* Violations discovered that Apple and Foxconn addressing
* To reduce work hours but keep pay steady
* If commitments kept, sets new bar for Western firms in China
* Move follows years of criticism of worker abuse
By Poornima Gupta and Edwin Chan
SAN FRANCISCO, March 29 (Reuters) - Apple Inc and its China manufacturing partner, Foxconn, agreed to improve wages and working conditions at factories accused of being sweatshops, a move that could set a new higher-cost benchmark for other Western users of Chinese labor.
Under Thursday's landmark agreement, Foxconn, which makes Apple devices from the iPhone to the iPad, will hire tens of thousands of new workers, eliminate illegal overtime, improve safety protocols and upgrade worker housing and other amenities.
It is a response to one of the largest investigations ever conducted of a U.S. company's operations abroad. Apple had agreed to the probe by the independent Fair Labor Association (FLA) in response to a crescendo of criticism that its products were built on the backs of mistreated Chinese workers.
The association, in disclosing its findings from a survey of three Foxconn plants and over 35,000 workers, said it had unearthed multiple violations of labor law, including extreme hours and unpaid overtime.
Apple, the world's most valuable corporation, and Foxconn, China's biggest private-sector employer and Apple's main contract manufacturer, are so dominant in the global technology industry that their newly forged accord will likely have a substantial ripple effect across the sector.
The agreement is a sign of the increasing power of Chinese workers to command higher wages given climbing prices in China in recent years for everything from food to housing and medical care, and an aging workforce that has led to labor shortages.
Working conditions at many Chinese manufacturers that supply Western companies are considerably inferior to those at Foxconn, experts say.
"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," FLA President Auret van Heerden told Reuters in an interview.
The Apple-Foxconn agreement may also raise costs for other manufacturers who contract with the Taiwanese company, including Dell Inc, Hewlett-Packard, Amazon.com Inc , Motorola Mobility Holdings, Nokia Oyj and Sony Corp.
It could also mean more work for cheaper contract manufacturers.
"If Foxconn tries to increase prices, Amazon could go to other major contract manufacturers like Quanta, Wistron, Pegatron or Inventec to see what they could do for the company," said Mark Gerber, director of technology research at brokerage Detwiler Fenton.
The agreement could result in higher prices for consumers, though the impact will be limited because labor costs are only a small fraction of the total cost for most high-tech devices.
"If Foxconn's labor cost goes up ... that will be an industry-wide phenomenon and then we have to decide how much do we pass on to our customers versus how much cost do we absorb," HP Chief Executive Meg Whitman told Reuters in February.
Foxconn said it would reduce working hours to 49 per week, including overtime, while keeping total compensation for workers at its current level. The FLA audit had found that during peak production times, workers in the three factories put in more than 60 hours per week on average.
To compensate for the reduced hours, Foxconn will hire tens of thousands of additional workers. It also said it would build more housing and canteens to accommodate that influx.
Apple CEO Tim Cook, who company critics hoped would usher in a more open, transparent era at Apple after he took over from the late co-founder Steve Jobs last year, has shown a willingness to tackle the global criticism head-on.
"We appreciate the work the FLA has done to assess conditions at Foxconn and we fully support their recommendations," an Apple spokesman said.
"We share the FLA's goal of improving lives and raising the bar for manufacturing companies everywhere."
But New York-based labour advocacy group China Labor Watch said the report failed to address the workers' primary concerns.
"Until Apple shares a larger proportion of its profits with its supplier factories, workers will receive the same pittance for a salary while working around the clock," Li Qiang, the director of China Labor Watch, said in an emailed statement.
"For the factories, the demand for astronomically high production rates at an extremely low price pushes them to exploit workers, since it is the only way to meet Apple's production requirements and make their owners a profit at the same time."
The much-anticipated report marks the first phase of a probe into Apple's contract manufacturers across the world's most populous nation.
With 1.2 million workers, Foxconn - an affiliate of Taiwan's Hon Hai Precision Industry - is by far Apple's largest and most influential partner.
Foreign firms have long grappled with working conditions in China, dubbed the world's factory because of its low wages and efficient coastal transport and shipping infrastructure.
That manufacturing prowess presents an attractive business proposition, but consumer concerns over allegedly brutal working conditions in China have caused headaches for foreign brands.
Global protests against Apple swelled after reports spread in 2010 of a string or suicides at Foxconn's plants in southern China, blamed on inhumane working conditions and the alienation that migrant laborers, often from impoverished provinces, face in a bustling metropolis like Shenzhen, where two of the three factories the FLA inspected are located.
In months past, protesters have shown up at Apple events - the rollout of the new iPad, the iPhone 4GS and its annual shareholders' meeting - holding up placards urging the $500 billion corporation to make "ethical" devices.
Some have also criticized the FLA for its close alignment with corporations.
The actor Mike Daisey also did much to raise awareness of the issue through his one man show, "The Agony and the Ecstasy of Steve Jobs," though his credibility was damaged when it emerged that parts of his monologue were fabricated.
In recent months, Apple's CEO has announced the results of an internal audit into more than 100 of Apple's suppliers; met Wall Street demands for a dividend and stock buyback program; and addressed labor abuse protests directly.
Cook reportedly told Chinese Vice Premier Li Keqiang in a visit to China this week he was working to resolve labor issues there. Apple joined the FLA in January and asked the group to conduct a full-scale audit of its Chinese manufacturing.
The FLA in its report sought measures that will reduce working hours while ensuring that migrant laborers - often willing to pile up the overtime to make ends meet back home - do not forego much-needed income.
Foxconn committed to building new housing to ease situations where multiple workers were squeezed into dorm rooms that seemed inhumane by Western standards. It also agreed to improve accident reporting and help workers enroll for social welfare.
But it is unclear if there will be independent monitoring of Apple and Foxconn's progress in adhering to its commitments.
The Apple agreement is not the first time a U.S. consumer brand has agreed to address broadly the issue of working conditions at overseas factories.
Nike Inc was rocked by reports in the 1990s that its contractors in China and elsewhere forced employees to work in slave-like conditions for a pittance.
The sportswear brand eventually implemented wide-ranging reforms that vastly improved safety and working conditions, but the issue continues to crop up: last year, Nike paid 4,400 workers $1 million to settle claims of non-payment of overtime.
Yet even Nike stopped short of Apple's and Foxconn's hiring and income-boosting spree. Last month, Foxconn said it was raising salaries by 16 to 25 percent, and was advertising a basic monthly wage, not including overtime, of 1,800 yuan ($290) in the southern city of Shenzhen, Guangdong province - where the monthly minimum wage is 1,500 yuan.
Besides the two factories in Shenzhen, the other factory covered by the FLA report is in Chengdu, in central China.
Future forays by the FLA over coming months will encompass Apple contractors Quanta Computer Inc, Pegatron Corp , Wintek Corp and other suppliers, all notoriously tight-lipped about their operations.
If Chinese manufacturers and their U.S. clients follow Apple's lead, severely strained margins might further narrow, experts say.
Labor costs are a relatively low percentage of total costs for electronics products, but account for a far higher percentage further down the value chain. Fast-food chains like McDonald's, or apparel makers like Nike or the Gap , are even more dependent on low-cost labor.
Many companies have already relocated some manufacturing either to inland China, where wages are lower, or to countries like Vietnam.