For Apple suppliers, loose lips can sink contracts

LONGHUA, China /TAIPEI Wed Feb 17, 2010 12:51pm EST

1 of 3. Workers walk outside Foxconn's factory complex in Guanlan in the southern Chinese province of Guangdong January 22, 2010. Foxconn manufactures products for Apple Inc. Picture taken January 22, 2010.

Credit: Reuters/James Pomfret

Related Topics

LONGHUA, China /TAIPEI (Reuters) - The massive manufacturing complex in the South China city of Longhua resembles an industrial fortress. To enter the facility, workers swipe security cards at the gate. Guards check the occupants of each vehicle with fingerprint recognition scanners.

Container trucks and fork lifts rumble nonstop across the sprawling compound, serving a grid of factories that churn out electronics goods for top global brands around the clock.

Inside the walled city -- one of several compounds run by Foxconn International, a major supplier for Apple Inc -- employees are provided with most of their daily needs. There are dormitories, canteens, recreation facilities, even banks, post offices and bakeries.

The rank-and-file within the compound have little reason to venture outside. That reduces the likelihood of leaks, which in turn lessens the risk of incurring the wrath of Apple and its chief executive, Steve Jobs, whose product launches have turned into long-running, tightly controlled media spectacles.

Many of Apple's finished gadgets, from iPods to iPads, are assembled at industrial compounds like the one in Longhua. And when it comes to guarding Apple's secrets, Foxconn, a unit of Taiwan's Hon Hai Precision Industry, and other suppliers throughout the region leave little to chance.

"Security is tight everywhere inside the factories," said a uniformed worker outside the Foxconn factory in Longhua, about an hour from Hong Kong. "They use metal detectors and search us. If you have any metal objects on you when you leave, they just call the police," he said.

Hon Hai spokesman Edmund Ding declined to comment for this article, as did Apple.

But industry sources in China and elsewhere in Southeast Asia say that Apple goes to what one person in the business termed "extreme lengths" to protect even the smallest details of its new products under development.

Many of the Cupertino, California-based company's tactics read like something from a spy novel: information is assiduously guarded and handed out only on a need-to-know basis; employees suspected of leaks may be investigated by the contractor; and the company makes it clear that it will not hesitate to sue if secrets are spilled.

On occasion, Apple will give contract manufacturers different products, just to try them out. That way, the source of any leaks becomes immediately obvious, people familiar with the supply chain said.

And unlike other electronics makers, some of whom prefer the convenience of one-stop shopping, Apple doesn't rely on a single firm to supply everything for a product. The industry sources say the company will often minutely divvy up projects.

"This ensures that the only people who have all the secrets to any Apple product is Apple itself," said a senior official at a subsidiary of Hon Hai Precision Industry. "Other tech companies will also look for their own sources of components to compare, but none of them do as many things in-house as Apple does."

The upshot is that even the people who man the assembly lines have no idea what the finished product will look like.

"The typical production line worker will not see the product until the very last minute when actual production takes place," said an official at one supplier. "It's all concentrated in the hands of a few product development teams." The discretion that Apple demands from its suppliers is merely an extension of the way the company operates at its own corporate headquarters in Cupertino, former employees say.

Apple's obsession with secrecy is the stuff of legend in Silicon Valley. Over the years, it has fired executives over leaks and sued bloggers to stop trade secrets from being exposed.

A tight-lipped ethos permeates working life, particularly in the run-up to the launch of a new device. Projects are siloed in carefully controlled work groups, rooms are guarded by strict key card access, and many have no firm idea about what even their colleagues in the same office are working on.

One former employee, who worked in the marketing department at the time of the iPhone launch, said workers understand that secrecy is part of Apple's mystique, and the silence is self-enforced at the most basic level.

"I didn't even talk about it with my wife," he said. "It's a culture of silence and it's just accepted. You get used to not talking about your work, it becomes normal because everybody is doing the same thing."

THESE GUARDS MEAN BUSINESS

In China, a Reuters reporter found out the hard way how seriously some Apple suppliers take security.

Tipped by a worker outside the Longhua complex that a nearby Foxconn plant was manufacturing parts for Apple too, our correspondent hopped in a taxi for a visit to the facility in Guanlan, which makes products for a range of companies.

As he stood on the public road taking photos of the front gate and security checkpoint, a guard shouted. The reporter continued snapping photos before jumping into a waiting taxi. The guard blocked the vehicle and ordered the driver to stop, threatening to strip him of his taxi license.

