SAN FRANCISCO—An investigation by a labor practice watchdog group that revealed serious workers' issues at Taiwanese contract manufacturer Hon Hai Precision Industry Co. Ltd.—which operates under the trade name Foxconn—could be a "moment of reckoning" for the electronics industry similar to what occurred in the footwear and apparel industry in the 1990s, according to market research firm IHS iSuppli.
The Fair Labor Association (FLA) issued a report last month detailing the results of a month-long investigation into labor practices at Foxconn. The FLA said the investigation uncovered "significant issues" with working conditions at three Foxconn factories in China, including workers working excessive hours in violation of Chinese law and not in some cases being properly compensated for unscheduled overtime.
The FLA, which conducted the investigation with the support of Apple Inc., one of Foxconn's largest customers, said that following its investigation in secured commitments from Foxconn to reduce working hours to legal limits while protecting pay, improve health and safety conditions and establish a genuine voice for workers. The FLA said it would monitor the situation on an ongoing basis to verify compliance.
Apple joined the FLA in January under mounting pressure from workers rights advocates and consumers concerned about working conditions at Foxconn in the wake of a string of suicides at Foxconn worker facilities last year.
According to IHS, the FLA investigation of Foxconn, the impact of the investigation could be similar to what Nike Inc. and other footwear and apparel manufacturers experienced in the 1990s, when damaging revelations over their use of sweatshop manufacturing resulted in the creation of fair labor standards for suppliers and ultimately led to the creation of the FLA.
"Much of the press coverage of the FLA investigation has focused on the impact it will have on Apple’s margins or on prices that consumers will pay for iPhone or iPads," said Thomas Dinges, a senior principal analyst for electronics contract manufacturing at IHS, in a statement. "However, the real impact is on the overall relationship of electronic brands with contract manufacturers like Foxconn. Brands now realize that the biggest risk in dealing with contract manufacturers lies in the potential public relations disasters that can arise from worker’s rights issues."
According to IHS, the Foxconn investigation underscores the serious risk to the public image of electronics brands inherent in their $360 billion relationship with the global contract manufacturing industry. The result of the investigation is likely an increased focus on compliance—as well as rising costs for electronics brands, according to a recent analysis from IHS.
Foxconn, the world’s largest maker of electronic components, is headquartered in Taiwan, but operates a number of very large manufacturing facilities in China.
The global electronics manufacturing business, consisting of electronics manufacturing services (EMS) and original design manufacturing (ODM) firms, generated $359.8 billion in revenue in 2011, a testament to the degree to which global electronics brands increasingly rely on them for outsourced production, according to IHS. As recently as 2006, these firms generated total sales of $264 billion, according to IHS. While revenue for EMS and ODM firms is expected to dip in 2012, it is forecast to grow to $426.1 billion in 2015, according to IHS. The firm estimates that contract manufacturing now accounts for 20 percent of all manufacturing.
"While the recent focus has been on Apple and Foxconn, the fact is that nearly all electronics brands make use of contract manufacturers," Dinges said. "Because of this, nearly all brands are at risk from negative headlines in their local newspapers that could arise from news of worker issues."
According to IHS, the moment has arrived for electronics brands to ensure that their contract manufacturing partners are in compliance with FLA rules. IHS expects more audits will take place that will uncover further issues, the firm said. OEMs will be forced to expand their operations that focus on supplier responsibility and compliance, the firm predicted.
As contract manufacturers move to ensure compliance, contract manufacturers will expand their workforces and increase their pay scales in China, causing manufacturing costs to climb, IHS predicted. But given the relatively small proportion of manufacturing costs compared to component expenses, this increase is unlikely to have a major impact on company margins or consumer prices, IHS said.
IHS also predicted that rising costs in China would likely will spur contract manufacturers to seek alternative, lower-cost locations for manufacturing. But because of the already extensive established supply chains and infrastructure in the country, China will remain the manufacturing engine of the global electronics industry, IHS said.
The "moment of reckoning" was long ago when the labor conditions and suicides at Foxconn were first revealed and made international headlines. Now we're observing a steady evolutionary progression of data gathering and corrective action. Wages and working conditions will continue to improve in China. The balance points will continue to shift for domestic vs. outsourced manufacturing decisions depending upon labor costs, shipping costs, intellectual property, technical support, and delivery time considerations.
"No, no one is pointing a gun to anyone's head and making them work at Foxconn. "
Have things changed in China then? When I was there in the 80's, it was explained to me that the government assigned you a job, and you either did that job, or starved. Moonlighting could get you put in jail or worse.
The problem is that China is a largely agrarian third-world nation trying to bootstrap itself into the 21st century and become an industrialized first world nation. We act horrified at the working conditions in Chinese factories, but fail to recognize that those jobs are steps *up* in pay, hours, working conditions, and status from being a peasant in the fields, and there is competition to *get* those jobs, with corresponding problems caused by mass migrations from rural areas to urban centers as people move to where the jobs are.
