NO WAY OUT
Competition to make products for Western companies has revived an old form of abuse: debt bondage.

By Nicholas Stein
FORTUNE    January 20, 2003

For the privilege of working 12-hour shifts seven days a week in a factory where she makes plastic casings for Motorola cellphones, Mary, 30, will be in debt for years to come.

Mary already owes every penny she earns. In the circular, crazy logic of the global labor economy, she owes the money precisely because she has a job. And she is bound to her job as a result of her debt. Once it would have been called indentured servitude. Today, in some parts of the world, it's standard hiring practice.

This is how it works: To secure work at the Motorola subcontractor, which is in Taiwan, Mary had to pay $2,400 to a labor broker in her native Philippines. She didn't have that kind of money, so, as is common, she borrowed from a local money lender at an interest rate of 10% per month. That payment, however, got her only as far as Taiwan. A second labor broker met Mary at the Taipei airport and informed her of his separate $3,900 fee before delivering her to the new job.

Before she left the Philippines, Mary rejoiced at the $460 a month she would be earning in Taiwan; it was a princely sum, more than five times what she could make doing similar work, if she could even find it, in her own country. But once in Taiwan she began to realize that after the brokers' fees and other deductions, she would be left with almost nothing. Out of her monthly check came $215 to repay the Taiwanese broker, $91 for Taiwanese income tax, $72 for her room and board at the factory dorm, and $86 for a compulsory contribution to a savings bond she will get only if she completes her three-year contract. After 18 months she will have repaid the Taiwanese labor broker. But she still must contend with the Philippine debt and its rapidly compounding interest. "It is very painful for us to have to pay so much of our money," says Mary, who asked FORTUNE to change her name to protect her identity. "But we don't have a choice. We either have to take it or leave it."

There are many forms of debt bondage. As students of American history can attest, we've seen our share on these shores, from coal miners forced to buy overpriced food at the company store to sharecroppers trapped by the money they owe landowners. Even today many illegal Mexican immigrants are working to pay off debts to the so-called coyotes who smuggled them across the Rio Grande. But unlike coyotes, the Asian labor brokers to whom workers like Mary are indebted operate in the open. Their services are sought by the factories that import foreign workers and sanctioned by the governments that send and receive them. The labor trade they facilitate functions in the name of global competition.

When Motorola, Ericsson, Nike, and other Western companies contract with Asian factories to produce cellphones and modems, sew clothes, or prepare leather for shoes, they are thinking about costs. The globalization of manufacturing has been a tremendous boon to corporations, allowing them to seek the lowest-cost suppliers, wherever they may be. Today the vast majority of suppliers reside in Asia, and the lowest costs on the continent are found in the new manufacturing mecca: China.

What does that last fact have to do with the labor trade? Everything. With its vast pool of cheap labor, China has proved irresistible to Western manufacturers, which have been flocking there since liberalization in the mid-1990s. As a result, factories that operate in countries such as Taiwan, South Korea, and Malaysia, which have higher labor costs, have had to scramble to compete. The solution they devised was to import workers from poor neighbors--Vietnam, Thailand, the Philippines--and sign them up for two- or three-year contracts. The cost savings are real: In Taiwan, for example, native factory workers earn between $600 and $850 a month, while their foreign co-workers get the minimum wage of $460 and are ineligible for raises and promotions. Moreover, because they need the job to pay off labor brokers, overseas workers are less likely to complain about long hours or abusive supervisors. The logic has caught on: The number of foreign contract workers in Taiwan alone has doubled, to 316,000, in the past seven years.

Five years ago the chief labor issue for American companies like Nike, Liz Claiborne, and Gap was the sweatshop conditions in suppliers' factories. In response to protests and boycotts, U.S. companies began to demand that factories meet basic health and safety standards, providing workers with facemasks, bathroom breaks, and well-ventilated workspaces. But the debt bondage ensnaring many foreign workers in those factories has not yet hit the radar of most big corporations. It will.

