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December, 01 2000 |  Share

Anatomy of Exploitation

 

What the U.S. Military, Kohl's and the Other Major U.S. Retailers Do Not Want You to Know

Unmasking the Cost of Offshore Production Sewing Jeans in Nicaragua


December 2000

Back to main Chentex page

 

 

 

The National Labor Committee has collected sufficient documentation on jeans production sourced to Nicaragua by the U.S. military, Kohl's and other major U.S. retailer — including internal factory production documents, dozens of factory pay stubs, shipping and U.S. Customs records and more — to unmask and lay out point by point how the system actually works. What emerges is a calculated anatomy of exploitation which resembles a giant pyramid scheme in which money is funneled out of the developing world and up to the U.S. retailers. The weakest link in this scheme is the workers in the developing world, whose wages can be artificially suppressed through repression — as is the case in the Taiwanese-owned Chentex factory in Nicaragua, where some 700 workers have been fired and blacklisted for asking for an 8-cent wage increase. At the Chentex factory, the U.S. military and Kohl's can slash $2.94 off the direct labor cost to sew each pair of jeans, as compared with even below-average labor costs in the U.S. We see the direct cost of labor to the retailers to sew a $21.99 pair of jeans falling from $3.30 in the U.S. to 36 cents in Nicaragua. The cost of labor as a percentage of the retail price has almost been wiped out, dropping from 15 percent to only 1.6 percent.

Here's how the retailers' pricing scheme operates.

 

Sewing Blue Jeans for the U.S. military, Kohl's and other U.S. Retailers at the Chentex Factory in Nicaragua—Total labor costs — direct and indirect (to sew standard 5-pocket jeans)at Chentex. 66 cents

 

Total direct labor piece rate pay to sew the jeans:.20 cents
All the sewing operators at Chentex are paid according to a piece rate system.There are 38 steps, or operations, involved in sewing a standard 5-pocket pair of jeans.Each operation is assigned a specific piece rate by the factory, breaking the pay scale down to one-thousandths of a cent!This is the calculated anatomy of exploitation.The total piecerate pay for all 38 operations comes to just 2.574 cordobas, 20 cents.(The exchange rate is 12.9 cordobas to U.S. $1.)

Workers Take-Home Pay Making the Jeans:.28 Cents
While sewers are paid according to a piece rate system, they can increase their earnings through working overtime hours which are paid at a premium, by reaching production goals and earning an incentive, and through two attendance bonuses for a perfect work record.Such incentives and bonuses add an average of 41 percent to the direct piece rate wage, or in this case, 8 cents.This means that the workers take-home pay for each pair of jeans sewn is 28 cents.)

The Fully Loaded Wage —
What it Actually Costs the Company to Sew the Jeans:
.36 cents
Beyond the piece rate wages and production and attendance incentives, the Chentex company has to pay its share of contribution into the Social Security system and The National Technical Institute.It has to pay holidays, vacation time and the traditional Christmas ("13th Month") bonus.On average, this adds 28 percent to the cost of the take-home wage, bringing the fully loaded direct labor cost — in other words, what it costs the Chentex company to sew the jeans — to 36 cents. This is an eight-cent increase on top of the take-home wage.

Indirect Labor Costs:.30 cents
Not everyone in the factory is employed as a sewer.Out of a total labor force of 1,750 employees, there are 960 sewing operators divided into eight production lines of 120 workers each.Another 790 people are then employed as cutters, helpers, mechanics, inspectors, security guards, maintenance workers and in the laundry, pressing and packing departments.Accounting for these 790 indirect laborers adds an 82 percent cost on top of direct labor expense, adding 30 cents to the fully-loaded direct cost to sew the jeans.

Total Labor Cost:Direct and Indirect:.66 cents
This means that the total labor cost, direct and indirect, for each pair of $21.99 jeans Chentex sews for the U.S. retailers amounts to just 66 cents.


