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Apple's Asian Labor Report Card: Problems Continue (and Are Hard to Solve)

On February 18, I wondered whether Apple (AAPL) would become the next Nike for using suppliers with bad labor practices. Last week, Apple released its latest supplier responsibility progress report, covering not just labor issues, but also environmental and ethics. The company has taken stronger steps than many other high tech companies, and still it finds problems. That raises the question of whether any business can adequately support labor, ethics, and environmental practices while outsourcing its manufacturing.

Setting standards for suppliers is not new. Back in 2004, a number of electronics companies -- including HP (HPQ), Dell (DELL), and IBM (IBM) -- created a coded of supplier conduct. As someone from IBM said in 2005:

"No one wants to be the Kathy Lee Gifford of their industry, or switch on the television to find 60 Minutes doing an expose on their supply chain," said John Gabriel, corporate manager of social responsibility for IBM Corp.'s Integrated Supply Chain Division (Somers, N.Y.). "Your brand image is being affected by your supply chain."
Apple isn't new to criticism over the practices of its suppliers. In 2006, it faced charges of using outsourced manufacturers that employed sweatshop conditions. In the fall of that year, Apple published its own supplier code of conduct.

There's little question that Apple goes further than many in high tech when it comes to policing practices at factories that make its products. Apple monitors not only the final assembly facilities every year, but includes a selection of suppliers that those companies use, "based on risk factors, such as the prevailing conditions in the country where a supplier facility is located and the supplier's past audit performance." In 2009 alone, Apple monitored 102 facilities throughout Asia, the Czech Republic, and the United States. It uses compliance auditors that, in turn, also use third-party local auditors, to gain language and cultural expertise.

There is also no question that Apple has done some commendable work, particularly in finding 17 major violations of its supplier code that fell into the following categories:

... eight violations involving excessive recruitment fees; three cases where underage workers had been hired; three cases where our supplier contracted with noncertified vendors for hazardous waste disposal; and three cases of falsified records provided during the audit.
And yet, here's the bigger picture, according to a table from the Apple report:

The following are the frequent types of violations of its supplier code that Apple found:

  • exceeding maximum work weeks of 60 hours and minimum time off of one day for every seven worked
  • underpayment of wages, benefit levels below those required by local laws, and wage deductions for disciplinary purposes
  • discrimination based on medical tests
  • lax or missing implementation of occupational safety standards
  • lack of ergonomic risk assessment
  • inadequate environmental permitting and reporting
  • lack of management commitment to compliance
Overall compliance is still poor in some important areas such as working hours (46 percent), wages and benefits (65 percent), occupational injury prevention (61 percent), and air emissions and hazardous substance management (74 percent and 70 percent). Apple noted that management accountability and responsibility, without which I'd argue no meaningful change can happen, was at 51 percent compliance. The company has seen some improvement in how well the final assembly plants have done, as this chart from the report shows:

But getting what it wants takes years, and this is a measurement of only a handful of final assembly locations. The overall results speak for themselves. If Apple is having decidedly mixed results in its efforts and it is going further than most other companies in high tech are, what would a report on the state of the industry look like? We'll never see it, but undoubtedly, it would be dismal. Perhaps it can't be otherwise, because there are intrinsically conflicting messages and motivations. Electronics companies don't want the ill repute of having products made under objectionable conditions, and yet they want to carve out every last fraction of a penny in cost that they can, because investors and owners insist on it. The contracting firms, in turn, also want to maximize profit, and so, as businesses have repeatedly shown over centuries, will often cut corners wherever possible.

To truly reform the way manufacturing is done, a company must control its execution. However, this is not possible at arms-length, even with annual investigations. Action only comes from the combination of managerial intent and compensation structures that reward support of the intent. Dictating policies without daily supervision and direction has as much success as telling your kids to clean their rooms and then only going in once a year to check compliance. If Apple and others are serious about really changing how they do business, they must act differently. Perhaps its time for them to again undertake manufacturing themselves and do it the way they say they wish. Otherwise, they will continuingly face harsh criticism -- especially when they keep using the same factories that provide the fodder to critics.

Image: Wikimedia Commons, public domain