Apple and the Ethical/Business Problems of Child Labor and Other Unsavory Practices


Apple seems to be having supplier problems.


Last week Wintek, one of Apple's suppliers, was reported to have been using a chemical, n-hexane, which had poisoned 49 workers. This week there is an issue with suppliers who use child labor to make Apple products. Either of these problems could affect any company that uses suppliers in areas with lax regulation, doing potential substantial damage to that company's brand and products.


Child labor is particularly problematic because the fix is to fire the underage employees, who may be the only wage earners in their families. The whole problem may be artificial. This doesn't help our own Don Tennant, who was already regretting buying an iPhone (and getting lots of feedback).

Steve Jobs has argued this isn't Apple's problem, but a world problem with regard to priorities and a general lack of enforcement by local agencies. I agree that this has resulted from policies that seem to focus more on appearance than reality. Apple, in effect, got nailed for trying to police the problem itself. However, while his statements are accurate, they don't absolve Apple or any other company focused tightly on costs for being part of the problem.

The Problem of 'Don't Ask, Don't Tell'


Companies are under heavy pressure to find the lowest-cost providers and typically are free to look globally to find them. While they often have guidelines for things such as green practices, bribery and child labor, there tend to be few in regard to enforcement. Companies tend to know who violates these guidelines, but often adopt a "don't ask, don't tell" stance with these suppliers to optimize margins and assure profits.


The problem isn't that these practices go on, but that their existence and the related risks aren't properly assessed against the savings that these low cost suppliers provide. In short, while the benefits, largely financial, of working with these suppliers are well understood, the risks aren't -- and this leads to lopsided decisions that don't take these risks into account.


This week it happened to Apple, a company known for being incredibly controlling, but it could happen to any firm using outside suppliers. So what should be done?

Risk Assessment


The first step would be to determine the risk, but the "don't ask, don't tell" practices make this difficult. Risk assessment should begin in a virtual sense. What I mean is that if components are being built in areas such as China where unacceptable practices like this are common, then simply assume they will at some point be discovered and assess the cost of this discovery. This should give you a baseline risk that is reasonably accurate.

Risk Mitigation


This then would suggest some mitigating practices such as packaging PR responses designed to deal with the problem both retroactively and proactively. These might include philanthropic efforts focused on green activities or protecting children in the affected areas. However, if the problem is extreme -- involving physical abuse, death or suicide -- it is doubtful any mitigation will be adequate. In addition, if one of the mitigating acts actually makes the problem worse -- as might be the case if children were fired and then starved along with their families -- your company might go from being indirectly to directly responsible for the unfortunate and image-damaging acts.


Whether the firm was held accountable should likely be secondary to the reality of the now double crime against the children and families, but it certainly didn't look like it in this case.

This Is a Complex Problem with a Simple Solution


At the core of the problem is a tight focus on price above all else. The "all else" part needs to be revisited, as is any belief that the company can effectively police suppliers. Any attempt to police suppliers might create more problems than it would solve or might only shift the behavior to another part of the firm. This would suggest the combination of a severe penalty coupled with a general hands-off approach to compliance auditing with regard to any issues outside of component quality.


The severe penalty could be termination with prejudice for the contract with charges for any resulting costs the company incurs if the supplier is found to have violated any of the critical rules related to child labor, bribery or caustic chemicals, for instance. The termination could last for three, five, 10 years, or indefinitely.


This should raise the risk for non-compliance unacceptably high. However, I wonder whether it might be wiser to simply avoid areas where these practices are common, so that political pressure is put where it needs to be, on effective government enforcement.

Wrapping Up


Too often I see companies take a blind eye to their suppliers and act like practices that are common in a region don't apply to them or these favored suppliers, even though they may know this isn't true. In an Internet age, I think that is increasingly problematic. Even if governments don't take action, competitors and activist groups are more than capable of making these unsavory practices visible.


Maybe it's time to step back and think about what the company should stand for, whether price should overrule all else, and whether the ecosystem that surrounds your business should be something you are proud of. The caution is that if Apple, one of the most image-conscious and controlling firms on the planet, has a problem with its suppliers, it is likely you do as well.


It may be time to put "don't ask, don't tell" aside and do something about it.