Case: Pepsi in Burma
Pepsi's Burma Connection
From: Business Ethics Concepts and Cases 5th ed. Velasquez (pp. 163-167)
On April 23, 1996, PepsiCo announced that it had decided to sell its 40 percent stake in a
bottling plant in Burma in part because of criticisms that by remaining in Burma the company
was helping to support the repressive military regime that now ruled the country. In a letter to a
shareholder who had been one of many pressuring the company to get out of Burma, the
company's corporate secretary wrote:
When we first spoke about Burma I promised to stay in touch with you on the subject. In that
spirit, I wanted to let you know about a change in our business there. We've decided to sell
PepsiCo's minority stake in our franchise bottler and we expect to finalize the divestiture soon.
As a result we will have no employees and no assets in the country.
We're taking this action for a number of reasons, including the sentiment expressed by you and
others about investing in Burma at this time. Having said that, let me reiterate our belief that free
trade leads to free societies.
The letter, however, made no mention of the fact that PepsiCo would continue to sell its syrup
concentrate to the bottler in Burma and would continue to allow the bottler to sell Pepsi in
Burma.
Burma is an Asian country with a population of 42 million and an area about the size of Texas; it
is bordered by India, China, Thailand, and the ocean. The country is poor, with a per capita gross
domestic product of only $408, a high infant mortality rate (95 deaths for every 1000 live births),
a low life expectancy (53 years for males and 56 for females), and inflation above 20 percent.
Burma gained its independence from British rule in 1948. In July 1988, as economic conditions
declined, large-scale and bloody rioting broke out in the cities of Burma. In September 1988, the
army under General U. Saw Maung assumed control and brutally repressed dissent, killing, it is
believed, thousands of students and civilians. General Maung replaced the government with the
State Law and Order Restoration Council (SLORC), a group of military officers. In 1990, the
SLORC, believing it had the support of the people, called for a new government and allowed free
elections, confident it would win. However, the overwhelming majority of seats in the proposed
new government (80 percent) was won by the civilian opposition party led by Suu Kyi. Refusing
to turn over power to a civilian government, the SLORC annulled the election, outlawed the
opposition party, and arrested its leaders, including Suu Kyi. The SLORC invited foreign private
investors and companies to invest in Burma with the hopes of improving the economy.
PepsiCo was one of many American companies that responded favorably to the invitations of the
SLORC. Others included apparel manufacturers such as Eddie Bauer, Liz Claiborne, Spiegel's,
and Levi Strauss; shoe manufacturers such as Reebok; and oil companies such as Amoco,
Unocal, and Texaco. The United States was the fifth largest foreign investor in Burma.
The country was attractive for several reasons. Not only was labor extremely cheap, but because
the culture placed a high value on education, worker literacy rates were very high. The country's
oil resources were and irresistible lure to the oil companies, and its many other untapped
resources presented major opportunities. Burma not only offered a potentially large market, it
also occupied a strategic location that could serve as a link to markets in China, India, and other
countries in Southeast Asia. Also, with the military dictatorship to maintain law and order, the
political environment was extremely stable.
The military, however, presented a problem. Many groups, including the U.S. Department of
State, accused the SLORC of numerous human rights abuses. The U.S. Department of State
reported:
The Government's unacceptable record on human rights changed little in 1994. Burmese citizens
continued to live subject at any time and without appeal to the arbitrary and sometimes brutal
dictates of the military. The use of porters by the army–with all the attendant maltreatment,
illness, and even death for those compelled to serve– remained a standard practice…. The
Burmese military forced hundreds of thousands, if not millions, of ordinary Burmese (including
women and children) to "contribute" their labor, often under harsh working conditions, to
construction projects throughout the country. The forced resettlement of civilians also continued.
Four hundred or more political prisoners remained in detention, including approximately 40
parliamentarians elected in 1990…. The SLORC continued to restrict severely basic rights to
free speech, association and assembly. In July and August the authorities arrested five persons
for trying to smuggle out information on conditions in Burma to the outside world….
Throughout 1994, the Government continued to rule by decree and was not bound by any
constitutional provisions guaranteeing fair public trails or any other rights…. The security
services continued to clamp down on those who expressed opposition political views…. labor
associations remained subject to arrest. Surplus labor conditions and lack of protection by
government authorities continue to dictate substandard conditions for workers.
Nevertheless, the management of PepsiCo was intrigued by the government's invitation to invest
in Burma. In 1991, PepsiCo decided to enter a joint venture with Myanmar Golden Star Co., a
Burmese company owned by a Burmese businessman named Thein Tun. Myanmar Golden Star
would own 60 percent of the venture while PepsiCo would own 40 percent. The venture would
set up a bottling plant with a 10-year license to bottle and distribute PepsiCo-owned products in
Burma, including Pepsi Cola, 7 Up, and Miranda soft drinks.
