Apple and Its Supplier: Corporate Social Responsibility

Dominican University of California

Barowsky School of Business
MBA 5404 - Global Business Environment
Prof. Vafa Saboorideliami, Ph.D

Sara Canright
Rudy Chery
Kevin Ow
Shaquille Powell
Cynthia Weingard

Apple strategizes to overcome ethics violations

 In 2009, the leading multinational technology company, Apple Inc. (Apple), was accused
of allowing labor rights violations in China at its primary products supplier, Foxconn. Five years
later, a British Broadcast Corporation (BBC) documentary presented new evidence that labor
issues continued at another Chinese Apple supplier, Pegatron. The documentary questioned
Apple’s public statements regarding its commitment to safe and ethical working conditions for
all vendors’ employees. The protagonist in the case, Jeff Williams, is the new senior vice
president of Operations in charge of Apple’s entire operations, which include offshore,
independent suppliers. Despite previous successful efforts to overcome negative perceptions and
protect the company’s image, Williams and Apple must again strategize how to respond to the
BBC, and other critics’ corporate social responsibility (CSR) continued allegations.

Apple must analyze CSR challenges at all stakeholder levels.

Although Apple had been working diligently to improve its image after accusations of
labour rights violations at Foxconn1, it again finds itself addressing corporate social
responsibility (CSR) challenges in its supply chain five years later. Evidence showed that labor
rights violations continued in China at another one of Apple’s suppliers: Pegatron. Despite being
highly ranked for its CSR reputation, along with a valuation close to $1 trillion2, CSR allegations
are still being made about Apple and their suppliers located in offshore locations, and they need
to be addressed. The case states four sets of challenges in their supply chain: (1) Apple operates
in different environments (legal, cultural, political, social and economic) from many of its
suppliers; (2) the conflict for suppliers between meeting expensive high labor standards, and
accepting lower payments from Apple, consequently earning less profit; (3) the gap between the
high CSR standard that Apple sets for itself and what it actually achieves; and (4) differing
assessments among labor experts about what constitutes healthy working conditions and the
amount of attention that should be paid to these labor issues. CSR management “assumes that
companies have responsibilities towards a number of external stakeholders that sometimes go
beyond mandatory obligations such as profitability and legal compliance.” 3 According to the

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Apple and its suppliers: corporate social responsibility, 2016, Richard ivey School of Business
Foundation
2
Apple and its suppliers: corporate social responsibility, 2016, Richard ivey School of Business
Foundation
3
Kourula, Arno; Paukku, Markus; Koria, Mikko. “The Multiple Levels of Corporate Social Responsibility:
Towards a Theory of Role Management” 14 Feb. 2011

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stakeholder framework, there are many parties, in addition to shareholders, for whom a company
should make decisions. The most important group (first level in the framework) includes
shareholders, suppliers, customers, employees, and suppliers’ employees. At the second level
(indirect relationships) of the framework are governments, nonprofits, media, among other
groups. Stakeholders significantly affect the business regarding customer perception and sales
revenues. Considering the continued high value of its brand, Apple effectively accounts for
stakeholders in its strategies and policies for CSR.4

To address its CSR management challenges, Apple is conducting analysis separately at

the (1) individual level, which includes all levels of employees and customers, for example, and
looks at how the individual would act based on her/his moral code; (2) firm level, which
examines what Apple can solve as a company; (3) inter-organizational level, which determines
how much control (if any) Apple has over its suppliers, for example, like Foxconn or AT&T; and
(4) social or national level, which takes into consideration where the company is doing business
and which points of view come into play. For example, in China, where CSR regulations are lax,
Apple has to decide whether to act from an ethnocentrism, relativism, or universalism
perspective. Apple has to figure out how their response to the labor workforce allegations of its
offshore suppliers will affect the financial and social considerations of its stakeholders
(individuals), the firm, its inter-organizational relationships, and their partnership with China.

