International Business

Foreign Trade University Fall semester 2012

International business
A case study on IKEAs global challenge in child labour Catrin Matwinska 1990-04-16

International Business
Abstract

Foreign Trade University Fall semester 2012

In order to shed light on current developments in the child labour causes and what implementations that can be applied this paper looks at one case of child labour in India. The argument is made that, from an ethical point of view, child labour should be forbidden, but at the same time if a child is denied work it might not be able to survive. The company is placed in a hard situation when children are found working in their factories. What should they do and which is the best way to act? In this paper I will first describe the history of the company (IKEA) in order to understand the supplier relationships and how closely knitted they are. This is made to get a deeper understanding of the situation and a further understanding on IKEAs future actions and on the recommended implantations. After the history I will define the problem and make an analysis on which way is the best way to act. History The 17year old Ingvar Kamprad founded IKEA in 1943, starting of as small mail-order company originating from his family kitchen. In 1948 he added furniture to his range that lead to immediate success. This made him change focus from small items to furniture. Sales really took off in the late 1950s. IKEAs radically new concepts began to encounter stiff opposition from Swedens large furniture retailers. They felt so threatened by this new cheap way of selling furniture that they colluded to stop the company from taking orders at fairs and to even show their prices. The cartel also pressured manufacturers not to sell to IKEA, and the few that continued to do so often made their deliveries at night in unmarked vans. Kamprad became increasingly frustrated with the way the tightly knit cartel of furniture manufacturers controlled the Swedish industry to keep prices high and trying to keep him out. He was unable to meet demand with such constrained local supply and was forced to look abroad for new sources. He began to view the situation not just as a business opportunity but also as an unacceptable social problem that he wanted to correct. He found his new supplier in Poland, which soon became IKEAs largest supplier to a much lower cost. In the beginning to assure quality output and reliable delivery, IKEA brought its know- how, taught its processes, and even provided machinery to the new suppliers. After this IKEA adopted a general procurement principle that it should not own its means of production but should seek to develop close ties by supporting its suppliers in a long-term relationship.

Catrin Matwinska 1990-04-16

International Business

Foreign Trade University Fall semester 2012

In the mid-1990s IKEA worked with almost 2,300 suppliers in 70 countries, sourcing a range of around 11,200 products. They had a close relationship with the suppliers and had continued with their goal to have long term relationships. However that where severely challenged in the mid-1990s when accusations of IKEA suppliers using child labour surfaced.

Problem In 1994 a Swedish television documentary showed children in India working at weaving looms. Some of the companies mentioned to import from India was IKEA. The TV-program sent shockwaves through the company since it was one of the companys major suppliers of Indian rugs. It was also raising awareness of a topic not well known and understood at the time. In fact, the U.N. Convention on the Rights of the Child had only been published in December 1989 so the problem had not been be lighted so much before. One of the actions IKEAs area manager for carpets - Marianne Barner took in this situation was to send a team to Geneva to seek input and advice from the International Labour Organization (ILO) on how to deal with the problem. They learned that Convention 138, adopted by the ILO in 1973 and ratified by 120 countries, committed ratifying countries to working for the abolition of labour by children under 15 or the age of compulsory schooling in that country. India, Pakistan, and Nepal were not signatories to the convention. Following these discussions with the ILO, IKEA added a clause to all supply contractsa black-and- white clause. The clause was simply stating that if the supplier employed children under legal working age, the contract would be cancelled. To take the load off field trading managers and to provide some independence to the monitoring process, the company appointed a third-party agent to monitor child labour practices at its suppliers in India and Pakistan. Barner appointed a well-known Scandinavian company with extensive experience in providing external monitoring of companies quality assurance programs. They gave them the mandate not only to investigate complaints but also to undertake random audits of child labour practices at suppliers factories. With India being the biggest purchasing source for carpets and rugs, Barner contacted Swedish Save the Children, UNICEF, and the ILO to expand her understanding and to get advice about the issue of child labour, especially in South Asia. She soon found that hard data was often elusive. While estimates of child labour in India varied from the governments 1991 census figure of 11.3 million children under 15 working to Human Rights Watchs estimate of between 60 million and 115 million

