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Summary:

“For a quarter of a century, Washington and Wall Street have wanted China to become an integral part of the world economy. Their wish has be…

Apple Foxconn Factory Workers
photo: Apple

“For a quarter of a century, Washington and Wall Street have wanted China to become an integral part of the world economy. Their wish has been granted, and now it’s time to come to grips with the implications.” –Jeffrey Garten, Yale, June 2002 (BusinessWeek)

Ten years after those words were written we still find ourselves wringing our hands over how much American prosperity is derived from Chinese manufacturing. A series of articles from The New York Times (NYSE: NYT) this week on Apple’s tricky relationship with the company that builds the iPhone and iPad makes it clear that while society may occasionally recoil at the human cost required to build our flashy mobile toys, when it comes to consumer electronics there is no Plan B.

A predictable series of questions emerged in the wake of those reports, which didn’t break a ton of new ground on the business practices of Foxconn but did well to explain how conflicted the tech industry can be about China. Foxconn, an electronics manufacturing giant headquartered in Taiwan that employs hundreds of thousands of people in China, has been Apple’s most important partner during its climb to the top of American business, cranking out the 315 million iOS devices that Apple (NSDQ: AAPL) has sold over the last five years at a reliable clip and an attractive price.

Why doesn’t Apple build the iPhone in the U.S.? How much do its executives really know about conditions in these factories? If they do know, why do they tolerate it? If they don’t know, how could they be so naïve as to not wonder at how tens of thousands of iPhones emerge from a drab factory in the middle of China overnight?

The answer to the first question is easy. China is the world’s workshop, having invested heavily in manufacturing and infrastructure over the last 20 years, and its advantages in consumer electronics are maybe even more pronounced. A complex network of electronics producers and suppliers has sprung up in cities like Shenzhen and Chengdu, much the same way that London and New York are centers of finance and Los Angeles dominates entertainment production.

There’s nowhere else in the world you can build a modern smartphone or tablet as cheaply, easily, and reliably as the massive factories of companies like Foxconn, which operate on a scale that is difficult to comprehend. The price for doing business with companies like Foxconn is living with the knowledge that these products are being built by people who have signed up for a modern-day version of indentured servitude.

So what can be done about that? Can foreign companies really force their suppliers to adhere to a standard pretty far above the basic requirements (assuming there are any) of their local governments?

They certainly do try. Clothing and sporting-goods companies were the ones in the crosshairs a decade ago, when a series of reports on the horrifying conditions that were employed to produce $120 Air Jordans prompted companies like Nike and The Gap to impose conditions on suppliers and adopt codes against doing business with companies that exploited their workforce.

So how are they doing?

Nike actually hasn’t released a supplier responsibility report in a few years. The Gap released one for 2010 in which it found that more than 50 percent of the 320 factories it buys from in “Greater China” did “not equip machinery with operation safe devices and inspect on a regular basis” and that somewhere between 10 percent and 25 percent forced workers to work seven straight days on occasion and “did not pay overtime & incentives as required.”

Apple released far more detail about its suppliers in its 2012 supplier report, which was obviously constructed with the knowledge that the Times was planning a series of articles around the same time. Apple also went a little further in saying whether or not it had stopped doing business with a particular supplier over issues detailed in the report, something The Gap did not include.

As should be clear by now, Apple is only being singled out by the Times because it is at the top of the tech heap, and while that may be fair game given Apple’s unbelievable profit, it overstates the ability of the company to act as a macroeconomic force.

Apple CEO Tim Cook told employees Thursday that the company is doing everything it can. In a company-wide e-mail sent in response to the Times articles and obtained by 9to5Mac.com, Cook wrote:

We know of no one in our industry doing as much as we are, in as many places, touching as many people. At the same time, no one has been more up front about the challenges we face. We are attacking problems aggressively with the help of the world’s foremost authorities on safety, the environment, and fair labor.

The truth is that an entire consumer electronics industry depends on these factories for their livelihoods; the dozens of companies and millions of people that have made a handsome living on the spread of mobile technology, gaming consoles, and high-definition televisions into everyone’s lives. And China depends on the demand for its manufacturing services driven by Western consumers who want quality goods at a low price, knowing that few other operations are able to hit those targets as consistently as its homegrown manufacturing base.

U.S. tech companies have a very complicated relationship with China. It’s the world’s largest potential consumer electronics market and is home to the world’s best tech manufacturing companies, but it is run by a government that encourages censorship, tolerates working conditions that other countries made illegal many years ago, and favors domestic companies to an unnerving degree.

