“For a quarter of a century, Washington and Wall Street have wanted China to become an integral part of the world economy. Their wish has been granted, and now it’s time to come to grips with the implications.”—Jeffrey Garten, Yale, June 2002 (BusinessWeek)
Ten years after those words were written we still find ourselves wringing our hands over how much American prosperity is derived from Chinese manufacturing. A series of articles from The New York Times (NYSE: NYT) this week on Apple’s tricky relationship with the company that builds the iPhone and iPad makes it clear that while society may occasionally recoil at the human cost required to build our flashy mobile toys, when it comes to consumer electronics there is no Plan B.
A predictable series of questions emerged in the wake of those reports, which didn’t break a ton of new ground on the business practices of Foxconn but did well to explain how conflicted the tech industry can be about China. Foxconn, an electronics manufacturing giant headquartered in Taiwan that employs hundreds of thousands of people in China, has been Apple’s most important partner during its climb to the top of American business, cranking out the 315 million iOS devices that Apple (NSDQ: AAPL) has sold over the last five years at a reliable clip and an attractive price.
Why doesn’t Apple build the iPhone in the U.S.? How much do its executives really know about conditions in these factories? If they do know, why do they tolerate it? If they don’t know, how could they be so naïve as to not wonder at how tens of thousands of iPhones emerge from a drab factory in the middle of China overnight?
The answer to the first question is easy. China is the world’s workshop, having invested heavily in manufacturing and infrastructure over the last 20 years, and its advantages in consumer electronics are maybe even more pronounced. A complex network of electronics producers and suppliers has sprung up in cities like Shenzhen and Chengdu, much the same way that London and New York are centers of finance and Los Angeles dominates entertainment production.
There’s nowhere else in the world you can build a modern smartphone or tablet as cheaply, easily, and reliably as the massive factories of companies like Foxconn, which operate on a scale that is difficult to comprehend. The price for doing business with companies like Foxconn is living with the knowledge that these products are being built by people who have signed up for a modern-day version of indentured servitude.
So what can be done about that? Can foreign companies really force their suppliers to adhere to a standard pretty far above the basic requirements (assuming there are any) of their local governments?
They certainly do try. Clothing and sporting-goods companies were the ones in the crosshairs a decade ago, when a series of reports on the horrifying conditions that were employed to produce $120 Air Jordans prompted companies like Nike and The Gap to impose conditions on suppliers and adopt codes against doing business with companies that exploited their workforce.
So how are they doing?
Nike actually hasn’t released a supplier responsibility report in a few years. The Gap released one for 2010 in which it found that more than 50 percent of the 320 factories it buys from in “Greater China” did “not equip machinery with operation safe devices and inspect on a regular basis” and that somewhere between 10 percent and 25 percent forced workers to work seven straight days on occasion and “did not pay overtime & incentives as required.”
Apple released far more detail about its suppliers in its 2012 supplier report, which was obviously constructed with the knowledge that the Times was planning a series of articles around the same time. Apple also went a little further in saying whether or not it had stopped doing business with a particular supplier over issues detailed in the report, something The Gap did not include.
As should be clear by now, Apple is only being singled out by the Times because it is at the top of the tech heap, and while that may be fair game given Apple’s unbelievable profit, it overstates the ability of the company to act as a macroeconomic force.
Apple CEO Tim Cook told employees Thursday that the company is doing everything it can. In a company-wide e-mail sent in response to the Times articles and obtained by 9to5Mac.com, Cook wrote:
We know of no one in our industry doing as much as we are, in as many places, touching as many people. At the same time, no one has been more up front about the challenges we face. We are attacking problems aggressively with the help of the world’s foremost authorities on safety, the environment, and fair labor.
The truth is that an entire consumer electronics industry depends on these factories for their livelihoods; the dozens of companies and millions of people that have made a handsome living on the spread of mobile technology, gaming consoles, and high-definition televisions into everyone’s lives. And China depends on the demand for its manufacturing services driven by Western consumers who want quality goods at a low price, knowing that few other operations are able to hit those targets as consistently as its homegrown manufacturing base.
U.S. tech companies have a very complicated relationship with China. It’s the world’s largest potential consumer electronics market and is home to the world’s best tech manufacturing companies, but it is run by a government that encourages censorship, tolerates working conditions that other countries made illegal many years ago, and favors domestic companies to an unnerving degree.
Engagement in hopes of changing the situation on the ground has yet to work, as anyone who worked for Google (NSDQ: GOOG) in early 2010 will readily attest. So what can Apple do to improve working conditions at its Chinese suppliers?
It could use some of its $97 billion cash hoard as a carrot and the threat of losing its formidable business (Foxconn has no customer more important than Apple) as a stick. But unless Apple is willing to incur significant risk and set up its own manufacturing facilities governed by its own principles within China (something which, to be clear, may not be permitted by either China or the U.S.) it is dependent upon suppliers that have different standards when it comes to the well-being of their employees. And changing the labor laws of a foreign country is not necessarily a project that a U.S. company can throw money at and cross its fingers hoping everything works out.
The truth is pretty simple: the modern consumer electronics industry couldn’t exist without companies like Foxconn. And Apple can’t just take its ball and go home: there’s nowhere else in the world one can find an industrial system that could replace what China has built, and attempts at building an alternative might take decades.
Apple is right to keep pressure on its suppliers to improve conditions, and critics are right to ask the company to do even more. But even Apple doesn’t have the clout to reverse two decades of economic history that has led to the status quo, in which low-cost Chinese manufacturing props up the consumer-driven U.S. economy.
How much change Apple can really bring to an irreplaceable partner born of a country without enough respect for the basic human rights of its people?
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