During a trip to Taiwan and the Philippines in December, FORTUNE visited four factories in the apparel and high-tech sectors, spoke with half-a-dozen labor brokers, and interviewed more than 50 overseas contract workers from Vietnam, Thailand, and the Philippines. All the workers reported paying broker fees similar to Mary's, and many had suffered other abuses as well. In theory, engaging foreign contract workers is a solution that should benefit all parties: Poor countries reduce their unemployment, wealthy countries get cheaper labor, and the workers earn far more abroad than they could at home. In practice, however, the labor brokers have every incentive and opportunity to gouge the workers under their control.

Li Tung International, one of Taiwan's largest labor brokerages, occupies the fifth floor of a low-rise office building on the industrial outskirts of Taipei. The firm's general manager, Eric Chiang, has been in the business for ten years and has a fleet of luxury automobiles to show for it, including a Porsche Boxster, a Lotus Elise, and a chauffeur-driven BMW sedan. Sitting in his well-appointed office one December afternoon, surrounded by fine art and antiques, Chiang acknowledges that other Taiwanese labor brokers may take advantage of foreign workers. But he insists that his firm charges only the legal limit. "We sign contracts with the Thai and Philippine governments," he says. "It is impossible that we charge higher than what the law requires." For a worker on a three-year contract, that limit is $1,725, about 10% of a worker's gross pay, collected in monthly installments.

The foreign workers under contract to Li Tung, however, tell a different story. FORTUNE spoke to more than a dozen, some in the company of their factory managers and others in the privacy of their dorms. All cited payments far in excess of the legal limit. At a tannery that provides leather to Nike for its athletic shoes, a young worker from Thailand says he is paying $2,100 for his three-year contract. At the plastics factory where Mary works producing parts destined for Motorola, General Motors, Mercedes-Benz, and others, a Thai worker says he is paying $2,900 on a two-year contract. And at a garment factory that supplies brassieres to the underwear giant Wacoal, a Filipina worker tells FORTUNE that she paid $2,900, all of it in the first 15 months, which meant monthly payments four times the legal limit. A Li Tung spokesman would not confirm these fees but says many workers return to the agency for a second contract, so they must find the terms acceptable.

Overcharging, it turns out, is an accepted business practice for labor brokers, and some are not afraid to admit it. In Manila a labor broker from the D.A. Rodrigo agency said that her firm charges Taiwan-bound workers a $1,600 fee, equivalent to more than three months' salary, even though Philippine law prohibits a broker's fee from exceeding one month's wages. The laws are simply not enforced. In fact, the broker admitted overcharging during an interview that took place while she was waiting to file papers inside the Philippine Overseas Employment Administration, the government branch charged with protecting the interests of workers who go abroad. "One month's salary is not enough to maintain a business like this," says Salvador Curameng, a Manila labor broker who presides over the profession's trade association, the Asian Recruitment Council. "Once you dip your fingers into this market, you are committing to do something illegal."

Governments are willing to look the other way because of what they get in return: The labor trade means jobs and capital will stay in their countries and not get shipped to China. Nations that import labor also tailor their laws to keep local factories happy. To hold turnover to a minimum, governments allow factories to retain workers' passports, impose curfews, and deduct compulsory savings bonds--or "run-away insurance"--which workers get back only when they have completed their contract. In South Korea, which limits foreign laborers to a single three-year visit, workers are considered trainees their first two years, so they are exempt from most of the country's labor laws, including minimum wage and overtime. In an effort to aid Taiwan's slumping manufacturing sector, the government last year passed a law allowing factories to charge foreign workers room and board.

The contracts are meant to be short term. Once they have finished, importing nations are eager to ensure that the workers won't find a way to stay. Almost all allow factories to administer pregnancy tests to female workers before they arrive. If a worker gets pregnant in Malaysia, the factory can terminate her contract and force her to cover the cost of her return airfare. Though Taiwan recently changed its law to allow pregnant workers to stay, in practice they are typically given the choice of abortion or deportation. Foreign workers who think marriage to a Taiwanese national is the route to permanent residency are out of luck: Marriage is grounds for immediate deportation.