Engagement in hopes of changing the situation on the ground has yet to work, as anyone who worked for Google (NSDQ: GOOG) in early 2010 will readily attest. So what can Apple do to improve working conditions at its Chinese suppliers?

It could use some of its $97 billion cash hoard as a carrot and the threat of losing its formidable business (Foxconn has no customer more important than Apple) as a stick. But unless Apple is willing to incur significant risk and set up its own manufacturing facilities governed by its own principles within China (something which, to be clear, may not be permitted by either China or the U.S.) it is dependent upon suppliers that have different standards when it comes to the well-being of their employees. And changing the labor laws of a foreign country is not necessarily a project that a U.S. company can throw money at and cross its fingers hoping everything works out.

The truth is pretty simple: the modern consumer electronics industry couldn’t exist without companies like Foxconn. And Apple can’t just take its ball and go home: there’s nowhere else in the world one can find an industrial system that could replace what China has built, and attempts at building an alternative might take decades.

Apple is right to keep pressure on its suppliers to improve conditions, and critics are right to ask the company to do even more. But even Apple doesn’t have the clout to reverse two decades of economic history that has led to the status quo, in which low-cost Chinese manufacturing props up the consumer-driven U.S. economy.

How much change Apple can really bring to an irreplaceable partner born of a country without enough respect for the basic human rights of its people?

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  1. this week on Apple’s tricky relationship with the company that builds
    the iPhone and iPad makes it clear that while society may occasionally
    recoil at the human cost required to build our flashy mobile toys, when
    it comes to consumer electronics there is no Plan B.—– What they mean is there is no plan B for making money.It’s ok for these companies like apple to get rich off of human suffering,but God help us if they spend any money making conditions better for the workers.Wouldn’t want to to loose any profits or anything like that.

    1. It’s clear that you did not read the article beyond the section of the first paragraph that you quoted.  It’s also quite clear that you know little or nothing about the actual situation. 

      Apple is operating in a system that they didn’t create.  As the article says China invested heavily in creating this manufacturing industry.  Nowhere else in the world would it have been possible to produce the 37 million iPhones that were purchased last quarter.  Foxconn while not a model company for treatment of employees is leaps and bounds ahead of the other manufacturers in China and Apple has been consistently encouraging them toward continued improvement.  Additionally these underpaid overworked employees are in general glad for the opportunity to earn a real wage (yes it’s much lower than America but so is the cost of living) as opposed to subsistence farming in the interior of China and dying at 50 due to malnutrition and backbreaking labor of farming rice only by hand.  They don’t have the option to get a better job somewhere else.  Through slow progress Apple is actually helping hundreds of thousands of workers improve their standard of living, giving them the chance to make a better life for their children.

      1. “Apple is operating in a system that
        they didn’t create.”

        This is true, and obviously they aren’t the only ones. I don’t think there are any easy answers here, however it is also true that Apple is choosing to operating in a system that
        they didn’t create. Just as we choose to support the situation for all of these manufacturers, because we love cheap electronics. The benefits over time are relative to the starting point, but at the end of the day we have to honestly reconcile that for ourselves, as individual consumers, just as those at Apple (or HP, or Motorola, or…) need to.

      2. Darlie Brewster Greg Sunday, January 29, 2012

        EXCUSE:Apple is operating in a system that they didn’t create.
        Who cares who created it, they are not obligated to use it. EXCUSE:Nowhere else in the world would it have been possible to produce the 37 million iPhones that were purchased last quarter.Who cares how many they produce?!  Tough!  There are limits to what any company can produce and sacrificing human beings is not justified by your production needs Adolf. EXCUSE:Foxconn while not a model company for treatment of employees is leaps and bounds ahead of the other manufacturers in China There is a minimum requirement of safety and humanity that a company  must abide. They have failed at it. EXCUSE: Additionally these underpaid overworked employees are in general glad for the opportunity to earn a real wage (yes it’s much lower than America but so is the cost of living) I have heard this excuse over and over and the idea you would mention a slave being thankful for his abuse is utterly sickening.  EXCUSE:  Through slow progress Apple is actually helping hundreds of thousands of workers improve their standard of living,
        Every American company that builds outside the US should have to maintain the same safety standards, working conditions and treatment of workers that is kept in this country. If they refuse, then they should lose the right to sell in America , period.

        1. “Every American company that builds outside the US should have to maintain the same safety standards, working conditions and treatment of workers that is kept in this country. If they refuse, then they should lose the right to sell in America , period.”

          Seriously? That would work how? I’m a very liberal, proud socialist, pro-union, Democrat, but I think you are seriously delusional at this point. Apple has to compete on price with Android phones, or at least be close. They actually are obligated to use it. It would be a violation of their fudiciary responsibility and would weaken the companies future growth. Applaud them for being more open and more forthright about the issues.

