“Who’s that?”
At most companies, becoming a household name was irrelevant to a CEO’s performance. But Apple presented a special case. For all their acumen Cook and his team were still stuck in the genius trap. A year after they had taken the reins, their company was still overwhelmingly defined by a cult built around a dead man. If Apple was ever going to truly move forward, its leadership had to replace that cult with a startling new invention, or another creative force. So far, Cook had shown himself to be either unwilling or incapable of filling that role. He was an unreadable mystery.
The most recognizable personality at Apple was Siri. Hapless. Confused. Devoid of soul.
15
Revolt
Two days after the iPhone 5 went on sale, a riot erupted in Taiyuan, in northern China.
The incident underlined the deeply interconnected nature of the global economy. In California, Apple ordered millions of new phones to meet preorders and initial sales. In China, Foxconn received the order and instructed its managers to rev the factory lines. The factory managers turned to the supervisors who ran the production lines, telling them to lean harder on their crews. The pressure, already surreal, suddenly spiked. And the workers, who had had enough, revolted. Up until then a few of them had sought release by jumping off buildings. Now, inside Foxconn’s factory, they turned their rage outward.
Gangs of employees—some estimates put the total number as high as two thousand—tore gates off hinges, broke windows, and damaged cars. Riot police were sent in to quell the violence. Dozens of people were hospitalized. Production stopped for a day.
Sitting in their offices in Cupertino, Apple’s executives had no way of knowing that this latest order would push the supply chain past its breaking point. All they knew was that the iPhone had a new design for the first time in two years, that their target audience was growing, and that their projections suggested that this phone would break all sales records. They couldn’t look into the hearts and minds of the hundreds of thousands of young men and women toiling on the other side of the planet to make those projections come true. All they had was their numbers, so orderly, so clean on their laptops.
Foxconn officials attributed the unrest to a personal dispute that spun out of control. But workers blamed the conflict on security guards who had severely beaten a man in a mini-bus after a fight started in the dormitory. When other workers from the same province learned what had transpired, they became angry. In the pressure-cooker environment, the tension ignited. More workers joined the riot. The roughly two hundred guards who were on duty were soon overwhelmed.
“The guards here use gangster style to manage,” one of the workers, Fang Zhongyang, told a reporter outside the campus gates. “We are not against following rules but you have to tell us why. They won’t explain things and we feel we cannot communicate with them.”
In the aftermath, security teams with helmets and plastic shields patrolled the grounds. A looped recording of a voice asking workers to maintain order blared over a loudspeaker as the factory resumed production. Guards at the entrance were on high alert. The slightest disturbance was quickly quelled. Guards reprimanded workers who chatted too loudly while waiting to enter the grounds. They also yelled at workers seen talking to reporters.
“Stop talking!”
“Be quick!”
Before Apple and Foxconn had a chance to recover from the bad news, another incident broke out, this time at Foxconn’s iPhone 5 factories in Zhengzhou, in north-central China. Workers and quality control inspectors went on strike over what they perceived to be unreasonably high production standards and inadequate training.
Apple was always demanding about quality, but manufacturing this latest model was extra challenging because of its design. The backs of the previous two models—the iPhone 4 and 4S—had been glass with a stainless steel frame. But this time, both the back panel and the edge were made out of the same aluminum that was used in its notebook computers. The designers liked the material because it looked sleek and was considerably lighter weight than glass and steel. The problem was that aluminum was malleable and led to frequent scratching and chipping.
Foxconn was expected to somehow overcome that shortcoming. The impossible task rolled down from the managers to the quality control inspectors to the line workers. To keep the production lines going, many of the line workers were asked to give up Golden Week, a seven-day holiday kicked off with National Day, a celebration commemorating the founding of their country. The pressure came to a head in early October.