The correspondent got out and insisted he was within his rights as he was on the main road. The guard grabbed his arm. A second guard ran over, and with a crowd of Foxconn workers watching, they tried dragging him into the factory.

The reporter asked to be let go. When that didn't happen, he jerked himself free and started walking off. The older guard kicked him in the leg, while the second threatened to hit him again if he moved. A few minutes later, a Foxconn security car came along but the reporter refused to board it. He called the police instead.

After the authorities arrived and mediated, the guards apologized and the matter was settled. The reporter left without filing a complaint, though the police gave him the option of doing so.

"You're free to do what you want," the policeman explained, "But this is Foxconn and they have a special status here. Please understand."

STRICTLY CONFIDENTIAL

It is unlikely that Apple tells security guards across the Pacific how to go about their business.

The company, which spends billions of dollars on components and contract manufacturers, has a code of conduct that spells out how those working in its supply chain should be treated -- "Suppliers must be committed to a workplace free of harassment," states one. To ensure compliance, Apple periodically audits its suppliers.

But the scuffle in Guanlan does underscore the intense pressure many contractors feel to clamp down on the information flow.

Another way Apple keeps leaks to a minimum is to bring suppliers in at the absolute last minute.

"What usually happens is that we will receive a call from Apple, and by then they usually already have some idea of what exactly they want," said an official at a component supplier, who, like nearly everyone else interviewed for this story, would speak only on condition of anonymity.

"They usually give us a couple of options, we present some stuff to them, and they look at quite a lot of samples before coming to a final decision, sometimes just weeks before the rumored launch," he said.

Apple also helps keep its components out of the mainstream by insisting on custom designs rather than off-the-shelf parts -- a practice that leaves many suppliers frustrated.

An official at a South Korean supplier who said he has participated in Apple projects complained that the company sometimes makes unreasonable requests.

"Apple also wants unique size and specifications," he said. "That means we won't be able to use a common platform or rework those components to serve other clients. And if there's any inventory left, it cannot be used any other way.

Not surprisingly, landing a contract with Apple will always include a confidentiality clause. And they usually come with stiff penalties in the event that a breach is discovered, said sources at some suppliers. These insiders added that such agreements often come on top of unannounced checks by Apple officials to maintain standards.

Two sources familiar with the matter said they were not aware of any company that has been fined for breaching a confidentiality pact. But they say a number a suppliers have been verbally warned that they were in danger of losing their contract if suspected leaks persisted.

The difficulty lies in proving the source of a leak. In the absence of solid evidence, the most Apple can do is to switch suppliers once the contract runs out, the sources said.

"Unless there's a recording or an email that can be clearly identified to a certain Apple supplier, it's all going to be a blame game with everyone pointing fingers at everyone else," one of the sources said.

Hon Hai, the huge Taiwanese manufacturer with units in China, has gone to great lengths in the past to maintain its own secrecy.

In a high-profile case in China in 2006, Hon Hai sued two Chinese reporters and asked for 30 million yuan ($4.4 million) in damages for exposing alleged subpar employment practices.

The amount was later reduced to a symbolic 1 yuan, after stinging public criticism was directed at Apple. Various groups including Reporters Without Borders wrote to Apple chief Jobs asking him to intercede in the case.

Apple's audit of Hon Hai's facilities after the case found that it was in compliance with a majority of its requirements under its supplier's code of conduct. But the company did find a number of violations that it was working to address, though it declined to disclose the specifics.

In another case that made global headlines last year, an employee in China for Foxconn was believed to have jumped to his death after being interrogated by his employer. According to local press reports, he was under suspicion of taking an iPhone prototype -- to which he had access -- out of the factory.

(Additional reporting by Rhee So-eui in Seoul, Gabriel Madway in San Francisco and James Pomfret and Don Durfee in Hong Kong; editing by Jim Impoco and Doug Young)

FILED UNDER:
We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (23)
ribbit wrote:
where are the pictures the journalist took? or was the picture snapping on the main road just intended to provoke a response?

Feb 17, 2010 1:44pm EST  --  Report as abuse
SkinnyCat wrote:
Will this constitute an violation of workers and civil rights if this happened in the U.S.A?

Feb 17, 2010 1:47pm EST  --  Report as abuse
That’s why I do not buy Apple products, or invest in it. They are very expensive and their manufacturing process, apparently, does not respect human rights.

Feb 17, 2010 1:49pm EST  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

Track China's Leaders