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.