apple - ba 385

APPLE INC.SUPPLIER SOCIAL RESPONSIBILITY

Phillip MillerBA 385

Final Research PaperDecember 4, 2013

CONTENTS

Executive Summary......................................................................................................................................................2

Apple Overview............................................................................................................................................................3

Issue Identification and Stance....................................................................................................................................3

Stakeholders and Stakes..............................................................................................................................................5

Recommendations.......................................................................................................................................................8

Diversify...................................................................................................................................................................8

Take the Lead...........................................................................................................................................................9

Give Back..................................................................................................................................................................9

Implementation Summary.....................................................................................................................................10

Implementation and Implications..............................................................................................................................10

Diversify – Implementation....................................................................................................................................10

Take the Lead – Implementation...........................................................................................................................11

Give Back – Implementation..................................................................................................................................11

Closing....................................................................................................................................................................... 12

Works Cited...............................................................................................................................................................14

Apple Inc. – Supplier Social Responsibility Page 1

EXECUTIVE SUMMARY

When people think of Apple Inc. they think of highly innovative and meticulously engineered consumer

products. As the creators of simple-to-use personal computers, the first smartphone, cutting-edge mobile music

players and the modern tablet, Apple has positioned itself as the world’s largest manufacturer of consumer devices

(Marketline). Apple does not own any internal manufacturing operations, but instead leverages contract

manufacturing partners primarily in low-cost geographies to build their products. In recent years, Apple has been

under a great deal of media scrutiny as reports of labor violations in Chinese factories have surfaced citing unpaid

overtime and poor conditions for working and living.

From line worker suicides at Foxconn, to toxic chemicals at Inventec used to clean LCD screens, to unpaid

and excessive overtime at Pegatron (China Labor Watch), Apple has responded by stepping up efforts in terms of

supplier audits and reporting transparency. As a technology icon and the 2nd second most profitable company in

the world (Marketline), these efforts are simply not enough. The problems with labor violations are not isolated to

Apple, but are found in several high-technology companies conducting manufacturing operations in China. The

industry is in dire need of a champion for social responsibility. Given Apples position and stature, it is our

recommendation for them to assume this role.

Within this research paper, Apple is provided recommendations to strengthen its performance

measurements and its stance on adherence to its supplier code of conduct by way of diversifying manufacturing

partners. It is also recommended that Apple strengthen the supplier industries best practices with increased

involvement with non-government agencies. Finally, it is recommended that Apple increase the investment with

the manufacturing line workers by greatly expanding its education advancement programs. Apple is capable of

implementing all three options and therefore it is recommended that they do.

Apple is known throughout the world for having best-in-class products; it’s time for the company to take a

stand and also be known as best-in-class in terms of corporate social responsibility particularly in regards to

supplier management.


APPLE OVERVIEW

Apple was incorporated in 1977 by founders Steve Jobs and Steve Wozniak. In 1976 the company

released its first personal computer, the Apple I followed by the Apple II in 1980. Apple Macintosh, the first

personal computer that was driven by a mouse rather than a keyboard, was introduced in 1984. Competition

increased rapidly by the early 1990’s with the introduction of Microsoft Windows as well as a wide variety of Intel

based computers being commonly available. Apple struggled to compete and was losing millions of dollars

through the 1990’s.

In 2001, a revolutionary service was launched with iTunes, which enabled users to download a single song

at a time from the internet. Nine months after the release of iTunes, Apple revolutionized the portable electronics

industry with the release their portable music device, the iPod, which could play music downloaded from iTunes.

Following the success of the iPod was Apple’s 2007 launch of the world’s first smartphone, the iPhone. The

success of the iPhone is largely responsible for catapulting the company back into the financial green and is still

responsible for 51.4% of the company’s revenue in fiscal year 2012 (Marketline). The iPad, a mobile tablet device,

was launched in 2010 and sold more than 300,000 units in the first day of sales.

Apple recorded staggering revenues of greater than $156 billion during fiscal year 2012 which included

net profit of nearly $42 billion. Apple is the 19th in terms of revenue on the Fortune 500 list and 2nd in terms of net

profit (Fortune). What’s the year?

