An iPhone Tester Caught in Apple's Supply Chain

Beneath the spotlight in a San Francisco performing arts theater, Apple (AAPL) marketing chief Phil Schiller was about to stage-manage one of the most anticipated product unveilings of the year. It was the first post-Steve Jobs reveal of a new iPhone. Schiller was comforted by what he saw in the darkened audience. “It’s really neat to stand here and see all the Apple logos glowing,” he said of computers on the laps of journalists, analysts, and fans, all poised to send his words into the world.
 

The lights dimmed, and Schiller stepped backward, stage left. A glowing iPhone 5 came up from beneath the stage, rising on a pedestal. “It is an absolute jewel,” he said. Schiller then pitched the phone’s features, including an 8-megapixel camera. A photo of a quiet cove flashed on the big screen. “The ocean just looks bluer on the iPhone 5,” he said, as an image of two boys, lying on green grass and smiling into the lens, replaced the cove. “Kids look happier. They really do. And the world is just a more beautiful place when you take pictures with the iPhone 5.”
 

Offstage, something far more extraordinary was under way, a display of the power and reach deployed by one of the largest companies in the world. Apple Chief Executive Officer Tim Cook, who oversaw the supply chain for Apple for years before succeeding Jobs, had planned what executives and analysts called the most aggressive production-and-launch schedule ever attempted by Apple—or, given its scale, speed, and complexity, possibly by any company. Even though relatively few units had been produced by the time Schiller took the stage on Sept. 12, 2012, the iPhone 5 would go on the market in the U.S. and eight other countries nine days later. By year’s end it would be in the stores of 240 mobile phone carriers in 100 countries. Apple would go on to sell iPhones at a rate of 3.7 million per week in the model’s first three months.

Apple, of course, is a designer, not a builder—it says so right on the back of every iPhone box. The builders, such as Foxconn, get the parts for Apple’s products from suppliers that are gigantic companies in their own right. One of Apple’s largest suppliers is Flextronics International (FLEX), a contract manufacturer based in Singapore with about 28 million square feet of factory space spread across four continents, including a plant in an industrial area south of Kuala Lumpur. That’s where the cameras Schiller raved about would be made. That meant Flextronics had to crank up its own supply chain. And that required sourcing and importing people—an army of them—to man factory lines.

Staffing production lines in Malaysia, where 28 plants run by 24 companies worked on Apple contracts last year, usually goes this way: Companies tap an informal, largely unregulated, and transnational network of thousands of recruiters. They fan out, often hiring subrecruiters, into the farm fields and impoverished cities of Indonesia, Cambodia, Myanmar, Vietnam, and even into the Himalayas in Nepal. The positions they’re trying to fill are so coveted that they’re not merely offered, they’re sold. The brokers take fees from families, representing as much as a year or more of wages; frequently the fees are paid with loans that can take years to pay off.

For the iPhone 5 rollout, a recruiter working for Flextronics contacted four brokers in Kathmandu, Nepal’s capital, in late August and early September, urgently seeking 1,500 men to make cameras, according to three of the four brokers. The pressure to move so many men so quickly was unprecedented. “The recruitment agency was telling me, ‘We need these workers, you have to send them by today,’ ” says Rajan Shrestha, managing director of a small company called Sharp Human Resources.

Alok Taparia, the managing director of Transworld Manpower, another of the four Nepalese brokers retained for that drive, says he was given clear instructions: Workers shouldn’t be charged; Flextronics would pay the brokers. But Taparia and the other Nepalese brokers say Flextronics demanded so many men so quickly that there was no way to do it without tapping the country’s network of subagents, stretching into Himalayan villages reachable only by foot. As Apple itself has described in reports on its supply chain, the subagents always charge.

