Apple Computer had a lot to answer for when a British tabloid in June alleged that some of the company's iconic iPod music players are being made under poor working conditions. Apple went a long way toward answering those questions on Aug. 17.
Soon after the mid-June report surfaced, Apple (AAPL) set out to investigate the allegations, sending a fact-finding mission to the Chinese facility. It found conditions mostly acceptable but uncovered problems concerning housing and overtime and said it's taking steps to remedy them. The investigation, whose results were published on Apple's Web site, was nothing if not thorough.
Attention to the plant, owned by Hon Hai Precision Industries in Longhua, China, was triggered by an article in British newspaper The Mail on Sunday (see BusinessWeek.com, 6/15/06, "High-Tech's 'Sweatshop' Wake-Up Call,"). In its report, Apple said Hon Hai, which operates the plant under the name Foxconn, had violated certain conditions of the supplier code of conduct that all Apple contractors have to follow.
SOCIALLY CONSCIOUS IMAGE. The newspaper report of what came to be known as "iPod City" cast an unexpected pall over a company with a long history of linking its brand to socially responsible causes and people. The sweatshop charges risked sowing doubt among a key Apple demographic—creative people who are socially aware and perfectly willing to tailor purchasing decisions to a political viewpoint.
Former Vice-President Al Gore, known recently for his activism against global warming, and a possible Presidential candidate in 2008, sits on Apple's board of directors. Apple also builds a special U2-branded version of its iPod music player, having forged a business relationship with U2 front man Bono, who moonlights as a global poverty activist. Apple Chief Executive Steve Jobs, aside from being a fervent vegetarian, is generally not linked with other social causes, though his wife Lauren is a frequent donor to Democratic politicians.
Apple is also closely watched by socially responsible investment funds. Apple appears alongside Hewlett-Packard (HPQ), Cisco Systems (CSCO), and Motorola (MOT) in the holdings of the Calvert Large Cap Growth Fund. Calvert evaluates the companies it invests in, and assigns ratings in several categories. It gave Apple a "4," or its second-highest rating in its workplace and human rights categories.
HOUSING PROBLEMS. Among changes that the fund has asked Apple to make: "publicizing a human rights code of conduct or other standards by which the company monitors conduct of its suppliers." Calvert also pressed Apple to join the Electronics Industry Code of Conduct Implementation Group, an industry consortium whose other members include HP, Intel (INTC), Adobe (ADBE), IBM (IBM), Dell (DELL), and Microsoft (MSFT), among others. Apple said on Aug. 17 that it's joining the group.
So what else did Apple encounter in China? One problem, Apple said, was with the conditions of three off-site housing facilities that Hon Hai had leased. The report describes conditions that closely resemble some of those described in The Mail On Sunday, including large dormitories housing hundreds in a single room.
Two of the buildings, Apple said, were converted factories used on an interim basis during a period of rapid growth and "now contain a large number of beds and lockers in an open space, and from our perspective, felt too impersonal." A third, Apple said, contained triple bunks, which it says doesn't provide adequate personal space for the workers occupying them. These dorms are in the process of being phased out in favor of new buildings, Apple said.
Apple's auditors randomly inspected several dormitories that collectively house 32,000 people, and in most cases found the living conditions of the workers to be acceptable.
NO FORCED OVERTIME. Apple also took issue with what it described as an "unnecessarily complex" compensation system. Employees were paid according to a formula that included base pay, bonuses for skill, attendance, overtime, and other factors that employees found difficult to understand. Apple says Hon Hai has put a simpler pay structure in place, and at the same time has created an electronic badge system for tracking hours worked and overtime.
Overtime turned out to be a problem as well. While Apple said its audit of the Hon Hai facility turned up no instances of forced overtime, it did find that employees worked more hours than the 60-per-week limit imposed by the code of conduct. Apple said the limit was exceeded more than a third of the time over the course of seven months, and that about 25% of the time employees worked more than six days straight without a day off.
Excessive overtime has been a persistent problem for companies doing business in China. A 2004 study by the nonprofit social research and auditing organization Verité found that of 142 Chinese factories it audited during 2002 and 2003, 93% used excessive overtime, which it defines as more than 60 hours per week.
The organization reported that workers said they needed to work overtime for financial reasons. Yet, Verité said, that need stemmed from illegal pay practices under which employees aren't always paid for all the time they work. Additionally, the report found that there's little enforcement of laws governing overtime by Chinese authorities.
And in an effort to ensure it doesn't get tripped up by similar allegations in the future, Apple said it has tapped Verité, based in Amherst, Mass., to conduct ongoing audits of all of the factories where its products are assembled.