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Bring Fair Trade to Electronics

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Reports about the inhumane or dangerous working conditions in Chinese factories that manufacture the innovative products for Apple, Inc. -- most recently by the New York Times -- have brought publicity Apple probably does not want. For this student of China's high-tech industry, however, the revelations are not surprising. In fact, the Chinese media has reported on many of the problems ever since the 2010 spate of suicides at the factories of the Foxconn Technology Group, the Taiwan-headquartered conglomerate that assemble products in China for Apple and many other foreign high-tech companies.

Debates in the United States in response to these disclosures have been how to assign blame or whether consumers can force Apple to be more ethical. This is not enough. The problems are certainly not limited to Apple or Foxconn. The case highlights the evident flaws of the model of corporate social responsibility standards, enforced almost entirely by the global companies bent on maximizing their profits.

Here is the global structure of the electronic industry: Supply chain has shifted largely to Asia, and is dominated by the Original Equipment Manufacturing (OEM) model, in which the lead western companies focus on design and marketing while Asian contractors manufacture high quality and quantity of the products, with extreme flexibility and speedy delivery. The largest OEM is Foxconn, with more than 300,000 workers at its Shenzhen site alone. In this system, pricing power resides primarily at Apple, which could shift or divide orders to other OEM manufacturers in Asia with relative ease. Given that OEM profit margins are razor thin, reduced scales would seriously hurt the OEM companies. In addition, to have such a demanding company as Apple being its clients provides the "seal of approval" for the manufacturers. So they do their best to satisfy Apple. The "breath-taking" flexibility cited by the Times article comes not just from the hard driving OEM manufacturers; it is also achieved by the subcontracting system which can be mobilized quickly when demand grows and contracts just as quickly if particular parts or procedures become obsolete. This makes it extremely difficult for Apple, or anyone, to monitor the entire networks of subcontractors.

While the system clearly has worked for consumers and shareholders, the impact on workers and the environment is much less sanguine. To avoid negative publicity, the current model of corporate social responsibility requires leading companies to demand the practices in their supply chains be improved. Companies such as Apple or Wal-Mart Stores have adopted codes of conduct and audit their suppliers frequently for ethical behavior. Some suppliers have mended their ways; Foxconn, for example, has increased salaries and provided more social support. Yet the relentless pressure to cut costs has not changed, nor have the bargaining positions for the suppliers. With Apple allowing suppliers "only the slimmest of profits" and demanding cost cuts year after year, it is not surprising that suppliers "often try to cut corners, replace expensive chemicals with less costly alternatives, or push their employees to work faster and longer, " according to the Times.

Improved human and environmental responsibilities involve increased costs. Yet the enforcement of corporate social responsibility standards by lead companies essentially shifts such costs down the supply chain. Suppliers are forced to fulfill existing conditions of the orders as being larger, better, faster and cheaper, while also meeting strict ethical and environmental standards. Hence consumers can have guilt-free use of the products without paying higher prices, and -- in the case of Apple -- not sacrifice a profit margin which according to an estimate by researchers at Asian Development Bank was a staggering 64 percent for the iPhone in 2009.

While the largest OEMs, such as Foxconn, have some bargaining power with Apple, the same cannot be said for its own downstream suppliers. Among these subcontractors, there are bound to be recurring rules violations concerning workers' health, working conditions and environmental protection when the pressures on price and timing remain so intense. And when audits do find violations, it is entirely at Apple's discretion to decide what action, if any, to take. It can punish suppliers if it chooses, but likely will drop them only if the overall supply system isn't affected and substitutes are available.

So what to do? Fundamentally, the current model of corporate social responsibility system is flawed. Critics could demand that Beijing apply its own labor and environmental standards more rigorously. Yet monitoring millions of factories with expertise and vigilance is a challenging task, even under the best circumstances. China is a vast developing country with huge variations in regional economies and law enforcement. Most Chinese officials at the local level are not interested in giving factories there a hard time. Western ethical standards took decades, if not centuries, to establish; Chinese practices won't change quickly no matter how hard domestic or foreign critics insist.

But there is another possibility, a version of the fair trade system developed for coffee growers and some other agricultural products. In this system, a third-party investigation sets floor prices based on responsible humane and environmental protection methods. In the electronics industry, the suppliers could use such reference pricing to increase their bargaining positions, and buyers could pay above the fair prices to claim meeting ethical standards. This should not be difficult in the electronics industry, where those in the trade know very well the prevailing prices and costs of particular products. And prices could be revised regularly to reflect technological innovation or wage increases. If some suppliers try to cheat the system by charging the fair price, but with substandard practices, their competitors will soon find out and the negative publicity could lead to contract cancellation. The beauty of the system is to use the subcontracting networks to monitor the contractors as competitors would always be on the lookout for cheating. Fair trade price does not eliminate market competition but curb its worst excesses and reward the responsible players.

One barrier is the electronics industry's prevailing secrecy; its executives are reluctant to describe their supplier networks. However, the corporate responsibility movement already has eroded such secrecy, even for tight-lipped companies like Apple. This barrier should not be insurmountable.

Regardless of whether a fair trade system is the best alternative, it is important to recognize that we must move beyond the existing corporate social responsibility system monitored entirely by profit-maximizing corporations. If they are part of the problem, they cannot be counted on to fix it.

Yu Zhou is a professor of geography at Vassar College, author of "The Inside Story of China's high-tech industry: Making Silicon Valley in Beijing."

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