Among all the chants of “being ready” (or was that Beijing Games?) and the billboards counting down the seconds between now and what is sure to be an event to remember, I have one fear…. that Shanghai’s metro is just not going to be able to cope with all the traffic.

It is a concern that is fueled by a simple calculation that there are an expected 70 million people who attended the EXPO, and while there is no breakdown of where those people are coming from, there would be at a minimum 55-60 million people coming to Shanghai.  or between 305,555 and 333,333 people PER DAY moving around the city between their hotels and the EXPO pavilions.

Visitors who are far more likely to take the metro than bus, and as you can see from the picture I took at 9:30 this morning… there is not a whole lot of room left inside the trains on line 2

Earlier this morning, the following tweet came across from HBS Professor Rosabeth Moss Kanter:

1st rule of success in life: Show up. 2nd rule: Speak up. 3rd rule: Partner up. 4th rule: Never give up.

It was a well timed tweet as (1) I had just returned from an opening ceremony in Chengdu to launch our community center (2) I had just received my class evaluation (3) I had spent an hour and a half talking about what “success” means in Chin and (4) I had a few minutes to put together a post (I have been struggling with this for the past 2 months).

All very positively oriented goals, and I would agree with them, I would say for anyone who is in China there are a number of additional rules that would need to be included into a “how to succeed post”.

The first being.. show up with reasonable expectations.  It is not a rule that is meant to limit anyone’s dream (Starbucks does have 90+ outlets in Shanghai), but a lot of people/ organizations that I speak with when looking to enter China (or in the middle of launch) often have unrealistic expectations… or at least have yet to fully put into context the amount of investment it will take in time, money, and capacity to achieve those goals.

Second: Develop a high tolerance for pain.  Want to be innovative?  cut a new path?  Don’t expect it to be easy, and don’t give up.  Things go right and wrong everyday, and regardless of how wicked the ride may be, as long as you are meeting expectations (see #1) and the reward is worth it, then it is worth it to persevere.  Cutting corners in the face of pain is the quickest way to move the defenses of a line backwards(see #3) and that will only land you in further trouble later.

Third. Have lines (moral and economic) that cannot be moved.  Stand up for something and develop a business model that you control and remember that if your supplier is messing around now, they will mess around later – unless you take the necessary actions (not doubling down) to rectify the situation.

Fourth.  understand what the motivating factors are for the parties sitting across the table, stop negotiating, and begin collaborating.   If you are walking into a meeting preparing for a heated pissing contest why bother?  There are no deals of the century in China, no deal has to be done today, and there are options.  Take the time to understand what is driving the person today, and what it will take to keep that party moving in the right direction (right director = down the same path as you), or cut the cord and develop another line.

Fifth: Plan ahead, speak up, and move quick… when things do go wrong.  Before launching a new product, or sourcing a new product, spending the time to to fire drill the what ifs can go a long way to preparing firms and their managers for when things don’t go right.. it may only require a tweak.  It may require a nuke.  But, knowing the signs and the available remedies ahead of time is far better than finding yourself in crisis mode not sure what to do and calling on externals to fix things.

Sixth: Pay the full real costs up front. Factoring in the costs of negative externalities is a must…  Regulations and consumer expectations are only getting tighter, and firms who are caught on the wrong side of a moving regulation are going to pay more to bring themselves into compliance.  Want to use a supplier who abuses line workers, you will pay the cost.  Don’t care if your supplier dumps chemicals into the river, someone else will.  Think that hongbao is the “key” to a relationship… what happens when they go to jail?  Price in the costs of choosing suppliers, partners, and channels that follow global standards… cause local standards are only going that way, and anything local+ will require upgrading at some point… at a cost that is far more uncertain than if you build your platform on it now.

Seventh: If something does go wrong, look internally first. It is not always the pain suppliers fault, or a nationalistic regulation.  When things fail it is typically no more than the byproduct of a failed process or system.  Identify that, work with it, and move on.

Finally… shut up and get to work.   I cannot possibly begin to list off the business ideas that I have heard, how many were “in the bag”, the fund is raised, blah blah…and how few of those ideas and people are still here.

