The Scary Supplier Practices of Apple and Samsung

No overtime pay, kids handling chemicals, and a lack of smoke detectors are a few workplace issues.

Jul 5, 2014 at 4:00PM

Both Apple (NASDAQ:AAPL) and Samsung (NASDAQOTH:SSNLF) release a sustainability report that trumpets their social and ecological progress. While both are improving their suppliers' practices, each tends to encounter the same repeated issues. The latest reports detail continued poor labor practices. Just what kind, and will these issues ever materially affect the companies or investors?



Source: 2014 Samsung Sustainability Report.

Issues in detail
The above list comes from Samsung's own on-site surveys of 200 Chinese suppliers. While the results of the survey were only reported with these numbers and no specifics, Samsung also published findings from a third-party audit, which goes into greater detail.

Out of 100 Samsung suppliers:

  • 48 had minors involved with chemical handling processes.
  • 59 failed to provide safety gear like gloves, ear plugs, goggles, or masks.
  • A majority (no exact number given) don't comply with China's legally permitted overtime hours.
  • Nine discriminated based on either age, gender, or pregnancy in contracts or recruiting notices.
  • 33 omitted working conditions from contracts or did not provide contracts to temporary workers.
  • 33 delayed providing social insurance to workers.
  • 39 paid only a fixed wage to part-time workers without providing pay for overtime hours. 
  • 33 instituted fines or cut pay as a disciplinary action.
  • "Some" did not have emergency exits or working smoke alarms.
  • 33 didn't properly monitor sewage.
  • 35 failed to control air pollution from manufacturing. 

To give credit, Samsung did actually publish these findings instead of hiding them and, more importantly, corrected each issue that it found. But Samsung isn't alone, as Apple faces many of the same issues.

In the audit of 451 Apple suppliers:

  • Four conducted pregnancy testing, which Apple classifies as discrimination.
  • 105 failed to provide workers with social insurance.
  • 71 incorrectly calculated and underpaid overtime work.
  • Eight were found to have underage labor.
  • 209 lacked proper approval for fire safety, construction, or lightning regulations.
  • 90 failed to provide safety gear like gloves, ear plugs, goggles, or masks.
  • 159 did not have proper hazardous waste storage.

Apple addressed and corrected each issue that it found as well.


Workers in Shanghai eat lunch. Source: Apple Supplier Responsibility 2014 Progress Report.

Potential effects
These findings are nothing new, and it seems even when widely reported on, as in 2012 with Apple and supplier Foxconn, customers just don't care. And since customers don't care, investors don't care, at least concerning the top line of the income statement.

But what about increased costs? As Apple and Samsung demand fair practices from their suppliers, the latter might face higher expenses to actually install smoke detectors and pay overtime. For example, after Foxconn's undesirable attention in late 2011, it bumped factory worker salaries by 16% to 25%, and surely some of that must have increased the cost of putting together an iPhone. But looking at the iPhone numbers specifically, labor is one of the smallest costs.

Analyst Horace Dediu broke down iPhone costs in 2012, and estimated labor costs to be between 2% and 5% of the retail price. While increasing labor costs would nibble into margins, it's easy for Apple (with net margins around 22%) to stomach. Additionally, industry trends mean that both companies can take on higher labor costs. First, the cost of materials to build phones is dropping: One analyst puts the bill of materials for a Samsung Galaxy S5 between 10% and 15% less than an S4. Second, as the phone maker targets growth at lower price points, like with the iPhone 5c, it's expected that margin percentages may fall as earnings rise.

Improving, slowly
Apple began auditing its suppliers in 2006 and conducted 173 first-time audits last year. As these companies expand both their production relationships and auditing programs, working conditions will continue to improve. And while customers never seem to care, investors can at least shrug off any worry of increased expenses of such programs given how little labor factors into cost and where the industry is headed.

What does Apple have its suppliers working on now?
Apple recently recruited a secret-development Dream Team to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out... and some early viewers are even claiming its everyday impact could trump the iPod, iPhone, AND the iPad. In fact, ABI Research predicts 485 million of these type of devices will be sold per year. But one small company makes this gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Dan Newman owns shares of Apple. The Motley Fool recommends and owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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 disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.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 disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information