Case Study

Levi Strauss & Co. and China

Edwin M. Epstein
Timothy Perkins
Colleen O’Connell
Carin Orosco
Mark Rickey
Matthew Scoble

Ref. : Case Studies in Business Ethics 5th ed. Al Gini

PART - A

The market that is the people's Republic of China consists of more than 1
billion consumers and offers low production costs, but its human rights
violations have long been condemned by international bodies. In 1993 Levi
Strauss & Co. (LS & Co.) faced one of its more difficult decisions in a long
corporate history. Would it continue to conduct business in this enormously
promising market or honor its relatively high ethical standards and withdraw?

Levi Strauss: History and Ethical Stance

Founded in the United States in 1873, LS&Co. enjoyed consistent domestic

growth for generations and began overseas operations during the 1940s. The
company became the world's largest clothing manufacturer in 1977 and
achieved $2 billion in sales by the end of the decade. Having offered stock to
the public during the 1970s to raise needed capital, management decided
fourteen years later to reprivatize in a $2 billion leveraged buyout, the largest
such transaction to date. Management's reasons included its heightened ability
to "focus attention on long-term interests (and)… to ensure that the company
continues to respect and implement its important values and traditions." By
1993, LS&Co. Produced merchandise in 24 countries and sold in 60.

LS&Co. has been a leader among U.S.-based corporations in recognizing the

importance of business ethics and community relationships. Two 1987
documents developed by management summarize the unique values operating
at LS&Co. The Mission Statement… affirms the importance of ethics and social
responsibility, while the Aspirations Statement… lists the values intended to
guide both individual and corporate decisions.
CEO Robert Haas frequently explains the importance of the Aspirations
Statement as a way employees can realize the company Mission Statement and
otherwise address factors that did not receive adequate consideration in the
past. Efforts to take the values seriously have led to specific changes in human
resources policies and practices. For instance, LS&Co. extends liberal domestic
partner benefits, offers flexible-work programs, and has established child-care
voucher programs. A series of classes for senior managers focuses on the
Aspirations Statement. The company has also earned a reputation as an
industry leader in facing controversial social issues. It was one of the first
companies to establish programs to support AIDS victims.

In 1990, the company closed a Dockers' plant in San Antonio, Texas,

transferring production to private contractors in Latin America where wages
were more competitive. LS&Co. provided a generous severance package for the
laid-off workers that included 90-day notice of the plant closing and extended
medical insurance benefits. LS&Co. also contributed $100,000 to local support
agencies and $340,000 to the city for extra services to the laid-off workers.
Despite these efforts, the company received serious criticism for relocating the
plant.

Ethical Standards for International Business

In early 1992, LS&Co. established a set of global sourcing guidelines to help

ensure that its worldwide contractors' standards mesh with the company
values. A group of 10 employees from different areas of the company spent nine
months developing the guidelines. The group used an ethical decision-making
model that ranked and prioritized all stakeholders to help design the
guidelines. The model examines the consequences of each action and suggests
a decision based on a balance between ethics and profits.

The ensuing guidelines, "Business Partner Terms of Engagement"… cover

environmental requirements, ethical standards, worker health and safety, legal
requirements, employment practices, and community betterment. Contractors
must: provide safe and healthy work conditions, pay employees no less than
prevailing local wages, allow LS&Co. inspectors to visit unannounced, limit
foreign laborers' work weeks to a maximum of 60 hours, and preclude the use
of child and prison labor.
In addition, the company established "Guidelines for Country Selection"…
These guidelines cover issues beyond the control of one particular business
partner. Challenges such as brand image worker health and safety, human
rights, legal requirements, and political or social stability are considered on a
national basis. The company will not source in countries failing to meet these
guidelines.

The question would soon be raised: Does China meet these guidelines

Human Rights and Labor Practices in China

China is ranked among the world's gravest violators of human rights, although
Chinese officials do not regard their actions as such. The U.S. State
Department says that China's human rights record falls "far short of
internationally accepted norms." Two more egregious violations include
arbitrary arrest and detention (with torture that sometimes results in death).
Despite laws prohibiting arbitrary arrest and providing limits on detention, a
commonly referenced clause states that family notification and timely charging
are not required if such actions would "hinder the investigation." Judicial
verdicts are believed by many observers to be predetermined.

Chinese prison conditions are deplorable, and a long-standing practice holds

that all prisoners, including political, must work. Chinese officials say that the
fruits of prison-labor are used primarily within the prison system or for
domestic sale.

Personal privacy is severely limited in China. Telephone conversations are

monitored, mail is often opened and examined, and people and premises are
frequently subjected to search without the necessary warrants. China has also
engaged in forced family planning, with monitoring of a woman's pregnancy
occurring at her place of employment. Official rights to free speech and
assembly are extremely restricted, as the world witnessed during the
Tiananmen Square massacre in 1989.

Regarding labor conditions, China's leaders have refused to ratify the 10

guidelines prohibiting the use of forced labor for commercial purposes
established by the International Labor Organization Convention. Although
China has regulations prohibiting the employment of children who have not
completed nine compulsory years of education, child labor is widespread,
especially in rural areas. Surveys show a recent increase in the dropout rate
among southern Chinese lower-secondary schools, presumably because the
booming local economy lures 12-16-year-olds away. At the time of LS&Co.'s
deliberations regarding China, no minimum wage existed and safety conditions
were found to be "very poor."