We continue to learn that a company’s policies and strategies are established for the best
financial return for investors and shareholders, and it is no different for Apple. Their profit
maximizing policies satisfy their customers with reasonable prices; their domestic employees
with salary, benefits, and other opportunities; and investors with an always increasing valuation
and high-profit margins. It often appears as if Apple’s CSR policies are secondary to profits.
Apple also measures their CSR management through reaction to negative publicity. When news
first hit about worker treatment at Foxconn, Apple moved some of its business from them to
another supplier, Pegatron, to show that the company was fulfilling its promises to improve

https://www.researchgate.net/publication/301293438_The_Multiple_Levels_of_Corporate_Social_Respon
sibility_Towards_a_Theory_of_Role_Management [accessed Jul 31, 2017]
4
Thompson, Andrew. “Apple Inc. Stakeholders: A CSR Analysis” Panmore Institute. 29 Jan. 2017
http://panmore.com/apple-inc-stakeholders-csr-analysis

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suppliers’ labor practices. The company had to decide how to address allegations around labor
violations – whether they should deny or defend the providers’ practices or publically commit to
improving labor working conditions around the world. “Did [Apple] want to satisfy its harshest
critics, or was it enough to please a mainstream Apple consumer?” 5 Even more telling, the
suicides at China's manufacturing behemoth, Foxconn, have created the uncomfortable
impression that “cool” products like the iPad are being produced by what amounts to economic
slave labor. This is decidedly “uncool” and not the image that Apple wants to portray. 6

Supplier employees - stakeholders located in the first level of the framework - are also a
major consideration as Apple analyzes its CSR efforts at the individual level. The company,
especially as unsafe and immoral labor practices come to light, addresses the interests of this
group and has created a Supplier Code of Conduct, among other policies. “The company
monitors and imposes requirements on the employment practices of firms in its supply chain.”7
When Apple makes these CSR decisions, they are using a combination of financial and social
analyses at four levels.

Apple should accept responsibility for ethics violations

If asked, “Is Apple Inc. responsible for the alleged human rights violations of its
contractors or subcontractors?” it is easy to agree; however, in today’s global economy we can
no longer simply rely upon our own conscience to decide whether companies are responsible for
the presumed human rights violations of their international contractors. We also have to take
into consideration the fiduciary responsibility of the companies to their stockholders, not to
mention the customs, norms, and economic pressures operative in the countries of the
contracting companies. This idea of fiduciary responsibility was introduced forcefully by Nobel
Laureate Milton Friedman in his September 1970 New York Times article, “The Social
Responsibility of Business is to Increase its Profits.” Ever since, companies have used this theory
to focus solely on making profits regardless of who is hurt in the process. Considering all of the

5
Apple and its suppliers: corporate social responsibility, 2016, Richard Ivey School of Business
Foundation
6
Corporate Social Responsibility at Apple CEO Tim Cook's greatest opportunity, Professor Rosa Chun,
October 2011 IMD
7
Apple Inc. Stakeholders: A CSR Analysis Updated Jan 29, 2017 Andrew Thompson Panmore.com
author Andrew Thompson

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factors involved (ethics, human rights, and fiduciary responsibilities), we conclude that Apple
bears some responsibility for the human rights violations by its contractors.

The idea of fiduciary responsibility for the shareholders focuses on doing whatever it
takes to increase the return on investment and as such is the reason behind Apple’s decision to
continuously use subcontractors to produce their products with a particular focus on high
productivity and low costs to maximize margins. Apple reasons that using subcontractors in
developing nations brings economic opportunities to these communities. In return, Apple
benefits from the sheer volume of labor that can provide the flexibility to make changes to
products quickly. However, the reality is that these developing countries have plentiful and
eager employees who are willing to work for little compensation. The combination of these
factors allows Apple to keep its costs low enough to produce a handsome profit for its investors.
Additionally, Apple claims that it does not have the power to force subcontractors to change their
business models in order to protect their employees.