Total Cost Breakdown to Sew and Finish Jeans at the Chentex Factory for Shipment to U.S. Retailers

 

1.) Total Labor Cost

* Direct labor

$ 0.36

 

 

* Indirect labor

$ 0.30

=$0.66

2.) Materials

* Denim Fabric

$4.55

 

 

(3.25/yard x 1.4 yards for standard 5-pocket jean, women's size 16, 98% cotton/2% spandex)

 

 

 

* Shipping the denim:

$0.20

 

 

Total fabric cost, including shipping:

=$4.75

 

 

* Trim

(zippers, buttons, thread, labels)

$0.80

 

 

Total material costs

 

=$5.55

3.) Overhead

Includes rent, utilities, office expenses, etc. In the U.S., this comes to approximately 68% of total direct and indirect labor costs.

 

 

 

 

 

=$0.45

 

Total Production Costs for Chentex:

 

=$6.66

4.) Chentex's Profit on each pair of jeans: $1.42
  It costs Chentex $6.66 to sew the jeans, which they then sell to Kohl's for $8.08. This means Chentex's profit on each pair of jeans is $1.42. This is a gross profit margin of 18 percent. Note: This is a very conservative estimate. Since Chentex operates its own textile mills, it is much more likely that the fabric cost to Chentex is at least 15 percent lower, or $4.72 rather than the $5.55 figure used. Also, overhead in the Las Mercedes Free Zone in Nicaragua, where Chentex is located, is most likely less than one-half the cost of overhead in the U.S. This would make overhead expenses 34 percent of the total labor costs, or, in Chentex's case, $0.22 rather than $0.45. Using these figures, Chentex's total cost to sew the jeans would be $5.60 and not $ 6.66. This would represent a $2.48 gross profit margin for Chentex for each pair of jeans sewn under contract for the U.S. retailers. This would amount to a gross profit margin of 31 percent rather than 18 percent. Nien Hsing, Chentex's parent company's profits are in fact continuing to rise. For the first nine months of 2000, Nien Hsing reported a pretax profit of over $45 million ($45,085,384). This means that Nien Hsing's profits are on course to exceed $60 million this year. Nien Hsing's profits are loaded toward their apparel assembly plants as compared with their denim textile mills. Nien Hsing's chairman has publicly spoken about the high profitability of their plants in Nicaragua, commenting that the Nicaraguans are very hard workers and work even faster due to the piece rate wage system which ties earnings to production levels.
Total Landed Value of the Jeans - what the U.S. retailer pays:  = $ 8.08
 

U.S. Customs documents show a shipment of the standard 5-pocket jeans shipped from Chentex arriving in Florida on June 25, 2000. The total landed Customs value of the jeans was $8.08. That price covers all the expenses to make the jeans — direct and indirect labor costs, all materials, fabric and trim, overhead and profit to the Chentex factory. This means that Chentex sells the jeans, to Kohl's for example, for $8.08.

There are additional expenses to the U.S. retailer: Under contract, Kohl's pays Chentex $8.08 to sew its private-label jeans. As we have seen, this includes all labor, materials, overhead costs and profits. However, to get to the true wholesale cost for Kohl's-what it costs Kohl's to get these jeans to its distribution center or warehouse-there are three additional expenses: U.S. tariffs, international shipping and domestic transport and handling.
 5.) U.S. tariff (The U.S. tariff rate on women's denim blue jeans is 17%)  $1.37
 6.)International shipping costs (by container ship Nicaragua to Miami)  $0.60
 7.) Domestic transport, handling (From port to distribution center)  $0.30
 Additional retailer costs:  = $ 2.27
 Wholesale price for Kohl's or other retailer (per pair of jeans)  = $10.35

 

 

Kohls and other U.S. retailers then mark up the wholesale price by at least 112 percent

The specific 5-pocket blue jeans we have been analyzing retails for $ 21.99.This represents a 112 percent mark-up over the wholesale cost of $10.35 for the jeans when they arrive at the retailers distribution center.Of course, here we are talking about low-end discount retailers such as Kohl's, Wal-Mart, Target and so on.With name brands such as Nike, the mark-up will be several hundred to over 1,000 percent.

