The following document was part of the Nikebiz/ Web site document set before the new web sites were put up in June/July 1999 - D Boje. This document was download by me from Nike Friday, June 19, 1998 8:26:13 PM.



Nike Chairman and CEO Phil Knight

New Labor Initiatives, May 12, 1998


In talking to Ken Eskey during lunch, he said that last week the speakers to the National Press Club were Miss America and the Surgeon General, which was the greatest difference of speakers that they'd ever had in one week, until this week when Phil Knight and George Mitchell are the speakers. But it's always nice to break records.


The thing that I'm going to focus on today is essentially the cloud that has been over Nike's head over the last couple years, and it has to do with our global manufacturing processes. A recent story I think is interesting from Nike's perspective. Mark Thomashaw, a long-time Nike employee, has had a ten-year correspondence with Garry Trudeau, the cartoonist who has been bashing Nike lately. The correspondence went like this: "Hey, Garry, would you like to see some facts on this issue," to which Garry Trudeau answered, "No, I'm not interested in facts. I'm not a journalist; I'm a social satirist."


Forgive us; out in the Pacific Northwest it's a little hard for us sometimes to tell the difference.


In recent times, Philip Knight has been described in print as a corporate crook, the perfect corporate villain for these times. In addition, it's been said that Nike has single-handedly lowered the human rights standards for the sole purpose of maximizing profits. And Nike products have become synonymous with slave wages, forced overtime, and arbitrary abuse. One columnist said, "Nike represents not only everything that's wrong with sports but everything that's wrong with the world."


So I figured that I'd just come out and let you journalists have a look at the great Satan up close and personal. But as long as I was going to do that, I thought that I might as well take along some of the Satanettes who are sitting out among you. Six of the owners and managers of Nike foreign factories are out there as well as four of the owners or managers of U.S. apparel manufacturers for Nike are out there as well. I don't know whether the U.S. apparel guys are Satanettes or the good guys, but I will say this: Without the foreign manufacturing processes, we wouldn't have the orders going to the U.S. manufacturers that we do, and U.S. manufacturers supply about 50% of Nike's apparel sold in the United States. Those people will all be available on a limited basis, I believe, after this session.


If I accomplish my objectives today, it's not to change the dynamics of the debate, but rather for those who are truly interested_those who want to look beyond the sound bite_to give you a base of facts for context on an issue that I believe will be with us for the better part of the next decade. We have some fairly significant announcements today, but I think to put them in some kind of perspective you have to know a few things about us and our industry.


The company that became Nike began life in 1964 as an importer and distributor of Japanese track shoes made by Onitsuka Company, Ltd., of Kobe, Japan. Starting out, everything was done either on a commission basis or a relative. We had no money, no sales force, no employees, and no clout. Our first year sales were $8,000, and we made a $254 profit. The outgoing freight company was the trunk of my 1963 Plymouth Valiant.

And as an asterisk to all that, factory workers at Onitsuka made about

$4.00 a day.


After eight years, our annual sales were up to $2 million, which was 10% of the total sales of Onitsuka Company, Ltd. And they decided if that little company in Oregon can do all that, what would we do with big-time distributors. So they pulled their distribution rights. But we thought our 45 employees had been instrumental in the success that Tiger had had.

So we started to do it again, this time doing it under our way and under our name. The brand we picked was Nike. Whenever I'm asked about

how we became the biggest sports and fitness company in the world, I'm reminded of John Kennedy's answer on how he became a war hero. "It was easy," he said. "They sank my boat."


When we started Nike, we had two other manufacturers in Japan make our shoes for us. One was in Hiroshima, Japan and the other was

Kurume, just outside of Fukuoka. In neither case were we 10% of their volume. We actually considered ourselves fortunate that they would make shoes to our design. It never occurred to us that we should dictate what their factory should look like, which really didn't matter since we had no idea what a shoe factory should look like anyway.


But some 26 years later, I can tell you one of the few absolutes of this business. However bad you think Nike shoe factories are today, they are far, far better than those factories in Japan some 26 years ago.


