Supplier Codes of Conduct and the Middle Class

Stephen DeAngelis

March 1, 2012

“Pardon me for sounding like a Marxist – which I decidedly am not,” writes Robert J. Bowman, managing editor of SupplyChainBrain, “but doesn’t it seem as though a thriving middle class in the Western world depends on the existence of workers making pennies an hour in some distant, underdeveloped country?” [“Tomorrow’s Global Consumer: Smack Dab in the Middle,” 16 January 2012] A quick answer to that question is: No. Bowman’s argument would be true if global wealth were a fixed sum and those trying to obtain it were involved in a zero sum game. Fortunately, neither of those things is true.

 

A thriving Western middle class depends on wages rising with productivity. The middle class in the West has suffered because productive has increased and wages have remained flat. Better wages means that the middle class could afford products produced in plants where fair wages were paid and working conditions were good. As better wages are offered overseas, the competitive landscape becomes more level. But I’ll let Bowman argue his point. He writes:

“According to Ernst & Young, the global middle class is set to burgeon from its current level of 1.8 billion to nearly 5 billion by the year 2030. With so many people in the ‘middle,’ where will retailers and manufacturers find the cheap labor that’s needed to supply them?”

There are, of course, places in the world where cheap labor can be found. But cheap labor isn’t all that attracts manufacturers — otherwise, Haiti would be a manufacturing powerhouse. African and Middle Eastern countries would also love to see manufacturers set up shop and provide jobs for their burgeoning youth bulges. But the point I made earlier is the most important point. Wealth is not a fixed amount. It can be created and shared. Bowman, in fact, goes on to provide a perfect example of that in China. He writes:

“Center stage for this stunning debut will, of course, be China, where even now wages are rapidly rising by as much as 30 percent. The Chinese government is encouraging the trend, much to the chagrin of low-cost manufacturers like Foxconn. The goal is to create a powerful middle class that generates local demand and transforms China from an economy dependent on cheap exports to one that makes a variety of quality products for its own people. But it’s more than a China story. The new Ernst & Young report, based on a survey of 547 executives around the world, also locates what it calls ‘the next three billion’ members of the middle class in India, Brazil, Indonesia, Turkey, Eastern Europe and even parts of Africa. One key driver is the high percentage of young people in those developing countries, says Maria Pinelli, global vice-chair of strategic growth markets for Ernst & Young. As they enter consumption age, these citizens will be demanding good, steady paychecks, which will translate into disposable income.”

The most important thing that Pinelli said is that young workers want “good” as well as steady paychecks. It is the “good” wage that provides disposable income. Bowman continues:

“Ernst & Young predicts that the increase in middle-income consumers will boost global demand from $21tr to $56tr by 2030. Asia, the report says, will account for 40 percent of middle-class spending, versus its current share of 10 percent. So where will manufacturers go to find cheap labor?”

Although it may sound like Bowman is persistently pushing a flawed argument, he finally admits that Ernst & Young concludes that asking where the cheap labor is to be found is the wrong question. He explains:

“Its study suggests that the traditional model of global production – make it cheap there, sell it at a hefty profit here – is on the way out. In years to come, suppliers won’t be able to compete entirely on the basis of low overhead. The focus will be on what they make, and where it’s sold. Forget about a global multinational coming in and automatically dominating a newly emerging market, says Pinelli. ‘That [scenario] couldn’t be further from the truth.’ It’s local production, with an intimate knowledge of consumer needs, that will have the upper hand.”

In the end, Bowman admits that exploiting sweat shop workers is not a necessary and essential foundation to keep the middle class happy and consuming. In fact, he admits, “Anything that lessens the possibility of work environments that appear to drive employees to suicide is welcome. Maybe there’s room in the middle for everybody after all.” The fact is that what has been called “corporate social sustainability” is likely to be more important in the future than it has been in the past. Lorcan Sheenan reports, for example, “On January 1st, a new law took effect in California. The California Transparency in Supply Chains Act of 2010 requires any retailer or manufacturer doing business in California and with greater than $100 Million in annual revenue to train employees and publish their approach to eliminating forced labor and human trafficking in their supply chains.” [“California Transparency in Supply Chains Act, ModusLink’s Value Unchained, 16 January 2012] He continues:

“The effective date of this legislation comes at a time of increased interest in the social implications of how products are made and distributed. And the interest extends well beyond the industry; I have begun to see people raise this topic on social networking sites like Facebook and Twitter. The increased focus on socially responsible supply chains is clearly a good thing. Any improvements made in this area – whether as a result of legislation, corporate action, or consumer attention – are unarguably positive. That said, I believe that many of the people outside the supply chain industry who have recently begun to take an interest in social responsibility in the supply chain would be pleased to learn what companies are doing in this area.”

