Executive Briefings

Apple's Supply Chain: Truth, Lies and Corporate Image

One night last January, Mark Shields was home in his kitchen making hummus, listening to This American Life, WBEZ's popular syndicated radio show. He was streaming the podcast on his Mac laptop via Apple's AirPort technology, which turned out to be an appropriate platform for listening to the episode, given that the subject was Apple itself.

More specifically, it concerned working conditions at factories in China that make Apple products. Shields was a devoted consumer of Apple devices, so he was shocked to hear correspondent Mike Daisey detail horrific incidents of workers as young as 12 subjected to grueling shifts of 12 hours and more, claustrophobic dormitories and production chemicals that were permanently disabling and even life-threatening. "It went from being a very pleasant evening to [me] feeling terrible about it," says Shields. The experience prompted him to post a petition on Change.org, calling for the protection of worker's rights at the Chinese factories, and an end to what he calls "horrible human suffering" in those facilities. Within days, Shields had amassed more than 225,000 signatures. Yet another example of the astonishing power of the internet.

There was only one problem: the stories told by Daisey weren't true.

At least some of them weren't. After some follow-up fact-checking, This American Life host and executive producer Ira Glass and his production team uncovered a slew of exaggerations and outright fabrications by Daisey, causing them to retract the original story and devote an entire episode to detailing the errors. It was a case of mea culpa rarely seen in today's world of 24/7 "journalism," fueled by ideology and frequent disregard for the truth.

In fact, although his story was broadcast on a show that prides itself on high journalistic standards, Daisey isn't a journalist at all. He's an actor and theatrical monologist whose one-man shows cover a variety of personal and social issues. (The Daisey segment that was broadcast on This American Life was actually part of a longer stage show, "The Agony and Ecstasy of Steve Jobs.") As such, his narratives are given to dramatization - which would be fine if he hadn't flatly stated that he had personally spoken with numerous Chinese workers who testified to abuse on the part of contract manufacturer Foxconn Technology Group. Now, it seems, he never met a man whose hand was mangled by repetitive tasks at the factory, or a girl worker who confessed to being 12 years old, or anyone who was seriously injured by poisonous industrial chemicals used to clean iPhone screens. Nor did the guards at the Foxconn factory gates carry guns. The total number of workers with whom Daisey spoke, and factories he visited, is similarly fuzzy.

The exact points about which Daisey lied are well-documented elsewhere. The question now is, where does this leave Apple in the minds of the consuming public? And what will be the long-term impact on the consumer-electronics giant's global supply chain?

Unhappily for Apple, Daisey and This American Life are far from its only critics. The New York Times recently ran a series of articles about working conditions in the Chinese plants, and the economics of producing iPhones and other Apple products. They found Foxconn workers earning a base wage rate of between $1.50 and $2.20 an hour. (Overtime, which is routine and substantial, adds a significant amount to the total pay package.) There were documented stories of 8,000 workers being rousted from sleep to replace plastic iPhone screens with glass, per a sudden order from then-chairman Jobs. And explosions at two Chinese factories of Apple parts suppliers, caused by the build-up of aluminum dust in poorly ventilated facilities, really did kill four workers and injure dozens more.

Apple hasn't been dismissive of such charges. The company issued its own Supplier Code of Conduct back in 2006. Many if not most of the facts about poor labor conditions and the use of underage workers at Chinese factories have been uncovered by Apple itself, in a regular series of public reports. More recently, Apple became the first consumer-electronics company to join the Fair Labor Association, a non-profit group formed by footwear and clothing manufacturers to monitor conditions at their overseas plants. The FLA has since launched its own independent investigation of several Foxconn facilities in Shenzhen and Chengdu. The results should be published shortly.

There's one undeniable truth that Apple must face immediately: consumers are starting to care. It doesn't take much for an army of loyal Apple customers to launch a damaging internet campaign, or even a live protest. (The latter of which, in the era of Occupy Wall Street, is becoming increasingly prevalent.) The late Steve Jobs once brandished the slogan "Think Different," and many Apple enthusiasts consider themselves to be members of a global community. Mark Shields proved that a customer can love Apple's products while being highly vocal about its supply-chain practices.