When the Nixon administration cut the yen dollar loose from its exchange rate that had existed since the end of World War II, in just a few short months it went from 360 yen to the dollar to 180. And within the last couple of years it went all the way down to 80, although it's back to 130 today. In that process, basically all shoemakers quit making shoes in Japan.


Even our old friends at Onitsuka now get approximately 90% of their product outside of Japan.


We began making shoes in Taiwan and Korea, and in a bold experiment in 1977 we made up to 15% of our shoe products in two owned facilities in Maine and New Hampshire. With lots of ups and downs and the emotional charge of being kicked out of the two banks from a state that only had two banks, using innovative design which spelled waffle sole and then later patented Air midsoles, we grew to be number one in the U.S. And in 1980, just eight years after starting the Nike brand, we had a public offering.


There are a couple of things about those days. The early success we had in making shoes in the United States happened during a severe recession. As New England came out of that recession, we began to lose workers to other industries until in 1984, the two factories became so uneconomical, we closed them. The write-off was about $10 million in a year when our total profit was $15 million.


Since that time, the U.S. economy has become by far the most robust in the world, and shoemaking has moved again to Southeast Asia. A lot of people say, "Why don't you bring shoemaking back to the United States?" Our studies show that using the same production techniques, the average cost at retail for a pair of Nike shoes if we did that would go up $100.


The average retail price for a pair of Nike shoes is between $70 and $75, so therefore it would go up to $170 or $175. The price of a pair of Air Jordans which sell for about $150 would go to $250.


There are only two ways of making shoe production come back to the United States. Either new advances in automation, which from my viewpoint are a ways away, or establishing tariffs and quotas that dictate that shoes have to be made in the United States.


But just as in Japan, the factories in Taiwan and Korea that we established back in those early days were far better, have been far exceeded in terms of their quality of work conditions than the factories that we had in Taiwan and Korea, and frankly the factories that we had in the United States in the '70s and early '80s.


The early 1990s brought another shift, which is basically sending shoe production to Southeast Asia. But we did it a different way. Instead of the way we did it before, which was to move production, this time we said we don't want to lose the management skill and the partnerships that we have built up with our Asian manufacturers. And so when we went into the Southeast Asian countries, we took the managers and owners from Taiwan and Korea with us. It essentially is a new type of manufacturing. It is not a legal partnership. It is really a more emotional partnership between us and our factories. And it does involve the way we think about the business, including that we believe the employees that work in those factories, we see them as our employees and they are our responsibility.


One of the great experiments and one of the great successes of that time is when we took Taiwan shoe managers and moved them into China. And some of the great problems that you read about during those early 1990 times in the relationship between Taiwan and China were basically surmounted in business practices during those times. And one of the great heroes of that is here today, C.H. Wong, who basically has been said by local people in Fujian Province that he's done more than any other single outside foreign investor to uplift the province of Fujian than anybody in the world.


We had one other thing as we went into these new factories in Southeast Asia. We got to build them from scratch. And now Nike, having had quite a bit of experience, was able to have quite a bit of input into what these factories look like. And we believe they are the most advanced and best physical facilities in the world.


During the 1990s, all our experiences have caused us to really believe in the benefits of international trade. The uplifting of impoverished people, the better values for consumers in industrialized nations, and most of all, the increased understandings between peoples of different cultures. As a Nike vice president recently said, "When you go to check out a Nike shoe factory, you now fly across the Pacific River."


So when we saw the need for advanced production going to Southeast Asia, one of the most adventurous things that we did was decide to make shoes in Vietnam, which is an area that has had a lot of observation and criticism over this last couple of years. It is a grand and bold adventure, and there are a lot of aspects of it that I believe that you have not heard.


There was lots that was attractive about making shoes in that country, not the least of which was basically to have commerce flow where that dreadful war had once been. But there was one serious problem. There was no existing shoe industry. So essentially, if we were going to make it work, we would once again have to take our Taiwan and Korean managers with us.


