Changing relationships between contract manufacturers and brands and uncovering forced labour in the electronics industry in Malaysia

Dr Gale Raj-ReichertUniversity of ManchesterConference of the Regulating for Decent Work NetworkInternational Labour Office8 July 2015, Geneva

Presentation outline

•Changing dynamics of inter-firm relationships between contract manufacturers and brand firms

•Forced labour in the electronics industry in Malaysia

•Global production network analysis of the uncovering of forced labour

•Conclusions

Background• Brand firms outsource 80% of production to five contract

manufacturers (European Commission 2012)• Relationship between brands and contract manufacturers

analysed in global value chain literature traditionally as modular (Gereffi et al. 2005; Sturgeon 2002)

• Recent developments question the exact nature and dynamics of these relationships▫ limits to product modularization, standardization, and

codification (Ernst 2002; Sabel and Zeitlin 2004)▫ evidence of growing dependency by brand firms on

specific CMs (Wong et al 2010; Sabel and Zeitlin 2004; Yang 2013)

▫ Giant contract manufacturers like Foxconn have ‘considerable clout’ in GVCs (Gereffi 2014)

▫ Different concepts of power, e.g. ‘strategic suppliers’ and ‘buyer’s dependence’ (Cox et al 2002; Kahkonen et al 2015)

• Changing power dynamics have implications for labour governance

Contract Manufacturers in the Electronics Industry Global Value Chain

Suppliers

Revenue (USD million, 2013)

Employees (2014)

Foxconn 131,533.1

1,290,000

Flextronics

26,108.6 150,000

Jabil Circuit

18,336.9 142,000

Sanmina 5,917.1 33,144

Celestica 5,796.1 22,600

Brands

Revenue (USD million, 2013)

Employees (2014)

Apple 170.910  92,600

Hewlett-Packard 111,851 317,500

Dell 56,940 108,800

Lenovo 46,295.6 60,000

Acer 10,662more than 10,000

Research questions• What are the changing power dynamics between brand

firms and contract manufacturers in the electronics industry global value chain?

• What implications does this have on the governance of labour conditions in the electronics industry global production network? In particular on forced labour in the electronics industry in Malaysia?

Methodology• Global value chain framework

▫ Inter-firm relationships• global production network framework

▫ Networks of firm and non-firm actors• primary and secondary research in 2008, 2010, 2013, and

2015• semi-structured interviews with firm and non-firm actors in

Malaysia, Singapore, the United States, and various countries in W Europe

Changing power dynamics: Growth and diversification amongst contract manufacturers

• “Contract manufacturers are in other markets and are attracting new customers… they are going after new markets.” (Contract manufacturer, 2013 interview)

• History of mergers and acquisitions ▫ e.g. Sanmina acquired SCI; Flextronics acquired Solectron;

acquisition of regional suppliers• Shift into higher value added activities

▫ Foxconn increasingly moving into software, hardware and wireless design

• Entry into new sectors:▫ Foxconn has own brand in mobile phone accessories and

robots (Foxbots)▫ Diversification into automobile industry and healthcare

- Ford Motor Company top 10 customer of Flextronics since 2013

Design & innovation, more control over GVC organisation

• “Top tier [suppliers] give complex design solutions to OEM customers… Some OEMs/brands are not touching products all together” (Contract Manufacturer, 2013 interview)

• Flextronics moved into ODM model, acquired design companies, developed mobile phones with Microsoft

• Jabil Circuit has expertise in 3D printing technology• Patents:

▫ Flextronics has 364 (in 2012); Foxconn has more than 64,000 and was top 20 patent holder in US

▫ In comparison, Apple holds around 15,500 patents (in 2012)

• Inventory management and handling of bill of materials• ‘Supply chain command center’ at Jabil Circuit

• CMs now have to control and manage ‘Brand-like’ reputations

Global supply chain regulations

•2010 US Dodd-Frank Act – disclosing conflict mineral use from Democratic Republic of Congo

•2010 California Transparency in Supply Chains Act – to eradicate human trafficking and slavery

•2015 US Federal Acquisitions Regulation – prohibits use of child and forced labour

•2015 UK Modern Slavery Act – report on what companies do to tackle modern slavery

•2011 UK Bribery Act

Foxconn suicides Staffing the iPhone Supply Chain, With Help From Bogus Documents (Bloomberg News 2013)

Electronics industry and foreign workers in Malaysia

• Electronics industry in Malaysia (Verite 2014)▫32.8% of exports ▫employed 27.2% workers ▫86.5% investment into industry foreign▫2nd largest employer of foreign workers▫20% to 60% of workers estimated to be

foreign workers (Bormann et al 2010)

• Malaysian government encouraged influx of foreign workers since 1980s (Rasiah et al 2015)

Findings of Verite report (2014) on forced labour in the electronics industry in Malaysia

1. High recruitment fees led to debt bondage through excessive working hours. 92% of workers interviewed paid fees and 77% had borrowed to do so.

2. Passports withheld by labour employment agencies. Returned to workers for a fee or not at all. 94% of workers interviewed had their passports taken away.

3. Employers restricted movement and instituted sense of fear and amongst foreign workers. Compounded by government raids on undocumented workers.  

4. Foreign workers unable to break work contracts or change employers to return home. Reported by 50% of workers interviewed.  

5. Deceptive recruitment on wages or the type of work.

6. Foreign workers excessively dependent on employment agencies for housing, medical care, food, transport, legal status, employment status, etc.  

7. Foreign workers hired by third party organisations, such as labour employment agencies, were more vulnerable to forced labour.

Global production network analysis: role of different actors in labour governance

• Firm actors▫ Brand efforts at labour governance not successful▫ Contract manufacturers are largest employers but missing link in

labour governance efforts▫ 2nd tier (and lower) suppliers fall into governance gap

• Electronics Industry Citizenship Coalition (EICC)▫ Created by brands (stronger members) and contract manufacturers

(weaker members)▫ Not many low 2nd tier supplier members▫ Verite is key auditor ▫ EICC audits did not find forced labour

• International actors▫ International Labour Organisation – minimal progress in Malaysia

(middle income country) on FoA and CB▫ Malaysia denounced ILO Convention on the Abolition of Forced

Labour in 1990

• Non-governmental organisations & trade unions▫ GoodElectronics Network (SOMO, CAFOD, CEREAL,

IndustriALL)▫ Weak civil society and trade unions in Malaysia▫ Verite –

‘activist auditors’ considered more credible auditor over labour violations by

firms (personal interviews, 2015) Networked relationship with US government

• State actors▫ Malaysian government – generally weak▫ United States government – campaign against human

trafficking Trafficking in Persons report Federal Acquisitions Regulation Global supply chain regulations

• Labour contractors/recruiters – unregulated and non-transparent

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Uncovering forced labour: global production network analysis

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Conclusions• Uncovering of forced labour involved non-firm actors

outside of the value chain (inter-firm) relationships• Limits to governance by local actors in Malaysia

overcome by global actors• Direct responses to forced labour issue undertaken

by brands, e.g. HP, and EICC• Further questions:

▫ Should contract manufacturers increase their role in labour governance – what would this look like?

▫ Is this a ‘historical moment’ or can it be replicated?▫ What are the implications for governance into the

future? GPNs require hybrid public and private governance,

more emphasis on public (Mayer and Pickles 2010) ‘Second generation’ governance models (Posthuma 2010)