That's rotten, Apple

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Apple shareholders are celebrating this week. Perhaps America’s most respected company, the computer, gadget and innovation manufacturer generated $46.3 billion in revenue last quarter and once again handily smoked the most optimistic predictions of Wall Street analysts. Its share price enjoyed a significant jump today that values the electronic company neck and neck with oil juggernaut Exxon. While all eyes are on the quarterly report today, just a few weeks ago Apple released a report of a different sort, a rundown on its overseas suppliers and manufacturing partners detailing some less great news, the many appalling to repugnant practices of the contractors that bring your iPhone and many other gadgets to life.

Apple employs about 60,000 workers in the the United States, but its overseas manufacturing sites put more than ten times that number to work. Getting your iPhone or Macbook into your hands affects the lives of many thousands of people. A majority of them work for Asian industrial behemoth Foxconn. That Taiwanese subcontractor maintains factory sites that resemble little villages in mainland China, where workers live in barracks and earn a little less than $300 a month and work 6 days a week (not more than 60 hours per week according to Apple’s code of conduct). It gained notoriety after it responded to a series of worker suicides by ringing survival nets around the outside of its factories.

To Apple’s credit, its report apparently does not try to gloss anything over (And it must be said, similar reports could be generated by virtually all the computer and gadget makers marketing products in the U.S.—if they bothered to do so—like Amazon, Dell, HP, Intel, IBM, Microsoft, Sony and others who all use Foxconn, often at the same sites)

Apple’s “Supplier Responsibility team” conducted a total of 229 audits—an 80 percent increase over 2010. More than 100 of these were at factories that it had not audited before.

The team found:

• 93 facilities had records that indicated more than 50 percent of their workers exceeded weekly working hour limits of 60 in at least 1 week out of the 12 sample period.

• At 90 facilities, more than half of the records indicated that workers had worked more than 6 consecutive days at least once per month, and 37 facilities lacked an adequate working day control system to ensure that workers took at least 1 day off in every 7 days.

• 42 facilities had payment practice violations, including delayed payment for employees’ wages and no pay slips provided to employee

• 68 facilities did not provide employees adequate benefits as required by laws and regulations, such as social insurance and free physical examinations

• 49 facilities did not provide employees with paid leaves or vacations.

• 108 facilities did not pay proper overtime wages as required by laws and regulations.

• Investigators discovered a total of 6 active and 13 historical cases of underage labor at 5 facilities. In each case, the facility had insufficient controls to verify age or detect false documentation.

These are significant problems; Apple claims it is working to vigorously address these subcontractor shortcomings and that it will sever relations with subcontractors which do not make adequate efforts to correct violations of the Apple code. Beyond these clear wage-hour issues, Apple investigators also reviewed some troubling practices which suggest even deeper violations of human rights lurking behind the production line. According to the report: “Some of our suppliers work with third-party labor agencies to hire contract workers from countries such as the Philippines, Thailand, Indonesia, and Vietnam. These agencies, in turn, may work through multiple subagencies in the hiring country, the workers’ home country, and, in some cases, all the way back to the workers’ home village. By the time the workers have paid all fees across these agencies, the total cost can equal many months’ wages, forcing workers into debt.

"Apple views recruitment fee overcharges as debt-bonded labor, or involuntary labor, which is strictly prohibited by our Code. We limit recruitment fees to the equivalent of one month’s net wages and require suppliers to reimburse over­paid fees for all foreign contract workers in their facilities, including workers not assigned to Apple projects.... As a result of our efforts, suppliers reimbursed $3.3 million in excess foreign contract worker fees, bringing the total to $6.7 million repaid to workers since 2008.”

It is of course laudable that Apple takes its subcontractor code of conduct so seriously and that it plans to maintain this level of critical oversight of its subcontractors in the future. But what of Apple’s code of conduct, well, for itself? Part of the reason Apple prefers to use overseas subcontractors like Foxconn, beyond the Foxconn's crucial proximity to its component supply chain, is the mind-bending “flexibility” of the Asian labor force. Let’s face it; in the U.S. you are not going to be able to awaken an extra shift of workers in the middle of night to come out and complete an emergency production run to meet a demand spike. Foxconn can. In most other countries in the industrialized world that practice would, properly, be considered criminal. Apple considers it a competitive advantage.

Let’s consider these two reports, the company’s official quarterly released to U.S. shareholders and the subcontractors’ review released to the media. What do they have in common? Apple’s gross margins, the difference between what it costs Apple to produce and market a product and the revenue it generates selling it. At 44.7 percent Apple’s gross margin is at a 15 year high. Foxconn’s margins are significantly slimmer, less than 8 percent according to one report I located. That means despite the gangbuster business it is doing churning out laptops, iPhone and iPads, Foxconn doesn’t have a lot of revenue left over to improve its treatment of workers or the salaries it offers. But Apple does.

Perhaps before investing in another costly print-run of its properly exhaustive investigation of its subcontractors, it might consider investing in industrial policy reforms that will ensure that the hardworking people helping to build the Apple gadgetocracy in America get a more equitable byte out of Apple’s success.