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Bangladesh Factory Collapse Highlights Surprise Risks to International Retailers

A recent Bangladesh factory building collapse and its dreadful human toll revealed Western retailers are exposed to supply chain risks that perhaps they had not expected: reputation and liability.

The collapse, neither the first nor even the most recent disaster for factory workers in countries with low production costs, was the site of more than 1,100 deaths. Cracks had been seen on the outside of the building the day before the collapse and workers from several factories located in the building fled. The next day, however, they were forced back to work—then died when the building came down on top of them.

The building owner, who, along with a municipal engineer and seven others, is now facing murder charges, could face the death penalty. But retailers, too, find that they are also being held accountable, at least in some way, for the tragedy.

Even before rescue operations and the death toll were complete, international retailers who outsource garment manufacturing to Bangladesh found themselves the target of a public outcry against conditions leading to the tragedy. Their responses differed widely; some were proactive: immediately acknowledging business ties, promising to work toward better conditions, some even contributing to the victims’ families. Others denied ever outsourcing to those factories until photos of their products amid the wreckage spread across the Internet.

Bangladesh has made itself the go-to country for cheap labor. Its minimum wage is about $37 per month, drawing Western clothing companies in swarms, even as Pope Francis denounced both the pay rate and the country’s working conditions as comparable to slave labor. The government has actively pursued the garment business, aided by a large labor force and the end of production quotas that resulted in lots of new business being thrown its way because of low production costs.

Another factor keeping costs low has been growth itself, so fast that it has led to poor or nonexistent government supervision and enforcement of standards for safety in the workplace—even, perhaps, according to activists, the government’s willful ignorance of labor conditions.

The European Union, which buys about 60% of garments manufactured in Bangladesh, has also allowed the country’s clothing products favorable trade terms. This is something Bangladesh was begging the EU to continue in the wake of the tragedy, claiming that imposition of harsh trade conditions would hurt the country’s economy and result in job losses. The garment industry in Bangladesh, according to its Export Promotion Bureau, makes up some 80% of its exports.

Yet factory owners bid each other lower and lower to win shares of what has become a $20 billion business from Western retailers who have constantly sought cheaper places to produce their wares. And it shows: in the past six months, three major factory disasters—a fire in November that claimed 112 lives and another in January killing 7, and the Rana Plaza building collapse with a final toll of 1,127—have shone a spotlight on the corners cut to achieve those low rates: lax or nonexistent zoning regulations, cronyism on building permits, corruption in construction.

The spotlight has not just captured Bangladeshi factory owners and government officials who have championed or ignored lax regulations. It has spread to the corporations who do business in Bangladesh and in other low-bid countries, and is likely to be costly—even to companies that deny any involvement.

The difference in response to the tragedy was most marked between European and U.S. retailers. Many of the former were among the 25 companies that have signed on to the Accord on Fire and Building Safety in Bangladesh, which is binding for a five-year term and mandates safety upgrades to factories that could cost its signatories up to $500,000 annually for those safety improvements. The cost has not deterred such firms as Marks & Spencer, PVH, Carrefour and even Benneton, which initially denied any involvement, from agreeing to its conditions.

Many of the latter, a group that includes such giants as Walmart and Target and such high-end retailers as Nordstrom, appear more worried about liability risk than reputation risk, and have declined to sign on while declaring they will take their own steps toward ensuring worker safety. Activists have been critical, saying that voluntary standards have already been proved ineffective and that binding requirements are necessary to compel subcontractors to comply. U.S. companies, however, are concerned that agreeing to the accord will open them to liability litigation because of the mandatory nature of its provisions.

Caroline Sapriel, managing director of international risk and crisis management firm CS&A, said, “Some of the companies were faster to take a stand and call for action in response to this tragedy as a demonstration of true commitment to their CSR [corporate social responsibility].” But, she added, “Some of these companies are ‘walking the talk’ and others are hiding behind an industry shield and keeping a low profile.”

It may cost accord signatories more in the short run, since expenses for safety improvements and higher wages, agreed to by the Bangladesh government, will be expensive. Despite that, some have been very outspoken in their willingness to participate and critical of companies that have declined.

With public awareness so high, however, non-signatories pursuing voluntary measures may find in the long run that their reputations take an expensive hit, negating any benefit they may have expected from their hands-off stance to ward off potential liability lawsuits, particularly if their voluntary measures are ineffective. Calls for boycotts and public shaming through social media are beginning to take a toll, with online petitions circulating for companies to more actively involve themselves in improving the situation. And as U.S. consumers become more informed, a Harris poll indicates that as many as 39% are willing to avoid products produced in Bangladesh.

While companies on both sides of the Atlantic have already suffered reputation damage, the rapid admission of involvement and willingness to work for change by European companies could make them more attractive to both consumers and stockholders, despite that initial hit to the bottom line.

According to Sapriel, the actions required by the accord “will likely affect prices, as the [companies] will need to put resources behind these decisions, and this will be costly.” She added, “If they do ‘walk the talk,’ … it can enhance their reputation.”

That can’t be the only reason, she said, that companies take action: “But reputation only cannot be a strong enough motive to sign this agreement. It has to be about corporate values and business principles and applying common standards, whether they operate in the U.S., Portugal, Columbia, Angola, Bangladesh or China.”

 

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