Catrin Matwinska 1990-04-16

International Business

Foreign Trade University Fall semester 2012

child labourers. It was clear that a very large number of Indian children as young as five years old worked. An estimated 200,000 were employed in the carpet industry, working on looms in large factories, for small subcontractors, and in homes where whole families worked on looms to earn extra income. The Child Labour (Prohibition and Regulation) Act of 1986 prohibited the use of child labour (applying to those under 14) in certain defined hazardous industries and regulated childrens hours and working conditions in others. But the government in India felt that the majority of child labour involved children working alongside and under the supervision of their parents in agriculture, cottage industries, and service roles. Indeed, the law specifically permitted children to work in craft industries in order not to outlaw the passage of specialized handicraft skills from generation to generation. Critics charged that even with these laws on the books, exploitive child labour was widespread because laws were poorly enforced and prosecution rarely severe. In the fall of 1994, after managing the initial response to the crisis, Barner and her direct manager travelled to India, Nepal, and Pakistan to learn more. They went out on unannounced carpet factory raids with local NGOs; they saw child labour and where even thrown out of some places. On the trip, Barner also learned of the formation of the Rugmark Foundation, a recently initiated industry response to the child labour problem in the Indian carpet industry. Triggered by a consumer awareness program started by human rights organizations, consumer activists, and trade unions in Germany in the early 1990s, the Indo-German Export Promotion Council had joined up with key Indian carpet manufacturers and exporters and some Indian NGOs to develop a label certifying that the hand-knotted carpets to which it was attached were made without the use of child labour. To implement this idea, the Rugmark Foundation was organized to supervise the use of the label. It expected to begin exporting rugs carrying a unique identifying number in early 1995. As a major purchaser of Indian rugs, IKEA was invited to sign up with Rugmark as a way of dealing with the on going potential for child labour problems on products sourced from India. On her return to Sweden, Barner again met frequently with the Swedish Save the Childrens expert on child labour. The people there had a very forward-looking view on the issue and taught us a lot, said Barner. Above all, they emphasized the need to ensure you always do what is in the best interests of the child. This was the principle set at the heart of the U.N. Convention on the Rights of the Child (1989), a document with which Barner was now quite familiar. The more Barner learned, the more complex the situation became. As a business area manager with full profit-and-loss responsibility for carpets, she knew she had to protect not only her business but

Catrin Matwinska 1990-04-16

International Business

Foreign Trade University Fall semester 2012

also the IKEA brand and image. Yet she viewed her responsibility as broader than this: She felt the company should do something that would make a difference in the lives of the children she had seen. It was a view that was not universally held within IKEA, where many were concerned that a very proactive stand could put the business at a significant cost disadvantage to its competitors. She also had to decide how to deal with the Indian suppliers apparent violation of the contractual commitment it had made not to use child labour. And finally, this crisis raised the issue of whether the overall approach IKEA had been taking to the issue of child labour was appropriate.

Questions IKEA had three major questions to deal with: Should the company continue to try to deal with the issue through its own relationships with its suppliers? Should it step back and allow Rugmark to monitor the use of child labour on its behalf? Should it recognize that the problem was too deeply embedded in the culture of these countries for it to have any real impact and simply withdraw?

Analysis The best would be to avoid these issues before they accrued or right from the beginning before they have time to harm sales and the IKEA brand name. IKEAs main tactic is the low cost on its products and this is made possible by the cheap labour. In this case the company confronts child labour issue and if customers perceive that the low price they benefit is by child labour exploitation in India, customers will react by avoiding products from IKEA which would result in a drop in sales. To deal with this situation IKEA could withdraw from India just to avoid the lost in sales. Staying and trying to solve the problem would be costly and take a lot of time but if the company withdraws from the Indian market it will loose the opportunity of cheap labour force. This would set the company in a disadvantage position because their competitors is accessing the Indian market and using cheap labour so that they can come up with even cheaper products. Therefore I think that IKEA should not start looking for new productions sites and other business opportunities but have to stay and deal with the problem. By leaving the market they would not only loose the competitive advantage but also put hundreds of working families out of work and that would ultimately create even more problems for them. By staying they would signal that they are not closing their eyes on social problems.

