Is there such a thing as too much profit? A disciple of Milton Friedman would say "never." The idea that companies should only maximize shareholder value has had a stranglehold on the business world for decades. It's time to rethink this assumption.
A couple of weeks ago, Apple reported breathtaking earnings. In the fourth calendar quarter of 2011, Christmas shoppers snapped up 15 million iPads and 37 million iPhone 4Ss. The world's most innovative company brought in $46 billion in revenues, $13 billion in profit, and an eye-popping $17.5 billion in cash flow. Apple is the only company competing with, and now beating, Exxon for the title of "most profitable company ever."
Right when Apple's earnings came out, the New York Times also hit us with two powerful articles about Apple's supply chain that revealed some deeply troubling issues for the company's business model. The first, "How the U.S. Lost Out on iPhone Work," painted a dim picture of U.S. competitiveness by demonstrating what Chinese suppliers are willing to do to get Apple's business. But the second article, "In China, Human Costs are Built Into an iPad," shows us the enormous human cost of getting work for cheap. It's a horrifying picture of life at the now infamous Foxconn facilities.
Combine Apple's incredible earnings with the reality of life in its supply chain, and it's clear that the tech giant could afford to do much better by workers. It's not sustainable for any company to continue relying on people with such limited rights and life prospects.
But is it fair to pick on Apple? Yes, to some degree, since other companies with deep connections to China have done better on working conditions (a Times source name checks HP, Intel, and Nike for example). In the spirit of being balanced, a few points: (1) even with a few good actors, worker treatment is a systemic challenge common to electronics, apparel, and any other sector with complex, worldwide supply chains; (2) Apple has put some effort into improving supplier conditionsand CEO Tim Cook replied last week to the concerns; (3) Consumers also take on some responsibility-we should be demanding more transparency and information about how our products are made (I'm targeting myself here as well since I'm typing this on a MacBook Pro).
But Apple too should be doing far more.
We'll only fix the problem if the largest, most profitable, and most powerful brands demand better treatment for all people who work on a product. The most damning quotes in the Timespiece come from former Apple execs: "Noncompliance is tolerated... If we meant business, core violations would disappear" and "Suppliers would change everything tomorrow if Apple told them they didn't have another choice."
So am I suggesting companies pursue unprofitable paths? Hardly. These labor challenges are complicated, but any argument that it would be too expensive to pay people better and give them much better working conditions is absurd.
Some reasonable estimates from The Atlantic place the cost of materials (of a mid-level 32GB $600 iPad) at about $325. Labor is a whopping $10. If we assume, very conservatively, that iPhone assembly costs the same, then in the fourth quarter, Apple spent about $500 million assembling iPhones and iPads.
Let's imagine that Apple tripled expense on assembly to ensure better pay and worker treatment. The total additional cost: $1 billion. The cost of an iPad or iPhone would go up $20 or -- and here's a radical thought -- Apple would make a little bit less money. I'm not remotely saying Apple shouldn't be profitable.
But would anybody in their right mind be disappointed with $16.5 billion in quarterly cash flow instead of $17.5 billion?
Am I making a complex issue too simple? To check my thinking, I spoke with a former Nike exec with deep experience in supply chains and China. Here's his view:
"Someone needs to break the cycle...why not Nike -- or Apple? I don't see that as an oversimplification at all. The current "low cost" business model is not really low cost. Isn't one purpose of business to create the prosperity needed to increase the number of consumers capable of buying the goods we make? In fact, I would argue that what Apple is doing now is against the best interests of the shareholders... I've never heard a lucid explanation of what I'm missing."
This is about what we value in the world. Consider IKEA, one of the most sustainability-minded large companies in the world. The Swedish furniture giant has its own challenges (some history of labor issues as well and concerns about the sustainability of its short-lived products, for example), but the company has stated clearly that it's about "low prices...but not at any price."
Why is that a radical idea? I refuse the notion that maintaining a moral compass is anti-business, anti-competitive, or naïve in some way. Smart, innovative, lean companies can make plenty of money and do the right thing. And, frankly, since companies have an awful lot of the rights of humans, they should share some of the moral responsibility as well.
Our system of competition yields amazing results -- incredible technological innovation provided in massive quantities very quickly. But these marvels often rely on very real human costs. The whole system has some deep flaws that we must fix.
Apple prides itself on changing the game. So just imagine a world where the company applied its staggering innovation and design skills to create the iSupplyChain or iWorkingConditions. Everyone, including this fan of Apple products, would be a lot iHappier.
(This post first appeared at Harvard Business Online.)