27.02.2013

The boom in sales of tablets, smart phones and other IT and consumer electronics devices is in full swing. The intense competition is based on rapid technological innovation, but also increasingly on brand image. Cost pressure is also encouraging companies to shift their production to low-cost countries, but in doing so they run the risk of attracting negative publicity due to precarious working conditions in suppliers' factories. Sarasin's sustainability rating shows that many consumer electronics brands are eligible for investment. Only Ericsson achieves the highest possible rating. Apple is winning the battle with Samsung for sustainability leadership of the smartphone market.

Manufacturers of IT and consumer electronics devices are constantly launching new models and product generations on the market. Sales of tablets are forecast to grow by 200% up to 2015, stealing market share from notebooks and desktop computers. The rapid pace of technological innovation is making it increasingly difficult to defend a strong market position in the long run purely on the basis of technical superiority. As a result, the battle for market share in this sector especially is also being conducted through disputes over patent rights. The stand-off between Apple and Samsung clearly demonstrates this. However, the competitive battle is also being increasingly fought on the basis of both content and access to the rapidly shifting world of applications ("apps"). Ultimately the image of product brands has now become a pivotal sales argument.

Global market shares of mobile phone providers


Source: Gartner

Ordering copies of the sustainability report on the Information & Communications Technology industry
The latest industry sustainability report to be published by Bank Sarasin & Co. Ltd, "Apple, Samsung & Co - interconnected with China" (author: Eckhard Plinke), examines the social responsibility of manufacturers and suppliers, along with the associated reputation risks, in the ICT sector and is available in English and German from media@sarasin.ch.

Brand image dictates product responsibility criteria

Brand image has a major impact on the financial valuation of many well-known consumer electronics companies. The spotlight is therefore being trained on the ecological and social issues thrown up by the boom in electronics. These can have a major impact on a company's reputation. This is even truer now that consumers are becoming more aware of ethically produced goods and services. The rapid innovation enticing users to upgrade regularly to new phone models and the rise in the number of devices owned by each user are adding to the mountain of electronic waste.  Large quantities of this waste are being shipped off to Africa and Asia, where devices are being dismantled and disposed of in a very haphazard fashion. Disposal methods are attracting heavy criticism because old devices contain hazardous substances that can damage human health and the environment. The existing ban on lead and other potentially harmful substances shall be extended to cover halogenated compounds, for example.

Precarious working conditions in supplier factories present a risk

Mounting cost pressure has encouraged companies to shift their production to low-cost countries, especially China. This has created social risks for the industry - and thereby reputation risks as well. Precarious working conditions in supplier factories, such as Foxconn, have prompted negative headlines for Apple and other brands. With a market share of almost 50%, Foxconn is the world's biggest electronics contract manufacturer and therefore plays a dominant role in shaping social conditions in Chinese factories. Bank Sarasin's Sustainability Research team looked at the measures being taken by the leading global OEMs to improve local working conditions. Most companies are aware of the grievances. An increasing number are conducting regular inspections of supplier factories, in many cases as part of joint industry initiatives. Since this control-based approach has only had limited success, however, more and more companies are now working in partnership with suppliers in a drive to improve conditions. These industry-wide initiatives have helped to improve working conditions in China. In some parts of China, for example, wages increased by 19% per year during the period 2005-2010. But the stronger negotiating power of employees as a result of growing labour shortages and the more open political situation have both played a greater role here.

Many ICT companies rated as "sustainable"

Source: Bank Sarasin

Many of the well-known consumer electronics brands perform relatively well in the sustainability ratings. In other words they lie in the grey shaded area of the Sarasin Sustainability-Matrix® and therefore qualify for Sarasin's sustainability funds. This may have something to do with the fact that they are more exposed to reputation risks than, for example, manufacturers of components, contract manufacturers or smaller and less well-known brands, all of which generally have lower sustainability ratings. Only Ericsson achieves the highest possible rating. Nokia, Motorola Solutions, Canon, Philips, Hewlett Packard and Apple follow in the rankings. