How Chinese Factory Woes Drive Up Smartphone Costs

Mobiledia |  By Margaret Rock | June, 26 2012 |  Share  | Source Article

Another Chinese factory's conditions are under scrutiny, implicating AT&T and Motorola in overseas labor controversies that could eventually raise prices for U.S. consumers.

Apple has been under the harsh and singular spotlight concerning unsavory working conditions in Chinese factories, but all along, other companies were suspected of doing the same thing. News of similar conditions in another plant, with ties to other prominent U.S. companies, confirms this long-standing suspicion and could likely mean higher prices for consumers.

Last week's report from the Institute for Global Labour and Human Rights paints a miserable portrait of degraded working conditions, including labor and human rights violations, within VTech's electronics factory in Guangdong, China. VTech manufactures cordless phones and other low-ticket electronics for companies like AT&T, Motorola, and retail giant Wal-Mart.

According to the report, titled, "Vtech Sweatshop in China: AT&T, Motorola, Wal-Mart and Others Endorse the China Model," the Chinese factory's 10,000 employees work 12-15 hour days, including mandatory overtime that greatly exceeds China's legal limits, are denied health care and other benefits, and earn substandard wages -- about 6.5 percent of what factory workers earn in the U.S.

Details from the report indicate workers live in primitive, crowded dorm rooms, sleeping on narrow plywood bunk beds, are forced to work without pay if they don't meet their mandatory production goals, and are often beaten by security guards.

VTech is also a major supplier for hardware companies like Sony and Philips, and the sole supplier of corded and cordless phones for Deutsche Telecom and Telstra. Following the report's release, an internal memo revealed that Telstra has ceased selling products manufactured by VTech, while the manufacturer's press release says the company "categorically rejects these allegations and is now considering taking appropriate legal action."

Previously, these kinds of reports have dogged Foxconn, another Chinese manufacturer and Apple's main supplier, though the company also supplies parts for several industry players.

After Tim Cook took the helm last fall, and following unsafe working conditions discovered as a result of Apple's requested audit by the Fair Labor Association, Apple moved toward more transparency in its dealings with the factory and pledged to improve factory working conditions in China.

The Cupertino, Calif.-based company and Foxconn agreed to hire tens of thousands of new workers to its already one million Chinese employee base, put an end to illegal overtime, take higher safety precautions and make improvements to workers' housing. These moves will ensure ensuring better working conditions, but also inflate Apple's expenses, some of which will likely reach consumers in the form of higher prices.

Hewlett-Packard CEO Meg Whitman told Reuters if the labor costs of factories like Foxconn goes up, companies like HP and Apple must decide how much of the additional costs they will pass on to customers and how much of they will absorb on their own.

Apple is arguably the most powerful tech company in the world and the company's decision to finally act on the problems at Foxconn also sets standards for other companies using factories in China. One thing is for sure: Apple didn't become one of the most profitable company in the world by simply absorbing labor costs on its own. The lessons the iPad maker learned with Foxconn will likely ripple throughout the industry as other players grapple with how to address labor problems as well as fund often expensive solutions.