Samsung to address labor issues in China manufacturing facilities

In response to allegations of abusive labor practices in its manufacturing facilities in China, Samsung initiated an audit of its suppliers in the country. While no cases of child labor have been found, Samsung nonetheless says it is addressing other “inadequate practices,” including illegal overtime, sexual harassment and physical and verbal abuse.

Labor concerns in China are not solely the problem of Apple and Samsung. But given that the two companies are currently at the lead in the smartphone industry, observers are keen to notice whenever either Apple or Samsung slip up in their labor practices, or that of their vendors and suppliers. As such, US-based China Labor Watch has criticized these firms for alleged malpractices, such as child labor and underpayment. Given these concerns, Samsung has initiated an audit of its Chinese factories to determine any irregularities affecting the 65,000 employees or so.

The audit reports not having found any case of child labor after reviewing HR records and doing face-to-face interviews and identity checks with employees. However, there are other findings that are as serious, including sexual harassment, verbal abuse, physical abuse and illegal overtime.

Samsung to address labor concerns

Samsung is instituting some changes, some of which will be effective immediately. These include new hiring processes that ban discrimination, and require personal interviews to confirm an applicant’s identity and age. Samsung is demanding that suppliers institute measures to prevent identity fraud, and this can be done through electronic devices that can detect fake IDs.

Samsung has also committed to eliminate hours beyond legal limits by 2014. Samsung will also set-up a hotline that will accept calls for any labor violation or inhumane treatment.

According to the report, Samsung is reviewing 144 additional suppliers by year-end, and will insure that audits are confirmed by an independent party, in particular the Validated Audit Process of the Electronic Industry Citizenship Coalition.

Driving up costs

These latest changes by Samsung come amid changes in the Chinese labor environment, particularly with workers demanding better benefits. The bigger implication here might be that as Chinese manufacturing firms move to improve the welfare of workers, costs will most certainly be driven up. Will China’s comparative advantage be lost if manufacturing becomes too expensive?

Will these changes affect Samsung’s bottomline? In a recent analyst report, Apple itself is said to have peaked in terms of the extraordinarily high profit margins it could charge per device. As such, the iPhone 5 may already be eating into the company’s gross profit margins. In Samsung’s case, it does not thrive on profit per unit, but on volume. With increased manufacturing costs, the Korean company will have to sell millions and millions more in order to ensure profitability.

[press]Samsung Electronics Announces Corrective Measures of Working Conditions at Supplier Factories in China
SEOUL, Korea – November 26, 2012 – Samsung Electronics Co., Ltd, holds itself and its supplier companies to the highest standards. In response to China Labor Watch’s reports on our suppliers, we conducted an audit over a four-week period in September of 105 suppliers that manufacture Samsung products in China, covering more than 65,000 employees.
The Samsung audit team, comprising 121 trained and certified employees, undertook this urgent and broad-scale action to ensure our suppliers in China are compliant with applicable labor laws and Samsung’s Supplier Code of Conduct.

Samsung did not identify any instance of child labor during the audits after reviewing HR records of all workers aged below 18 and conducting face-to-face ID checks. However, the audit identified several instances of inadequate practices at the facilities, including overtime hours in excess of local regulations, management of supplier companies holding copies of labor contracts, and the imposition of a system of fines for lateness or absences.

Samsung is currently reviewing 144 more supplier companies in China, which will be completed by the end of this year. From 2013, Samsung will ensure the independence of the audits and continue to monitor working conditions at 249 Samsung suppliers in China through the Validated Audit Process of the Electronic Industry Citizenship Coalition, a third party audit program.

We are now designing, researching, and/or implementing corrective actions to address every violation that was identified. Corrective actions include new hiring policies and work hours and overtime practices, among other steps, to protect the health and welfare of employees.

Corrective Actions in Progress

New Hiring Process to Avoid Child Labor
Samsung has a zero tolerance policy on child labor violations. Although we did not identify any child labor during our audits in September, we have demanded all suppliers to adopt a new hiring process immediately, and contracts with suppliers who use child labor will be terminated.
• All candidates will be interviewed in person before hiring to strengthen identity verification measures and to detect fake IDs.
• Samsung demanded all suppliers to purchase an electronic device to effectively detect fake IDs by the end of November 2012.
• Special guidelines on the banning of child labor were distributed to all suppliers with necessary training provided. The guidelines will include Samsung’s strong commitments to prevent circumstances of child labor and its pre- and post-actions to prevent employment with fake IDs.

Immediate Actions to Complete by the End of 2012
• Hiring discrimination will continue to be prohibited.
• Samsung has demanded all suppliers to correct irregularities in labor contracts and distribute one copy to all employees.
• A fines/penalty system has been abolished.
• Samsung has enforced all suppliers to provide adequate safety equipment and sufficient safety training.
• Samsung has demanded all suppliers to provide first-aid kits at manufacturing facilities and dormitories.
• Samsung has recommended all suppliers to provide additional training for managers on sexual harassment and physical and verbal abuse.
• Hotlines at Samsung subsidiaries are being established for workers at supplier companies to report anonymously any inhumane treatment or violations of labor laws.

Commitments to Address Working Hours
We have identified the need for initiatives to reduce employee overtime as a top priority, and we are researching and developing measures that will eliminate hours beyond legal limits by the end of 2014.
• Samsung will develop a longer term plan to resolve working hour practices by the end of 2012.
• Samsung will demand all suppliers to cap temporary workers at a maximum of 30% of full-time employees.
• Samsung will financially support suppliers in China to increase investment in equipment and to hire additional workers.
• Corrective action plans tailored to each supplier are currently under development.

To serve customers better, Samsung mostly manufactures its products in-house through the company’s own facilities, although some manufacturing is outsourced when necessary. Unlike companies that rely predominantly on the outsourcing of manufacturing, Samsung can maintain its own high standards throughout its in-house manufacturing network to offer world-class working conditions.

Samsung takes concerns about working conditions in China seriously and, whenever an issue is identified, we take immediate and appropriate steps to correct it. Our goal is to assess, improve, and continuously monitor every aspect of working conditions at Samsung supplier facilities to meet our own high standards.[/press]

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