ISSUE IDENTIFICATION AND STANCE

Renowned for attention to detail and designing superior quality products accompanied with a premium

price tag, Apple’s competition in the hardware industry has increased market share and financial pressure by

offering comparable products at lower prices. Apple products are built primarily by contract manufacturers in

China and supported by a massive supply chain of more than 200 suppliers employing more than 1.5 million

workers (Apple, Inc.) year?.


Beginning as early as 2006, coinciding with the iPhone 1 launch and the explosive growth of the iPod MP3

player, Apple has been under continuous media scrutiny for reports surfacing of poor labor practices in Chinese

factories. Forced and excessive overtime, exhausting working conditions, unsafe working environments, worker

compensation violations, inhumane treatment of workers, child labor and discrimination are all areas in which

Apple suppliers such as Foxconn, Pegatron and most recently Jabil, have been found in violation (China Labor

Watch). Allegations of beatings and even worker suicides have been reported on multiple occasions.

While Apple has a clear code of conduct for supplier responsibility and a published annual report, the

company does not appear to be enforcing the policies strictly enough as the issues have surfaced regularly over the

past seven years and do not appear to be improving. In the 2013 supplier responsibility progress report, Apple

cited that only 77%seventy-seven percent of the supply base is in compliance with its ethical standards (Apple,

Inc.). Given the intense competitive pressure to lower costs, will Apple take a more assertive role in governing

suppliers? How have these issues impacted Apple sales? Is this primarily an Apple issue or do Apple’s competitors

have the same challenges? Are government entities (Both domestically and internationally) involved at the right

levels? These are the issues this research paper will attempt to address.

The issue of fair and ethical labor practices is a very important subject. The social importance in Apple’s

case is magnified as society would expect compliance performance of at least 90% or greater when the actual

result is far less at only 77%. To most given Apple’s position as one of the top ten richest companies in the world,

77% is a clear violation of the social contract between business and society. As defined in the textbook, corporate

social responsibility is the obligation of decision makers to take actions which protect and improve the welfare of

society as a whole along with their own interests.

Apple, as a public company, is in the business of providing shareholder value buy sales of innovative

products and services, but that should not be at the expense of society. The primary stakeholders within the

company have economic, legal, ethical and philanthropic responsibilities. Economic responsibilities are required

by society in that the company needs to be profitable. Apple does an amazing job of this. From a legal

responsibility perspective, society requires Apple to adhere to the laws. This is an area in which Apple is, by their


its own admissions, failing. Ethical responsibility is expected and another area where Apple is failing. Philanthropy

is desired by society and certainly expected for companies of the financial stature of Apple, but yet Apple is not a

company known for philanthropy.

Apple continues to conduct and award additional business to China-based supplier, Pegatron, who has

recently been under scrutiny for violating Chinese labor regulations. Issues have been reported citing unpaid

overtime and poor conditions for working and living. Apple cites that they have performed multiple audits which

all resulted in good working conditions; however this is a common trend with suppliers connected to Apple.

Multiple reports over the years cite similar issues at Foxconn and recently at the injection plastics factory Jabil

Circuit Inc.

After repeat offenses, does Apple truly enforce its own social responsibility code of conduct within its

supply base in regards to enforcing fair treatment, safe working conditions and local labor laws? As stakeholders,

Apple has an ownership stake and Apple customers have an interest stake in ensuring that their innovative, world

class products are manufactured ethically.

Apple must take a stand not only for the well-being of its contracted work force, but also to be a catalyst

for change within the industry. The company must more strictly enforce its supplier code of conduct as well as the

repercussions for violations. The company must also work together with NGO’s and other companies within the

industry to impact regulation and fair treatment of workers.