However, in contrast to Apple’s methods, other companies have found labor practices
that truly benefit the employee and the company. In August 2013, Motorola began producing
smartphones in the United States at competitive prices using a manufacturing supplier,
Flextronics, that is located in Texas. The strategy behind the US location is productivity, pricing,
speed to market, as well as flexibility, that was made possible by well compensated employees
who were happy to work hard to make great products. Mr. Woodside acknowledges that while
wages and other costs are higher in the US, there are other clear benefits as well. Even more to
the point is the conclusion of Wayne Lam of IHS Technology at AllThingsDigital.com that
Apple only saved five dollars per phone manufactured in Asia. Mr. Lam noted that Motorola’s
US labor manufacturing costs were $12.00 per phone, while Apple’s Asia labor manufacturing
costs were $7.00 to $8.00 per unit. For Apple to move its manufacturing production to the US, it
would have to increase its prices by only $5.00. It is also worth noting that in 2014, Flextronics
managed to pay its employees $14.00/hour, produce over 100,000 devices per week, and had the
capacity to produce tens of millions of units given that more than half of the 400,000-ft. factory
floor was unused. In an interview with The Verge, Motorola CEO Dennis Woodside claims that
manufacturing its products in the US offers many benefits, including the ability to make quick

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changes or tweaks to the design if necessary. The success of Flextronics shows that Apple had
the opportunity to make meaningful changes but chose not to.

Apple is responsible for 40 to 50% of Foxconn’s total revenue each year. This position
gives Apple’s considerable leverage against Foxconn. However, Apple has decided to use this
leverage for different purposes. On October 2012, Michael Kan, IDG News Service writer,
reported that Apple demanded that Foxconn secure the secrets regarding its products. To meet
Apple's demands, Foxconn began to build manufacturing plants exclusively to assemble Apple
products, presumably for the sole purpose of shielding abuses from public scrutiny.

When evaluating CSR issues and Apple’s responsibility towards human rights violations
in particular, we need not look any further than the Foxconn “nets.” In an article from the
Guardian, Duncan Jefferies writes that 18 Foxconn employees left their workstations, in apparent
suicide attempts, and jumped off the roof of the building. Fourteen died. As a results, Foxconn
installed nets around its buildings. Evidence shows that employees presently working at Foxconn
are still working under inhumane conditions. They are forced to work long hours in rooms so
uniformly and constantly bright that they lose any sense of time. The employees are forced to
work in awkward positions resulting in chronic body pain. Employees get very little time for
breaks. They receive minimal compensation and they have to pay rent (using a significant
portion of their check) to Foxconn for the privilege of sharing a small room with seven other
people. Apple makes the claim that it has some of the most rigorous verification processes to
ensure that its manufacturer contractors provide a safe working environment. Yet those who
visit the Foxconn manufacturing properties today can still see the surrounding nets to discourage
jumpers.

Is Apple responsible for the alleged human rights violations that occurred?
Notwithstanding Friedman’s argument to the contrary (that Apple’s – or any company’s - sole
responsibility is to its shareholders), Apple still bears culpability. Apple has the influence to
pressure manufacturers to protect the dignity of their workforce and ensure their safety. Apple
has the power to influence manufacturers to build multiple buildings for the sole purpose of
producing its products in secret. However, as Motorola demonstrated, it’s possible for

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contractors to build safe manufacturing plants, pay a living wage to employees, and deliver on
speed flexibility and price, while respecting human life and dignity. Apple has both the
opportunity and the power to protect human rights while continuing to uphold its fiduciary
responsibilities to its shareholders. Unfortunately, Apple Inc. chose not to do so.

Apple should keep production offshore and outsourced

Apple is known for its superior and efficient supply chain management, which involves
over 200 suppliers8. The ethical dilemmas involving Foxconn and Pegatron are examples of
limited regulation that Apple has over its major suppliers. These primary ethical responsibilities
that Apple continuously vows to solve, plague the companies supply chain, due to differing
cultural ideologies. Solutions need to be implemented by Apple to limit unethical practices
within its global supply chain, nevertheless; onshoring and insourcing, offshoring and
outsourcing, and offshoring and insourcing are not a suitable responses from Apple.

Where goods are produced and who produces them are critical strategic choices as each
option will have attributes that are attractive to firms while having weaknesses that must be taken
into consideration. A firm can choose to in-source (produce internally) or outsource (have
another party produce). Additionally, firms can on-shore (produce domestically) or offshore
(produce internationally). Firms can mix and match from the two categories to best fit their
needs.

