CLIFF

LIN

Marketing Professional


Apple Inc & Foxconn Technology Group

April 16, 2013Cliff Lin

Company Profiles

Apple Incorporation

Established in 1977 by Steven P. Jobs and Steven Wozniak, Apple originally specialized in manufacturing personal computers. However, following the company’s expansion strategy, it began to broaden its product portfolio and shift its focus to the consumer electronics market (Datamonitor, 2010). In 2007, the company changed its name from Apple Computer Incorporation to Apple Incorporation, reflecting its growing presence in the consumer electronic industry.

As a major player in the consumer electronic industry, Apple offers diversified products and services (Datamonitor, 2010). Its hardware products range from Mac computers, iPods, iPhones, and other peripheral products and accessories, such as printers and storage devices. Its software products include operating systems (Mac OS), application software (iTunes), and Internet software (Quick Time). Aside from its high quality products, Apple further addresses consumer needs by the development of Apple Care, which provides product support and services for its customers.

In terms of managing its global business operations, Apple divides its operations into five main segments: the Americas, Europe, Japan, Retail, and Others (Datamonitor, 2010). The Americas include both South and North American operations, while the Europe segments include European, African, and the Middle Eastern operations. Japan consists only of the Japanese operations. The retail segment deals with Apple’s retail stores both in the US and international markets. The Others segment consists of operations in Australia, and Asia, excluding Japan. Apple does not customize its products for each geographic region; rather, it offers the same type of products and services worldwide to reach global integration and economies of scales.

Apple’s headquarter is located in California, US and has over 200 retail and office locations worldwide (Datamonitor, 2010). The geographically dispersed locations of Apple’s confirm its status as a Multi-National Company (MNC). As of September 2009, Apple employs approximately 34,300 full-time workers and 2,500 temporary and contract employees (United States Securities and Exchange Commission, 2009). To fulfill its large production volume, Apple sole-sources the manufacturing of many of its critical components to various third party vendors in countries such as China, Malaysia and Taiwan. Virtually all of Apple`s portable and desktop products are assembled by third-party vendors; the largest one being Foxconn.

In terms of financial performance, Apple’s latest financial report reflects a $3.803 billion increase in sales revenue during its first quarter in 2009 totaling $11.880 billion (refer to Appendix A). The US continues to be Apple’s largest consumer market, representing more than half (54%) of the $15.683 billion revenue (Datamonitor, 2010). Its gross margin has also grown from the previous year’s 37.9% to 40.9% (Apple Inc., 2010).

Foxconn Technology Co. LTD

With an initial investment of only $7,500 USD, Terry Gou established Hon Hai Precision Industry Company Ltd., the parent company of Foxconn Technology Company Ltd. The company’s success lies on its core strategy to “to provide the lowest total cost solution to increase the affordability of electronics products for all mankind” (Foxconn Electronics Inc., 2007). Foxconn`s heavy emphasis on research and development, especially hardware related technology, propelled it to become the leading global Computer, Communication, and Consumer-electronics (3C) manufacturers. In addition to the ‘3C’, Foxconn also operates in a wide range of industries: nanotechnology, heat transfer, wireless connectivity, material sciences, and green manufacturing.

To achieve its goal of providing total cost advantages, Foxconn invented the eCMMS (e-nabled Components, Modules, Moves, and Services) model, which incorporates the company’s mechanical, electrical, and optical capabilities into an integrated unit (Foxconn Electronics Inc., 2007). The company’s Southern China campus is the largest 3C manufacturing base worldwide, a clear example of its eCMMS model. This integrated model became Foxconn’s competitive advantage as it offers a shorter and more efficient supply chain for Foxconn and its partners. With business operations spread across three continents (America, Europe, and Asia) and over 200,000 employees globally, Foxconn has effectively established itself as a multinational enterprise. The company’s continued net income growth, from 6,202.9 in 2008 to 6,262.5 million Taiwanese dollars in 2009 (NT $), further strengthens the company’s financial stance (Bloomberg Businessweek, 2010).

Apple’s Partnership with Foxconn

In its attempt to protect its technological expertise and retain high quality standards, Apple outsources the final assembly of each of its iPod products to different suppliers, most of which are located in Taiwan. For instance, Taiwanese Inventec Appliances produces the video iPod, while Foxconn is responsible for the production for the iPod Nano (Einhorn, 2007).

