Bad News Hounds Apple Days Before iPhone Gala

A US$5 stock drop, a hacker attack on celebrities using your cloud, and charges of worker abuse in the factory of an overseas supplier aren’t the kind of news a company wants to see as it’s poised to announce a refresh of its iconic product, but that’s what Apple must deal with this week.

The Labor Day weekend was barely over when news broke that a number of celebrity accounts on Apple’s iCloud service had been cracked and some embarrassing photos posted to the Web. That triggered a stock drop from $103 a share to $99 on Wednesday.

Just as Apple’s stock was showing signs of recovery on Thursday, two activist groups released a report critical of work conditions at an Apple supplier in China. Its shares slipped to $98 by market close.

The groups, China Labor Watch and Green America, found extensive law and code violations in a factory operated by Catcher Technology in Suqian, China. The violations reported include discriminatory hiring practices, excessive working hours, mandatory overtime, training documentation fraud, locked fire exits and windows, and environmental pollution.

This is the second time China Labor Watch has investigated Catcher. It performed a similar probe last year. Those findings were reported to Apple but not made public.

“Apple said improvements would be made, but our second investigation found no real improvements were made, so we published it,” Kevin Slaten, program coordinator for China Labor Watch, told the E-Commerce Times.

Committed to Safety

For its part, “Apple is committed to ensuring safe and fair working conditions for everyone in our supply chain,” the company said in a statement provided to the E-Commerce Times by spokesperson Chris Gaither. “We are the only technology company to be admitted to the Fair Labor Association, and our suppliers must live up to the toughest standards in the industry if they want to keep doing business with Apple.”

Last year, Apple conducted 451 audits deep into its supply chain so it could uncover problems and work with its suppliers to fix them, it said.

“Our most recent annual audit, in May, found some concrete areas for improvement in Catcher’s operations, and we worked with Catcher to develop a corrective action plan,” Apple added. “We had scheduled a follow-up visit next month to review their progress but have dispatched a team there immediately to investigate this report.”

Although Apple is committed to safe and fair working conditions in its supply chain, more than commitment may be needed, noted China Labor Watch’s Slaten.

“We can see from this report that we published today that commitment alone doesn’t mean anything,” he said. “The commitment has to be followed up with action.”

Auditing plays an important role in Apple’s program to ensure good working conditions among its suppliers.

“Audits, in general, are announced,” Slaten pointed out, “so they can be manipulated.”

Strategic Timing

Auditors also can be deceived by false documentation. For example, workers have been instructed to sign forms saying they received safety training even though no training was ever given to them, the China Labor Watch/Green America report notes.

“When an auditor goes into the factory, they don’t sit through the safety training with the workers. They’re going to look at documents given to them by management that say all the workers have received safety training,” Slaten explained.

It’s no accident that the report is being released less than a week before Apple unveils a new version of its iPhone.

“We wanted to make sure that the human rights and environmental safety violations in Apple’s supply chain are at the forefront of people’s minds if they’re considering a new electronic device,” Elizabeth O’Connell, campaigns director for Green America, told the E-Commerce Times.

“We feel Apple has been making commitments to the media about all the progress it’s making, but in reality progress hasn’t happened,” she added. “We feel that consumers don’t know that.”

Glory Days

Will this week’s bad news put a damper on Apple’s big event next week?

“Negative stories about the supply chain may briefly tarnish Apple, but the general perception is that Apple is thoughtful and leading company when it comes to the environmental impact of it products and manufacturing,” said former Forrester analyst Charles Golvin, who recently founded Abelian Research.

The iCloud hack isn’t likely to dull the festivities next week, either.

“There’s so much hype and so much interest and desire for new Apple products that anyone who is interested in buying a new iPhone isn’t going to be swayed or dissuaded because of concerns about iCloud security issues,” Golvin told the E-Commerce Times.

“These breaches are part of living in a connected world,” said Trip Chowdhry, managing director of equity research for Global Equities Research.

“You have to learn, prevent and move forward. It won’t be a sustainable negative,” he told the E-Commerce Times.

“Apple needs to re-ignite its innovation — That is the only issue,” added Chowdhry. “For the last three years, Tim Cook hasn’t delivered a single innovation. If he can deliver innovation, Apple will go back to its glory days. If he can’t, Tim Cook is fired.”