However, over recent years Nike has been the target of great criticism and accusations on their policies of employment conditions due to reports of workers receiving sub-standard wages, harassment, forced overtime and poor working conditions. Latest reports show that the minimum wage in Indonesia is currently at $33.65 per month, and Nike admit to paying their workers $33.30 a month. Nike claim that bonuses push wages above the minimum wage mark, but refuse to publish details on these bonuses. There are also claims that Nike restricts workers to form Independent Unions for better wages and conditions. Forced overtime can also occur with some employees working over 70 hours a week.
Nike’s official report show that the cost of production labour for a pair of trainers produced in Indonesia and sold at $70.00 is $2.75. This is 4% of the overall retail price which shows how Nike are capitalising and benefiting on low wage costs to maximise profits.
Globalisation:
“The conditions and consequences of financial, technological, cultural and political global interactions that are being put into place by and for National Governments and multi-national businesses”
Smart (1993)
Globalisation refers to economies being brought together through increased trade. It has 3 key aspects. 1) Increased trade flows 2) Free movement of capitol and 3) Free movement of people.
There are many factors that have facilitated Globalisation. In the scenario of Nike in Indonesia, outsourcing is relevant. This refers to the situation whereby large, established companies like Nike, shift the whole part of their production where wage costs are lower. The new locations often tend to be in developing countries. Even when companies decide to move from these countries as wages have become too high as well, the countries have often benefited because investment will have led to a rise in employment and living standards, and they have often been able to set up other industries as well. The time that multi-nationals spent at one of these developing countries resulted in a more stable infrastructure within the country. This could lead to other forms of Foreign Direct Investment (F.D.I) as all aspects of the countries conditions may have improved.
What are the costs and benefits for Nike for using Indonesia as its main producer?
The main advantage for Nike is the fact that they are able to set up factories and employ workers more cheaply than in any country in the Western world. These low set-up and running costs enable Nike to maximise profits. As the minimum wage in Indonesia is very low, Nike can legally pay workers very poor wages, again cutting down on costs. Another huge benefit for Nike is the fact that if the Indonesian economy begins to grow, become more competitive and national minimum wage increases, Nike can terminate manufacturing in Indonesia and move to more under-developed countries and begin the process again, for example in Cambodia. This is a disadvantage for Indonesia as they may have become dependant on the work and income, but an advantage for Nike as revenue will always stay at a peak due to maintaining low running costs.
One of the main disadvantage for Nike is the fact that they are setting up technically modern factories in an under developed country. All workers would need training in order to work for Nike. Even though the training is very basic, it would still be extra costs for the company to pay. I think another big problem facing Nike in their 3rd World production is the damage to their brand image. Nike has had a great deal of bad publicity due to the reports of child labour and extremely poor working conditions for their 3rd world workers. Nike has been shown up worldwide by contradicting itself on its fair human rights policies. The issue has been taken very seriously by many and there has even been an organisation set up called ‘Nike Watch’ to monitor any unfair practices that Nike may be taking part in.
How Nike answers the critics:
The following points are taken from a statement from a senior member at Nike in response to the allegation that they were exploiting their Indonesian workers;
− Nike is part of a plan that has succeeded in increasing per capita income in Indonesia by 10 times since 1970, while decreasing those living in poverty from 60% to 15%.
− Nike will generate more than $1.500 million in export sales for Indonesia.
− By supporting light manufacturing Nike contributes to the increase of workers skills, wages and capabilities.
− A skilled manufacturing base will attract more lucrative industries such as electronics.
Indonesian Infrastructure and the size of the potential market for Nike.
Nike’s presence in Indonesia in many ways acts as a positive multiplier. Nikes factories employ thousands of Indonesian workers, which raise the employment rates in Indonesia. The rise in employment means a rise in income for the Indonesian people. This would mean Indonesian people spend more money, which gets re-invested into the economy and aids growth. In this way, Indonesia benefits from this positive multiplier.
The figures above back up the growth that is taking place in Indonesia. It is clear that there is a greatly rising enrolment into education. The consequence of this would be more people entering work and higher employment rates, which would lead to higher income and more money being generated and going back to the Government aiding economic
Growth. I have also found figures that show Education expenditure has dropped from 1.7% to 1.4% between 1980 and 1996. I believe this is a result of the success that has been achieved within the education system freeing up money to be spent in other necessary areas.
With Nike aiding Indonesia’s growth they are benefiting themselves through running their factories. However, manufacturing is not the only way that Nike can benefit from Indonesia’s growing economy.
As you can see from the above table manufacturing growth has decreased over recent years while Services growth has increased. I believe that this is a result of the country’s economic growth leading to Indonesia growing in more prosperous industries that will be more profitable for the country, such as the services industry. Nike will be fully aware that as Indonesia’s economy grows the manufacturing industry will slow, as the country will become less dependant on Nike and other factories to create jobs and revenue. However, Nike will look on this not as a loss but as an opportunity. They will now view the country not as a manufacturing base but now as a potential market for selling Nike goods. This will look at the issue of ‘income elasticity of demand’. Indonesia now has a foundation on which it can grow from. Workers now have money to spend in the market for the first time. As the Indonesian people are aware of the Nike merchandise, Nike can now advertise to these people as potential consumers. This is due to the fact that as income levels rise, such products as branded goods come into peoples income range, Nike are then able to capitalise on this and sell to many millions of Indonesian people with no competition as it is an un tapped market.
Conclusions and Recommendations.
After assessing all available information it is clear why Nike choose Indonesia to be it’s main producer. Nike is able to benefit from low running costs, cheap labour and the assistance of the Indonesian Government to achieve high productivity and maximise profits with as little costs as possible. However, manufacturing is not the only aspect Nike will benefit from. Once Indonesia has become the competitive economy it is growing to become, Nike will be able to target Indonesian people as potential consumers in a un tapped market. This will give Nike great competitive advantage in the global market against other leading sports labels.
I believe that Nike now how to be careful about not letting their reputation suffer any more, as this may have a negative effect on consumer confidence in the label. I feel that Nike should make a conscious effort to rectify any miss-management and unfair labour conditions in their 3rd world manufacturing plants. If they are seen as recognising the problem and doing all they can to put it right then those consumers who have shunned Nike because of their unfair practices may become consumers of Nike products. This could increase Nike’s market share in the industry and keep them as the number one sports label.