STAKEHOLDERS AND STAKES

Apple’s impacted stakeholders concerning this issue are vast. The following stakeholder matrix has been

included as well as detail on each stakeholder:


Types of ResponsibilitiesStakeholders Prioritization Economic Legal Ethical PhilanthropicNon-Government Agencies (NGO) 1 ● ● ●Special Interest Groups 2 ● ● ●Finished Good Supplier Leadership 3 ● ● ● ●Finished Good Supplier Managers 4 ● ● ● ●Component Supplier Leadership 5 ● ● ● ●Component Supplier Managers 6 ● ● ● ●Shareholders 7 ● ●Apple Inc. Leadership 8 ● ● ● ●Investors 9 ● ●Customers 10 ●Local Communities 11 ● ●Apple Inc. Supply Chain Managers 12 ● ● ●Apple Inc. Supply Chain Employees 13 ● ● ●Third Party Supplier Auditors 14 ● ●Internal Apple Auditors 15 ● ●Government – China 16 ● ● ● ●Third Party Labor Agencies 17 ● ● ●Finished Good Supplier Employees 18 ● ● ●Component Supplier Employees 19 ● ● ●Government – USA 20 ● ● ●

Narrowing down the issue at hand to responsible labor enforcement by Apple in regards to Chinese factory partners, the stakeholders above were identified and prioritized. Here are details on each stakeholder in the list:

1. Non-Government Agencies: Ranked as priority 1 as these agencies are the primary reason that Apple is found in the headlines of the news. If not for the NGO’s, little light would be shed on this issue. The NGO’s have a moral and ethical stake as well as a philanthropic stake to ensure that the Chinese workers are treated fairly, safe and compensated for their efforts.

2. Special Interest Groups: Groups such as the Fair Labor Association (FLA) are Apple’s biggest ally in combating the NGO’s as they can be leveraged to build closer relationships with the NGO’s and can help to bridge communication. They SIG’s also have a moral, ethical and philanthropic obligation to the Chinese people.

3. Finished Good Suppler Leadership: Apple’s biggest opportunity to correct these issues is to have the leadership of their primary finished goods suppliers, such as Foxconn, on-board with the code of conduct and strictly enforcing Apple’s policies. They have a high economic stake and legal stake if Apple choses to pull its business or have them investigated.

4. Finished Good Supplier Managers: Many of the infractions cited in the reports of the NGO’s, SIG’s and auditors are infractions by managers either showing falsified paperwork, not enforcing the law or coaching employees on what to say when confronted by the auditors. They have an economic stake in ensuring that the company stays in business and a legal stake to keep them out of jail.


5. Component Supplier Leadership: This is one of the easiest areas to not follow the law and not get caught. Component suppliers are rarely the focus of the NGO’s and even internal audits as they are not nearly as big from both an employee and revenue perspective. Their biggest stake is in economic in keeping the company making money.

6. Component Supplier Managers: Highlighted for the same reason as finished good supplier managers. These managers, when audits are conducted, are typically at the center behind any infractions. Having them enforce ethical behavior is critical to also maintain business.

7. Shareholders: Apple stock has made a lot of people money over the years and it continues to do well. The shareholders have a huge responsibility in economic as they are one of the key growth enablers for the company.

8. Apple Inc. Leadership: A stakeholder with every responsibility at stake. Apple leadership needs to take a stronger stance with supplier relations—even if it impacts the bottom line and/or compromises shareholder value.

9. Investors: Large capital investment firms are lower than shareholders in priority as they are not as critical to Apple due to having such a large revenue pool. However, these investors are key enablers of Apple future growth and have economic and moral stakes.

10. Customers: Apple only makes money when customers buy the products. Most consumers seem willing to either not pay attention or just turn a blind eye to the labor issues in the headlines. There is a strong ethical responsibility to not support the company if it is not enforcing human rights and laws.

11. Local communities: This stakeholder is not called as the community in Cupertino, but rather the local Chinese communities in which these workers are recruited. They have an ethical and legal stake to ensure their rights are upheld and they are treated fairly.

12. Apple Inc. Supply Chain Managers: The managers noted here are specifically the supplier managers who select the supply base and award business to suppliers. They have an economic stake to Apple but also a legal and ethical stake to ensure they are giving business to suppliers that are in alignment with Apple’s code of conduct.

13. Apple Inc. Supply Chain Employees: Supply chain planners and buyers have insight into supplier operations at a much lower level than management and are privy to information that may not be heard at strategic levels. They have a legal and ethical responsibility to call out the issues they find out about while also having an economic stake and making a profit.