If Apple chooses to on-shore and in-source production, they would take on the task of
producing all products in the market in which they are to be sold. This provides a greater degree
of control and communication; however, labor cost would be high and the cost of creating the
manufacturing facility would also be high. Comparative advantage would be low as Apple is
diverting resources to a function that is not part of their core competency. If Apple chooses to
on-shore and outsource production, communication, comparative advantage, and set-up costs
would be positives. Control would rank on the positive end but not to the same degree. Labor
cost would be a negative as it would be relatively more expensive than the offshore options. If

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Apple and its suppliers: corporate social responsibility, 2016, Richard ivey School of Business
Foundation

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Apple chooses to offshore and insource, Labor cost would be low, control would be high, and
communication would be high; however, comparative advantage would be low and setup costs
would be high. And finally, in choosing to offshore and outsource, labor cost and setup costs
would be low, comparative advantage would be high; however, control and communication
would be low.

Neither onshoring and insourcing/outsourcing will significantly impact Apple’s objective

of maximizing revenue. With the unethical practices occurring in Apple’s global supply chain,
customers are still loyal to the brand. In 2014, a study involving 3,000 people revealed that 78%
of participants stated they “couldn’t imagine having a different type of phone and 60% declared
they had “blind loyalty” to Apple9. In western society, humanistic disparities are mostly glossed
over by consumers in the short term. If corporations take minimal responsibility, but the
customers still receive the product, then things generally move smoothly. Brand image may be
damaged; however, customer loyalty is so high for Apple that negative PR does not significantly
impact sales revenue. The Chinese Labor Watch (CLW) exposed Pegatron in 2013, yet Figure 1. Commented [1]: Should we include the Figure 1
graphic?
shows that sales revenue still increased. Onshoring and insourcing to the U.S. would bring minor Commented [2]: I think we should.
change to sales revenue, but would increase expenses drastically.

The greatest benefit for offshoring is that Apple can maximize revenue and cash flow. In 2016,
Apple CEO Tim Cook announced he would not bring back business operations until taxes were
more favorable to businesses, as Apple had $230 billion in offshore accounts. If he brought
operations back to the U.S., than 40-50% of that money would be lost to taxes10. Losing 40% of
$230 billion can drastically affect the resources a company has to invest in R&D and future
projects. Onshoring and insourcing would benefit the country, but not Apple. Limited investment
and R&D would mainly hurt their competition in the market. It would be a questionable decision
to endure such penalties. The same outcome will stem from insourcing.

9
Apple and its suppliers: corporate social responsibility, 2016, Richard ivey School of Business
Foundation

10
Erb, Kelly Phillips. “Apple CEO Says Company Won't Bring Home Money Parked Overseas Until Tax
Rates Are 'Fair' ” Forbes. 17 Aug. 2016. https://www.forbes.com/sites/kellyphillipserb/2016/08/17/apple-
ceo-says-company-wont-bring-home-money-parked-overseas-until-tax-rates-are-fair/#29b4a1221667

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 Insourcing and onshoring would eliminate many of the financial benefits Apple has
received since 2004 from its 200 global suppliers. Apple’s global strategy makes it difficult to
make deadlines for last minute orders. China suppliers can hire 3,000 workers overnight to work
8+ hour shift while living in dorms. Not to mention, Chinese workers have made as little as
$1.50 an hour. Adjustments like these are why 90% of iPhone manufacturing is done overseas 11.
Cheaper supply chain cost allows Apple to have higher margins for their most popular product.
America simply cannot compete with cheap overseas manufacturing without possible
investment. Apple’s blind customer loyalty allows them to effectively get away with offshoring
and off-sourcing, without much of an impact on its brand. Neither are suitable responses because
they are unnecessary to Apple's success.

Apple should adopt a single global ethical standard to avoid impacts to positioning
Some may propose that Apple should adopt different ethical standards to apply to each
company. Some may believe that in countries like China, Apple can get away with lower
standards as long as Apple remains compliant in the West to accepted ethical standards.
However, it is not reasonable for Apple to do so given its profile and media attention. Apple
must remain mindful of how it presents itself in each country, as its customers across the globe
will eventually find out what happens in their operations due to the free flow of information and
social media. While the impacts may not be noticeable in the short-term, having a double
standard and the ethical issues that can arise from it can have serious impact on their brand and
marketing position in the long-term. If different standards are applied in each country, then the
likelihood of another event getting publicized increases. While businesses are responsible for
earning a profit for their investors, they are also equally responsible for minimizing and
eliminating exposures of risk to that profit.