Another overlooked factor is that those jobs are attractive opportunities for *women*, in a culture where men are valued and opportunities for women are not abundant. Electronics assembly is a task that can be done by a woman as well or better than a man, which is not true of many of the other better paying jobs.
Yet another overlooked factor is fundamental differences in the underlying culture. The most important social unit in China is the *family*. Things are done for the benefit of the family, and by our standards, the individual simply may not *matter.* I think you'll find that many of those workers at Foxconn and other manufacturers are sending most of their pay back home *to* their families. They are working for the benefit of their families, not themselves.
What China is going through now is a stage I think every developed first world nation had to pass through on the way to becoming a first world nation. Conditions in China for those workers will improve as their economy expands and they come closer to *being* a first world nation, but while we can try to mitigate what we see ad problems, we can't make them go away.
I have worked on deals where we have competed head-to-head with Foxconn for Apple manufacturing contracts. I must admit that we struggle to compete with them on price as they have a completely different set of ethics to us.
@dencon22- yes, I believe most Americans would not want to work in unsafe conditions for a wage that does not cover their basic needs. With the labor reforms won in this country in previous generations, the idea of doing so is unsavory. Is that wrong?
@dranger-I don't agree that the article is "shrill" or that it "screams hyperbole." But you make a fair point about the characterization of the overtime pay issue. I have made some changes to that paragraph after considering your comment. Thanks for weighing in.
Sadly, Frank, I agree with you 100 percent. But I don't think it's that people are amoral or that they don't care, I think that people just don't truly think it through. I have to admit, until the last couple weeks, I didn't truly think about it. We've all got plenty of issues of our own to deal with, and it's not that easy to step outside of our situations and think deeply about the plight of other people that we don't personally know. But after giving it consideration, I feel that this is wrong and I personally won't support it.
Safe working conditions start with unblocked exits and functioning protective equipment, both of which were found lacking in the FLA investigation. The investigation also found that the employees worked excessive hours in violation of Chinese labor law.
"Living wage" is defined as the minimum hourly income necessary for a worker to meet basic needs (http://bit.ly/9l7UOe). In the FLA investigation, 64% of workers said of employees said their compensation does not meet their basic needs. Not a living wage.
IHS said that if ODMs comply with FLA rules, costs will increase. But IHS added, "Even so, given the small proportion of manufacturing costs compared to component expenses, this is unlikely to have a major impact on company margins or consumer prices."
According to an IHS teardown analysis (http://bit.ly/FQQYYn), the 32GB, 4G-capable version of the new iPad has a bill of materials cost of $364.35 and manufacturing cost of $10.75. Apple sells this model for $729. If the IHS estimates are accurate, the manufacturing cost is about 3% of the total cost to produce the device and about 1% of the retail price. If Foxconn were to give all employees a raise of 25%, how much more would you expect the iPad to cost?
You touch on the crux of the issue. At the same time that there is soul searching (among some) over labor practices in foreign countries where the electronics goods we buy are produced, many in the U.S., including the president, are concerned about manufacturing disappearing from this country. The pragmatist in all of us accepts at some level that offshoring manufacturing to developing nations with lower wages makes sense from a business perspective. But if we as consumers insist that the people who make the goods we buy be provided a safe working environment and paid a living wage, perhaps the numbers look different. Perhaps, if the exploitation of human beings were removed from the equation, it might not seem so foolish to just build stuff in the U.S.
This whole discussion reminds me of a segment several years ago on one of the newsmagazine shows. The subject was the plight of workers in the textile industry in Bangladesh and the influence of Walmart buyers and the endless pursuit of cutting costs.
They profiled a worker -- a single mother living in what westerners would describe as deplorable conditions, and they even brought her to New York, and to a Walmart where she found some of the very clothing she had sewed.
Various Walmart shoppers were asked, on camera, if they would be willing to pay just a little bit more so that this woman and others like her could have a slightly better life, maybe more nutritious food and so on. The majority said "no" -- times are tight, I shop here for the low prices, and all the usual excuses.
Dylan says "moral consumers" should send a message to Apple and other companies that we won't buy their products unless blah blah blah.
Call me cynical, but I suspect that if all the "moral consumers" took Dylan's advice, the effect on sales of Apple or Dell or HP or Nike or Aeropostale or whoever would be less than negligible.
I understand what this specific investigation was not about Chinese firms as a whole, however the issue is with Chinese firms as a whole, but if we were honest about that, it wouldn't show Apple in as unfavorable a light now would it? And yes, we can refuse to do business with any firm that does not insist on basic safety, as I referred to sweat shop conditions, but when half the world separates you, there's not a whole lot that can be done other than empty words. Again, those factories are gems in China. They can't change the entire country and the way business is done there overnight, but they are the example of a firm that is trying to do right by its employees - even if it's against the grain of the country. Foxconn losing business and going under would be the worst thing that can happen for China. There are checks and balances in life for a reason and they generally work out. This country had all the issues we are now seeing in other countries and today they are the exception and not the norm. China has a long way to go, but without firms like Apple they would likely never improve.