Case Study: Apple and Supply Chain Risks

Responding to a growing outcry over conditions at its overseas

factories, Apple announced that an outside organization had
begun to audit working conditions at the plants where the bulk
of iPhones, iPads and other Apple products are built, and that
the group would make its finding public.
For years, Apple has resisted calls for independent scrutiny of
the suppliers that make its electronics. But for the first time, it
has begun publicly divulging information that it once
considered confidential after criticism that included
coordinated protests in January 2012 at Apple stores around
the world and investigative news reports about punishing
conditions inside some factories.
In January 2012, Apple released the names of 156 of its suppliers. Two weeks later, Apples chief
executive sent an e-mail to the companys 65,000 employees defending Apples manufacturing
record while also pledging to go deeper into the supply chain. And now, the company has asked an
outside group a nonprofit financed partly by participating companies like Apple to publicly
identify specific factories where abuses are discovered.
Corporate analysts say Apples shifts could influence widespread changes throughout the electronics
industry, since several companies use the same suppliers. They also said it seemed calculated to
forestall the kind of public relations problems over labor issues that in previous decades afflicted
companies like Nike, Gap and Disney. This is a really big deal, said Sasha Lezhnev at the Enough
Project, a group focused on corporate accountability. The whole industry has to follow whatever
Apple does.
But it is unclear if the efforts by Apple, whose $469 billion market value is the largest of any
company in the world, will be enough to quiet its critics, some of whom had urged Apple to work
with Chinese monitoring organizations with direct knowledge of its suppliers in China.
Though some labor groups applauded Apples announcement, others said that the outside auditor
Apple chose, the Fair Labor Association, which is based in Washington, was not sufficiently
independent. And some critics questioned whether the inspections Apple said the manufacturers
had agreed to do them voluntarily would sharply curtail problems or merely help Apple deflect
criticism.
F.L.A. is part of a corporate social responsibility industry thats totally compromised, said Judy
Gearhart, executive director of the International Labor Rights Forum, an advocacy group for
workers. The auditing has been proven to be weak, and real solutions need a lot more than auditing.
It takes empowering workers.
Apple, in a statement, said that the Fair Labor Association was an independent organization that had
been given unrestricted access to the companys suppliers.
The first inspections, Apple said, were conducted at a factory in Shenzhen, China, known as Foxconn
City, one of the largest plants within China. Human rights advocates have long said that Foxconn
Citys 230,000 employees are subjected to long hours, coerced overtime and harsh working
conditions, all of which Foxconn disputes.

Apple has said that if the companies manufacturing its products do not measure up to its labor and
human rights standards, it will stop working with them.
We have a very credible, independent monitoring system, said Jorge Perez-Lopez, executive
director of the Fair Labor Association. Yes, Nike is on our board. So are other companies. But so are
universities. And our reports are written by staff, without consultation or influence.
Since 2007, Apple has released yearly audit reports of its own detailing labor violations and unsafe
conditions at its suppliers. More than half of the facilities audited by Apple every year had violated at
least one aspect of the companys supplier code of conduct, and in some instances violated the law.
Auditors have found instances of excessive overtime, underage workers, improperly disposed
hazardous waste and falsified records, according to the companys reports. Two years ago, 137
workers at an Apple supplier in eastern China were injured after they were ordered to use a
poisonous chemical to clean iPhone screens. Last year, two explosions at iPad factories killed four
people and injured 77.
Because Apples public disclosures of problems do not identify the suppliers by name, it is difficult to
determine where specific abuses happened. It is also tough to determine if conditions improved after
Apple demanded changes, as the company says. The company has disclosed little about its
manufacturing process over all, at least partly because it does not want to tip off competitors.
For instance, Chinese advocacy groups which are often considered reliable, independent monitors
have published multiple reports saying that Foxconn employees regularly work more than 12
hours a day, seven days a week, a violation of both Chinese law and Apples code of conduct. Apple
has audited Foxconn City multiple times and Foxconn, in a statement sent to The Times, said it had
never been cited by Apple for overworked employees.
If the Fair Labor Association conducts wide-ranging audits and publishes data on specific facilities, it
could transform the attention brought to the worst performers, and in the example of Foxconn City,
help determine whether Foxconn, or the advocacy groups, have been telling the truth.
The problem with the F.L.A. is that it lives by rules set up by the companies itself, said Mr. Lezhnev
of the Enough Project. Real transparency will transform the electronics industry. But if its just a
whitewash, Im not sure how much will change.
Apple, in its statement, said the Fair Labor Associations findings and recommendations from its first
inspections would most likely be posted online in early March on the groups website, fairlabor.org.
At Apples request, the group will also conduct audits of Apples other main assembly factories,
including Foxconns plant in Chengdu and facilities run by Quanta and Pegatron, where the bulk of
iPhones, iPads and other devices are made. Those and other plants also build goods for almost every
other major electronics company, including Dell, Hewlett-Packard, I.B.M., Lenovo, Motorola, Nokia,
Sony, Toshiba and others.
While other companies have been criticized for conditions at their operations overseas, Apple has
received particular attention because it is the biggest its market value is more than the combined
value of Google and Microsoft and among the richest. Its stock closed Monday at $502.60, up more
than 20 percent this year. The company also has a vast overseas presence, with its contractors
employing 700,000 people in China and elsewhere.

Apple announced in February 2012 that its suppliers had pledged to give the auditors unrestricted
access to their operations during the inspections. Apple said the organization would interview
thousands of employees about working and living conditions including health and safety,
compensation, working hours and communication with management. It will also inspect
manufacturing areas, worker dormitories and other facilities, the company said.
In announcing that the association had begun inspecting Foxconn factories in Shenzhen and
Chengdu, Timothy D. Cook, Apples chief executive, said, we believe that workers everywhere have
the right to a safe and fair work environment, which is why weve asked the F.L.A. to independently
assess the performance of our largest suppliers. The inspections now under way are unprecedented
in the electronics industry, both in scale and scope, and we appreciate the F.L.A. agreeing to take the
unusual step of identifying the factories in their reports.
In January 2012, Apple announced it would be the first technology company to join the Fair Labor
Association. The organization was founded in 1999, and evolved out a task force created by
President Bill Clinton and a handful of apparel and footwear companies including Nike to
combat child labor and other abusive working conditions.
When completed, Apple said, the associations inspections will have covered factories where more
than 90 percent of Apples products are assembled.1
Critics argue, however, that the association and its corporate members should not suggest that its
inspections are independent.
The F.L.A. does some good work, but we dont think its appropriate for them to call themselves
independent investigators because theyre in part funded by companies, said Scott Nova, executive
director of the Worker Rights Consortium, a university-backed factory monitoring group.
Independent monitoring means youre generally independent of the companies.2

1 Apple Asks Outside Group to Inspect Factories, New York Times, February 14, 2012, pg A1
2 Critics Question Record of Monitor Selected by Apple, New York Times, February 14, 2012, pg B1
http://bits.blogs.nytimes.com/2012/02/14/daily-report-apple-asks-outside-group-to-inspectfactories/?ref=applecomputerinc