The Tech Sector's Dangerous Elephant in the Room

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Most of us know where our smartphones, tablet computers, and other electronic gadgets are manufactured: China, or somewhere overseas. And even if we don't want to admit it, most of us have a vague notion the subpar conditions under which they're produced -- conditions that, if we're being honest, we wouldn't want our own family members to be working under.

A new report is shedding light on this issue, one that's surfacing more and more. Here's what it says, and why tech investors should be concerned.

America outpaced
The report is courtesy of The New York Times and is an in-depth look at what the paper is calling the "iEconomy." The thrust of the article is that the kind of manufacturing jobs that currently exist in China and other emerging economies, i.e., the kind of jobs that built the American middle class, are never coming back.

It's not just that labor is cheaper abroad. It's also the vast scale, coupled with the flexibility, diligence, and industrial skills on the part of the workers there, which have so outpaced American workers that "made in the U.S.A." is no longer realistic for most consumer-electronics manufacturers.

Apple (NAS: AAPL) is the company used to perfect example in the article. And while it's by no means the only company that operates in this fashion, it's as good a place as any to start talking about the darker side of the iEconomy.

I want it perfect, now
The most eye-opening portion of the article takes us back to just weeks before the first iPhone was set to be sold, a prototype of which Steve Jobs had been carrying around in his pocket for weeks. An angry Jobs calls a handful of senior staff into his office, holds up the phone -- which is clearly covered with scratches -- and says: "I won't sell a product that gets scratched. I want a glass screen, and I want it perfect in six weeks."

A senior executive speeds off to China and quickly finds a company that can make the glass screens. Immediately, 8,000 workers from the company's dormitories are roused, given biscuits and tea, and start 12-hour shifts fitting glass screens into beveled frames. Within 96 hours, the plant is producing more than 10,000 iPhones a day. 

Anarchy in the U.S.
You just can't do that kind of thing in America anymore. First, workers wouldn't put up with it. Can you imagine GM factory workers being woken at 3 a.m. -- from their communal sleeping quarters, no less -- being handed a cup of coffee and a doughnut, and then marched off to the production line?

Second, even if they didn't strike or riot, you'd still be breaking a filing cabinet full of labor laws. You could get away with this sort of thing around the turn of the 20th century here, but no longer.

Suicide is bad PR
Foxconn is the company that's been most in the news lately regarding these types of work situations and the disasters, both personal and potentially financial, that can result. In 2010, 12 Foxconn workers committed suicide, and just weeks ago 150 workers at a Foxconn factory in Wuhan threatened mass suicide if they were moved to a new production line.

These 150 employees were involved in producing Microsoft's (NAS: MSFT) Xbox, a flagship product the company is placing big bets on to stay connected, and relevant, to the next generation -- a generation that, with the current pace of innovation, may never use Windows or MS Office.

Foxconn also manufacturers the Kindle for Amazon.com  (NAS: AMZN) . The online-retailing behemoth is placing a massive bet that the Kindle product line can drive substantial portions of future growth, and the company needs this new product launch to go well, undistracted by public-relations disasters like worker suicides.

The high cost of cheap labor
Even if Apple could get away with here what it did in China to get the iPhone fixed so quickly, would you really want it to? Would you want anyone in your family to have to endure a life lived at the beck and call of a manufacturer?

On a less emotional note, no company -- even industry chiefs like Apple, Microsoft, or Amazon -- need the kind of bad press that can come with situations like the ones at Foxconn. Consumers are becoming more and more socially conscious, and they want the goods and services they use to measure up. And if consumers aren't happy, and stop buying, unhappy investors will surely follow.

To give credit where credit is due, Apple has recently joined the Fair Labor Association, a group set up in 1999 to monitor workplace conditions around the globe. It's the first technology company to do so. The company will no doubt benefit from this move, both perceptually and financially. In this day and age, the two are inseparable.

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At the time this article was published Fool contributorJohn Grgurichlikes the sound of biscuits and tea, but not followed by a 12-hour, production-line shift. The Motley Fool owns shares of Microsoft, Apple, and Amazon.com. Motley Fool newsletter services have recommended buying shares of Amazon.com, Microsoft, and Apple and creating bull call spread positions in Microsoft and Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has a scintillatingdisclosure policy.

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