Apple Needs Good, Not Just Better, Supply Chain

Agenda-Setting Financial Insight.
March 7 2012 12:05 PM

Apple Needs Good, Not Just Better, Supply Chain

124796377
An Apple logo is seen at the fifth Apple Store on Nanjing Road on September 12, 2011 in Shanghai, China.

Photo by ChinaFotoPress/Getty Images

Apple has taken its share of criticism lately over working conditions at the Chinese factories of suppliers like Foxconn Technology. Despite the bad press, workers preparing the iPad 3 - which Apple is widely expected to unveil on Wednesday - are treated less badly than many in the electronics business. The sector in turn provides a noticeably better environment than, say, toy or clothing makers do, in the eyes of labor groups. But with Apple’s iconic brand, roughly $500 billion market capitalization and $100 billion of cash, doing things relatively well isn’t enough. 

The basic problem is in some ways like Nike’s back in the 1990s. The sneaker maker was slow to wake up to criticism of sweatshop conditions at its suppliers’ factories. In the end, it realized its reputation and brand were too valuable to risk. Nike helped create the Fair Labor Association (FLA), a group of companies, organizations and academics that aims to protect workers’ rights, partly by requiring member firms to follow processes it lays down. 

The result was never going to be perfection, but Nike has since successfully built a reputation for responsibility and fended off a repeat of the consumer boycotts of 15 years ago. Along the way, the company has talked about its “lonely leadership position,” arguing essentially that it was held to higher standards than others. 

That may be both true and justifiable - and surely applies to Apple, too. Quantifying the reputational risk is difficult, but brand value sheds some light. Last year, the company’s global brand was estimated to be worth $153 billion, a massive 84 percent jump from the previous year and easily topping the BrandZ ranking conducted by WPP’s Millward Brown. 

All these 12-digit dollar numbers - not to mention the nine-digit, 10-year pay package recently handed to Tim Cook, Apple’s chief executive - help any hint of mistreatment of the often low-paid workers at Apple’s suppliers resonate with the general public and maybe especially with the educated, artsy crowd the company likes to associate itself with. 

Apple’s banana skin 
The iPhone, iPad and Macintosh computer powerhouse Cook took over from the late co-founder Steve Jobs last year is renowned for micromanaging everything about its products. Cook himself was involved in establishing Apple’s hyper-efficient global supply chain. 

Yet there are signs that, at least until recently, labor standards at some suppliers slipped through the cracks. With Apple’s rapid growth, plus the massive size and huge campuses of a supplier like Foxconn, which has around 1 million employees, it’s perhaps not surprising. But while Jobs himself was quick to publicly tackle the so-called “Antennagate” episode in 2010 when the iPhone 4’s aerial didn’t work perfectly, Apple wasn’t initially so sharp to act on trouble in the People’s Republic. 

Several Foxconn employees were killed last year in an explosion on an iPad assembly line. Before that, a string of workers committed or attempted suicide in 2010. Workers’ rights advocates say people can’t continue for more than a few years with the fast-paced, highly repetitive tasks on electronics assembly lines before their joints wear out. China Labor Watch, for one, has also documented excessive working hours and breaches of Chinese laws at electronics factories. 

Others have noted the total dependence of many migrant workers on employers like Foxconn for dormitories and cafeterias, which they have to pay for, as offering additional scope for abuse. Poor enforcement of local laws and the absence of meaningful organized labor add to the concerns, and explain why giant multinationals like Apple and Nike need to take a hefty dose of responsibility for their impact on workers, as well as in other areas like the environment. 

It’s not a new idea for Apple. The company has for several years produced reports on conditions in its suppliers’ factories, arguably offering a clearer picture than many peers do. Notably, Apple also sets out remedial actions it has taken, from requiring suppliers to correct procedures or invest in new safety equipment to halting production in some instances. 

Cook also addressed the matter at a Goldman Sachs conference last month, saying Apple takes working conditions very seriously and knows about them through the hundreds of employees based full-time at supplier factories. He talked about Apple’s regular publication of reports and said no one in the industry was doing more to deal with issues like underage labor, excessive overtime and worker safety. 

Apple exceptionalism? 
One big question is whether this is all enough for a company as prominent and image-dependent as Apple. The CEO said the company has this year increased efforts to audit and control supplier conditions. In what may be a sign of that, Apple (already a member of the Electronic Industry Citizenship Coalition, which promotes responsibility in the supply chain) in January joined the FLA, the first electronics firm to do so. 

While some activists have criticized the association for its financial dependence on member companies, it acts, at the very least, as a third-party auditor distanced from any one member’s direct control. Importantly, it also publishes its findings after unannounced visits to factories. Initial scrutiny of some Apple suppliers is under way. 

Assuming Apple’s latest push continues, it could eventually help turn the opinion of critics who think the company hasn’t done enough in the past, even compared with some less profitable peers. 

But even if reasonable people can probably agree the basic goals are safety, dignity and a living wage for workers, it’s a long haul. “The target is improvement, there are no final victories in this business,” says Bennett Freeman of corporate responsibility-focused Calvert Investments. Experts emphasize the need for local engagement and enforcement, not just the imposition of conditions or audits from afar. That’s also one of the “teachable moments” described in Nike’s most recent corporate responsibility report, for 2007 to 2009. 

And with Apple keeping its product cycle rapid and needing to stockpile huge numbers of products when shiny new gadgets like the iPad 3 are announced, there’s another significant question: Could, or would, the company forgo any of its profit to give its suppliers room to pay people more, or employ more of them at busy times to reduce working hours? 

Apple reported net sales of $46 billion with an enviable 45 percent gross margin in the last quarter of 2011. That tallies with the “teardown” costing of an iPad 2 by IHS iSuppli: a version retailing for $600 may cost under $330 in components, with just another $10 for manufacturing. That’s the sliver Foxconn’s assembly workers are potentially sharing - under 2 percent of the retail price. 

On last quarter’s company-wide pace, that’s a mere $3 billion over the course of an Apple year. Foxconn has raised wages. But it seems like it shouldn’t be out of the question for Apple to hand over a little more in return for suppliers treating workers better - and thereby helping to preserve its brand, valued at more than 50 times that $3 billion figure. 

Yet for all they may genuinely desire to ensure workers are treated better, company executives as a breed are understandably reluctant to squeeze their own profit margins. As Calvert’s Freeman puts it: “Very few of them pound the table and say, ’By God, we’re going to raise the wages there!’” 

Apple could yet have to consider doing just that. If it wants the iPad 4, 5, and 6 to be as desirable and therefore (almost) as profitable as previous versions, Cook may have to invest more to achieve an objectively good record on supplier labor - not just one that looks better than those of other companies.

Read more at Reuters Breakingviews

Richard Beales joined Breakingviews.com in 2007 from the Financial Times, where he was the US markets editor and a Lex columnist. Prior to the FT, he spent more than 10 years as an investment banker, based largely in Hong Kong.