Investing in China is more than about how much money, what school one went to, or how well a product launch in a particular city went.  It is about putting heads down, soldiering through the minefield, and getting things built.  It is a process that rarely is advanced within the bars of the Bund, or through social mediums like twitter or a kaixin page.  It is about building solid foundations in product quality, market channels, branding, human resources, management depth, and a store of cash locally to advance through the stages. It is not a foundations built on consultants, an entourage of expats, or through “guanxi”.

things will not always go right in China, but they are not always predetermined to go wrong in China, but when they do one can often look at the structure, expectations of the firm, and a firms real commitment to their plans as the root cause behind success/ failure.  It is a dynamic place, painfully so sometimes, but one of the best places about being in China is watching growth in people and organizations who have taken the time to get it right.

Have a “rule” to succeeding to China?  Submit it in the comment section.

Update 1: One rule I forgot is that in building a long term platform, that will mean building something that does not rely on expats holding all key management positions.  Expats are temporary, halfpats are half way there, but if you want to be able to really judge the success of how well something is built, look to see who is actually running things.

Perhaps one of the more interesting, and at times comical and frustrating, dynamics about working in China is that sometimes you just know that the word  “China” can create an emotional response that some cannot overcome.  It is a dynamic that China does bring upon itself sometimes, but it is also a response that some managers should have really taken more time to consider, and the Why Your ‘Green’ or Vegan Shoes May Be Neither and the Youtube clip Whole Foods Market “Organic” food made in China!!!! illustrate this point nicely.

That regardless of whether or not you can source organic, or vegan, products (you can) in China, this is a great example of how brand, purchasing, and marketing managers need to carefully consider just how having the word “China” one’s packaging may rub the wrong way with consumers. ..  and that brands need to really spend more time thinking about this as they go forward with their plans in China.

It is not to say that you cannot source organics from China, or non-lead based painted toys, but that there are clearly new considerations for firms that should be considered.

so, as my first post of substance for the Year of the Tiger, I thought I would make it a bubble post.  Will China’s economy survive the Year of the Tiger in tack, or will it implode.  It is a question that has been debated in many forums, and there are a wide range of “experts” on the topic, but two pieces over the break caught my eye.

The first is the clip below from Tsinghua University professor, rock-and-roller, and blogger Michael Pettis.  Pettis has provided some of the most interesting analysis of the China stimulus over the last 18 months, and why I prefer his analysis over others (UBS in particular) is he tends to look at underlying structures vs. the next two weeks of pricing, and sees through the thin veil that has become statistical measurements of an economy.. i.e.,you can certainly spend a trillion dollars to get to 11% GDP growth in a recession, but that doesn’t mean you can sustain it… and in this clip for Carnegie Endowment, Pettis runs through several important topics that I feel should be considered by anyone betting on China,expanding into China, or developing a “China plan”.

the next piece was Gady Epstein’s piece, also entitled China: Boom Or Bust?, where two prominent Chinese economists (Mao Yushi and Ha Jiming) respond to questions on China’s economy, and the answers are ones that again should make one think about jsut how stable the economic foundations are.. and how the economic stimulus may have only exacerbated the fissures.  Of particular note for me was the following:

Epstein: Some economists worry that the growth in money supply in China–30% in 2009–along with the speculative bubbles and overcapacity problems, have greatly increased the chance of a hard landing for China, though perhaps not for several years. What do you think?

Mao: There will be a hard landing if the bubbles burst. I can’t say. I don’t know how much time China still has.

Ha: Please remember 2015. That is the year when China’s baby boomers start to retire and the share of the working age population begins to fall–a phenomenon seen in Japan in 1990. That is also the year that the number of the baby boomers’ children begins to decline. Asset prices, particularly housing prices, will stop rising, and may even fall, when demand from the baby boomers and their babies shrinks.

Some economists suspect that China’s bubbles will burst in the next one or two years, while some expect that China will maintain fast growth for decades. I disagree with both.

Removing your inner alarmist, and planting an inner planner, there are two things that I feel are worthy of a healthy dialogue.

First, what would cause the bubble to burst?  high property prices? out of control lending?  inflation?  missallocation of resources (particularly those that came through the stimulus)? Chinese banks unable to recover stimulus loans and seizure of Chinese banks?  Some would say that ALL of these conditions exist.  Both Michale PEttis and Victor Shih (Northwestern) have written extensively on the topics, but these are debates that are being had locally.. and VERY publicly.  YOU now see regular, and highly visible, speeches from Zhongnanhai on the issues.  Even Wen Jiabao is out talking inflation and housing prices.  Which leads me to believe that Mao’s statement on timing is shorter than we think.

