The Low Cost of High Wages

Dov Charney, founder and CEO of American Apparel, the Los Angeles-based purveyor of high-quality T-shirts and undergarments, wants to follow in Wal-Mart's footsteps and open a factory in China. There, the similiarities end. Instead of moving to China so he can pay his workers less than a dollar per day, Charney says he'd pay a decent wage.

At his factory in downtown Los Angeles, American Apparel workers make $12.50 per hour plus benefits—more than twice the U.S. federal minimum wage and several times the $2 to $3 per hour paid at other sweatshops just blocks away. Those high wages explain why American Apparel is unique in a textile industry characterized by some of the worst working conditions on the planet.

Other haberdashers typically outsource their labor to contractors who operate in the Third World—especially China—where workers earn just a few dollars a day and enjoy few rights and scant protection from abuse by management. In September, for instance, Wal-Mart apparel workers in China, Bangladesh, Nicaragua and Swaziland sued the company, alleging they were forced to work overtime and denied their right to organize a union.

Like Wal-Mart, American Apparel is a nonunion shop. But unlike Wal-Mart, American Apparel has never obstructed its workers' collective bargaining rights. It even offered to hold a union election, but its workers weren't interested—they already earn twice as much as unionized garment workers.

Meanwhile, the company has thrived; in 2004, revenue jumped to $128 million from $80 million the previous year. And China is calling.

"It's just talk at this point," Charney says. "But we'd like to open a factory in China if we start selling T-shirts there." China's 1.3 billion citizens wear a lot of T-shirts, so Charney recently sent over one of his henchmen to study consumer trends.

"They are interested in a lot of American products," he says. "But we don't know if it's right for American Apparel yet. American Apparel can work in Hong Kong, Korea or Bangkok, but in China, they are very brand-oriented. They want 'Gucci' spread across their chests. American Apparel is more of a 'less-is-more' type of brand—quality T-shirts that fit well."

American Apparel already owns retail stores in Japan and Korea, and putting a factory somewhere in Asia is the logical next move. China would be perfect, except with only 80 American Apparel stores now open, Charney lacks the 300 outlets he says are necessary to warrant a new factory.

"You want to have different production in different regions because it's more efficient—you don't have to pay for transportation or taxes," he explains. "But we've only been in retail for two years and have only managed to capture 80 stores. Once we're the size of the Gap, we can do it. Right now, our efficiency comes from having one vertically integrated factory in LA, but we hope to take it to another level."

His long-term plan is to locate factories in regional markets where American Apparel sells its clothes. Today, the company still makes all its clothing at its sole factory in LA, which started with 60 workers in 1997 and now employs 4,000. Those workers are engaged in every level of production—from cutting and sewing to finishing and quality control. The company has 1,000 more employees at stores in England, France, Germany, Canada, Mexico and the U.S., including a recent addition in Huntington Beach. Last month, the company added new stores in Paris and one each in Providence, Rhode Island, and Atlanta, Georgia.

Money invariably follows the expansion: wherever American Apparel goes, it pays workers well above their country's minimum wage—it even pays them more than the U.S. minimum wage. In Mexico, for example, Charney has two stores, one in Mexico City and one in Playa del Carmen, and those workers earn 70 pesos an hour.

"With statutory holidays, it comes out to more like $7.50 an hour," Charney says. "The idea is to pay those workers the same as our other employees, but it's still a little bit less because the stores have just opened. When we started in the [U.S.], we had the wages come up as we optimized the stores."

And as the workers make more money, so does American Apparel—a happy circumstance Charney attributes to treating them well.

"We just try to get the best people," he says. "Money walks and bullshit talks. To have a better staff and pay slightly more than prevailing wages, you get more out of it. . . . We don't have to rely on low wages."

Perhaps Wal-Mart should take note.


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