The details of what transpired next in Zhengzhou are unclear. According to China Labor Watch, the New York–based advocacy organization that first reported the strike, Apple had instructed Foxconn to raise its quality control standards after receiving complaints from customers about scratches on the iPhone. When the inspectors stepped up their scrutiny of the production line and began rejecting products, some of the workers revolted and beat several of them. In frustration and anger, the inspectors had then initiated the worker strike.
“Workers are under tremendous pressure,” wrote Wang Sheng, a factory worker, in an online chat on the Chinese microblogging site Sina Weibo. “Foxconn and the clients still set rigid quality standards. We have to bear all the difficulties in production.” Wang used the pseudonym Ye Fudao. When his real name became public, he stopped communicating with reporters.
Both China Labor Watch and Wang estimated that three thousand to four thousand workers had gone on strike, and multiple iPhone 5 production lines were paralyzed for an entire day. But a government spokesman in Zhengzhou told China’s official Xinhua News Agency that the strike had involved only about one hundred inspectors, who had refused to work for an hour after one of them was beaten by workers.
Other local media, who interviewed Foxconn employees, estimated that the workers who directly participated in the strike had numbered in the hundreds. One publication reported that the strike lasted for two days, not one.
Foxconn itself gave at least two different explanations. In a statement, its Taiwan-based offices insisted, “Any reports that there has been an employee strike are inaccurate.”
A press release said the incident involved two brief and small disputes. “There has been no workplace stoppage in that facility or any other Foxconn facility and production has continued on schedule.” The statement added that workers had been paid triple time to work through the holidays.
One of Foxconn’s spokespeople separately told the Chinese financial newspaper Securities Daily that about four hundred workers were “absent from work” for two hours.
Wherever the truth lay, two such controversies in such a short time span was damaging to both Apple and Foxconn. After the earlier suicide and labor scandals, this latest turmoil again reminded the public of the darker side of how their beautiful new iPhones and iPads were made.
The workers’ riot and the strike exposed ominous cracks that threatened the future of Apple and Foxconn’s symbiotic relationship.
A certain degree of labor unrest was inevitable for a massive manufacturer that had grown to employ more than a million workers in a society undergoing major socioeconomic changes. In a communist country that prohibited independent labor unions, workers’ only recourse to express their dissatisfaction was through spontaneous strikes or protests. Foxconn wasn’t unique. It was just singled out in the media because of its association with Apple. Few Asian manufacturers could withstand the kind of scrutiny that Foxconn received.
But if Apple brought Foxconn unwanted attention, the opposite could be said as well. Two partners that had worked so well together for nearly fifteen years were increasingly becoming liabilities to each other. The growing problems between Apple and Foxconn were particularly evident in the sprawling complex of factories where the strike had reportedly broken out. The fissures threatened Apple’s supply chain—and its future.
Until recently, the massive Zhengzhou campus had embodied the culmination of Foxconn’s w
ildly successful partnership with Apple. Terry Gou, Foxconn’s dynamic CEO, had built the Zhengzhou facility to manufacture tens of millions of iPhones, and his ability to deliver on those ambitions was a testament to the tremendous influence that Foxconn now wielded in China. Henan, the province where Zhengzhou was located, had long been notorious for its thieves and petty criminals. Gou had won the governor’s support by promising to remake the province.
“Everyone said I cannot change Henan, where there is only stealing and deception without any high-tech background,” Gou told the governor. “It’s okay, I will make the change for you by bringing you the finest, the iPhone!”
Close to three hundred thousand employees worked on the secluded grounds, which encompassed nearly two square miles. It was Foxconn’s biggest location in China. The land had once been a sleepy agricultural site known as “the Village of Jujubes.” The oldest jujube tree was said to be more than one thousand years old, dating back to the Song Dynasty. In record time, the government relocated the trees and the farmers who tended them, built apartment buildings for workers, and established “The Xinzheng Comprehensive Tariff Free Zone.” Zhengzhou’s politicians had seen how Foxconn’s presence in Shenzhen had transformed that province into the leading economy in the nation, elevating its government leaders to prominent positions in the Communist Party. They hoped that the new factories would provide Henan with the same economic boom and that their careers would prosper, too.
