Apple Wrestles with Its 'China Problem'

(MarketWatch) - Apple began last week by basking in record quarterly profits, but then ended the week in a public relations retreat after reports of exploited workers in factories in China assembling its hot-selling iPads and iPhones.

For now, the media spotlight is on Apple and its Taiwanese contract supplier Foxconn. But China's leaders will also be shifting uncomfortably as the gaze of the international media turns to the harsh underbelly of its manufacturing economy.

Behind China's remarkable economic progress toil an estimated 120 million migrant workers, typically living and working in austere factory complexes.

Two decades into China's industrial transformation, questions are being asked about how much responsibility authorities shoulder for its hukou (household registration) system that effectively institutionalizes migrant workers as second-class citizens in their own country.

But for now, it is Apple in the firing line. The New York Times ignited media interest after a story on unsafe working conditions, as well as seven-hour days and cramped dormitories at Apple's Foxconn supplier in China.

The public relations drubbing was ramped up another degree by Jon Stewart's Comedy Central, with a disturbing "Fear Factory" satire on the lot of the workers behind Apple's prodigious profits.

The problem for Apple is that beneath the humor and the shock headlines, there is enough truth about worker conditions in mainland Chinese factories to offend many of its customers and ultimately damage its premium brand.

At the same time, apportioning blame and improving the current situation is much less simple.

Apple's Chief Executive Tim Cook has expressed "outrage" at reports of unsafe working practices at suppliers and has promised to step up audits. It should also be remembered that Apple is just one of many international companies -- such as Nokia, Dell and Microsoft -- that use Foxconn as an assembly supplier.

Foxconn, which employs over a million workers in China, has been in the headlines before after a spate of worker suicides at its factories in 2010.

It later set up helplines and safety nets to stop employees jumping, as well as raising salaries. Basic pay was increased to 2,000 yuan (US$315) a month, up from 1,200 yuan (US$189).

The company tends to attract attention because of its size, with over 300,000 working and living in its Shenzhen complex that is the size of small town.

While home for workers is most likely still a cramped, shared dormitory, in the past decade Shenzhen has transformed with new skyscrapers, subways and streets packed with new cars.

The depressing prospect for migrant workers is they are prevented from joining this new China. Thanks to the decades-old hukou system, they cannot enjoy resident perks such as housing, education and medical benefits available to locals.

This suits provincial authorities, who avoid bearing the costs of providing these services or the infrastructure that an influx a population the size of Foxconn's plant in Shenzhen would require. Meanwhile, they still get the tax revenue from the business located locally.

Such a system might have been justified when China was starting out on its path of industrialization. But holding back a permanent rump of citizens as factory cannon fodder is inevitably going to lead to rising tensions.

Another unpalatable consequence of the hukou system on such a scale is it makes it difficult for migrant families to resettle. It is estimated 58 million children of migrant workers are left behind with relatives or in care.

Apple and other multinational will argue they are just following the rules laid out by the authorities in China or whatever country.

Understandable perhaps, but how long will it be good enough, especially if this situation begins to offend Apple's socially responsible consumers?

After all, if consumers are willing to demand eggs from chickens that were not factory farmed, it is not much of a stretch that they might demand smartphones assembled by workers with some basic dignity.

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