What Apple's Supply Chain Woes Mean for the IT Industry
Ideas like corporate social responsibility (CSR) and the "triple bottom line" (people, planet, profit) have been around a long time. As they move from the fringes to the mainstream, most companies have learned at least to talk the talk.
But in an era of globalization, where some corporations have hundreds or thousands of factories scattered across the globe, how possible is it to manage a supply chain that complies with labour and environmental standards -- in other words, to walk the walk?
That question is beginning to haunt the information technology industry as local NGOs use open government information laws to document environmental and labour abuses in the supply chain in China -- culminating most recently with the publication of report about U.S. consumer-electronics giant Apple, The Other Side of Apple II -- Pollution Spreads through Apple's Supply Chain.
Perhaps the prime example from the past of a company shamed into CSR submission is U.S.-based sportswear company Nike. In the 1990s, the popular supplier became infamous for its exploitative manufacturing practices, including the use of sweatshops and child labor. Local watchdog groups, mostly in Asia, played a key role in taking the message to the media, spurring boycotts by groups like United Students Against Sweatshops.
That furor has faded from the headlines, thanks in part to the company's efforts to get its supply chain under control, including disclosing the names and locations of its factories. Perhaps it's also thanks to a short public attention span: Nike still struggles to ensure that its factories live up to its code of conduct and sometimes it falls short -- but that no longer seems to hurt its increasing sales and record-high profits.
But either way, CSR experts say the apparel industry is now ahead of the IT industry in effective supply chain management; and environmental activists in China -- who are beginning to find their voices as a lobby -- hope to focus on the push for accountability in the IT sector.
Many developing countries host IT production, but China is a global center. "It is shocking," said Ma Jun, director of Institute of Public and Environmental Affairs (IPE), the Beijing-based nonprofit organization at the center of the Apple story, referring to the wastewater, hazardous waste and solid waste he has witnessed at IT plants.
Some of the damage will take decades and vast resources to repair, he said. Information technology is not the virtual industry that people often envision, Ma said. "It's an actual industry with huge amounts of discharged pollution, including toxics and heavy metals."
Supply Chains and CSR
Recognizing the potential risks to their reputations, most global IT corporations have now joined the Electronic Industry Citizenship Coalition (EICC), an industry group that works to help global electronics supply chains improve working and environmental conditions.
"We have a code of conduct that our members need to adopt," said Wendy Dittmer, director of communications for the group. That code reads like everything people would want to hear about their electronics manufacturers: It addresses labour, health and safety and the environment in addition to business ethics and ensuring code compliance.
But actually ensuring CSR compliance in an era of global trade is complicated. "Where you have a great distance between your headquarters and your manufacturing, there are problems," said Andrew Hutson, project manager for corporate partnerships with Environmental Defense Fund, a U.S.-based nonprofit.
"A lot of managers will candidly tell you, 'Yeah, we're operating in an environment we don't understand, and we're trusting people that we don't necessarily know that we can trust. But that's part of the reality of global business,'" said Hutson, who doesn't work directly with IT companies.
Problems arise in part because multi-tiered supply chains are hard to manage. Many companies try to get a better bead on their partners by maintaining a local office in countries where their suppliers operate, but that doesn't necessarily translate into eyes on the scene, said Hutson. "If you've got an office in Shenzhen or Hong Kong, it's very hard to keep tabs on the perhaps thousands of factories you have across China in any given moment," he said. And indeed, scrutiny can sometimes lead contractors to move factories to more remote areas, farther away from watchdogs.
Companies usually work most closely with their assembly factories, said Huston, and problems are more likely to arise in the primary or secondary processing of materials. "A lot of electronics components are purely commodities: circuit boards, resistors, chips, transistors, wires," said Huston. "They can be sourced from anywhere, a couple of tiers down in the supply chain, and it's virtually impossible for a company to know where they're coming from."
That might be part of the outsourcing attraction for companies: the sheer distance from headquarters created by chasing low-cost labor to developing countries can effectively reduce accountability. Developing countries usually have less stringent laws regulating pollution and labour and less enforcement. Significantly, most codes of conduct specify that operations comply with local laws.
The EICC's code says: "A business, in all of its activities, must operate in full compliance with the laws, rules and regulations of the countries in which it operates." While it does go on to say that "the Code encourages Participants to go beyond legal compliance, drawing upon internationally recognized standards, in order to advance social and environmental responsibility," it is common for companies to take refuge from complaints by claiming adherence to local laws.
