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Last week, the New York Times published an article detailing some of the troublesome working conditions in Chinese factories that makes Apple (NASDAQ:AAPL) products:

[T]he workers assembling iPhones, iPads and other devices often labor in harsh conditions, according to employees inside those plants, worker advocates and documents published by companies themselves. Problems are as varied as onerous work environments and serious — sometimes deadly — safety problems.

Employees work excessive overtime, in some cases seven days a week, and live in crowded dorms. Some say they stand so long that their legs swell until they can hardly walk. Under-age workers have helped build Apple’s products, and the company’s suppliers have improperly disposed of hazardous waste and falsified records, according to company reports and advocacy groups that, within China, are often considered reliable, independent monitors.

The article ignited a firestorm of controversy. Consider the reaction that the paper published in a follow up entitled Apple in China: Has iOrwell Arrived?

The inscrutable Chinese

What should Apple do? How should the company react? Before jumping to conclusions, Charles Hugh Smith put the Chinese attitude into context and compared it to the attitudes in an immigrant societies such as America. He writes that in America:

Nobody cares where you're from, or what caste you are, or anything like that. As long as you do your work without being a real pain in the rear-end, are pleasant to your neighbors and workmates, keep your pitbull chained, etc., then you are good to go. Many if not most of the people you interact with also know English as a second language, and since that's burden enough for all of us, we dispense with all the insider stuff. America is on most levels a WYSIWYG culture: what you see is what you get.

Places like China and Japan are on the opposite end of the spectrum: they are not immigrant cultures. Very few nations have a culture that is adapted not to tradition and an opaque mindset but to getting on with immigrants from everywhere. This is one reason people want to come to America; they lose their baggage here and can be themselves, because nobody cares, we're busy with other things, and it doesn't take 15 years to figure out how things actually work here. If it did, the whole thing would grind to a halt and that would be really annoying.

Unspoken attitudes and preferences are far more important in cultures with long established traditions. Smith writes [emphasis added]:

[T]here are always two doors in Asia: the front door, carefully arranged to present a face-enhancing image to the outside world, and the back door, where everything important actually takes place.

A typical front door in China is the banquet with the glad-handing mayor. The back door is for his mistress, the cash "commissions" from various deals and the cover-up of the face-damaging deaths in the local factory. Bad business, that; we lost face. Go take care of it with cash, threats, promises or whatever is required to bury it and restore face.

What is going on at the back door in this Chinese manufacturing operation that makes Apple products?

The truth of the matter is that a class structure exists in Chinese society. Those at the top don't think that "little people" matter. The dirty little secret is the belief that human life is cheap.

The Globe and Mail peeked behind this door recently with the article entitled: In de-coding class in China, cars are your best clue. The story began when Canadian envoy seemingly "lost face" with the locals because he drives a Toyota Camry:

A Toyota Camry isn’t usually the type of car that turns heads. It certainly isn’t considered a flashy ride on the streets of Beijing, where Audis, BMWs and Mercedes SUVs dominate where three-wheeled rickshaws once ruled.

So when David Mulroney, Canada’s ambassador to China, posted online photos of his official car – a silver Camry hybrid – the reaction from the Chinese Internet was something close to shock. Especially when he explained that even cabinet ministers in Canada only have a budget of $32,400 for their official car.

"Face" matters in China. It signals class and status, which matters a lot. The Globe article went on to decode the class structure, as interpreted by a Bejing cabbie:

Toyota sedan – Driven by putongren. Ordinary people. Not so ordinary that they have to use public transport or ride a bicycle, mind you.

Mercedes SUV – Driver Zhao presumes someone who drives one of these ubiquitous (and always black) vehicles is a laoban. The word means “boss,” but in this case laoban can mean anyone who recently come into cash and wants to show it off.

Buick GL8 minivan – Wildly popular in China (though discontinued in North America), these vans aren’t for soccer moms. To Driver Zhao, someone driving a Buick GL8 is a “xiao laoban,” or little boss. Someone who can’t yet afford the Mercedes. Just as often, the driver is a professional and the passengers are Western expatriate families with kids.

Audi A6 – Weibo had it bang on, it’s the automobile of choice for the Chinese bureaucrat. Seeing an Audi A6 in traffic means you’re idling beside part of the country’s power structure. As The New York Times put it, the A6’s “slick frame and invariably tinted windows exude an aura of state privilege, authority and, to many ordinary citizens, a whiff of corruption.” (The Beijing government says there are 62,000 official cars in the city, a figure that seems far too low. The state-run CCTV television station reported last year that the real figure is closer to 700,000.)

Humvees or Ferraris – Driver Zhao says the only people arrogant enough to drive one of these on Beijing’s streets are the well-off children of top government officials. As evidence of that, I once saw a bright yellow Humvee rip the wrong way through traffic in Beijing’s busy Sanlitun bar district, before proceeding to drive through a red light without so much as tapping the brakes. At least three policemen witnessed the same scene, but seemed to conclude from the driver’s brazen behaviour that he was too powerful to be stopped.

When the New York Times article appeared, the Chinese reaction is quite predictable, characterized by Smith as "Bad business, that; we lost face. Go take care of it with cash, threats, promises or whatever is required to bury it and restore face."

For Apple, however, it has a tricky public relations problem with its customers, a problem that may eventually devalue its image and the value of its brand. It too, has "lost face" with its customers. How it responds will be a key test of new CEO's marketing and management savvy. As well, it will be a sign of how far the West has journeyed to meet the East.

Disclaimer: Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Source: Apple's Problem With The Chinese