How a Chinese Company Threatens Your Stock's Brand


Whether or not one self-identifies as a socially responsible investor, negative public perception can easily tarnish a brand and a stock -- just ask BP. Giving the traditional "sin industries" a break, Chinese electronics manufacturer Foxconn recently stumbled into the scrutinizing limelight for its questionable labor practices and worker suicides. And unfortunately for Foxconn's customers, including (NAS: AMZN) , Apple (NYS: AAPL) , Dell (NAS: DELL) , Microsoft (NAS: MSFT) , and Netgear (NAS: NTGR) , a negative perception of their supplier could punish their own brand -- and stock.

Foxconn allegations
Recently picked up by NPR's This American Life, storyteller Mike Daisey has been performing a show since 2010 based on his experience traveling to a Foxconn factory in Shenzhen and uncovering how his beloved Apple products are made. He claimed to find appalling labor practices with shifts longer than an entire day, underage workers, hands deformed by years of repetitive tasks, and the use of n-hexane, a neurotoxin, to clean iPhone screens. In 2010, there were at least 12 suicides out of the 400,000 Shenzhen workers, many jumping from buildings -- but this number is actually lower than China's national suicide rate of 22 people per 100,000.

This American Life fact-checked Daisey's story and found many answers in Apple's own Supplier Responsibility reports. Apple does not report on specific facilities, but in its 2010 supplierwide audit, Apple discovered:

  • 91 cases of underage workers.

  • 68% of working-hour practices failing Apple's limits.

  • 137 workers suffering adverse health effects following exposure to n-hexane.

  • One case of coaching workers to answer auditors' questions.

To Apple's credit, and to protect its image, it takes corrective actions to any violations found. For example, Apple ceased doing business with one factory that had 42 underage workers, after requiring the factory to support the workers in returning to school.

Foxconn ties
Apple isn't alone in its ties to Foxconn. The company also pumps out Amazon's Kindle and may potentially design an Amazon smartphone. Foxconn had been negotiating to buy a Dell plant in Poland to further integrate their business relationship. Foxconn produces Microsoft's Xbox 360. Netgear, which just released consumer-networking products that will rely on positive brand image, also outsources manufacturing to Foxconn. There are many more prominent Foxconn customers, and with Foxconn's estimated 50% market share in outsourced electronics manufacturing, chances are that at least one piece of whatever electronic device you are using to read this article spent time at a Foxconn facility.

Is Foxconn that bad for business?
Ultimately, consumers will decide whether Foxconn and its customers' image will be hurt from any poor working conditions. Nike, criticized in the '90s for using sweatshops, has arguably repaired its brand through supplier audits and saw its stock gain 14.5% last year. But perhaps consumers just don't care, as a recent report found that many top brands, including Nike, use factories that fail to pay a living wage with decent hours.

No matter what consumers think, working conditions could direct affect the bottom line of these companies through increased labor costs for better worker conditions. Foxconn's profit margins have fallen from a high of 2.2% in 2010 to 1.5% near the end of 2011. Poor working conditions also drive extremely high turnover rates of 10%-20% per month, leading to increased training and recruitment costs. While large contracts like Apple's have pressured Foxconn to swallow these costs, Foxconn can only push its own margin so low.

Beyond Foxconn
The most recent news that 150 Foxconn workers threatened to commit mass suicide from a rooftop over disputed compensation demonstrates what will become a larger trend: developing-world employees demanding and winning better working conditions. Exploited workers are learning how to pressure employers -- and it's through the brand value. Employees know that Foxconn must satisfy Apple and Microsoft, and Apple and Microsoft do not want consumers to associate iPods or Xboxes with oppressed labor.

If Foxconn's labor conditions have turned you off the technology sector, but you still want high growth, read our new free report that details our analysts top pick for 2012. Thousands have already requested access. Get your copy for free.

At the time thisarticle was published Fool contributorDan Newmancan't look his iPhone in its 8MP camera anymore. He holds no shares in the companies mentioned above. The Motley Fool owns shares of, Apple, and Microsoft.Motley Fool newsletter serviceshave recommended buying shares of, Microsoft, Dell, Netgear, and Apple and creating bull call spread positions in Apple and Microsoft. 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 adisclosure policy.

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