Second, to Ha’s point on China’s greying.  It cannot be understated, and while I have broached the topic on a few occasions, anyone who has a long term China angle needs to carefully consider the fact that within the next 15-20 years there is going to be a HUGE shift to the grey.  Right now Shanghai’s over 60 population is roughly 20%, and by 2050, China’s over 60 is projected to be a whopping 30% of the population.   Which changes the working to retired equation dramatically (see graphic) from roughly 5.4 workers to over 60 to 1.6 by 2050.

How do you think GM, Nokia, and Starbucks will fare in this environment?  More importantly, while everyone is focused on the fact that China put up a huge number on the scoreboard for this game, the question I have for this year is whether or not its bull pin will be able to sustain the full series.  Or whether, after working through this stimulus round and perhaps the next one that needed, the fissures will grow to wide and the air will be let out of the bubbles.

Over the last couple of years, one of the firms that has popped up on the radar of firms whose labor conditions I felt were at some point going to come back to haunt them… and I think we have come a bit closer with the above CCTV report, an 11 and a half minute investigative report (in Chinese) where former employees of the Suzhou based Wintek facility speak about the physical ailments they experienced while working at the facility.

It is a report that covers all the bases. Interviews of former employees who detail the illnesses they feel come from working at the plant, people in the hospital who are still recovering, labor bureau officials, the cursory tours, some scientific facts on the chemicals used in the process of cleaning/ finishing the screens, and even a Wintek Manager interview.

It is a report, that while “unverified”, is unlike before when Apple (and its suppliers) had labor issues as it is a report that cannot be contained by suing a reporter or leveraging the brand to keep the story from entering the mainstream, and it is the “report” that I had in many ways been waiting for. That, as the reports of Apple’s supply chain issues were becoming more frequent in the international press, it was the potential spillover into the Chinese press that I was looking out for and in my opinion significantly heightens the risk to Apple locally.

Link to video (Chinese) here

Update: Shanghai Daily is reporting that Wintek admits to having 49 employeees exposed, and “taken care of”, a few months back.  That, the exposures were a failure of managers understanding the chemicals, and how to properly manage them.. and that following the 49 employees being sicked, they took immediate action. Interestingly enough, the hospital says that more than 100 employees have been received thus far, and that they are still coming in.

hmm.. I am guessing there isn’t an Apple employee with direct knowledge of the situation, but given Apple’s plans to open up a Apple store in Shanghai this summer, I would suggest they get books on the ground fast to work out what is going on.  Last thing they would want would be 2500 Wintek employees to go on another walk, but this time move the meeting point to Nanjing road.

Update 2: Turns out that Wintek is also a supplier to Nokia, and Nokia has sent out a very strongly worded message to put a lot of distance between them and the current issues at Wintek. Here are two passages that I believe are the most damning for Wintek – and ultimately Apple (emphasis mine)

#1 – Wintek is a Nokia supplier, and provides components for its mobile phones, but N-Hexane is and has NOT been used on Nokia’s production lines at this supplier. Nokia strictly forbids all use of chemicals which are illegal.

#2 – We became aware of the allegations regarding the use of n-hexane in July 2009 and started our investigation immediately. Although it was confirmed that the n-hexane was not used on our production lines at the supplier, as part of our assessment we agreed on a development plan for health and safety management at Wintek’s Suzhou factory and a series of corrective measures have been taken since then.

So, if I read this right, not only is n-hexane illegal, but this has been going on for nearly a year.

That is would have been more than enough time for Apple to have made the necessary adjustments had they put in the effort when the first Wintek strike occurred, or even the second one.  OR.. even when they did their supplier evaluations in as part of the 2009 supplier responsibility report.

Welcome back everyone.

Seems like it has been a while since I have posted, it has been a whole 10 days, and I have a few posts in the cage getting warmed up. In the meantime, I thought I would just post a short clip of something that I found while diving through my RSS feeds and doing a bit of random research on sustainabile transportation in China. The clip is essentially a 5 minute snapshop of a pretty typical intersection in China, and like the painful punchlines that The Office brings the average viewer, this clip is a great laugh for anyone who has sat at an intersection in China and been amazed by just how little the painted lines mean to any driver on the road. It is a clusterf**k, and it is sadly all too common ( I have seen police literally flee intersections like this one they realize the battle has been lost).

Will be back with a post or two of real substance shortly.

Relational Traffic Studies #19 from Christen Sperry-Garcia on Vimeo.

