Capitalist solution for a capitalist failure

In April 2013, a horrendous collapse of a rickety garment factory in Bangladesh killed more than 1,100 workers. The year before, fire swept through another, killing 117 people, and despite such tragedies, improvements in that country’s garment sector have been few and far between.

Bangladesh-rmg-workerThe reality is that capitalism and globalization have given Western consumers cheap goods and helped emerging economies grow, but that’s usually done through the exploitation of workers and the environment. Shop floor conditions are Dickensian in Bangladesh and elsewhere because there continues to be a race to the bottom that doesn’t seem to be reversing.

But Oliver Niedermaier has come up with a “capitalist solution for a capitalist failure.” He founded private-equity firm Tau Investment Management (Tau means “resurrection in the Greek alphabet) in partnership with Alex Soros and other well-heeled Americans who are raising US$1-billion to clean up the world’s worst supply chains.

The idea is to use capital to invest in inefficient supply chains and transform them into ethical, sustainable and efficient businesses that pay decent wages and respect the environment.

This is not about charity. Tau hopes to generate above-market returns for its investors. “Supply chains represent the biggest cleanup requirement in capitalism,” he said in a recent interview in New York. “When we started setting up Tau as a firm, one of the first areas we were looking at was the garment manufacturing industry because we view it as one of the biggest turnaround opportunities in history.”

With a substantial pledge from Soros, Tau has assembled “boots on the ground” in Bangladesh and will invest in a handful of the country’s 6,000 garment manufacturers. Its team includes experts in manufacturing systems and processes, human resources and environmental practices.

“To upgrade jobs there must be more automation but bigger efficiencies will create sustainable employment with higher wages, better environmental practices, training, opportunities, child care and health care for workers,” he said. “Ninety-five percent of workers are women who are underpaid, and supervisors are picked because they are male and can shout at the women.”

Another Tau founder is former ExxonMobil Corp. vice-president of global procurement Jean Baderschneider, who has been active in the fight against forced and slave labour. She believes Tau represents the best, and perhaps only, way to stop the exploitation of workers.

“There is legislation against forced labor in 190 countries but laws have no teeth,” she said. “NGOs don’t know how to create sustainable businesses, and governments are part of the problem. The solution is that business must be engaged in human rights issues, just as it has become involved in health and safety issues. Companies must buy into the cause and make money from it.”

Tau hopes to raise a total of US$1 billion by 2015 from importers and investors. Garment manufacturing is the world’s third-biggest industry — some US$700-billion a year — behind only autos and electronics.

This spring, Tau announced its first investment fund in Dhaka and was deluged with interest from suppliers that want to tap into its funds, expertise and contacts with western customers.

“There are 6,000 factories in Bangladesh and consolidation will eventually reduce the number to 2,500 bigger and better platforms. The total Foreign Direct Investment in 2013 in Bangladesh was US$1.3 billion and our US$200 million in Bangladesh will make a big difference,” Mr. Niedermaier said.

Tau’s private-equity team has screened 1,000 companies in Asia with at least $70-million in annual revenues and reviewed more than 150 so far in Bangladesh, Vietnam, Cambodia, and Indonesia. “We are looking for ethical management, often second-generation family owners, who have been educated in the west,” he said.

Turnarounds will concentrate on processes, replacing old machinery and dirty diesel generators to reduce power costs and emissions, and work practices. “We have a blueprint of every detail of the manufacturing process,” Mr. Niedermaier said. “For instance, buying strong needles for sewing machines, instead of cheap ones that break constantly, can dramatically increase productivity. Simple but efficient.”

Tau will retain or recruit managers “who know how to treat people properly to get good outcomes.” Metrics, including labour and environmental measures, will be transparent to investors and available in real time.

Since the two factory tragedies, Bangladesh has increased minimum wages (to a paltry US$38 a month), allowed more unionization and shut down a few of the worst culprits.

Some Western companies have invested in their suppliers to address some issues and Western nations have asked retailers and clothing manufacturers to improve conditions. California passed laws that make buyers legally responsible for supply chain abuses and an executive order from U.S. President Barack Obama applies tough standards on all defence contractors.

“California has a strong law already in place and this is good,” Mr. Niedermaier said. “If you want to change the world you have to change the way corporations work and change the laws to get boards moving.”

Within 18 months, Tau hopes to prove that its handful of Bangladeshi suppliers can do well by doing good. This will encourage others to do the same and demonstrate to Western retailers, consumers and brand-name manufacturers that they can still source goods cheaply without the mass exploitation of women or the environment.

“Suppliers want change and retailers want fewer, more strategic suppliers. Most of all, they don’t want to find their labels in the rubble of a factory that’s collapsed,” Mr. Niedermaier said. “We think we will be able to organize a race to the top and fix the capitalist model.”

Courtesy: Financial Post