Wal-Mart Meeting: Factory Remediation Underway, Systemic Challenges Remain

On Sept 30 and Oct 1, 2009, Richard Coyle, Sr. Director of International Corporate Affairs at Wal-Mart, and Rajan Kamalanathan and Petra Herbertz-Crumpler, executives from Wal-Mart's Ethical Standards Program, met with China Labor Watch Executive Director Li Qiang and translator Gregory Fay to discuss Wal-Mart's corporate responsibility efforts, including systemic challenges and Wal-Mart's response to CLW's July report on two supplier factories, Hantai and Huasheng.

1. Challenges Confronting the Wal-Mart System

Wal-Mart announced the following changes to its Ethical Standards policies:

• Changes to the color-coded factory rating system. Whereas previously, four orange (substandard) ratings resulted in termination of new orders to a factory, now, Wal-Mart will not place new orders if a factory is rated orange three times in 2 years, until an audit results in a green or yellow rating. Follow-up audits take place 6 months after an orange rating is given, always unannounced. 95% of all private label, nonbranded and direct import products must come from green- or yellow-rated factories.
• As of April, all audits are conducted by 3 rd party auditors, reserving Wal-Mart's auditors for quality check audits on the 3 rd party audits, as well as investigations of all external allegations. Wal-Mart has begun communicating with other brands to coordinate auditing work with a goal of reducing wasteful audit duplication and creating streamlined standards for factories to meet.
• Supplier development is a focus of Wal-Mart's relationships with its larger or more critical suppliers, with a focus on improving supplier management. Wal-Mart also now requires all suppliers to release information on factories.

CLW Executive Director Li Qiang described systemic challenges facing Wal-Mart's supply chain, and raised the following concerns:

• Wal-Mart pricing is too low. As the world's largest retailer, Wal-Mart leverages its huge orders to convince factories to sell goods at low prices that are not sustainable. This puts pressure on other brands to pay less and sets a dangerous industry precedent. In conversations with CLW, both factories and other brands frequently cite Wal-Mart's pricing structure as a major source of financial pressure.
• Wal-Mart's audits systematically fail to identify all labor violations. Although Wal-Mart has only worked with its 3 rd party auditors since April, some auditors have a history of corruption, including bribery and fraudulent “consulting” offers which allow violations to go undetected. After failing two Wal-Mart audits (orange rating), factories may bribe auditors on the third audit to avoid losing Wal-Mart orders. Auditors may lack experience to identify issues or realize when they are being tricked. Possible solutions to this problem include supplementing Wal-Mart's internal audits with external monitoring, and making more stringent requirements for orange factories, extending the three orange limit to three years.
• Wal-Mart's corporate structure is too concerned with image and not enough with actual change. CLW has consistently found that Wal-Mart turns a blind eye to poor conditions in supplier factories unless investigations are made public. Furthermore, even after an initial surge of activity following a report, factories investigated by CLW often revert to their original violations within a year or two. Wal-Mart has basic standards which it must implement. It has the size and power to be an industry leader, and this will not come from Ethical Standards Program initiatives alone but also from major change to Wal-Mart's corporate practices, including increased investment in the audit system and careful review of purchasing practices.
• Wal-Mart needs more transparency in its Ethical Sourcing efforts. First, it should be transparent about its response to allegations of violations in its supply chain and publicize steps taken to remediate factories. Changes to conditions in these factories and verification of improvements should also be made public. Second, Wal-Mart should be more transparent about specific challenges facing its system and how new policies target these challenges.

2. Wal-Mart's Response to CLW's July Investigations

Hantai Shoe Factory

The Wal-Mart Ethical Standards team visited the factory on three occasions since July, and both the supplier company and factory management attended meetings at Wal-Mart's Shenzhen office. Wal-Mart recommended changes to the factory and followed up to confirm implementation of remediation goals. Wal-Mart states that Hantai has relatively good conditions.

Currently, as is the case with many factories, orders are down at Hantai factory, and orders in the peak season are less than half of previous years. The factory now has inadequate overtime opportunities, and workers have quit to find jobs with more overtime.

Key findings of Wal-Mart's investigations include:

• Regarding the issue CLW discovered where, in order to avoid paying weekend overtime wages, janitors were not allowed to work weekends and during those times the dormitory lavatories regularly turn foul, Wal-Mart reports that bathrooms appeared sanitary. Factory management was advised to monitor their cleanliness, especially on weekends,
• Wal-Mart confirms that overtime is voluntary and paid according to the law, and
• Regarding the inhumane overtime system that CLW discovered, a disguised form of forced overtime in which the factory would deny any overtime opportunities for a month if workers requested not to work overtime for a single day, Wal-Mart found no evidence substantiating this system.

Huasheng Packaging Factory

The violations CLW identified at Huasheng Factory were more severe, and Wal-Mart states that the following efforts are being taken to ensure compliance.

• The piece rate system which at times yielded below-minimum wages has been replaced by an hourly wage.
• The hourly wages of workers in the two month probationary period has been adjusted to meet the minimum wage.
• Arbitrary wage deductions have been eliminated, a policy identified by CLW in which deductions are made from wages due to workers not following the factory's rules. Wal-Mart confirms this change based on record checks and worker interviews.
• A second factory was confirmed, but with no Wal-Mart production.
• Wal-Mart found no evidence to substantiate wage caps.

Finally, Wal-Mart did not obtain any new information on the audit falsification document.