Apple foxconn case study

Sun Hye Lee, Michael J. Mol, and Kamel Mellahi wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com. Copyright © 2016, Richard Ivey School of Business Foundation Version: 2016-03-22

Will it ever be good enough? That was the key question facing Apple Inc., (Apple) the California-based multinational technology company that was known for its innovative hardware, software, and online services. Apple had been accused of having allowed labour rights violations in China at Foxconn, a major supplier of its products in 2009, but the company had worked hard to overcome these issues to avoid any negative ramifications for its corporate image. Yet on December 18, 2014, new evidence was presented in a British Broadcasting Corporation (BBC) documentary that showed that labour rights violations continued to occur in China, this time at Pegatron, another large Apple supplier that specialized in the assembly of Apple’s iPhones 1 This documentary questioned Apple’s repeated statement in its 2014 supplier responsibility progress report that “Each of those workers has the right to safe and ethical working conditions.”2 Jeff Williams had been promoted to the role of senior vice president for Operations only 15 days earlier, when he was put in charge of what Apple called “end-to-end supply chain management . . . dedicated to ensuring that Apple products meet the highest standards of quality.”3 Given the huge progress that Apple had achieved, was the company simply being singled out unfairly because of its size, visibility, and earlier problems? Indeed, Apple now had an excellent reputation in terms of corporate social responsibility (CSR) and, in 2014, had been ranked fifth on Forbes’ “best CSR reputations” list.4 As Apple’s stock market value moved ever closer to US$1 trillion,5 did outside observers hold Apple, the most valuable company ever, to a higher level of corporate social responsibility? Alternatively, had the company still not fully come to terms with the nature and magnitude of its CSR challenges? It had indeed proven to be difficult to maintain control over Apple’s vast operations, particularly when most activities were undertaken through outsourcing to independent suppliers that were mostly situated in offshore locations, such as China, far from Apple’s base in California. Perhaps the most important question of all was what Williams and Apple could do to tackle the allegations. Would it suffice to adopt a defensive strategy, by simply denying that the problem was structural in nature and pointing to Apple’s many and costly efforts? Or should Apple’s management instead engage with the issue and instigate further CSR changes in its sourcing strategy? If so, what changes should be implemented? In short, how should Apple and Williams respond?

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In 2014, more than 1.2 billion smartphone devices were sold worldwide, for combined revenues of more than $380 billion.6 The competition among the major players — Samsung, Huawei, HTC, Nokia, and Apple — had started to take a toll on the industry’s profitability, which led industry experts to suggest that the smartphone industry was reaching its maturity stage, with year-on-year growth set to gradually decline. Apple was the largest player in the industry, accounting for more than 90 per cent of profits in the fourth quarter of 2014 and the first quarter of 2015.7 Samsung dominated the low end of the smartphone market, while Apple dominated the more lucrative high end. The low-cost players, Lenovo and Xiaomi, which were introduced to the smartphone market in 20128 and in 20119 respectively, broadened the reach of the smartphone market to lower-income countries and intensified competition among the key players in the market.10 The smartphone market had reached a saturation point in western markets, but was still expanding in emerging and low-income countries, providing new emerging-market multinationals such as Xiaomi with a potential competitive edge over traditional players such as Samsung, Apple, and LG.11 Besides its superior aesthetic design and cutting-edge features, Apple’s products were differentiated from those of its competitors by its use of a proprietary operating system (iOS) and its connection to Apple’s successful iTunes website that offered multimedia content for the iPhone and other Apple products. Because of its differentiated position, Apple’s iPhone commanded a premium price, which drove up Apple’s profitability and market value.12

Apple was not only the world’s most valuable company but also a hallmark of how information technology could change lives. The company was founded in 1976 and started to encroach into the personal computer market from the late 1980s and early 1990s onward. After the company nearly experienced a total collapse, it convinced co-founder Steve Jobs to return in 1997 to revive the company. Jobs and his team succeeded with great verve, launching such innovative products as the iPod and the iPad.13 However, Apple’s greatest success (as of the writing of this case) came from its debut in the smartphone market.14 Ever since the introduction of the first-generation iPhone in 2007, Apple was recognized as the market leader of the smartphone industry with its cutting-edge technology and design, enabling it to charge a premium price and obtain a very high profit margin. In 2013, Apple’s sales revenue reached $170 billion and its net income was more than $37 billion. In 2014, Apple’s revenue rose to nearly $183 billion, with net income reaching $39.51 billion. Apple experienced exponential growth since 2008 (see Exhibit 1), and the iPhone was the biggest contributor to its success (see Exhibit 2) Apple customers were extremely loyal to Apple products, often also buying its computers and tablets alongside the iPhone. For example, a survey conducted by Simonlycontracts.co.uk found that nearly 60 per cent of 3,000 iPhone owners declared that they had “blind loyalty” to their iPhones, and 78 per cent said they couldn’t “imagine having a different type of phone.”15

Foxconn, headquartered in Taiwan, was one of Apple’s biggest and oldest suppliers. In 2014, Apple contributed more than 40 per cent of Foxconn’s revenue. It was the biggest privately owned company in Taiwan with $131.8 billion sales revenue in 2013, and operations that stretched around the globe. Despite

its large size, Foxconn, as an original design manufacturer (ODM) had long been an unfamiliar name in the public eye, chiefly because it did not produce its own branded goods. In 2009, however, the Foxconn name suddenly came to prominence when a factory worker reportedly committed suicide after losing a prototype of the iPhone 4. It was later alleged that the employee’s treatment during questioning came close to being torture. One year later, another 18 Foxconn workers attempted to kill themselves, and 14 died at the manufacturing company’s facilities.16 Various explanations were offered for these deaths. Poor labour practices and working conditions were considered to be the main motivations for the employee attempting to commit suicide. Ever since the 2010 incidents, the company had been under increased scrutiny and pressure to improve its working conditions from various stakeholders, including non- governmental organizations (NGOs), the media, and customers such as Apple.

