Apple (AAPL) Puts iPhone Subcontractor Wistron on Probation

Apple Inc. (AAPL) has completed a preliminary investigation into a large-scale worker riot at an iPhone assembly plant in India run by a key subcontractor in its international supply chainTaiwan-based Wistron Corporation (3231.TW). Unpaid wages have been a major grievance among workers. As a result, Apple has announced that it will monitor Wistron closely and not send it any additional orders until it demonstrates that it can properly manage and pay its rapidly expanding workforce. 

Apple’s statement said: “Wistron has taken disciplinary action and is restructuring their recruitment and payroll teams in Narasapura [India]. We have placed Wistron on probation, and they will not receive any new business from Apple before they complete corrective actions. Apple employees, along with independent auditors, will monitor their progress.”

Rapid Workforce Expansion Overwhelmed Wistron

To keep up with current and anticipated future orders from Apple, Wistron expanded the workforce in the plant in India at a feverish clip that overwhelmed its HR and payroll systems, as well as its management teams. One source indicates that employment at this facility shot up from about 2,000 just before the COVID-19 pandemic struck to about 9,000 in November 2020.  

Meanwhile, inspectors from the factories department in the Indian state of Karnataka found that employment had soared to 10,500 in a short period of time, more than double the authorized headcount of 5,000. Moreover, Wistron was planning to hire up to 20,000 workers within a year’s time.

“The HR department has not been adequately set up with personnel of sound knowledge of labour laws,” the inspection report stated. Among the violations cited in the report were underpayment of wages to contract workers and housekeepers, due to record-keeping problems, as well as making female staff work overtime without legal authorization.

Wistron’s Response

“This is a new facility and we recognize that we made mistakes as we expanded,” Wistron said in a statement.  The company added: “We are deeply committed to our business and employees in India. We are working diligently on corrective actions to ensure this does not happen again.” More specifically, Wistron acknowledged: “Some of the processes we put in place to manage labor agencies and payments need to be strengthened and upgraded.”

Wistron has removed the vice president in charge of operations in India. It also has established a telephone hotline for workers to voice grievances anonymously.

Significance for Investors

The Wistron matter is a case study in the risks associated with outsourcing to subcontractors. By surrendering control over critical business processes, Apple made iPhone supply more uncertain, while also opening itself up to potential damage to its own reputation, as the result of missteps by a subcontractor. Indeed, Apple previously suspended new business with a larger Taiwan-based competitor of Wistron, Pegatron Corporation (4938.TW), over labor violations in China.

“The violence [at Wistron’s plant in India] brings into focus the geopolitical challenge Apple faces,” Bloomberg observes. It made strategic sense to shift production away from China against a background of growing trade tensions with the United States. Moving this production to India also made sense. However, it seems that Apple did not put enough focus on how this was to be achieved.

In particular, choosing a Taiwanese company to manage this shift of production from China to India has proven to be a questionable decision. Guoli Chen, a professor of business strategy at the Singapore campus of INSEADobserves that, while American and Japanese companies have many years of experience in establishing subsidiaries in foreign cultures, Chinese and Taiwanese firms are very new at this. A critical question for Apple is whether the company can learn from this incident and act accordingly to limit such potential damage in the future.