Private-sector dynamism in development cooperation
The PPP programme of GTZ
Better working conditions in Asia
A review of PPP from the vantage of the participating private sector
Agreement and dissent
Good prices are not enough
A PPP project ensuring better working conditions at Asian suppliers
By Karsten Schütt
Shoe retailer Deichmann was one of the first German companies to establish a PPP with GTZ to improve social standards in developing countries. Managing director Karsten Schütt reports on how that cooperation worked.
Long before expressions like 'corporate social responsibility' and 'corporate citizenship' became buzzwords in the international debate, a number of companies in the Western world started on their own initiative to help improve social standards and working conditions in the producer countries outside Europe. One of those companies was Deichmann, which, like most of the others, started by incorporating the relevant internationally recognised social standards (based on the conventions of the International Labour Organisation (ILO) and the Social Accountability Standard SA 8000 created by cooperation between trade unions, NGOs and employers) into their general purchasing conditions. Suppliers were asked to comply with social standards. Today, it is fair to say that those non-compulsory arrangements alone would not have made much difference in producer countries like China, India and Vietnam.
So in 1999, together with the German technical cooperation organisation GTZ, Deichmann initiated a project designed to lay foundations that would really make for long-term improvements in working conditions at Asian suppliers. The aim was to introduce social and environmental standards at selected companies in the Indian footwear industry. What made the cooperation possible was the private-public partnership (PPP) programme of the German development ministry BMZ. Within the framework of that programme, Deichmann was able to get together with experienced public partners and plan, organise and finance a project which offered better prospects of long-term success and really helped change conditions for the better for the people concerned.
A company with a social conscience
Our decision to commit resources in this way did not come out of the blue: it is rooted both in the company's social conscience and in its success.
For one thing, the company looks back on decades of promoting causes other than its own through the Deichmann trusts. The family that gave the company its name launched aid projects for the homeless in Germany, for example, and for leprosy and TB sufferers in India. It has also lent support to health programmes in Indian slums and Tanzania. Like many other staunch Christian entrepreneurs, Deichmann saw what is now called 'corporate citizenship' as a major element of company management from the outset.
In addition, the enterprise has expanded significantly in recent years. Today, it sells some 78 million pairs of shoes a year in just under 1900 shoe shops in the United States and eight countries in Europe. This has impacted on purchasing. Ten years ago, it was customary to work through import/export companies. There was virtually no direct contact with manufacturers in Asia and no knowledge of the production conditions prevailing there.
Direct access to global input markets came only with corporate growth and new purchasing strategies. Today, Deichmann cooperates increasingly with factories in Asia direct. As a result, the number of suppliers is steadily declining, which, conversely, makes cooperation with the remaining suppliers a great deal more intensive and long-term. The company now knows fairly precisely who produces what and where, and can thus take better account of a very complex aspect: customer conscience.
Many customers have long expected more than just a good-quality product at a fair price. They also assume that products are made under the same working and environmental conditions that they know from their own surroundings. These customers respond to news of poor working conditions or environmental problems at production facilities by withdrawing their custom. And how well or how badly a production facility compares with others in the context of local conditions counts for little in those customers' eyes. They expect the kind of production standards that are found in Europe, and especially in Germany. These heightened expectations, Deichmann's greater proximity to suppliers and last but not least the company's culture of social commitment ultimately led to the PPP project in India.
The PPP project in India
In late 1998, the management decided to increase footwear imports from India. After the Chinese market, there was now the threat of Vietnam which is an important supplier for us being subjected to EU import quotas. India has a long tradition of footwear production. Unfortunately, the country also has a bad reputation for child labour, working conditions and environmental protection. The Deichmann Group's aim was to expand the good supply base it had in India and put cooperation with those suppliers on a long-term footing. The work was to be secured by a guarantee of internationally acknowledged social and environmental standards.
But the company needed a partner for that. Its own purchasing organisation did not have enough manpower for a venture of that nature; nor did it at that time have any experience of implementing such projects. The search for a competent partner led Deichmann to GTZ in Eschborn. GTZ had experience of developing social and environmental standards from its involvement in several projects in the past. In particular, it had the Indo-German Export Promotion (IGEP), an organisation running an efficient operation, recognised in India and already noted for its role in the Rugmark carpet label project. The idea behind Rugmark is to use income generated by the label to eliminate child labour in carpet-making and at the same time help children get an education. So GTZ possessed expertise and experience in the very areas in which Deichmann wanted to pitch its project.
Together with its experienced public partner GTZ, Deichmann realised its plan to introduce and implement social and environmental standards as a PPP project. And the project soon had a name: ISES Improvement of Social and Environmental Standards.
The four project phases
The project was executed in four phases. In the initial discussions with GTZ, the question of the concrete objective was a key issue. The idea of the ISES project was not to audit factories and analyse multiple-choice questionnaires to obtain ratings that would show if we could work with a particular factory or not. On the contrary, our aim was to work with our Indian partners to make production conditions better. Any company which showed willing and basically seemed able to achieve the standards required could participate in the ISES project. GTZ provided crucial assistance in achieving these goals. Development of the project concept was a cooperative exercise involving a project manager in Germany and the GTZ office in New Delhi. Initially, this entailed compiling a package of measures designed to show what conditions were like in the Indian facilities. The GTZ personnel, drawing on years of intercultural experience, attached importance from the outset to ensuring that the requirements local firms needed to meet were not just objectively sound but also communicated with competence and sensitivity.
