What luxury brands have learned from Italy’s sweatshop scandal

Insiders say the luxury sector is stepping up to tackle an issue that’s long been a blind spot and brands appear to have made progress in tightening up their oversight of external suppliers. Recently, an Armani manufacturing unit has been released from supervision by a court-appointed administrator last week, after satisfying officials that it had taken the necessary steps to improve its supply-chain controls.

An LVMH subsidiary responsible for making Dior handbags is still going through the process, having started months later. Meanwhile, industry leaders and local officials have been working to establish a new protocol for the Lombardy region, where Milan is located, that they say will help prevent future abuses. But critics worry the measures under discussion — voluntary and localised — are simply adding more red tape without really tackling the underlying issues in the sector.

“It is difficult to think that the… action of the [Milan Prosecutor’s] Office has induced a widespread and generalised change and in such a short time,” said Deborah Lucchetti, coordinator of Campagna Abiti Puliti, the Italian branch of labour advocacy group Clean Clothes Campaign. “Effective measures to curb… exploitation in the sector must be binding, provide for public reporting on the real improvement of working conditions and, apply to the entire supply chain, not just a single region or even a single country.”

Luxury brands have long claimed that their supply chains are free from the labour exploitation that plagues more mass-market labels, thanks in part to their strong connection to Italian manufacturing. For years, they have wielded the “Made in Italy” label as a badge of quality and craftsmanship that helps justify increasingly steep price tags and guarantee responsible working conditions.

Major luxury brands typically work directly with a small number of suppliers who then subcontract out work as needed, making it difficult to keep track of where goods are really being produced. And some luxury brands, keen to boost profit margins without sacrificing their “Made in Italy” marketing halo, have not maintained proper controls over their supply chains, according to investigators.

Both Dior and Armani have previously said that the links investigators uncovered between their suppliers and Chinese-owned subcontractors that exploited workers were the result of isolated glitches in otherwise robust systems of control. Dior declined to comment further.

Sanctions against Armani were “due to the behaviour of two of the numerous suppliers employed by the company who, in addition to violating the company’s code of ethics, betrayed the founding values of the Armani Group, which has never pursued profit as an end in itself and has never waived respect for workers and consumers,” the company said in a statement.

Even without further investigations, the impact of the scandal has been felt across the industry, insiders say. Brands have tightened up their auditing systems and placed tougher restrictions on the factories their suppliers can use as subcontractors. “This has had a ripple effect on the other brands. They all went and did their homework,” said Caterina Occhio, a sustainability advisor to the UN and luxury companies and co-founder of ethical supplier network, Ethicarei. “They all got scared.”

Under the oversight of its judicial administrator, Armani has updated its corporate governance structures, according to court documents. It’s made strides to map and streamline its supplier base and rolled out training on compliance across the business. It established a new supervisory body to ensure supply chain controls are operating effectively and that issues are acted upon when they arise. The process to onboard new suppliers has been tightened up and manufacturers will now undergo an audit at least once every two years, the documents say.

The court praised Armani’s rapid and collaborative approach, granting the company’s manufacturing unit an early release from supervision. The swift remedial steps the business has taken were possible because of systems it already had in place and updates have been “not only effective, but also innovative,” it said.

The Prefecture of Milan (a local branch of the interior ministry) has also been consulting on ways to improve supply-chain controls across the industry. A working group that includes government and law enforcement agencies, unions and trade organisations is close to finalising details of a new protocol intended to lay out a common framework of best practices and promote responsible actors.

The proposed system lays out guidelines to include commitments to social welfare and labour standards in contract terms, re-enforcing regulatory requirements. It also aims to establish a centralised database where suppliers could upload documents certifying their compliance with tax and labour laws, making it easier for brands and regulators to carry out checks. However, participation would be voluntary and only apply to the Lombardy region, where Milan is located.

The changes come at a precarious moment for Italy’s manufacturing sector. The luxury downturn has hit the industry hard and manufacturers say they are already drowning in regulatory red tape. More than 3,000 factories making clothing, textiles and leather goods closed last year, according to the portal for Italy’s business register, InfoCamere.

 The participation of key trade groups like Camera Nazionale della Moda Italiana and Confindustria Moda means widespread uptake is likely, they say. CNMI and Confindustria Moda declined to comment. Critics still worry that the system will simply add another layer of costly bureaucracy for manufacturers, without addressing underlying pressures caused by demand for lower-cost, more agile production from big brands.

Questions also remain over how the process will be policed to prevent unscrupulous actors from simply becoming “ghosts in the system,” as one manufacturer put it. Similar measures have done little to prevent abuses in other industries, like agriculture. The European Union reconsiders flagship regulation intended to make large brands operating in the trading bloc more accountable for labour abuses in their supply chains.

“Unless we challenge and change the underlying business conditions that push suppliers to cheat, nothing will change,” said Hakan Karaosman, an assistant professor of sustainable supply chain management at Cardiff University. “Luxury needs to remember that what they do today will be their legacy in 10 to 20 years. And heritage is one of the most critical factors they need to succeed in the marketplace.”

Adapted from Business Of Fashion, Fortune, Reuters

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