Over the last few weeks, I have been spedning a lot of timethings about the risks of China.  More specifically the risks that either are not thought through, are thought to be too low to consider, or are believed to be removed by a third party relationship.  It is a sitution that, as the interview below will show, is almost systematic in the outsourced manufacturing game, and was highlighted by the recent strike at one of Apple’s Suzhou based suppliers two weeks.

It was a strike that particularly frustrated me because Apple has had 3 or 4 other incidents in the past two years, and had in my mind simply not done anything to address the problems in a productive manner.  So, I asked long time friend and labor compliance specialist Pierig Vezin  (Founder and CEO of WethicA) to answer some questions for me based on his experiences in the field

what are the biggest compliance issues that exist in china?
The more common compliance issue in China is about working time. It is found in almost every factory as the Chinese law is quite strict (40 hours per week), but the reality is that the average working time is among the highest worldwide with around 70 to 75 hours per week.

The toughest compliance issue, bounded labour (i.e. young child labour),  is rarely an issue of big factories. Second to the issue of child labor though is that we regularly meet factories that pay workers once a year only, which essentially means that workers can’t resign from their job once they have started. This kind of practice leads workers to be fully dependent on the factory, even in case of major needs to change.

Do firms (buyers)understand the conditions on the ground? do they plan well?

Most of them don’t understand. Actually to be able to claim you are working with compliant factories only is already an evidence of lack of awareness of real situation.When I do training in companies on social situation in factories, I have people astonished by actual situation, and because many figures are not easily understandable , I spend a lot of time helping them understand the meaning of these figures.

For example on working time. When I explain days are often 12 hours long there is always one in each group to explain we were working that long not so long ago in western countries. Ans I also usually have one who claim to work 12 hours a day him(her)self. Then I point out that working in a factory 12 hours is not as working in an office 12 hours as you take break to talk with colleague, take break to eat, having some not fully efficient meeting… When talking about working time in factories it is 12 effective working hours. Then I explain. And what will you do Saturday or Sunday? In factories they will work as usual up to the end of the month. This is when people start to figure out what 12 hours a day 7 day a week really means.

Starting from this gap in understanding the actual situation it is difficult to imagine a proper plan. Experience shows proper plan on this topic can’t be done immediatly as once as to get involved first to be able to define proper goals.

Has anyone learned anything since Nike?
Even Nike haven’t learn anything since Nike.

They were attacked by a Chinese newspaper in November for wages only half the legal minimum in a factory of Jiangsu.

You also still have many brands claiming they are working only with compliant factories, but are still producing in Asia. If we just look at the working time issue, we know it is impossible all goods are done in compliant factories. Thus there are still many people who prefer to claim they don’t know.

Many companies are also having a more pragmatic approach while trying to manage the social f-grade of factories for the best and asking continuous improvement. Thus the understanding is improving, but not everything is done on that topics. Still many need to be taught

Are there industries that have always had high risk or labour noncompliance or cutting corners?
As soon as you work with many workers, that the wages is an important part of your turnover, you are more likely to try to cut “staff cost”. So obviously hand labour intensive users as garment, shoes, jewelry, luggage… small stuff are first in line. But many other industry are huge user of hand labour, even if we don’t think of it. mobile phone, computers,… are high tech goods, but they are also goods that needs to be assembled. The assembly lines are still mainly manual and it is an important part of the production of such goods. Thus they are at risk too.

What are the areas that pose the trouble for firms who are trying to do things right?
The working time is obviously the most difficult one, as it is the one where the gap with the requirement is the biggest. Wages is also a difficult topic as it is directly linked to cost. moreover, the wage system in China is complex and depends on a city level. Thus you can have a factory which pay better wages than another one 10 km away, but this one is not compliant while the other is. The compliance on wages isn’t actually something really important for factories while talking with local government. Thus sometimes you also found factories which give wages lower than legal minimum but many advantages. They could make calculation job to keep wages same level and it appears compliant. they usually don’t bother with that. So asking for improvment in that matter is often not understood as it is always seen as increasing wages.

Safety on the opposite is usually quite achievable while health of workers is a much more difficult topic.

Have things improved over the last 5 years?  Still the same?
Yes things have improved. the average wage has increase, the management of the age of workers is usually better even from time to time we have period of higher child labor. But I guess what has the most improved are the living conditions, with cleaner and healthier dormitories. Safety in China is also usually correct.

