New York, USA.- Two Italian luxury giants pay only a small amount to produce handbags that sell for thousands of dollars, according to documents in a wide-ranging investigation into subcontractors cited by Business Insider.
Italian prosecutors in Milan have been investigating in recent months the use of one of several third-party suppliers used by LVMH subsidiary Dior.
Prosecutors said the companies exploited workers to produce handbags at a fraction of their retail price.
Citing documents reviewed by authorities, Reuters reported last month that Dior paid a supplier $57 to produce handbags that sold for about $2,780. The costs do not include materials such as leather.
Dior failed to take “appropriate measures to verify the actual working conditions or technical capabilities of the contracting companies,” according to a prosecutor’s document.
In investigations in March and April, investigators found evidence that workers at a Dior supplier slept on the premises so that the bags could be produced around the clock.
They also tracked electricity consumption data, which showed work was done during nights and holidays, the report said.
The subcontractors were Chinese-owned companies, prosecutors said.
They said most of the workers were from China, with two living in the country illegally and seven others working without the required documentation.
The investigation also noted that safety devices had been removed from the gluing and brushing machines so that workers could operate them more quickly.
LVMH did not immediately respond to a request for comment from Business Insider sent outside regular business hours.
Court documents showed Dior submitted a memo outlining improvements to its supply chain.
The investigation also extended to Giorgio Armani’s contractors, who were accused of failing to properly supervise their suppliers.
Armani paid contractors $99 per bag for products that sold for more than $1,900 in stores, according to documents seen by Reuters.
Judges in Milan have ordered that units of both companies be placed under judicial administration for one year.
Prosecutors said the violation of labor standards was a common practice in the industry that luxury giants used to make bigger profits.
“This is not a sporadic event that concerns individual production batches, but rather a widespread and consolidated manufacturing method,” court documents said of the decision to place Dior under administration.
“The main problem is obviously the mistreatment of people: applying labour laws, meaning health and safety, hours, wages,” Fabio Roia, president of the Milan court, told Reuters earlier this year.
“But there is also another major problem: unfair competition that drives companies that comply with the law out of the market.”
Last year, LVMH had 2,062 suppliers and subcontractors and conducted 1,725 audits, according to its environmental and social responsibility report.
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