          One does not simply create a new manufacturing infrastructure. One does not simply tell the companies how they will operate. One does not simply change another culture in a day. One does not make Darlie see the complexities of this issue…

        2. If you really mean all that you say and are not just an Apple hater then I expect that you have got rid of all Chinese manufactured good, no matter the brand name on them, from your household.

        3. 1st Excuse – Apple chose to use it because they are the best.

          2nd Excuse – If you are so smart suggest an alternative and not the high horse EXCUSE you are sprouting.

          3rd Excuse –  Name a company in China doing better.

          4th Excuse – They are competitively paid and not under paid.

          5th Excuse – Try telling it to HP, Dell etc.. because they use Foxconn too.

        4. “Every American company that builds outside the US should have to maintain the same safety standards, working conditions and treatment of workers that is kept in this country. If they refuse, then they should lose the right to sell in America , period.”  
          Make that “Every company *regardless of origin* that builds outside the US…” and I’m sure Apple would be happy to comply.  But you can’t really expect Apple to effectively compete with non-American imports that don’t also maintain acceptable standards. Furthermore, unless other countries also apply the same import restrictions, American companies would be at a disadvantage selling to the global market.

          At least you realize that this problem is beyond the ability for a single company to solve, and that government intervention is likely to the only thing that can make a substantial difference.

    2. When you speak of “companies like Apple” you have to include virtually every personal computer company in the world and virtually every cell phone company in the world. In addition Foxconn manufactures its own line of electronic parts, including connectors and cables. Are the working conditions in China abysmal, yes. Should they vastly improved, absolutely. But can all of these problems be blamed solely on Apple, not a chance. There are literally hundreds of companies that profit from the terrible human rights abuses in China. And there are hundreds of millions of people who buy products assembled in China.

      1. I’m pretty sure I didn’t just blame apple,Unfortunately it is the norm in China. But it was the article that mentioned apple.

    3. So you created your reply on a machine from the future where all labour is done by machines? The problem is not Apple! The problem is all of us. We all want our opinions to be heard by the entire world and therefore we need all these gizmos that give us the ability to do so. It’s not Apple you need attack, it’s my ego and your ego you need to attack.

  2. There is a six month waiting list of people trying to get working
    In these factories ( not many actually leave ) , I am not saying what is happening is right, but to these people a wage , if only $ 1 per hour makes a huge difference.

    1. You are justifying slavery.

  3. there’s no plan b?

    seen a map with a little place called africa?

    it may take a while, but these chinese will get comfortable with $1 an hour and 2 squares a day. then what?

  4. It is self-delusional to think that making goods in China or other low-wage countries is charity or beneficence on our part (in the West). To say that “American prosperity” comes out of Chinese manufacturing is a mental distortion. International trade is at best a chess game. We play it daily.

  5. Paint it in any light that you want to, but there is simply no way that lazy American labor can produce these devices. Period. When Apple introduced it’s iPhone 4s on October 4 last year, there was immediate disappointment from all circles that it was not the iPhone 5. The 4s replaced the iPhone 4, which itself was barely one year old. Imagine the behind-the-scenes scrambling that had to be done to get the 4s out the door at such breakneck speeds. There is no way that such a pace would be tolerated in a regulation-crazy environment like the USA. We Americans have our lofty standards, but the tradeoff is that we are unable to manufacture high tech devices on our soil because of those same idealistic standards. An iPhone produced in Amerca, using American labor working under America-enforced labor laws, would cost 5x more than today’s price and each new model would be introduced at 5 year intervals. Tell me that you’d be happy with such a “fairly made” product like this,

    1. “lazy American labor”
      My my, so America isn’t te greatest any more? What hypocrisy!

    2. Perhaps manufacturing in the U.S. in fully automated factories is the way to go. Instead of many poorly paid workers they would employ fewer highly skilled and well paid technicians. The U.S. might even regain its lead in manufacturing.

    3. @8a1a7e6ae7e2dae6402cdf51c2e7a1a3:disqus It’s pure conjecture on your part to claim that Americans cannot produce these devices.
      1. The devices themselves are _not_ complex. 
      2. Their manufacturing process is _not_ complicated.
      3. The rapid response required to get the product out is _not_ novel.

      Americans have done, and can do, all of this. Americans can do anything they set their minds to doing.

