AMERICAN APPAREL BRANDS SEEK DIALOGUE ON HONDURAN

C O N F I D E N T I A L SECTION 01 OF 03 TEGUCIGALPA 000345 SIPDIS DEPARTMENT OF STATE FOR: MMITTLEHAUSER AND SMORGAN, DEPARTMENT OF LABOR FOR: PAULA CHURCH, DEPT PASS USTR E.O. 12958: DECL: 05/07/2019 TAGS: ELAB ETRD HO KDEM ECON SUBJECT: AMERICAN APPAREL BRANDS SEEK DIALOGUE ON HONDURAN LABOR ISSUES REF: A. TEGUCIGALPA 332 ¶B. TEGUCIGALPA 69 Classified By: Ambassador Hugo Llorens, reasons 1.4 (b & d) ¶1. (U) Summary: Embassy hosted a meeting of U.S. brand name apparel manufacturers April 28 in San Pedro Sula to discuss the global financial crisis, their short-term and long-term Honduran operational plans, and responsible management of plant closings. The group unanimously expressed interest in establishing a multi-stakeholder group to share information and work together to promote corporate social responsibility (CSR),improve buyer-supplier relationships and ensure the continued competitiveness of the Honduran apparel sector. The multi-stakeholder group dialogue would include the government of Honduras (GOH),unions, NGOs, private sector firms and their affiliated organizations. All parties agreed that the group could only be hosted by a neutral party such as the Embassy. End Summary. ¶2. (C) Embassy hosted a meeting focused on responsible management of textile operations for U.S. apparel brands in San Pedro Sula (SPS) on April 28. The meeting was attended by over 20 representatives of U.S. brands including: Adidas, Aeropostale, Calvin Klein, Champion, Fruit of the Loom, Gear for Sports, Haynes, Nike, Russell, Timberland, Under Armor, Van Heusen and Wal-Mart. The meeting was closed, and all discussions were confidential. Topics included the short-term and long-term operational forecasts for each brand; experiences regarding their suppliers closing operations (some in a responsible and others in an irresponsible manner); and an introduction to the MFA Forum's multi-stakeholder dialogue initiative. (The MFA Forum is a textile and garment sector organization that promotes social responsibility and competitiveness created after the expiration of the Multi-Fiber Arrangement (MFA) in 2004. Nike was the driving force behind the meeting and the next steps to establish the working group. Its experience, learned in the 1990s when it faced similar CSR challenges, was very useful to other firms who have not faced CSR challenges. BACKGROUND -------------- ¶3. (U) Since October of 2008, the textile manufacturing sector has shed approximately 30,000 jobs due to dwindling market demand. This year, through April, over 20 textile factories have closed and experts predict more job losses. A number of these closings have been handled irresponsibly with owners closing shop and disappearing over night. Post has been reporting on the contentious closing of the Jerzees de Honduras plant (reftel) and alleged labor violations there since October of 2008. The impetus for the meeting was the spate of layoffs in the maquila sector in response to U.S. recession and controversy over the Jerzees de Honduras closure. AMERICAN BUYERS' EXPERIENCES WITH HONDURAN SUPPLIERS -------------- -------------- ¶4. (C) The Regional Manager for Philips - Van Heusen (PVH), Juan Carlos Contreras, stated that since 2002 PVH's profits have quadrupled thanks to its acquisition of Calvin Klein and Timberland, but they foresee significant consolidation in their supply chain on the horizon. PVH is optimistic about Honduras in the long-term because in its view Honduran plants respond very quickly to market changes and can produce jeans and T-shirts that are competitive with Asian-produced products. PVH,s short-term concerns include the effects of cost-cutting measures taken by its suppliers, such as reducing inventories, which can lead to delays, and other lean management techniques that lead to labor violations. ¶5. (C) Brands are often held accountable by workers, rights NGOs for labor violations committed by their suppliers. In the past three years, PVH has had two of its suppliers close, which puts them at-risk of being targeted by workers' rights TEGUCIGALP 00000345 002 OF 003 NGOs. Brands can and have put pressure on their suppliers to pay the dismissed workers by withholding payments until workers are paid, but this only works until suppliers file legal grievances to collect what they are owed. PVH described a common tactic whereby after a plant has closed, plant owners force workers to sign illegal agreements relinquishing their entitlements, simply to receive a portion of what they are owned and move on. PVH said the Ministry of Labor (MOL) does not pursue these cases because the MOL would rather workers, collect something than nothing at all while their cases languish in the inefficient labor court system. ¶6. (C) PVH stated that competition is so fierce in the textile industry that many suppliers do not set aside contingency funds for workers, severance and fringe benefits. The results are that when a factory goes bankrupt, the workers are the last to collect, and typically receive little or nothing. In one Guatemalan case, after a supplier closed, the plant,s workers were able to collect substantial amounts from the plant,s owner by threatening to bring negative publicity on the well-known Asian