Corporate Social Responsibility Sourcing Strategies and Trade William Anderson Head of Social & Environmental Affairs Asia Pacific

Corporate Social Responsibility SOE, SEA & Sourcing  The Standards of Engagement (SOE) is a Code of Conduct for our Suppliers  It asks them to be legal  To have a safe work place  Not to pollute the environment  To follow good employment practices  To treat their workers fairly, and with dignity  Managed by Social Environmental Affairs (SEA) part of adidas’ legal department  Reports directly to Board  Independent of Sourcing : international (managed by aSIS) and locally by subsidiaries

Corporate Social Responsibility Interface: SEA and Sourcing  Performance: Sourcing and retention of new suppliers (KPIs) :  Innovation  Performance (delivery)  Quality  Customer satisfaction  Sustainable compliance  Pre-approval audits and action plans  Managing compliance, for factory downsizing or closures  Strategy: SEA consulted on socio-political risks and impacts, re: country selection  SEA provide feedback on stakeholder engagement/ concerns

Corporate Social Responsibility International Sourcing Strategy, Asia  Quota free footwear has migrated from Taiwan and Korea to China and Indonesia, and in more recent years to Vietnam  Apparel has been wide ranging, in Asia :  Sri Lanka, Cambodia, Mauritius, South Korea, Taiwan, Philippines, Thailand, Vietnam, Singapore, Indonesia and China  Strategy:  maintain balanced porfolio,  manage exposure/risk,  be responsive to trade issues and market needs,  work with key partners on investment/disinvestment strategies

Corporate Social Responsibility International Sourcing from Asia  As 2005 approaches, apparel focused on 5 countries:  Vietnam,  Indonesia,  Thailand  India  China  Secondary sourcing : Cambodia, Sri Lanka and Philippines

Corporate Social Responsibility Factory Consolidation & Growth  Internationally fewer, but larger factories  Higher productivity through lean manufacturing (maintain competitiveness)  More secure orders, increased certainty, higher levels of investment  Stronger, closer business relationship  Increase leverage to bring about labour rights and safety compliance

Corporate Social Responsibility End of Quota Impact  Strategy has not changed, balanced portfolio  China accounts for a little over 30% of our global apparel, only a 3% growth shift in the past 3 years (2002-4).  China will grow for domestic market reasons and to fill growth of our apparel business  India will grow in the coming years  Order volumes will remain stable or grow in other countries in the region  Increased investment (new plant) by business partners in Indonesia, Thailand and Vietnam

Corporate Social Responsibility 2008 and beyond Long term trend:  China dominant because of Competitive Advantage: price (scale, productivity), vertical integration, level of investment, infrastructure, delivery distances to USA  Not simply a question of cheap labour  Quote-free China will see 20-30% reduction in F.O.B prices  Other countries, unless highly productive and quality driven - marginalized

Corporate Social Responsibility Ranking After MFA

Corporate Social Responsibility 2006 and beyond Near term:  Removal of quota, but likely imposition of tariffs i.e. anti-dumping (“surge” quota).  Need for balanced sourcing strategy (risk management, example of SARS)  Differentiation, through specialization e.g. Thailand  Wage pressures and industrial competition in China and Vietnam  Linking labor rights and trade, e.g. Cambodia

Corporate Social Responsibility ILO Better Factories Cambodia  Linking trade and labour rights – bi-lateral in nature  ILO has traditionally been a reluctant partner in these processes, so it has demonstrate the important role the ILO can take – they are trusted institution  Only four factories, whereas other suppliers have over 40  Independent monitoring less important to us, than:  Structural support ILO offers (regulations, institutional strengthening which was very weak) and  Training and productivity  Multi-stakeholder support, cooperation and dialogue

Corporate Social Responsibility ILO Better Factories Cambodia cont’d  Can it work elsewhere?  Scale of sourcing base in other countries,  Resources (people/ funds),  Expertise,  Sustainability (e.g. IMAC in Pakistan)  Supports:  Common standards  Eliminating duplication of monitoring – but leading brands moving away from this  Prefer to see institutional strengthening where Governments have capacity to monitor and enforce laws

Corporate Social Responsibility Source: FT

Corporate Social Responsibility Source: FT