5 Misperceptions of the Electronics Supply Chain


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Presentation delivered at the Green Festival NYC - explains the complexities of the supply chain which make it challenging for consumers to know whether their electronics came from an 'ethical' workplace

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  • Have you ever boycotted a product? Have you ever followed up to see what happened as a result of it?
  • Do you know the name of any supplier factory other than Foxconn? One major reason for vertical disintegration is to share risk. Also, in some cases, smaller firms can be more responsive to changes in market conditions. Vertical disintegration is thus more likely when operating in volatile markets. Stability and standardized products more typically engender integration, as it provides the benefits of scale economies.
  • Long term contracts – most supplier factories do not get them. This creates a lot of insecurity over money, and pressure to perform on time, ‘by any means necessary’ behavior. Often factories have to make products by putting their money up front, if the order is not completed – no one gets paid. It’s important for brands to establish relationships with factories. Adequate lead time – if brands don’t give supplier factories adequate lead time, you can run into a major issue of overtime and unauthorized subcontracting. The purchasing depart of brands shouldn’t just be asking ‘can this be done on time?’ but rather ‘can this be done on time realistically based on the supplier factory’s actual capacity?’ Two way dialogue – this needs to happen, but if a brand makes up 90% of your business, it gives you little leverage to voice your concerns, you turn into a yes-factory. Brand integrity – I’ll explain in the next few slides, but this contractual relationship can be a huge risk to brand integrity
  • This leads into the fact that suppliers are in fact independent businesses. Foxconn is an independent business, and one of its clients is Apple.
  • Hello outsourcing – in 2011, approx $360 billion spent on the global electronics manufacturing business, consisting of electronics manufacturing services (EMS) and original design manufacturing (ODM) firms. As brands have increasingly outsourced production, the contract manufacturing industry has undergone enormous growth in recent years, with revenue rising from $264.0 billion in 2006. While revenue is expected to dip in 2012, the industry continue its expansion trajectory in the coming years, with revenue expanding to $426.1 billion in 2015.The real impact is on the overall relationship of electronic brands with contract manufacturers like Foxconn, brands now realize that the biggest risk in dealing with contract manufacturers lies in the potential public relations disasters that can arise from worker’s rights issues. (brand integrity)http://www.forbes.com/sites/connieguglielmo/2012/04/10/tech-needs-to-clean-house-after-apple-foxconn-fallout/http://blogs-images.forbes.com/connieguglielmo/files/2012/04/isuppli.jpg
  • Information from audits shows where change is needed. QA, products, QA workplaces. Both needed.And then there’s the story of the factory that gets audited, receives information, but no mandate to resolve the issues. There have been certainly hundreds of audits and there have been findings from those audits, with action now being taken, resources now be used to address the existing findings. It remains to be seen if there is any value added to the additional FLA  audits at this time. Better to have them, or--better!-- third party audits take place in six months to verify improvements made...and worker safety, health, and [key metric!!] turnover rates improve.  I have been told the turnover rate is 10%/month.....if true shows workers voting with their feet about conditions and also of course means training costs way higher than 'should/could' be...
  • Turn audit informationinto action
  • This is an example of what happens when you don’t take action on issues raised. This was an early report – it actually killed 4 people. Activist Debby Chan from SACOM actually documented this in a report, which was featured in an Al Jazeera documentary, and delivered it personally at Foxconn’s shareholder meeting. Two years ago, 137 workers at an Apple supplier in eastern China were injured after they were ordered to use a poisonous chemical to clean iPhone screens. Within seven months last year, two explosions at iPad factories, including in Chengdu, killed four people and injured 77. Before those blasts, Apple had been alerted to hazardous conditions inside the Chengdu plant, according to a Chinese group that published that warning.