The bottling venture did well. In 1995, PepsiCo reported that the revenues made by the Burma
bottler totaled $20 million, of which PepsiCo's share was $8 million. The company announced
that in 1996 revenues in Burma increased by 25 percent. Pepsi products had become the main
source of income for Thein Tun, who was a very close friend of the generals who made up the
SLORC. Tun's close ties with the military junta was one of the factors that had led PepsiCo to
choose him as a partner.
Back in the United States, however, critics were questioning the ethics of doing business in
Burma. On numerous campuses, students were pressing universities to purge their portfolios of
any companies doing business in Burma. Several cities had passed bans on city purchases of any
goods or services from companies doing business in Burma. A network of students on about 100
campuses had launched a boycott of Pepsi products. Harvard students had pressured that
university to refuse to give PepsiCo a contract (valued at $1 million) to sell Pepsi on campus.
Company shareholders had submitted resolutions urging PepsiCo to leave Burma. The company
had received hundreds of letters demanding that the company leave Burma.
Critics claimed that, by doing business in Burma, American companies were helping prop up the
repressive military government of that country through taxes and other means. If foreign
companies were to abandon Burma, the military would fail in its attempt to create a vibrant
market economy. Declining economic conditions would pressure the military into instituting
democratic reforms to attract foreign investment back into the country.
Moreover, many of the American companies in Burma engaged in a practice called countertrade,
which according to critics was associated with the forced labor now rampant in rural areas.
Burmese money was worthless outside of the country, making it virtually impossible for an
American company to transfer its profits out of Burma and into the United States. To get around
this problem, many companies traded their Burmese profits for Burmese agricultural
commodities. They would then export the agricultural commodities to countries outside of
Burma, sell them there, and transfer those monies to the United States. PepsiCo had admitted to
engaging in countertrade, as had many other companies. The problem with countertrade, critics
claimed, was that forced labor was widely used throughout the agricultural sector, particularly on
the many farms now controlled by the military. The military had confiscated much of the best
farmland in Burma, evicted the farmers, and then forced them to return to provide slave labor to
grow the crops that the military then harvested and sold, keeping the proceeds. A good portion of
the agricultural commodities that American companies purchased and sold abroad were thus
likely to have been produced by forced labor.
PepsiCo and other companies, however, argued for a policy they called constructive engagement.
The best way to get the military to institute reforms, they argued, was by staying in Burma and
pressuring the military to change its ways. Improving economic conditions would develop a
flourishing middle class that would bring about democracy. "Free trade leads to free societies"
was a favorite slogan of PepsiCo and others.
In 1992, however, Levi Strauss withdrew from Burma saying, "it is not possible to do business in
[Burma] without directly supporting the military government and its pervasive violations of
human rights." In 1994, Reebok and Liz Claiborne withdrew, saying they could not do business
in Burma until "significant improvements in human rights conditions" were enacted. In 1995,
Eddie Bauer and Amoco pulled out, citing growing opposition at home to company involvement
in Burma.
The growing pressures being put on PepsiCo to leave Burma finally convinced the company in
1996 that it should divest itself of its holdings in the Burmese bottling plant. In 1997, the
company sold its holdings in the plant to its partner, Thein Tun. But PepsiCo had decided to
continue to honor its 10-year license allowing the bottler to sell Pepsi in Burma and continue to
provide the bottler with the necessary syrup used to mix Pepsi soft drinks. Critics objected that
the half-way move meant that PepsiCo was still doing business in Burma and vowed to keep up
the pressure on the company.
Levi Strauss & Co. and China
From: Case Studies in Business Ethics 5th ed. Al Gini (pp. 294-298)
The market that is the people's Republic of China consists of more than 1 billion consumers and
offers low production costs, but its human rights violations have long been condemned by
international bodies. In 1993 Levi Strauss & Co. (LS & Co.) faced one of its more difficult
decisions in a long corporate history. Would it continue to conduct business in this enormously
promising market or honor its relatively high ethical standards and withdraw?
Levi Strauss: History and Ethical Stance
Founded in the United States in 1873, LS&Co. enjoyed consistent domestic growth for
generations and began overseas operations during the 1940s. The company became the world's
largest clothing manufacturer in 1977 and achieved $2 billion in sales by the end of the decade.
Having offered stock to the public during the 1970s to raise needed capital, management decided
fourteen years later to reprivatize in a $2 billion leveraged buyout, the largest such transaction to
date. Management's reasons included its heightened ability to "focus attention on long-tem
interests (and)… to ensure that the company continues to respect and implement its important
values and traditions." By 1993, LS&Co. Produced merchandise in 24 countries and sold in 60.
