1 Introduction

In recent years, the world has started looking towards companies to bring forward solutions to various challenges, such as those pertaining to the environment and poverty alleviation. The call by the United Nations (UN) to companies in 2000—especially multinational enterprises (MNEs)—to form a Global Compact (GC) was the first action of its kind. This effort is in line with the Millennium Development Goals (MDGs) and Sustainable Development Goals (SDGs) of the UN. Although the participations in such a global legitimate action by MNEs has been a subject of debate and is sometimes criticized as blue wash, the GC, MDGs, and SDGs requested the MNEs to participate in the multilateral discussions as an important global actor. Nowadays, around four in ten sustainability reports from large companies make a connection between their activities and the SDGs (KPMG International 2017).

Against the background of such a ‘cooperative’ relationship between the UN and MNEs, there are failures regarding the UN Code of Conduct on Transnational Corporations, which aims to monitor and control MNEs’ global operations and the problems faced by MNEs such as Nike in 1980s and 1990s. The case of Nike triggered the argument for global sustainable business models of MNEs (Ruggie 2013). It demonstrated the difficulty regarding who is responsible for implementation, and how to implement such a model in the global production system of MNEs between developed and developing countries. Although many visible MNEs recognised the responsibility, which has now become one of the norms in good corporate citizenship, the setting up of an effective way to be responsible is still based on trial and error (Vogel 2005).

MNEs have, either directly or indirectly through their operations, caused many of the problems inherent in the GC, MDGs, and SDGs (Kagata 2006). The economic power of MNEs has both a positive and negative impact on the world. They have efficient large-scale production capacity backed up by advanced technological capabilities, networking ability to connect suppliers across the country, labor absorption ability to provide employment, and marketing method with high-profile brands. MNEs contribute to the economic development of countries (Sekishita 2017). On the other hand, their management has resulted in various problems globally: low wages, poor working conditions, overdevelopment, tax havens (Sekishita 2017; Jones 2005).

In particular, the apparel industry has the characteristic of being labour-intensive, and labour and environmental issues have occurred in some developing countries where companies can take advantage of cheap labour (ILO 2019). In April 2013, a factory in Bangladesh used by some apparel companies from developed countries due to cheap outsourced labour collapsed. The industry came under criticism again and the issue was raised globally in the OECD and the G7. The business model is considered unsustainable (ILO 2019).

What form of business model should MNEs practice, under such circumstances? MNEs, in particular MNEs in the apparel industry, are no longer acceptable the world over. They have now implemented corporate social responsibility (CSR) and sustainability. Furthermore, creating shared value (CSV) (Porter and Kramer 2011), social business (Yunus 2009; Demise 2018), and BOP business (Bottom of the Pyramid) (Prahalad 2005; Hayashi 2016) have now become essential practices in their global businesses. The UN has offered some platforms and ideas to encourage them to solve and implement sustainability voluntarily, not through monitoring and control.

The activities regarding sustainability are multi-dimensional in nature (Vogel 2005). While the apparel MNEs implement sustainability through initiatives such as partnerships and donations, they have faced criticism about working conditions and environmental pollution. Depending on the degree of business model innovation, Schaltegger et al. (2012) divided sustainability strategies, case drivers, and business models into three: defensive, accommodative, and proactive. From the Nike’s case and the accidents in Bangladesh and regarding the arguments, how the MNEs modify their business models in terms of sustainability?

Many arguments focus on MNEs from Europe and the United States, and there is a lack of research on Asian apparel MNEs. This study focuses on Fast Retailing (FR), which is the one of the largest fashion Japanese apparel MNEs that has grown rapidly after Nike’s fiasco. It has a widely distributed production system in Asia including many outsourcing factories. This study clarifies how FR modified its business model and what stage it is currently in.

2 Sustainability in the Apparel Industry

For apparel companies that employ a specialty store retailer of private label apparel (SPA) in particular, the main problems are the poor working conditions and environmental burden. Both problems are strongly related to the competitive business models of the MNEs. SPA is a business model that manages the entire clothing manufacturing process from design to manufacturing to retail. However, some companies outsource their manufacturing. Gap Inc. first adopted outsourcing as its business model in 1987. Other typical examples are FR, Zara, and H&M (The Senken Shinbun 2018).