  • While this information of aluminum dust didn’t necessarily arise from an audit – this is an example of what happens when you don’t take action on issues raised. This explosion happened in Chengdu, China http://www.aljazeera.com/programmes/activate/2011/09/201194144739197637.html
  • There is no concrete research that has shown a direct correlation between paying a worker a living wage, and an increase in the price of the product—or do you know of any? it is not known if investing in workers' health, safety, and living standards,  does increase product price, either significantly or at all. Labor costs are likely a very small component of price; one can refer to an analysis of sneaker pricing done years ago: manufacturing labor cost of approximately $1.70 in a $170 sneaker. Thus, the actual impact on retail price, even if all cost increases are passed on and none allowed to impact the brand's profit margin, could be quite small. It is also likely that lower staff turnover, because of better working conditions, will reduce the manufacturers' training and recruitment costs, so unit cost would increase even less than the amount of benefits increases. Wages a small % of retail price…[what if more production wages led to lower than 43% profit margin?] why are wages the only variable? Why not profit? Why not executive comp? etc etc…[[[’’’are manufacturers price takers? Or do they actually calculate costs of production and then price products???]]Is there an implicit assumption that the only changeable /reducable part of price is production worker wages???
  • Let’s think about it – these people are not enraged over Foxconn (and yes this photo was taken during the height of the news coverage) – they’re enraged because they want an iPhone. And they’re enraged because it’s not for them, they were paid by people to stand in line to get one for them. So the argument that people absolutely will not pay more for a product is a bit hard to believe considering this situation.
  • This isn’t just in China
  • Andthe currency isn’t always money.
  • First, it doesn't note that we bargain shoppers are not in fact offered a choice between 'cheap' or 'ethical' products when we shop.  Our retailers do not offer one machine at $x and another $x+y, with the latter having good working conditions. It they did, we could choose between the two different products. Market research to date, by a Harvard-led consortium,  has found that consumers will put their money where their ethics are, if they have the information to do sohttp://www.pacinst.org/topics/globalization_and_environment/public_policy/ebay_fair_labor_survey_study.pdf
  • “who signs the contract?”-purch“why such long hours?”-csr“work overtime to make the changes today”-design
  • Look at the mandates of the depts that influence the product – ask the right questions. “who signs the contract?”-purch“why such long hours?”-csr“work overtime to make the changes today”-designWhere are the incentives, really?
  • Some former Apple executives say there is an unresolved tension within the company: executives want to improve conditions within factories, but that dedication falters when it conflicts with crucial supplier relationships or the fast delivery of new products. Tuesday, Apple reported one of the most lucrative quarters of any corporation in history, with $13.06 billion in profits on $46.3 billion in sales. Its sales would have been even higher, executives said, if overseas factories had been able to produce more.Executives at other corporations report similar internal pressures. This system may not be pretty, they argue, but a radical overhaul would slow innovation. Customers want amazing new electronics delivered every year.“We’ve known about labor abuses in some factories for four years, and they’re still going on,” said one former Apple executive who, like others, spoke on the condition of anonymity because of confidentiality agreements. “Why? Because the system works for us. Suppliers would change everything tomorrow if Apple told them they didn’t have another choice.”“If half of iPhones were malfunctioning, do you think Apple would let it go on for four years?” the executive asked.
  • Indicator of demand- people are getting injured as a result of there being a high demand for apple products – sends a message to apple – we need to make more
  • If this rage could just be able poor working conditions…
  • 5 Misperceptions of the Electronics Supply Chain

    1. 1. Joleen Ong – Social Accountability International (SAI)Green Festival 2012 - NYC
    2. 2. Live Tweet SAI: @SA_INTL EPEAT: @EPEAT Conference hashtag: #GreenFest
