Foxconn Auditor Finds ‘Serious’ Violations of Chinese Law

An audit of Foxconn Technology Group (2354) found “serious and pressing” violations of Chinese labor laws, prompting the biggest maker of Apple Inc. (AAPL) devices to pledge to cut working hours and give employees more oversight.

Inspectors found at least 50 breaches of Chinese regulations as well as the code of conduct Apple signed when it joined the Fair Labor Association in January after deaths of workers at suppliers, the monitoring group said today. Foxconn will bring hours in line with legal limits by July 2013 and compensate its more than 1.2 million employees for overtime lost due to the shorter work week, it said.

“The eyes of the world are on them and there’s just no way they can’t deliver,” FLA President Auret van Heerden said. “It’s a real showstopper.”

Assessors found cases of employees working longer hours and more days in a row than allowed by FLA standards and Chinese law. They uncovered inconsistent health and safety policies and instances of unfair pay for overtime work. To meet its commitments, Foxconn must hire, train and house tens of thousands of workers to assemble products for Apple, Dell Inc. (DELL), Hewlett-Packard Co. (HPQ) and other customers, the FLA said.

Foxconn Response

“We are committed to work with Apple to carry out the remediation program, developed by both our companies,” Foxconn said in an e-mailed statement today. “Our success will be judged by future FLA audits and the monitoring of the implementation of the remediation program, by reviews carried out by Apple and other customers and by future employee surveys.”

Shares in Hon Hai Precision Industry Co., Foxconn’s flagship, dropped 2.1 percent to NT$113.5 as of 11:54 a.m. in Taipei after dropping as much 3 percent, the largest decline since Feb. 21. Apple fell after the report was released, dropping 1.3 percent to $609.86 at the close in New York.

Apple said it appreciated the work FLA has done to assess conditions at Foxconn.

“We fully support their recommendations,” Cupertino, California-based Apple said in an e-mailed statement. “Empowering workers and helping them understand their rights is essential.”

Costs for Consumers

Apple, the world’s most-valuable company, will have to cut profit margins or pass the resulting costs on to consumers, said Alberto Moel, an analyst at Sanford C. Bernstein & Co. in Hong Kong.

“The benefit we, the consumers, and Apple extract from these products at the expense of Foxconn and its workforce is completely unequal,” Moel said in an interview earlier this week. “Foxconn will also have to meet these requirements for all its customers -- Apple, Dell, HP -- because it is at risk of being audited at any production line.”

Foxconn’s pledges will leave more money in the pocketbooks of workers and give them more time to spend it, dovetailing with government plans to rebalance the economy away from exports and toward domestic consumption. Chinese Vice Premier Li Keqiang told Apple Chief Executive Officer Tim Cook during a March 27 meeting in Beijing that multinational companies should pay more attention to caring for workers and share development opportunities, the official Xinhua News Agency reported.

Profit Margins

Apple’s operating margin rose to 31 percent last year, from 12 percent in 2005, according to data compiled by Bloomberg. At Foxconn’s flagship company, Taiwan-listed Hon Hai Precision Industry Co. (2317), the measure fell to 1.1 percent from 3.2 percent.

Apple built computers in the U.S. for much of its 36-year history. As the manufacturing capabilities in Asia improved, it joined other electronics companies in moving assembly lines to China to take advantage of less expensive labor. Now Apple products, including the iPhone and iPad, read on the back: “Designed by Apple in California. Assembled in China.”

The conditions at those facilities have been under scrutiny in recent years, particularly after at least 10 workers committed suicide at plants owned by Foxconn. Three employees died last year and more than 70 were hurt in blasts at two iPad facilities, one owned by Foxconn.

Responding to the criticism, Apple agreed to FLA audits. After surveying more than 35,000 workers and logging over 3,000 hours on site, inspectors found long hours and a failure to engage workers in management decisions.

Inland Expansion

As Foxconn grows, it’s expanding to inland Chinese cities such as Chengdu in the southwestern province of Sichuan and Zhengzhou in the central province of Henan -- where Cook visited yesterday -- to be closer to workers’ hometowns.

When most employees are migrant workers from other areas of the country, businesses can end up with a lot of dissatisfaction and turnover, the cost of which is “humongous,” Moel said.

“If you bring the factories to the workers, they can go home at night,” Moel said.

