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On Tuesday, the Fair Labor Association sat Apple (Nasdaq: AAPL ) down for a progress report. Earlier this year, several journalists revealed gross misconduct at Apple’s manufacturing facilities, igniting a public firestorm, and forever tainting the company's squeaky clean track record. The report reveals Apple’s progress, but it also alludes to a larger movement that could level the playing field for manufacturers worldwide.
Fantastic Mr. Foxconn
Despite the polished look of iPhones and iPads, there’s a lot of dirt underneath the smooth surface of your newest Apple purchase. In the past year, Chinese factories owned by Foxconn International Holdings have been more than just a birthplace for Apple devices and other tech products. These facilities have also been home to explosions, union busts, worker suicides, and a laundry list of other atrocities.
In response to public outcry and consumer boycotts, Apple hired the Fair Labor Association (FLA) in January to serve as an objective third-party investigator to document Foxconn’s infractions, and develop strategies to improve its facilities. On Tuesday, the FLA released its first report. In four words: so far, so good.
Foxconn has completed 284 of the 360 FLA-assigned remedial tasks. Work environment changes include ergonomic enhancements, overdue equipment maintenance, and safety trainings. Workers’ rights improvements include union elections, limits on overtime work, and (read carefully) extended publicly funded unemployment insurance coverage.
This changes everything
It's not a typo: publicly funded unemployment insurance. In six months’ time, an appeal in America moved through the corporate circuitry of Apple, Foxconn, and, ultimately, ended up in passing government legislation that will benefit migrant workers in Shenzhen, China.
The Chinese government has had a rocky relationship with migrant workers, but it has recently begun to realize that the benefits of including these 220 million workers in its social services far outweigh the costs of marginalizing 16% of its population.
Furthermore, incentives, such as medical and unemployment insurance, are crucial to ensuring that companies like Foxconn can attract and keep healthy and competent employees. Factory work is cyclical, so unemployment insurance provides a buffer for workers waiting for a job, with the added benefit of creating a more stable worker pool for employers.
Take a moment to let this soak in: In a world where Apple's consumers and shareholders can demand beneficial government regulation for workers halfway around the world, "comparative advantage" doesn’t have to be code for "loose regulation" or "child labor." Policies just like the one above could improve factory conditions, and equip manufacturers with a more efficient workforce, all without taking a dime out of shareholder profits.
They got it all wrong
When the news first broke of Apple's rotten Chinese manufacturing, many investors believed this was the first nail in the coffin of Apple's all-important brand. Six months later, I find the opposite to be true. Take a look at the long list of "who's who" clients that Foxconn serves:
- Cisco (Nasdaq: CSCO )
- Google's Motorola Mobility
- Hewlett-Packard (NYSE: HPQ )
- Intel (Nasdaq: INTC )
- Nokia (NYSE: NOK )
Although Apple would've undoubtedly rather taken a backseat in the Foxconn fiasco, it shouldered its blame publicly and maturely. It responded with a plan and, with the help of the FLA, is well on its way to meeting its industry-defying standards.
Apple has provided itself with a new opportunity that few would've imagined before this week's report: Manufacturers, like Apple and other Foxconn clients, can focus on growing their top line through brand recognition and technological innovation, without having to worry about competitors cutting corners on expenses to make up for their sub-par products. To put things in perspective, Apple's brand (top line) is estimated to be worth as much as a third of its market cap, while labor costs (bottom line) represent only 5% of an iPhone's final price.
As consumers and shareholders, it seems that our dollars and votes can now do more than ever before. We can level the economic playing field to protect workers' rights, while simultaneously enabling corporations with sustainable competitive advantages to trounce competition, fair and square.
A year ago, Apple lost its spotless reputation. This week, it not only reinvented itself, but it paved the way for a more profitable and equitable manufacturing industry that could serve as an international model for years to come.
I've invested real money in Apple, and made an outperform CapsCall on my Motley Fool Caps page, but you shouldn't make a snap decision on this company without understanding the full context of Apple's business. That's why Motley Fool Analyst Eric Bleeker has prepared a special report outlining his criteria for Apple's ultimate success or failure. It's chock-full of excellent analysis, and comes with a year of free updates, so be sure to pick up your copy today.