Exercising power over labour governance in the electronics industry

Geoforum 67 (2015) 89–92

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Critical review

Exercising power over labour governance in the electronics industry Gale Raj-Reichert Global Development Institute, The University of Manchester, Arthur Lewis Building, Oxford Road, Manchester M13 9PL, United Kingdom

a r t i c l e

i n f o

Article history: Received 1 September 2015 Accepted 24 October 2015

Keywords: Power Contract manufacturers Labour governance Global production network Electronics industry

a b s t r a c t Power relationships between contract manufacturers and brands in the electronics industry global production network are changing. Brands show increasing dependency on contract manufacturers, whereas contract manufacturers show the opposite dynamic. This paper argues that using different understandings of power in inter-firm relationships reveal an opportunity for contract manufacturers to exercise collective power against brand firm behaviours that can cause labour violations in their factories. This requires non-firm actors in the global production network to create risk and obligation that would compel contract manufacturers to exercise more power over labour governance, for example, through the establishment of a ‘floor’ on labour costs and working conditions. Ó 2015 Elsevier Ltd. All rights reserved.

Contents 1. 2. 3. 4.

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Understanding different forms of power in inter-firm relationships Contract manufacturers are becoming more powerful . . . . . . . . . . . Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1. Introduction Of late, there have been numerous labour violations in the electronics industry global production network (GPN). They include factory worker suicides, forced labour, child labour, excessive over-time, poisonings, illnesses, and deaths from chemical exposure (Blanding and White, 2015; Chan, 2013; Verite, 2014, 2015). The majority of labour violations occur in supplier factories in developing countries. Public outcry often leads to pressure on brands to improve the situation in their supplier factories. Brands are considered ultimately responsible because they have set orders with conditions that led to the labour violations in their supply chains. Indeed, brands do not shirk public calls for responsibility and have increased resources spent on supplier governance programs. Supplier governance activities by brands, however, have not always been successful or sustainable (Locke, 2013). Very recently, governments in developed countries from which many brands originate have responded to incidences of labour violations

E-mail address: [email protected] http://dx.doi.org/10.1016/j.geoforum.2015.10.013 0016-7185/Ó 2015 Elsevier Ltd. All rights reserved.

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89 90 91 91 92 92

with global supply chain regulations against human trafficking, slavery, and conflict minerals (European Parliament, 2015; Pickles and Zhu, 2013; Verite, 2015). The root cause of much of the problems around labour violations in the electronics industry is the just-in-time production model that demands fast and cheap, yet high quality outputs from suppliers. Suppliers also face unpredictable and last minute changes to production orders and specifications, which are exacerbated with sales cycles that have become shorter over the years. For example, when the iPhone was introduced in 2007, the time to market was six months. Five years later, the time to market was less than two weeks (Yeung, 2014). Suppliers find ways to meet tough orders and have little bargaining power to change the purchasing practices of brands. The situation described assumes a stark power asymmetry between brands and suppliers. This paper challenges the notion of ‘powerless’ suppliers, by considering the case of a small group of suppliers called ‘contract manufacturers’ (CMs). CMs are large multinational corporations (MNCs) in their own right with high degrees of production and other capabilities. The top five CMs (see Table 1) in the industry conduct up to 80% of manufacturing for brand firms (European

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Table 1 Top five CMs compared with the top five brands in the electronics industry. Sources: Fortune 500, 2014 (http://fortune.com/fortune500); http://investing.businessweek.com/research/common/symbollookup/symbollookup.asp; www.google.com/ finance (accessed 17 June 2014); https://www.linkedin.com/company/asus (accessed 12 June 2015); company websites. Contract manufacturer

Revenue (USD million, 2013)

Employees

Foxconn Flex Jabil Circuit

131533.1 26108.6 18336.9

Sanmina Celestica

5917.1 5796.1

1,290,000 (2014) 150,000 (2014) More than 175,000 (2015) 33,144 (2014) 22,600 (2014)

Brands

Revenue (USD million)

Employees

Apple Hewlett–Packard Dell Lenovo Acer

170.910 (2014) 112,298 (2014) 56,940 (2013) US$46,296 B (2015)a US$10.48 B (2014)b

92,600 (2014) 317,500 (2014) 108,800 (2014) 60,000 (2014) More than 10,000 (2014)

a

Lenovo (2015). http://www.bloomberg.com/research/stocks/financials/financials.asp?ticker= 2353:TT&dataset=incomeStatement&period=A¤cy=US%20Dollar. b