At two factories in Shenzhen in southern China and at a third in Chengdu, inspectors found the average working week exceeded both the FLA’s 60-hour cap and China’s 49-hour maximum.

Workers were excluded from decision making on health and safety issues, with management nominees dominating the company’s labor union, the FLA said. “Factories’ communications are almost entirely top down,” the report said. Fewer than 1 in 1,000 employees at three business units making Apple products were managers, it found.

Less Than Big Mac

Foxconn pledged to allow workers to elect representatives to union positions and other workplace committees, in line with government rules that are rarely followed in China.

The FLA auditors found no issues related to child or forced labor, according to the report. The average age of workers was 23, they found.

While Foxconn scored well for paying wages on time and at rates higher than the local minimum, more than 64 percent of employees said the basic wage was insufficient.

Foxconn workers in Shenzhen start on 1,800 yuan ($285) a month, rising to about 2,200 yuan after probation, the report said. The average wage in one of the Shenzhen plants was 2,687 yuan and in the other it was 2,872 yuan.

The minimum wage set by the government is 1,500 yuan a month, and 13.3 yuan an hour for part-time employees -- or less than the 15.5 yuan price of a Big Mac.

Updates Coming

More than 80 percent of workers surveyed said they were either content with their hours or wanted more overtime to earn extra money, the report said. Still, employees who worked shorter weeks were more content and expressed a higher level of loyalty to the company, it said.

Today’s report isn’t the first time worker violations have been highlighted. Apple’s own annual audits have cited excessive working hours as a problem since 2006.

The companies haven’t made adequate changes in the intervening years, said Scott Nova, executive director of the Worker Rights Consortium, a labor group in Washington.

“Apple and Foxconn don’t deserve the benefit of the doubt at this point,” Nova said. “The burden is now on Apple and Foxconn to demonstrate that these promises are real by actually implementing these changes.”

To monitor Foxconn’s compliance, the FLA will give regular updates on its website, the new report said.

“We’ve set milestones and concrete deliverables for them to give workers a say,” said Van Heerden, a former South African activist who was imprisoned and tortured under the apartheid regime, exiled in 1987 and later appointed under Nelson Mandela as labor attache to the United Nations.

Companies working with the FLA must agree to disclose their suppliers and have them submit to inspections. The FLA audits about 5 percent of its members’ supply chains each year.

Apple’s membership in the independent FLA will increase scrutiny of its other suppliers, including Seoul-based Samsung Electronics Co. (005930) and Inchon, South Korea-based Hynix Semiconductor Inc. (000660)

“Apple is the most valuable company on the planet and Foxconn the biggest producer of electronics,” Van Heerden said. “This could set the bar for the electronics industry as a whole.”

To contact the reporter on this story: Stanley James in Hong Kong at sjames8@bloomberg.net

To contact the editor responsible for this story: Ben Richardson at brichardson8@bloomberg.net

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Photographer: Thomas Lee/Bloomberg

Employees of Hon Hai Precision Industry Co. Ltd. work along a production line in the Longhua Science and Technology Park, also known as Foxconn City, in Shenzhen, China.

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Photographer: Thomas Lee/Bloomberg

Employees of Hon Hai Precision Industry Co. Ltd. work along a production line in the Longhua Science and Technology Park, also known as Foxconn City, in Shenzhen, China. Close

Employees of Hon Hai Precision Industry Co. Ltd. work along a production line in the Longhua Science and Technology... Read More

Photographer: Bobby Yip/Landov

Workers are seen inside a Foxconn factory in the township of Longhua in the southern Guangdong province May 26, 2010. Employee deaths at global contract electronics manufacturer Foxconn, Apple's main supplier, has cast a spotlight on some of the harsher aspects of blue-collar life on the Chinese factory floor. Close

Workers are seen inside a Foxconn factory in the township of Longhua in the southern Guangdong province May 26, 2010.... Read More

Photographer: Thomas Lee/Bloomberg

Workers at Foxconn City, in Shenzhen, China. Close

Workers at Foxconn City, in Shenzhen, China.

Photographer: Qilai Shen/Bloomberg

Employees at Hon Hai's Foxconn plant in Shenzhen. Close

Employees at Hon Hai's Foxconn plant in Shenzhen.

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