How have conditions changed over the last 18 months with the recession?
We thought the economic downturn would lead to less work in factories and decrease the overtime. Actually the opposite happens. As factories had no idea of the future they refuse to hire workers, and ask the present ones to do more. Since this summer the situation is going back to “normal” (not compliant) level. Actually the main consequence has been the stop of some action taken by the government. In January 2008 started the new labour contract. It wasn’t much different from the previous one, but it was a way to claim for its implementation. It as actually started , but then stop soon, and we still find as many workers with no contract at all than before. We also see factories who has understand they won’t be able to continue to compete only on price with other countries. Bangladesh is already much cheaper than China for basic garments. Thus some are changing their approach by trying to upgrade their level. it is going also in a social upgrade as they need to keep the best workers.

How much does it cost to do it right? What are the costs of doing it wrong?
It depends on what right and wrong means. Wrong is sometimes prison where labour cost close to zero. If right means compliant, then you’ll have not to produce in China. You can’t ask a factory to work 40 hours a week when all others are working 70 or 75. Actually if you ask it to strongly and refuse to see it is impossible, then you ask the factory to lie to you. Asking for better than the average is reachable. Asking for compliance is not.

Now on how much it cost, it is very difficult to answer. It depends on the good, it depends on what is expected, and it depends on how you implement it. Workers productivity in Chinese garment industry for example is very low. it is low because of lack of training, of organization, of rest. If you have workers waiting for goods to be worked, and the same workers making overtime all night because they are late, it is not talking about cost, it is talking about organization. Thus you can’t take the cost of social requirements separately of the whole factory organization. Another important topic on cost is the cost of the work on a global product. In a trouser, the cost of the fabric is usually much higher than the cost of the workers who cut an sew it. But pressure is done on this step as it is the most seen. To finish about costs, western buyers should sometimes rethink their buying process. I have seen so often company switching from suppliers for few cents per piece, while cost of changing supplier was to count in dollar per piece.

What do you make of the recent news of Apple’s compliance issues( should apple be doing more? What could they do?
Apple has decided long ago to work with a supplier well known for workers abuse. Every one or two year problems are raised on this topics. this summer it was about the student who “had been jumped” from his apartment window. before that it was about the sickness of girls working on Ipod. Apple has never shown any real action on that matter. We talked about Nike before. Even if not every thing perfect with Nike, when facing such challenge, they act and try to improve the situation. The current situation in Nike factories is better than the average of comparable factories. It is not the case for Apple. I guess that’s my answer about Apple actions.

Do codes of conduct really help? Can suppliers be trusted to follow these?
COC are guidelines, they are just reminder of what is asked; It is just a way to remind “we don’t want you to work with children…”; But they are not dynamic and most if not all of them have the same flaws in. They are not dynamic. They ask the factory to comply today. They are written in a western point of view when they have to be applied in Asia. The very notion of a law or a rule is different in Asia and in western countries. This it is most of the time impossible for factories to comply and sometimes even not fair. Let’s take the example of Young workers. The young workers are the one above child age (usually 16) but still minor. In local legislation young workers must usually be protected (avoid dangerous job…). In India for example (but it is seen in China even not so directly) most of factories forbid workers below 18 years old. Thus they don’t have to manage these workers; Thus young workers can’t found job in structured factories and have to work in unofficial workshops. Should the factory who is hiring young workers from time to time but not perfectly managing them be considered of lower social grade than the one refusing young workers?

What role can the market play to improve conditions?  Are Apple and Nike still at risk of consumers pushing back?
The market can surely play a role. The toy industry is a good exemple. Even if not everything perfect the Mattel case have stressed the risk for the brands of lack of control on the supplier. They have act together on the whole toy industry and worst factories have been closed. But there are still problems of huge subcontracting not always managed by the buyers. Even if they ask factories not to do so, it is not always respected and sometimes they prefer not to know. Managing the supply chain is probably the key factor on that matter as well as consumer safety. To answer your question on Apple and Nike, as Apple has done nothing effective yet, they are still at risk. The last fall example of Nike been attacked for lower wages also shows they are still at risk. But in the case of Nike, an important part of their goods is properly managed and the risk is lower.

