Apple has an opportunity to use its industry domination to revolutionise hi tech supply chains for good

On the face of it, Apple’s world could not be rosier – it’s a highly successful and widely admired corporation. Rising from the rubble of a floundering and disintegrating company in 1997, Apple has reached the pinnacle of success in 15 short years. With a market capitalisation of more than $500bn, it is among the most valuable and profitable companies in the world.

Apple’s remarkable success lies in the company’s ability to create truly innovative products with vast customer appeal. The foundation of this success is rooted in the company’s ability to flout the conventional wisdom of the consumer electronics industry that has an emphasis on low cost, me-too products, and continuously shortened product life. Instead, Apple has opted for constant product innovation, resulting in fanatic consumer loyalty.

Historically, very large and highly profitable corporations have not necessarily been the most admired. In part, this lack of respect arises from a perception that a high level of profitability invariably results from a company’s ability to exploit market imperfections through oligopolistic power and anti-competitive behaviour, and thus take unfair advantage of other stakeholders and the public.

The bad Apple

Apple, which enjoys tremendous customer loyalty, is also confronted with public criticism for poor treatment of workers – in terms of working conditions, excessive working hours and low wages – in factories where its products are manufactured in China.

What is most disconcerting is the fact that these practices are in apparent violation of not only local and national laws but also Apple’s own voluntary code of conduct.

The failure of Apple’s code to yield improved results comes despite years of monitoring of factories where Apple’s own audits show persistent non-compliance and repeated promises of improved performance.

What makes such a company so unable or unwilling to remedy the situation, which from its own account violates its standards of conduct? Why does the company treat its customers and workers by two different standards?

When it comes to customers, Apple is a bold innovator that leads the industry into new directions and forces others to follow. However, when it comes to the management of its supply chain, and treatment of workers, it hides behind the constraints of prevailing industry practices.

On the surface, Apple appears to have a conflicting persona in its business operations as they pertain to the company’s treatment of (a) its customers, and (b) workers employed in the factories that manufacture its products. Apple’s two conflicting persona are not the result of extenuating circumstances or different sets of market factors beyond its control. Instead, they both emanate from the same business philosophy – adroit exploitation of market power for the sole benefit of the company and its investors. This model does not consider “what is fair” but only what is competitively achievable in higher prices for products sold and lower costs for products made.

Labour practices

Concerns about widespread exploitation of workers, and unsafe and unhealthy working conditions, have been around from the early days of China’s efforts to encourage companies to set up manufacturing operations that would provide employment to large numbers of low skilled workers.

These workers were hungry for work, any work, even if it barely provided subsistence level wages. Furthermore, these workers were young, often under the age of 18 and sometimes as low as 15 years. They were also, for the most part, women (or girls). Stories about mistreatment of workers in terms of wages and unsafe working conditions have been widespread over 15 years.

Notwithstanding continuous complaints and findings of abuses, neither the local manufacturers nor the foreign buyers were willing to insist on substantial changes in working conditions and wages. There was a fear that it would lower their foreign buyers’ profit margins because the increased costs could not be passed on to consumers. It was also understood that since most of the foreign companies faced similar challenges, their customers did not have an effective alternative.

Thus both sides resorted to a ritual dance of complaints, audits, and promises to reform, superficial follow-up, and repeat of the process when the next cycle of complaints hit the media. Both the foreign buyers and local manufacturers realised that media attention always subsided when the events lost their news value and with declining media attention, civil society organisations also lost the leverage in terms of public pressure.

It should therefore be no surprise that changes in wages and working conditions in China have come about only when certain cities and provinces raised minimum wages and imposed higher safety standards with a view to encouraging low-wage industries to move out and to make room for higher-paid sectors. The poorly regarded industries, on their part, responded by moving to the country’s interior where wages remain low and the factories are protected from the preening eyes of pro-worker groups.

Foreign buyers have also moved their buying activities to other countries in Asia where wages remain low and where there are fewer regulations.

Apple and Foxconn

Until about 1995, hi-tech companies operating in China remained below the radar with regard to their labour practices. Initially, these companies were concentrated in Shanghai and somewhat removed from the hotbed of labour issues in the coastal areas. This situation, however, changed once these factories expanded to Shenzhen and other coastal areas. The tech-oriented companies also created enormous scale in highly integrated production facilities, often employing more than 50,000 workers on a single site.

