No Company Follows Apple’s Expanded China Factory Audits: Tech

Apple Inc. (AAPL)’s rivals aren’t rushing to emulate the iPhone maker’s decision to subject supplier factories to audits by a labor group. Instead, they’re sticking to internal checks that may leave room for violations -- and negative public relations fallout.

Apple said on Feb. 14 the Fair Labor Association had started independent audits amid criticism of conditions at its plants in China. Companies including Microsoft Corp. (MSFT), Dell Inc. (DELL), Hewlett-Packard Co. and Samsung Electronics Co. rely on their own evaluations, based in part on guidelines from the Electronic Industry Citizenship Coalition, which they say are sufficient to prevent abuses.

Though Apple’s decision to join FLA may not root out all instances of labor abuse, the EICC’s member companies may open themselves to even harsher criticism. While the EICC sets standards for ethics, worker safety and labor practices, it doesn’t require members to disclose findings and it lacks enforcement powers. The result is a disjointed system of self- imposed regulations that fail to hold companies accountable when abuses arise, according to labor advocates and technology executives.

“They are absolutely toothless,” said Tom Fallon, chief executive officer of Infinera Corp. (INFN), a Sunnyvale, California- based maker of telecommunications equipment that hasn’t joined the EICC because Fallon says the group isn’t effective. “I don’t think they do meaningful work.”

Wendy Dittmer, a spokeswoman for EICC, said she doesn’t know of any instance of a factory losing business, permanently or temporarily, for failing to live up to the group’s code of conduct. The EICC doesn’t require companies to share those details about their relations with business partners, she said.

Foxconn

Technology companies are under scrutiny for working conditions at Foxconn Technology Group (2354) and other manufacturers’ Chinese plants, where the world’s best-selling gadgets are assembled. Workers making Apple products log 11 hours of work a day, six days a week, while production speeds are so high that workers aren’t able to rest while making iPads, according to New York-based China Labor Watch. Employees have been exposed to dangerous aluminum dust, the group said. Foxconn installed safety nets and hired counselors and psychologists in response to multiple suicides in 2010.

Apple’s FLA Membership

Amid the criticism, including a New York Times investigation highlighting Foxconn’s labor conditions, Apple opened factories to the FLA, a Washington-based nonprofit organization, and said that the group would inspect plants owned by three of its largest manufacturing partners. Apple in January also listed its suppliers for the first time. The company has disclosed instances of rights violations in an annual progress report since 2006, though it has never specified where or at which suppliers the violations occurred.

Foxconn also said on Feb. 18 that it was raising wages to $290 a month, double the level of three years ago.

No other technology company has sought membership in the FLA, said CEO Auret van Heerden. Founded in 1999 to address working conditions in the apparel industry, most of the group’s 34 member companies come from that business, including Nike Inc. and Adidas AG.

Unlike the EICC, FLA member companies must agree to disclose their suppliers and to submit to unannounced visits from the FLA or third-party auditors. The FLA also posts results of all audits on its website.

The 67-member EICC, a Washington-based trade group founded in 2004, doesn’t require companies to stop using suppliers or manufacturers regardless of their record on treatment of workers. It dictates only that “members commit to continuous improvement,” said Dittmer, the group’s spokeswoman. Cupertino, California-based Apple also is a member of the EICC.

Internal Audits

When it comes to ensuring factories’ ability to reliably make a quality product, most companies in the EICC insist that all factories earn certifications to ensure a plant can reliably deliver high-quality products.

The EICC doesn’t require any such certification regarding the treatment of workers. Member companies may choose an EICC- sanctioned outside auditor, usually paid by the company. Yet, companies aren’t required to make the results of their audits public or share them with the EICC. Each company owns the results of its audits, Dittmer said.

A drawback to both the FLA’s and EICC’s approach is inspections often don’t include suppliers further down the supply chain, said Mike Fawkes, a former supply-chain executive at Hewlett-Packard. (HPQ) A handheld product like the iPhone has hundreds of parts, many of them made by small companies in China.

Defining ‘High-Risk’

Even the FLA only requires companies to audit about 5 percent of companies in their supply chains, down from 30 percent when the organization was created, said Heather White, who founded workplace-auditing firm Verite in 1995 and is now a fellow at Harvard’s Edmond J. Safra Center for Ethics.

Until recently, the EICC hadn’t required member companies to audit a specific percentage of its suppliers, the EICC’s Dittmer said. In 2010, the EICC members voted to create a compliance program to include a requirement that members audit some percentage of “high risk” factories owned by the company or important suppliers. The board voted on Feb. 17 on what number of high-risk suppliers would need to be inspected, though it hasn’t released the result. She says the definition of high- risk is up to each company.