What can brands do together to make improvements? do brands work against each other?
In my opinion the most important thinks brands can do to make improvements is to stop to hide themselves the true. When an audit report is perfect, you have to wonder how it is possible. How can a factory be so different from the prevailing practice. Why (as it is the perfect factory) there is no a queue of 1000 workers waiting each morning to be hired. By accepting lies from factories brands are pushing factories to lie more and more and to invest on better lying system. There is automated IT system to generate compliant time records, wages… simultaneously as the real one. This is pushing to invest on non transparency. So if Brands were wanting improvement they should first accept the actual situation and starting from here instead of starting from where they want Asia to be. Then it would be possible to favor factories that really try to improve and not the one that looks like. So every brand that accept to work with lying factory is working against the ones who push for improvements

A lot of conversation over the last few weeks about what China is for many firms. and what it is not.

It is a conversation that, while recently catalyzed by Google’s announcement that they were looking at pulling the plug, is a conversation that I would say is had on a basis that is more frequent than many would like to admit to at time. Typically preceded by an event of some sort, commercial or political, and can be defensive, self defeating, or well analysed depending on the person, and one of the more interesting analysis I have seen lately comes from James McGregor in his recent piece in Time, The China Fix, where he writes the following:

The foreign business community in China has deep respect and affection for the Chinese people and their hard-earned success. But more than a few foreign business leaders are asking themselves if they have been bamboozled by the system. Multinationals have been solid citizens in China, handing over heaps of capital, technology, training, source code, best practices and proprietary products to joint-venture partners they were forced into bed with. They have funded schools, orphanages, disaster reconstruction, overseas scholarships and all manner of poverty-alleviation programs. But now that the China market matters more to them, it appears that China couldn’t care less. Increasingly difficult China-market access is the immediate worry. But many are looking ahead and losing sleep over expectations that their onetime partners are morphing into predators — and that their own technology and know-how will be coming back at them globally in the form of cut-price products from subsidized state-owned behemoths.

Some would say that this paragraph sums it up nicely, and that what is described above amounts to a big China bamboozling.

For me, while I agree that there is a general negative vibe going on, what I am consistently surprised by (perhaps disappointed is a better term) is that people really will fool themselves into believing anything about China at any given time, and when you look at the recent case of Google.. it is really hard to sympathize on some levels as their executives came in believing they could change the structures of the market.

It is a belief that has lead many bad retail strategies, joint ventures, and investments, and it is a large reason why I typically advise an organic growth strategy.

But, that being said, has the situation changed?  Has a new day dawn upon China?  Have Westerners (firms and managers) outlived their useful shelf life?

Or is this another case of anecdotes clouding sound judgment?

This afternoon I was asked by someone why I am involved in CSR and sustainability.  It is a question that I seem to asked frequently, but one that I am not sure I ever answer with any measure of clarity as I have worked in a very wide range of issues related to these big topics, and my interests for each issue hit me in different spots.

But, if there is one common thread that I feel binds each of the issues I work on (see a recent list of 35 projects I am managing through my class at CEIBS), it is that of responsibility… or the lack there of.

That, regardless of the issue under the microscope, at any one time there are up to 5 different groups that share a role and responsibility, and that should one of those groups fail to assume their responsibility, or should one of those groups act in a deliberate manner to upset the balance, then they are by their very nature irresponsible and are taking on a measure of risk to their person or organization.

If this sounds a bit alien, then think back to Nike circa 1996-1997 when the entire world was given a glimpse into the realities of Indonesian labor standard.  It was a classic case of a model that was unsustainable. Nike outsourced all their manufacturing to largely Asian owned/ operated contract manufacturers (still does today), but with little oversight or belief that they had any responsibility of the conditions on the ground.  It was a denial of responsibility that lead to a huge PR disaster for them, and they took win huge losses as consumers walked away from them in what I would call an act of consumeristic responsibility.

Fast forward to 2006 when the international press got wind of an issue related to the dormitory conditions of the Suzhou factory that manufactured Apple’s famed iPod.  It was a story that immediately became controversial as Apple and Foxconn tried to skirt the stories and admit no wrong, but ultimately Apple did send over a team of investigators to Suzhou who:

In response to the allegations, we immediately dispatched an audit team comprised of members from our human resources, legal and operations groups to carry out a thorough investigation of the conditions at the manufacturing site. The audit covered the areas of labor standards, working and living environment, compensation, overtime and worker treatment. The team interviewed over 100 randomly selected employees representing a cross-section of line workers (83%), supervisors (9%), executives (5%), and other support personnel (3%) including security guards and custodians. They visited and inspected factory floors, dormitories, dining halls, and recreation areas. The team also reviewed thousands of documents including personnel files, payroll data, time cards, and security logs. In total, the audit spanned over 1200 person-hours and covered over one million square feet of facilities.