    3. 3. Social Accountability International • Multi-stakeholder • Multi-industry • Developed SA8000® standard for decent work • Activities: – Supply chain management training & capacity building – Social Fingerprint® Program – Corporate Membership program – Public private partnerships © Social Accountability International 2011 @SA_INTL #GreenFest @EPEAT
    4. 4. Social Accountability InternationalDecent work can secure basic human rights while benefiting business © Social Accountability International 2011 @SA_INTL #GreenFest @EPEAT
    5. 5. SA8000® Standard for Decent WorkChild Labor Child labor shall not be usedForced Labor People have the right to change jobs and shall not be forced to workHealth & Safety People must not be endangered at workFreedom of People have the right to organize and be heard at work through collective bargainingAssociation &Collective BargainingDiscrimination Hiring, promotions and wages must be equal and fairDiscipline People must not be abused at work and free from all corporal punishmentWorking Hours Overtime is limited, voluntary and paid at a premiumRemuneration People must earn enough to live on during a regular work weekManagement System A management system is the key to sustainable compliance @SA_INTL #GreenFest @EPEAT
    6. 6. 5 Misperceptions of theElectronics Supply Chain @SA_INTL #GreenFest @EPEAT
    7. 7. #1 Vertically Disintegrated Almost no large brands own thefactories from which they source. @SA_INTL #GreenFest @EPEAT
    8. 8. Consumer Electronics Supply Chain PO CONSUMER ELECTRONICS BRAND SUPPLIER: ASSEMBLY, QC & PACKAGING Sub-Contractor: Sub-Contractor: Memory Batteries Sub-Contractor: Sub-Contractor: Plastic Cases Displays Sub-Supplier:Sub-Supplier: Wires Switches Sub-Supplier: Sub-Supplier: Dormitory Cleaning Sub-Supplier: Sub-Supplier: Cells Connectors Sub-Supplier: Sub-Supplier: Security Cafeteria X X X X Produce Meat Paper Tools Bakery X X X X @SA_INTL © Social Accountability International #GreenFest @EPEAT
    9. 9. Power dynamics: • Long term contracts • Lead time • Two-way dialogueBrand Supplier • Brand integrity @SA_INTL #GreenFest @EPEAT
    10. 10. #2 One production line, many brands Suppliers are independent businesses, and their clients are brands. @SA_INTL #GreenFest @EPEAT
    11. 11. Global Electronics Manufacturing Business *Source- Forbes Magazine• 2011 – $360 billion revenue (contract manufacturing)• 2015 – $426 billion (projected revenues) @SA_INTL #GreenFest @EPEAT
    12. 12. So if there is a problem discovered in one customer’s production...the apple doesn’t fall far from the tree. @SA_INTL #GreenFest @EPEAT
    13. 13. #3 “Audits don’t change anything” Alone, they are not supposed to. @SA_INTL #GreenFest @EPEAT
    14. 14. Audits So what? Regulation – Action – it’s whatPeople do what’s you do with the inspected & audit information expected to affect change @SA_INTL #GreenFest @EPEAT
    15. 15. @SA_INTL #GreenFest @EPEAT
    16. 16. Two Weeks Before• SACOM documented the aluminum dust issue• Report hand delivered to Foxconn• Report hand delivered to Apple in Cupertino @SA_INTL #GreenFest @EPEAT
    17. 17. #4 Ethically made = more expensive? Where’s the proof?* *Open for debate @SA_INTL #GreenFest @EPEAT
    18. 18. Price elasticity varies byproduct, sector, consumer base, cult followings… @SA_INTL #GreenFest @EPEAT
    19. 19. This isn’t just in China @SA_INTL #GreenFest @EPEAT
    20. 20. And the currency isn’t always money @SA_INTL #GreenFest @EPEAT
    21. 21. Case Study: Do consumers really vote with their dollars? • Two eBay auctions set up • Identical product description • One auction promoted with ethical ‘label’ • Findings show that labeled products had a substantial positive effect on bidding @SA_INTL #GreenFest @EPEAT
    22. 22. #5 Integrated Departments Most CSR departments are silos – mandatesconflict with purchasing & design department @SA_INTL #GreenFest @EPEAT
    23. 23. Can you produce this by next week? (Purchasing Dept) $$$ Can you change this Why suchlong hours for $$$ now? (Design Dept) workers? (CSR Dept) Supplier @SA_INTL #GreenFest @EPEAT
    24. 24. Ask the Right Questions: How can we design for decent work? Expand the question…• Purchasing Department: Can you produce this on time… in your current capacity? (without excessive overtime or unauthorized subcontracting?)• Design Department: Can you make this change… in your current capacity? (without worker exploitation?) @SA_INTL #GreenFest @EPEAT
    25. 25. Send the Right Messages @SA_INTL #GreenFest @EPEAT
    26. 26. Re-channel the Rage @SA_INTL #GreenFest @EPEAT
    27. 27. Stay ConnectedJoleen Ong, Communications Manager – JOng@sa-intl.org Twitter: @sa_intl Facebook.com/socialaccountabilityinternational LinkedIn Groups: • Social Accountability International • Social Fingerprint® Subscribe to e-Newsletter: • www.sa-intl.org/news