LS&Co. in China

This combination of government practices and labor conditions increased

pressure within LS&Co. to rethink its decision to operate in China. In 1992,
operations in the country generated some 10 percent of the company's total
Asian contracting and 2 percent of worldwide contracting. Its Chinese
operations produced approximately one million pants and shirts in 1993 and
operated directly or indirectly through some 30 Chinese contractors. Over one
half the goods produced in China were shipped to Hong Kong to be refined for
sale in other countries. These contracts were estimated to be worth $40
million.

LS&Co. is only one of thousands of foreign firms operating in China. The other
companies, especially prominent Fortune 500 companies with factories or
manufacturing contracts in China, are cognizant of the human rights and labor
conditions. Most of these companies lobbied President Clinton to renew China's
Most Favored Nation (MFN) trading status, arguing that the continuing
presence of U.S. companies would have a positive influence on reform.
According to this viewpoint, investments made by companies such as LS&Co.
could transform working conditions and thereby accelerate movement toward
the social, economic, and political standards favored by the United States and
other western countries.

Should Levi Strauss Stay or Leave?

In assessing the objectionable conditions in China, LS&Co. management felt it

could not improve the situation because the violations were well beyond what
could be remedied strictly through company communication and cooperation
with contractors. At issue were practices that had to be addressed on a larger,
national scale.

Leaving the country would expose LS&Co. to the high opportunity cost of
foregoing business in a large emerging market. Some managers and employees
felt the company would be supporting a repressive regime if it remained in
China, while others argued that LS&Co. is a profit-making business enterprise,
not a human rights agency. This latter group saw as positive management's
acknowledged responsibility to society, but it felt the company also needed to
consider its responsibilities to shareholders and employees. Some employees
argued that staying in China would enable LS&Co. to improve conditions for
Chinese citizens. But other stakeholders countered that remaining in China
would violate the company's own guidelines about where it would and would
not conduct business.

Important issues that complicated the decision include: the possibility that
China might not accept LS&Co. back if the company left until conditions
improved. If the company ceased production in China, it might be difficult for it
to sell product there due to high tariffs imposed on imported apparel. But,
some voices argued, continuing to manufacture in China would have a
damaging impact on Levi's reputation possibly putting at risk its valuable
brand image.

PART - B

To address the many issues regarding LS&Co.'s continued operations in China,

the company organized a China Policy Group (CPG). Composed of 12 employees
who together devoted approximately 2,000 hours to reviewing the China
situation, the CPG consulted human rights activists, scholars, and executives
in its attempt to fully address the critical issues.

The group examined all the issues highlighted in Part A and found itself divided
on the question. In March 1993, the CPG delivered a report to LS&Co.'s
Executive Management Committee. On April 27, after a half-day of
deliberation, this most-senior management group remained undecided over
what to do.

Robert Haas Acts

Confronted by the indecision of the Executive Management Committee,

LS&Co.'s CEO and Chairman, Robert Haas, ended the stalemate by
recommending the company forgo direct investment in China and end existing
contracts over a period of three years due to "pervasive violations of basic
human rights." He maintained that the company had more to gain by
remaining true to its ideals than by continuing to produce in China.
Reactions to the Decision

LS&Co. did not publicly announce its decision, but the news hit the airwaves
with a speed and volume that surprised all involved. John Onoda, LS&Co.'s
vice president of corporate communications, explained: "We never intended to
get in the spotlight… It was leaked and got out in 20 minutes."

Many people were highly skeptical of the company's stated intentions. Some
asserted it was only a public relations ploy engineered to make the company
look good. "I don't see broad support of it," claimed Richard Brecher, director of
business services at the U.S.-China Business Council. "[It] would be regarded
much more seriously if Levi's had made a direct investment in China."

In one respect, Brecher is right. The company did not directly invest in China;
it produced its merchandise through Chinese contractors. In fact, on the sales
side, LS&Co. jeans continue to sell in China through Jardine Marketing
Services. Moving production contracts to other countries in Asia raised costs
between four and ten percent, depending on which location was chosen.
LS&Co. recognized this cost and considers it the price it must pay to uphold its
integrity and protect its corporate and brand images.

Vice President Bob Dunn explained, "There's the matter of protecting our brand
identity. Increasingly, consumers are sensitive to goods being made under
conditions that are not consistent with U.S. values and fairness." Linda Butler,
director of corporate communications for LS&Co., iterated this sentiment when
she affirmed that it was "better for us to honor our company's values." Some
even believe that the decision may ultimately prove profitable to the company.
As one person claimed, "In many ways, it strengthens the brand…. This is a
brand that thinks for itself, and these are values which people who buy the
brand want for themselves. They're a badge product for youth who want to say
'I'm different.'"

Impact in China

China's leadership showed no interest in the company's decision. One Chinese

foreign ministry official was quoted, "At present there are tens of thousands of
foreign companies investing in China. If one or two want to withdraw, please
do." Coincidentally, the LS&co. decision-making process occurred as the
United States considered extending China's MFN status. U.S. Trade
Representative Mickey Kantor voiced his support for LS&Co. by stating, "As far
as what Levi Strauss has done, we can only applaud it; we encourage American
companies to be the leader in protecting worker rights and worker safety and
human rights wherever they operate."

More recently President Clinton renewed China's MFN trading status without
requiring steps to improve human rights. Clinton explained, "I believe the
question… is not whether we continue to support human rights in China, but
how we can best support human rights in China and advance our other very
significant issues and interests. I believe we can do it by engaging the Chinese."

The position of the Clinton administration is that the United States should
continue trading with China and hope that economic involvement will
contribute to improvement in the conditions of Chinese citizens. As one might
surmise from the case, LS&Co. takes a different position.

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