After the Foxconn scandal, Apple and its suppliers were under more scrutiny than ever before. Apple made various promises to improve its practices. One of Apple’s responses was to move some of its business away from Foxconn to Pegatron, a Taiwanese electronics manufacturing company that mainly assembled the iPhone 4, 4s, 5, and 5c, along with Apple’s iPad. The company’s factories were located in Taiwan, mainland China, the Czech Republic, and Mexico, while its customer service centres operated in the United States and Japan. Since it started producing Apple products in 2011, Pegatron showed remarkable increases in revenue that mirrored those of Apple itself, from TW$599.9 billion in 201117 to TW$881.2 billion in 201218 to TW$949.8 billion in 2013.19 In 2013, China Labor Watch (CLW), a U.S.-based NGO, whose mission was to increase the transparency of factory labour conditions in China, published Apple’s Unkept Promises, a report based on an undercover investigation into working conditions at Pegatron factories. The situation was even more serious than at Foxconn. According to the report, three Pegatron factories in China had violated 86 Chinese regulations, including 36 legal and 50 ethical violations, ranging from use of a juvenile workforce, to violations of women’s rights, excessive working hours, and environmental pollution. 20 In response to the public disclosure of the report, Apple again promised its full dedication to addressing those issues.21 Jason Cheng, Pegatron’s chief executive officer (CEO), also stated, “We will investigate the allegations fully and take immediate actions to correct any violations to Chinese labour laws and our own code of conduct.”22 Nonetheless, on December 19, 2014, the global news media again accused Apple and Pegatron, alleging that Apple had “broken its promises.” The previous day, the influential BBC Panorama program had broadcast a documentary based on an undercover investigation of the actual practices and working conditions at a Shanghai factory owned by Pegatron. The factory specialized in producing Apple products, including the iPhone. A variety of poor practices were exposed. For example, workers had to hand in their identification cards before entering the factory, were given no basic health and safety training, and had to work excessive hours — up to 16 hours a day, which would sometimes continue for 18 consecutive days. According to the documentary, workers’ requests for a day off were routinely ignored. Another scene in the documentary showed workers who could not help but fall asleep in the middle of a busy production line. The quality of life outside the factory was also criticized. Dormitories were overcrowded, and consisted of nothing but 12 tiny beds placed end to end.23 Apple did not comment on camera for the BBC documentary, but the next day, Jeff Williams clearly expressed what he and Apple CEO, Tim Cook, felt about the documentary. Their “deeply offended” feelings were delivered to the 5,000 U.K. Apple employees in the form of a letter, which became public when it was published by the Daily Telegraph.24 In the letter, Williams said, “We know of no other company

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doing as much as Apple does to ensure fair and safe working conditions, to discover and investigate problems, to fix and follow through when issues arise, and to provide transparency into the operations of our suppliers.”

In its 2014 progress report, Apple confidently remarked, “At Apple, we believe in making complex things simple.”25 This statement was an apt description of its products’ appeal to consumers and in the area of product design. Apple retained firm control to ensure it could deliver on this promise, but when it came to supply chain management, an approach of simplification could have its limitations. Given the global nature of Apple’s supply chain, the various products it produced, and the technological complexity of these products, Apple needed to work with a wide array of suppliers. To fulfill its “promise,” Apple needed to be aware of and appropriately manage all these relationships. Doing so raised various challenges. Some of these challenges related to the various formal and informal national institutional regimes that applied to various offshore locations. Apple and its suppliers operated in very different cultural, legal, political, social, and economic environments. For example, its two key suppliers, Foxconn and Pegatron, conducted their manufacturing operations mostly in mainland China. The top 200 suppliers on Apple’s supplier list were scattered around the world, ranging from Korea, Japan, and Taiwan, through to Ireland and the Czech Republic.26 As much as Apple may have wanted to make complex things simple, it could not single-handedly change these diverse national environments to suit its own purposes. Apple and its suppliers faced completely different stakeholders with different expectations. Apple needed to deal with high expectations from consumers, employees, investors, NGOs, and governments in the United States and other developed countries, while most of the suppliers were located in emerging countries that had much lower expectations and different social values and norms. Forbes, for instance, commented on the Panorama documentary:

While these issues are faced by every manufacturer, only Apple was specifically named in the programme. More than any other company, Apple has been the leading target for campaigners on working conditions, but it seems unfair to single out one manufacturer for the alleged sins of an industry.27 No solitary manufacturer can walk into the supply chain and demand working conditions far in advance of the prevalent conditions of the country. Change will be gradual, and measured over years, if not decades.28