corporation. This would not be effective in Honduras, however, as many Honduran apparel makers are small family-owned operations that can disappear without facing the ramifications of their actions. ¶7. (C) Nike stated that it was well insulated from the global financial crisis and currently increasing its operations in Honduras because of positive long-term relationships it has established with several high-quality suppliers who respect labor regulations. Haynes Brands stated that they have had suppliers close "overnight" without any forewarning because of the owner's financial troubles caused by the current global financial crisis. Even though the brands do not own their supply chain, but simply buy the finished product they commission from the factory owners, they are often blamed for the plant closings and are vulnerable to public outcry and negative publicity that result when their suppliers close. WHAT CAN BE DONE? -------------- ¶8. (U) The discussion shifted to determining how brands can influence their suppliers in a positive manner while still maintaining the competitive advantage of sourcing their products in Honduras. The discussion began with a realization that as buyers, the brands pay for a finished product, but the suppliers are the ones who incur the capital costs and business risks associated with procuring inputs, paying workers, and financing their operations. Scarcity of financing was discussed, but most brands seemed unaware of the status of their suppliers, working capital. The consensus was that labor violations have risen as a result of increased competition and buyers procuring products at lower prices. However, many buyers cannot afford to pay higher prices because their profit margins are determined by their retailers. There was unanimous agreement that all should work toward a better buyer-supplier relationship with more trust and less policing and auditing. Consensus was reached that one way of achieving this ideal model is to begin sharing information and promote an inclusive dialogue of all interested parties. MULTI-FABRIC AGREEMENT (MFA) FORUM -------------- ¶9. (C) The MFA Forum,s multi-stakeholder committee, begun in 2005, is currently chaired by Levi,s. A number of countries (including Mexico and Nicaragua) have established working groups at the country level made up of the private sector, public sector, civil society and organized labor, which meet to discuss pertinent industry issues. Nike,s Director of Compliance for the Americas, Fukumi Hauser, participated in the meeting in SPS on April 28 and has close contacts in the Secretariat of the MFA Forum. Under the leadership of Hauser, Nike would like to form a working group in Honduras and is anticipating some form of support for these developments from the MFA Forum as well as possible World Bank monies for supply-chain trade financing and/or TEGUCIGALP 00000345 003 OF 003 entrepreneurial training programs for dismissed workers. HONDURAN MUTLI-STAKEHOLDER APPAREL INDUSTRY WORKING GROUP -------------- -------------- ¶10. (U) There was unanimous agreement that the working group could prove very useful for the American buyers, while also providing a means to renew tripartite (government, labor, and business) dialogue, which has been largely abandoned for nearly two years. The participants requested that Embassy host the working group because it is widely viewed as a neutral party. The working group's purpose would be the following: establish a dialogue to share information and work together to explore how the combined competencies of participants can improve sustainability while promoting social responsibility and competitiveness of the apparel sector in Honduras. It was agreed that the working group will engage the apparel sector at three levels: 1) to seek and sustain supply chains, and in times of retrenchment advocate for responsible transitions; 2) advance responsible competitiveness that includes labor rights; and 3) influence trade and other public policies. NEXT STEPS -------------- ¶11. (U) The group agreed that Hauser should approach the MFA Forum Secretariat to seek their interest and engagement in the Honduran multi-stakeholder group to either provide guidance or official recognition of the group as an "official" working group of the MFA Forum. The working group will base itself on the MFA Forum Framework and hopes to become a network of participants open to all who want to participate. The next group meeting was tentatively scheduled for early July of 2009, and Laboff asked participants to provide him with a list of suggested invitees. ¶12. (C) Comment: Nike representatives had many innovative ideas for the multi-stakeholder working group. They have already met with Honduran NGOs that teach entrepreneurial skills, talked to the University of San Pedro Sula about supporting its textile engineering and industrial relations programs, and established contacts with the labor confederations. Laboff will continue to monitor the situation and follow up with Nike in regards to the MFA Forum discussions. The Embassy will host the next event tentatively set for July in San Pedro Sula, and work to ensure that the group facilitates positive dialogue between the GOH, private sector and organized labor. End Comment. LLORENS