private sector companies were exploiting migrant labor, mostly young females. At the very root of the problem was the failure of local government to address the issue. He recounted in his journal, “The local authority’s priority is to attract foreign direct investment, and

Country Rate ($/hr)

Laos 0.04

China (mainland / inner) 0.12

Vietnam 0.12

Sri Lanka 0.14

Bangladesh 0.19

Pakistan 0.23

India 0.25

Indonesia 0.42

China (coastal) 0.48

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