Peak Apple: Understanding the Foxconn Deal

Apple has quickly raised worker wages to address the highly publicized problems with working conditions in its supplier network. The decision protects Apple’s pristine brand and costs the company next to nothing. It cleverly exploits the high-minded principles and low-level economic literacy of those of us who are its devoted customers. A series of well-researched articles by Charles Duhigg in the New York Times that included a long article on sweatshop subcontractors put Apple on the defensive. It appears that hard working people risk their lives to make sure that our iPads are shiny. Apple responded by asking the Fair Labor Association to investigate working conditions at its Chinese suppliers. Back home, Mike Daisey’s professional self-immolation magnified the controversy by forcing NPR to retract a series of assertions about Apple’s Chinese suppliers. This week, Apple CEO Tim Cook visited a huge Foxconn assembly plant in China as the FLA issued its report. Cook knows a lot about manufacturing both as a global supply chain expert and as a former factory worker. Cook played the event perfectly. When the FLA reported that, shockingly, Chinese factory workers endure long hours for low pay, he promptly gave workers a raise by pledging to cut hours without cutting pay. The audience applauded, the curtain dropped, and the world returned to its apps. The story displays a confidence and an ability to turn crisis into yet another advantage that makes me wonder whether we are approaching peak Apple. Apple raised Chinese wages not simply because it cares so much, but because it can afford to care so little. They know that their move causes bigger problems for their competitors than it does for them. Apple cares less about Chinese labor costs than Dell, HP, Google, and many others who produce lower margin products that use more Chinese labor. Apple spends about $8.25 per iPhone on Chinese labor — a completely irrelevant number in the lifetime economics of an iPhone. Had Chinese workers targeted Apple for a campaign to increase their wages, they would have chosen well. Is Apple’s move good for Chinese workers? Sure — for some of them anyway. Apple’s decision does not mean that Chinese workers will necessarily take home more money — just that they will work fewer hours. This may not sit well with workers at Foxconn and other subcontractors, most of whom move from the countryside, live in company housing at the factory, and want to maximize their earnings, not minimize their working hours. Duhigg’s excellent reporting cited a factory where workers rioted when hours were reduced under pressure from a western customer, acknowledging:

The other (workers) we talked to all seemed to regard it as a plus that the factory allowed them to work long hours. Indeed, some had sought out this factory precisely because it offered them the chance to work more.”

Does China benefit from this decision? Not necessarily. Manufacturing jobs are declining China in favor of Vietnam and Cambodia (the great promise of the campaign this week by Nobel Peace Prize winner Aung San Suu Kyi is that Burma will attract urban factories to relieve the punishing life of rural peasants). It surprises many Americans to learn that manufacturing employment in China is actually declining. With the Apple settlement raising labor costs, peasants in adjacent countries can cheer: soon they too can trade in their hoes and hats for a white coats and the opportunity to polish iPads. Nobody said economic progress was beautiful. Apple’s decision to polish its “Think Different” brand built on images of Ghandi and Cesar Chavez is tribute to both the company’s high moral tone and to it’s willingness to indulge the low economic literacy of its Western customers. Apple sells products to people who prefer a world in which every kid can go to college and work eight hour days. Apple customers hate sweatshops, even those that are demonstrable vehicles of economic progress. We have a hard time acknowledging that countries in South Asia, sub-Saharan Africa, or Haiti demonstrably need more sweatshops. We commit what economist Harold Demsetz memorably called the Nirvana Fallacy: we compare the choices facing overseas workers to the alternatives we have, instead of to the alternatives they have. As economist Eric Crampton notes:

Harold Demsetz warned in a beautiful piece of economic writing back in 1969 against what he called Nirvana Theorizing. He said there that we can’t say markets fail just because they deliver outcomes that we don’t like; rather, we have to compare the outcomes of markets to real-world achievable alternatives. We can’t just assume Nirvana on the other side of the scale. And, most of the arguments against sweatshops effectively assume Nirvana on the other side: if only we were to ban sweatshops or, more realistically, impose bans on the import of products produced by sweatshop labour, the employees would suddenly be freed to pursue fulfilling careers or to go and get that Bachelor’s in Cultural Studies that they’ve always wanted….. It’s only the evil sweatshops that are keeping them from achieving their dreams. If only it were that easy. For proper comparative institutional analysis, we really have to look at how working in a sweatshop compares with what else these workers could be doing.