Advocacy groups, meanwhile, will continue to apply pressure for reform. The Hong Kong-based China Labour Bulletin, a group formed to defend the rights of Chinese workers, recently charged that Foxconn continues to engage in unfair labor practices. "All of these things are very much in place," CLB spokesman Geoffrey Crothall told Reuters. "I don't think there's been any alleviation [of these problems] in the past few months."

Against this backdrop of continuing controversy, it doesn't help Apple's cause that the company has been sitting on a cash hoard of some $98bn. Last week, it announced plans to spend down some of that windfall, although the money isn't going into the pockets of Foxconn factory workers. For the first time since 1995, Apple will start paying a quarterly dividend to shareholders, and will also launch a $10bn stock buyback program. Additional spending targets, according to Apple chief executive officer Tim Cook, will include research and development, new retail stores, infrastructure buildouts and supply-chain capital expenditures.

Meanwhile, Apple reaps huge profits - a gross margin of 55 percent on iPhones, by one estimate - while limiting its suppliers to the barest possible margins. Labor reportedly only accounts for between 2 and 5 percent of an iPhone's sales price; in fact, the additional cost of making the devices in the U.S. has been estimated at between just $10 and $60 per unit. (There are other reasons, including the difficulty of finding enough industrial engineers, why that idea is probably not feasible.) So Apple has a lot more to do before satisfying customers and critics that its supply chain pays sufficient attention to workers' rights. Otherwise the company could find its dominant position in the market disappearing faster than you can get a signal on an iPhone.

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Keywords: High-Tech/Electronics, Customer Relationship Mgmt., Event Management, Supplier Relationship Management, Supply Chain Visibility, Global Supply Chain Management, HR & Labor Management, Quality & Metrics, Supply Chain Security & Risk Mgmt, Legal, Govt. & Regulatory Issues, Business Strategy Alignment, Apple Supply Chain, This American Life, Mike Daisey, Foxconn, China Manufacturing, Unfair Labor Practices, Steve Jobs, Change.Org

More specifically, it concerned working conditions at factories in China that make Apple products. Shields was a devoted consumer of Apple devices, so he was shocked to hear correspondent Mike Daisey detail horrific incidents of workers as young as 12 subjected to grueling shifts of 12 hours and more, claustrophobic dormitories and production chemicals that were permanently disabling and even life-threatening. "It went from being a very pleasant evening to [me] feeling terrible about it," says Shields. The experience prompted him to post a petition on Change.org, calling for the protection of worker's rights at the Chinese factories, and an end to what he calls "horrible human suffering" in those facilities. Within days, Shields had amassed more than 225,000 signatures. Yet another example of the astonishing power of the internet.

There was only one problem: the stories told by Daisey weren't true.

At least some of them weren't. After some follow-up fact-checking, This American Life host and executive producer Ira Glass and his production team uncovered a slew of exaggerations and outright fabrications by Daisey, causing them to retract the original story and devote an entire episode to detailing the errors. It was a case of mea culpa rarely seen in today's world of 24/7 "journalism," fueled by ideology and frequent disregard for the truth.

In fact, although his story was broadcast on a show that prides itself on high journalistic standards, Daisey isn't a journalist at all. He's an actor and theatrical monologist whose one-man shows cover a variety of personal and social issues. (The Daisey segment that was broadcast on This American Life was actually part of a longer stage show, "The Agony and Ecstasy of Steve Jobs.") As such, his narratives are given to dramatization - which would be fine if he hadn't flatly stated that he had personally spoken with numerous Chinese workers who testified to abuse on the part of contract manufacturer Foxconn Technology Group. Now, it seems, he never met a man whose hand was mangled by repetitive tasks at the factory, or a girl worker who confessed to being 12 years old, or anyone who was seriously injured by poisonous industrial chemicals used to clean iPhone screens. Nor did the guards at the Foxconn factory gates carry guns. The total number of workers with whom Daisey spoke, and factories he visited, is similarly fuzzy.

