Manufacturing: The Burden of Good Intentions

Two rickety ceiling fans stir the stale air in a cramped room in New Delhi where 10 men hunch over bright fabrics, sewing shorts to be sold overseas. "I get paid 24 rupees [56 cents] for every piece I stitch," says 31-year-old Amjad Ali. "But I'm sure it's very expensive when it sells abroad." Ali works a lot of overtime at this garment subcontractor, with no holidays, yet he can still barely support his wife and son.

In another Delhi neighborhood, Sami Alam, 8, tells of escaping earlier in the week from a sweatshop where he'd worked as a cook for nine months. His parents had sent him to Delhi from his native Bihar, in exchange for cash. "I didn't know how to cook, so the owner would beat me," he says, showing scars on his frail arms.

Western multinationals have been trying for years, with mixed success, to stamp out such scenes. In the 1990s, a series of scandals showed the damage that could be wrought if a brand was linked to shoddy labor practices overseas. For example, in 1996, it was alleged that a Wal-Mart clothes label endorsed by American TV personality Kathie Lee Gifford had been produced using child labor in Honduran sweatshops. Gifford sobbed on air, saying she hadn't been aware of conditions at the factory. For corporations and consumers alike, it brought home the realization that globalized production comes at a price: the cheap labor that lured multinationals to developing countries often goes hand in hand with less appealing hallmarks of developing nations — harsh working conditions and unenforced labor laws. Governments in most developing nations weren't monitoring conditions, so Western firms found themselves "held responsible for problems they didn't really know existed," says Daniel Viederman, executive director of Verité, a U.S.-based NGO that investigates workplace conditions globally.

In response, companies scrambled to put together codes of conduct and teams of auditors. Bigger firms either set up their own monitoring departments or hired auditing firms to check up on their overseas factories. Gap, the U.S.-based retailing giant, now has a staff of about 90 overseeing working conditions in factories that supply its clothes, and last year it conducted 4,927 inspections in 1,879 factories worldwide. Such initiatives are part of a much broader effort by Western firms to embrace the tenets of corporate social responsibility (CSR). Annual reports today glow with descriptions of companies' attempts to be green, fair and transparent — partly because it's good p.r. and offers protection against reputational risk, partly because executives know it's the right thing to do. But even with the best of intentions, living up to CSR's high-minded ideals is proving extraordinarily hard in countries like China and India that are at the heart of global manufacturing.

Nowhere is the struggle more apparent than in China, where many factory owners and some less reputable audit consultants have figured out dodges to get around auditors. On one Chinese-language website, factory bosses swap tips and ask questions such as: "Is it really a must to bribe auditors in order to pass audits?" The response: "You must first raise the standards of your falsified documents. Otherwise, auditors might not dare to take money from you."

A shadowy industry has sprung up in China in recent years that caters to factory owners anxious to disguise breaches of clients' codes of conduct — illegal overtime, say, or a lack of fire extinguishers on the factory floor. Unscrupulous consultants offer quick fixes before a factory is audited; for a price, they can even pose as a fake management team to convince auditors that a sound leadership structure is in place. Factory owners can also buy computer software that presets the times when workers punch in and out, so no illegal overtime shows up on time cards. Lower-tech tactics, employed across Asia, include keeping double books, coaching workers on correct answers for auditors and paying bonuses to reward workers for passing audits. "It's like a nuclear arms race," says Ian Spaulding, managing director of Infact Global Partners, a compliance consultant and former director of global compliance for a large U.S. retailer. "The auditors do one thing, so the factory does another thing."