14. Third Party Supplier Auditors: These third parties, in many cases, are former employees of the company and selected intentionally because they understand the inner workings of the business. While that knowledge is not an implied known fact with Apple, these auditors are being paid to provide a service. The contracts with these auditors are that the findings are strictly Apple’s property and only Apple is able to share the information publically. Therefore, while they have a high legal and ethical stake, they are lower in priority.

15. Internal Apple Auditors: These auditors travel with the third parties, set the agendas with the factory partners and help to steer the audits. They have a legal and ethical stake to ensure the issues are highlighted at the right level of management.

16. Government – China: Listed as a low priority because frankly, this is not just an issue for Apple but an issue seen commonly with China in general. The government in China needs to take a much stronger stance on enforcing the laws and not so focused on simply bolstering the economy.

17. Third Party Labor Agencies: Factory workers in China have an extremely high turnover rate and every major Tier1 and Tier2 supplier uses agencies to recruit workers from all over the country. These agencies are in the foul practice of bonded labor and requiring workers to sign unreasonable


contracts in order to find employment. They have a legal and ethical stake in fair practices to the workers.

18. Finished Good Supplier Employees: It’s a well-known fact that the excessive overtime is desired by many of the workers. In some cases it is enforced, but in the vast majority of cases it is desired by the workers to make more money. Many of the larger Tier1 suppliers are so large that they have on-site dormitories for the workers. Many of the workers are far away from their families and only there to work for a short period of time. The goal is to maximize the money before leaving. That said, it is not that way for everyone and they have a legal stake to be treated fairly.

19. Component Supplier Employees: For the same reasons highlighted above.20. Government – USA: While this business is conducted overseas, American corporations should be held

to enforceable standards. The US government has a legal stake in ensuring that American based corporations are conducting business that meets local laws—not to mention is also ethical.

RECOMMENDATIONS

Our recommendations to address this issue are a three phased approach for Apple to consider implementing in full:

Diversify: Expand finished goods and component manufacturing footprint to multiple vendors enabling production transition flexibility and competition for improved service levels as well as increased policy adherence

Take the Lead: Increase involvement with non-governmental agencies such as the Fair Labor Association (FLA) to further awareness, expand policy development and encourage industry partnerships

Give Back: Create more professional growth and development opportunities for workers.

DIVERSIFY

Selecting the right contract manufacturing partner is critical for Apple. They need partners that have the

capability to scale as the business grows while also meeting critical performance measurements for cost, quality

and lead-time. Apple products are highly engineered making them very complex to assemble while maintaining

strict quality and consumer experience expectations. There are very few top tier contract manufacturing

companies in China with the capability to deliver at this level. Apple produces the majority of their goods at

Foxconn and an increasing share at Pegatron. In various parts of China, other top industry players such as

Flextronics, Celestica and Mitac exist all with competitive capabilities. An additional complexity with consumer

electronics is the tremendous amount of work, effort and cost required in transitioning manufacturing from one

site to another. Moving and re-qualifying expensive capital equipment, technical knowledge transfers between


engineers and factory personnel, costly factory infrastructure upgrades to facilities as well the component supply

chain setup challenges are a major barrier to pulling business out of an established partner.

By putting all of the eggs in a small number of baskets, Apple is able to leverage high production rates to

drive the costs down. In this same scenario, the vendor also has leverage in that it is very difficult for the Apple to

move out business when situations such as labor audit violations arise. Our recommendation is that Apple multi-

source production of similar intellectual property (platforms and components) with additional vendors creating an

environment that simplifies the vendor transition process. Apple will lose gross margin points but will have the

leverage of pulling business from a partner in violation of its supplier code of conduct. This will also require

additional hires on the Apple side to manage, but it is viewed as far more important to lead the industry with the

highest standards of social responsibility as they will still be in a position to still deliver high value to stakeholders.