While the domestic apparel market size has declined from 15 trillion yen during the bubble period to 10 trillion yen, the supply volume has nearly doubled from 2 to 4 billion in 2016 in Japan (Ministry of Economy, Trade, and Industry 2018). There is oversupply in the market because of the mass production and mass disposal model of fast fashion. While this change is in the consumer’s favor, it causes an environmental burden (Tokoro 2010). Additionally, since general clothing, such as men’s clothing, ladies’ wear, and children’s clothing is prioritized on fashionableness, the combination of materials is complicated, the design is not uniform. Therefore, compared with uniforms, recycling of general closing is delayed. There are difficulties in collection and recycling, but there are some companies like FR are addressing the problem (Tokoro 2010).

Working conditions in the outsourcing factories in developing countries have also been criticized. The Nike case of poor working conditions and child labor had triggered the debate on sustainable business model of MNEs. The case questioned the scope of responsibility in the world production system that is large competitive advantage for MNEs. When Nike was criticized, it replied that the conditions in the outsourcing factory was out of Nike’s scope of responsibility because the factory did not belong to Nike. After facing severe criticism from consumers, NGOs, and media, Nike started to audit and monitor the factories, educate and train the workers, and public disclosure of the information on its factories as part of its solution to the problems (Scheiber 2015; Doorey 2011; Park 2006; Vogel 2005; Tulder 2001).

The problem of poor working conditions in the factories is rooted in the power gap between the factory workers in developing countries and retail buyers in developed countries (Perry et al. 2015). Apparel manufacturing is labor intensive. There is little room to save on textiles, which constitutes the largest single cost. This means that the cost of cutting, and stitching clothes is key to overall production costs and ultimately, profits (The Guardian 2014).

In 2013, a fire broke out in a Bangladesh clothing factory. In the building there were five apparel factories that had been commissioned for outsourcing by brand companies. This second incident occurred within six months of the collapse of Rana Plaza that housed several clothing factories and where more than 1100 people had died (CBC news 2013). These accidents once again fueled the debate on the responsibility for the supply chain of brand companies. “Responsible supply chain” was the agenda at the G7 Ellmau Summit held in 2015, confirming the role of the G7 countries in promoting labor rights, certain level of working conditions, and environmental protection in the global supply chain (Ministry of Economy, Trade, and Industry 2018).

While there have historically been severe problems in the apparel industry, they contributed to economic growth and job creation in the eighteenth and nineteenth centuries in newly industrialized countries in Europe (ILO 2019). In the recent year, the industry and the outsourced production is essential for some developing countries in Asia. For example, FR outsources its products to factories in China, Bangladesh, Indonesia, and Vietnam. The major export items for Vietnam are firstly, phones and parts, and secondly, sewn products. Japan is the third major export destination, after the United States and China. Focusing on the relationship with Japan, the sewn items occupied the first place from 2009 to 2017 in Vietnam (JETRO). This shows the importance of the product in export for the countries. Therefore, the problem of working conditions in developing countries is a deep-rooted structural issue; it is not merely a regulatory matter.

Furthermore, apparel industry is still a growth industry. Globally, the market size has expanded from 1306 billion USD in 2015 to 1598 billion USD in 2018. It is forecasted to expand to 2714 billion USD in 2025. The winning model in this market is divided into three types: the high value-added type, global SPA type, and category killer (Roland 2017). In the Japanese market, the spend is decreasing every year. The annual expenditure per household was 137,673 yen in 2017 (from 206, 742 yen in 2000). However, only the both categories low purchases of “less than 3000 yen” and “high price purchase of 20,000 yen or more” is increasing (Ministry of Economy, Trade, and Industry 2018).

This paper focuses on FR, ranked 3rd in the apparel industry. FR was not affected directly from the Nike incident at the time like Gap and Levi’s were, as it has grown rapidly in the 2000s globally. How does FR implement sustainability in its management? Its business model in its global value chain is highly regarded. While FR outsources its production, it has strong ties with its factories (Porter Prize 2009). One of the competitive advantages for outsourcing model is the low cost of production from their production system. This entails large profits as well as poor working conditions in the supplier factories (Kasai 2016). Kasai suggested that FR is under the risk noted above, because they cannot solve the stocks. They postpone the order to the factories as much as possible. It causes too much overwork (Kasai 2016). In fact, while FR invests a lot in Bangladesh; they established joint venture with Grameen healthcare trust in Bangladesh in 2010 to construct SPA there (Tsuboi 2012), they were criticized for the working conditions of their outsourced factories by NGO in 2015.

