Otto von Bismarck, the first chancellor of the German empire, once smartly compared laws to sausages, observing that anyone fond of either should never see them being made. The same might be said for many consumer products such as clothing. Fancy new clothes may look nice, but if you were to drop in unannounced at the factory where they're made, more often than not you would be hard pressed to describe the working conditions as pleasant.
Ditto for electronic goods. The products we casually buy today at places like Best Buy (BBY) or Circuit City (CC) were at various times in years past more expensive as a portion of income. Take the DVD player for instance: In 1998, I paid more than $300 for my first DVD player. I wasn't alone: that year: Some 1 million consumers paid on average $390 for a DVD player. But last year, 16 million people paid less than $105 on average. Between 1976 and 1999— and not accounting for Moore's Law—the price of computers by one reckoning fell on average by 27% per year.
Part of the reason: the falling cost of labor. You know what happened. As workers in the U.S. and elsewhere commanded ever higher wages, manufacturers shifted operations elsewhere, including such places as Mexico and Japan, and later Taiwan and China. Many companies, Apple among them, get outside companies to handle the manufacturing entirely, often in places where labor costs are low and workplace regulations differ from those in the U.S. and Europe.
Given this economic backdrop, I wasn't terribly surprised to read allegations in the British newspaper The Mail on June 25 that Apple Computer's (AAPL) iPod portable media players are made in what the paper portrayed as sweatshop conditions (see BusinessWeek.com, 6/15/06, "High-Tech's 'Sweatshop' Wake-Up Call,"). The plant specified in the report is said to employ some 200,000 people who live in dormitories crammed with up to 100 people at a time, for wages that appear to Western eyes shockingly low—about $50 a month.
The report raised potentially damaging allegations, and concerned parties—including Apple—appear to be taking them seriously. But if the computer maker wants to face the concerns head-on, it should consider making the music players itself, in its own overseas factories.
Before I make my case, a bit of background is in order.
The plant in question is operated in Longhua, China by an outfit called Foxconn, the trade name given to Hon Hai Precision Industry. Known as a contract electronics manufacturer—a company whose sole purpose is to manufacture products for other companies—Hon Hai is by all accounts successful. It turned a $1.2 billion profit on $28.4 billion in sales in 2005 (see BusinessWeek.com, "The InfoTech 100: Hon Hai Precision Industries").
Last year, Hon Hai eclipsed Flextronics (FLEX), the Singapore-based electronics giant, as the world's biggest contract manufacturer. Hon Hai's other clients include Hewlett-Packard (HPQ), Nokia (NOK), and Sony (SNE).
Hon Hai executives initially took issue with the report, pointing out what they said were inconsistencies: Its entire corporate workforce is only 160,000 people, and so how could a single plant employ 200,000? A later report appeared on ChinaCSR.com, a Web site devoted to promoting corporate responsibility in China. In that account, Hon Hai admitted to breaking some local laws regarding overtime. It also said its salary structure had been misinterpreted in media reports and that it complies with minimum-wage laws.
WALKING THE WALK?
Apple, clearly wanting to avoid unpleasant appearances, has sent a team to investigate. Some reports have suggested the investigation is complete, but as of June 28, it was not. "We are still investigating the working conditions at Foxconn's manufacturing plant in Longhua"" says Apple spokesman Steve Dowling. "This is a thorough audit, which includes employee working and living conditions, interviews of employees and managers, compliance with overtime and wage regulations, and other areas as necessary to insure adherence to Apple's supplier code of conduct. Apple's supplier code of conduct sets the bar higher than accepted industry standards and we take allegations of noncompliance very seriously."
Clearly, much about this situation is not yet known, and Apple is to be commended for springing into action when the allegations surfaced. Steve Jobs is a socially conscious person, and he associates with people of the same ilk. Former Vice President Al Gore is on the Apple board of directors. Apple makes a special U2-branded version of the iPod whose front man is global activist Bono, the band's lead singer (see BusinessWeek.com, 6/14/06, "Rockers Push Policy, Not Product"). Such high-profile folks linked with Apple—and more importantly for Apple, a lot of its customers—will eagerly await the investigation's outcome.
What are the possible scenarios, starting with the worst-case? For the sake of argument, let's assume that the allegations are true, and that working conditions at the plant are horrible. In this case, it would be incumbent on Apple to either demand rapid and sweeping changes at Hon Hai's plant, or to take its business elsewhere. Certainly, other companies could build iPods, but such a change wouldn't happen without major disruption to Apple's business. Products could be delayed or go in short supply. This would anger shareholders, and could cause serious damage to Apple's reputation.
But Apple would clearly want to avoid the kind of public-relations problems that for so long plagued Nike (NKE) about sweatshops in Vietnam. Stigmas like the one in that case don't go away fast. Decisive, corrective action would be the order of the day, even if it hurts business.
Consider the opposite scenario. Let's say that Apple's investigation finds nothing amiss or improper with the way iPods are made by Hon Hai and the conditions under which its employees work. Apple and Hon Hai jointly brand the story as fiction and go their merry way, making iPods and money.
Both scenarios call for transparency. If the findings are bad, people will wonder if the whole story has been told. If the findings are good, questions may linger, nevertheless, and doubt will fester. Some will wonder if it's really humane to buy an iPod. Regardless of the findings, Apple should make every effort to disclose whatever it finds—good or bad—immediately. And it should ask for help from an independent authority to verify whatever the company finds and to help oversee whatever corrective action is taken—if any is ultimately needed.
BE A MODEL.
I'd suggest the U.K.-based Catholic Agency for Overseas Development. In 2003, the agency reported on working conditions in the PC industry—again at contract manufacturers—and spurred changes from companies such as Dell (DELL), HP, and IBM (IBM), which were targeted in the first report. They've since updated their supplier codes of conduct to address issues the agency raised.
Apple has a Supplier Code of Conduct as well, which can be read at this site. Among the actions it forbids are corporal punishment of workers. Working hours are to be no more than 60 hours in a single week, including overtime. Plus, workers must be allowed one day off each week. Dowling says Apple's code of conduct is intended to exceed standards established by the International Labor Organization. "We set the bar high," he says.
But is it enough to demand that another company do things in a manner you prefer? High-profile companies like Apple are often held to higher standards because they lead in what they do. The industry follows Apple in how computers are made and personal electronics are designed. Apple should also set an example for how their products are made.
CONTROLLING ITS DESTINY.
One way to do that: build a factory in China. Rather than hire a Chinese company to build iPods, why couldn't Apple build them in China in its own factory? It has $8.2 billion in cash and would be in good corporate company. I can think of at least two electronics companies, Motorola (MOT) and Plantronics (PLT), that both build products at wholly owned facilities in China. Plantronics spent $23 million to build a 270,000 square-foot plant for wireless-phone headsets. It employs 425 now, and expects the headcount there to grow to 2,000.
Motorola's Chinese factory is in Tianjin and makes wireless phones. It doesn't disclose how many people it employs there, but has had operations in the country for more than a decade.
An Apple factory built to accommodate good working standards in China would give the company total control over conditions, environmental practices, and all the other things that manufacturers like to brag about these days. It would erase any concerns—warranted or not—about worker exploitation there.
It would be no small undertaking: Expensive, complicated, fraught with bureaucracy. But it could be done. No one said running the world's most influential technology company would be easy.