Foxconn’s highly efficient eCMMS model enticed Apple to accept its production proposal for Apple’s iPhone and iPad. Foxconn’s integrated manufacturing plant allows the company to supply iPhone and iPad at a much lower cost, giving Apple a higher profit margin. This partnership has inadvertently made Apple its largest customer, which is illustrated by how video iPod production accounted for 5% of Foxconn’s total sales in 2007 (Einhorn, 2007). On the other hand, by manufacturing most of Apple’s products, Foxconn has also become Apple’s largest supplier. This supplier agreement has clearly benefited both companies financially.

Apple’s Business Goals

Apple’s global business goals differ by the business units it obtains. These units are defined by the different products they manufacture which include the Mac, iPod, iPhone, iPad and iTunes. Each product is set out to define being the best brand and product in each industry. Apple strives to design the best personal computers in the world with its Macs; lead the digital music revolution with its iPods and iTunes online store, and define the future of mobile media and computing devices by reinventing the revolutionary iPhone and App store (Apple, 2010).

Apple is able to achieve its global business goals with its extremely strong brand image that is recognized amongst most consumers. This high level of brand awareness and brand recognition throughout the industry enables it to set premium prices for its products. Its strong investment on research and development is critical for the development of innovative products and technologies, giving Apple a guiding business strategy to dominate the industry in which it competes in (Datamonitor, 2010). In addition, Apple commits to ensure the highest standards of social responsibility in places where its products are manufactured. The social responsibility goes beyond the basic human rights. Apple claims that its suppliers provide safe working conditions, treat workers with dignity and respect, and use environmentally responsible manufacturing processes. In order for Apple to reinforce these concepts, Apple solicits all its suppliers to commit and follow the comprehensive Supplier Code of Conduct (Apple, 2010). Apple produces environmentally friendly products and by doing so it made Apple more globally competitive. Apple continues to design smaller, thinner, lighter, and energy efficient products in order to reduce material usage and to be energy efficient. Harmful environmental substances are removed from its products and recycling programs have been instituted in 95 percent of the countries where its products are sold (Apple, 2010)

Global Human Resources Function

Undoubtedly, human resources management (HRM) is becoming the strategic center of many corporations. However, Apple, being unique as it is, refuses to implement strategic HRM practices (Josephson & Reinken, 2008). The common misperception of Apple is that it creates an innovative environment by removing all possible constraints. In reality, that statement only holds true for aspects of business that offers leeway for creativity (Josephson & Reinken, 2008). Apple invests a lump sum of resources in departments where innovation is the fundamental attribute. Such investments are reflected by the comprehensive training, abundance of working capital, and energetic work environment. For departments such as Accounting where procedures and tasks are standardized, there is less emphasis on HRM. (Josephson & Reinken, 2008). A possible explanation for this phenomenon is that the Chief Talent Officer (CTO), the global head of HR, has the background of head-hunting executives, not HR. His primary focus lies in recruitment, in which he creates a “people factory” (Josephson & Reinken, 2008). With this mindset, he moved certain HR activities into other departments. For example, employee benefits and stock plan administration are moved to the finance function.

Moving into the international context, the HR policies are still more ethnocentric and centralized, mostly due to the unfamiliarity of HR knowledge for the CTO. The international HR policies are rarely adjusted to the culture, with the exception of compensation norm and commercial law. Still, Apple does not make the effort to reinforce the policy, as Foxconn’s consecutive suicidal issue outlines the apathy of Apple’s CTO (Josephson & Reinken, 2008).
Apple’s global HR in respect to overseas suppliers entails a supplier code of conduct. This conduct includes internationally recognized standards and requires suppliers to adhere to the code or result in termination as an Apple Supplier with possible legal consequences. Sections in this conduct include: labour and human rights, health and safety, environment and ethics. More specifically, employees are restricted to work 60 hours per week including overtime and are allowed at least one day off out of seven days. Also, workers are not allowed to exceed the maximum permitted workweeks and overtime is voluntary. Benefits such as vacation time leave periods and holidays must be consistent with applicable laws and regulations. With compensation, wages must be at least the minimum wage and overtime hours must be at the premium rate required by applicable laws and regulations. In addition deductions from wages as a disciplinary measure are prohibited (Apple, 2010).

Apple conducts yearly audits of their suppliers of component such as companies that produce screens and hardrives and non-production suppliers such as office supply vendors and call centers (Moren, 2010). Expert auditors are paired up with an Apple procurement manager who manages the supplier’s business relationship with Apple. During the auditing process records and relevant policies and procedures are reviewed and physical inspections of manufacturing facilities, factory dormitories and dining areas are performed. Extensive interviews with workers and senior managers are also conducted (Apple, 2010). After the completion of the audit, the findings are reviewed with the Facility Manager and Senior Manager. If violations are found, the facility is required to implement a corrective action plan along with a plan to prevent the re-occurrence. The corrective actions are then tracked to closure and all violations are expected to be corrected within 90 days after the audit (Apple, 2010).

