Apple, Foxconn Controversy Gives Tech Industry Its 'Nike Moment'

Apple's relationship with Foxconn is bringing about an industry overhaul, says a new report, to protect companies' images and the billions they spend on manufacturing.

With Apple at the forefront, the electronics industry is having its "Nike moment," research firm IHS iSuppli said in an April 10 report.

Alluding to the 1990s public relations disaster that followed spreading knowledge of sweatshop manufacturing in the clothing industry and led to the creation of the Fair Labor Association (FLA), Apple and the like are having a "moment of reckoning," said the firm, following widespread news of the labor conditions at several of the factories owned by Foxconn, a contract partner that builds iPhones and iPads for Apple, along with most of the consumer electronics sold by a variety of brands.

The contract partners are also having a moment, feeling the world's eyeballs on their businesses, which have been chosen for their inexpensive rates.

"Much of the press coverage of the FLA investigations has focused on the impact it will have on Apple's margins or on prices that consumers will pay for iPhones or iPads," Thomas Dinges, an IHS senior principal analyst, said in a statement.

"However," Dinges continued, "the real impact is on the overall relationship of electronic brands with contract manufacturers like Foxconn. Brands now realize that the biggest risk in dealing with contract manufacturers lies in the potential public relations disasters that can arise from workers' rights issues."

Foxconn and its ilk have billions of reasons to keep those relationships healthy. In 2011, the electronics manufacturing business€”a combination of manufacturing services and original design manufacturing (ODM)€”collectively earned $359.8 billion in revenue. While 2012 revenue is expected to dip slightly, IHS expects that figure to climb to more than $426 billion in 2015.

In January, in-depth reports from The New York Times and other news sources on working conditions at Foxconn caused Apple fans to consider their devices anew. The Times report told of workers made to work such long hours on their feet that their legs swelled to where they couldn't walk and described one of two explosions, tied to polishing iPads, that resulted in one death, dozens injuries and one young man whose facial features were scrubbed off "by heat and violence."

Apple quickly went on the offensive, with CEO Tim Cook expressing in a companywide email that he was "deeply troubled" by such reports and that any insinuation that Apple wasn't taking steps to ensure its partners were treating workers properly were "patently false and offensive."

No one in the industry, Cook insisted, did as much as Apple to improve the conditions for its hundreds of thousands of workers.

Shortly afterward, Apple asked the FLA to investigate the Foxconn factories, and on March 29, the FLA released a report of its findings, which included "serious and pressing" violations of the FLA's Workplace Code of Conduct as well as Chinese labor laws.

While the report was generally more tame than some expected, it described workers feeling "insecure" about their safety at work, not being paid properly, in many instances, for overtime hours, and many not being paid for, or understanding how to sign up for, "Social Security insurance."

IHS expects that as contract manufacturers work to ensure compliance, by growing their workforces and increasing pay scales, manufacturing costs will also rise. (According to the FLA report, Foxconn will need to hire "tens of thousands of extra workers" over the next year, to achieve compliance about workers' hours while maintaining current output levels.)

"Even so, given the small proportion of manufacturing costs compared to component expenses, this is unlikely to have a major impact on company margins or consumer prices," states the report.

While manufacturers are likely to look beyond China, for still less-expensive locations in which to work, IHS added, "China will remain the manufacturing engine of the global electronics industry."