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Another Tragic Reminder to the Implications of Supply Chain Social Responsibility

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We just published Prediction Six of the Supply Chain Matters 2014 Predictions for Global Supply Chains which declared that supply chain social responsibility strategies would continue to become far more visible and have business and shareholder implications in the coming year. No sooner had we unveiled this prediction to our followers, yet another example of such implications has come to light.

Today’s Markeplace Section of the printed Wall Street Journal features a report headline: iPhone-Factory Deaths Dog Apple and Supplier Pegatron. (paid subscription or free metered view) The article describes how recent deaths of a 15 year old underage worker and the death of three other workers have occurred at the Pegatron iPhone production and assembly complex in Shanghai that employs upwards of 100,000 workers. It re-iterates the ongoing challenges that Apple and its suppliers continue to experience in managing the existence of underage workers in factories.  Visibility to these practices are far more prevalent as labor watch groups continue to advocate for the safety of global workers.

In October, an underage worker, apparently utilizing a falsified identification card, became severely ill and subsequently died. Three other workers were confirmed by Pegatron as having died from recent illness. Family members of the 15 year old were quoted as indicating that the teenager worked 12 hour shifts. Apple has since dispatched medical experts from the U.S. and China to the Pegatron facility to conduct a further investigation. The reports apparently come from labor rights groups who communicate with workers.

Pegatron responded to WSJ reporters indicating it conducts strict measures to verify job applicant ages.   The contract manufacturer also indicated that the 15 year old’s illness was not related to workplace conditions and that the company was not at fault. By our lens, that was not exactly the correct response.  Words indicating regret and measures being taken to investigate and correct hiring standards and working conditions would have been far better. The WSJ further reported that Pegatron offered approximately $15,000 in compensation to the child’s family but that was turned down.

As a contrast to the above, a blog posting on the WSJ Digits blog, Apple Supplier Pegatron Seeks to Improve Labor Conditions,  provides the more positive spin.  While it confirms the deaths of the four workers it points out that both Pegatron and Apple investigations indicated that the deaths were not linked to working conditions. The posting quotes Pegatron’s CFO as indicating that four new dormitories had been built to ease crowding with the numbers of workers in dorm rooms dropping from 10-12 to 8-10. The rapid ramp-up of iPhone production had apparently necessitated the need to house workers in offsite living facilities. The posting further points out that Apple has been advertising job openings for “supplier responsibility” managers in recent months because of the recent changes in the base of suppliers.

Today, we exist in a 7 by 24 news cycle where social media either amplifies or counters headlines.  Notice first the WSJ printed edition headline that links the key words of “iPhone”, “factory deaths” associated to the names, Apple and Pegatron, terms that will hence be incorporated in search engines for future reference in buying or sourcing decisions.  The subsequent blog posting provides the more positive spin without reference to the published edition article.  One would suspect that public relations teams were hard at work with storylines and interview further opportunities. We’ll let our readers make their own determinations as to what really occurred.

Yes, certain large OEM customers will continue to be extremely demanding on production timetables and ramp-up requirements. That seems to be the advantage of sourcing high volume manufacturing in a country with lower wages and suppliers not tethered to stricter labor laws.  However, OEM’s need to be aware of the implications of their supplier sourcing and product management decisions, and suppliers need to be more transparent as to the implications. These efforts include assisting suppliers in making the monetary investments in worker and supervisory training, employment screening, and factory safety. Management investments come in the form of social responsibility practices and sensitivity to worker needs.

The essence of the intent of our 2014 prediction regarding social responsibility is that continued incidents of this kind will have stronger implications for both the supplier and the brand owner.

Social responsibility cannot be just a written statement but rather the way business is conducted. The deaths of any worker, are tragic and unacceptable. There is joint accountability for corrective action and for continuing to strive for exceeding acceptable standards of labor, factory and housing safety standards.

Bob Ferrari

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  1. Stephen C. says:

    It is estimated that an average Foxconn or Pegatron factory worker makes approximately $2.50 per hour, or at 160 working hours per month, approximately 400 dollars per month. In contrast, Samsung pays its manufacturing labor churning out Galaxy handsets approximately 12 dollars per hour, or 1920 per month. Assuming that output per worker is approximately equal between the Korean and Chinese factories, it thus follows that Korean overhead per handset is approximately 5 times higher than that enjoyed by Apple. Given Samsung’s market positioning, and because the cost is minimally passed on via higher product prices, it thus follows that much of the advantage Apple derives is pure profit. Indeed, approximately 10-15% of Samsung’s total payroll is attributed to manufacturing, which accounts for a much larger proportion than that of its main rival.

    Bearing in mind that Apple continues to reap its significant labor cost advantage over its Korean counterpart, implications for social responsibility along the supply chain will persist, as the costs and potential risks of managing workplace standards, worker safety, in in-sourced manufacturing versus outsourced manufacturing will continue to be issues when OEMs are making their strategic sourcing decisions.