Transforming Global Supply Chains Tau Investment Management and its Quest for Capitalist Solutions to Capitalism’s Failures
By: Javier Ortega-Araiza.
On April 24, 2013, the garment industry suffered a major setback as Rana Plaza, a building in Bangladesh that housed clothing factories, collapsed in what is up to date one of the deadliest accidents in the history of textile manufacturing. In the 2013 BSR Conference TAU Investment Management co-founder Oliver Niedermaier compared the incident to the Triangle Shirtwaist Factory fire, that deadly incident in New York City which killed more than one hundred workers and marked a black period in the industrial history of the United States. The big difference is that the Triangle Shirtwaist Factory incident happened in 1911, more than a century ago, and the Rana Plaza incident precisely came to show that even though the United States has come a long way in manufacturing, or so we’d like to think, many countries still have a long, long way to go.
Alike many of its neighbors in Southeast Asia, Bangladesh is a country that has a highly dependent Gross Domestic Product (GDP) in manufacturing, most of which comes from the garment industry. There are two major points of attraction for many clothing companies to establish a part of their manufacturing base in a country like Bangladesh: regulations are very loose, and it is very, very cheap. In an industry that is resenting China’s increase in wages, Bangladesh ranks as one of the first countries that are taking the lead by providing manufacturing for a lower price. As Quartz (2014) reports, an study done together with the United States Fashion Industry Association showed that many executives planned to increase sourcing from countries like Bangladesh while decreasing their sourcing from countries like China. Nevertheless, as the Rana Plaza disaster has shown, attracting this business has come with a high price tag for the Bengali society and only enhanced the growth of a systemic problem that is now currently spread out across the existing capitalist model: to reduce costs at every cost possible while highly undervaluing human capital as well as the environment.
Of course, this approach is far from being sustainable. Hoping to correct this trend and to provide sustainable solutions, Oliver Niedermaier and Benjamin Skinner, with the support of investor Alexander Soros, have teamed up to build Tau Investment Management, a private equity firm that hopes to disrupt the supply chain of the clothing industry while producing superior returns to their investors. In Niedermaier words, “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”, adding that “one of the worst failures of capitalism is in global supply chains”.
Tau hopes to create an impact that will ultimately make possible a systemic solution that will change the way in which garments are manufactured. In his speech at the BSR Conference, Niedermaier mentions how the current manufacturing process creates a “race to the bottom”, where human capital is being undervalued and therefore causing high turnover rates, absenteeism, and worker injuries, as well as short-term pressure for results, which results in management from factories making decisions that keep compromising real sustainability and even profitability towards the long run. Tau
Tau is trying to convert this race to the bottom into a “race to the top”, where garments are manufactured in upgraded factories that are environmentally sustainable, offer safe labour conditions, workers are properly trained and compensated, and the whole supply chain becomes more transparent as a result. These increments in costs are compensated with the fact that productivity is highly optimized, with Niedermaier also stating that “all of our business cases are based in the premise that the customer is not willing to pay a cent more”. After optimizing productivity as a result of all the improvements, factories being transformed could not only maintain the same level of profitability as they had but also increase it as more clothing companies are gravitating towards sustainable manufacturers, thereby generating growth in the volume of production of the factory.
As a part of Tau’s founding team we see journalist and writer Benjamin Skinner, who has worked extensively fighting modern-day slavery and has a book, A Crime so Monstrous, which presents a narrative about the issue around the world based on a trip he did across different parts of the world. This expertise will hopefully prove very helpful precisely as Tau aims to revamp what they describe one of the most undervalued aspects of current capitalism: the power of human capital.
So far, the fund has raised $1 billion US dollars, and it has said about plans of investing $200 million of those in revitalising the garment manufacturing industry in Bangladesh. Tau has forged an initial partnership with GAP, a powerhouse in the clothing industry that also has been a pioneer in ethical standards in their labour practices, increasing base wages above the minimum wage level for their lowest-paid employees and also served as a founding member of the Better Factories program of the International Labour Organization.
If successful, Tau’s results will hopefully bring more companies, governments, and organisations together to help scale the solution to a systemic level and not only within the garment industry, but to use it as a base model to transform supply chains in other areas of industrial production such as toys, furniture, and consumer electronics, helping developing countries to innovate their practices and increase their competitivity, build a more sustainable economic growth model, and restore the human dignity of its undervalued workers, all while providing superior financial returns.
Originally published at www.redefiningcapitalism.com on January 4, 2016.