Foxconn built its campus in one hundred days. The complex opened in 2010, and within two years was churning out two hundred thousand iPhone 5s daily. Farmers put down their shovels to sign up for jobs at the factory. The base salary Foxconn offered—1,800 yuan a month—may have been insufficient for workers in Shenzhen, but in Zhengzhou, it was about 70 percent higher than the local minimum wage. With overtime, a farmer could make in two to three months what he used to make in a year.
The properties around Foxconn’s complex soon turned into prime real estate for shops, entertainment venues, and restaurants that catered to the factory workers. With a major airport just ten minutes away and a new high-speed rail system that connected it to Beijing five hundred miles to the north, Henan Province was poised to grow into an important transportation hub: The Chicago of China, so to speak.
Though Foxconn made products for almost all of the top electronics brands in the world, Apple’s business mattered most. When the two companies first began working together, neither had anything to lose. Back in 1998, Apple was a has-been close to bankruptcy, weighed down by huge inventory buildups in its warehouses and factories. Foxconn was a small company with little experience. Apple was able to close its factories in the United States and make products more cheaply without compromising quality.
As Apple soared, so did Foxconn. In just seven years, Foxconn jumped 328 spots in Fortune magazine’s Fortune 500 list, moving from number 371 in 2005 to number 43 in 2012. Its 2012 revenues reached more than $130 billion—nearly a third of Taiwan’s gross domestic product. Analysts estimated that about 40 percent of its revenues came from Apple. Its profits surpassed the combined total from its rivals—Wistron, Quanta, Inventec, Pegatron, and Compal.
But if the two companies had ascended together, they also risked faltering together. Their intertwined fortunes were underscored by Apple’s disappointing earnings report for the quarter ended September 2012. Helped by the launch of the iPhone 5, the company had sold more phones than analysts had predicted, but iPad sales had missed expectations. Concerns about Apple’s performance spilled over to Foxconn’s business even though the manufacturer’s earnings report was strong that quarter.
After doubling and tripling revenues and profits for several years, Apple’s business growth slowed to 20 to 30 percent. At other companies, in other industries, that growth rate would have been more than respectable, but the drop was steep enough to bring the negatives of Apple’s business to the forefront and upset the dynamic between the two companies. Once Apple’s business slowed, the very premise of their mutually beneficial liaison began to break down. That made Apple vulnerable.
Over the years, Terry Gou had agreed to every demand that Apple made. Gou had acquiesced to decrees on costs, quality, and deadlines. To keep up with the production orders from across the Pacific, Foxconn had trained hundreds of thousands of new workers and had invested in factories in Zhenghzou and elsewhere. As Foxconn’s association with Apple brought greater scrutiny, the company opened its doors to journalists and tried to be more transparent about its business. When questions about labor conditions surfaced, Foxconn raised wages, curbed overtime, and addressed other complaints.
In years past, even when Apple’s operating margin topped 30 percent, Gou had been willing to live with as little as 1.5 percent. Even with that differential, Apple’s business was crucial to his company’s future.
Like Apple, Foxconn was at a crossroads. Nearly forty years after Gou had founded the company, the business was maturing. Already manufacturing electronics goods for practically every major brand in the world, the company now found itself with little room left to expand. To keep growing it, Gou needed to transform Foxconn and reduce its reliance on Apple. And it had to happen soon. Gou was already in his early sixties, and he had pledged to retire at seventy.
Virtually unknown in the United States, Gou was a towering figure in Asia, every bit as ambitious and charismatic as Steve Jobs. Unlike many business owners in Taiwan who came from privileged backgrounds, Gou was a self-made man.
