Nike reports problems at China factories

HONG KONG (Reuters) - Nike Inc (NKE.N), the world's biggest sneaker and sportswear maker, said it found falsified documents, underage workers and unpaid wages at suppliers in China, despite what experts say is one of the top social compliance regimes in the industry.

The company's shares were down nearly 2 percent in afternoon trading on the New York Stock Exchange.

The Oregon-based company's difficulties highlight the deep roots of some of the problems businesses face in manufacturing in China, particularly at a time of sharply rising costs and a stiffening legal environment.

In its first country-specific supply chain report, which it said focused on China because of the upcoming Beijing Olympics, Nike detailed the efforts it has been making to get suppliers to comply with its code of conduct and Chinese law, including a program to monitor Olympics-related suppliers this year.

"As China continues to develop we see progress and best practices emerging," said the report, which was released earlier this month on Nike's Web site. "But like our partners in any other country, the factories we contract with in China continue to face challenges as well."

The report noted problems including falsification of factory documents such as payroll records, lack of effective grievance systems for disgruntled workers and hiring practices that did not ensure minimum age standards were met.

Christopher Svezia, an athletic footwear and apparel analyst with Susquehanna Financial, said Nike has made strides over the years to improve labor conditions in China, where about one-third of its shoes are made.

"I think there's always going to be incremental issues that crop up as China continues to evolve as an entity in terms of labor laws and salaries and working conditions etcetera," Svezia said.

"Do you ever get to a point where it's 100 percent perfect? I don't know," he added.

The report said China is Nike's largest single sourcing country, with some 180 manufacturers and about 210,000 employees.

Last year, Nike rolled out a program to check the identity of some 150,000 of its workers in China and found 167 cases of people who were below minimum-age standards when they were hired but were now 18 or older. Two people were found to be underage.

Wages in some places were not tracking government-mandated raises, the report said.

"As multiple factors drive up the cost of business, we find that some contract factories try to avoid making changes to wages in a timely manner," the report said.

In 2005 and 2006, Nike "secured" over 6.53 million yuan ($921,300) in back wages owed to workers in China. Last year, it said it recovered more than 500,000 yuan in back pay.

Nike's shares were off $1.11, or 1.8 percent, to $59.92 in afternoon trading on the New York Stock Exchange.

($1=7.088 Yuan)

(Reporting by John Ruwitch in Hong Kong, with added reporting by Karen Jacobs in Atlanta; editing by Kim Coghill and Gerald E. McCormick)