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.

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.

Friend Pierig Vezin of WethicA (one of my recommended vendors) has put out one of his more compelling newsletters to date where he offers readers Untouched Pictures of Factory Conditions around Asia.

We are posting real untouched photos of factory working conditions from about one year ago. We have decided this summer to show you an important part of the job we do during audits by telling you why these pictures have been taken. Actually, an audit is much more investigative than ticking boxes off a questionnaire. One has to walk in with an open mind ready to question everything in these situations and not only ask a list of pre-defined questions.

The pictures pretty much speak for themselves.

To see more pictures here, and to learn more about the conditions and socio-economic conditions that exist in these factories I highly suggest watching the movies China Blue and A Decent Factory.

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.

There has been a lot of talk lately about China’s inability to maintain its role as the world’s factory floor. Costs across the board are higher according to some, and it is just too much for them to handle… they are now looking at Cambodia, Laos, and Vietnam.

CNN in fact just profiled one such factory owner.

Based in Dongguan, a bicycle helmet manufacturer who supplies Wal-Mart and others is feeling the pinch. the recent labor laws have increased his costs, and he is now considering moving half of the lines from his 17 factories around China to Cambodia, Laos, and Vietnam.

What I found most interesting about the report is that it showed the factory owner as a bit of a victim. That because of the new laws, inflation, and a couple of other things that “all came together” he was no longer able to make a profit from China anymore…

For me, this is simply another case of how this situation needs to be reframed, and what I found interesting about this report was that they were more concerned with the conditions of the owner than the workers that the law was supposed to protect.

Now, why is all this relevant?

Continue reading »

Sure, it was the much discussed topic last year, and since its January 1 implementation 14000 HK firms have said they will need to close from its increased cost (note: Nike says it still does not meet ILO standard).

But it appears that there are still some who haven’t caught up on their paperwork as Kraft and Wrigley have both been outed in the papers this week for potential labor violations.

For Kraft’s part, they:

Kraft Foods (China) Co. has been accused of violating the country’s new labor law for the decision of shifting its headquarters from Beijing to Shanghai without consulting employees.

Whereas Wrigley appears to have what could potentially be a more controversial process as one of their employees was a Hep B carrier whose job involved handling food items. After laying him off, he has fired back with a lawsuit using the new labor law verbage to back his claim:

According to China’s Labor and Employment Promotion Law which took effect on January 1, 2008, employers must not refuse to use workers who are infectious disease carriers, and China’s Ministry of Labor and Ministry of Health also asks employers to protect the interests of Hepatitis B virus carriers.

when attending the AMCHAM labor law reading last year, one member of the crowd mentioned that the only way he felt he would be able to fire companies was by claiming bankruptcy.. and with that in mind my suggestion before taking out the pink slip is to (1) do what you can to move people (2) work with the labor union and get their buy in (3) check with the local labor bureau and (4) READ THE TEXT OF THE LAW

Oh – you all know that you were supposed to send in your taxes last month right? If not, and you want to figure it out on your own (I suggest sending a self criticism with it since you are late) here is the form.

While catching up on some reading this weekend, I came across a new anacronym in the book Natural Capitalism that I thought was pretty applicable to how some in China are operating… they are taking a CATNAP

Cheapest Available Technology Narrowly Avoiding Prosecution

With timing being everything, this anacronym is timely as last week during the showing of A Decent Factory. The movie, a documentary of an ethical audit at one of Nokia’s factories, catalyzed a discussion about global vs. local standards where some argued that the balance between moral obligations and profit had to be balanced.. and that while Denmark may have one standard, and China may have another, a firm may not necessarily feel compelled to do more than the minimum of either, much less implement a global standard.

Where this debate gets interesting, and where I will open it to comments, is that China’s regulatory and market conditions are changing very fast and that when they do it is almost always by taken a step towards global standards… not away.. and that firms investing in China need to begin looking at developing global standards rather than local +.

Areas that have seen changes in the last 12 months include labor, the environment, investment, and tax.. and as we have seen in many announcements, it was those firms who were banking on the minimum local standard rather than the global standard that were rushing to lawyers, accountants, and consultants (labor, environment, government relations) to make sure they were compliant, or figure out how much the cost to get compliant would be.

So, at this point, I will open the floor.

Should firms begin looking to implement global standards, codes of conduct, labor practices, etc? By doing so, is it actually more cost effective, or is the risk of over investment greater than getting compliant later

or

Should firms continue to leverage lawyers, accountants, and consultants to define the minimum and then develop the loopholes once the standard is raised?

and

will the primary catalyst for the rise of standard/ expectations be the government going forward? Or will it be consumers? labor market? Environmental NGOs? media?

In the article Factory fallout written by Bonnie Chen of The Standard, readers are invited to play a game of literary three card monty when Clement Chen Cheng-jen of the Federation of Hong Kong Industries is quoted as saying:

Up to 14,000 Hong Kong-owned factories in the Pearl River Delta may be forced to close over the next few months partly due to the snowstorms that have crippled the mainland’s infrastructure

er. Come again? 14,000 factories are going to close because of a snow storm that largely passed 10 days ago?

Sure, I can see that they may need to extend the holiday, but close? Well, according to Cheng-jen

more than 30 percent of the migrant workforce in the delta area may still not have returned from their Chinese New Year holidays when factories reopen today. The workers, he said, have opted to remain in their hometowns due to the travails they experienced after the snowstorms paralyzed railway networks.

As the article proceeds, the truth is set free, and the snow day theory melts:

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Moving to China for many rests on their ability to save money, and as we all know the cost and availability of labor have been one of the key considerations for investing in China.

So, when the new labor law drafts were being reviewed, managers up and down the east coast began to sweat bullets…

For Beijing is not middle managers who are working a few extra hours, but college students who are paid less an a pittance in foreign fastfood retail shops, child slaves working in the mines of Shanxi, migrant workers who build China’s glimerring buildings without pay, and others.

According to Eric Ardnt’s post on Crossroads:

If appropriately enforced, the LCL will help reduce the abuses that are leading to labor unrest such as that which recently resulted in the deaths of migrant workers at the hands of strikebreakers. However, as with so many laws in China, enforcement of laws is far more challenging than enacting them. Only time will tell if the LCL is able to help curb the many problems plaguing labor relations in China.

However, up and down the east coast, there are still a lot of concerns about how this new law will impact operations, and as such I would like to open the floor to readers.

1. Will the new law have a significant impact on the operations of your firm?
2. What are the three biggest issues for your firm?
3. What did you do to prepare for the passage of the law?
4. Will the new law prevent further investments, or catalyze your exit?
5. Will these laws be enforced evenly across China’s regions?
6. Do you think that foreign firms need to be more careful and protect themselves more than they used to when documenting hiring/ firing and employee performance?

Leave your comments here