TAKE THE LEAD

An expanded production profile will enable Apple to transition business as needed to partners that meet

expected standards and share the same values as Apple. Our next recommendation is that Apple takes a stand as

the industry leader in Chinese labor social responsibility by furthering the partnership with non-governmental

agencies such as the Fair Labor Association. NGO’s can help to evolve Apple policies and their supplier code of

conduct to ensure it meets the highest standards of the industry. Apple can also leverage the NGO relationships to

harbor partnerships with similar companies to collaborate on policies and acceptable practices such as blacklisting

suppliers in violation. Given that this is an industry-wide problem in China, building partnerships with competitors

in this area is an important statement to drive change within the supply base.

GIVE BACK

The large tier one suppliers in China bring in workers from all over the country and house them in

dormitories. The suppliers provide meals, room and board, and in some cases medical services as part of the labor

contract. As a large percentage of workers are away from their homes and families, our recommendation is for

Apple to be a leader in professional development opportunities. Apple has the SEED program (Supplier Employee


Education and Development) which boasts that more than 200,000 workers have participated in since 2008.

However, given that Apple has millions of workers currently on the payroll; there is ample opportunity to greatly

expand this program and to invest in the workers future. In an industry consistently plagued with labor shortages

of skilled workers, this will give Apple a competitive advantage which will attract more talent.

RECOMMENDATION SUMMARY

By implementing this three phased approach, Apple will essentially increase value for every stakeholder

within the scope of the responsibility and prioritization matrix. When you consider Apple’s annual revenue of $156

billion at a gross margin of 43.9% (Marketline), there is plenty of opportunity available to change the entire

landscape of socially responsible manufacturing in China.

IMPLEMENTATION AND IMPLICATIONS

Implementation for implications for the recommended way forward for Apple for each of the three areas

is as noted in the following sections.

DIVERSIFY – IMPLEMENTATION

Of our three phased approach, diversifying suppliers is of the highest risk to Apple from both a product

quality and on time delivery perspective. It will be more resource intensive but in the end will give leverage to

influence suppliers from both a cost and corporate social responsibility perspective due to the competition and

threat of losing business. Additional engineering resources will be necessary to oversee tooling and process, but at

the same time this can be offset by including detailed mandatory resource requirements as part of the request for

quote and business award process. The average engineer in China with the necessary skillset for this effort is

~$60,000 USD per year. It will take a team of roughly four engineers to be successful. Manufacturing engineering

to handle tooling, test engineering for manufacturing process and functional test, electrical engineering for circuit

board and silicon technology and finally an engineering program manager to pull together all of the details.


The typical transition or factory ramp depends on tooling lead-time. If tools are transferred from one site

to another, the work can be done in as little as six months. If new tools are needed, the time will vary significantly.

Additionally, a supply chain team of three will be needed for sourcing decisions and to manage the bill of materials

as well as the approved vendor list. Professionals with this skillset are typically paid ~$40,000 USD per year in

China and can also be supplemented by requirements during the business award process. The time required to

transition the supply chain is quite fast as long as there is strong coordination with the suppliers and required

logistics details.

Along with professional resources, charges will also be assessed for non-recurring engineering fees (NRE)

assessed during the initial ramp of production. Multiple stages of engineering builds will be required to ensure

quality and process before moving to mass production (MP). For an item with the volume and complexity of an

iPad or iPhone, NRE could easily be as high as $5 to $10 million USD. However the leverage gained for cost-downs

from the finished good and component suppliers should offset both the indirect labor and NRE charges over time

as well as enabling Apple to take a firmer stance on corporate social responsibility initiatives.

TAKE THE LEAD – IMPLEMENTATION

Costs and timeline for implementation in the NGO space will mostly be subject to event costs and shared

program costs with partners. In terms of resources, a program manager reporting into the corporate ethics team

will suffice and likely cost Apple ~$120,000 USD per year to cover the salary. It is our recommendation to create an

aggressive timeline with short, mid and long term goals. It will be important to gain a quick “win” within the first

90 days as well as establishing and publishing the longer term vision. Simply hosting a summit with the FLA to

establish a charter and then to announce the partnership will suffice for the initial benefit.

Mid and long term goals will be subject to other industry partners and scope definition.