In marketing, companies attempt to influence how a customer thinks about both the
company and its products. Each company will attempt to occupy positive places in customers’
minds as, in general, a better position means more sales. However, a negative position means

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Apple and its suppliers: corporate social responsibility, 2016, Richard ivey School of Business
Foundation

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fewer sales as the customer does not think highly of a company. Given the maturity of Apple’s
product lines in the West and its reliance on repeat customers, it needs to ensure that its
consumers are left feeling satisfied about the company to prevent the effects negative positioning
caused by unethical actions. For example, child labor is often a hot-button issue in the United
States whereas it is accepted in others. Given that a lack of child labor is not looked down upon
in some countries, Apple should apply the most stringent ethical standards globally which would
result in a no-child labor policy throughout the entire company and its supply chain. Adhering to
the strictest global ethical standards of each area of concern eliminates this risk. Having a single
global standard also helps the positioning of any new products introduced in the Western
markets.

Another consideration is the effect double standards will have on its marketing position
as it expands to other countries. While Apple is huge in the U.S., in China its market share is
falling12 in the face of stiff competition from other companies. Given the size of China’s market,
Apple must grow in China, but the double standard in its ethics may lead to the perception that
Apple cares more about its U.S. or western employees and suppliers and not about their Chinese
workforce.13 This acts as a negative positioning surrogate, as it plays into the history of the West
bullying China during the 19th and most of the 20th century. Apple cannot gain ground if this
type of negative positioning is present in the minds of Chinese consumers. It would also give its
competitors an advantage as they could actively point out Apple shortcomings. Apple’s supplier,
Foxconn, is setting up a manufacturing facility in India. If an ethical double standard exists there,
what would happen to Apple if it expands into that market? The exposure to risk in these
massive markets should be avoided in order to maximize shareholder profit.

In 2014, about the same time as the case, Apple spent nearly $12 billion14 in marketing
worldwide. With that amount of money, Apple should capitalize on positive positioning to
increase sales, rather than using those resources to combat negative positioning. Having a single

12
Graham, Luke. “Apple’s Market Share in China Falls for First Time.” CNBC, CNBC, 6 Feb. 2017,
www.cnbc.com/2017/02/06/apples-market-share-in-china-falls-for-first-time.html.
13
Hui, Wang. “Why Corporate Social Responsibility is the Greatest Ethical Challenge to U.S.-China
Relations.” Global Ethics Network, 30 Apr. 2013, http://www.globalethicsnetwork.org/profiles/blogs/why-
corporate-social-responsibility-is-the-greatest-ethical
14
Apple. “2014 10-K Annual Report.” 27 Oct. 2014

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consistent ethical standard for the company would prevent the need for dollars spent to remediate
their positioning.

Jeff Williams should focus on its Supplier Responsibility to reduce ethical violations
Violations in labor working conditions and supply chain ethics have plagued Apple since
the story first surfaced in 2009 involving Foxconn in China. Jeff Williams, VP of Operations
under Tim Cook, has faced challenges with both keeping up with demand and the allegations of
unethical corporate behavior. In 2017, Apple published a Supplier Responsibility Progress
Report. In the 37-page report, Apple, under Williams’ leadership, details a strategy on issues
including supplier improvements, environmental improvements, employee conditions, education
improvements, and responsible sourcing, as well as a look at assessment scores and metrics of
their suppliers. Apple began by setting a Supplier Code of Conduct in place, which would serve
as a tool by which to measure compliance.

Apple states it has instituted an auditing program which examines “more than 500 data
points corresponding to our Code of Conduct. We continue to partner with independent third-
party auditors to review documents, interview management and line operators, and perform
onsite inspections. While evaluating overall conditions, we also look for core violations. These
include underage workers or involuntary labor, document falsification, intimidation of or
retaliation against workers, and egregious environmental and safety risks.”15 According to the
report, Apple has implemented a program involving Subject Matter Experts (SMEs) who have
technical expertise in areas of health and safety, labor laws, chemical, industrial, and water
treatment hygiene to help increase the scores of suppliers who scored lower than standard. Apple
also used third party auditors to perform 705 comprehensive site audits covering 138 suppliers.
Apple bases its assessment scores on three areas; administration including record keeping
and training, insufficient benefits or environmental permits and the core violations which the
company considers to be the highest importance. “In 2016, 22 core violations were uncovered in
labor and human rights; these included 10 bonded labor violations, 9 working hours falsification
violations, 2 harassment violations, and 1 underage labor violation involving a worker who was

