Retailers' dilemma: To axe or help fix bad factories

Apple CEO Tim Cook laughs during a Senate homeland security and governmental affairs investigations subcommittee hearing on offshore profit shifting and the US tax code, on Capitol Hill in Washington, on May 21. Photo: Reuters

When seemingly preventable disasters strike factories in developing countries, many retailers such as Wal-Mart Stores Inc. react the same way: by pulling their orders or threatening to cut off factories that don't meet their safety standards.
By contrast, H&M -- the biggest buyer of clothing from Bangladesh's $20 billion garment industry -- has taken a highly public role in pledging to work with factories to improve their standards.
After a series of deadly factory fires in Bangladesh and last month's factory collapse, which killed more than 1,100 people, Wal-Mart has publicly blacklisted about 250 Bangladeshi suppliers found to have safety problems.
Walt Disney Co. told its licensees in March that they could no longer produce Disney-branded goods in Bangladesh after boxes of Disney sweatshirts, bound for Wal-Mart, were found at the site of a major factory fire in December. Wal-Mart said it didn't know its goods were being produced at the plant, which wasn't authorised to make them.
Supporters of the stay-and-fix-it approach say it encourages retailers to play a more-active role in lifting standards, increasing the odds factories will fall in line. "The easy thing is to withdraw," says Viveka Risberg, the head of Swedwatch, a nonprofit group involved in developing countries.
But even backers of the fix-it approach admit it has its limits. Retailers can't catch everything that goes on in factories or fully track their suppliers. H&M has continued to face problems elsewhere, including in Cambodia, where the collapse of a rest area last week hurt more than 20 at a factory that was making H&M clothes without its permission.
Other critics say H&M parent Hennes & Mauritz AB had no choice but to double down on Bangladesh because the garment volume it requires from there is so big. Earlier this month, H&M was the first major label to sign a new industry pact, updated after last month's catastrophe, to tighten safety standards in Bangladesh.
H&M is "better than other buyers but still needs to do more if it wants to be effective," says Rashadul Alam, joint secretary of the Bangladesh Independent Garment-Workers Union Federation. More pressure on factory owners by buyers is the only effective means of prompting change in the industry, he said, since the government is loath to take on wealthy and politically connected factory owners.
A key test of H&M's approach is under way at a Dhaka-area factory owned by Garib & Garib Co., a sweater supplier for H&M that was the site of a 2010 fire that killed 21 people. H&M has been the company's biggest client since soon after its five-story factory was inaugurated more than a decade ago, its owner said, but H&M's earlier efforts to prevent workplace accidents there failed.
In the fall of 2009, H&M's auditors dropped in on Garib and found fire extinguishers had been covered, a safety violation that the retailer says was fixed on the spot. Nazmul Haque Bhuiyan, the owner, says the fire extinguishers weren't covered.
But such safety controls didn't prevent a fire from breaking out in February 2010. A short circuit on the first floor set the building on fire—an accident that H&M said couldn't have been detected by an audit. Twenty women and a male supervisor died of inhaling noxious fumes from burning acrylic yarn, according to Bhuiyan.
Garib & Garib closed for six months. Bhuiyan says he borrowed $900,000 to make repairs and change all the wiring, and still has $2 million of debt from costs related to the fire. He said H&M contributed compensation for the victims of the fire, something the company confirmed. H&M declined to comment on Bhuiyan's account that he had to pay for all the repairs.
Several buyers left Garib or declined to take delivery of orders after the fire, Bhuiyan says, without naming the retailers. But H&M stuck with the company, stepping up oversight while maintaining the same volume of orders as before the accident, accounting for 70 percent of Garib & Garib's business.
After the factory opened again, H&M began making two unannounced visits a month, up from one a month before the fire, with the most recent last week, Bhuiyan said. He said he also got an email from H&M recently informing him his factory would undergo a fresh fire inspection as part of fire-safety checks H&M is conducting on all its factories in the country, and that the company would split the cost.
Other factories in Bangladesh say they have benefited from H&M's more-flexible approach. DBL Group, which owns several factories and has worked with both Wal-Mart and H&M, says H&M gave one of its factories more time to resolve complaints of overtime violations and worked with the company to fix them, while Wal-Mart ultimately cut that factory off. Mohammed Abdul Quader Anu, a director at the company, said it was able to use the extra time from H&M to cut working hours for some employees, which it achieved in part by offering bonuses to teams that were more productive during regular work hours.
Labor group leader Babul Akhter said that Garib & Garib and DBL Group are now among Bangladesh's better factories, particularly when it comes to physical safety, though some issues relating to leave and annual salary increases remain. Both plants say they meet compliance requirements for working hours and pay.
Wal-Mart said it stands by its zero-tolerance policy to automatically cut ties with suppliers that violate its safety standards or engage in unauthorised subcontracting. "Our message is loud and clear to our suppliers that we don't tolerate such behaviour and we are not backing down from it," said Rajan Kamalanathan, Wal-Mart's head of ethical sourcing. "Suppliers may try it, but as soon as we know what they have done, they will no longer work with Wal-Mart."
Even if Garib & Garib and DBL are making progress, to be sure, they are only two of the more than 166 factories H&M says it uses in Bangladesh.
Boosting standards at factories H&M and other major retailers work closely with, meanwhile, is only part of the solution. It doesn't cover the scores of other factories that sometimes wind up with retailers' orders after authorised factory owners subcontract the deals to other, unapproved manufacturers. Retailers say the factories often do this without their knowledge.
In the case of the recent Cambodia accident, in which a relaxation shelter fell into a pond, an H&M supplier redirected the order to the factory without H&M's permission—a violation of its code of conduct, the same one it applies in Bangladesh. "We can never guarantee that a supplier doesn't subcontract an order to a factory that is not approved," says Maritha Lorentzon, H&M's Social Sustainability Coordinator. "But the more presence you have in a country, the greater overview you have."
Bhuiyan says he is convinced H&M is serious about improving factories, but he says their flexibility does have a limit. The firm has warned him that there can be no second chances at Garib & Garib, he said.
"They say, 'Be careful Nazmul. If I get one chance I'll put you out,'" said Bhuiyan.