Foxconn and its China-based subsidiaries are owned and controlled by the Taiwan-based Hon Hai Precision Industry Co Ltd. Foxconn is primarily an original equipment manufacturer (OEM), and is a joint-design, joint-development, manufacturing, assembly and after-sales services partner for most major consumer electronics companies in the world. It was founded in 1974 by Terry Guo to integrate manufacturing of electronic products at lowest total cost. It is now a Fortune 500 company.

Foxconn is the largest and most technically sophisticated manufacturer of consumer electronics. In addition to Apple, its clients include Dell, HP, Sony, Intel and Microsoft. The company is the single largest exporter of products from China.

An important element of Foxconn’s success is its secrecy. Factories operate under high security to protect new products and production processes from competitors’ gaze. Entry to Foxconn’s plants and other facilities is almost impossible without specific permission of the plant management and authorisation from the foreign buyers.

Apple’s problems in China

Most of Apple’s worker-related problems have been focused on Foxconn and its subsidiaries. Apple’s China operations first caught international media attention in June 2006 with a story in the UK’s Mail on Sundaynewspaper. This was followed by similar stories in other leading international media, and a steady stream has continued to this day.

News reports over the past few years have described instances of Foxconn employees committing suicide. Other incidents include an explosion at the Chengdu plant, which killed three workers and injured 15, and allegations of bribery, falsified records, underage workers, and adverse health effects of exposure to harmful chemicals – all of which were identified in Apple’s own audits.

It should be emphasized that accusations against Apple’s operations have been similar to those made against other foreign buyers of consumer electronics in China. And they have echoed the findings over the previous decade and more in the clothing, shoes and toy industries in China and other low-wage countries, such as Vietnam, Indonesia, Thailand and the Philippines.

But to put this proviso another way, the hi-tech foreign buyers did not distinguish themselves in terms of better treatment of workers. Instead, they eagerly followed the practices developed by their predecessors in the low-tech, low-wage industries, only with the added problem of exposing workers to toxic materials.

Apple’s response pattern to the mistreatment of workers is also the mirror image of its industry peers. Every complaint has been followed by Apple sending a team of auditors to China, who would find all the obvious violations, which had already been known to Apple from earlier visits.

Typically, the company would then promise corrective action including training of the China partner in human resource management. The entire process is slow and deliberate and its intensity fades in direct proportion to a decline in media attention – until the next phase, when the entire cycle is repeated.

For many years, Apple – like its competitors – was adamant about not disclosing the names of its China partners. However, with the recurrence of complaints and media attention, Apple and some other hi-tech companies have decided to disclose the names of these companies. In many cases, the information had already been made public by news organisations, labour groups and consumer watchdog NGOs.

In late 2011, Apple announced with great fanfare that it had joined the Fair Labor Association (FLA) and asked it to conduct an independent and comprehensive audit of the Foxconn facilities with the promise that it would make public the FLA’s findings and also take appropriate action (See ** below).

The FLA has been criticised by civil society organisations dealing with worker-related issues in Asia and Latin America. The FLA’s board is dominated by industry representatives who exercise strong influence on what plants are to be audited, the scope of individual audits, public disclosure of findings, and verification of corrective action. In the early years of its formation, the FLA would not public provide details of its audit findings, and would limit disclosure to short statements on its website that the factories had passed their audits.

Improving working conditions

Why should Apple not use its superior earning prowess to challenge prevailing industry practices and assume leadership in creating in fairer wages and a better work environment for its overseas workers? One possible answer is that Apple has no competitive pressures to do so – why should it voluntarily help workers to gain fairer wages and humane working conditions when its competitors have not chosen to do so?

Apple faces five types of external pressures in the marketplace that could influence its strategies and operational policies. These are: customer loyalty, industry best practices, expectations of major shareholders and the investment community, civil society organisations or NGOs, and government pressure and regulatory oversight.

It is clear that despite extensive negative news coverage, Apple has suffered no loss in demand for its products. Apple enjoys broad customer loyalty even in China where customers have better knowledge of workers’ issues.

Apple does not have to fear its competitors because they all use factories with similar labour practices. In fact its rivals are likely to be afraid of Apple since its power and wealth means it could take the initiative in changing industry practices, which other companies would be pressured to emulate.

