Apple (AAPL) iPhone Subcontractor Rocked by Worker Riot

Apple Inc. (AAPL) is facing a disruption to its international supply chain as a result of a large-scale riot at an iPhone assembly plant in India owned by one of its major subcontractors, Taiwan-based Wistron Corporation (3231.TW). The incident, which occurred on Saturday, Dec. 12, 2020, reportedly was sparked by contract workers' grievances over unpaid wages and working hours. 

"We have teams on the ground and have immediately launched a detailed investigation at Wistron's Narasapura facility," Apple indicated in an e-mailed statement. The tech giant added that it is committed to having all workers in its supply chain treated with dignity and respect.

Extent of the Damage

In the incident report filed with police in India, Wistron initially pegged the damage at the equivalent of $60 million. However, in a later statement to the Taiwan Stock Exchange, Wistron revised this estimate significantly downward, to the equivalent of about $7.12 million, and indicated that the damage to major production facilities and warehouses was not as severe as local media reports had suggested. Wistron indicates that it is working hard to get the plant back in production as soon as possible. 

Police have arrested at least 149 people so far, and investigations are underway to identify more perpetrators. In its complaint, Wistron accused more than 5,000 contract workers and roughly 2,000 other unknown individuals of contributing to property damage in the riot. Identifying rioters caught on surveillance video may be hampered by the fact that many were wearing masks as the result of COVID-19.

Contradictory Claims

In a filing with regulators in Taiwan, Wistron asserted that it "always abides by the law, and fully supports and is cooperating with relevant authorities." By contrast, Indian trade union leader M.D. Harigovind accused Wistron with "brutal exploitation of workers and sweatshop like conditions." Workers at this plant are not unionized.

Significance for Investors

"The incident hurts the 'Make in India' label," according to brand consultant Harish Bijoor, making reference to the Indian government's efforts to lure more manufacturing operations. "Such events are small scars left on India as a manufacturing facility," he added.

Meanwhile, under CEO Tim Cook, Apple has been increasing its presence in India. One motivation is to become even more embedded in one of the world's largest markets for smartphones. Another reason is to diversify its manufacturing footprint in Asia.

It is unclear at this point how the incident at the Wistron plant will affect Apple's ambitious plan to manufacture up to 96 million iPhones in the first half of 2021. This would represent a 30% increase over production in the same period of 2020. For the full year of 2021, the goal is to produce up to 230 million iPhones, which would be a 19% increase compared to 2019.

Finally, the Wistron incident illustrates a key downside of cutting costs by outsourcing to subcontractors. While this can reduce costs, it also involves surrendering much control over key business processes, including, in this case, the management of employees and contract workers. Additionally, negative publicity about subcontractors has the potential to damage the reputation of the company doing the outsourcing, in this case Apple.