Manila's C-5 Expressway runs straight through Escopa 3, a cramped and crowded neighborhood of rickety wood-and-tin shanties. Beneath the highway's overpass, 34-year-old Edwin lives with his brother and sister in a dark two-room dwelling. The stench of raw sewage seeps in from the narrow streets. Edwin has attempted to work overseas twice. He first left home in 1996 for a job in a Taiwanese factory, testing circuitboards for Sony computers. The experience proved disastrous. The factory was having financial troubles and eventually shut down. Edwin was shuttled to another factory owned by the same company but never got the four months' salary he was owed from the first job--nor the $2,000 in run-away insurance that had been deducted from his pay. When he returned to Manila, all Edwin had to show for three years of work was $1,100.

The second time Edwin sought work in Taiwan, in 2000, the experience was worse. His Philippine labor broker absconded with his $1,000 placement fee and never even got him a job. A subsequent class-action suit claimed that she had bilked 286 others out of fees ranging from $500 to $1,700. Two years later the case remains unresolved.

Stories like Edwin's are not uncommon. Stranded in a foreign country with no knowledge of the local language or labor laws, lacking government protection, and restrained by debt, foreign contract workers are especially vulnerable to mistreatment. "Some of the worst abuses we've ever seen have been in factories with foreign contract workers," says Heather White, executive director of Verite, an Amherst, Mass., nonprofit organization that has audited more than 1,000 factories on behalf of large corporations.

At the Hope Workers' Center, a shelter for foreign laborers in Taiwan, Father Peter O'Neill tends a wall of filing cabinets filled with complaints against employers. Most workers complain about unpaid wages, though there are also instances of forced labor, physical abuse, and even rape. In one case Vietnamese workers who made clothes for an Ann Taylor Loft and Dockers supplier charged that their employer withheld their passports and forced them to sign a contract in Chinese that they couldn't read. "We have workers come to the center who have been in Taiwan for six months," says O'Neill, "and have never seen Taiwanese money."

Felicidad Revolledo was working in Taiwan assembling modems for an Ericsson and Motorola subcontractor, when the factory simply cut her wages in half and suspended overtime pay for four months. When she refused to work more overtime until she got paid, she says the factory forced her to resign. Revolledo was lucky; she didn't owe any money in the Philippines. "A lot of my co-workers still working at the factory can't fight for their rights," says Revolledo, who left Taiwan in December, seven months before the end of her contract. "They are afraid to be sent back before they pay off their loans."

Now home in the Philippines, Revolledo hasn't been able to find another job. She's thinking about borrowing money to pay a labor broker to get back to Taiwan. "I cry a lot," she says. "But I think next time it will be better."

Once you've visited a place like Escopa 3, you immediately understand why people are desperate enough to seek work as an overseas contract worker again and again. "The choice is overseas employment or unemployment and poverty," says Mary Lou Alcid, the executive director of the Kanlungan Center for Migrant Workers in Manila. "Workers' expectations are high that they will be able to make big amounts of money--that the bad experiences will happen to someone else." Dr. Mariano Gagui, a psychiatrist who has treated many contract workers after their return to Escopa 3, says people are ashamed to talk about their ordeal. "A lot get traumatized," he says. "And you are not going to admit that going abroad is why the life of your family has disintegrated, why your husband is with another woman, and why your kids are on drugs."

