Archive for February, 2012

Internal Control and a safe working environment in developing economies

A month ago, Apple became the first technology company to join the Washington-based non-profit Fair Labor Association (FLA), a group of businesses and universities focused on improving working conditions around the world.

On February 13, 2012 Apple announced that auditors from FLA have started assessing the work environment at its final assembly suppliers, including Foxconn Technology Group (Foxconn) facilities in Shenzhen and Chengdu, China. A series of suicides at Foxconn plants in 2010 and two factory explosions in 2011, one at a Foxconn facility and one at a Pegatron facility, drew world-wide criticism for the working conditions at some of Apple’s partners’ plants. According to informationweek.com, in its September 2011 report, Students & Scholars Against Corporate Misbehaviour (SACOM) exposed various problems at those plants, including withheld wages, forced and unpaid overtime, exposure to harmful chemicals, and uncaring management.

Public responses to Apple’s decision to launch the investigation are mixed. Investors gave their thumbs up; Apple shares hit an all-time high as the company announced that it would investigate the alleged ‘sweat shop’ conditions in its supplier’s factories. However, the announcement has also prompted more outcries for Apple to find the solutions over the labor and environment problems at its products assembly facilities. ‘‘The reason why Apple is having this FLA inspection is not because they want to solve the problems; instead, it’s because Apple wants to get publicity and rebuild its positive image,” Li Qiang, executive director of China Labor Watch (CLW) said in a statement made after Apple’s decision. “What Apple should do now is to take action to solve the problems and improve the labor conditions in their supplier factories.”

Apple has made the right move as positive images, I believe the smart management of Apple understand, are not built on scandals. As a public company, Apple gets audited of its internal control over financial reporting and the effectiveness of its internal control system.  It may be time for Apple to apply the same internal control principles to its suppliers, balancing risks and controls.

The risks brought about by not tackling the dire working environments at its suppliers’ facilities are as follows:

*  Loss of public trust;

*  Loss of future investment funds;

*  Injury to the company’s reputation;

*  Increased legislation;

*  Violation of laws;

*  Default on a project;

*  Bad publicity;

*  Drop in the stock price.

Apple needs to create a control-conscious environment not only within Apple

but also at its suppliers’ facilities. The control environment is the control consciousness of an organization where people are committed to following an organization’s policies and procedures and its ethical and behavioral standards.

The followings are the action steps that would help Apple and its suppliers to encourage ethical behavior:

*  Set up policies and procedures, in this special case, labor standards at its suppliers’ factories;

*  Communicate up and down that the policies and procedures are important and should be followed;

*  Make suppliers fully aware of their responsibilities to enforce internal control measures;

*  Document key policies and procedures;

*  Send key employees of the suppliers to ethics and internal control training;

*  Evaluate suppliers not only on the quality of Apple’s products but also performance related to internal controls;

*  Take disciplinary or other actions for non-performance, discontinuance of contracts, for example;

*  Monitor the internal control system on an on-going basis, e.g., audits by Apple’s internal auditors or by external auditors like FLA;

*  Establish a whistle-blower system that provides a channel for disgruntled employees at Apple’s suppliers’ facilities to report violations of labor standards or vent their dissatisfaction or resentment on corporate unethical behaviors; and put control measures in place so that all misbehaviors are properly and promptly corrected.

Controls come with costs. To continue being successful, Apple needs to balance risks, controls and control-related cost. Fortunately, Apple’s suppliers like Foxconn also produce for other reputable technology companies like Sony, Nintendo and Hewlett Packard (HP). Apple is the only one who has been working with FLA, for which we should applaud. We ought to make sure that we do not punish the leader of righteousness (犯枪打出头鸟的错误.)

To conclude, to create a safe and healthy working environment in developing economies requires the work of a team of law makers, government regulators, organizations like FLA and CLW, and corporations from developed nations like Apple, Sony, and HP.

Huaqin Kim Chen, MBA

Financial Controller

CD International Enterprises, Inc. (NASDAQ: CDII)

431 Fairway Drive, Suite 200

Deerfield Beach, FL 33441

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Supplying Iron Ore to China – a Lawyer’s Perspective

China is the world’s largest importer of iron ore used for both domestic consumption and for production of finished goods for export.  China has seen increases in imports of iron ore of over 11% per year on average over the past five years and is expected to continue average annual increases of over 7.0% per year over the next five years.

In the wake of this enormous demand and the expected increases in import activity, dealing with the legal aspects of contracting for the supply of iron ore to companies in China is critical to the success of such endeavors.  The following are some insights and experiences from a legal perspective with regard to doing this type of business that I believe should not be overlooked.

Customers drive the procurement process by indentifying required product specifications, expected pricing and payment terms, and quantities.  They also have standardized contract terms and conditions, warranty conditions, quality and inspection criteria and logistics requirements. While the significant business terms are common in most agreements across the globe, when dealing in China, customers use a variety of forms in Chinese and English that often times require significant expertise with individuals capable of working in both languages in order to finalize a contract to include all of the agreed on business terms in the proper form for all parties.

While standard terms are often not altered, business negotiators must work closely with legal counsel to negotiate only the issues that will have a significant business or legal affect on the successful completion of the contract. This requires experience in dealing with the supplier to know what accommodations they will accept based on prior business dealings and liability exposure.  Also, it is necessary for both the business negotiator and legal counsel to be sensitive to regional cultures and personalities. For example, the concept of guanxi is essential to the success of every business deal. Guanxi describes the importance of doing business based on personal relationships; it is one of the key social concepts that unite China culturally. However, guanxi can be interpreted differently by members of different generations, and can be accorded different levels of importance by those of the same generation. Individuals who are sensitive to the subtle cultural nuances can distinguish between essential parties and time-wasters and identify euphemisms to distinguish between good and bad reactions to negotiations. Once these key social concepts are understood and put into practice, the terms and conditions of the contract can be easily worked out to everyone’s satisfaction. The ability to understand and apply these cultural aspects of negotiating contracts with customers in China is critical and often very challenging without an experienced multi-cultural team.

Take-it-or-leave-it deals in China are culturally rooted — inexorable situations that force suppliers to take on some amount of risk. In these instances, it is important to recognize the difference between real risk and theoretical risk. The lawyer must put into perspective how contract terms will play out and much of this is derived from experience in completing actual transactions with Chinese companies rather than a theoretical approach.

One of the most significant aspects of an iron ore supply contract for delivery into China is that all iron ore imports are required to be inspected by China Inspection and Quarantine (“CIQ”) to confirm their weight, mineral composition and moisture content.  Results of this inspection which are used to calculate final pricing of a deal often times differs from inspections performed at the port of loading.  Consequently, this contract clause must be carefully negotiated to include a conflict resolution mechanism.  In addition, careful supervision by experienced personnel of the inspection process at all phases of the production and shipping process are essential to ensure the proper application of the agreed on pricing terms. For our transactions dealing with these issues, we have developed workable contract terms that are acceptable to all parties.  Also, we have experienced personnel stationed at each phase of production and the port of loading and the port of discharge in China to ensure that the expected economic results of each transaction are achieved.

We expect to ride the wave of the projected 7% annual growth in demand for iron ore in China using the experience of our worldwide, multi-cultural staff and tools we have developed to ensure success in completing supplies of iron ore to China.

 

Lazarus Rothstein

Executive Vice President and General Counsel

CD International Enterprises (NASDAQ: CDII)

431 Fairway Drive, Suite 200

Deerfield Beach, FL 33441