Market Overview

The New York Times' Ode to Foxconn and Anti-Employee Control Fraud

I wrote recently about Apple's (NASDAQ: AAPL) release of information from its “audits” of its major suppliers.  Apple constructed the release to deny the public information on the identity of the suppliers that defrauded and endangered the lives and health of their workers. 

I explained that criminologists classify these as “anti-employee control frauds.”  Control frauds occur when the persons who control a seemingly legitimate entity use it as a “weapon” to defraud.  Anti-employee control frauds defraud the workers.  Apple’s audit, and I explained why it was far from vigorous, showed endemic anti-employee control fraud by its suppliers. 

Apple overwhelmingly purchases components from Asian suppliers that are criminal enterprises.  The control frauds operate in fraud-friendly nations with non-Western managers selected for their willingness to cheat the workers.  

Apple creates a criminogenic environment in its supplier selection process that leads it to, pervasively, hire criminal suppliers.  Honest manufacturers cannot compete with firms that force their workers to work more than the maximum 60 hour work week and fraudulently refuse to pay them for the extra time they work.  Firms that provide minimal safety protections also find it difficult to compete with fraudulent rivals. 

This is known as a “Gresham’s dynamic” in which bad ethics drives good ethics out of the workplace.  The perverse dynamic is not limited to Apple’s suppliers.  Any honest Western firm that seeks to compete with Apple’s suppliers will be driven to slash its workers’ wages, benefits, working conditions, and pensions while increasing their workload.  I call this the “Road to Bangladesh” strategy.

I explained that the fact that Apple’s suppliers keep records proving that they are cheating their workers, even though they know that Apple will audit those records and their governments could do so demonstrates that they have no fear that their frauds will be sanctioned.  Apple obviously does not stop dealing with suppliers it knows to be criminal enterprises that cheat their workers.  I urge reporters to ask Apple how many criminal and regulatory referrals it has made to the relevant governments about the endemic anti-employee fraud it has documented among its suppliers.  I am willing to bet that the number is currently zero.

Jon Stewart has shown pictures of one of the most infamous Apple suppliers’ workplace – Foxconn.  The most unusual feature is the nets strung between the dormitories where the workers live.  The nets are there to reduce the suicides among the workers.  Foxconn is so dehumanizing a place to work that suicide is a leading cause of deaths among the workers and workers protest the inhumane conditions by threatening to engage in mass suicide.    

http://www.huffingtonpost.com/2012/01/17/jon-stewart-foxconn-siri-the-daily-show-video_n_1210556.html

It was certain that there would be push back on Apple’s suppliers, but it is revealing that it came in the New York Times on January 21, 2012 in an article entitled “How U.S. Lost Out on iPhone Work.”

http://www.nytimes.com/2012/01/22/business/apple-america-and-a-squeezed-middle-class.html?_r=2&hp  

I address one the article’s weaknesses, its discussion of Foxconn.  The article is over 4,500 words, so its failure to discuss Foxconn’s anti-employee actions was not compelled by space constraints.  Indeed, Foxconn’s anti-employee practices are of central importance to the issue that the article purports to discuss – why Apple rarely employs U.S. suppliers based in the U.S.  Instead, the article alludes to an illegal act by Foxconn, in tones of amazed praise, with no discussion of the illegality.

“Apple executives say that going overseas, at this point, is their only option. One former executive described how the company relied upon a Chinese factory to revamp iPhone manufacturing just weeks before the device was due on shelves. Apple had redesigned the iPhone’s screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight.

A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day.

“The speed and flexibility is breathtaking,” the executive said. “There’s no American plant that can match that.””

Ah yes, what “speed” and “flexibility.”  Indeed, it could not be matched in the U.S. – or any other nation that enforced its laws.  What the authors are describing was unlawful under Chinese law.  The article eventually gets back to Foxconn.

"To Apple executives, Foxconn City was further evidence that China could deliver workers — and diligence — that outpaced their American counterparts.

“That’s because nothing like Foxconn City exists in the United States.

The facility has 230,000 employees, many working six days a week, often spending up to 12 hours a day at the plant. Over a quarter of Foxconn’s work force lives in company barracks and many workers earn less than $17 a day. When one Apple executive arrived during a shift change, his car was stuck in a river of employees streaming past. “The scale is unimaginable,” he said.

Foxconn employs nearly 300 guards to direct foot traffic so workers are not crushed in doorway bottlenecks. The facility’s central kitchen cooks an average of three tons of pork and 13 tons of rice a day. While factories are spotless, the air inside nearby teahouses is hazy with the smoke and stench of cigarettes.

