“The era of cheap labor is coming to an end,” says Dov Charney, the founder and chief executive officer of apparel chain American Apparel.
For decades, the fabric and garment industries have been engaged in a constant chase for cheaper labor—from the mills of England to New England in the 19th century; to the sweatshops of the Lower East Side of Manhattan a century ago to textile plants in South Carolina in the first half of the 20th century; to the Philippines, South Korea, and China in the second half of the 20th century; and now to places like Bangladesh and Africa.
But every strategy has its limits. And the limit may have been breached in Bangladesh, where the collapse of the Rana Plaza garment factory has claimed the lives of at least 800 people, most of them extremely low-paid workers. The disaster has inspired a backlash and a round of soul-searching.
Charney, who sells $600 million worth of clothes a year, understands the business and the pressures that suppliers face. American Apparel has 249 stores in the U.S. and 20 other countries and manufactures clothing for other companies.
All clothing manufacturers are under intense pressure. Miss a deadline, and you own the goods. “If you’re in Bangladesh and you don’t put the merchandise on a boat by a certain date, you’re done. You’re out of business. You’ll do anything to get those goods out,” says Charney. That mindset encourages cutting corners and pushing employees and facilities to the limit, all while constantly looking for the lowest possible price, he says.
In the 21st century, most companies outsource production to overseas contractors and subcontractors, who scour the globe for the cheapest possible labor. But Charney has borrowed a page from industrialists of the early 20th century, pursuing a strategy of so-called vertical integration, which means it makes almost all the clothes it sells in a factory in Los Angeles. And, as Henry Ford did a century ago, American Apparel strives to pay an above-market wage. The company says, “The average sewer with experience at American Apparel is making about $25,000/yr, or $12 an hour, almost twice the federal minimum.” The company also provide benefits including “subsidized public transport, subsidized lunches, free on-site massages, a bike lending program,” low-cost health insurance, and a medical clinic. In contrast to some other companies that keep information about their supply chains opaque, American Apparel invites people to explore its factory online.
Charney is a controversial character. He has been accused of flaunting norms of employer-employee relationships and has exhibited an openness about sexuality not common among CEOs of publicly held companies. As The New York Times noted in an April 2011 article: “Mr. Charney masturbated in front of a female reporter from now-defunct Jane magazine. In 2008 he was lampooned on ‘Saturday Night Live’ for walking around the office in his underpants.” Charney has also been on the receiving end of several sexual-harassment lawsuits, virtually all of which have been thrown out, dismissed, or settled.
Ralph Lauren, he isn’t. But Charney’s image and voluble mien shouldn’t detract from the seriousness of his message. The reliance on ever-lower wages is a big problem for apparel companies.
Charney argues that his peers and rivals should embrace voluntary higher wages, for a host of reasons. First, the world is changing. A strategy that is already yielding diminishing returns for many is likely to offer even more meager ones in the future. If global growth continues, wages will eventually harmonize and converge across the world, much as they have done in Europe and in the U.S. “It used to be that Maine was so inexpensive,” he notes. Many garment factories have already left China in search of cheaper areas. At some point in the not-too-distant future, today’s low-cost locales will be middle-class societies. “I’m in Korea right now, and you can see pictures from 40 years ago. Most places are getting richer and richer,” he said.
Consumers, by and large, don’t care about apparel companies eschewing sweatshop labor. “If you hope it’s a marketing tool, it never works,” he said. “That’s worth about 1 percent.” But while paying above-market wages may not make consumers feel warm and fuzzy toward a retailer, it will help the employees and owners feel better about their profession. “A lot of well-educated businesspeople will say, ‘I don’t know if I want to be part of this,’” Charney said. “I’m a young entrepreneur from Montreal. I could have dealt drugs. I could have been a party promoter. But selling heroin isn’t good for anyone. I want to assert my self-interest, but I don’t want to hurt people. People don’t want to be evil if they can avoid it. It doesn’t feel good.” And running a business that relies on paying people 20 cents an hour to work in potentially fatal conditions doesn’t make people feel good.
Ultimately, though, Charney says embracing and dealing with higher wages is good for the viability of a business, whether you’re making clothes or electronics. Companies that consciously pay higher wages than competitors, thus disadvantaging themselves, have to work harder in other areas. “You have to engineer products in such a way that it doesn’t require cheap labor,” he said. “Maybe you remove a couple of buttons, and remove some details.” Designing a shoe, maybe a company substitutes polyurethane for leather in some areas or doesn’t use silk for the laces. As Charney sees it, higher wages for workers on the bottom end of the income scale require higher-paid employees—the store manager, the marketer, the people running distribution and sales—to figure out how to operate more intelligently and efficiently. “It puts pressure on the white-collar worker rather than on the blue-collar worker,” he said.
Of course, the bottom line is the bottom line. And while American Apparel’s vertically integrated approach may prove more morally satisfying, it hasn’t necessarily proven to be a better business model. Like many companies, American Apparel experienced significant losses during the recession. In 2010 it lost nearly one third of its employees in an immigration sweep. The company, which had $617 million in sales last year, operates on very slim margins. It reported a net loss for 2012, though it eked out a slim $4.9 million profit in the fourth quarter. It pays a hefty interest rate to borrow. American Apparel is a small firm, with a market capitalization of about $210 million. But in the past two years, as the chart below shows, American Apparel’s stock has performed about as well as Walmart and the market as a whole.
Charney says the company’s results—positive or negative—shouldn’t be seen as a verdict on its labor policy. Even while paying higher wages, American Apparel’s products are competitive on price with companies that rely on lower-cost labor. “My profitability challenge isn’t in the cost of goods,” he says. “In my opinion, my profitability challenges result from logistics issues, store management issues, organizational issues—they are white-collar issues,” he says. “This is an intensely and fiercely competitive industry.”