Inconveniently for the Nirvana view, thousands of people voluntarily line up outside of Foxconn’s gates when factory jobs open up. Those clamoring to work at Foxconn know that factory work is tough and sometimes dangerous. But, like factory workers everywhere, they know that farm work is worse. The Times documented a horrific aluminum dust explosion in a Foxconn plant. This is not something to take lightly (my grandfather, uncle, and kid brother all died on the job or from occupational illness; occupational safety has never been an abstract problem to me), but the risks of factory work are nothing compared to the risk of illness (especially malaria), injury, or poisoning faced by Chinese peasants. Just about everyone who has tried both farm and factory prefers the latter. I worked in several factories; most of the jobs were boring and some were wildly unsafe (I thought for awhile that Westinghouse had a “hire the handicapped” policy because so many of my co-workers were missing fingers or limbs. D’oh). But two days spent harvesting hay under idyllic conditions hurt me worse than any factory job I ever did. Former paper and aluminum mill worker Tim Cook also understands this extremely well. Crampton cites recent work by Benjamin Powell on standards of living associated with sweatshop work showing that in most of the countries he studied, the average wages were equal to or better than the national average. In poor countries like Cambodia, Haiti, Nicaragua and Honduras, sweatshops paid twice the national average. This is why countries like Bangladesh, where 80% of the population lives on less than $2 per day, need more sweatshops, not fewer. Crampton reminds us of Nick Kristof’s reporting on workers in a garbage dump in Phnom Penh. Kristof gets it:

Another woman, Vath Sam Oeun, hopes her 10-year-old boy, scavenging beside her, grows up to get a factory job, partly because she has seen other children run over by garbage trucks. Her boy has never been to a doctor or a dentist, and last bathed when he was 2, so a sweatshop job by comparison would be far more pleasant and less dangerous. I’m glad that many Americans are repulsed by the idea of importing products made by barely paid, barely legal workers in dangerous factories. Yet sweatshops are only a symptom of poverty, not a cause, and banning them closes off one route out of poverty. At a time of tremendous economic distress and protectionist pressures, there’s a special danger that tighter labor standards will be used as an excuse to curb trade. When I defend sweatshops, people always ask me: But would you want to work in a sweatshop? No, of course not. But I would want even less to pull a rickshaw. In the hierarchy of jobs in poor countries, sweltering at a sewing machine isn’t the bottom.”

Tom Harkin, a progressive, pro-labor Senator from Iowa, introduced a law in Congress in 1992 that understandably prohibited the import of products made by children under age 15. In 1997, UNICEF investigated the effects of the Harkin Bill and found that even though the legislation had not taken effect, the mere threat had

“…panicked the garment industry of Bangladesh, 60 per cent of whose products — some $900 million in value — were exported to the US in 1994. Child workers, most of them girls, were summarily dismissed from the garment factories. A study sponsored by international organizations took the unusual step of tracing some of these children to see what happened to them after their dismissal. Some were found working in more hazardous situations, in unsafe workshops where they were paid less, or in prostitution.”

Once again, sweatshops are hardly the bottom of the heap — indeed the export shops targeted by Harkin are on average the better places to work. Most child labor is local production or rag picking, so if you ban exports, you may push some of the world’s most vulnerable children into the garbage dump, begging, child prostitution and starvation. This is not an argument for unfettered child labor or dangerous factories — just a note that exploitation is relative not absolute, protection is never free, and economic progress proceeds in steps not leaps. Apple understands that paying slightly higher wages simultaneously pressures their competitors, appeals to western decency, and exploits economically ill-considered aversion to sweatshop labor. But in technology, companies with more competitive advantages than they can possibly exploit should worry about hitting their peak. Having watched first Microsoft and now Google decline after amassing what once seemed to be insurmountable advantages, it is time to ask whether peak Apple is now in sight?

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Economics, Politics, Technology

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