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The Other Side of Samsung- Increased Scrutiny on Tolerance to Supplier Labor Practices

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Yesterday, Samsung unveiled its latest model Galaxy S smartphone, and by today’s headlines among business media, created a lot of new buzz regarding its ability to be a strong innovator and competitor in the smartphone arena. In this hubris of smartphone and other consumer electronics OEM’s such as Samsung and Apple, are the continuing challenges in requiring proactive labor rights policies among various suppliers.

Last week, three French labor rights groups along with a noted human rights lawyer filed a lawsuit against Samsung Electronics accusing the company of misleading consumers and investors amid allegations of labor abuses occurring among its supplier factories in China. This suit centers on a series of reports from the New York based China Labor Watch organization that alleges systemic labor rights violations among Samsung’s external suppliers in China.

According to last week’s report published by The Financial Times, Samsung denies all claims of labor rights abuses at its factories, but does acknowledge employees at external suppliers sometimes work excessive amounts of overtime.  In September of 2012, Supply Chain Matters noted that after a series of stated findings from China Labor Watch, Samsung was initiating an unprecedented amount of  supplier audits involving all 250 of its China based suppliers within its supply chain. Samsung promised to terminate a supplier contract if any violations were found that breached the company’s supplier agreements. Our expressed view at the time was that Samsung was wielding a rather significant stick, the outright declaration of supply contract suspension if suppliers were found to be in violation and corrective actions were not taken to the satisfaction of Samsung.

According to last week’s FT report, the head of China Labor Watch indicated that the labor rights organization felt that Samsung’s response to his group’s findings declaring strong evidence of underage labor practices were not as proactive as those concerning Apple. This included a finding in December of underage workers at a Samsung supplier factory, and two weeks after Samsung rejected a previous separate finding involving another supplier.

Readers of this blog are probably well aware that the issues of labor rights abuses involving high tech manufacturing factories in China have been far reaching.  While Apple has taken on the brunt of investigations and proactive calls for action, other high tech manufacturers are now being called to task.

In February, Hewlett Packard issued tightened labor standards among its China based suppliers regarding the use of temporary and student based labor.  These new guidelines stipulate that all work must be voluntary, and comply with local regulations regarding minimum working age and designated working environments.  HP developed these guidelines in tandem with China’s Center for Child Rights and Corporate Social Responsibility and according to its announcement, go beyond regulatory expectations for suppliers.

What seems to be perplexing regarding reports of this latest Samsung lawsuit is the premise that a company has purposely misled investors by tolerating underage labor practices among suppliers.  We are certainly not lawyers, and thus can only opine, but it seems that the outlined premise may be rather  difficult to prove in a court of law. In its reporting, the FT rightfully points out that: “If successful, this lawsuit could open up a new legal risk for companies whose suppliers breach labour laws.”

To its credit, Apple has taken rather proactive and open commitment in its actions to have the Fair Labor Association conduct an open audit of its entire China based supply chain for any labor rights abuses, including underage workers. Apple provides open access to audit findings.  Samsung, on the other hand, has been more behind the scenes in its approach to these alleged conditions, openly stating strong consequences for those suppliers found in violation, but not as transparent on reporting of auditing progress. As a consequence, Samsung is now being targeted for its alleged tolerance of practices. The time has probably come for Samsung to open its China supply chain to an open and visible third party audit process similar to what Apple has launched. Samsung’s supply chain management teams may well believe that clear labor standards and implications for violation are clearly communicated, but often times a transparent and open process has far more effectiveness in driving change.

In a separate Supply Chain Matters commentary in late September 2012, we stated that change and reform is long overdue and the high tech and consumer electronics industry can no longer turn a blind eye to what may be occurring among suppliers and contract manufacturers. The notion that an OEM can dictate unplanned changes or insist that virtual capacity exists is now being challenged by the realities of supplier social responsibility. Whether the objective is a new product launch, the peak consumer buying season, or an extraordinary market opportunity, there are new realities occurring in global based supply chains, and as community, we need to be aware of these implications, from both operational and legal consequence.

Bob Ferrari

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  1. Global companies can impact dozens of countries in various ways–they get supplies from this country, labor in another and sell most of their products in another. But when your supply chain is so large and touches so many end to end visibility is so important. You can’t pretend like what goes on in China has no impact on the rest of your supply chain and it should be harder and harder for suppliers to skirt the rules, not easier.