.. and what they found was:

Our audit of on-site dormitories found no violations of our Code of Conduct. We were not satisfied, however, with the living conditions of three of the off-site leased dorms that we visited. These buildings were converted by the supplier during a period of rapid growth and have served as interim housing. Two of the dormitories, originally built as factories, now contain a large number of beds and lockers in an open space, and from our perspective, felt too impersonal. The third contained triple-bunks, which in our opinion didn’t provide reasonable personal space.

To address this interim housing situation, the supplier acquired additional land and is currently building new dormitories. These plans were in place prior to our audit, and will increase the total living space by 46% during the next four months.

It was a report, a process, and reaction that while initially grabbed some press, was  in the end chalked up to  just another problem that overseas brands faced when outsourcing.  As the Wired article Judging Apple’s Sweatshop Charge seemed to conclude in their assessment:

The situation is too murky for a rush to judgment on Apple’s ethics here, and it may well meet minimum global standards. But for a company that has staked its image on progressive politics, Apple has set itself up as a potential lightning rod on global labor standards. Sweatshops came back to bite Nike after its customers rose up in arms; and Apple can expect a similar grilling from its upscale Volvo-driving fans in the months ahead.At this point,

It is at this point that Apple appears to have been genuinely woken up, or at least rattled, because 18 months later Apple released its first supplier Responsibility report (download here) where the findings of a complete review were released.  It was a report that was opened with the passage below:

Apple is committed to ensuring the highest standards of social responsibility throughout our supply chain. The companies we do business with must provide safe working conditions, treat employees with dignity and respect, and use environmentally responsible manufacturing processes wherever Apple products are made.

For the past several years, Apple has required suppliers to commit to a comprehensive Supplier Code of Conduct as a condition of their contracts with us. We drive  compliance to the Code through an aggressive monitoring program, including factory audits, corrective action plans, and verification measures.

Apple’s approach to supplier responsibility extends beyond compliance monitoring. We also provide detailed standards and ongoing training support to help suppliers continue to meet our expectations. And by making social responsibility part of the way we do business, we ensure that suppliers take our standards as seriously as we do.

.. but, it was a report whose contents were shocking as more than half of their suppliers were not in compliance.  There were material issues that were across the board (as the graphic below shows) with overtime, wages deductions, age limits, and so on, and regardless of whether or not these could be explained away or were “problems of the past”, the fact is that Apple should have at this very moment stopped dead in their tracks, realized that they were sitting on a problem, and made changes.  Changes in their partner relationships, changes in the way they monitor and measure relationships, and changes in their attitude about who is ultimately responsible for labor abuse (and other issues of corporate responsibility) within one’s supply chain.  Outsourced or not.

Sadly though, their own internal document did not provide the “come to Jesus” that it should have and last summer, again at a Foxconn site, a 25 year old employee committed suicide after he was interrogated by Foxconn employees over the theft of a prototype iPhone.  an event that I covered in my article Apple’s China Supply Chain Issues Require IMMEDIATE Attention and Action, and believe to this day that Apple should have taken the following actions:

1. Contact Nike to learn lessons of how to develop an IN-HOUSE program that manages and monitors the factory conditions
2. Get boots on the ground.  Pay the money for a team of people who will make inspections and be given the power to make corrections
3. Invite in third parties to not only verify what Apple has found and done, but to give public credibility to the process in place
4. Do the right thing and begin making better decisions about who their suppliers are, and what is expected.  If the profit from an iPhone is 50USD, spend the extra buck now to do the right thing.  It is not an expense, it is an investment
5. Make materials improvements, or make materials adjustments.  Give suppliers a chance to change, but do not wait long.  Begin developing parallel supply lines and force suppliers to comply through the threat of lost business (partial or whole).
6. Open Up

Once again, this event would not serve as a learning lesson for Apple either (they largely skirted their responsibility of this once again), and 7000 employees of another Suzhou based supplier Wintek went on strike in May of 2009 over poor working conditions, and another 2000 employees again went on strike this week over working conditions and pay.   As the China Daily article Workers protest over pay, toxic chemicals highlights:

He said at least four workers had died from overexposure to hexane, a toxic chemical workers had been asked to use for cleaning touch panels manufactured at United Win (China) Technology Ltd Co. The company is a subsidiary of Taiwan-based Wintek Corporation, one of the world’s leading producers of small mobile phone panels and touch panels. [...] Media previously cited local authorities as saying workers had been provoked by rumors that the company planned to cancel a year-end bonus, which company executives later dismissed and promised to distribute before the Chinese Spring Festival that is less than a month away.