In the past, institutional investors, notably public employee pension funds, have been aggressive in filing proxy resolutions requiring companies toward greater transparency of their activities in China and other low-wage countries and to initiate measures to improve conditions. However, in the case of Apple these voices have been especially muted.

NGOs have also been reluctant to mount a rigorous and meaningful effort to seek a response from Apple. For example, at Apple’s recent annual shareholder meeting, institutional and socially active investors gained changes in Apple’s board election procedures, but none raised any questions about the labour situation in China.

Corrective action options

There are no quick fixes to create a sustainable improvement in the treatment of workers and workplace safety as covered under the Chinese employment law and Apple’s own voluntary code of conduct.

Tackling excessive hours in the manufacturing processes would entail additional costs. A reduction from the current 68 hours per week to 48 hours would entail increasing the labour force by about a third to maintain the current rate of output. To accommodate these workers, the factory would need to build extra dormitories and related infrastructure. The capital investment could be substantial but would not add to production capacity, or manufacturing efficiency, and thus would be reflected in higher production costs.

Workers, in general, do not like lower overtime hours because it effectively cuts their income. Factory owners love to keep regular wages as low as possible so as to incentivise workers towards overtime. From the factory owner’s viewpoint, the real cost is the average wage per hour, and the distinction between regular and overtime wage rates is played tactically to make workers put in longer hours.

Health and safety is a similar issue. Improving factory conditions, such as better air filtration, better work stations, and provision of safety equipment, would require additional factory space that is “non-productive”. It would increase operating costs without commensurate increase in the number of units produced per worker, per hour or per machine.

For these changes to be effective, Apple and other foreign multinationals must have agreement with major factory owners. This would require voluntary but rigorously monitored and transparent actions, to minimise the problem of free riders on both sides.

From Apple’s point of view, handling the issues of workers’ wages and working conditions has been an unnecessary distraction. In the absence of strong and persistent disapproval from Apple’s three main constituencies – customers, stockholders, and regulators – why should Apple do more than it is statutorily required?

One important element in this equation is the evolving nature of Apple’s corporate culture and in particular the character of its new leadership. Chief executive Tim Cook was the architect of Apple’s supply chain and claims to have “ground level” understanding of the working conditions in the Chinese factories. He can play a pivotal role in moulding Apple’s corporate culture.

Apple could blaze the trail and thereby solidify its reputation not only as a corporate innovator but also a leading socially responsible corporate citizen. The company might once again astonish the world by showing a new approach to building better bridges between private profit and public good.

The 21st century has brought the remarkable ascendancy of large corporations, most notably large multinational corporations. The emerging global economic order has once again brought capitalism and its principal actor, the multinational corporation, to the apex of social institutions. But the corporation cannot confine its role to maximizing profits for its shareholders to the exclusion of every other consideration. As a dominant institution in society, it must assume its rightful place and contribute to a broader public agenda.

The justification of private enterprise and competitive markets does not rest solely on the profitability of its leading protagonists, but ultimately on the impact of their activities on the well-being of all stakeholders and society at large. Otherwise, they lose their social licence to pursue their business activities. Corporate participation in social policy is not a luxury but a necessity. And this participation must not be construed in the narrow terms of enhancing corporate profits, but in broader terms of creating a healthier and wealthier society.

Dr Prakash Sethi is university distinguished professor and fellow at the Weissman Center for International Business, Baruch College, the City University of New York. Research assistance by Ajinkya Khedekar. 

 

** Fair Labour Association, Apple and Foxconn

The Fair Labour Association has now released a report into working conditions at Foxconn factories supplying Apple. The FLA found more than 50 breaches of its own code and/or Chinese labour laws in health and safety issues, matters of worker integration and communication, and wages and working hours.

The average hours worked per week at Foxconn’s factories was found to exceed Chinese legal limits, including periods where workers were required to work more than seven days in a row. A major health and safety issue regarding excess levels of aluminium dust was identified – something implicated in previous factory explosions – though Foxconn’s procedures were found to be improving.

Other major concerns highlighted by the report included worker alienation from health and safety management procedures, and unfair allocation of overtime payments and other benefits.

Foxconn has publicly pledged to work on making improvements, in remediation plans agreed with and approved by the FLA. Apple also stated its approval and support of the report’s findings.



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