However, FR’s sustainability actions as a whole are not clear enough yet. This paper explores the transition of FR’s sustainability model historically and by a contents analysis of the sustainability reports focusing on working conditions to contribute to sustainable development in Asia’s production system.

3 Fast Retailing Co., LTD.

3.1 Overview

FR was established in 1963. It employs 52,839 full-time employees (consolidated) as of August 31, 2018. It has a paid-up capital of 10,273 million yen. It owns the brands UNIQLO, GU, Theory, Comptoir des Cotonniers, Princesse tam.tam, and J Brand (FR homepage). At the end of August 2018, UNIQLO Japan had 827 stores and 1241 stores internationally, including 726 in Greater China (Mainland China, Hong Kong, and Taiwan), 186 in South Korea, 198 in Southeast Asia and Oceania, 78 in Europe, and 53 in North America. New store openings have been especially rapid in Greater China and Southeast Asia. Although FR’s sales were just 20% of Gap’s sales in 2000, they were roughly the same by 2015. FR is in the 3rd largest company in the apparel after Inditex and H&M (FR 2017). It is estimated that UNIQLO is in the 8th in Japan Brands 2018 in brand value (Interbrand 2018).

UNIQLO procures its own materials and initiates joint fabric developments. However, the company does not own any factory. FR’s worldwide sales now exceed 500 billion yen, and the maker has tied-up with only 70 long-term-partner companies that comply with UNIQLO’s quantity, delivery, and cost standards to produce at their factories (Porter prize 2009). In addition, FR has formed teams of craftsmen, who have retired from leading Japanese sewing companies with over thirty years’ experience, to transfer know-how to the factories. These craftsmen are involved in every process from thread inspection to shipment of finished products (Porter prize 2009).

Figures 1 and 2 show the change in net sales from 1992 to 2013 and from 2014 to 2019. Although the sales revenues have fluctuated slightly, overall, it shows growth. Recent growth, in particular, is supported by growth of overseas markets (Fig. 3). The first UNIQLO International store opened in the United Kingdom in 2001. By August 2018, UNIQLO International accounted for approximately 51% of total UNIQLO sales, with 1241 stores (vs. 827 stores in Japan). The Asian countries show strong growth (Fast Retailing, homepage).

Fig. 1
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Source Fast Retailing homepage. https://www.fastretailing.com/eng/about/business/aboutfr.html (2019, Jan. 9 last accessed)

FR net sales from 1992 to 2013.

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Fig. 2
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Source Fast Retailing homepage. https://www.fastretailing.com/eng/ir/financial/segment_5yrs.html (2019, Jan. 9 last accessed)

FR net sales from 2014 to 2019.

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Fig. 3
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Source Fast Retailing homepage. https://www.fastretailing.com/eng/ir/financial/segment_5yrs.html (2019, Jan. 9 last accessed)

UNIQLO Overseas operation (%).

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FR adopted IFRS in the fiscal year 2014. The JGAAP data presented for fiscal 2014 is not subject to audit by the independent auditors of the company. 2019 figures are estimated as of 11 October 2018 (Fig. 3).

The principal shareholder of FR is Tadashi Yanai. Although his shareholding has decreased from 26.68 to 21.67% in 2012, he still remains the largest shareholder. In the holdings by shareholder type, Japanese individuals and others have had the highest share since 2002, but their shareholding is decreasing gradually. Until 2004, foreign investors, with the highest holding after Japanese individuals and others, have passed the Japanese financial institutions since the following year. The ratio of Japanese financial institutions has since risen (FR 1997, 2018).

4 Sustainability

When Nike was criticized for its business practices from 1980 to the 2000s, some of the other companies that employed a similar model were also criticized. However, FR did not face any criticism. FR first listed its shares on the Tokyo Stock Exchange and opened its Shanghai office to enhance production management in 1999. The company’s rapid growth started around 2000. This suggests that, before 2000, FR did not get much international attention as Nike and Gap. In fact, FR’s sustainability management information disclosure started from 2005 as shown in Table 1.

