Monday, January 30, 2012

The Future of Chinese-manufactured Apple Products

China's economic miracle has lifted countless millions of supremely poor people out of poverty. But this progress has come at a price. The Apple Corporation's experience in manufacturing its popular iPhones, iPods and iPads in China - recently described in the N.Y. Times - has subjected many of those making Apple products to unsafe and unfair working conditions.

Apple has been good for China. It has provided hundreds of thousands of jobs for the 300 to 400 million Chinese anxious to leave their rural, impoverished existence and move to a city where they can get a paying job. When these migrant workers get that job they send home 30-50% of their earnings, and then they and their families back home buy, amongst other things, electronic consumer products like cellphones, smartphones and iPods.

Many of these jobs have been created by the Apple phenomenon whereby Apple keeps making trend-setting products through new and novel uses of technological achievement.

People want to buy their iPhones and iPads. Apple just had it's biggest ever quarter: 37M iPhones, 15M iPads, $46 billion revenue. Plus, as the economy has started to improve, people have more disposable income and are willing to spend even more for Apple products - 60% of which are manufactured and assembled in China, much of that by one large contract manufacturer: Foxconn.
Foxconn - whose parent company is Hon Hai Precision Electronics, a publicly traded Taiwanese company (TPE:2317) - is the hub in the center of this wheel of motion. It is in their factories in China where some of the components are built and much of the final assembly takes place. As recently reported by the New York Times, CBS, NPR, various watchdog groups and even an off-Broadway play, these factories are havens for worker mistreatment, suicides, unsafe conditions, low pay, and even child labor.

Suicides reached a peak in 2010 and Foxconn implemented solutions, including protective barriers, hotlines and counseling to help prevent further incidents. No suicides were reported in 2011.

Unsafe factory conditions, particularly working with toxins (polishing resins and cleaners) and dusts from metal shavings and other materials were cited as another example. Two serious explosions involving improperly ventilated aluminum shavings occurred in 2011 killing 20 and injuring 50. Subsequently, better ventilation systems and the replacement of workers with robotic polishing, sanding and spraying machines is beginning to take place.

Pay has raced to keep up with discontent and has risen from $0.25 per hour to $0.50 and then $1.00 and now, in many cases, $2.00 per hour. But in this excerpt from a report by a labor rights group, China Labor Watch, one can see the underlying problems:
The minimum wage in many factories does not meet the living costs of its workers. Workers cannot earn a living wage from normal working hours alone, and must work excessive overtime hours in order to earn enough money to survive. At one factory [not Foxconn] for example, workers’ minimum monthly wage was $138 in October 2010. There was a $6 deduction for dormitory accommodations, a $40.50 deduction for food and utilities fees, and a $15.30 deduction for social insurance, which left $76.20. If workers have other expenses or financial responsibilities, such as vocational classes or financial support of their parents (one of the main reasons migrant workers seek work in cities), it would be impossible to meet their living costs with only $76.20. In this situation, workers find themselves with no other option but to work excessive overtime. 
Furthermore, many factories require workers to complete a fixed term of employment before they become eligible for a salary increase. Some factories required workers to complete at least a three month probation period and an additional three month evaluation before becoming eligible for a salary increase. Other factories require a year or longer before workers are eligible for an annual bonus. The difficulty, lengthy terms, and sometimes unpredictability involved in gaining a salary increase and bonus further reinforces workers’ dependence on overtime in order to earn a living wage.
Interviews by the press and various workers rights groups indicate that the main form of discontent is pressure and punishment from long hours at monotonous but intricate work in less than ergonomically friendly postures. 60-72 hour  6-day work weeks are the norm. The pressure comes from the demands to produce more, work more and complain less with punishment for infringements meted out in the form of financial fines, push-ups, public humiliation and attitudinal retraining classes.

Crowded dormitories, cafeterias, long and regimented lines, low pay and condescending contracts, have all contributed to a high turnover -- 20-30% at last report. This perpetuates the cycle of employing unskilled migrants, training them in factory work, housing them, and getting them onto the factory floor and assembly line as quickly as possible.

Apple CEO Tim Cook was outraged at the N.Y. Times. Two recent stories in the N.Y. Times were followed by pieces on NPR and CBS: (1) In China, Human Costs Are Built Into an iPad and (2) How the U.S. Lost Out on iPhone Work. He considered the articles to be an offensive pseudo exposé. In an internal e-mail message to select Apple employes, Cook wrote:
We care about every worker in our worldwide supply chain. Any accident is deeply troubling and any issue with working conditions is cause for concern. Any suggestion that we don't care is patently false and offensive to us. As you know better than anyone, accusations like these are contrary to our values. It's not who we are. 
For the many hundreds of you who are based at our suppliers' manufacturing sites around the world, or spend long stretches working there away from your families, I know you are as outraged by this as I am.
Foxconn, like many of the other suppliers, has denied many of the accusations and responded to periodic audits by saying that they've made or are implementing the legal changes suggested.

To be fair, one must keep in mind that China's internal labor laws are newly emerging and are different from ours - their minimum age and wage are different too. Their management style is significantly different as well.

The N.Y Times articles failed to note what may be Foxconn's most important long-term remedy to problems with its workforce: its plans to deploy one million robots. Foxconn appears to actually be ahead of the news cycle in this instance. Early in 2010 they realized that there would be increased demand for their products and services - particularly Apple products - and that they just couldn't handle more workers. Instead, they decided to deploy 1 million robots as part of their solution. Mid-2011 they launched an R&D facility and robot manufacturing factory in Taiwan to design, develop and produce those 1 million factory robots. Recently they confirmed their intentions to replace but not necessarily lay off 500,000 workers with those 1 million robots thereby moving those workers up the skill-level ladder to more experienced and higher paying jobs.

By any reasonable definition of product liability law, Apple products are Apple's products regardless of whether Apple subcontracts some or much of the effort. Apple is liable for any product failures that injure buyers. Consequently Apple is responsible for the actions of their suppliers to the extent that they are working on Apple's products. Thus it comes down to this: what can and should Apple and other companies do when their sub-contractors are not holding to acceptable Western standards?

Here are my two suggestions:
  1. Apple could insist that dull, dirty and dangerous tasks be automated with robotics and other processes that eliminate these jobs and, more importantly, reduce the areas where injury and discontent are likely to occur.
  2. The N.Y. Times articles implied that Apple monitors its contractors' costs and squeezes their profit margins to the lowest level possible and, when that happens, it becomes a major factor in these contractors subjecting their employees to unsafe and unfair working conditions in order to meet Apple's price. If, on the other hand, Apple provided additional profits to their suppliers but stipulated that those profits be passed down to their workers in the form of additional funds for safety, better work-hours, automation and higher pay, everyone would benefit and the Apple culture would be preserved. Some might argue that this solution doesn't address the competitive pressures of the marketplace. Apple's recent quarterly 28% net profit results - and their $92 billion cash hoard - suggest that, regardless of market pressures, Apple does have some ability to share their profits where they will do the most good for long-term growth, the welfare of their sub-contract workers, shareholder value, AND global public relations.
And a solution from the folks at Change.org - a petition to Apple to protect workers making iPhones in Chinese factories. As of this posting there are already 157,000 signatures!