Hell is Cheaper: China, Apple, and the Economics of Horror

I hate what I've learned about Apple's outsourcing to China. I hate hearing Professor William Black explain why he believes that Steve Jobs, who I admired very much in some ways, must have ignored repeated reports that employees were being cheated and endangered. I hate knowing that Apple's business practices are destroying the kind of good middle-class job his adoptive father had.

I hate knowing that many of this week's news stories about China ignore the fact that American companies who outsource to China have employee fraud and death built into their business plans.

In the words of the old Bob Seger song: Wish I didn't know now what I didn't know then. But I do.

Where the Blame Belongs

China and trade are back in the news, thanks to the trade visit of Chinese Vice President (and future President, by most reports) Xi Jinping. Last week on The Breakdown radio show [1] I interviewed William K. Black, Jr., the former regulator who is now a Professor of Law and Economics at the University of Missouri in Kansas City.

Prof. Black, who describes himself as a "white collar criminologist," makes a compelling argument that the cruelty and cynicism of both Chinese authorities and American companies like Apple are far worse than most people can imagine. He identifies Apple's greatest misdeed - one that may be shared by most of its competitors - as "anti-employee control fraud [2]" which it tolerated despite repeated reports.

Before the interview, Bill Black and I shared stories of the working conditions we'd both seen in other countries. Sometimes it isn't pretty at all. So let's not kid ourselves any longer: Companies like Apple don't outsource to China because the workforce is better-educated or more highly motivated. They don't even outsource just because the labor is cheaper there. They outsource because employers who defraud their workers can make products more cheaply, and those who ignore their safety can produce them more quickly.

"I won't sell a product that gets scratched," Steve Jobs said in a famous anecdote. "I want a glass screen, and I want it perfect in six weeks."As Prof. Black noted in our interview (audio here [3]), "Imagine what would have happened if Steve Jobs cared as much about the health of his workers as he did about the quality of an iPhone screen."

As someone who has admired both Jobs and Apple - and who just bought a new MacBook Pro - the issue strikes close to home. Because the worst moral depravity doesn't belong to the Chinese authorities, although they're shockingly heartless toward their own workers - and, as Prof. Black notes in this audio clip [4], don't even hesitate to tolerate fraud that kills infants. Even companies like Apple who, as Prof. Black says [5], knowingly create the environment that makes fraud and employee danger unavoidable, aren't the guiltiest among us.

The greatest moral failing isn't theirs: It's ours. We buy products from manufacturers like Apple. We ignore the reports that we hear. We read newspapers and watch television without ever demanding that their reporters ask companies like Apple at every press conference: What are you doing to protect workers overseas?

Shame on them, all of them: the Chinese government, the reporters, executives at Apple. But most of all, shame on us.

The Economics of Horror

The situation in China is Dickensian in the scope of its horror. But the laws of economics makes that situation a predictable, even an inevitable horror. Dave Johnson [6] provides an excellent overview of the horror and its impact here at home, including living twelve to a room in dormitories and being roused at midnight to work unplanned shifts. Dave does, however, omit this detail [7], from the New York Times: "Some say they stand so long that their legs swell until they can hardly walk." (Update: Dave reminds me he did note it in an earlier post [8]. I should've known; it's a hard image to forget.)

Here's how the economics of outsourcing - the economics of horror - works: Companies like Apple that ignore reports of fraud and danger against employees make it impossible for honest, conscientious suppliers to survive.

Prof. Black offers a compelling argument that Apple - and Steve Jobs - had to know what their practices were doing to Chinese workers. They received audits every year [7] which told them that workers were being defrauded out of their pay. Yet they did nothing. As Prof. Black notes, it's easy to keep two sets of books to fool auditors. Why didn't Apple's suppliers bother doing that? Because they knew Apple didn't care.

As Prof. Black rightly says [9], corrupt suppliers inevitably drive good suppliers out. But ethics drives out good ethics. Companies that don't pay their workers can always underbid those that do. Companies that maim and kill their workers can always deliver the goods more cheaply and quickly. That's why we have worker protection laws - and why some countries don't.

Apple knew that. So do its competitors, who also rely on many of the same strategies.

Why would otherwise decent people behave like that? To get faster turnaround on their orders. And to save money - even though Apple's profits rose from $26 billion in 2010 to $46.3 billion in 2011. Just one billion of that profit - less than one-forty-sixth - could raise the average salary of workers [10] at its Foxconn supplier from $890 to $1,890 per year.

They could raise those yearly Foxconn salaries from $890 to $1,278 apiece using just one person's salary, that of CEO Tim Cook. Cook, who earned $378 million in total compensation [11] last year, said yesterday [12]that "Apple takes working conditions very seriously" but that "the supply chain is complex." If the journalists at the Times could figure it out, you'd think someone who's paid more than a third of a billion dollars per year could do it too.

Mr. Cook also said they were going to get new, better audits performed. That would be more reassuring if they hadn't repeatedly ignored the ones they'd already received. There's only one reason companies tolerate working conditions that amount to hell on earth: It's cheaper and easier.

Engineers Who Kill Have a Competitive Advantage

Steve Jobs complained about the availability of good engineers in the US, and said they were plentiful in China. Guess that depends on what you mean by "good." As Prof. Black notes in these comments [13], there aren't many US engineers who would order workers to use a nerve toxin to clean iPod screens just because it's quicker. Chinese engineers did, and more than 100 employees were sickened.