Still, that 112 percent mark-up for the discount retailers leaves them with $11.64 out of $21.99 the retail price.Using that $11.64 margin Kohl's can run sales, cover advertizing and overhead expenses, salaries for sales personnel, pay stock dividends and enormous compensation packages to its executives.For example, last year Kohl's Board chairman, Mr. William Kellogg, paid himself $38.7 million in wages and stock options. That comes to $18,500 an hour.In 1999, Kohl's profits were up 34 percent to $258 million.


What would happen if the Chentex workers received their 8-cent wage increase?Would the sky fall in on Chentex, AAFES and Kohl's?

 

We know what happened:When the workers asked for an 8-cent wage increase, Chentex responded by firing 700 workers and bringing trumped up criminal charges against all eleven union leaders, which could send them to jail for seven to twenty years.Kohl's has refused to lift a finger, claiming to have no responsibility—despite the fact that their Code of Conduct supposedly guarantees workers anywhere in the world making goods for Kohl's the right to organize and bargain collectively free of repraisals—since this was supposedly a "third party labor-management dispute" in which Kohl's had no role.Since every single product for sale in Kohl's stores is made under third-party contract (like other retailers, Kohl's does not own a single factory) their position is disingenuous in the extreme.In fact, Kohl's is signaling a bright green light to all their contractors around the world that they are free to do whatever they can get away with given the circumstances on the ground.Kohl's will not intervene.There are no standards.Given that 42 percent of all Kohl's imports worldwide come from China, one can only imagine how their contractors hidden across China are interpreting this.

So, what would have happened if Chentex and Kohl's had agreed to the 8-cent wage increase? Would their profits plummet and their businesses be ruined?Or, would an 8-cent wage increase add only a tiny fraction to the cost of making the jeans?

In fact, an eight-cent wage increase in the total piece rate to sew the jeans, raising the sewers' earnings from 20 cents to 28 cents per pair, would, as it worked its way through the entire production system add at most just 14 cents to the fully loaded, direct and indirect labor cost to sew the jeans.Fourteen cents is just six-tenths of one percent of the $21.99 retail price of the jeans.Such an increase would hardly destroy Kohl's or Chentex.First, the vast majority of American people would be glad to pay an extra 14 cents ($22.13 rather than $21.99) to be guaranteed the jeans would now be made under humane conditions.But this might not be necessary.If Kohl's and Chentex split the 14-cent wage increase between them, each absorbing seven cents, what would this do to their profits?Kohl's purchases the jeans from Chentex at a wholesale price of $10.35 and turns around and sells them for $21.99.This is a 112 percent mark-up, leaving Kohl's with $11.64 of the $21.99 retail price.If Kohl's absorbed the 7-cent wage increase, this would cut its gross profit by just six-tenths of one percent.This would hardly destroy Kohl's.For Chentex, which makes a gross profit upwards of $1.42 on every pair of jeans they sew under contract for the U.S. retailers, absorbing the 7-cent wage increase would lower their profits by less than five percent.

In other words, the wage increase sought by the workers in Nicaragua is quite easily do-able—and certainly it is just and desperately needed.The impact on Kohl's would be miniscule.What is lacking is the will.Kohl's, like the other giant retailers, will get away with whatever it can.That is how the system has worked.Some would call it corporate greed.