What ensued, according to Taparia and the others, was a frenzy. Even the Nepalese government official in charge of approving foreign-worker permits, Surya Bhandari, says he was deluged with calls from Malaysia and Nepal urging him to issue permits faster and to waive a mandated seven-day waiting period. “They pressured me,” recalls Bhandari, now retired. They also told him the men were needed to work on iPhones and that sending men to work for Apple would be good for Nepal. The hunt reached then-27-year-old Bibek Dhong on his mobile phone, while he was packing milk crates at a Kathmandu dairy to support his wife, a newborn daughter, and his extended family. The call would change his life.
 
 
For a decade, groups such as Verité, a Massachusetts-based nonprofit, have warned about the treatment of foreign workers at electronics manufacturers in countries such as Malaysia. Largely, these concerns have been overshadowed by problems at final-assembly plants in China, such as those of Foxconn, but Verité and others have found that conditions in Malaysia can be similar, with a crucial difference: Factory managers often control the right of imported workers to leave.
 

Apple discovered this during an audit of a Taiwan component maker in 2008. An Apple auditor saw the passports of foreign workers stacked in a safe, according to a person familiar with Apple’s audits. The manager said his workers owed money to recruiters, so he kept their passports to guarantee they paid up. Apple realized many migrants could be trapped abroad for months or even years because of seized passports, debts, and interest, says Dionne Harrison, a London-based executive for the consulting firm Impactt, which works with Apple. Apple, along with others, calls that bonded labor, a form of modern-day indentured servitude, one step removed from slavery. Apple blames the worst abuses on companies that rely on a daisy chain of payment-demanding brokers and recruiters that reaches “all the way back [to] the worker’s home village,” as Apple put it in its 2010 supplier report.

Because these problems are widespread in the industry, Apple in 2009 tried barring suppliers from using workers who had been charged more than one month’s net factory wages. But by Apple’s own accounting, the problem got worse. Last year the company’s audits turned up $6.4 million in fees paid by workers beyond the company’s prescribed limit—compared with $6.7 million in the previous four years combined. And Apple audited fewer plants last year than it did in 2011. The company orders its suppliers to refund workers charged beyond its limit.

One plant where auditors found excessive fees last year was the Bukit Raja Flextronics plant south of Kuala Lumpur, where Dhong and his compatriots ended up working. Flextronics is one of Apple’s top 10 suppliers, Bloomberg Industries estimates show, employing about 150,000 workers in 30 countries. Apple’s iPhone may be the best-known product some of them work on, but they also build components for Lockheed Martin (LMT), Ford Motor (F), and more than 1,000 other customers in almost every line of business. “There’s almost no customer in the electronics chain, and many outside of the electronics chain, that we don’t touch,” CEO Michael McNamara said at a presentation in New York on May 30. “We want to be the supply chain of everything.”
 
 
After torrential rains destroyed a family farmhouse in Dhong’s home village on the edge of the Kathmandu Valley, where farmers sow their crops on mountain terraces, Dhong became just the sort of recruit the global electronics industry scoops up across Asia. Tall and wiry, Dhong towers over his wife, Salome. He often seems to be struggling to repress a smile, which pushes his already high cheekbones even higher. His “love marriage” to Salome and their Christian faith make them outsiders in a culture dominated by arranged marriages, Hinduism, and Buddhism. Like many subsistence farmers who move to the city, the couple didn’t find urban life much easier than living off the land. “There is no work living here,” Dhong says.

Photograph by Cam Simpson/BloombergDhong with his wife, Salome

At some point, he paid $250 to a recruiter who promised to line him up with a good foreign job. That recruiter then connected him to a broker in Kathmandu, one of more than 750 registered with the government. Dhong left his passport with the overseas broker—and waited. On Oct. 14, 2012, he got the call. He was told to get to Kathmandu’s Tribhuvan International Airport for a flight in three hours and to bring the equivalent of $500, or about six months of his dairy wages. There was no way Dhong could come up with that much cash, pack, and leave so quickly, so the broker told Dhong to bring as much money as he could to the office, then head to the airport at the same time the next day. Dhong and his wife borrowed about $350 from a local lender. He gave it to the broker, saying it was all they had. The broker took the cash and told Dhong to meet yet another agent, the third link in Dhong’s own personal supply chain, at the airport.

