Fashion brands struggle to balance profit and principle in China

Major apparel names face calls to cut ties to reported forced labour in China while chasing growth in a crucial market


Man holds up sign protesting China's treatment of Uyghur Muslims

Fashion brands love to promote their commitment to sustainability. But when the industry’s links to forced labour in China’s Xinjiang region has come up on recent earnings calls, apparel executives have been reticent. 

“With regard to China, the situation remains complex,” said H&M CEO Helena Helmersson on a July 1 conference call on the company’s latest quarterly results. 

Such terse comments contrast with fashion brands’ otherwise high-profile embrace of environmental, sustainability and governance (ESG) values, reflecting the challenge they face in upholding their own human rights pledges and international standards without jeopardising a crucial growth market. 

That dilemma is heightened by the broader trade and human rights tensions roiling relations between China and the West. 

“They’re caught in between two big markets. So they have to make a decision about how they continue to balance, by saying one thing and doing another, or by saying one thing and not doing anything,” says Sarosh Kuruvilla, a professor at Cornell University’s School of Industrial and Labor Relations and the author of a recent book on corporate self-regulation in world supply chains. 

Trying to serve two masters

The challenge was evident earlier this year when brands including H&M and Nike became the targets of a Chinese boycott over months-old statements expressing concern about alleged forced labour by the Uyghur Muslim minority in cotton production in Xinjiang. 

Reports have tied many of the world’s best-known clothing brands to Xinjiang cotton through their supply chains or to forced Uyghur labour elsewhere when workers have been sent to textile factories around China.

The whole luxury market is going to be very dependent on China. It’s highly dependent now, but it’s going to be more and more in the next five-plus years

The Chinese backlash against H&M, which included the company being dropped from major e-commerce sites like JD.com and Tmall, led the Swedish fashion giant to issue a statement saying it was “dedicated to regaining the trust and confidence of our customers, colleagues, and business partners in China”. 

Conversely, Inditex, parent of fast-fashion retailer Zara, came under fire from Western activists in March after quietly removing a statement from its site about forced labour in Xinjiang. The activists urged the company to reaffirm that none of its fabrics use cotton from the region.

Seizing the China opportunity

Caught between both sides, it’s perhaps not surprising that top apparel executives have turned tight-lipped on the forced labor issue. At the same time, they’ve not been shy when it comes to discussing China’s market potential.

“China is a primary focus for us. It will continue to be. We think we can create enormous value out of that market,” said Burberry CEO Marco Gobbetti during the luxury brand’s fiscal fourth-quarter earnings presentation in May. Its overall 32% year-on-year gain in comparable store sales was buoyed by a 50% sales jump in mainland China.

Likewise, German fashion house Hugo Boss said it almost doubled sales in China during the first three months of 2021. CFO Yves Müller talked up the company’s plans to expand its presence in Asia, especially China, while scaling back in Europe and the US in the coming years. 

China’s relatively quick recovery from Covid-19 has made it all the more appealing for retailers hard hit by the pandemic. That’s especially true for luxury brands, which have long cultivated the nation’s surging base of affluent shoppers.

“The whole luxury market is going to be very dependent on China. It’s highly dependent now, but it’s going to be more and more in the next five-plus years,” says David Swartz, an analyst covering the apparel industry for US-based investment research firm Morningstar. 

Consulting firm Bain & Company projects China will make up 46% of the worldwide luxury goods market by 2025, up from 35% in 2019. Against this backdrop, Swartz suggests apparel brands have more to lose by irking the Chinese government or consumers than running afoul of ESG-focused investors or activists in the US and Europe. 

A low-risk investment?

Morningstar unit Sustainalytics analyses the investment risk of companies across 42 industries on ESG issues. It generally rates companies in the apparel/textile sector as low-to-medium risk. 

Given the industry’s long association with poor working conditions and low wages, as well as tragedies like the Rana Plaza collapse in 2013, that might seem strange. But the investment risk is minimised by a lack of regulation, especially around supply chains, “and the fact that many people still consume these products despite their negative impact on people and the planet”, explains Jessica Grant, a senior researcher for Sustainalytics. 

There are exceptions. Grant points to the controversy that arose last year over allegations of modern slavery at UK-based online retailer Boohoo Group. A Sunday Times investigation revealed evidence of illegally low wages and abusive working conditions among its Leicester-based suppliers.

Because of subsequent actions taken against Boohoo, such as divestment by Aberdeen Standard Investments, one of the company’s largest investors, Sustainalytics downgraded Boohoo’s overall risk score. It’s now teetering on the cusp of “high risk”, Grant says.

A Boohoo spokesperson says the company is making “great progress” on its ‘Agenda for Change’ programme undertaken last year. “We are also working collaboratively with government agencies, NGOs and many more to drive long- term meaningful change which will make a positive difference  to the sector and those employed in it.”

Government action heats up

To ratchet up regulatory pressure, Western governments have begun taking steps to address Uyghur forced labour. US Customs and Border Protection (CBP) has ramped up enforcement of orders to stop imports of cotton and other products from Xinjiang, according to a Wall Street Journal report last month. 

Japanese retailer Uniqlo is among the companies whose shipments were detained because they contained goods suspected of being produced at least partly by slave labour in Xinjiang. 

Separately, the US Senate in July passed the Uyghur Forced Labor Prevention Act. The bipartisan bill would ban imports from Xinjiang on the presumption that goods manufactured in the region are made with forced labour, unless deemed otherwise. 

They have to make a decision about how they continue to balance, by saying one thing and doing another, or by saying one thing and not doing anything

Europe is pushing new measures as well. The EU in March introduced legislation that would require companies in member countries to conduct due diligence to ensure against human rights violations in their supply chains. Norway passed its own human rights due diligence law in April, with Germany following suit in June. 

And while the UK’s Modern Slavery Act of 2015 already targets forced labour and human trafficking, advocacy groups are pushing Parliament to pass a mandatory due diligence law to bolster the existing legislation. 

Relying on private regulation 

Apparel companies have long conducted voluntary social audits of their operations, but experts say this system of private regulation often falls short. 

In particular, efforts to monitor and prevent labour violations typically focus on the facilities where the final product is made. But businesses struggle to extend their auditing oversight to earlier parts of the supply chain, like spinning mills and cotton farms, where forced labour is more likely to be pervasive. 

In its latest report on the apparel industry, the nonprofit KnowTheChain – which tracks corporate supply chain practices – found that just 19% of the 37 companies it studied disclosed labour risks across the tiers of their supply chains. 

Some companies have made significant progress. For example, Boohoo announced in June that it will grow its own cotton in Pakistan. Still, there is much more to do across the sector as a whole.

“The supply chain traceability problem is not something that the apparel companies have solved,” says Kuruvilla.