Labor Cost to Sew Jeans    
  At Current Wage levels
With the 8-cent wage increase
* Total piece rate perpair $ 0.20 $ 0.28
* Workers' take-home wageper pair of jeans, including production incentives, attendance bonuses, and overtime. $ 0.28 $ 0.36
* Fully-loaded direct labor cost
to the company per pant, including
Social Security, holidays, vacation,
13th month/Christmas bonus, etc.
$ 0.36 $ 0.44
* Indirect labor, including all
cutters, inspection, laundry,
pressing, packing, etc. (82%
of fully-loaded direct labor cost)
$ 0.30 $ 0.36
* Total direct and indirect labor
cost per pair of jeans
$ 0.66 $ 0.8


Another way to look at this is that the 8-cent wage increase in the piece rate per pair of jeans would add 15 cents to the workers' average take-home wage, which would rise from 53 cents an hour to 68 cents an hour.For a 48-hour work week, this would amount to a $7.20 a week increase.For all 1750 workers in the factory, this would total $12,600 a week and $655,200 for an entire year.This $655,200 figure is less than two percent (0.01693) of the $38.7 million compensation package William Kellogg, Chairman of Kohl's Board, paid himself last year.Instead of paying himself $38.7 million, he could have paid himself $38.1 million and everyone would be happy.

The Race to the Bottom:A Comparison with Labor Costs in the U.S.

It is important to compare the Chentex company's labor costs with those of a typical U.S. apparel manufacturer.

The average apparel wage in the U.S. is $9.16 an hour.But for purposes of this comparison — to make it as conservative as possible — we will use a below-average $8.00 an hour factory wage.

Sewing Jeans in the U.S. / Cost Breakdown

Total Direct U.S. Labor Cost:= $3.30

The process of sewing and finishing the jeans in the U.S. is broken down into three major catagories — cutting, sewing and laundry, and each category is assigned a time value.

* Cutting the fabric:2 minutes * Sewing (with average machines):18 minutes

* Laundry (washing, pressing, packing):5 minutes

Total time to sew the jeans:25 minutes.

A typical U.S. apparel factory will cost out the direct labor at 11 cents a minute.This is the direct labor cost, with no profit or other expenses included.So for the 25 minutes it takes to sew and finish the jeans, the labor cost is $2.75.

However, no factory operates consistently at 100 percent efficiency.Machines break down, fabric does not match, trim components are missing, etc.So to account for delays and down time, the manufacturer adds 20 percent to the direct cost of labor, or in this case, 55 cents.

This brings the total direct labor cost in the U.S. to $3.30 to sew the standard 5-pocket blue jeans which will retail for $21.99.

Compare this to the direct labor cost at the Chentex factory in Nicaragua, which is just 36 cents.

This means that the U.S. military, Kohl's and the other U.S. retailers save $2.94 on direct labor costs alone for each pair of jeans they sew in Nicaragua, as compared with labor costs in the U.S.Even using the below-average $8.00 an hour wage figure, direct labor costs to sew the jeans in the U.S. are more than nine times higher than in Nicaragua.Nicaraguan direct labor costs come to less than 11 percent of U.S. labor costs.

In a recent nine-month period — from December 1999 to August 2000 — Kohl's produced at least 531,168 pairs of private label "Sonoma" jeans at the Chentex factory.(This is not counting other non-private labels such as "Bugle Boy" which Kohl's also sells.)So in one factory alone— one among the well over 10,000 contractors Kohl's uses around the world — and on one line of jeans, in just a nine-month period, Kohl's slashed $1.6 million from its direct labor costs by sourcing production to the Chentex factory offshore.

This is the race to the bottom, as Kohl's and the other major retailers chase low wages around the world.When 700 workers were fired from the Chentex factory for asking for an 8-cent wage increase, Kohl's did not lift a finger to restore and demand respect for fundamental human and worker rights at its contractor's plant.The fact that women sewing Kohl's jeans in Nicaragua are forced to raise their children on coffee and sugar water since they cannot afford milk is of no consequence to Kohl's or the other retailers.In fact, that is precisely how the system is supposed to function.Suppressing labor costs is necessary and key to the retailers' strategy.Nor do they shy away from repression to accomplish that end, while at the same time crying plausible deniability that this is a third party labor-management conflict, in which Kohl's has no role and will not intervene.Dirty deeds while pretending to have clean hands.