After starting his company in the mid-seventies, he had boldly pursued business in the United States largely on guts and willpower. Gou had traveled across America in the early 1980s, visiting companies in thirty-two states in eleven months. Though he was on a shoestring budget, he had rented a Lincoln Town Car in every city so he could make a stylish impression. In anticipation of his future success, he practiced signing his name in English until he perfected it.
His big break came at IBM in Raleigh, North Carolina, possibly in the same offices where Cook had worked. Desperate to secure an order for connectors, Gou camped out in the lobby for three days until he got an appointment. When Compaq was looking for a partner in Asia, Gou won the contract over bigger rivals with his determination and a belief in unbeatable customer service.
“There was nobody like Terry,” remembered Greg Petsch, a Compaq operations executive. “It was like, ‘You need me to expand my factory, I’ll put the cost in there and won’t charge you if you don’t fill my capacity.’ ”
Gou put out the red carpet on Petsch’s first trip to Taiwan. When the plane door opened, there stood Gou with a customs official to escort his customer off the plane before anyone else. After bypassing customs through a special exit, a car stood waiting to speed Petsch and Gou away. With other contract manufacturers, the CEOs might make an appearance once and then let their underlings handle the relationship, but Gou was front and center every time Petsch flew in. Foxconn’s CEO provided five-star service. When it came to pleasing potential business partners, no demand was too great.
When Cook moved to Apple and hired Foxconn to make its computers, Gou approached the business with the same relentless drive. His relationship with Apple’s executives was so close that when he married his second wife, both Cook and Jonathan Ive attended his wedding banquet in Taipei. Apple executives referred to him as “Uncle Terry.”
Inside his own company, Gou was terrifying. Behind the conciliatory veneer was a general who required his managers to squeeze profits out of the toughest contract requirements. Internal meetings with Gou were known to be as harrowing as meetings with Cook. Gou would curse and interrogate his subordinates, and he openly scolded people to make an example of them. Unlike Cook, Gou was a bit of a showman and preferred to talk rather than listen.
“Gou cannot talk to an empty meeting room,” a former Foxconn executive told a Taiwanese magazine. “There has to be many people sitting there, and he will not talk but curse at them to get his inspiration.”
“Cell phone, tablet, notebook, all-in-one, portable TV, TV, electronic billboard, LED big screen.”
Gou barked back, “Why did you name them in that order? Is it by size? Wrong! It’s about eye distance.”
Gou’s point was that the quality and type of screen needed in a product was not determined by the size of the device but by the distance that the user was looking at it. A touchscreen, for example, doesn’t make sense in a sixty-inch television screen that is viewed from a long distance. His men were awed by his ability to think differently.
Gou had a reputation in the industry for being a megalomaniac. Among his top lieutenants, an allegory was told about Gou ordering an executive to knock down a load-bearing wall. The executive nodded, but didn’t follow through. A few days later, Gou asked again, “I told you to knock it down last time. Why didn’t you do it?”
“Yes, yes, yes,” the executive responded as he pretended to obey the order by picking up a hammer. The third time Gou passed by, he threatened punishment, so the executive knocked down a tiny bit of the wall. When Gou discovered that the wall was still there, he was livid, so the man finally obeyed.
But when the walls of the building predictably came crashing down, Gou told the executive, “So if I told you to jump off the building, will you really jump off?”
Governed by a founder-CEO with that kind of total control, Foxconn faced the same leadership challenges as Apple, especially as Gou looked for someone to succeed him. Except Gou didn’t have a Tim Cook. He was said to start his day by personally approving travel requests from his one hundred direct reports. Many of his senior executives were too old to take the reins of the company, but the younger managers were not yet capable of such enormous responsibility. Even if Gou hoped to keep the company in the family, his two eldest children by his first wife had so far expressed no interest in running the business. One worked in the film industry and the other in the financial sector. A daughter and son by his second wife were still preschoolers.
Haunted Empire: Apple After Steve Jobs Page 29