The California law may have had something to do with the fact that Apple recently asserted that it is “committed to driving the highest standards for social responsibility throughout [its] supply base,” and that its suppliers must “provide safe working conditions, treat workers with dignity and respect, and use environmentally responsible manufacturing processes wherever Apple products are made.” [“Apple’s Groundbreaking Moves to Audit its Extended Supply Chain for Compliance to its Supplier Code of Conduct,” Supply Chain Digest, 25 January 2012] On the other hand, Apple’s report may have been released in response to “a two-part series in the New York Times that in part says that working conditions at many of Apple’s sub-contractors is often abysmal and often dangerous, even if Apple is making progress. … The Times articles were published just a few days after Apple released its report. The Times says it let Apple know the articles were coming some time ago, when it had asked Apple to comment on its findings; Apple declined to address the allegations.” [“Under a Microscope, Apple’s Supply Chain Shows both Progress and Problems with Regard to Working Conditions in Asia – and the Challenges for Western Manufacturing,” Supply Chain Digest, 2 February 2012] Regardless of the reason, Apple’s actions are welcomed and should support the emerging global middle class. The January Supply Chain Digest article reports that adhering to Apple’s Supplier Code of Conduct is “a condition of doing business with the company.” It continues:

“To ensure compliance, Apple says it conducts ‘rigorous audits,’ with the help of independent experts, of both end assemblers and component manufacturers, and that if it finds any of these suppliers do not meet Apple’s standards, ‘we stop working with them.’ … Interestingly, Apple says its programs include training workings at its suppliers about its standards and local laws and regulations, and that ‘there are more than one million people who know their rights because they went to work for an Apple supplier.’ How well the suppliers react to that education is not clear.”

Technology should be able to help maintain audit trails and ensure better compliance to corporate standards of conduct. I assume that suppliers would prefer a set of accepted international standards so that they don’t have to try and keep up with potentially hundreds or thousands of different codes. That may be one reason that Apple “became the first technology company accepted by the Fair Labor Association (FLA), and that it will open its supply chain to the FLA’s independent auditing team, who will measure Apple’s suppliers’ performance against the FLA’s Workplace Code of Conduct.” The article continues:

“Apple says it is also spending money to provide free training to employees of its contracted final assembly operations. The Supplier Employee Education and Development (SEED) program offers free classes on a range of subjects including finance, computer skills, and English. Apple says that ‘More than 60,000 workers have taken one or more of these professional development courses. The curriculum continues to expand, and we have partnered with local universities to offer courses that employees can apply toward an associate degree.’ This one really surprised us: Apple says it monitors the process of workers who move from their home country to work in its suppliers’ factories in another country, saying there are often abuses in this process, especially around fees charged to these workers to get the jobs. Stepping up efforts in this area in Singapore and Malaysia, it forced suppliers there to reimbursed $3.3 million in excess foreign contract worker fees last year, bringing the total that has been repaid to workers since 2008 to $6.7 million.”

The article goes on to report that “Apple is especially sensitive to what it calls ‘core violations.’ Those include underage or involuntary labor, falsification of audit materials, worker endangerment, intimidation or retaliation against workers participating in an audit, and significant threats to the environment.” The article continues:

“The report notes, for example, that Apple’s Code sets a maximum of 60 work hours per week and requires at least one day of rest per seven days of work, while allowing exceptions in unusual or emergency circumstances. … Apple also found a number of violations relative to worker pay. For example, 67 facilities used deductions from wages as a disciplinary measure. Although this is legal in some countries where the factories are located, it is not permissible under Apple’s Code. Another 108 suppliers were not paying appropriate overtime wages. … There is a lot more in the full report, including environmental reviews, but this seems to us a seminal sort of shift in how offshored suppliers may need to be managed in the future.”

The staff at Supply Chain Digest isn’t sure what impact corporate social sustainability will have on supply chain and production costs. It calls that, “The real million dollar question.” Will costs increase? Very likely. But the benefits of adhering to fair labor practices far outweigh any increased costs. If they aren’t addressed, the future will likely be filled with protests, violence, and supply chain disruptions that cost a lot more than being fair in the first place.