On June 11, the British tabloid Mail on Sunday published an article citing sweatshop-like conditions at the Chinese factories where some of Apple Computer's iPods are made. Then came the reaction from Apple (AAPL) headquarters in Cupertino, Calif. “Apple is committed to ensuring that working conditions in our supply chain are safe, workers are treated with respect and dignity, and manufacturing processes are environmentally responsible,” the company said in a June 14 statement. “We are currently investigating the allegations regarding working conditions in the iPod manufacturing plant in China.”
No doubt, that's true. As strong as Apple's brand is, the company can't afford to have its affluent customers wondering if the company is profiting from human suffering. Still, the article and Apple's response to it are a wake-up call that the tech industry as a whole needs to get serious about ensuring that its suppliers and manufacturing partners maintain decent working conditions.
OVERSEAS FACTORIES.In one of the more amazing industrial migrations in history, the world's tech companies have gone from building their own products in places like California and France to having over 90% of them built in poorer locales, such as China, Mexico and Romania—all in the past decade or so. That's billions of dollars of contracts flowing into regions with very different customs, laws, and pay scales.
It's created hundreds of thousands of jobs at thousands of companies that operate at the extremes of the industrial food chain, often in anonymity—whether at tiny shops that make a certain kind of connector, or at Foxconn Electronics' impossibly huge Long Hua campus, which employs 200,000 people (see BusinessWeek.com, 6/19/06, "Stalking High-Tech Sweatshops").The shift has created an environment in which abuse can and will flourish—unless overseas worker conditions become more of a front-burner issue for an industry that has become addicted to rock-bottom prices in recent years.
To be sure, the industry has taken some steps to try to ensure humane working conditions. In 2004, HP (HPQ), Dell (DELL), IBM (IBM), and five big contract manufacturers joined together to create the EICC (Electronics Industry Code of Conduct); Intel (INTC), Cisco (CSCO), Seagate (STX), and five others have joined since. The code spells out members' expectations relative to topics such as child labor, worker safety, and the rights of workers to be fairly and fully paid for their hours on the job. Apple published its own Supplier Code of Conduct in November.
SELF-SCRUTINY.HP, in particular, has won praise from watchdog groups, in part for its willingness to report frankly on conditions among its suppliers. The company's 2006 Global Citizenship Report includes charts that reveal some remarkable data. For example, HP found “nonconformances” related to the amount of hours expected of workers in at least 41% of the factories of its top-tier partners. More than 21% of the sites did not satisfy HP's auditors when it came to “occupational safety” and “dormitory and canteen” issues, such as poor hygiene or overcrowding in the dorms that many of these manufacturers provide for their workers.
That jibes with the Mail article, which referred to dorms at Foxconn holding 100 people. Bonnie Nixon-Gardiner, HP's program manager of Supply Chain Social & Environmental Responsibility, says she's never seen dorms that large at Foxconn, but says HP did find nearly twice as many workers living in a large hall at a Chinese power supply company last year. When HP complained and threatened to terminate its contract within six months if the situation was not rectified, the supplier built new dorms.Now, workers live in rooms for no more than eight workers.
The trouble is, not enough tech companies are investing sufficient energy into tracking down such instances—and efforts they do make lack the teeth needed to make manufacturers change their ways, watchdogs say. That's in part because tech companies are toeing a difficult line. Most are focused on helping suppliers and manufacturers improve working conditions, rather than on punishing them by withholding contracts—which, after all, hurts workers most of all.
NO INCENTIVES.But some believe the industry needs to get tougher, making it crystal clear that they'll take their business elsewhere. Indeed, some established contract manufacturers say the supplier codes of conduct are mostly a PR vehicle for the famous brands—providing cover so they can blame the manufacturers when instances like the Mail story occur.
Indeed, an uncomfortable rift exists between big western contract manufacturers that have been serving high-tech's giants for decades—mostly controversy-free—and the mostly Asia-based newcomers that have been winning much of the business in recent years. When the big computer companies were creating the EICC in 2004, one top executive from one of the older manufacturing firms protested vehemently, though privately. His argument: his company should not have to pay the millions of dollars it would cost to implement systems and pay for factory audits until the computer makers promised to hold low-cost overseas rivals accountable if abuses were uncovered. “HP and Dell and IBM got together to do this code of conduct, because they were worried about these watchdog groups,” says a source with knowledge of the talks. “They wanted to head off any industry scandal. If you believe in [the Code of Conduct], then award business based on [how well manufacturers' meet its requirements].” In the end, the company joined the EICC.
There are no easy answers. For starters, it's difficult to set minimum standards of treatment, given vast regional differences. Indeed, the Mail story cited a monthly salary of 27 pounds (about $50) as evidence of harsh working conditions. Nixon-Gardiner says that represents minimum wage in some parts of China. Based on that figure, “It's not entirely clear to me that they're not meeting minimum wage standards,” she says. Or consider the issue of worker's rights to organize. While HP added language supporting worker's right to collective bargaining and “freedom of association,” to its own internal supplier code, it's not mandatory—in large part because of China's stringent opposition to Western-style unions.
WHO PAYS?In the end, the working conditions for tech's factory workers may have less to do with the business complexities that exist in these far-off locales and more to do with what happens in the boardrooms of Armonk, Austin, and Silicon Valley. Clearly, tech companies have been caught in a race to find the lowest-cost manufacturers in recent years—with great benefits to consumers who can now get nifty $99 iPods and $600 laptop PCs, and to investors who've benefited from rising share prices. Over time, the industry will have a choice, however: live with periodic controversies, such as the one facing Apple now, or agree to pay up for manufacturers that can keep them out of the headlines.