NIKE COMMERCIAL DISPUTE RESOLVED

C O N F I D E N T I A L SECTION 01 OF 02 JAKARTA 002069 SIPDIS NOFORN SIPDIS FOR EAP/MTS; EB/TPP/IPE; EAP/RSP; EB/TPP/BTA; EB/TPP,PA COMMERCE FOR 4430/ BERLINGUETTE COMMERCE PASS USPTO JNESS DEPT PASS USTR FOR DKATZ, RBAE, E.O. 12958: DECL: 08/01/2017 TAGS: KCASC ASEC EINV ECON KCOR KPAO PGOV ID SUBJECT: NIKE COMMERCIAL DISPUTE RESOLVED REF: JAKARTA 01957 Classified By: Econ Officer Jonathan Alan. Reason: 1.4 (b) and (d). ¶1. (C) Summary: Nike and Central Cipta Murdaya (CCM) reached an agreement on July 31 to phase-out their business relationship over the next 24 months. The agreement includes concessions by Nike to increase the phase-out time for one of CCM,s factories to 24 months from 9 months, as well as increase the second factory to 12 months from 9 months. President Yudhoyono (SBY) thanked Ambassador Hume for his role in resolving the commercial dispute between U.S.-based Nike Corporation and their local partner CCM during the Ambassador's credentialing ceremony at the Presidential Palace on August 1. End Summary. Agreement Reached -------------- ¶2. (C) Nike executives reached an agreement with CCM on July ¶31. The agreement includes concessions by Nike to increase the phase-out time for one of CCM,s factories to 24 months from 9 months, as well as increase the second factory to 12 months from 9 months. Nike also guaranteed orders of 100,000 shoes per week per factory for the phase-out period, representing more than 80% factory capacity. In exchange, CCM would: -- acknowledge financial responsibility for factory workers; -- agree not to litigate; -- cease all public disparagement of Nike; and -- cease all illegal trade in Nike goods. Ambassador's Statement -------------- ¶3. (U) The Ambassador issued the following statement on August 1: "The U.S. Embassy welcomes the new agreement between Nike and Central Cipta Murdaya (CCM),an agreement consistent with rule of law and respect for contracts. This is a good agreement for both the Republic of Indonesia and the United States, as well as for the overall investment climate. Nike's decision to extend the phase-out period of CCM's contract is consistent with its long-term commitment to Indonesia. We thank the Government of Indonesia for its role in facilitating this agreement, in particular Investment Coordinating Board Chairman Muhammad Lutfi, who played an active role in assisting both parties to reach a beneficial outcome." Background -------------- ¶4. (SBU) Nike informed CCM on July 6 that Nike would end it's 20 year business relationship with CCM at the end of ¶2007. Nike executives explained the decision was based on CCM's inability to meet the company's minimum contractual product quality and delivery standards. CCM responded by ceasing all Nike factory production on July 16 and directing disgruntled employees to Nike's downtown Jakarta offices. The ensuing protest alarmed Nike executives, who received Embassy assistance in obtaining protection from local police and safe passage to the airport where they departed for Singapore (reftel A). Ambassador Meets Investment Chairman Lutfi -------------- -- ¶5. (C) On July 18, Ambassador Hume met with Muhammad Lutfi, Chairman of the Government of Indonesia (GOI) Investment Coordinating Board (BKPM) to discuss the dispute (reftel A). Lutfi explained that SBY was engaged in the issue and had designated Lutfi to coordinate GOI response. Lutfi promised GOI security for Nike executives if they return to Jakarta and assured the Ambassador that Nike executives would not be detained by authorities even in the event of civil JAKARTA 00002069 002 OF 002 litigation. Ambassador Hume offered to call Nike executives but reminded Lutfi that security assurances must come from the GOI directly. Negotiations -------------- ¶6. (C) On July 24, U.S.-based Nike executives, accompanied by Lutfi, flew to Jakarta from Singapore via private GOI plane to re-negotiate the terms of the phase-out agreement with CCM. The negotiations were attended by Emboff and took place at the Jakarta Ritz Carlton in rooms provided by the GOI. Lutfi mediated, moving back and forth between Nike executives and CCM, each located in suites on different floors of the hotel. After four hours of negotiation both parties met face-to-face in a hotel conference room to sign the completed agreement. However, CCM raised last minute objections and refused to sign. Ambassador Meets Lutfi (Again) -------------- ¶7. (C) On July 26 Ambassador Hume met with Lutfi at his BKPM office to discuss ways to resolve the impasse. Lutfi thanked Ambassador Hume for facilitating Nike's willingness to negotiate and for the Embassy's presence at the July 24 negotiations. Lutfi expressed surprise at Nike's generosity in the terms of the phase-out and harshly criticized Hartati Murdaya, owner of CCM, for her "nasty intentions." Lutfi conceded that GOI could not force Murdaya to sign the agreement, but promised continued "informal" efforts to encourage resolution. The Ambassador assured Lutfi of continued Embassy engagement and promised to issue a statement if a successful outcome was reached. HUME