      The fact that it will cost more because American labor is paid more and protected by laws which we all endorse is only natural. The cost of manufacturing these Apple products is a _small_ portion of the price of these devices. Even doubling or quadrupling the manufacturing cost isn’t going to drastically change the profit margins. And there is no reason why Apple couldn’t raise the retail price in order to manage their margins, should they so choose. The products that they are making in China are some of the most expensive everyday consumer devices ever made ($600 iPhones, $900 iPads, etc.)

      Of course Apple wouldn’t be able to make last-minute changes to the product before ramping up a new manufacturing line, but any high-tech manufacturing organization will confidently tell you that such an anecdote reveals a _weakness_ about Apple’s product development, not a strength.

      Any device manufacturer knows that a last-minute change like the one featured in the NY Times story (and that everyone is using to indicate the flexibility of China’s indentured labor pool) simply means that the upstream development process broke badly. Someone, somewhere made a mistake (or a series of them) that forced them to rework (and lose time and money) production while in final assembly.

      And there is no reason why Apple couldn’t maintain multiple manufacturing lines to make the iPhone 4 _and_ the iPhone 4S, while prepping a new line to manufacture the iPhone 5. It will cost more, but that’s fine, as that cost will simply be absorbed into what the consumer pays at the register. It’s clear from Apple’s volume that such increases will not prevent consumers from purchasing their products.

  6. So why doesn’t someone do an article about Samsung and human rights (NYT)? I’ll tell you why, link bait. Fair and Balanced…

    1. Darlie Brewster Jtkt Sunday, January 29, 2012

      You see , it’s this thing wher Americans go to other countries and hand American jobs to basically slave workers turn back to American workers and say “COMPETE!” So what American business is doing when they call American workers “lazy” is saying “YOU SHOULD BE CHILD LABOR SLAVES”. Doesnt that make you want to punch a CEO right in the face ?

      1. I will be over to collect every electronic device and appliance in your house for you since you surely don’t want to support all the evil being done in your name. Oh, and your car and wiring and insulation in your house as well.

  7. Patently wrong. Walmart’s procurement policies clearly prove otherwise. Although they have never been used to regulate work place protections, they have demanded much of suppliers and Apple is even more influential than Walmart. These could be made any where to say differently is flying the the face of reason. Could they be made as cheaply is the question and when they are making as much as they are off these products it stands to reason there is room in the cost/unit analysis to at least consider threatening to explore competing suppliers. Human beings are much more important than people having cheap iPhones or iPads! Apple is losing credibility by the minute on this issue and they better get their head around it.Dougfarrar that is an insult to American’s everywhere. Hard working industrious workers who have been marginalized by greedy incompetent corporate schlocks whose only goal is to line their pockets with ever more amounts of money, human costs be damned.

    1. I don’t know where you are from and from what you have written showed you are a frog in the well. The small picture at the top of the well you saw is what you see and nothing beyond that.

      You reckon walmart is successful in controlling their suppliers think again and just because no one bother to do a report of them doesn’t mean their procurement policies worked. 

      Apple outsourced the manufacturing of the iPhones and iPads to gain an competitive advantage over their competitors and made money is because their products are in demand and the best in their class. 

      The ball also can go the other way like not able to sell well and this competitive advantage is useless. 

      Dell and HP also used Foxconn to make their products and Microsoft also use their services – remember the one with the mass suicide threat it happened at the Xbox plant.

      Hard working people demand to be paid fair wages so you think the Chinese in the Foxconn are not hard working?

      Looks like Dell and HP are also marginalizing hard working Americans by outsourcing to Foxconn so they are greedy too because they want to line their own pockets. What about Nike, Levis jeans and what have you do you sincerely believe their products are made in the US and the people running them are saints.

      Btw Foxconn is a subcontractor and a listed company on its own and whatever working conditions in their factories maybe deplorable to you but at least these workers are paid competitively and they can live comfortably and yes most important put food on the table for their families.

    2. Walmart has that kind of power because they regularly destroy their smaller competition, not because of control of the supply chain.

  8. I would happily pay more money for an iPhone made in the USA under reasonable working conditions.  I don’t see why it is all or nothing.  Infrastructure can be built.  And I certainly don’t believe that the supply of gadgets would cease if China were to close its doors.  

  9. “…these products are being built by people who have signed up for a modern-day version of indentured servitude.”

    … Except For the whole indentured servitude part, yeah it’s pretty much exactly like that…

  10. There’s a lot of people all over the world who would take these jobs that bleeding hearts cry about as opposed to the alternative, starving to death.  I love all the liberals who pretend to care about these people then suggest a protectionist policy for U.S. companies which would take the jobs out of poorer areas which would sink the people there that had a job with the company back into complete starvation level poverty.  How’s that better than sweatshops and low wages in factories?

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