But Zhu said it was not just about the money. “What we feel angry about is the company authorities’ apathy to our workers’ health,” he said.

Unconfirmed deaths aside, the fact that employees are being exposed to these chemicals at all should have been something that Apple’s inspectors should have picked up on.  Unless of course the team of inspectors were outside to Apple’s process, and really had no idea what they should have been looking for.  Plausible?  But, if it was Apple’s team, then they should have been looking for this type of issue, and had they found a chemical exposure issue, they should have taken action right away to make sure that employees had the equipment (suits, ventilation, etc) to protect themselves from exposure.

It just begs the question.  Does Apple feel any real sense of responsibility for the conditions of their supply chain, and why is it that a firm that is trying to crack the China market so willing to risk so much?

Is it that Apple is ignorant of the fact that these problems exist? Is it that they believe the brand is impermeable?  Or are they just scared of standing up their suppliers?

It is a horrible miscalculation in my opinion, and when speaking to a friend this evening who is in the audit business about the situation we were stuck on why a company with Apple’s size and cash position wouldn’t spend the 2-3 million USD it would take to fix this problem.

For me,it is a sign that Apple’s model is broken.  That regardless of how well they are selling now, or what the next gadget will be, that they will at some point experience the loss that Nike did in the late 90s, or larger.  That while there seems to be little recognition of Apple’s supply chain issues in the U.S, and no sustained pushback in China, Apple is playing with fire.

It has clearly set up a supply chain that allows suppliers to structure their operations in a manner that exploits the living conditions of employees.

A structure that, getting back to my first point, will become an issue of economic sustainability for Apple.

In what may be the biggest sign of the problems that China’s energy infrastructure faces, a recent Alibaba article China’s spreading power shortage by province listed out the provinces that are going through shortages (Henan, Hubei, Chongqing, Zhejiang, Shandong, Shanxi, Yunnan, and Guizhou), and by how much (5-20% short), and it is clear that something is gonna give.  and soon.

Go back 2 years when China was hit by a blizzard the knocked out many of China’s North to South rail lines, which resulted in 17 provinces losing power, and fast forward to today (in a time where the export economy is off) … and there are still problems.

The recent Jan 6 WSJ article Europe and Asia Struggle With Travel, Power Woes says:

China faces potential power shortages as parts of the country struggle with the coldest weather in decades, authorities said. The cold spell is expected to persist through the week, driving up demand for heating and electricity.

… but in the China based Global Times December 31 article Power shortages worsen in Wuhan, the issue was already highlighted as one that Wuhan (Hubei province) was already fighting, and had been fighting for a very different reason:

“As the coal used for power generation is still in short supply, residents’ lives would be affected without the ban on industrial sectors,” said Fu Jianjun, deputy general manager of Wuhan Power.”

The severity of the problems which ultimately were highlighted in the Clean Techica article Coal-Power Shortage Threatened in China:

Any time coal reserves go lower than three days, coal-fired power plants must shut down. Eleven percent of the key coal producing provinces’ power plants are close to getting to that point. Coal reserves at power stations are in dangerously short supply.

As of Sunday, coal reserves in 598 major power plants were decreasing and were only enough to last for nine days. Coal storage in 205 power plants will last for seven days, an alarming level, the National Power Dispatch and Communication Center said.

Which takes me back to the Steel Guru piece Chinese utilities accept 2010 coal price hikes in regions from December 26, where I think we hit bedrock on the issue:

A power company executive said that a few coal groups in China’s top coal producing province Shanxi have asked to raise term prices by CNY 30 per tonne to CNY 50 per tonne with coal with calorific value of 5,000 kcal per kilogram at around CNY 500 per tonne after the hike. In the northern province of Heilongjiang, utilities and coal miners have agreed on a price hike of CNY 50 per tonne to about CNY 390 per tonne.

So, on Dec 26 an increase in the price of coal was agreed upon, a week later the capital of Hubei province was reporting coal shortages, and now you have 10 provinces short of power.  It is a condition that of course will have immediate economic and societal impacts, and is perhaps the key reason why the December Smartgrid conference in Beijing was packed.