LS&Co. has been a leader among U.S.-based corporations in recognizing the importance of
business ethics and community relationships. Two 1987 documents developed by management
summarize the unique values operating at LS&Co. The Mission Statement… affirms the
importance of ethics and social responsibility, while the Aspirations Statement… lists the values
intended to guide both individual and corporate decisions.
CEO Robert Haas frequently explains the importance of the Aspirations Statement as a way
employees can realize the company Mission Statement and otherwise address factors that did not
receive adequate consideration in the past. Efforts to take the values seriously have led to
specific changes in human resources policies and practices. For instance, LS&Co. extends liberal
domestic partner benefits, offers flexible-work programs, and has established child-care voucher
programs. A series of classes for senior managers focuses on the Aspirations Statement. The
company has also earned a reputation as an industry leader in facing controversial social issues.
It was one of the first companies to establish programs to support AIDS victims.
In 1990, the company closed a Dockers' plant in San Antonio, Texas, transferring production to
private contractors in Latin America where wages were more competitive. LS&Co. provided a
generous severance package for the laid-off workers that included 90-day notice of the plant
closing and extended medical insurance benefits. LS&Co. also contributed $100,000 to local
support agencies and $340,000 to teh city for extra services to the laid-off workers. Despite these
efforts, the company received serious criticism for relocating the plant.
Ethical Standards for International Business
In early 1992, LS&Co. established a set of global sourcing guidelines to help ensure that its
worldwide contractors' standards mesh with the company values. A group of 10 employees from
different areas of the company spent nine months developing the guidelines. The group used an
ethical decision-making model that ranked and prioritized all stakeholders to help design the
guidelines. The model examines the consequences of each action and suggests a decision based
on a balance between ethics and profits.
The ensuing guidelines, "Business Partner Terms of Engagement"… cover environmental
requirements, ethical standards, worker health and safety, legal requirements, employment
practices, and community betterment. Contractors must: provide safe and healthy work
conditions, pay employees no less than prevailing local wages, allow LS&Co. inspectors to visit
unannounced, limit foreign laborers' work weeks to a maximum of 60 hours, and preclude the
use of child and prison labor.
In addition, the company established "Guidelines for Country Selection"… These guidelines
cover issues beyond the control of one particular business partner. Challenges such as brand
image worker health and safety, human rights, legal requirements, and political or social stability
are considered on a national basis. The company will not source in countries failing to meet these
guidelines.
The question would soon be raised: Does China meet these guidelines
Human Rights and Labor Practices in China
China is ranked among the world's gravest violators of human rights, although Chinese officials
do not regard their actions as such. The U.S. State Department says that China's human rights
record falls "far short of internationally accepted norms." Two more egregious violations include
arbitrary arrest and detention (with torture that sometimes results in death). Despite laws
prohibiting arbitrary arrest and providing limits on detention, a commonly referenced clause
states that family notification and timely charging are not required if such actions would "hinder
the investigation." Judicial verdicts are believed by many observers to be predetermined.
Chinese prison conditions are deplorable, and a long-standing practice holds that all prisoners,
including political, must work. Chinese officials say that the fruits of prison-labor are used
primarily within the prison system or for domestic sale.
Personal privacy is severely limited in China. Telephone conversations are monitored, mail is
often opened and examined, and people and premises are frequently subjected to search without
the necessary warrants. China has also engaged in forced family planning, with monitoring of a
woman's pregnancy occurring at her place of employment. Official rights to free speech and
assembly are extremely restricted, as the world witnessed during the Tiananmen Square
massacre in 1989.
Regarding labor conditions, China's leaders have refused to ratify the 10 guidelines prohibiting
the use of forced labor for commercial purposes established by the International Labor
Organization Convention. Although China has regulations prohibiting the employment of
children who have not completed nine compulsory years of education, child labor is widespread,
especially in rural areas. Surveys show a recent increase in the dropout rate among southern
Chinese lower-secondary schools, presumably because the booming local economy lures 12-16year-olds away. At the time of LS&Co.'s deliberations regarding China, no minimum wage
existed and safety conditions were found to be "very poor."
LS&Co. in China
This combination of government practices and labor conditions increased pressure within
LS&Co. to rethink its decision to operate in China. In 1992, operations in the country generated
some 10 percent of the company's total Asian contracting and 2 percent of worldwide
contracting. Its Chinese operations produced approximately one million pants and shirts in 1993
and operated directly or indirectly through some 30 Chinese contractors. Over one half the goods
produced in China were shipped to Hong Kong to be refined for sale in other countries. These
contracts were estimated to be worth $40 million.
LS&Co. is only one of thousands of foreign firms operating in China. The other companies,
especially prominent Fortune 500 companies with factories or manufacturing contracts in China,
are cognizant of the human rights and labor conditions. Most of these companies lobbied
President Clinton to renew China's Most Favored Nation (MFN) trading status, arguing that the
continuing presence of U.S. companies would have a positive influence on reform. According to
this viewpoint, investments made by companies such as LS&Co. could transform working
conditions and thereby accelerate movement toward the social, economic, and political standards
favored by the United States and other western countries.