Along with the audit, Apple provides an intensive monitoring program to ensure suppliers are in accordance with the code of conduct. It provides its suppliers with programs such as Supplier Management, Train-the-Trainer, and Supplier Employee Education and Development. Specifically, workers are educated and trained on topics such as occupational health and safety, work-related injury prevention, management obligations, and workers’ rights. To expand this training, Apple has developed the Train-the-Trainer program that permits their suppliers to enforce their own social responsibility courses. To make this happen, Apple collaborated with Verité, an independent non-profit organization that monitor international labor rights in overseas production facilities (Verité, 2010), to plan and convey a five-day workshop to train Human Resources staff from all of their manufacturers (Apple, 2010).

Problem Identification

Foxconn, one of Apple’s largest manufacturers, continues to struggle with an enormous amount of employee suicides with nine suicides and two attempted suicides this year (Barboza, 2010). According to the World Health Organization, the suicide rate at Foxconn is below estimates of the national rate of about 14 per 100,000 people in China, but the high number in such a short period has raised major concerns (Loyd & Ward, 2010). The root of the high suicide rate at Foxconn is still uncertain. According to sociologists, some of the suicides may be copycat attempts by distressed youths, learnt from the earlier suicide attempts. These copycat suicides are common in Asia and experts believe that news media reporting on the suicides can lead to such contamination (Barboza, 2010). Labor rights groups have accused Foxconn of operating militant-style factories with harsh working conditions, long hours, and by abusing workers. They also believe some of the deaths are suspicious and have asked for independent investigations (Barboza, 2010). This raises a big concern for Apple as Apple claims that it emphasizes responsible Supplier Management by requiring suppliers to commit to the Supplier Code of Conduct (Apple, 2010). According to Apple, during its comprehensive audits, hundreds of records are reviewed and physical inspections of manufacturing facilities, factory managed dormitories and dining areas are conducted. In addition, interviews are conducted with workers and senior management (Apple, 2010). Apple’s emphasis on its international Human Resource management severely conflicts with the issues occurring at Foxconn. Damaging Apple’s corporate image, the question raised is what steps Apple should take in response to the problem.

Foxconn’s Response to the Issue of Suicide

The recent spree of suicides at Foxconn this year and increasing public pressure has caused the firm to take appropriate measures in addressing these events. Foxconn initially responded to the suicides by claiming that the jumpers were suffering from personal problems that were unrelated to the company. However, Foxconn has been heavily criticized for its poor working environment and staff treatment. In May 2010, Foxconn opened its Shenzhen plant to the media in hopes of suppressing false rumors and to show the public the company was making an effort in addressing problems (Hogg, 2010). Terry Guo, chairman of Foxconn’s parent company, personally led the tour. In essence, the plant is like a town itself – it has shops, post offices, banks, theatres and an Olympic-sized swimming pool. “You can see we have the facilities for workers who want to relax. This is not a place that treats its staff badly” says Guo (Hogg, 2010). Although Foxconn provides facilities to address the physical wellness of their employees, there are still concerns over their mental wellness. To address these concerns, a brand new counseling centre has been built at the Shenzhen plant. In addition, reporters noted that throughout their tour, posters were advertised everywhere with numbers to call for counseling and help. Guo also stated that the company would be increasing the number of trained counselors to 1000 at the plant.

Apple’s Response Regarding the Issue of Suicide

Initial complaints regarding unethical employment practices in Apple’s subcontractor, Foxconn, started in June 2006. Back then, Apple had investigated such allegations but found certain claims to be exaggerated. Its audit findings noted that Foxconn was mostly in compliance with workplace standards, this was verified by Verite,. However, the audit did find that Foxconn committed some violations to Apple’s Code of Conduct, primarily in the area of working hours. Results indicates that most employees exceed the work hour limit by 35% and worked more than six consecutive days 25% of the time.

In an interview with BBC News, Steve Jobs CEO of Apple stated that he believed Apple was one of the best companies in the industry that works to understand working conditions in its supply chain. The company performs vigorous and transparent audits with its suppliers at secondary and tertiary levels. “We’re all over this. Foxconn is not a sweatshop. You go in this place and it’s a factory but, my gosh, they’ve got restaurants and movie theatres and hospitals and swimming pools” states Jobs (“Apple boss defends”, 2010). He also states that although there have been 13 suicide attempts which accounts for 26 per year out of 400,000 employees; it is still less than the average US suicidal rates. However, Apple does find this issue to be troubling and is looking to see how they can help.