Commission, 2012). When it comes to discussions around improving labour conditions in the electronics industry, I argue that more attention needs to be paid to contract manufactures. This is because CMs own, run, and manage the largest factories in the industry and employ a significant amount of workers worldwide. The majority of their factories are located in developing countries, which face a greater risk of poor labour conditions. CMs have also been increasingly linked to labour violations in recent years (Bormann et al., 2010; Simpson, 2013). This paper will show that from a business perspective CMs have increasingly become relatively indispensable, in terms of their capabilities, to brands. As a result, power asymmetry between the two groups of firms change and diminish in different ways. In order to understand the dynamism of their inter-firm relationships, however, traditional concepts of firm power must be challenged and a pluralistic view of power used instead. The paper argues that CMs are becoming more powerful vis-à-vis brands in different ways, and this opens up a space for ‘‘pushing-back” against the just-in-time production model upheld by brands. Indeed, to make serious progress in reducing labour violations in outsourced factories, a change in the business model is required. The next question naturally is how can such a radical outcome be achieved? It is argued that CMs are entry points for change for two reasons. First, CMs are no longer only low-value added, low waged assembly manufacturers. They are individually shaping their business models in ways that can or are already creating tensions, if not threats, to brands. At the same time, they have developed capabilities that are leading to increasing dependency by brands, and thereby influencing inter-firm power dynamics. When power is theorised in different ways, brand dependency on CMs can allow the latter to influence terms and conditions of production for better worker conditions. Second, brands have imposed labour governance from the top down through private standards and codes of conduct with limited success (see Nadvi and Raj-Reichert, 2015; Raj-Reichert, 2011, 2013). If CMs are compelled to influence and have more power in negotiations over labour governance in their factories, their experience and knowledge over factors that lead to labour violations could result in more effective governance measures. Here, a new research agenda is called on to move focus away from brands in discussions over improving worker conditions in the electronics industry and towards CMs. Would CMs, who have better knowledge of worker management,

propose to do things differently from brands, if given the platform to influence labour governance measures? Might they have better solutions? Should they be telling brands what to do? Importantly, and to avoid imagining a ‘‘kumbaya” moment where firms come up with solutions to their own exploitative working conditions, the politics of governance through the networked power of mobilization by non-firm actors in GPNs would be critically needed (Wills, 2001). This means engagement by nongovernmental organisations (NGOs), trade unions, and governments to not only better understand the changing power and commercial dynamics between brands and CMs but to compel CMs, through the creation of risk and obligation, to exercise more power over labour governance, for example, through the establishment of a ‘floor’ on labour costs and working conditions. The remainder of this paper addresses each of these factors in more detail. The discussion is also informed by qualitative research (interviews) conducted in 2008, 2010, 2013, and 2015 with brands, CMs, NGOs, trade unions and government agencies in the electronics GPN located in the United States, various countries in Western Europe, Malaysia, and Singapore. The next section discusses different concepts of power for understanding inter-firm relationships in GPNs. Section three discusses changes in the relationships between brands and CMs in the electronics industry. It also discusses networked power through the mobilization of non-firm actors in the GPN to compel CMs to improve working conditions. Section four concludes the paper.

2. Understanding different forms of power in inter-firm relationships The traditional concept of inter-firm power is structural, where the firm with more economic might wins (Allen, 2003). In an outsourcing relationship a brand that contracts suppliers, has the ability to dictate terms and conditions or cancel or exit out of the contract. This is why suppliers are considered to be in a position of less power. However, power can be conceptualised and exercised in different ways. Critical research has included concepts of networked or relational power and Foucauldian governmentality to describe inter-firm relationships in GPNs (Hughes, 2009; Larner and LeHeron, 2004; Ouma, 2015). From a networked and relational perspective, for example, small firms and in particular clusters can exercise power collectively to overcome structural powers of large brand customers through upgrading (Rutherford and Holmes, 2008; Smith, 2003). From a governmentality perspective, actors within firms can exercise micro processes of power, for example, through self-disciplinary or self-regulatory mechanisms that can affect inter-firm relationships within a GPN (Raj-Reichert, 2013). When power is conceived in different ways more possibilities of power dynamics can be analysed in a GPN. For example, suppliers can work together on a common problem, such as risks that arise from labour violations, and agree to collective strategies to overcome them. Indeed cooperation amongst competitive firms has been widely studied in the business literature (see De Marchi and Grandinetti, 2014; Sako, 1996; Wilhelm, 2011). When brands become dependent on a small group of suppliers while the latter become less dependent on brands,1 diminishing power asymmetry can open up space for the exercise of collective power by suppliers to overcome constraints dictated by brands. These ideas underpin the discussion of changing power dynamics of brands and CMs in the next section. 1 There is a related emerging literature on bi- and multi-polar governance in global value chains (see Fold, 2002; Ponte and Sturgeon, 2014).