The plight of overseas contract workers is just starting to enter the consciousness of big corporations. A year and a half ago Gap launched a new division of its global compliance department devoted solely to monitoring the treatment of foreign contract workers by its subcontractors abroad. "The presence of foreign workers is now one of the core issues we look at when we evaluate a new supplier--just like product quality or safety standards," says Dan Henkle, the apparel giant's vice president of global compliance. If a factory does employ foreign workers, Gap requires that factory management let the workers control their own travel documents and wages. Management must also agree to assume the workers' debt and travel costs if they choose to leave. "We want workers to feel they can leave at any time for any reason," says Henkle. Even with those rules in place, Gap remains wary of the possibilities for abuse: Only 5% of the company's production comes from factories that use overseas contract workers.

Gap's active response is unusual. "Companies are only beginning to understand this issue," says Doug Cahn, vice president of Reebok's human rights programs. "Although there are instances where some progress has been made, generally the abuses facing migrant laborers remain widespread." As a result, Reebok pays particular attention to subcontractors who use those workers.

Because of intense criticism over human rights abuses in the apparel and footwear industry over the past half-decade, companies like Gap, Reebok, and Nike are generally alert to labor issues. Many now monitor factories, and judging from FORTUNE's visit to the Yng Hsing tannery in Taiwan, which last year supplied leather for a million pairs of Nike Air Jordan basketball shoes, physical working conditions have improved as a result. "After we started working with Nike, we had to change our philosophy," says Philip Lo, the tannery's vice general manager. "They have strict requests about how you treat safety, health, attitude, environment." Nike is so sensitive to potential criticism that when the company learned of FORTUNE's visit to Yng Hsing, it immediately informed the tannery that unless it passed a hastily arranged inspection, it would be removed from Nike's supplier list.

The debt burdens and abuses of foreign contract workers, however, don't get the same level of attention as factory conditions. While Nike is aware of the abuses often faced by the workers, the company has no policy specifically governing supplier behavior on the issue--beyond a general statement in its code of conduct prohibiting forced labor. And this is a company whose brand was famously slammed in the late 1990s over the conduct of some of its suppliers. Nike's audit of Yng Hsing, which the tannery passed, did not even address the crushing debt loads carried by some of its Thai workers. "We checked out Yng Hsing," says a senior Nike official, "and all their employment contracts conform to Taiwanese law." (Nike declined to comment for attribution because of a pending lawsuit on another matter.)

In the high-tech sector, there appears to be even less attention paid to potential abuses. "I wasn't aware of this at all," said Pia Gideon, Ericsson's vice president of external relations, when first informed about the experiences of Revolledo and other foreign workers at a Taiwanese factory producing the Swedish company's modems. "I've never heard any indication about this situation in Taiwan." During a subsequent conversation, Gideon made a distinction between Ericsson's direct contractors, which it audits periodically, and subcontractors, which it expects to do "self-assessments" of the conditions in their factories. "I don't think you can have a law that says if you don't do this or that we will punish you," says Gideon. "Business doesn't work that way. We want our subcontractors to act a certain way, and we have to trust them." (Motorola representatives declined to be interviewed but issued a written statement saying the company "has a strict policy of adherence to the laws and labor practices in the countries where it operates, in addition to a rigorous code of conduct.")

FORTUNE visited factories and spoke with workers who make products for Nike, Motorola, and Ericsson, but they are not the only companies whose subcontractors rely on overseas contract workers. And with so many independent monitors now assessing labor rights and working conditions in manufacturing plants, it's hard to believe they could be completely ignorant of debt bondage in their supplier companies. "Five years ago, clients could say, 'I didn't know,'" says Verite's White. "There were no monitors. There was no awareness. They can't say that anymore. They have to acknowledge what is going on."

Companies' acknowledgment of the debt burden--and their doing something about it--is the best hope for the factory workers. And it's not an altogether quixotic one. After all, when companies believed their brands were at risk because of the sweatshop issue, they took action. The alternative is bleak. People like Mary and Edwin will continue to go to Taiwan or other countries as long as jobs remain scarce at home. "There are so many problems if I stay in the Philippines," says Edwin. "So what's more if I go abroad?"And when they do--barring pressure from Western corporations--they will continue to owe nearly everything they earn to the labor brokers.