Why Apple Can't Control Its Chinese Factories

Last year, after a 25-year-old Chinese university graduate committed suicide at one of the factories that makes Apple's iPhone, executives from the Californian company flew in for an urgent review.

Sun Danyong threw himself from the 12th floor window of his apartment block after an iPhone prototype went missing on his watch. Before he jumped, he sent a message to a friend claiming that security staff at Foxconn, the notoriously secretive Taiwanese company that makes all of Apple's mobile phones and the upcoming iPad, had beaten him severely.

The allegations deeply shocked Apple's management, and there were calls for Foxconn to be fired. The Taiwanese firm, which operates a series of mega-factories on the Chinese mainland, has been described as "inhumane and militant" by China Labour Watch, a US-based NGO.

However, at the end of the day, Apple was powerless to change the situation. According to analysts, Foxconn and its two rivals, Quanta and Pegatron, are the only three companies in the world that are capable of quickly mass-manufacturing Apple products of the right quality.

Industry insiders said it is this triumvirate, and not Apple, that really holds the power in the relationship. "In the near term, there is absolutely nothing that Apple can do to shift away from these companies," said Edward Yen, a technology analyst at UBS.

"Apple's biggest concern is whether the factories can deliver on time, and get the quality right. There really aren't that many players who can do that, major players who have the skillset and flexibility," he added.

Apple's lack of power over its suppliers came under the spotlight again last week, when the company's own investigation revealed widespread allegations of abuse among the 102 factories that manufacture its goods.

Apple's 2010 Supplier Responsibility report listed claims of child labour, excessive working hours, environmental abuses and very low wages at many of its suppliers.

And while Apple deserves credit for transparently auditing its suppliers and publishing the results, it was notable how little the US company could do to resolve the problems. Many issues had worsened in the last year, but Apple only terminated the contract of a single supplier.

"Apple can't do anything about it, it has nowhere else it can turn to to make its products," said one expert in sourcing from Chinese factories. "If they try and move business away from Foxconn, Foxconn can simply go out and buy whichever supplier they turn to".

Although Apple carefully chooses the smaller component companies that make the parts that go into its computers, iPods and iPhones, it is the triumvirate of big suppliers who are in charge of running the system day-by-day. If Apple tried to take its business elsewhere, it would risk losing its entire supply chain.

The three companies are behemoths in their own right, producing goods for a roster of blue-chip brands, including Sony, HP, Dell, Acer and Nokia. Quanta is the world's largest laptop maker, and manufactures 90pc of Apple's Macbooks, according to Mr Yen.

Foxconn, meanwhile, makes all of the iPhones and the two companies split the production of Apple's iMac desktop computers half-and-half. Pegatron makes some of Apple's iPod models.

All three companies are deeply secretive. Foxconn did not respond to requests for a comment on its relationship with Apple, while Elton Yang, the vice president of Quanta said: "We strictly follow up any core policy stipulated by our customers. Meanwhile we shall not and could not comment on anything regarding our customers."

Apple, asked about the abuses in its report, said: "Last year Apple proactively audited more than 100 supplier facilities around the world to ensure that they comply with Apple's strict standards. We have also created extensive training programs to educate workers about their right to a safe and respectful work environment."

Apple controls its research and development, dreaming up its products in Cupertino, California, and then passing the blueprints to its suppliers.

However, elsewhere in the technology industry, the relationship between big name brands and the triumvirate is changing rapidly. Analysts said Apple's rivals, HP and Dell, have even less control of their supply chain. "With Dell, HP and Acer, they pretty much say to Quanta and Foxconn: 'Show us what you've got'," said Mr Yen. It is the suppliers, rather than HP and Dell, who come up with new designs and technology. Both Quanta and Foxconn have heavily invested in making sure they are at the cutting edge.

Quanta, for example, made a $10m (£6.65m) investment last year in Tilera, a chip-maker whose technology may allow users to control their computers by waving their hands in front of their screen. Foxconn has backed Innovation Works, the technology incubation firm started by Kaifu Lee, the former head of Google in China.

Nevertheless, Mr Yen predicted it would take Apple a long time if it wanted to change the practices in the Chinese system. "If they genuinely do not like what is happening, they can build up the capabilities of another supplier, feeding it a few projects here and there. They can't do it overnight though. It would take a couple of years."