Table 1 The chronological table of FR’s sustainable actions from “News & Updates”
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The distinctive effort of its sustainability is in recycling of its products, refugees, and working conditions. The All-product Recycling initiative was started in 2006. The initiative delivers clothing aid to refugees though a partnership with UNHCR (the Office of the United Nations High Commissioner for Refugees). The company has donated 25.58 million secondhand clothing items collected in their stores worldwide (FR 2017).

FR has an established Partner Factory Code of Conduct and it works with its manufacturing partners to ensure that the factories where UNIQLO clothing is made are safe and has appropriate working environments. UNIQLO began monitoring working conditions in primary factories in 2004. This was extended to include working conditions and environmental impact at the fabric supplier level, which constitute 70% of UNIQLO’s production volume in 2015. FR encourages factories to appoint specialized inspectors and create proper inspection systems to improve the monitoring of working environments. UNIQLO sends 170 of its own people to monitor and provide guidance to these factories with regard to manufacturing quality, safety, trueness to the design, and manufacturing volume (FR 2017).

Table 1 shows the brief chronology of FR’s sustainability efforts. FR published its first sustainability report in 2006. This was relatively later compared to other Japanese manufacturers, but not too late compare to their international competitors. H&M published its first report in 2002 (H&M homepage). Inditex published its report in 2003 (Inditex homepage).

In the holdings by shareholder type, foreign investors held the second largest share until 2004. However, together with Japanese investors and Japanese financial institutions, the share has been more than 59% from 2002 to 2018.Yanai owns 26.28% until 2011 (21.67% after 2012). Additionally, UNIQLO’s overseas revenue accounts for only 0.8% (Japanese operation is 95.1%) in 2005 (FR 1997, 2018). This could be because the external pressure from overseas was not strong at that time.

Further, FR is now increasing its focus on other issues. Until 2012, most efforts were in the area of disaster relief and recycling that is regarded to their subjective actions and it is placed in the philanthropic responsibility (Carroll 1991). The accident occurred in Bangladesh in 2013. FR had already started its social business practices in 2010. From 2013, it scaled up its efforts.

Many incidents have come to light from 2014 to 2018 related to FR’s outsourced manufacturing system in China, Cambodia, and Indonesia. They were criticized for their working conditions by NGOs in 2015. SACOM (Students & Scholars Against Misbehaviour) had published a report claiming issues with working conditions in FR factories (SAMCOM 2015). In response, FR stated that it was monitoring its factories.

As their business has grown, the problems of working condition have increased in FR’s factories in Asia. With this, the company has responded to these quickly. Typical example is the sufficient support in Bangladesh. In essence, FR’s response is the same as Nike: audit, monitoring, and disclosure. Similar problems have been experienced already by sports apparel companies before 2000. Although FR has been successful in constructing a distinctive business model, it has had a defensive stance regarding sustainability.

5 Content Analysis to Sustainability Reports

This paper examines their sustainability reports from 2006 to 2018 by content analysis to extract words and capture the relationship between the words (co-occurrence) to clarify more details of their sustainability. The analysis method can be defined as “an observational research method that is used to systematically evaluate the symbolic content of all forms of recorded communications” (Kolbe 1991). In particular, researchers can transfer communication content into data that can be quantitatively compared by using this it (Paisley 1969). One of the content analysis’ advantages is that researchers can capture extracted words automatically and obtain a whole picture and explore the features of the data without prejudices of researcher (Higuchi 2016).

Content analysis is used widely in research to analyze sustainability reports to extract and compare the features and trends (Landrum 2017, 2018). It clarifies the difference of disclosure between family and non-family companies (Campopiano and De Massis 2014). By the content analysis, this paper clarifies the transition of the company’s interest in the sustainability field.

6 Results

Table 2 shows the top 5 frequency in the reports. Although FR does not have any of its own factories for production, the word “factory” (工場) is ranked. In particular, the word ranks in the top 3 from 2010 to 2017. The ratio of overseas sales increased in 2010 (3.4%, 0.5 in 2009). Furthermore, both the word “factory” and “environment” (環境) was in the top 5 from 2010 to 2017.

Table 2 The top 5 of frequencies by each sustainability report
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The word related to sustainability was always found “society” (社会), “labor” (従業), “recycle” (リサイクル), “monitoring”(モニタリング), “refugees” (難民) in top 150 in Table 2. “Recycle” can be found many times, but it is relatively less than the other words as noted above. “Social business” has not been dealt with in the reports in the top 150.

