The Tech Sector's Dangerous Elephant in the Room

Most of us know where our smartphones, tablet computers, and other electronic gadgets are manufactured: China, or somewhere overseas. And even if we don't want to admit it, most of us have a vague notion the subpar conditions under which they're produced -- conditions that, if we're being honest, we wouldn't want our own family members to be working under.

A new report is shedding light on this issue, one that's surfacing more and more. Here's what it says, and why tech investors should be concerned.

America outpaced
The report is courtesy of The New York Times and is an in-depth look at what the paper is calling the "iEconomy." The thrust of the article is that the kind of manufacturing jobs that currently exist in China and other emerging economies, i.e., the kind of jobs that built the American middle class, are never coming back.

It's not just that labor is cheaper abroad. It's also the vast scale, coupled with the flexibility, diligence, and industrial skills on the part of the workers there, which have so outpaced American workers that "made in the U.S.A." is no longer realistic for most consumer-electronics manufacturers.

Apple (Nasdaq: AAPL  ) is the company used to perfect example in the article. And while it's by no means the only company that operates in this fashion, it's as good a place as any to start talking about the darker side of the iEconomy.

I want it perfect, now
The most eye-opening portion of the article takes us back to just weeks before the first iPhone was set to be sold, a prototype of which Steve Jobs had been carrying around in his pocket for weeks. An angry Jobs calls a handful of senior staff into his office, holds up the phone -- which is clearly covered with scratches -- and says: "I won't sell a product that gets scratched. I want a glass screen, and I want it perfect in six weeks."

A senior executive speeds off to China and quickly finds a company that can make the glass screens. Immediately, 8,000 workers from the company's dormitories are roused, given biscuits and tea, and start 12-hour shifts fitting glass screens into beveled frames. Within 96 hours, the plant is producing more than 10,000 iPhones a day. 

Anarchy in the U.S.
You just can't do that kind of thing in America anymore. First, workers wouldn't put up with it. Can you imagine GM factory workers being woken at 3 a.m. -- from their communal sleeping quarters, no less -- being handed a cup of coffee and a doughnut, and then marched off to the production line?

Second, even if they didn't strike or riot, you'd still be breaking a filing cabinet full of labor laws. You could get away with this sort of thing around the turn of the 20th century here, but no longer.

Suicide is bad PR
Foxconn is the company that's been most in the news lately regarding these types of work situations and the disasters, both personal and potentially financial, that can result. In 2010, 12 Foxconn workers committed suicide, and just weeks ago 150 workers at a Foxconn factory in Wuhan threatened mass suicide if they were moved to a new production line.

These 150 employees were involved in producing Microsoft's (Nasdaq: MSFT  ) Xbox, a flagship product the company is placing big bets on to stay connected, and relevant, to the next generation -- a generation that, with the current pace of innovation, may never use Windows or MS Office.

Foxconn also manufacturers the Kindle for Amazon.com  (Nasdaq: AMZN  ) . The online-retailing behemoth is placing a massive bet that the Kindle product line can drive substantial portions of future growth, and the company needs this new product launch to go well, undistracted by public-relations disasters like worker suicides.

The high cost of cheap labor
Even if Apple could get away with here what it did in China to get the iPhone fixed so quickly, would you really want it to? Would you want anyone in your family to have to endure a life lived at the beck and call of a manufacturer?

On a less emotional note, no company -- even industry chiefs like Apple, Microsoft, or Amazon -- need the kind of bad press that can come with situations like the ones at Foxconn. Consumers are becoming more and more socially conscious, and they want the goods and services they use to measure up. And if consumers aren't happy, and stop buying, unhappy investors will surely follow.

To give credit where credit is due, Apple has recently joined the Fair Labor Association, a group set up in 1999 to monitor workplace conditions around the globe. It's the first technology company to do so. The company will no doubt benefit from this move, both perceptually and financially. In this day and age, the two are inseparable.

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Fool contributor John Grgurich likes the sound of biscuits and tea, but not followed by a 12-hour, production-line shift. The Motley Fool owns shares of Microsoft, Apple, and Amazon.com. Motley Fool newsletter services have recommended buying shares of Amazon.com, Microsoft, and Apple and creating bull call spread positions in Microsoft and Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a scintillating disclosure policy.