Need for ‘Vision’

The technology industry’s inconsistent approach illustrates the need for a more comprehensive strategy to prevent excessive overtime, poor pay and dangerous chemical exposure, said Scott Nova, executive director of Worker Rights Consortium, a group that investigates factory conditions.

“We don’t see that kind of vision,” said Nova, who is based in Washington. “We see it with technological innovation, with design and marketing, but we don’t see it when it comes to human rights.”

The EICC was formed when large U.S. technology companies sought to create an industry code of conduct. Almost all of them had outsourced most of their production in the previous decade, and had watched as Nike and other apparel makers came under criticism for child-labor violations and other workplace issues.

“None of us wanted to get Nike’d,” said Fawkes, the former executive at Hewlett-Packard, the world’s largest maker of personal computers.

Getting Started

Fawkes said the founding members of the EICC, including Dell and International Business Machines Corp. (IBM), sincerely wanted to improve working conditions at their suppliers. The companies debated whether to let members satisfy the code of conduct as they saw fit, or to implement a more explicit certification process. In the end, they went with the less rigorous approach.

“We felt we had to get something started, because this was going to be a long journey,” said Fawkes, who is now a venture capitalist at VantagePoint Capital Partners. “These supply chains are 10 levels deep, and we intuitively knew that the lower you got, the worse the conditions got.”

Some executives said it’s unfair to demonize Western technology companies, which outsourced production to Asia to deal with competitive pressure to keep prices low, since workplace norms are so different in China. In addition, many workers in China were young people from the countryside who wanted to make as much money as quickly as they could, said Michael Marks, former CEO of Flextronics International Ltd. (FLEX), the world’s largest contract manufacturer before Foxconn’s rise a decade ago.

“Most Chinese workers at that point in time wanted as much overtime as they could get,” he said. “If we tried to limit them to 50 hours, we’d get complaints.”

Microsoft, Dell, Samsung

Companies that are part of the EICC defend their practices even if they don’t plan to partner with FLA. Microsoft, whose Xbox game system is assembled by Foxconn, said it has a code of conduct that suppliers are required to meet, including factory inspections, or they risk losing contracts.

Dell, the third-largest maker of personal computers, has employees inspect suppliers’ operations, including Foxconn’s, said David Frink, a spokesman. “It’s an ongoing process,” he said. “We’re encouraged by the progress.”

Samsung, the world’s biggest smartphone maker last year, said it has a “limited” relationship with Foxconn. The company doesn’t have any current plans to partner with the Fair Labor Association and will continue to monitor production on its own.

‘Clear Requirements’

“All Samsung Electronics supplier agreements contain clear requirements for labor and workplace standards that are consistent with industry best practices and fully compliant with local laws and regulations,” said SungIn Cho, a Samsung spokeswoman.

Shelby Watts, a spokeswoman for Hewlett-Packard, said the company “takes seriously the challenge of raising social and environmental responsibility standards in its supply chain.”

Hewlett-Packard “engages regularly with its contract manufacturers, industry peers and non-governmental organizations to establish and implement continual improvements in overall working conditions in electronics manufacturing worldwide,” she said.

In the company’s 2010 corporate responsibility report it said it found child-labor violations at 1 percent to 10 percent of its audited sites, and excessive working hours at more than half. The Palo Alto, California-based company didn’t provide more specifics about the violations.

‘Hands-On’ Assessment

Companies that aren’t members of EICC also have internal inspections under way. Nokia Oyj (NOK1V), the world’s second-largest maker of mobile phones, said it works with aid organization Oxfam and the International Metalworkers Federation to ensure proper conditions. Nokia said it tours factories, interviews workers and managers, and reviews documents to assess many aspects of labor practices.

“To be truly responsible in this area, you have to be very hands-on,” Nokia said in a statement.

Even before Apple joined the FLA, conditions at its factories were better than others in the technology industry, said Yuan Fan, a researcher at China Labor Watch.

“We see more improvement in Apple’s supply chain,” Yuan said. “The other companies that we talk with don’t have so many improvements. They are mainly focused on building a relationship with the labor groups as PR.”

Customer Demands

Rival technology companies may follow Apple in partnering with the FLA if customers begin to see Apple as having higher standards, said Jerry Kim, a management professor at Columbia Business School in New York.

“It will boil down to whether customers demand it,” said Kim, who researches management strategies and how companies deal with regulation. “There’s always an incentive to have the worst labor practices so long as customers don’t know. If Apple and the FLA can elevate this to a level where customers are demanding to see that certification, then competitors will have no choice but to join.”

And audits and factory inspections can only go so far. If technology companies are serious about improving conditions, they need to accept lower profit margins and slower production times, Worker Rights Consortium’s Nova said.

“As long as the company is not willing to demand change from suppliers, and adjust prices and delivery deadlines to implement that change, we’re not going to see it,” he said.

To contact the reporters on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net; Peter Burrows in San Francisco at pburrows@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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