There were two problems with that. First of all, foreign owned factories by law in Vietnam must pay a minimum wage 50% higher than Vietnamese owned factories. So if we were successful, we would then in turn create a shoe industry in which our competitors would be able to come in and start their businesses with Vietnamese owned factories and have a competitive advantage.


The second thing, of course, is very simplistic, but it's true. There was truly historical hatred between the two ethnic groups which would go in there and manage those factories in Vietnam. But we did it anyway. A couple months ago I had dinner with my friend David Halberstam who's had quite an experience out in Vietnam as well. When we told him that we were using Korean and Taiwanese managers in Vietnam, his comment was simple: "How could you have been so stupid?"


But the flip side is equally simple: No Koreans and Taiwanese; no Vietnamese shoe industry. And for all you have read, Nike shoes make up 5% of the total export of the whole nation of Vietnam. So we contribute on two counts: to give jobs and to generate a significant amount of foreign currency.


But there are, with all of that, lots of problems. The management of the Vietnamese work force by foreign managers has complicated the whole process, and it has come under a great spotlight which has given our critics lots of anecdotes to talk about.


Essentially, those critics will hang around restaurants, outside factories, in the pubs to get those anecdotes, to tell how dreadful this whole globalization process is in general and how evil Nike is in specific.


We have about 530,000 workers working on Nike shoes and clothes on a given day. There are going to be incidents. There have been some in the past, and there certainly will be more in the future. There are too many workers, too many interactions daily; and in Vietnam, too much tension based on nationality to avoid any incidents. That there have been as few as you have read about I think in many ways is remarkable.


Back in 1992, before anybody else in the athletic footwear industry_and I believe that only Levi Strauss had one_Nike instituted a code of conduct for use in factories throughout Asia. In 1994, we took a step that I hadn't heard of been taken by anybody, and I believe we were the first in any industry, to have that code of conduct audited by the international accounting firm of Ernst & Young. We've been criticized for using a firm that we are paying for this review, and I think this is really pretty funny. The only reason that a CPA firm has for its very existence is its independence. And if in fact it was not independent, we have a much bigger problem than Nike foreign factory relations. The whole New York Stock Exchange is built on a fraud.


There is another incident which I think is somewhat instructive of Nike's activities in Asia. Kushid Soufi is not able to be here today because his father took ill. He is from Sialkot, Pakistan. But his associate Dr. Shaw is here and will be able to talk to you later, I believe.


In 1994, Jack Beecraft of our Singapore office flew into Sialkot, Pakistan to check out the first ever Nike soccer ball order. What he found was conditions that were not acceptable. What he found was conditions that did not meet Nike's code of conduct and were not controllable.

Essentially, for 50 years the Pakistan soccer ball industry had been made up of a process in which the ball uppers were sent out into a cottage industry with very little controls on who the uppers were sewn by, and they in fact were sewn by children, old people, blind people, under all kinds of bad conditions.


Basically seeing this, he said it was not acceptable under the way we do business. And he and Mr. Soufi got together in Beaverton, Oregon three months later to hack out a different way of making soccer balls in Pakistan.


It's been two years now since we set up the first controlled soccer ball stitching centers under which we have a minimum age of 16. They are well lit, and the balls are made under our control. They are clean, and it is essentially changing the way of 50 years of doing business in Pakistan.

Nine months after we began that process, Reebok started a similar process in their soccer ball factories in Pakistan as well.


But the European athletic firms who make by far the greatest number of soccer balls in Pakistan_as much as 70% of the total export of soccer balls_have not changed the way they do business at all. And I point this out to show that the often-used phrasing of Nike critics, that they pick on Nike because as an industry leader, if Nike changes their manufacturing process, the others will follow, is simply not true.


A couple other things about some of our people doing business in Southeast Asia. Nharon Chatnahat, who is here today, 30 years ago faced a career decision. His career decision was to either become a Buddhist monk or go into the family business. His choice was to go into the family business. But I'll say this: The very thought that he went intothe family business to abuse Thai workers is absolutely absurd.

Hundreds of Nike people have worked with him over the last 15 years, and not a single one of them has ever heard Nharon tell a lie.