In China, enforcement of existing laws is frequently lacking, a reality that inspires the work of IPE, who use government information and enforcement data to track pollution across China, and have brought together 37 local NGOs to form the Green Choice Alliance, which advocates for reduced consumption of energy, water, and natural resources; increased use of renewable energy; decreased waste and pollution; and improved treatment of waste byproducts.
"We are not trying to destroy any business," said Ma. "We appreciate their contribution to our society. But we just can't accept them making their profits at the expense of others' interests."
One of IPE's biggest challenges is trying to ascertain which global companies work with which local firms, because many have signed confidentiality agreements. This reflects the norm in the apparel industry a decade ago, prior to expanded transparency measures.
IPE uses information in the technology press to match global companies with their suppliers, and relies upon their willingness to respond. Since contacting 29 global IT companies ahead of its first published report in April 2010, IPE has had dialogue with most of them. Some responded right away; others required more nudging. Initially slow to respond, Siemens has since used IPE's database to track its more than 10,000 suppliers in China.
"[Siemens] developed software to automatically compare their list of suppliers with our list of polluters and violators," said Ma. When Siemens identified problems, it required violators to take corrective action and to make public disclosure about what went wrong and how they tried to fix problems. Vodafone, BT, Hewlett-Packard, Samsung, Sony, Panasonic and Lenovo have also been fairly proactive, Ma said. Non-IT brands including GE, Nike, Wal-Mart, Coca-Cola and Unilever have also been using the database, said Ma.
U.S. retail chain Walmart -- another company that, like Nike, seems to have achieved a significant turnaround in its reputation -- has been an assiduous user of the database, said Ma. "Every month, Walmart is comparing their list and our list," he said. When it identifies problem suppliers, it gives them a certain time frame to deal with the problem. If they fail to do so, Walmart pushes them to go through a third-party audit under the supervision of NGOs. That process identifies problems and requires corrective actions.
Apple's "Other Side"
However, Apple seemingly did not take its lessons from such experiences, refusing to cooperate with IPE and leading the NGO and its coalition to rank the transparency of the 29 IT companies. Apple placed dead last.
Through a spokesperson, Apple contended that it did respond to these concerns via its Apple Supplier Responsibility 2011 Progress Report, published in February. The report gave special attention to employees' suicides at factories of manufacturer Foxconn (at least 17 workers have committed suicide at its plants since 2010) and a 2009 incident in which workers were poisoned by n-hexane, a solvent. It listed other violations in the back in an appendix. "This report is the first admission that these were, in fact, their suppliers," said Ma.
So Apple may be starting to take IPE's data into account, but many activists are still unimpressed. "If [Apple] are just going to publish a one-sided report, is that really going to address the situation if we cannot independently verify it?" asked Xiu Min Li, former director of the China programme at Pacific Environment, a U.S. nonprofit that collaborates with IPE. "Apple's attitude and strategy is, 'We're going to do things our way. We're not going to answer any questions, but we're the best at what we do. Just take our word for it.'"
The critical issue here is independent, third-party auditing, which green groups recommend in part to rule out conflicts of interest in the results. But businesses still often argue that they are best equipped to understand the particulars of their own operations.
Moreover, the IT industry rarely audits all the way down to the base of its supply chain, with most efforts still focused on the assembly plants. "Apple audits all final assembly manufacturers every year," said the company's report. "We select other suppliers based on risk factors -- such as conditions in the country where a facility is located and the facility's past audit performance."
At least in the short term, Apple doesn't appear to have suffered much from the increased scrutiny. In July it announced a record quarterly net profit of US$7.31 billion for its fiscal 2011 third quarter, largely thanks to its popular iPad, which has been flying off the shelves. The immediate numbers seem to indicate that consumers either don't know about supply chain issues or are willing to ignore them because of their desire to own an iPad.
That might suggest that Apple has the leeway to pay more and help ensure CSR compliance. But that's not how it plays out in the supply chain, said Ma. Chinese factory managers don't invest in pollution controls because they fear losing Apple's business to competitors. "They care only about the price," he said. "It's quite ironic that [Apple] makes US$7 billion in three months while some of their polluting suppliers are actually operating in the red, despite manufacturing millions of products."
That helps to explain the focus on Apple. "Apple, as a rule-setter of the game, has to change first and leverage its buying power to help with China's pollution control," said Ma.
This article originally appeared on ChinaDialogue, and is reprinted with permission.
Photo CC-licensed by Gualterio Pulvirenti.