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3. Contract manufacturers are becoming more powerful Early research on contract manufactures was prominent in the global value chain (GVC) literature. According to the GVC typology of inter-firm relationships set out by Gereffi et al. (2005), brands and CMs fall into a modular value chain where the latter are highly capable producers of ‘‘generic” manufacturing, e.g. assembly, and manufacture of parts and components, to brands. Because CMs could cater their generic capabilities to a range of brands, they were not dependent on any particular one. Similarly, their generic capabilities meant that brands were also not dependent on a single CM and could easily move their orders from one CM to another with relative ease. Because of low levels of dependency by both groups of firms the modular GVC is characterised by low power asymmetry (Sturgeon, 2002). However, questions around whether brands are increasing their dependency on CMs was raised when Apple was unable to drop Foxconn – who was the sole manufacturer of the iPhone and iPad – after several worker suicides in its factory in 2010 (Chakrabortty, 2013). Since the mid-2000s CMs have changed their ‘‘generic” profile to widen their capabilities into functions traditionally occupied by brands and original design manufacturers (ODMs). These capabilities include supply chain management, product design, technological innovation, and brand development (Ernst, 2005; Gentry and Elms, 2009). Design capabilities have been gained organically and through strategic mergers and acquisitions of design houses. For example, in 2003 Flex acquired the Finnish ODM Microcell and today Flex has its own chip design subsidiary. It also develops technologies and components for customer firms and has innovation centres with engineers that help customers with product development (Flex website, 2015). When it comes to technological innovation, Jabil Circuit is one of the first companies to possess cutting edge 3-D printing technology (Shinal, 2013). Foxconn in 2014 acquired the Taiwanese semiconductor chip designer Socle Technology, which came with a well-equipped engineering workforce (evertiq.com, 2014; Luethje et al., 2013). From its acquisitions, Foxconn has the capability to design its own semiconductor chips (Shilov, 2014). Advanced capabilities have also led Foxconn to enter the brand market in Asia; for example with its smartphone ‘‘InFocus” (Sims, 2014). Flex also entered the Asian product market with the generic mobile-phone ‘‘PhoneOne”, which was developed with Microsoft (EE Times, 2003). A surge in patent ownership is also taking place amongst these firms with Foxconn becoming one of the top 20 patent owners in the US in 2013 (Luk, 2014). CMs have also diversified their markets and business strategies. Flex and Foxconn, for example, have become suppliers in the automotive industries. Celestica has become a CM to the aerospace industry. Jabil Circuit has entered the health care industry. These other industries also promise longer and more stable contracts and higher prices (CM managers, Personal interviews, 2015); perhaps more fundamental is evidence that CMs have reduced their dependence and concentration of business with electronics brands in recent years (see Table 2). Information from Flex’s SEC 10-K filings show that for the first time since 2000 it did not have a single customer with which it had more than 10% of net sales in 2013. Similarly Sanmina-SCI’s SEC 10-K filings showed that for the first time since 2000 it did not have a single customer that represented more than 10% of net sales in 2014. In 2013 and 2015, Ford Motor Company became a top 10 customer of Flex signaling industry diversification. From the brand perspective, long-term relationships are maintained with CMs. This is a result of brands having assisted CMs over the years with building capabilities for the manufacturing specifications of their products. Increasingly, brands have come to rely on CMs to conduct higher value added activities, such as

Table 2 Brands with which CMs had greater than 10% net sales (A) or greater than 10% net revenue (B). Source: Company SEC 10-K filings. 2014 Flex (A) Google/Motorola Hewlett–Packard Blackberry Sony-Ericsson Jabil circuit (B) Apple Blackberry Cisco Hewlett–Packard Nokia Royal Philips Sanmina-SCI (A) Alcatel-Lucent IBM Lenovo Hewlett–Packard