So aside from the Indian suppliers, ISES project partners included Deichmann personnel, GTZ in Germany and the IGEP in India. In the preparatory phase, detailed discussions were held on social standards. But discussion was focused not on the standards themselves an accepted framework for definition here was provided by the canon of national legislation, ILO conventions and SA 8000 but on the question of how social standards could be applied in the context of the Indian footwear industry. One thing that needed to be avoided was any risk of the requirements for Indian partners being misunderstood as an expression of an arrogant Western attitude towards traditional Indian culture.
No Western arrogance
In Germany, Deichmann and GTZ started by developing detailed questionnaires as a basis for factory audits. Before auditing commenced in the second phase of the project the partners staged a workshop in New Delhi with owners and managers of the footwear factories concerned. That workshop, held in October 1999, was vital for the success of the entire project. It successfully communicated the requirements Deichmann needs to meet in retail sales markets. The Indian managers' ready acceptance of the IGEP also helped underline the credibility of the requirements. Social standards were thus removed from the pedestal of "Western arrogance" and presented on the platform of economic necessity.
Straight after the workshop, GTZ provided IGEP personnel with the audit training needed to ensure professional data collection. In the first quarter of 2000, the footwear factories were then visited by a GTZ staff member and Indian IGEP personnel. The factories were examined in line with the procedures that had been agreed. These included interviews with the factory management, interviews with employees and an assessment of the production and sanitary conditions encountered. Not all the questions could be answered on the first visit. A second visit ensued a few weeks later. In the interval, the factories were able to compile the missing information. In many cases, this consisted of personnel data and details of second tier suppliers.
The question of the integration of suppliers is a difficult one. How far should one go down the chain of supply? In this project, the partners focused on principal suppliers, which in the footwear industry are the tanneries and sole-makers. The products of the first audit were a detailed report and a list of measures drawn up by each company. In that list known as the 'corrective action plan' the factories set out proposals for measures to eliminate infringements of social standards.
In the third phase of the ISES project, the reports and corrective action plans were studied in Germany and, in some cases, additions and/or further corrections made to the measures proposed. On another visit by the auditors, the measures were discussed with the companies, relevant management appointments were made and implementation deadlines were agreed. Most of the measures were implemented within months.
Changes noted just six months later
The most frequent infringements of accepted social and environmental standards related to work safety, e.g. safety devices or shielding missing from machinery, blocked emergency exits, absence of first aid facilities and a lack of the general precautions that constitute 'good housekeeping'. Another widespread problem related to the handling of hazardous substances, i.e. cleaning fluids, adhesives and other chemicals. A third unsatisfactory state of affairs and one which was regrettably common concerned waste management. In most of the factories, far too much waste was generated and disposal concepts often ended behind the factory wall.
The project partners did not encounter the problem of child labour or any form of discrimination. This does not mean, of course, that it does not exist in the Indian footwear industry. That it presented no problem in this project is probably due to the fact that the partners are leading players in their industry. Overall, nearly all the footwear factories were found to be very willing to implement the agreed measures at once. Even after just six months, astonishing changes were seen. Only one supplier failed to do any more than give a verbal assurance.
Companies committed to ensuring social standards at their manufacturing locations are often confronted with the question of whether a supplier's competitive strength is impaired by the higher costs entailed. Deichmann also needs to address such questions. Certainly, the ISES project has shown that implementing the requisite measures costs a company money. At nearly every factory, however, the resulting improvements in work organisation led to a higher quality of product. An overall decrease was registered in both material input and labour. Most of the additional cost of improving production conditions is thus recouped. When everything is considered, suppliers run a much greater risk of losing their competitive edge if they fail to comply with international standards.
This PPP project marked a first step towards better working and environmental standards. To ensure that the standards achieved are maintained and continually improved, the partners and suppliers agreed that an independent re-audit should be conducted once a year by IGEP personnel. Any new suppliers contracted in India are also taken on board the ISES programme. As a preliminary step, they are checked by local buying agents to see if they have the potential to achieve ISES standards. If they pass this initial test, our purchasing organisation can place orders with them. Then they undergo the ISES audit.
From ISES to Code of Conduct
The introduction and implementation of social standards is a long-drawn-out process which is still far from complete. The results of the ISES project, however, are encouraging. Framework conditions in the Indian subcontinent have not been wholly transformed, of course, but one thing is clear: taking one small step at a time is the only way to achieve long-term success. In that respect, the auditing project set up in conjunction with GTZ in India is highly promising. It paved the way for a general 'Code of Conduct' which Deichmann has now also introduced in other countries. Outside India, we have also audited direct partners of footwear factories in China and Vietnam. The factories have agreed to maintain the requisite standards and spot checks are conducted on a continuous basis. So the knowledge and experience gained from the PPP project are now being passed in stages to other companies with which Deichmann is associated.
Another reason for hope: the suppliers that took part in the ISES project as well as those that joined it later are leaders in their industry. They are acknowledged in their communities; many of them are opinion-formers and opinion leaders. If these suppliers can be encouraged to share their experience with their communities, sectors and colleagues, a snowball effect could be achieved. In other words: the auditing programmes implemented by Deichmann and other companies could prove a driving force which, in the best sense of the word, is self-perpetuating so that not only global companies but also local people profit from Eastern Asia's attractive production locations. And that is precisely where the interests of companies and development policy institutions like GTZ coincide. In the PPP programme, we believe the BMZ has created a good platform for important and sensible projects which would otherwise probably never be realised.
Karsten Schütt is managing director of Heinrich-Deichmann-Schuhe GmbH & Co KG