Next, it is investigated the co-occurrence of the words. “Environment” sometimes uses various meaning and co-occurrence various the word. A company interest in the solution of pollution in automobile industry, “environment” often used with “burden” (Negishi 2018).

We can find that FR use the word “environment” meaning workers environment in the factory, not suggest natural environment mainly as shown in Figs. 4 and 5.

Fig. 4
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Co-occurrence network of FR Sustainability Report 2017

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Fig. 5
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Co-occurrence network of FR Sustainability Report 2006

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It is also found that “working” (労働), “factory,” “monitoring,” and “environment” relates strongly in Fig. 4. Comparing with Figs. 4 and 5, the words appear similar, but co-occurrence and frequency are not similar. “Factory” is separated “environment” and “working” in Fig. 5. The trend of co-occurrence like Fig. 4 shows strongly from 2010 as the words have been increasing. Focusing on the word “social (社会)” which also included various meanings, the results suggest “social” do not include labor, factory, human right, and their business directly.

From the result, we can see that FR’s largest concern is their factories’ working conditions. The tendency becomes strong from 2010 onwards. The word “environment” means worker’s conditions in a factory in FR from before 2013 when the accident occurred in Bangladesh and the conditions had been one of the largest agenda for their sustainability.

7 Considerations

There are many differences between industries in the concerns and implementation of sustainability. In the automobile industry for example, in the backdrop of pollution problems, the word “environment” still mainly means the natural environment (Negishi 2018). Unlike other industries, the work in apparel manufacturing is labor intensive, and the industry have been criticized for it. The result is reflected from it.

While the implementation regarding natural environment and resources has become generalized, because it could lead to cost reduction and creation of new markets, it is usually difficult to do so as labor and human rights tends to raise costs (Vogel 2005). Additionally, monitoring and audit is costly because of outsourcing to the numerous factories (Vogel 2005). FR has implemented sustainability practices in its overseas expansion and as a response to disputes from the factories. There is a possibility that cutting down on its list of 70 factories could make them cut costs. The strong ties between them also make it possible. There is also a possibility that they pass on the price decrease partially to consumers. FR differentiates Inditex and H&M in contrast to their focus on fast fashion (FR 2017).

On the other hand, the criticism faced by Nike and other sports apparel industries for their business model since the 1990s has not affected FR much. For example, Nike and Levi’s started their disclosure on supplier list in 1995, but FR did so in 2016 after facing criticism by NGOs in 2015. Furthermore, FR’s implementation to solve the problems have been the same as Nike’s.

They have competitiveness on their supply chain in Asia. It is quite difficult to change it fundamentally in Asia. Hence, FR has responded to the problems by strengthening their continuous effort. Although there is a possibility that they can cut their costs of monitoring and audit, it will not create new value. FR follows a defensive and/or accommodative sustainable business model, and not a proactive model that would redesign their business model (Schaltegger 2012). The efforts with regard to working conditions in factories, support for refugees, and recycling, do not make or relate to profit. No doubt that sending recycled products for refugees is a meaningful activity, but if the items create new value, and can be categorized in the “create value from waste” (Bocken et al. 2014), it will have a significant impact on recovery rates as well.

8 Conclusion

This study examines how FR implemented initiatives to address poor working conditions in outsourcing factories in Asia. They should have been able to develop sustainability efforts based on the lessons learned from Nike.

The result clarifies that their main concerns have been the working conditions in factories and strengthening its implementation. The large number of contractors in compliance monitoring in the apparel industry is suggested as the large problem (Vogel 2005). However, by narrowing the number of contractors (only 70), FR achieves continually both economic growth and monitoring. It is the one of the possibility about sustainability in the global supply chain. On the other hands, the implementation that the monitoring, audit, disclosure of the factories is defensive. The ways of implementation followed is similar to what Nike has implemented. Their implementation is response for the incidents and it does not in itself create new value. One of the reasons is that there is less pressure from the outside, that is, from shareholders and consumers in their primary market. There is the possibility to increase the efficiency with a partnership with others that are an important part of the SDGs. For further research, it should be compared with the practices of Indetex, H&M and Gap. Additionally, it more investigations are required each practice by FR in its factories.

Notes

FR’s sustainability report was not published in 2007. The reports 2006 period is September 2005 to August 2006. The report 2008 period is September 2006–August 2007. 2009 is September 2007–August 2008. The Japanese report of description is the same as English version.