“They could hire 3,000 people overnight,” said Jennifer Rigoni, who was Apple’s worldwide supply demand manager until 2010, but declined to discuss specifics of her work. “What U.S. plant can find 3,000 people overnight and convince them to live in dorms?””

Yes, “convince” them to live them in dorms complete with anti-suicide netting at no extra charge.   Foxconn truly is convincing.  It’s probably the pork and rice.  Alternatively, it could be the fact that rural China is still extremely poor, the rule of law is a fiction in China, and it is a crime to start a real labor union.  It could also be that the “300 guards” have broader duties than guiding traffic flow.   

So, the workers had already generally worked a 12 hour shift and were then woken up at midnight to be ordered (unlawfully) to work another 12 hour shift.  In case this is not obvious, some of the workers’ tasks are dangerous and exhaustion endangers their health and lives.  Indeed, the facts are likely far worse than what I have just related.  Apple’s refusal to identify the suppliers that violated the maximum work week rules and the suppliers that stole their workers’ overtime pay makes it impossible to say for sure how bad things are at Foxconn.

Apple’s audits found that both forms of anti-employee control fraud were common among its suppliers.  Given Foxconn’s problem with suicide one is entitled to demand that Apple identify what violations its audits found at Foxconn.

The article later comes back to the Foxconn tale for a third time to add this passage.

“Foxconn, in statements, declined to speak about specific clients.

“Any worker recruited by our firm is covered by a clear contract outlining terms and conditions and by Chinese government law that protects their rights,” the company wrote. Foxconn “takes our responsibility to our employees very seriously and we work hard to give our more than one million employees a safe and positive environment.”

The company disputed some details of the former Apple executive’s account, and wrote that a midnight shift, such as the one described, was impossible “because we have strict regulations regarding the working hours of our employees based on their designated shifts, and every employee has computerized timecards that would bar them from working at any facility at a time outside of their approved shift.” The company said that all shifts began at either 7 a.m. or 7 p.m., and that employees receive at least 12 hours’ notice of any schedule changes.

Foxconn employees, in interviews, have challenged those assertions.”

I doubt that the average reader could tell from the disjointed article that the actions that Apple’s officers ascribe to Foxconn were unlawful, but Foxconn obviously understood that such actions would be unlawful and fraudulent.  Apple’s audit found that over 60% of its suppliers violated its policy limiting the workweek to 60 hours.  That means that the suppliers kept records that on their face demonstrated that they had violated (a) their contracts with their workers, (b) their contracts with Apple, and (c) Chinese law. 

If Foxconn keeps “computerized timecards” that prove that the unlawful and fraudulent actions that both Apple and its employees say it committed that would not make the action “impossible” – it would make it the norm for Apple’s suppliers.  The fact, demonstrated by Apple’s audit, that most Apple suppliers maintain a paper trail proving that they engage in anti-employee control fraud proves that they know that can defraud their employees with impunity.  Neither their governments nor Apple has established even such a minimal threat of sanctioning their violations that it has become cost-effective for the suppliers to hide their frauds.    

Consider another fact that the NYT article ignores.  The Apple officers were describing an action by Foxconn that violated Apple’s standards, which it had imposed on Foxconn by contract.  Apple’s corporate response – and the response of the Apple officials that the authors interviewed about the incident – was to gush with enthusiasm about Foxconn’s violation of Apple’s standards.  What conclusion would Foxconn draw from Apple’s reaction as to the importance of not defrauding the workers or having them work in inhumane and exceptionally dangerous conditions? 

The NYT ombudsman has heaped derision on the concept, formerly known as journalism, that its reporters should inform the reader that they have strong reason to doubt the veracity of a source’s statement.  This may explain why the reporters felt there was no need to inform the reader that the quoted claim that Foxconn“takes our responsibility to our employees very seriously and we work hard to give our more than one million employees a safe and positive environment” is demonstrated most graphically by its provision of anti-suicide netting in its dormitory complex.

<i> <p> Bill Black is the author of <a href="http://www.amazon.com/Best-Way-Rob-Bank-Own/dp/0292706383">The Best Way to Rob a Bank is to Own One</a> and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.</i> </p>

 

<p> <i> Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his <a href="http://papers.ssrn.com/sol3/cf_dez/AbsByAuth.cfm?per_id=658251">Social Science Research Network author page</a> and at the blog <a href="http://neweconomicperspectives.blogspot.com/">New Economic Perspectives</a>.</i>

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Bill Black is an Associate Professor of Economics and Law at the University of Missouri – Kansas City (UMKC). He is a white-collar criminologist. He was the Executive Director of the Institute for Fraud Prevention from 2005-2007. He taught previous

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