In May, the broader consumer electronics global supply chain community began hearing the plans of Apple to dual-source its contract manufacturing needs with Pegatron. Just last week, Supply Chain Matters again highlighted the supply chain segmentation strategy that Apple was pursuing, introducing Pegatron for high volume contract manufacturing requirements related to the company’s current and future lower-cost product

Today, the Wall Street Journal reported (paid subscription or free metered view) that a new report issued from the non-profit China Labor Watch, the same organization that called attention to wide-scale labor abuses within Apple’s contract manufacturing and supplier factories in 2011, alleges numerous worker-rights abuses at Pegatron. 

A press release issued from China Labor Watch on its web site makes note of 86 labor rights violations, in 36 legal and 50 ethical categories. The report alleges: “Pegatron factories are violating a great number of international and Chinese laws and standards as well as the standards of Apple’s own social responsibility code of conduct.” An executive of the labor rights group declares in the press release: “Our investigations have shown that labor conditions at Pegatron factories are even worse than those at Foxconn factories.”  The organization indicates that it conducted undercover investigations with nearly 200 interviews with factory workers in the period from March to July 2013.

Supply Chain Matters made a quick review of the report which is titled, Apple’s unkept promises: Cheap iPhones come at high costs to Chinese workers, (Report can be downloaded at this web link).  It alleges that workers at Pegatron’s factory near Shanghai are required to perform 11 hour shifts , six days a week at a rate of $1.50 per hour before overtime ($268 per month), compared to a local average rate of $764 per month.  It also alleges that workers are forced to sign forms that indicate that their overtime hours are less than actual hours worked while workers recruited by labor contractors are required to work three month mandatory service or wages are deducted from the worker’s pay.  The report also alleges over 10,000 underage and student workers (interns) working in crowded production rooms along with 12 person dorm rooms. In short, the report outlines a number of significant alleged labor abuses and contrasts these abuses specifically to 17 of Apple’s supplier code of conduct standards.

In its reporting, the WSJ extracted a statement from Apple indicating that it was committed to providing safe working conditions and that it will investigate the claims outlined by China Labor Watch. The reporting also reveals that Pegatron has hired an additional 20,000 workers in the period from March to present, an indicator in our belief, of the current ramp-up of high volume production prior to the announcement of new lower cost Apple products, rumored to be sometime in October. The hiring of that many workers in a short time period required the contract manufacturer to have large reliance on third-party factory worker recruiting firms. Pegatron officials indicated to the WSJ that they would take stern actions against recruiters who withheld worker pay for not working a defined period.

No doubt, this latest allegation will motivate Apple and Pegatron to revisit current labor practices and perhaps step-up ongoing third-party audits.  The Fair Labor Association has been involved in ongoing audits and monitoring of corrective efforts at Apple’s existing contract manufacturing and supplier facilities in China and we speculate that the organization will probably be asked to broaden its audits of Pegatron facilities.

As noted in our earlier commentaries, being named a prime Apple supplier can provide financial and volume benefits, but comes with lots of global visibility and scrutiny.  No doubt, some Foxconn executives may be whispering about this latest revelation: Welcome to the Apple ecosystem of high visibility and social responsibility standards despite tight lead times and high volume expectations.

More revelations and developments will surely come.

Bob Ferrari