David Tsai who is here today began as a worker in a shoe factory in Taiwan 30 years ago. He made $15 per week. Today he is a major shareholder of the largest manufacturer of athletic shoes in the world. And his associate Wong Li, who started at $2.00 a day in Taiwan and is not here, today makes $1,500 a month working in a shoe factory in Taiwan. And it is a story told thousands of times throughout this whole process.


Recently we have come across an interesting incident in China. Young women come from farms clear across China to go to work in a shoe factory to make their lives better. These women_average age, 18 to 22 years old_have never had a TV, have never had a VCR, have never had a DVD, have never had a camera, and usually does not even own a radio.

But what we have found in a couple of instances over the last couple months is that hundreds of them will pool their money together and buy a personal computer. And after hours, they are entertaining themselves by going up on the Internet.


The thing that we have learned more than anything else in this process is that when Nike has gone into a country with its manufacturing operations, wages have increased and poverty has decreased. Nike of course is not solely responsible for that, but we have been a part of that process, and we are proud of it and not ashamed of it.


With this as a background, we have on this day six new things toannounce.


1. The first one has to do with health conditions within the factories. I believe it is true that every Olympic marathon champion in this century but one has run the 26 miles, 286 yards in shoes made with harmful chemicals, including the much-publicized toulene. It is just the way rubber soled athletic shoes have always been made. And the one marathon exception, of course, was Abebe Bikila, who won the 1960 Olympic marathon in Tokyo running barefoot. Today, marathoners and most other athletes for the first time have a choice. After four years of extensive research and hard work with our partners in Asia, we have developed and put into practice water-based adhesive which allows shoes to be cemented without the use of the most solvents, including toulene. Today we use water-based cement in 80% of all our shoe production. We still haven't figured out a way to bond the plastic soled cleated shoes, the baseball, football, and soccer cleats, but they represent less than 15% of our production. So what we say is that with that major breakthrough in footwear manufacturing, that by the end of this calendar year all Nike shoe factories will meet OSHA standards in indoor air quality. And five other announcements go with this.


2. We have raised the minimum age of all footwear factories to 18. And at all apparel and equipment factories, the minimum age is 16 - the same as it is in the United States. And I really do have to add this: There has never been a time in Nike's history where child labor has been a problem. And I also say that it really hasn't been a problem in the shoe industry as a whole.


3. We've publicly recognized the need for expanded monitoring to include NGOs and the need for a summary statement about this monitoring. We are not ready to announce how that will be done, but our current guess is it will include a CPA firm as well as health and social auditing by an NGO one, two, or three. The specifics of this obviously will come some time down the road, but we are working hard to put this into effect.


4. We are expanding our education program in our footwear factories. It began this year in Vietnam and it includes middle and high school equivalency course availability for all workers in Nike footwear factories.


5. We've increased support of our current Micro Enterprise Loan Program to a thousand families each in the countries of Vietnam, Indonesia, Pakistan, and Thailand. These Micro Enterprise Loans are used for small businesses such as pig farming and the making of rice paper. The limited amount of experience we've had in doing that in Vietnam is showing that they've been extremely well received and also extremely successful.


6. We will fund university research in open forums to explore issues related to global manufacturing and responsible business practices such as independent monitoring and health issues. We will begin by funding four programs in United States universities in the 1998-99 academic year, and we'll have our first public forum in October of this year in Hong Kong.


Having lived through this business for 35 years and the current debate for the last couple, I know that these announcements will not end that debate. In fact, perhaps just the opposite. It will create many more targets to shoot at. Opponents will certainly be able to find incidents and anecdotes of exception. "Aha! Got you there!"


But for those that are truly interested, the North Carolinas and Dartmouths of this world will set the standard for our industry and related industries to follow. We believe that these are processes which the conscientious, good companies will follow in the twenty-first century. These moves do more than just set industry standards. They reflect who we are as a company. I don't necessarily expect you to believe that, but I will tell you this: It makes us feel better about ourselves.


Thank you.