Will Apple, Foxconn, & Sweeteners Satisfy Labor Activists?

Foxconn Electronics Inc. is either one of the most loyal corporate partners in the electronics manufacturing community or a patsy for its biggest customer, Apple Inc. (Nasdaq: AAPL)

Before you charge me with being too harsh on the world's No. 1 electronics manufacturing services provider, consider two recent developments. First, early this week, the Fair Labor Association began auditing Foxconn factories in Shenzhen and Chengdu, China, under instructions from Apple, which faces a barrage of accusations of condoning labor violations at plants that make its products. Apple said the audits were "voluntary." That implies Foxconn readily and willingly allowed FLA workers to turn the floodlights on its operations.

"Apple's suppliers have pledged full cooperation with the FLA, offering unrestricted access to their operations," Apple said when it announced the beginning of the inspections. CEO Tim Cook had this to say:

We believe that workers everywhere have the right to a safe and fair work environment, which is why we’ve asked the FLA to independently assess the performance of our largest suppliers. The inspections now underway are unprecedented in the electronics industry, both in scale and scope, and we appreciate the FLA agreeing to take the unusual step of identifying the factories in their reports.

I don't accept the notion that Foxconn cheerily invited the scrutiny. Few companies would ever do this. Granting such access inevitably turns up something, no matter how spotless a manufacturing facility might be. Foxconn agreed under pressure. Apple is by far its biggest customer and helped propel it to the top of the EMS rankings. The idea of turning down such a request from Apple is laughable. Apple needed to deflect complaints from workers' rights advocates and an intensely inquisitive press, and this move ensured that any blame would be placed squarely on Foxconn's doorstep.

That's the first evidence that Foxconn is willing to take a blow for Apple. But Foxconn is going further to burnish its own reputation and stop those who want to use it as a cudgel against Apple. Today, it announced that salaries for workers making iPhones and iPads in China will go up 16-25 percent starting in February. This will be the third hike in just under two years, according to a Reuters report. Junior-level worker salaries could rise to 2,200 yuan (about $350) per month from as low as 900 yuan three years ago.

Such a hike is incredible and probably unprecedented in manufacturing. Somehow, though, Foxconn is able to swing it without necessarily pushing the cost back to Apple in a business with extremely thin margins. Either Foxconn was overcharging Apple before, or it can now absorb the extra costs without disappointing investors. Whatever the case might be, iPhone, iPad, and iPod prices are unlikely to increase at a double-digit rate to offset the additional costs.

I want to return to the question at the top of this page. Will these steps taken by Apple and Foxconn satisfy their critics? Probably not, and this won't be because the actions are not commendable. They are. What may detract from the effectiveness of these moves are issues such as the timing and the controversial role the FLA is playing.

Two days after the FLA supposedly began its review of the Foxconn facilities, its president, Auret van Heerden, set off a firestorm of criticism by telling Reuters the EMS provider's plants are "first-class." Apple critics have seized on this statement to claim that it selected an organization already seen as partial to businesses to audit its suppliers. However one looks at it, Apple and Foxconn still have much to do to convince folks their operations are above board.

In a subsequent blog, I will write about what Apple's actions mean for other electronics and high-tech OEMs and their extended supply chain.