Apple’s China Supply Chain Issues Require IMMEDIATE Attention and Action

Wednesday, July 22, 2009 12:46

News of a 25 year old committing suicide at Apple’s primary China supplier (Foxconn) has once again brought to the front burner the difficulties of managing outsourced operations, and the risk to the brand that these arrangements bring when improperly managed.

It is a situation that sadly I believe could have been avoided, and that unlike the 1997 Nike scandal where it took NGOs and the media to highlight the problems (for the first time), labor problems – particularly with its supplier – are neither new nor unknown.

Go back 36 months, when news (and pictures) hit the wires that Apple’s Suzhou supplier (Foxconn) was improperly housing employees, forcing overtime, and paying poor wages. A huge story for both the domestic and international press, Apple responded very quickly by sending their “crack” team to investigate the allegations. Allegations that ultimately Foxconn and Apple would own up to, almost.

However, more recently, signs that Apple’s China supply chain were really in poor shape came through another report that one of their suppliers, Wintek, was wrapped up in a number of disputes and strikes over labor conditions.   Conditions that violated Apple’s own Code of Conduct.

The most recent warning sign came in the form of Apple’s own internal document the release of the Supplier Responsibility 2009 Progress Report (download here) where the following highlights went public

45 of the 83 factories that built iPhones and iPods in 2008 weren’t paying valid overtime rates for those workers that qualified, while 23 of these weren’t even paying some of their workers China’s minimum wage.

A deeper look at Apple’s findings found that about 25 of the 83 also discriminated to some degree against people based on ethnicity, biological issues like disabilities, or political leanings. 22 didn’t meet environmental standards, while almost exactly a fifth also had problems with on-site living conditions and safety.

It is quite simply a report that should have set off an all hands on deck response in Cupertino, and were the press not obsessed with the health of the Dear Leader, perhaps the release of this document would have been a leading story.  Instead, it largely passed under the radar, and over the last few days we have come to see how poorly Apple assessed the risks and severity of the problems.

I by no means want to imply that had Apple taken steps beforehand that this situation would have been avoided, however I think it is important to point out that through its own issues in 1997, Nike began putting 1 full time inspector on site of factories.  inspectors who were independent of the supplier, an moved on a regular basis.  Suppliers who were the eyes and ears of the corporate, and could alert HQ of issues and manage the programs meant to minimize code of conduct infractions.  Infractions that Nike still admits openly it struggles with.

Apple’s consistent issues are a problem that goes far wider and deeper than a single guard, and like Mattel’s paint line, is in need a change. A systematic change.  A change that will be difficult, as they have completely outsourced all operations, I have a few suggestion of where I would start:

1) Contact Nike
Why contact Nike?  simple.  Nike and Apple are essentially one in the same, they are design and marketing firms who rely on others to bring their designs to the market.  At the same time, they take no equity stake in these firms, and like everyone else who outsources, are focused on the bottom line.

So, by contacting Nike to learn lessons, Apple will essentially be reaching out to a peer who has been through the same things.

2) Get Boots on the Ground
Simply allowing their suppliers to “manage” things is at this point negligent at best, and perhaps criminal.  Their own code of Conduct is simply being breached on a regular basis by an unacceptable number of their suppliers, and they need to take the reigns of this wild horse.

So, get inspectors from Cupertino on the ground.  NOW.

3) Invite in third parties.
Clearly Apple needs assistance in the process, and firms like Business for Social Responsibility would bring a significant amount of experience, independence, and credibility to the issue. Quite simply, at this point, whey would anyone trust another Apple report, and more than that, what is the risk that now external agencies, NGO, and media are given the access now (think Indonesia).

4) Do the Right Thing
Foxconn is not the one on the firing line, Apple is.. and it must make sure to either hold Foxconn’s head to the fire, or take the bullet themselves because in the end, it is Apple that lawyers will sue, that reporters will write up, and consumers will boycott.

5) Make materials improvements, or make materials adjustments
Going forward, breaches must end.  Period. Otherwise, Apple will need to look at being a manufacturer again.  That,while manufacturing is seen as expense by investors, the point will be made that the risk of brand damage will need to be made.

That it is a much better use of money to bring it inhouse vs. burning down the house.

6) Open Up
Apple’s previous life as the introverted firm with cool stuff is over, and like Nike, it will have to open itself up.

Managing global operations is not an easy task, and while this post is focused on Apple, the point that this could have happened to anyone needs to be made. 2 years ago, when we were in the middle of the “Made in China” crisis, I made the same point, and at the core the issues behind both are the same.

It comes down to investment. Investing in a process. Investing in people.

That treating China like a McDonald’s drive-thru is not sustainable over the long term, and regardless of whether or not breakdowns occur in China, the fact that breakdowns do occur is not a “China” problem.

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