Challenges for Apple to Respond to the Issue

Supplier Management

Apple may find it difficult to enforce stricter regulations on its Human Resource operations and practices. In addition to Apple, Foxconn is also a low-cost manufacturer for MNEs such as Dell, Sony, Nokia, and Hewlett-Packard. Therefore, Foxconn may refuse Apple’s request to make increased investments on improving work environment, employee health and safety, and monitoring manufacturing plants. Supply chain expert Pam Gordon expressed that it would cost Apple a lot to switch its supplier because of the complexities of assembly lines and supply chains. Gordon claims that it would be especially difficult for Apple to sever ties with Foxconn because it would not be able to meet production demand for their iPad tablet computers (Culpan, Liu & Wong, 2010). Thus, Apple may have some limitations on what it can negotiate with Foxconn about Human Resource practices.

Increase in Overhead Cost

Apple may have to increase the price for its products as a consequence of trying to appease the Chinese workers and protesters. Investor’s Business Daily reported that Foxconn is increasing wages by almost two-thirds to its employees, which would lead to higher costs for the Apple products it manufactures (“Apple, Dell will”, 2010). The main reason for Apple to choose Foxconn as its supplier is because of its low price. Apple may have to sacrifice its price and its own resources to exert more pressure and deal with the incidents. However, this challenge is easy to overcome as executives are well aware of the fact that the damage in brand image is more costly.

Ethics and Morality

According to Dowling et al, MNEs face the dilemma of following either the parent country’s or the host country’s ethical standards when it comes to HRM. If Apple chooses to take the ethical Universalist approach: a belief that “there are fundamental principles of right and wrong that transcend the cultural boundaries” it may reduce its global competitiveness (Dowling, Engle, Festing, & Groschl, 2009). The current working conditions at Foxconn`s factories have been questionable. For example, according to an interview with a Foxconn employee, workers are prohibited to talk in the workplace, and only a ten minute bathroom break is allowed every two hours. In addition, most employees’ ears are subject to severe damage due to the factory noise (Liu & Wong, 2010). However, according to a professor at Taipei National University, “Foxconn’s working conditions are among the best in China” (Liu & Wong, 2010). In essence, Apple may face difficulty implementing standards similar to its own in China due to differences in cultural values and work practices.

Potential Loss of Intangible Assets

In responding to the current crisis at Foxconn, Apple must take caution in their actions as it may have direct effects to its brand name and reputation. Apple`s Supplier Code of Conduct has not been enforced effectively. If Apple does not take further action to enforce the Code with Foxconn, it will ultimately face criticism from its customers who are socially aware, caring about the environment and working conditions (Liu & Wong, 2010).

Recommendations

Business Proposal

Gene Grabowski, who chairs the crisis and litigation practice at Washington-based Levick Strategic Communication, claims that Apple is especially vulnerable from the crisis because Apple customers are more socially aware than the other segments of consumers. Apple consumers care about the quality of products, the environment, and working conditions (Liu & Wong, 2010). Since social responsibility is a major concern to Apple, we suggest Apple to intervene Foxconn’s HR policies by developing a business proposal. This proposal needs to provide guidance for Foxconn to overcome its current issues, and any incurred costs by the proposal should be shared amongst the stakeholders (Apple and Foxconn). The proposal is composed of the following sections:

      • Information sessions for upper management about the relationship between employee satisfaction and revenue
      • Training programs for line managers (employment law, leadership, communication, and tactical management training)
      • Efficient resources allocation: amenities such as pools and entertainment areas prove to be ineffective and costly. The resources should instead be used to establish programs that promote employee welfare.
      • Increased employee breaks, teamwork and communication enhancement amongst employees to improve employee satisfaction with essentially no monetary cost.

Contract Amendment

Based on the information given by Apple, the Supplier Code of Conduct does fully address the current work environment issue. The issue at hand is that the disciplinary action is a termination clause (Apple, 2010). Since Foxconn produces majority of Apple’s products, termination of Foxconn as a supplier is simply not an option. Therefore, the disciplinary actions need to be re-negotiated or re-designed. In substitution, fines will be imposed on any violations. This amendment will greatly reduce violations as the termination clause has absolutely no value and Foxconn is well aware of this fact.

