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