Should Levi Strauss Stay or Leave?
In assessing the objectionable conditions in China, LS&Co. management felt it could not
improve the situation because the violations were well beyond what could be remedied strictly
through company communication and cooperation with contractors. At issue were practices that
had to be addressed on a larger, national scale.
Leaving the country would expose LS&Co. to the high opportunity cost of foregoing business in
a large emerging market. Some managers and employees felt the company would be supporting a
repressive regime if it remained in China, while others argued that LS&Co. is a profit-making
business enterprise, not a human rights agency. This latter group saw as positive management's
acknowledged responsibility to society, but it felt the company also needed to consider its
responsibilities to shareholders and employees. Some employees argued that staying in China
would enable LS&Co. to improve conditions for Chinese citizens. But other stakeholders
countered that remaining in China would violate the company's own guidelines about where it
would and would not conduct business.
Important issues that complicated the decision include: the possibility that China might not
accept LS&Co. back if the company left until conditions improved. If the company ceased
production in China, it might be difficult for it to sell product there due to high tariffs imposed
on imported apparel. But, some voices argued, continuing to manufacture in China would have a
damaging impact on Levi's reputation possibly putting at risk its valuable brand image.
To address the many issues regarding LS&Co.'s continued operations in China, the company
organized a China Policy Group (CPG). Composed of 12 employees who together devoted
approximately 2,000 hours to reviewing the China situation, the CPG consulted human rights
activists, scholars, and executives in its attempt to fully address the critical issues.
The group examined all the issues highlighted in Part A and found itself divided on the question.
In March 1993, the CPG delivered a report to LS&Co.'s Executive Management Committee. On
April 27, after a half-day of deliberation, this most-senior management group remained
undecided over what to do.
Robert Haas Acts
Confronted by the indecision of the Executive Management Committee, LS&Co.'s CEO and
Chairman, Robert Haas, ended the stalemate by recommending the company forgo direct
investment in China and end existing contracts over a period of three years due to "pervasive
violations of basic human rights." He maintained that the company had more to gain by
remaining true to its ideals than by continuing to produce in China.
Reactions to the Decision
LS&Co. did not publicly announce its decision, but the news hit the airwaves with a speed and
volume that surprised all involved. John Onoda, LS&Co.'s vice president of corporate
communications, explained: "We never intended to get in the spotlight… It was leaked and got
out in 20 minutes."
Many people were highly skeptical of the company's stated intentions. Some asserted it was only
a public relations ploy engineered to make the company look good. "I don't see broad support of
it," claimed Richard Brecher, director of business services at the U.S.-China Business Council.
"[It] would be regarded much more seriously if Levi's had made a direct investment in China."
In one respect, Brecher is right. The company did not directly invest in China; it produced its
merchandise through Chinese contractors. In fact, on the sales side, LS&Co. jeans continue to
sell in China through Jardine Marketing Services. Moving production contracts to other countries
in Asia raised costs between four and ten percent, depending on which location was chosen.
LS&Co. recognized this cost and considers it the price it must pay to uphold its integrity and
protect its corporate and brand images.
Vice President Bob Dunn explained, "There's the matter of protecting our brand identity.
Increasingly, consumers are sensitive to goods being made under conditions that are not
consistent with U.S. values and fairness." Linda Butler, director of corporate communications for
LS&Co., iterated this sentiment when she affirmed that it was "better for us to honor our
company's values." Some even believe that the decision may ultimately prove profitable to the
company. As one person claimed, "In many ways, it strengthens the brand…. This is a brand that
thinks for itself, and these are values which people who buy the brand want for themselves.
They're a badge product for youth who want to say 'I'm different.'"
Impact in China
China's leadership showed no interest in the company's decision. One Chinese foreign ministry
official was quoted, "At present there are tens of thousands of foreign companies investing in
China. If one or two want to withdraw, please do." Coincidentally, the LS&co. decision-making
process occurred as the United States considered extending China's MFN status. U.S. Trade
Representative Mickey Kantor voiced his support for LS&Co. by stating, "As far as what Levi
Strauss has done, we can only applaud it; we encourage American companies to be the leader in
protecting worker rights and worker safety and human rights wherever they operate."
More recently President Clinton renewed China's MFN trading status without requiring steps to
improve human rights. Clinton explained, "I believe the question… is not whether we continue
to support human rights in China, but how we can best support human rights in China and
advance our other very significant issues and interests. I believe we can do it by engaging the
Chinese."
The position of the Clinton administration is that the United States should continue trading with
China and hope that economic involvement will contribute to improvement in the conditions of
Chinese citizens. As one might surmise from the case, LS&Co. takes a different position.
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