Alliance Formation

If Foxconn refuses to accept the business proposal, an alternative recommendation needs to be imposed. Foxconn is a supplier for Apple along with other major players such as Hewlett-Packard, Dell, Sony, Motorola, Intel, Microsoft, and Nintendo (Poeter, 2010). We believe that separate investigations held by each company creates inefficiency and overlap as repeating audits may occur. A joint force of Apple and these major players can produce a significant in-depth audit program which will reduce inefficiency. By creating this strategic alliance, Apple can gain more bargaining power against Foxconn. New policies, procedures, and contracts can be easily implemented and compliance will be mandatory. However, this recommendation is meant to be the last resort since both parties are interested in establishing a good relationship and coercion is undesirable.

Maximizing Efficiency

One factor that contributes to the suicides is the ineffective compensation system. Empirical evidence has shown that prolonged work hours increase fatigue, which resultantly reduces efficiency. Foxconn’s employees are paid hourly, providing them with financial incentives to work long hours. However, the efficiency, undoubtedly, decreases. The vicious cycle begins with employees working extensively long hours and the lack of sufficient time to recover from the fatigue. The fatigue accumulates as the cycle continues. In the end, the employees’ efficiency decline with respect to time.

In order to improve its efficiency, Foxconn can enforce a maximum working hour limit for all of its employees. This policy will prevent employees’ over exhaustion, which plays a major role in the suicides. Not only will it promote employees’ work-life balance, it will also increase productivity. In addition to the daily working hour limits, Foxconn can also introduce a piece rate system on top of the hourly rate. This approach will encourage employees to work more efficiently, not necessarily longer. By combining these two systems, both parties, Foxconn and its employees, will reap benefits.

References

Apple boss defends conditions at iPhone factory. (2010, June 2). BBC News, http://www.bbc.co.uk/news/10212604

Apple, Dell will face higher costs. (2010, June 10). Investor’s Business Daily, pA02

Apple Inc. (2010, January 25). Apple reports first quarter results. Retrieved July 28, 2010, from http://www.apple.com/pr/library/2010/01/25results.html

Apple Inc. (2010). Supplier responsibility. Retrieved July 28, 2010, from http://www.apple.com/supplierresponsibility

Barboza, D. (2010, May 25). String of suicides continues at electronics supplier in China. The New York Times. Retrieved July 28, 2010 from http://www.nytimes.com/2010/05/26/technology/26suicide.html?_r=2&scp=1&sq=foxconn%20copycat%20suicides&st=cse

Bloomberg Businessweek. (2010, July). Foxconn Technology Co Ltd. Retrieved July 28, 2010, from Bloomberg Businessweek Web site: http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=2354:TT

Burnett, M. & Frost, S. (2007). Case study: the Apple iPod in China. Corporate Social Responsibility and Environmental Management, 2007(14), 103-113. doi: 10.1002/csr.146

Culpan, T., Liu, J,. & Wong, S. (2010, June 3) Why Apple and others are nervous about Foxconn. Bloomberg Businessweek. Retrieved July 28, 2010, from http://www.businessweek.com/magazine/content/10_24/b4182035750226.htm?campaign_id=rss_topEmailedStories

Datamonitor. (May 2010). Company profile: Apple Inc. Retrieved July, 28, 2010 from Business Source Complete

Dowling, P.J., Engle, A.D., Festing, M., & Groschl, S. (2009). International human resource management: A Canadian perspective. Toronto, Ontario: Nelson Education Ltd.

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Hogg, C. (2010, May 26). Taiwan iPhone-maker Foxconn opens doors after death. BBC News. Retrieved July 28, 2010, from http://www.bbc.co.uk/news/10161633

Liu, J. & Wong, S. (2010, June 2). Foxconn workers in China say `meaningless` life sparks suicides. Bloomberg Businessweek. Retrieved July 28, 2010, from http://www.businessweek.com/news/2010-06-02/foxconn-workers-in-china-say-meaningless-life-sparks-suicides.html

Loyd, B. & Ward, C. (2010, June 1). Rash of suicides in China where Apple products are produced. ABC News. Retrieved on July 28, 2010 from http://abcnews.go.com/Technology/string-suicides-apple-manufacturer-china/story?id=10789704

Josephson, M. & Reinken, B. (2008). The CEO worked where? Putting human resources in the leader’s path to the top. Retrieved July 20, 2010 from Egon Zehnder Intrnational Leadership Magazine.

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Cliff Lin

Cliff Lin

Internet Marketer

Cliff is an Internet Marketing guru with extensive experience in ecommerce and internet marketing roles. He has solid small business background, successful ecommerce experience, and internet marketing expertise. He is capable of implementing the latest interactive marketing tools for company, as well as backend information systems to maximize efficiency.

Cliff Lin

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