Read/Post Comments (16) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 25, 2012, at 7:02 PM, rfaramir wrote:

    "Would you want anyone in your family to have to endure a life lived at the beck and call of a manufacturer?"

    You mean like having a pager at a startup company? Yes. Yes, I would.

    So long as it is voluntary, it is fine and no one has the right to interfere. To do so would make things worse.

    If they were shanghai'ed into the job, then yes, this is bad. (Pun intended)

    If they are held there against their will and cannot quit without their lives or their families' lives being threatened, then it is wrong.

    But the reality for them, is that, as bad as these jobs look to us rich, fat, lazy westerners, these jobs are a big step up for them. They often come from very poor rural communities to the cities for work like this. The pay is likely several times higher than they can get farming. Communal living means spending less on where they sleep, so they can save more of their salary, which means hope for their impoverished family back home.

    Do not agitate to take this away from them!

    Look into whether force is being used (or threat of it). But if it's not, butt out.

  • Report this Comment On January 26, 2012, at 4:36 AM, MichaelDSimms wrote:

    I'm sure Steve Jobs never lost an hour of sleep from the suicides in his sweat shops. Buy your Apple stock and your Apple products and enjoy them. After all It's what Steve would have wanted. And it will make you wealthy, right?

  • Report this Comment On January 26, 2012, at 5:06 AM, CaptainWidget wrote:

    Working at Foxconn is a pretty hefty step up from being a rice farmer.

    We get into the habit of thinking those jobs aren't "good enough" for us, so we don't want anyone in the world to have those jobs.

    But the fact is that your grand parents or great grand parents worked jobs just like that, saving their labor in the form of capital and productivity advancements, to pass down to you so you wouldn't have to work so hard.

    The Chinese are in that process right now of saving their blood, sweat, and tears for future generations. And they're not complaining. They're by and large a hard working and industrious nation. Why should we complain for them?

  • Report this Comment On January 26, 2012, at 10:09 AM, XMFGrgurich wrote:

    My grandparents did work in similar conditions to the Chinese, coming over from Europe around the turn of the 20th century to get jobs in the steel mills of Pittsburgh, and I wish they wouldn't have had to work in some of the worst conditions of their time. I wish labor law would have curtailed some of the worst practices then.

    Threatening suicide, or actually committing it, because you see it as the only way out, is not the way anyone should have to live.

    That said, I am typing this response right now on my brand new MacBook Pro, made no doubt in one of these Chinese factory towns.

    There can be balance between commerce and human rights; that's what we should be shooting for.

  • Report this Comment On January 26, 2012, at 10:11 AM, XMFGrgurich wrote:

    Cheers to all for checking, by the way. The comments were all civil and thoughtful, to boot. Hey, we humans really can get along! ;->

  • Report this Comment On January 26, 2012, at 11:00 AM, tgnytg wrote:

    This "story" has been "reported" every couple of months for three years running. I smell a Quixotic political agenda at work here.

    The actual gist of the complaint is against cheap, communist, govenment subsidized labor. Even though these jobs are some of the best working conditions, and some of the highest wages in China for unskilled labor. Foxconn workers' suicide rate is roughly a third the per capita rate in the rest of China.

    In the last five years anyone who can read a newspaper has seen scandal after scandal in the Peoples' Republic, of exploited workers making unsafe or toxic products under grueling working conditions - everything from electronics to pet food, infant formula to medications. Heck, even the Kardashians' clothing line was being assembled in China by "slave labor" and therefore cancelled.

    In spite of these scandals, thousands of corporations around the globe take advantage of reduced labor costs with the blessing of the Cinese government and their non-existant labor laws.

    The alleged verdict: Apple is mean.

    The real verdict: Communism sucks.

    How come the zealots aren't up in arms at Foxconn or any of the other thousands of corporations that take advantage of cheap labor?

    Because using the name of deep-pocketed Apple lends instant credibility to the cause.

    I can't understand how Foxconn stays in business with all of their employees collectively diving off their buildings to take a dirt nap. Maybe, just maybe, the effort to repeatedly fabricate this "news" is intended to put forth a political cause.

    I'll bet Apple is mean to little soft fuzzy kitties, too.

