What Did Apple's Supply Chain Audit Uncover? Part 1

Apple Inc. (Nasdaq: AAPL) does not manufacture its own products, yet the company has been clobbered in the press and by human rights campaigners in recent past for alleged abuses and violations at plants operated by some of its contract manufacturers, including Foxconn Electronics Inc. The company's internal response has been unknown until now, but it initiated a comprehensive review of its supply chain ecosystem and just issued a report on its findings. (See: Apple Responds to Workers' Rights Abuses.)

In this blog, I am going beyond what Barbara Jorgensen discussed in her blog to highlight the key findings from Apple's review of its extended supply chain. Some of the discoveries were unpleasant, but Apple took the unusual step of publishing the unvarnished results, setting an example for the industry and indirectly challenging other electronics equipment makers to examine their operations to ensure compliance with international manufacturing standards.

Guaranteed, many of these companies will not like some of what they will uncover. Apple didn't either, but by turning the searchlight on suppliers, it will take the sting off criticisms that it hides behind contractors and does not care about actions taken on its behalf as long as these help it reduce manufacturing costs and boost margins. Those criticisms, as you'll see from the details of Apple's findings below, might have been spot on.

Too many third-party supply chain partners are cutting corners, short-changing workers, and jeopardizing the entire ecosystem in order to offer the advantages they believe their OEM customers want. Unfortunately, they often hide these actions from the OEMs, including the ones that try to peer behind the veil, as Apple found out. The company said in its report that its suppliers are required to "provide safe working conditions, treat workers with dignity and respect, and use environmentally responsible manufacturing processes wherever Apple products are made."

That was the order from Apple. What it discovered, when it lifted the hood, were extreme and repeated violations by some of its suppliers. Here, in the report's own words, are the key findings from Apple's recent review of its supply chain:

• Underage workers: A total of 49 underage workers across 9 facilities.
• Excessive recruitment fees: Apple considers this to be involuntary labor.
• Worker endangerment: 137 workers at the Suzhou facility of Wintek, one of Apple's suppliers, had suffered adverse health effects following exposure to n-hexane. The factory had reconfigured operations without also changing their ventilation system.; workers performed at heights greater than 3 meters without guardrails or safety harnesses ; 80 facilities were not storing or handling hazardous chemicals properly; 37 facilities failed to monitor and control air emissions; 47 facilities did not have appropriate first-aid supplies for emergency situations; 78 facilities did not have properly maintained fire detection and suppression equipment; 81 facilities did not have adequate exit paths for emergency situations and; 54 facilities had workers who were not wearing appropriate personal protective equipment (PPE), such as earplugs, safety glasses, and dust masks.
• Record falsification: One facility presented falsified payroll records and provided misleading interview answers to Apple's audit team; One facility concealed a production area from Apple's audit team, preventing assessment of associated environmental health and safety risks.
• Bribery: A facility manager offered cash to Apple's third-party auditors, asking them to reduce the number of audit findings.
• Coaching: A facility manager assembled workers and told them to provide false wage payment information to Apple auditors.
• Discrimination: 41 facilities screened job candidates or current workers for hepatitis B, and 54 other facilities lacked policies and procedures that prohibit discrimination based on results of medical tests; 30 facilities conducted pregnancy tests, and 57 other facilities did not have policies and procedures that prohibit discriminatory practices based on pregnancy.
• Violation of labor laws: 76 facilities had records that indicated workers had exceeded weekly working hour limits more than 50 percent of the time. At 74 facilities, more than half of the records we reviewed indicated that workers had worked more than six consecutive days at least once per month.

Kudos to Apple; let's see what its competitors will do. By the way, let me sweep aside here any arguments that the industry is already doing enough. Of the 288 facilities it audited in 2010 in China, the Czech Republic, Malaysia, the Philippines, Singapore, South Korea, Taiwan, Thailand, and the US, "more than 40 percent stated that Apple was the first company ever to have audited their facility for social responsibility compliance," according to the company.

It's not enough, though, to only highlight what Apple discovered. The company has been seeking solutions, and in Part 2 of this series, I will list the actions already taken by the company and other steps it is contemplating, both alone and in conjunction with regulatory authorities and independent examiners.