Click here for an interactive graphic

Dhong grabbed a black-and-tan backpack holding his shaving kit, a single change of clothes, two Bibles (one in Nepalese, one in English), and three family photos. He said goodbye to his crying wife and daughter, then jumped onto a microbus on a loud and dusty Kathmandu road. As promised, the third agent was at the airport, holding Dhong’s passport. He demanded money, but Dhong had nothing left to give. So the broker told Dhong to sign a debenture agreement promising to pay $400 more. If Dhong didn’t sign and if he didn’t quickly pay, he would lose the job. He had yet to start work, and already he was $1,000 in debt.
 

Dhong signed and got his passport and a sheaf of documents. He says all the brokers involved told him never to mention the fees, because, “If any worker reveals it to anyone, he will be sent back to Nepal immediately, and he will be charged and punished.” Later that afternoon, Dhong climbed aboard a plane for the first time in his life. There were 41 others headed for Flextronics on the same flight. When the recruits landed in Kuala Lumpur on Oct. 15, a representative from Flextronics met them at the airport. He took their passports and put them on a bus that took them south of the city, then past a security gate to two high-rise towers the company rented as a hostel for the men.
 
 
By the end of October, the drive to produce cameras was in full swing. Dhong and the other men on the day shift rose around 5 a.m. to get ready and line up for buses that drove them to the factory for a 7 a.m. start—the trip could take more than an hour in the crush of traffic. When he arrived at the plant each morning, Dhong slipped into a white clean-room suit covering his body head to foot, including a tightly cinched hood. A cotton mask hid most of his face. Except for breaks, Dhong and the others stood throughout their 12-hour shifts beneath white drop-tile ceilings and fluorescent lights. Their lines were named after American states: New Mexico and Rhode Island. About 3,000 women from Vietnam and Indonesia also worked in the plant, according to the recruiting agents in Nepal, but the Nepalese workers say they had little contact with them. Contracts for Dhong and the other Nepalese men set their base salaries for 12-hour shifts at about $178 per month. It was the minimum monthly salary mandated by the government of Nepal for its citizens living in Malaysia.

In Schiller’s pitch in San Francisco, he said that even though the iPhone 5’s camera was 25 percent smaller than the one in the previous version, it would deliver sharper pictures, because its lenses were precisely aligned and engineered “down to the micron level.” Others made the lenses; Dhong’s job was to test them. He got them in trays and placed each in a machine that checked alignment, focus, and other variables. A computer told him whether to accept or reject each lens, with rejects sorted based on more than a dozen different “fail” codes flashed on the screen. On a busy day, Dhong says he could test about four per minute.

In November, Dhong and the other men say they noticed the number of failures appeared to be growing. Production slowed to a drip by the end of the month. The recruitment agents in Nepal say they were summoned to Kuala Lumpur for a meeting on Dec. 19. They went to the offices of the Malaysian staffing agency working for Flextronics, where executives explained that Apple was rejecting about 7 out of every 10 cameras. Production was being shut down. Dhong and the other Nepalese men, unsure why their work had stopped, were sent to their living quarters. They heard nothing for more than 20 days.

Dozens of policemen and a man the Nepalese brokers identified as a Flextronics executive came to the workers’ hostel on Jan. 10, gathering them in the courtyard between the two high-rise towers. Through a bullhorn, he told them their jobs had been eliminated and they were being sent home. Each got a letter on Flextronics stationery blaming the “current economic environment,” instead of the company’s manufacturing process, for his termination “on grounds of redundancy.” The 3,000 women also were fired, says Sharp’s Shrestha.