  • Report this Comment On January 26, 2012, at 4:40 PM, XMFGrgurich wrote:

    It's not just Apple. Everyone's at it. But awareness helps. Sunlight is the best disinfectant.

  • Report this Comment On January 26, 2012, at 4:43 PM, CaptainWidget wrote:

    <<My grandparents did work in similar conditions to the Chinese, coming over from Europe around the turn of the 20th century to get jobs in the steel mills of Pittsburgh, and I wish they wouldn't have had to work in some of the worst conditions of their time. I wish labor law would have curtailed some of the worst practices then.>>

    I wish they didn't have to as well. I wish the Chinese could be instantly rich just like us.....but I also wish that the Cincinnati Bengals would win the Super Bowl and we had hotels on the moon (in that order)

    The question is...at what cost? At what cost would it take to provide those things? The working conditions could have been improved in the steel mill by raising wages and government legislation on working conditions. Guess what...the cost of that would be those jobs would have never existed. Your great grand parents would have been farmers, never rising above poverty their entire lives.

    I'll bet if you ask them, your grandparents were thankful for the opportunity. And I'll bet if you asked the Chinese, they're thankful for the opportunity.

  • Report this Comment On January 26, 2012, at 4:57 PM, Brent2223 wrote:

    Don't hate the players, hate the game. If the Chinese government doesn't care to protect their workers what chance does a foreign company have to make changes? Like it or not, humanitarian issues aren't real high on the list of concerns for business in a Capitalist society. It is governments role to step in and set the ground rules.

    We get into trouble when governments forget that Capitalism is an economic concept and start making political decisions based on economic theory.

  • Report this Comment On January 26, 2012, at 5:07 PM, XMFGrgurich wrote:

    "Like it or not, humanitarian issues aren't real high on the list of concerns for business in a Capitalist society. It is governments role to step in and set the ground rules."

    Cheers to this. Again, balance between gov't and commerce is the answer.

  • Report this Comment On January 26, 2012, at 5:30 PM, PSU69 wrote:

    Fools invest to make money. Do we invest to avoid tobacco? If you read the Steve Jobs biography you will learn a lot about many crazy decisions involved. My nephew married a gal from China. She is so glad to be in the USA. He stories about the government abuse, the fear mongering, and the theft of property are just sickening. China has massive internal problems. Our blogging will not improve conditions in China friends.

  • Report this Comment On January 26, 2012, at 5:31 PM, PSU69 wrote:

    BTW, she just delivered her first baby her in the USA.

  • Report this Comment On January 26, 2012, at 6:55 PM, tomboalogo wrote:

    Yes and I'm sure that the suicides at the Golden Gate bridge are the responsibility of Apple too.

    No?

    Maybe the Governor of California is responsible? No?

    Blaming suicides at Foxconn on Apple is like blaming the rain on what you had for dinner, it doesn't make sense. The media has to stop reporting these unbalanced stories. The song "Dirty Laundry" comes to mind.

  • Report this Comment On January 27, 2012, at 4:51 PM, TomBooker wrote:

    You might want to try the Golf Channel instead of Fox Business and CNBC.

    What you do has nothing to do with a person in China? And you don't have to worry about what happens to somebody 12,000 miles away?

    Oh, that's the beauty of capitalism and globaiization.

    What goes around, always eventually comes around.

    It won't look exactly like being willing to die, rather than face the conditions of your life.

    But it will feel like it.

  • Report this Comment On January 29, 2012, at 4:47 AM, lwbaum wrote:

    To add a bit to this interesting conversation, minimum wages in China (which are set by local or provincial governments) are rising quickly. Workers are finally starting to see their low wages increase because there are now enough factories to employ most of the surplus labor as a result of decades of industrialization. Companies are moving some factories to cheaper countries, like Vietnam or Bangladesh. More poor people will benefit, and more countries will develop.

    Many people talk about buying American, but to me that seems backwards. To accelerate the process of development around the world and bring poor people into the middle class, we should instead buy Bengali (or wherever is the forefront of industrialization). Of course, this depends on which you care more about: your country or people in general. We can also accelerate this process and help people both in rich and poor countries by advocating good working conditions.

  • Report this Comment On January 29, 2012, at 6:35 AM, ortho1g wrote:

    we need them in kentucky they could rebuild the eggners ferry bridge in a week

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