LVMH's Dior Subsidiary Under Court Administration Amid Worker Mistreatment Allegations

An Italian subsidiary of French luxury giant LVMH, responsible for producing Dior-branded handbags, has been placed under court administration following a probe alleging it subcontracted work to Chinese-owned firms that mistreated workers. This move marks the third such decision by the Milan court this year as consumer and investor scrutiny of luxury goods companies' supply chains intensifies.

Court Ruling and Worker Conditions

The Milan court ordered Manufacturers Dior SRL to be placed under judicial administration for one year, according to a ruling seen by Reuters. Despite this administration, the company will continue its operations during this period. The investigation focused on four Chinese suppliers employing 32 workers in the Milan area. The probe revealed that two workers were illegal immigrants, and another seven lacked the required documentation.

The court document detailed the substandard conditions these workers faced, living and working in environments that fell below ethical hygiene and health standards. Additionally, the ruling highlighted that workers were forced to sleep in the workplace, ensuring their availability 24 hours a day. Data mapping of electricity consumption confirmed continuous production cycles, even during holidays, indicating severe worker exploitation.

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Supply Chain and Ethical Concerns

The investigation further uncovered that safety devices had been removed from machinery to increase production speed. This allowed contractors to cut costs significantly, charging Dior as little as 53 euros for a handbag model that retailed for 2,600 euros. The court criticized the Dior unit for not implementing appropriate measures to verify the working conditions or technical capabilities of its contractors.

While Dior itself is not facing a criminal probe, the owners of the contracting and subcontracting companies are under investigation by Milan prosecutors for exploiting workers and employing people off the books.

Industry-Wide Implications

This case is part of a broader trend of increased scrutiny over luxury fashion supply chains. In April, the Milan court similarly appointed a commissioner to oversee a company owned by the Giorgio Armani group for failing to adequately oversee its suppliers. The Armani investigation revealed similar violations, with Chinese manufacturers disregarding worker protection laws.

Luxury fashion companies have been reducing the number of subcontractors and internalizing production to mitigate reputation risks, a trend that has negatively impacted sectors like the Tuscan leather goods industry. Italy, which produces 50-55% of the world's luxury clothing and leather goods, according to Bain consultancy, is at the center of these supply chain concerns.

Market Reaction and Company Response

The heightened scrutiny and subsequent legal actions reflect a growing demand from consumers and investors for transparency and ethical practices in the luxury fashion industry. Companies are increasingly held accountable for their supply chain practices, and failures to uphold ethical standards can result in severe reputational and financial consequences.