Q&A: Apple-Foxconn raises bar on U.S. firms in China - auditor

SAN FRANCISCO Fri Mar 30, 2012 2:04am IST

Apple Chief Executive Officer Tim Cook (2nd L) talks to employees as he visits the iPhone production line at the newly built Foxconn Zhengzhou Technology Park, Henan province in this March 28, 2012 handout photo. REUTERS/Apple/Handout

Apple Chief Executive Officer Tim Cook (2nd L) talks to employees as he visits the iPhone production line at the newly built Foxconn Zhengzhou Technology Park, Henan province in this March 28, 2012 handout photo.

Credit: Reuters/Apple/Handout

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SAN FRANCISCO (Reuters) - A month-long investigation by the Fair Labor Association covering three Chinese factories run by Apple Inc's main contract manufacturer, Foxconn, revealed a host of issues from excessive overtime to problems with overtime compensation.

The D.C-based non-profit group has been conducting its probe at Foxconn facilities in Guanlan, Longhua, and Chengdu in China since February after Apple joined the group this year. The world's most valuable technology company hopes it will counter criticism it does not care about worker issues in its manufacturing chain.

Foxconn agreed to reduce working hours while protecting pay and benefits as remedial measures.

Reuters spoke with FLA President Auret van Heerden after its report was released. Here are edited excerpts from the interview:

Q: How did this package come together?

A: We had a closing meeting where we had the owner of Foxconn, CEO of Foxconn, the (senior vice president of operations) of Apple. We had a very big delegation of top managers from all sides. And they were very, very open to these recommendations.

Terry Gou, CEO of Foxconn, came up with a number of suggestions himself and he has really decided to get ahead of this game, in a way. He decided to not just look at incremental changes. He is really pushing the envelope. His decision to go to full compliance ... sets a very high bar for the rest of the industry.

Q: What are the next steps?

A: Apple has asked us to look at eight or nine of the final assembly suppliers - the key ones. That will last the rest of the year. Apple is an affiliate of the FLA. They also have a regular due diligence cycle, which they have to go with. We are not just looking at the final assembly but taking more of a risk-based approach and trying to identify three or four different levels of the supply chain where the greatest risks lie, and starting to analyze those.

Q: Any companies you are going to be looking at apart from Foxconn?

A: We're still planning that, so I can't give you any exact names right now.

Q: Would reducing overtime hours impact volume?

A: I don't think so. They can't afford any kind of interruptions in supplies. So that's one of the reasons why this plan needs to be implemented over a one-year lead time. They need to obviously hire a lot more workers to make up for the reduced hours.

They need to build dormitory facilities for those workers, make sure they're trained so that there is no wobble in the output.

Foxconn doesn't only supply Apple. It supplies 50 percent of, I guess, the consumer electronics (industry). So there are a lot of people who have a lot riding on this.

Q: How far-reaching is this action? Would it have an impact on the electronic supply chain?

A: Apple and Foxconn are obviously the two biggest players in this sector and since they're teaming up to drive this change, I really do think they set the bar for the rest of the sector.

And if you look at the labor market situation, there's a very tight labor market in China right now. There's a shortage of workers.

Foxconn is proposing this better deal ... This will start to attract more workers, and the best workers. So I think their competitors will be obliged to offer a similar package just in order to get enough workers.

Q: Was it your recommendation on overtime hours that Foxconn has agreed to implement?

A: It was their recommendation, they really bought into this. This is really coming from them. They decided to do this and they're driving this in. They know they have to do this on all their lines because otherwise workers on the other lines are going to protest that they want the same deal.

Q: Was it stressful to do these audits? Can you give some color?

A: It was certainly the biggest exercise that we or anyone has ever undertaken. This is by far the biggest factory assessment that has been done to date. And just the logistics of interviewing 35,000 workers over a three-week period was quite challenging.

I would say that what we found is pretty much in line with what we find elsewhere in China, so there weren't any surprises in that sense. The hours of work situation is what you really expect to find, and in a way what was quite interesting is what we didn't find.

We didn't find any child labor and we didn't find any wage violations. We didn't find any forced labor. But again I would say that tracks pretty much with the Chinese labor market situation.

And then I think for us really the most eye-opening part of it was this agreement to cut hours to Chinese legal limits. Not just to go to Apple code standards but to go beyond that. That was the biggest surprise for us.

Q: Is this a watershed moment in the Chinese labor market and would this have an impact on the wage situation in China?

A: Certainly the Chinese government has made it quite clear that they want wages to continue to increase in double-digit figures for the next five years, and they've signaled that clearly. They've even made some projections of it so we will continue to see wage increases.

And I think this additional free time workers have will mean they can consume more. And that again goes to one of the Chinese government's economic objectives - to boost domestic consumption. In that sense, Foxconn would be setting something of an example. That's very much what the Chinese government wants to see.

Q: Will this agreement lead to any problem in supply?

A: No. I'm sure that in making this commitment they've already done their homework and they know exactly how they're going to maintain supply at the same time.

Q: How do you plan to keep track of whether Foxconn is implementing these changes?

A: We will conduct onsite verification visits. We have detailed action plans with the actual deliverables, the names of the people who are responsible and the deadlines. We will continue to update those and we will report out publicly. This is something we will follow closely.

Q: Will this come to fruition in one year or will we see changes soon?

A: Some of the action items were immediate and they were dealt with on the spot, and others have one-month, three-month, six-month timelines. We have a list of items, we're checking them off as we go along, and the big one - of course the hours of work one - is due to be completed by July 2013.

Q: The survey reveals that many workers want to work more. That seems counter to what Apple and Foxconn are striving for.

A: It's an interesting finding. We find that in a lot of developing countries, workers have ambition, they have aspirations. Particularly migrant workers go to find work with a view to make as much money as they can in the shortest time possible. So they do push for extra hours, especially overtime hours that are paid at a premium.

There's something of a tension there between our code standards and our legal standards, which call for shorter hours and the objectives of these migrant workers. This will call for very, very careful consultation with workers to make sure that they don't resist this plan.

Q: Is Apple footing the bill for this?

A: I'm not party to those discussions as to how they are going to absorb the costs.

(Reporting by Poornima Gupta; Additional reporting by Malathi Nayak; Editing by Gary Hill)

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