Labor Audit Finds 'Serious' Breaches At Apple Supplier; Changes Promised

An audit of labor conditions at Apple Inc.'s (Nasdaq: AAPL) major supplier in China found serious and pressing violations including 60-hour workweeks and breaches of health and safety rules, but the targeted company agreed to change the way it treats employees.

A report issued Thursday by the Fair Labor Association, a group funded by technology companies to inspect work conditions at their subcontractors' factories, found at least 50 violations of Chinese regulations at Hon Hai Precision Industry Co. (TPE: 2317), the main handler of Apple's China manufacturing on behalf of Foxconn Technology Group.

An auditing team from the labor association, or FLA, surveyed 35,500 workers in recent weeks at factories where the Apple subcontractor makes iPhones and iPads. The Hon Hai/Foxconn employees were interviewed about their working and living conditions, particularly compensation and hours.

Apple itself commissioned the FLA audit, which found that 43 percent of workers had experienced or witnessed accidents, and that nearly two-thirds said compensation does not meet their basic needs. Many said the company-backed unions available to them did not provide true worker representation.

The report said Foxconn, Hon Hai's parent company, was willing to work with Apple to correct the violations uncovered by the audit and address workers' dissatisfaction.

On Friday, Foxconn welcomed the audit's results. We are committed to work with Apple to carry out the remediation program, developed by both our companies, that has been presented along with the FLA audit findings, the parent company said. We will continue to support Apple's initiatives to ensure that its business partners are in compliance with all relevant China laws and regulations and the FLA's Workplace Code of Conduct.

The survey found at least 50 breaches of Chinese law or codes, as well as industry-wide policies overseen by the nonprofit FLA. According to the report, the average number of hours worked per week at Foxconn factories exceeded both the association's standards and Chinese legal limits. The audit also found that unscheduled overtime was paid only in 30-minute increments.

The FLA said Foxconn has agreed to bring its factories within China's legal limits of 40 hours of work per week and a maximum of 36 hours' overtime per month by July 2013. That would require more than halving the average hours of overtime, which the report estimated at 80 hours a month. Foxconn would have to recruit tens of thousands of extra workers to comply with its pledges, the FLA said.

Hon Hai is considered the center of operations for Foxconn. Both companies are based in Taiwan, and Hon Hai alone employs about 1 million people in mainland China, most in the southern manufacturing hub of Shenzhen.

The changes could lead Apple to cut its profit margins or pass the resulting costs on to consumers, Alberto Moel, a Sanford C. Bernstein & Co. analyst in Hong Kong, told Bloomberg News.

The benefit we, the consumers, and Apple extract from these products at the expense of Foxconn and its work force is completely unequal, Moel said. Foxconn will also have to meet these requirements for all its customers -- Apple, Dell, H-P -- because it is at risk of being audited at any production line.

Apple joined the FLA in February after acknowledging that aluminum dust caused explosions at two of its Chinese suppliers' factories last year. One of the blasts, at a Hon Hai plant in Chengdu in May, killed four people and injured 18 others.

On a visit to China this week, Apple CEO Tim Cook met with Vice Premier Li Keqiang to talk about intellectual-property issues. It wasn't clear if their discussion Tuesday -- two days before the release of the FLA's audit report -- included labor conditions at Apple-contracted factories, but Cook spent the next day touring plants run by Foxconn and other vendors. On Feb. 13, when the audit began, the Apple chief had said: We believe that workers everywhere have the right to a safe and fair work environment, which is why we've asked the FLA to independently assess the performance of our largest suppliers.

Apple is the world's most valuable company, with a current market capitalization of $559 billion. Its shares closed Friday at $599.55, down $10.31, or 1.7 percent.