Should Apple Investors Be Scared Over Foxconn Riots?

by Jeff Reeves | September 24, 2012 10:00 am

By now, you’ve probably heard about the riots at Apple (NASDAQ:AAPL[1]) supplier Foxconn. The site’s facility in China apparently was the flashpoint of a fight that involved as many as 1,000 and resulted in the shutdown of the facility, according to reports[2].

Investors must let the news cycle play its course, but there are two big questions that traders have to ask themselves:

  1. What does this mean for Apple stock?
  2. What does this mean in the greater scheme of China’s economic and political future?

The first question is perhaps the most urgent: What will the effect be on Apple’s share price? The company was at an all-time high above $700[3] last week on enthusiasm over the iPhone 5, and any reduction in output is sure to damage the bottom line.

Of course, the initial shipments already have been packed up and stocked at merchants — including stores that serve AT&T (NYSE:T[4]), Sprint (NYSE:S[5]) and Verizon (NYSE:VZ[6]) customers, as well as some retailers like Wal-Mart (NYSE:WMT[7]). So you can be sure that the first wave of sales will be filled, no problem.

And as history shows, that first push is the most important. Apple sold 2 million iPhone 5 models in the first 24 hours of preorders[8], so you can bet Apple was prepared for that kind of demand with initial shipments, or else the launch would be a disaster.

Longer-term, time will tell how much damage has been done to the Apple brand or supply chain. If the riots fade away — with 5,000 Chinese police called in to help push things along — then it shouldn’t have a lasting impact on Apple stock despite shares trading down slightly this morning. But if events at Foxconn continue as some broader protest against worker conditions, it could be disastrous.

Take this, from the New York Times[9]:

“Disturbances at factories have become increasingly common in China, rights groups say, as laborers have begun to demand higher pay and better conditions.

Geoffrey Crothall, spokesman for the China Labor Bulletin, a nonprofit advocacy group in Hong Kong seeking collective bargaining and other protections for workers in mainland China, said workers in China had become increasingly emboldened.

‘They’re more willing to stand up for their rights, to stand up to injustice,’ he said, adding that damage to factory buildings and equipment still appeared to be unusual, occurring in fewer than 1 in 20 protests.”

You can bet Wall Street will be watching closely.

The bigger question here, of course, is how you feel as an investor when your beloved profit-maker is associated with such an ugly scene. I personally own Apple stock, and the idea of a Chinese authorities cracking down on a worker protest doesn’t sit well with me. However, I am not naïve enough to think that you can wave a magic wand and give China democracy and fair wages overnight.

The sad reality of an emerging economy is that growth and justice take time. That doesn’t sit well with many Americans, particularly doe-eyed optimists.

Consider this 2009 column[10] from liberal activist Nicholas Kristof, where he refers to the “dream” of working in a sweatshop for those who live in even worse squalor. Kristof has long championed against human rights abuses and social injustices, and his causes include the conflict in Darfur and human trafficking.

It’s a stark and wrenching read, but here’s the gist: In Phnom Penh, Cambodia, there is a literal mountain of festering garbage and human waste that takes a half-hour to hike across — and some families actually live on top of the filth, sifting through the trash to survive. Kristof says for these unfortunates, life in an urban sweatshop would be salvation.

Here’s an excerpt:

“Talk to these families in the dump, and a job in a sweatshop is a cherished dream, an escalator out of poverty, the kind of gauzy if probably unrealistic ambition that parents everywhere often have for their children.

‘I’d love to get a job in a factory,’ said Pim Srey Rath, a 19-year-old woman scavenging for plastic. ‘At least that work is in the shade. Here is where it’s hot.’”

In short: It’s a matter of perspective. And the slow march of progress, while not fast enough for some in the West, is indeed raising standards of living in emerging markets like Cambodia — or, more to the point, China.

Could the march of progress be faster? Maybe. But if you think Apple dishing out 100% raises to its staff fixes the command-and-control nonsense in Beijing or a Chinese information superhighway stuck in second gear thanks to blocked websites and censorship … well, it’s just not that simple.

Perhaps this is self-justification, a way for me to sleep well at night despite my investment.

Maybe.

After all, you can’t always make the argument of sweatshop vs. garbage heap. The situation becomes stickier when you talk about companies like Caterpillar (NYSE:CAT[11]), which is notorious for union-busting and demanding big concessions even as it turns big profits[12]. Or Boeing (NYSE:BA[13]), which tried to move a production facility simply to avoid unionization[14]. These are companies operating in America, after all, not a cesspool in Phnom Penh.

But that’s the thing — in this complex global economy, in many ways the situations are closely related. Because cheap labor overseas is precisely what’s driving down the wages of manufacturers at home. And one could argue that’s “fair.”

The days of a UAW assembly-line worker making $75,000 a year and retiring at 80% pay are long gone, and should be in this global economy. The reason auto workers in South Carolina get $10 an hour[15] nowadays is because they need jobs and will work for the wage — and if they refuse, BMW can take its plant to Mexico or South America where costs are cheaper.

After all, one man’s sweatshop is another man’s salvation.

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[16] Write him at editor@investorplace.com or follow him on Twitter via@JeffReevesIP. As of this writing, he owned a long position in Apple.

Endnotes:
  1. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  2. according to reports: http://investorplace.com/2012/09/riot-suspends-iphone-ipad-production/
  3. an all-time high above $700: http://investorplace.com/2012/09/wall-streets-own-700-club-is-very-exclusive-brk-a-brk-b-aapl-goog-nvr-aex/
  4. T: http://studio-5.financialcontent.com/investplace/quote?Symbol=T
  5. S: http://studio-5.financialcontent.com/investplace/quote?Symbol=S
  6. VZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=VZ
  7. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  8. Apple sold 2 million iPhone 5 models in the first 24 hours of preorders: http://investorplace.com/2012/09/monday-apple-rumors-2-million-iphone-5s-sold-in-24-hours/
  9. from the New York Times: http://www.nytimes.com/2012/09/25/technology/foxconn-plant-in-china-closed-after-worker-riot.html?_r=0
  10. this 2009 column: http://www.nytimes.com/2009/01/15/opinion/15kristof.html
  11. CAT: http://studio-5.financialcontent.com/investplace/quote?Symbol=CAT
  12. demanding big concessions even as it turns big profits: http://www.nytimes.com/2012/07/23/business/profitable-caterpillar-pushes-workers-for-steep-cuts.html?pagewanted=all
  13. BA: http://studio-5.financialcontent.com/investplace/quote?Symbol=BA
  14. tried to move a production facility simply to avoid unionization: http://www.nytimes.com/2011/04/21/business/21boeing.html
  15. auto workers in South Carolina get $10 an hour: http://www.nytimes.com/1993/04/11/business/what-bmw-sees-in-south-carolina.html?pagewanted=all&src=pm
  16. “The Frugal Investor’s Guide to Finding Great Stocks.”: http://www.amazon.com/dp/B007KB9CSI/ref=rdr_kindle_ext_tmb

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