Catrin Matwinska 1990-04-16

International Business

Foreign Trade University Fall semester 2012

Some might say that by staying in India and dealing with the situation by getting more involved would lead to a drop of sales and lost profit in comparison to the competitors. This might be true in the short run when they loose the customers who avoid the products because of the child labour cause and the negative attention around the brand. This might be an blow worth taking because I believe that IKEA in the long run can turn this situation into an opportunity giving themselves and the workers in India some gain from it. They should be actively involved working on a solution and publicizing their achievement to let customers take part and appreciate their effort. This would not only improve the brand image but also give them better profit when good cause products made in a good way are very popular and would increase sales. The good cause products are very much in fashion right now so they can charge a premium price for the products and people would be willing to pay. By staying and working on the situation they have to come up with an solution to the problem and, as mentioned before, a long term strategy to deal with child labour. The manager for carpets should travel down to the Indian supplier and investigate the workplace thoroughly. They should gather all the children working there and offer them education opportunities instead. IKEA should create some kind of own children incentive and have a special budget to help the children found working there. They should also hire experts to keep track of the factory and to execute investigation at its supplier and sub-supplier level. The hired monitor should have access to the factory and do a walkthrough each month to ensure that the conditions of the contract are kept intact. The monitor will also have the mandate not only to investigate companies but also undertake random audits of child labor to IKEAs supplier factories. By making these changes IKEA can continue its already established relationship with the supplier instead of searching for new ones. They should also implement a new contract with harder rules one the child labour part as prevention. That in case of violation of the child labour laws it would lead to immediate resignation. IKEA should also explain that this incident would be treated as a warning. If IKEA does not chose to do this by themselves then working with Rugmark can be good option to make sure the problem is under control. It can be very hard for IKEA to monitor the whole productions process by themselves especially since they are not their own manufacturers but contractors that in addition gets their supplies from other suppliers. By working with Rugmark they make a smaller investment then by trying to fix it by themselves so it can also be good from an economical point of view but also bad because then they dont have the same control or influence. Either way when working with Rugmark IKEA be sure that the carpets are made without child labour and each carpet will get a label with an unique identifying number certifying that the carpet was made without the use of child labour. Rugmark will add more monitoring control and will help guarantee that no child participated in making our products.

Catrin Matwinska 1990-04-16

International Business

Foreign Trade University Fall semester 2012

When IKEA has taken command in the situation and followed the steps above, either by working wit Rugmark or by implementing the changes themselves, then they will have advanced to a proactive level of social responsibility. I also think that IKEA should make an even longer long term plan by advancing themselves to an even higher level of social responsibility interactively by executing more assertive plans. By working on an interactive level IKEA gets a long-term advantage in brand image and profit. When child labour is, like in India, considered a part of the culture and like nothing unnormal it requires a lot of time, energy and finance to make progress. IKEA should work tightly with organisations that have the same goals like them such as UNICEF and Save the Children Alliance (which is a Swedish organization expert on child labour) to learn from each other. They can also involve other NGOs that strive for the same thing. By working with them IKEA can learn to understand how they can prevent child labour more effectively in their organization. Situations for some families in India are hard and they have to send their children to work because of economic initiatives. Therefore IKEA have to in order to improve the situation work deeply in the living system by for example fund a budget in the need of education for those families. By helping them form the ground they can get well educated and improve their economical situation and reduce the need to send children to work. IKEA should together with the other organizations lobby to coerce the government to get involved more actively in the process. In the long run, family income boosting plans need to be implemented to achieve a better standard living for Indian families, as poverty is the root of the problem. Conclusion Even though all these effort sounds challenging and hard to implement a withdrawal from India inhibit IKEA from the opportunity of cheap labour, which is fundamental to compete for cheap prices, especially when other giant rivals are looking at this opportunity at the same time. By doing something about the situation and not withdrawing IKEA will be able to maintain its high values and protect its brand and image. This will help customers identify with IKEA and support its cause, increasing IKEAs sales and preventing more losses from this social issue.

References
Unicef (2012-09-04) IKEA Foundation http://www.unicef.org/corporate_partners/index_25092.html IKEA (2003-03-) IKEAs position on child labour http://www.ikea.com/ms/it_IT/about_ikea/pdf/ikea_position_child_labour.pdf

Catrin Matwinska 1990-04-16

International Business
IKEA (2012-09-23) IKEA does not accept child labour

Foreign Trade University Fall semester 2012

http://www.ikea.com/ms/en_US/about_ikea/our_responsibility/working_conditions/preventing_child_ labour.html John Tagliabue (1996-11-19) Europe Fights Child Labor in Rug Making new york times http://www.nytimes.com/1996/11/19/business/europe-fights-child-labor-in-rug-making.html Marc Wadsworth (2007-05-22) IKEA exposed over 'child Labour' and green issues http://www.the-latest.com/ikea-slammed-over-child-labour-and-green-issues Rosie Bristow (2012-06-06)Tackling the root causes of child labour The Guardian http://www.guardian.co.uk/sustainable-business/live-discussion-tackling-child-labour UNICEF, (1997-) The State of the Worlds Children 1997 focus on child labour, Oxford University press UNICEF (2005-) Child labour resource guide http://www.unicef.org/csr/css/Child_labour_resource_Guide_UK_NatCom.pdf

Catrin Matwinska 1990-04-16