Apple, Foxconn, Wisconsin

After reading Janesville, I couldn’t help but be interested in this perfectly titled piece in The Atlantic.

Numbers to ponder:

“It has up to $3 billion in tax breaks, to be passed and provided by the state government. Those kinds of tax incentives can get a manufacturer to plant a factory in a given location—but generally at a significant cost to the state budget, and without doing much to help the economy overall.”

What does $3b mean?

“The Washington Postestimates that the breaks could cost the state as much as $230,700 per job created. Tim Culpan at Bloomberg Businessweek puts it at $1 million per job, enough to buy every man, woman, and child in Wisconsin a new iPhone.”

So the margin of error is only $770k/per job created. I recommend the rest of the succinct piece.

Apple Cares About Profit Margins Not Its Chinese Workers

My conclusion after carefully reading Charles Duhigg’s and David Babroz’s NYT article, “In China, Human Costs are Built Into an iPad“. Major props to Duhigg and Barboz for the thoroughly researched, fair, convincing, damning description of Apple’s negligent, laissez faire approach to working conditions in its suppliers’ factories in places like Chengdu, China where I once lived for a few months and toured the largest television factory in the world.

In fairness to Apple, I should read Tim Cook’s “we care about every worker in our supply chain” email to Apple employees, but Duhigg’s and Babroz’s analysis convinced me that Cook’s email is most likely hollow, public relations spin.

Apple recently reported their 2011 fourth quarter results—$13.06b in profit on $46.3b in sales. The sales number is remarkable, but given industry norms, the profit margin even more so. I’ll return to it later. As a result of the record quarter, my AAPL holdings increased in value way more than the cost of the MacBook Air I bought the GalPal for Christmas and the iPad 3 I’ll be buying myself in March. I divulge that to point out I am complicit in Apple’s pernicious business practices.

I have a responsibility to carefully consider Apple’s relationship with its suppliers in China because I help create demand for Apple products. I also think of myself as a global citizen with a social conscience, I have praised the company in previous posts, and I own individual shares of AAPL both directly and through stock index ETFs.

Some key excerpts from Duhigg’s and Barboz’s article:

“We’ve known about labor abuses in some factories for four years, and they’re still going on,” said one former Apple executive who, like others, spoke on the condition of anonymity because of confidentiality agreements. “Why? Because the system works for us. Suppliers would change everything tomorrow if Apple told them they didn’t have another choice.”

Foxconn is one of the few manufacturers in the world with the scale to build sufficient numbers of iPhones and iPads. So Apple is “not going to leave Foxconn and they’re not going to leave China,” said Heather White, a research fellow at Harvard and a former member of the Monitoring International Labor Standards committee at the National Academy of Sciences. “There’s a lot of rationalization.”

Granted, China is still a developing country with a serious urban/rural imbalance. Young people are choosing, of their own free will, to migrate to its cities to work in factory jobs that require, by our standards, long hours in tough conditions. Even when adjusting for where China is in its development, Apple is failing its Chinese workers who had no idea they’d have to suffer grievous injury and in some cases death as a result of toxic chemicals, aluminum dust, and large-scale explosions.

Three quarters through the article I sadly concluded Apple is to technology as Walmart is to retail—so large and influential that it can dictate conditions to suppliers. Apple says to suppliers, “Get us this product, tomorrow, at this price.” In order to make money, the supplier has to figure out how to do things more efficiently or cheaper, which often means cutting corners on implementing Apple’s ineffectual code of conduct. Then, Apple pays suppliers less each year and looks the other way when they fail to implement the code of conduct.

What makes this unconscionable is Apple’s unprecedented profit margins. If Apple users and shareholders like me take the baton from Duhigg and Babroz and put serious pressure on Apple to truly enforce their code of conduct, they could not only match the global labor practices of Intel, H.P., and the ubiquitous swoosh, they could raise the bar for every other multinational operating in China.

More key excerpts:

“If you see the same pattern of problems, year after year, that means the company’s ignoring the issue rather than solving it,” said one former Apple executive with firsthand knowledge of the supplier responsibility group. “Noncompliance is tolerated, as long as the suppliers promise to try harder next time. If we meant business, core violations would disappear.”

“You can set all the rules you want, but they’re meaningless if you don’t give suppliers enough profit to treat workers well,” said one former Apple executive with firsthand knowledge of the supplier responsibility group. “If you squeeze margins, you’re forcing them to cut safety.”

“It is gross negligence, after an explosion occurs, not to realize that every factory should be inspected,” said Nicholas Ashford, the occupational safety expert, who is now at the Massachusetts Institute of Technology. “If it were terribly difficult to deal with aluminum dust, I would understand. But do you know how easy dust is to control? It’s called ventilation. We solved this problem over a century ago.”

But ultimately, say former Apple executives, there are few real outside pressures for change. Apple is one of the most admired brands.

People like Ms. White of Harvard say that until consumers demand better conditions in overseas factories — as they did for companies like Nike and Gap, which today have overhauled conditions among suppliers — or regulators act, there is little impetus for radical change. Some Apple insiders agree.

Will Dughizz’s and Babroz’s reporting create a groundswell of pressure that forces Apple to care—even in a Chinese context—about the quality of life of their Chinese workers? “Right now,” Harvard’s White says, “customers care more about a new iPhone than working conditions in China.

Near the end of the article a “current Apple executive” is quoted as saying, “You can either manufacture in comfortable, worker-friendly factories, or you can reinvent the product every year, and make it better and faster and cheaper, which requires factories that seem harsh by American standards.” That’s flat out wrong. Given Apple’s unprecedented profit margins, here’s what the exec should have said, “You can manufacture in comfortable, worker-friendly factories, reinvent the product every year, and make it better and faster and cheaper in factories that supersede existing Chinese standards if stockholders—especially my Apple execs and me—are willing to accept smaller profit margins that are more typical for the industry.”

I’m not ready to sell all my shares and boycott the products until work conditions in China truly improve, but I am willing to accept slower growth in AAPL’s share price as a result of smaller profit margins.