GIVE BACK – IMPLEMENTATION

One of Apple’s competitive advantages for this final recommendation phase is that they produce the

personal computers which are the primary capital required to meet this objective. Apple should find the existing


programs that are working successfully and simply expand the scope by widening program entrance criteria, scope

of education offered and available working capital by adding computers. Secondly, they should drag and drop

those programs into factory partners where they do not currently exist. Given an aggressive action plan, this could

be managed by an adding an additional program manager to the team at ~$120,000 USD per year and could be

implemented within 120 days in a phased approach.

CLOSING

The emphasis of this paper is that unlike many other companies, Apple is actually in a position to address

this Chinese labor issue. In fact, Apple would almost surely win additional customers for taking such a stand. The

products that Apple sells are at a premium price and the world has shown that they are continually willing to pay,

but the competition is gaining ground every day. Examining the pyramid of social responsibility below, Apple has

the foundation nailed!

The company is making a tremendous profit each year and exceeding analysts’ expectations. Although

their observed tax practices of using subsidiaries in low-tax countries have been called into question, they are

above the board from a legal perspective. From a compliance perspective, they are not in violation of Chinese laws

directly, but they are only meeting the bare minimum when it will take them as a catalyst to raise the industry best


Philanthropic

Ethical

Legal

Economic

practices. If they do this, the regulations will surely follow in due time. The recommendations in this paper help to

go a long ways addressing ethical concerns and also philanthropic.

Apple has the money, the power and the capability. It’s (stay away from contractions in this type of

writing) a matter of doing the right thing for man-kind instead of business for a change. Other companies, such as

Nike, have done it and are reaping the benefits. It’s time for a leader in the tech industry to step up and make a

difference.

Phillip Miller

Title: Apple, Inc.

Grade: A

Feedback:

This was a very well written, well-cited, and thoughtful treatment of the labor issue at Apple’s affiliates.

You identify relevant and specific economic, social, and environmental stakeholders and their stakeholders and their stakes. In addition, your stakes are authentic and clear. Also, your stakeholder selection demonstrates an ability to survey a broad scope of relevant stakeholders as you effectively defend solutions in light of stakeholder interests. This is an EXCELLENT use of the stakeholder analysis tool.

In addition, you have recognized the interdependencies between Apple and those economic, social, and environmental stakeholders operating in a mutually influencing system. Furthermore, your analysis recognizes crucial direct and indirect effects of business decisions, including intangible effects of business decisions, including intangible effects.

Your analysis considers environmental, social, and other external impacts in the evaluation process. You also evaluated the effects of following your analysis across a broad spectrum (i.e. from shareholders to environment).

You comprehensively analyzed potential short and long-term results of putting quantity based incentive program in place and revising Foxconn’s incentive based program. All the while, I got a sense of the possible intended and unintended consequences and their implications from multiple stakeholders’ points of view. Finally, you seem to recognize the subjective and dynamic nature of the analysis.

Excellent Work.


WORKS CITED

Apple, Inc. "Apple Supplier Responsibility." 2013. 2013 Progress Report. <https://www.apple.com/supplierresponsibility/pdf/Apple_SR_2013_Progress_Report.pdf>.

—. Social Responsibility at Apple. 2013. <https://www.apple.com/supplierresponsibility/>.

China Labor Watch. Apple's Unkept Promises: Investigation of Three Pegatron Group Factories Supplying to Apple. 29 July 2013. <http://www.chinalaborwatch.org/pro/proshow-181.html>.

Fortune. Global 500. 2013. <http://money.cnn.com/magazines/fortune/global500/2013/full_list/>.

Global Data. "Apple Inc. - Financial and Strategic Analysis Review." 27 March 2013. Business Insights: Essentials. <http://callisto.ggsrv.com/imgsrv/FastFetch/UBER1/300559_GDTC27353FSA>.

Marketline. Apple Inc. 29 May 2013. <http://stats.lib.pdx.edu.proxy.lib.pdx.edu/proxy.php?url=http://search.ebscohost.com.proxy.lib.pdx.edu/login.aspx?direct=true&db=dmhco&AN=5B0A0C20-9BB6-4284-A575-AC0F2261F45C&site=ehost-live>.


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