2013

2012

2006

2005

>10% >10%

>10%

10%

>10%

14%

21% 12%

10% 13% 14%

>10%

18%

20% 12%

>10%

14% 11% 11%

>10% 12.8% 10.5% 10%

23%

(co)-designing products and developing and testing prototypes. According to a CM, ‘‘Some OEMs/brands are not touching products all together, where it is handled from CM to consumers directly. . . Some OEMs don’t even design” (CM Director of Social Responsibility, interview 2013). Another representative at the CM noted that 20% of their business involves designing and taking over supply chains from brands (CM Vice President of Social and Environmental Responsibility, interview 2013). What is significant about these changes is that as CMs become less dependent on brands and engage in other industries, the ability of brands to have significant power over CMs diminishes. This is important to consider, assess, and pay attention to with regards to negotiations over labour governance in the electronics industry GPN. Today, brands control private governance mechanisms, such as the Electronics Industry Code of Conduct and hiring third party auditors and monitoring organisations, to audit labour governance in supplier factories (Raj-Reichert, 2011). However, brand efforts have not been successful. One example is the discovery by the international social auditing organisation Verite of forced labour in the electronics industry in Malaysia, where four out of the five major CMs have very large factories (Verite, 2014). This incident exposed starkly the inadequacy of the industry leaders in supplier governance. It is conceivable that as brands increase their dependency on CMs, the latter can exert more influence individually and collectively in negotiations over labour costs and standards in return. However this would not be guaranteed. This is where NGOs, trade unions, other non-firm actors, and government agencies must exercise networked ‘powers through mobilisation’ through campaigns and policies that create risk and obligation (the ‘stick’), which compels CMs to bring changes to business models that create labour violations (Allen, 2003; Faulconbridge and Hall, 2009). GPNs have not only created production networks of brands, CMs, and suppliers, but also a network of workers and consumers worldwide ready for mobilization and global campaigns based on common challenges and experiences (Wills, 2001). Indeed, the multiple and complex power relationships amongst different actors that make-up a GPN inevitably leads to contestation around social concerns (Levy, 2008). When labour violations in factories turn into a real business risk for CMs, improving working conditions goes hand in hand with staying in business and remaining competitive. 4. Conclusion This paper sets forth a research agenda on CMs and their role in labour governance in the electronics industry GPN. It argues that

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more attention is needed on the changing power dynamics between CMs and brands in order to understand how the former can be an entry point for improving labour governance in the electronics industry. In order to incentivize CMs to exercise their power requires non-firm actors, such as NGOs, trade unions, government agencies, and others, to compel CMs to push back against brand behaviours that result in labour violations. If faced with the risk and obligation to improve working conditions one solution would be for CMs to collectively agree on floors on labour costs in the bidding process with brands. A ‘floor’ on working conditions agreed amongst CMs may also have an industry-wide effect. A challenge to this research agenda is the question on whether the current generation of CMs will be replaced by a newer set of players with less power vis-à-vis brands. For example, Pegatron who has become a competitor to Foxconn for Apple contracts has had worse labour violations in recent years (China Labor Watch, 2015). However, this would make it more imperative to establish ‘floors’ on labour costs to prevent a race to the bottom with regards to labour standards with a new generation of weaker CMs. Thus, the changing dynamics of the power relationships between CMs and brands today provide a unique opportunity for enhancing labour governance in the electronics industry GPN. Acknowledgements I would like to thank the editor for useful and helpful comments and guidance on the article. This research was funded through a British Academy Postdoctoral Fellowship and financial support from the Hallsworth Endowment at the University of Manchester. I would like to thank both funders for supporting my research. References Allen, J., 2003. Lost Geographies of Power. Blackwell Publishing, Oxford. Blanding, M., White, H., 2015. How China is Screwing Over its Poisoned Factory Workers, 4 June, Wired (accessed 13 July 2015). Bormann, S., Krishnan, P., Neuner, M.E., 2010. Migration in a digital age. Migrant workers in the Malaysian electronics industry: Case studies on Jabil Circuit and Flextronics. World Econ., Ecol. Develop. (Berlin). Chakrabortty, A., 2013. The Woman Who Nearly Died Making Your iPad, 5 August. The Guardian (accessed 15 July 2015). Chan, J., 2013. A suicide survivor: the life of a Chinese worker. In: New Technology, Work and Employment, vol. 28(2), pp. 84–99. China Labor Watch, 2015. Analyzing Labor Conditions of Pegatron and Foxconn: Apple’s Low-Cost Reality (accessed 31 August 2015). De Marchi, V., Grandinetti, R., 2014. Industrial districts and the collapse of the Marshallian Model: looking at the Italian experience. Compet. Change 18 (1), 70–87. EE Times, 2003. Flextronics Expects its ODM Profits to Surpass EMS. EE Times (10 April 2015). Ernst, D., 2005. Limits to modularity: reflections on recent developments in chip design. Indust. Innov. 12 (3), 303–335. European Commission, 2012. ICT Sector Guide on Implementing the UN Guiding Principles on Business and Human Rights. Brussels, European Commission. European Parliament, 2015. Conflict Minerals: MEPs Ask for Mandatory Certification of EU Importers, 20 May (accessed 2 July 2015). Evertiq.com, 2014. Foxconn to Acquire Chip Designer Socle. evertiq.com (14 May 2015). Faulconbridge, J., Hall, S., 2009. Organisational geographies of power: introduction to special issue. Geoforum 40 (5), 785–789.

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