15
Apple. “Supplier Responsibility 2017 Progress Report.” March 2017

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15 ½ years old.”16 In each case, action was taken to correct, improve or eliminate the the root
causes. Even with corrective actions, the assessment score average is 85% compliant, making
2016 the best year to date. “Corporate social responsibility (CSR) reporting, sometimes referred
to as the triple bottom line (for "people, planet and profit"), has seen significant growth in the
past five years, nearly tripling from 2,000 in 2007 to almost 6,000 in 2011, according to
Corporate Register. Manufacturers in particular have taken to releasing these reports, if for no
other reason than to keep their customers happy or at least informed about the nature of their
sustainability initiatives.” Apple has been praised for the publishing of the report and its
corporate transparency by organizations such as GreenPeace.17

GreenPeace adding Apple to its favored list of companies is not enough to fully satisfy
consumers or enact change. With Apple holding an estimated $200 billion in cash offshore, there
is an opportunity to do much more. In an article entitled, Microsoft Employees Raise $1 Billion
For Charity In 30 Years Of Employee Giving Campaign, giving is explained to be part of the
company culture of Microsoft. “The company says 65 percent of employees have gotten
involved, accounting for more than 35,000 participants, and Microsoft announced... that the
program has generated $1 billion for 31,000 nonprofits and community organizations around the
world.”18

Apple has a problem in its supply chain. The decision was made to use suppliers in
China. There is a cultural gap in China when it comes to human rights obligations by the
government. Companies like Apple have an opportunity to work hand in hand with companies
and the government in China or other parts of the world who are still only 85% or below
compliant with human rights violations. Addressing the root causes of these violations including
increasing wages, offering education, family leave, or addressing quality of life would go a long
way in improving the situation. In the triple bottom line, it is time to look at the people and

16
Apple. “Supplier Responsibility 2017 Progress Report.” March 2017
17
Leswing, Kif. “Apple says it found one underage worker building Apple products last year” Business
Insider. 27 March 2017. http://www.businessinsider.com/apple-supplier-responsibility-report-underage-
worker-2017-3
18
Huffington Post “Microsoft Employees Raise $1 Billion For Charity In 30 Years Of Employee Giving
Campaign” 22 Oct. 2012. http://www.huffingtonpost.com/2012/10/22/microsoft-employees-raise-1-billion-
charity_n_2001535.html

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planet. 18 people jumped from the rooftops at the manufacturing facilities in China and 14
individuals died. The workers who jumped felt they had no other options. Even a little relief
would go a long way. Apple has the means to do much more to create shared values between the
company who prides itself on innovation and being “different” and the companies who are
literally dying to supply the products.

Apple should act ethically to drive sales

In the end, it will be the consumer and the companies working together to lead the charge
in social responsibility and change. As consumers become more aware and educated about the
products bought and sold, the demand for companies to operate ethically becomes a purchase
motivator. In the triple bottom line, profit has been the driver for corporations however,
consumers can sway profit with choices involving people and planet. Ethical standards will
continue to raise issues with the global supply chain, as there are no international standards on
ethics. World ethics, driven by profit, are changing over time as the consumer demands
sustainability results especially results having to do with human life and the planet in which we
live.
Some marketers believe brand loyalty, regardless of ethical issues, wins. This being said,
some savvy marketers are using ethics to drive sales as we have seen with Whole Foods.
Humans contradict themselves and often have a short memory. The quote by Mark Sagoff sums
it up, “I love my car; I hate the bus. Yet I vote for candidates who promise to tax gasoline to pay
for public transportation. I send my dues to the Sierra club to protect areas in Alaska I shall never
visit…I have an “Ecology Now” sticker on a car that drips oil everywhere it is parked.” Doing
the right thing “feels good.” as long as we still get what we want. It is up to the companies to
give consumers what they want in an ethical way.

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