The exact points about which Daisey lied are well-documented elsewhere. The question now is, where does this leave Apple in the minds of the consuming public? And what will be the long-term impact on the consumer-electronics giant's global supply chain?

Unhappily for Apple, Daisey and This American Life are far from its only critics. The New York Times recently ran a series of articles about working conditions in the Chinese plants, and the economics of producing iPhones and other Apple products. They found Foxconn workers earning a base wage rate of between $1.50 and $2.20 an hour. (Overtime, which is routine and substantial, adds a significant amount to the total pay package.) There were documented stories of 8,000 workers being rousted from sleep to replace plastic iPhone screens with glass, per a sudden order from then-chairman Jobs. And explosions at two Chinese factories of Apple parts suppliers, caused by the build-up of aluminum dust in poorly ventilated facilities, really did kill four workers and injure dozens more.

Apple hasn't been dismissive of such charges. The company issued its own Supplier Code of Conduct back in 2006. Many if not most of the facts about poor labor conditions and the use of underage workers at Chinese factories have been uncovered by Apple itself, in a regular series of public reports. More recently, Apple became the first consumer-electronics company to join the Fair Labor Association, a non-profit group formed by footwear and clothing manufacturers to monitor conditions at their overseas plants. The FLA has since launched its own independent investigation of several Foxconn facilities in Shenzhen and Chengdu. The results should be published shortly.

There's one undeniable truth that Apple must face immediately: consumers are starting to care. It doesn't take much for an army of loyal Apple customers to launch a damaging internet campaign, or even a live protest. (The latter of which, in the era of Occupy Wall Street, is becoming increasingly prevalent.) The late Steve Jobs once brandished the slogan "Think Different," and many Apple enthusiasts consider themselves to be members of a global community. Mark Shields proved that a customer can love Apple's products while being highly vocal about its supply-chain practices.

Advocacy groups, meanwhile, will continue to apply pressure for reform. The Hong Kong-based China Labour Bulletin, a group formed to defend the rights of Chinese workers, recently charged that Foxconn continues to engage in unfair labor practices. "All of these things are very much in place," CLB spokesman Geoffrey Crothall told Reuters. "I don't think there's been any alleviation [of these problems] in the past few months."

Against this backdrop of continuing controversy, it doesn't help Apple's cause that the company has been sitting on a cash hoard of some $98bn. Last week, it announced plans to spend down some of that windfall, although the money isn't going into the pockets of Foxconn factory workers. For the first time since 1995, Apple will start paying a quarterly dividend to shareholders, and will also launch a $10bn stock buyback program. Additional spending targets, according to Apple chief executive officer Tim Cook, will include research and development, new retail stores, infrastructure buildouts and supply-chain capital expenditures.

Meanwhile, Apple reaps huge profits - a gross margin of 55 percent on iPhones, by one estimate - while limiting its suppliers to the barest possible margins. Labor reportedly only accounts for between 2 and 5 percent of an iPhone's sales price; in fact, the additional cost of making the devices in the U.S. has been estimated at between just $10 and $60 per unit. (There are other reasons, including the difficulty of finding enough industrial engineers, why that idea is probably not feasible.) So Apple has a lot more to do before satisfying customers and critics that its supply chain pays sufficient attention to workers' rights. Otherwise the company could find its dominant position in the market disappearing faster than you can get a signal on an iPhone.

Comment on This Article


Keywords: High-Tech/Electronics, Customer Relationship Mgmt., Event Management, Supplier Relationship Management, Supply Chain Visibility, Global Supply Chain Management, HR & Labor Management, Quality & Metrics, Supply Chain Security & Risk Mgmt, Legal, Govt. & Regulatory Issues, Business Strategy Alignment, Apple Supply Chain, This American Life, Mike Daisey, Foxconn, China Manufacturing, Unfair Labor Practices, Steve Jobs, Change.Org