International organizations reported that improper dust management in Apple suppliers' plants could lead to flash fires. That was easy to discover, as Prof. Black notes in our interview. In fact, Apple was warned about it several months before a fire killed several employees who were building iPads and disfigured others. One of the dead was Lai Xiaodong [7], who lingered for two days before dying of his burns.

Maybe he was making my iPad when he died. Maybe he was making yours. His family might not be comforted to learn that Apple's profits "soared [10]," exceeding all analysts' expectations in the year after his death. Lai Xiaodong was twenty-two years old.

Chinese engineers aren't less moral or human by birth than those elsewhere in the world. But Horror Economics applies among individuals as well as companies: If tolerating flash fires and nerve toxins is the only way to get ahead - or to keep your job - some people will be willing to do it.

Which puts the moral responsibility right back on us.

The Dirtiest Secret

There was a famous exchange in which President Obama asked Steve Jobs what it would take to bring Apple's manufacturing jobs back home and Jobs replied, "Those jobs aren't coming back." The New York Times repeats Apple's often-repeated public justification for that position, describing the company as praising the "flexibility, diligence and industrial skills of foreign workers."

It does take "flexibility" to assign workers to scrub Apple screens with a nerve toxin, or to ignore reports that they're in danger of death or mutilation. American workers are skilled and diligent, and there's no reason for Apple's executives to believe otherwise. It's possible that Steve Jobs and other outsourcing executives really think that "those jobs aren't coming back" because they expect it will always be impossible to underbid the Chinese - because they don't believe Chinese workers will ever be protected by law.

That's the inexorable logic of the unrestrained and unregulated market. If things don't change, there will be no stopping the outflow of employment from the safe and the stable to the cheated, the endangered, and the abused. Bad ethics drives out good ethics.

Perhaps that's what Jobs knew and Obama didn't: that there was nothing Obama could do to bring those jobs back - not as long as danger and fraud can underbid safety and fairness.

Paul Jobs [14] adopted Steve and raised him on the salary he earned as a machinist manufacturing lasers in the Silicon Valley. You'd think this childhood experience would have created some sort of loyalty in Steve toward the middle class, some understanding of what a living wage and decent working conditions mean. But that doesn't seem to have happened.

What a shame.

Immoral Trade

President Obama was characteristically understated when he said he this week wouldn't tolerate trading partners who don't "play by the rules." Play by the rules? They cheat.

But if we don't want to tolerate trading partners like that, then we can't be trading partners like that. Apple wasn't "playing by the rules" when it ignored one audit after another that reported fraud against Chinese workers. It wasn't "playing by the rules" when it ignored an aid organization's warning that workers in its Chinese plants were in danger of being killed or disfigured in flash fires - and when, a few months later, some of them were.

Vice President Xi offered greater cooperation on trade. But what kind of cooperation? Will he enforce the law? Will he make it illegal to cheat workers? Will he imprison employers who cause their deaths? Will he end these Dickensian conditions? American lawmakers are outraged at Chinese currency manipulation, and they should be. But death and cheating are even higher on the list of moral wrongs.

"Speaking frankly," said Xi, "an important aspect of addressing the imbalance in Chinese-U.S. trade is the United States' own economic policies and structural adjustment." By "structural adjustment," he meant "allowing the last manufacturing jobs in your country to die." China needs to make some adjustments instead.

Americans should reject "greater cooperation" with an immoral trading partner. And we must learn to become moral trading partners ourselves.

Insanely Great

Steve Jobs could be famously nasty to people, but he also had a lot of terrific qualities. And for someone who reportedly mistreated his employees, they sure seemed to stick around. That says a lot about his management abilities. In a world where mediocrity is tolerated in every walk of life, it's profoundly gratifying to come across someone who was so passionate about his work that he wanted to make sure every product was "insanely great." I love that about Steve Jobs.

But it would really have been insanely great if Steve Jobs had shown the world that you can be an innovative corporate leader without losing your moral and social conscience. Jobs knew how to charge more for a product and make people buy it anyway. (Trust me; I know.) If these calculation [15]s are correct - and they look sound - he could have settled for a 39 percent profit margin on an iPad instead of the curent 54 percent, or split the difference with consumers, sold them for $784, and made a 46 percent margin. Jobs probably could have sold more of them that way, too, and made just as much money.

Couldn't he have added twenty percent or so to the cost of an iPad so that the people making it didn't have to suffer nerve damage, be disfigured, or die in a flash fire? Couldn't he have adjusted his already "insanely great" profit margins so that Chinese workers weren't forced to live in slaveship-like dormitories while being cheated out of their earnings? Couldn't he have supported unionized workers?

Couldn't he have done those things so that maybe some kid who's being raised by a machinist could grow up to be the next Steve Jobs?

Steve Jobs changed the culture - visually and digitally. He could have changed corporate morality, too. He could have demanded that his own company's ethics be "insanely great."

Instead he reinforced a horror-driven economy that's greatly insane.

Shared Responsibility

"China and the United States face shared challenges and shoulder shared responsibilities in international affairs," said Vice President Xi [16].

But for each of them, and for their people, the shared responsibility actually begins much closer to home - not with international affairs but with matters domestic: The safety of the innocent. An end to criminal mistreatment of employees. A refusal to enrich ourselves - or buy cool products - with the blood of others. An obligation to demand better from corporate citizens.

I hate knowing what I now know. But I do. You do too. Now we have to act. Our common human bond, the one we share with working people around the world, demands no less.

(The entire China section of WIlliam Black's interview is here [17]. The full interview, which also addresses Wall Street fraud, can be found in the "Conversations [18]" section of the program website [1] for The Breakdown.)