Click here for an interactive graphic

Another letter explained that the men were getting paid for the rest of January, plus a month. It was a total of about $600 each. Flextronics says it was more than Malaysian law required. Dhong and many others wired most of it home, as they had done for the few other paydays they’d experienced before the shutdown. Dhong didn’t know it that day, but it would be all his family would have to live on for two months. They didn’t dare spend it paying off the debt he incurred buying the job he’d just lost.

The man with the bullhorn had promised workers they’d be sent home fast, and about 200 were, say the workers and brokers. But managers kept the passports of Dhong and more than 1,300 others, instructing them not to leave the hostel. Then repatriation flights stopped. Again, the men say they were told nothing.
 

Days of uncertainty stretched into weeks. Flextronics had allowed Dhong’s visa, and those of many others, to expire, leaving their legal status in doubt, making them feel vulnerable to arrest if they left the hostel and even afraid to question their treatment. “We were now illegals,” Dhong says. “We decided not to go anywhere.” Malaysian police are notorious for mistreating immigrants, even legal ones. The U.S. State Department’s annual human-rights reports on the country are filled with allegations of illegal detention, torture, and rape. Some of the Flextronics recruits who dared to wander out of their hostel say police shook them down for cash.

Men started each day expecting word about their flights home or new jobs. Some passed time playing soccer. Pirated DVDs of Bollywood classics ran on an almost constant loop, blaring from television speakers in small rooms. Local television was always on, even though most of the men couldn’t understand Bahasa Malaysia. Dhong discovered and embraced one show for which the language was universal: American professional wrestling. “My favorite was John Cena,” he says.

Having wired home much of their money in anticipation of following close behind, many started running out of cash. Then they ran low on food. The first to go hungry were among a group of younger men who had relied on a local restaurant outside the hostel to give them a meal a day on credit. The owner cut them off when he found out they’d lost their jobs, Dhong says. Hunger soon spread to almost everyone. At night Dhong could hear some of his compatriots shouting and screaming out the windows of their high-rise towers. One man Dhong knew seemed to be going stir-crazy, muttering and shouting to himself as he paced the hostel grounds. Dhong tried to keep to himself, staying in the small room he shared with three other men and reading his English and Nepalese Bibles side by side to practice English. By late January, his food supply was down to rice flakes, which he shared with the others in his room. “We put out what we had, and mixed and ate together,” he says.

By early February, hope evaporated. Everyone seemed to be out of food and money. “We were scared,” says Hikmat Prasad Kafle, 27. “We thought, if we die here, we will die together.” Several others say they had no food for days or survived only on charity. “They treated us like dogs,” says Ramesh Kumar Parajuli, a 30-year-old subsistence farmer from eastern Nepal with a wife and two sons. “If you’re going to starve, it is better to starve in your own country.” Dhong spoke to his wife less and less, preserving credit on his phone.

At the end of the first week of February, fear and hunger turned to rage. Some men smashed windows. Others threw televisions from floors six or seven stories above Dhong. When Malaysian police arrived, the men say that rather than making arrests, the officers ordered the company to start sending food. The manager of the hostel, a Malaysian named Raganathu Rao Appalanaidu, dealt with police and confirmed they didn’t arrest the Nepalese men, “but negotiated with them, and then they speeded up the whole process of sending back these guys.”

Flextronics started trucking over ready-made meals, though the men say they were often spoiled and never enough. Flights resumed. Dhong was one of the last to leave. Like all of the workers interviewed for this story, he says he got his passport back on the way to the airport. It had a one-day “special pass” stamped inside—good to get him out of the country only on Feb. 21, the day he flew home to his wife. It had been more than two months since he last worked.
 
 
Back in Nepal, many workers still owed the money they’d borrowed to pay recruiters and brokers. Even some who managed to eliminate their debts are living precariously. Krishna Prasad Poudel, a 31-year-old subsistence farmer who flew to Malaysia on the same flight as Dhong, says he sold much of his land to pay off the principal and interest. Now his ability to provide enough food for his family is in jeopardy, he says. At least four others say they did the same or will have to, after mortgaging farms for their jobs.

