After months of growing scrutiny over its labor practices, Apple has agreed to implement reforms following an independent audit that discovered major violations in the sprawling Chinese factories that produce iPhones and iPads. The report, conducted by the Fair Labor Association, comes as Apple seeks to diffuse criticism about labor conditions at Foxconn following a rash of worker suicides and industrial accidents.
The FLA’s report is the most comprehensive audit of Chinese tech hardware factories ever conducted, and the commitments it has received could mean a significant change in the way that Western companies do business in China. Foxconn is the largest private employer in China, so its reforms could set an example for other Chinese manufacturing firms to follow.
For Western companies, particularly in the consumer technology space, the changes could raise production costs as contractors spend more to ensure labor safety and rights, as well as hire more workers to compensate for reduced hours. Foxconn, which recently increased factory wages by up to 25%, says it will maintain worker compensation, even as it moves to reduce hours worked to be in compliance with Chinese law.
That could ultimately mean higher prices for consumers, unless Apple and its consumer tech peers are willing to absorb the new costs. Apple is on pace to earn over $40 billion in profit this year, and is sitting on a cash hoard of $100 billion. (The company recently announced a stock dividend and buyback plan that will cost $45 billion over the next three years.)
Last month, HP Chief Executive Meg Whitman said consumer tech companies would have to decide how much of higher labor and production costs to pass on to consumers. “If Foxconn’s labor cost go up, their product cost to us will go up,” Whitman told Reuters. “But that will be an industry-wide phenomenon and then we have to decide how much do we pass on to our customers versus how much cost do we absorb.”
On the other hand, higher costs at Foxconn could drive tech companies to cheaper contractors that haven’t agreed to the same labor protections. ”If Foxconn tries to increase prices, Amazon could go to other major contract manufacturers like Quanta, Wistron, Pegatron or Inventec to see what they could do for the company,” Mark Gerber, director of technology research at brokerage Detwiler Fenton, told Reuters.
In its report, the FLA found 50 issues related to health and safety risks, excessive overtime and problems with overtime compensation, and “crucial communication gaps that have led to a widespread sense of unsafe working conditions among workers.” The FLA said it has secured commitments from Apple and Foxconn to reduce working hours, improve health and safety protections, and establish a “genuine voice for workers” in the factories.
“The Fair Labor Association gave Apple’s largest supplier the equivalent of a full-body scan through 3,000 staff hours investigating three of its factories and surveying more than 35,000 workers,” Auret van Heerden, President and CEO of the Fair Labor Association, said in a statement.
The FLA’s investigation follows increasing controversy about working conditions at Foxconn, which produces an estimated 40% of the world’s consumer electronics, prompted in part by a New York Times article that painted a grim picture of life at the factories and raised questions about the effectiveness of Apple’s supplier code of conduct. The controversy began after 10 workers committed suicide at plants owned by Foxconn, prompting the company to install nets around worker dormitories. And last year, three employees died and more than 70 were hurt in explosions at two Chinese factories producing iPads, including one owned by Foxconn.
Although many major technology companies produce products at the Foxconn factories — which employ an estimated 1.2 million workers — Apple has been the focal point for the criticism because it is the largest and most successful consumer tech company in the world. CEO Tim Cook, who toured a Foxconn plant this week while visiting China, seems intent to tackle the labor issue head on, lest it damage Apple’s image as one of the most respected companies in the world.
FLA’s investigation found that within the last year, three Foxconn factories, at Guanlan, Longhua and Chengdu, exceeded Chinese legal limits of 40 hours per week and 36 hours maximum overtime per month. The report found that some employees work seven days in a row without the required 24 hours off. In response, Foxconn has agreed to bring working hours within Chinese legal limits by July 1, 2013. Additionally, Foxconn said it would implement a compensation package that protects workers from losing income due to reduced overtime.
FLA’s survey of 35,500 workers found that 64% of employees say that compensation in the factories does not meet their basic needs. The report found that average monthly salaries at the factories inspected by the FLA ranged from $360 to $455. The report also found that 43% of workers said they had experienced or witnessed a workplace accident.
In a statement, Apple said it would work to implement the FLA’s recommendations. “We think empowering workers and helping them understand their rights is essential,” the company said. Our team has been working for years to educate workers, improve conditions and make Apple’s supply chain a model for the industry, which is why we asked the FLA to conduct these audits.”
Human Rights First, a member of the FLA Board of Directors, greeted the report — and the resulting reform commitments — with cautious optimism. “This FLA agreement with Foxconn will safeguard the health and welfare [of] the company’s employees by bringing their work conditions into compliance with basic human rights standards,” Meg Roggensack, the group’s Senior Advisor for Business and Human Rights at Human Rights First. “The key to the report’s success, however, will be implementation of this agreement. Talk is cheap. The steps needed to protect workers in Apple’s supply chain may not be.”