Forced Labor in Footwear Manufacturing Poses Risk for Global Investors | Kharon The Kharon Brief

Forced Labor in Footwear Manufacturing Poses Risk for Global Investors

(Source: Created in Midjourney)

By Kharon Staff

August 15, 2023

Fulgent Sun International, a publicly traded shoemaker listed on the Taiwan stock exchange, is an original equipment manufacturer (OEM) for international footwear and sports apparel brands. The company has a wholly-owned subsidiary in China that has shown indicators of forced labor use flagged in a 2021 U.S. government Business Advisory.

With a market capitalization of 23 billion TWD (approx. $720 million USD), Fulgent Sun's shares are held in funds provided by various asset management firms, including Blackrock, State Street, and Vanguard, according to public fund data.

Xinjiang, a region in China, is subject to sanctions and import restrictions by the U.S. and Europe due to evidence of forced labor practices against Uyghur minorities. While much of the U.S. and European regulatory attention has been on importers and manufacturers whose supply chains are exposed to forced labor in Xinjiang, investors with exposure to emerging market equity and debt funds may also face similar risks.

According to the U.S. government advisory, investors should be cognizant of the reputational, economic, and legal risks of involvement with entities in or linked to Xinjiang that engage in forced labor abuses.

“Given the severity and extent of these abuses, including widespread, state-sponsored forced labor and intrusive surveillance taking place amid ongoing genocide and crimes against humanity in Xinjiang, businesses and individuals that do not exit supply chains, ventures, and/or investments connected to Xinjiang could run a high risk of violating U.S. law.”
– U.S. Government Xinjiang Business Advisory, July 2021.

Labor Transfers

The transfer or use of laborers through Chinese government-sponsored programs from Xinjiang under the guise of “poverty alleviation” may be an indicator of forced labor, the U.S. government has warned.

In March 2018, Fujian Sunshine Footwear – a Chinese company wholly owned by Fulgent Sun International – received a transfer of 62 “registered impoverished people” from Akto County in the Xinjiang Uygur Autonomous Region. The transfer was organized by the county’s Human Resources and Social Security Bureau, according to an Akto County report.

A December 2021 Chinese media interview with a government official of Kizilsu Kyrgyz Autonomous Prefecture discussed the government’s poverty alleviation through employment efforts, including providing subsidies for “vocational skills training”, and mentioned a farmer from Kizilto Town, Akto County, who started working at Fujian Sunshine Footwear Co., Ltd. through a “labor transfer.” The 2021 Xinjiang Business Advisory identifies nonstandard hiring practices, hiring through government recruiters, and terminology related to poverty alleviation and reskilling as possible indicators of forced labor.

In 2022 and 2023, Fujian Sunshine directly shipped over a million kilograms of shoes and related footwear products to major brands in the United States. Fujian Sunshine also supplied basic materials like shoe pads, woven fabric cotton, rubber soles, shoe buttons, and zipper sets to Fulgent Sun International’s Vietnam-based subsidiary, Fulgent Sun Footwear Co, which has produced shoes for other major Western footwear and apparel companies, according to a review of trade data.

Fulgent Sun International, the parent organization of these two companies, is also listed as an OEM for a number of international brands in the U.S., France, U.K., South Korea, and elsewhere. Several of these brands were recipients of shipments from Fujian Sunshine Footwear and Fulgent Sun Footwear in 2023.

Sourcing Raw Components

The Uyghur Forced Labor Prevention Act (UFLPA) prohibits the importation of goods into the United States mined, produced, or manufactured wholly or in part with forced labor in China. Cotton and its downstream products from Xinjiang were also added to the U.S. Customs and Border Protection (CBP) Withhold Release Order list in January 2021, banning their import into the United States.

The U.S. government in its 2021 Xinjiang Supply Chain Business Advisory also highlighted raw materials used in the production of footwear, such as cotton, as high risk for exposure to forced labor in Xinjiang.

​“Third country risk is the highest risk…we [CBP] look at just the volume of the manufacturing and the affiliations of these companies in Southeast Asia that are tied back to China and the Xinjiang Region that creates a significant risk in supply chains.”

- Eric Choy, Executive Director for Trade Remedy and Law Enforcement, U.S. CBP

ED Choy's full remarks can be viewed here:
A ​Fireside Chat with CBP: UFLPA Enforcement, Year One and Beyond

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