Dhong found work in a Kathmandu shoe factory that churns out $5 sneakers sold in neighboring India. He earns $3 a day for a 12-hour shift inspecting the glue seams on shoes before they’re shipped. It’s about half of the minimum pay he’d been promised in Malaysia. He earns less than $90 per month and owes about $300 in interest annually. That means almost a third of the family’s annual income goes to make the interest payments for buying a job he no longer has.

In response to Bloomberg Businessweek, Flextronics says it has commissioned an outside group to travel to Malaysia and Nepal to try to conduct a sort of forensic audit on the fees Dhong and other workers paid to buy their jobs. “As with previous practice, we will immediately reimburse any employees that have been charged excessive fees by labor agencies,” Renee Brotherton, a spokeswoman, said in an e-mail. Chris Gaither, an Apple spokesman, says his company will make sure “the right payments have been made” when Flextronics finishes its audit.

But Apple’s standard calculation of how much is too much—more than one month’s net pay in Malaysia—is a percentage of an assumed three-year work contract. Because the Nepalese men worked only a few months, they face debts that equal, in Dhong’s case, about half of everything he earned in Malaysia. Almost all of the more than 40 Flextronics recruits interviewed in Nepal say they’re worse off today for their journey into Apple’s supply chain.

Dhong and his wife see only one escape: borrow more money and pay for another job abroad. Many other former Flextronics recruits say they will do the same. “I am scared,” Dhong says. “I am in debt already, but now I need to borrow more on top of that to be able to go away. I have paid a lot of interest on it already. So now I think I need to look for a reputable recruiter, check the demands and working conditions properly, and only then I want to go away. In which case I hope I won’t be duped.”
 

Apple lost billions of dollars in market value last year because it couldn’t produce enough handsets to meet record demand, one of several factors that precipitated a 20 percent decline in its share price at the end of last year. That only underscored the importance of speed in the supply chain to Apple executives, and Cook today is repeating the strategy of aggressive production-and-launch schedules, including with the iPad Air, which started shipping on Nov. 1.

Spokesman Gaither says, “Apple has led the industry in uncovering and preventing the abuse of migrant workers. … We were the first electronics company to mandate reimbursement to employees who were charged excessive recruitment fees, and our program has helped contract workers reclaim $16.4 million since 2008. We aggressively investigate any claims of bonded labor where Apple products are made, and our team is continuously auditing deeper into the supply chain. We recently updated our code of conduct to require our suppliers to directly interview workers who are hired through labor brokers, as another way of eliminating unethical practices. Although Flextronics’s Bukit Raja facility is no longer in Apple’s supply chain, we take these allegations extremely seriously.”

Photograph by Goh Seng Chong/BloombergA Flextronics factory in Shah Alam, Selangor state, Malaysia

Flextronics’s Brotherton declined to discuss details surrounding the fate of the 1,500 men flown to Malaysia. Brotherton added: “Please understand that Flextronics is unable to answer questions that are specific to our customers, and specific to what we do for them, due to confidentiality agreements.” She also said Flextronics was concerned about allegations of excessive fees and improper treatment of workers and that the company is “committed to the well-being of all of our employees.  … We are thoroughly investigating the allegations to ensure that any cases of misconduct are immediately addressed and any necessary corrective actions are promptly implemented across Flextronics to avoid reoccurrences.”

When Schiller pitched the iPhone 5 last year during the frantic recruiting drive in Nepal, Cook spent little time on the stage. But he did have the last word. He said Apple had never been stronger, “because of the dedication and creativity of our employees throughout the world.” Their work, he said, “has real significance, because delivering revolutionary products makes a real difference in people’s lives.”

http://www.businessweek.com/articles/2013-11-07/an-iphone-tester-caught-in-apples-supply-chain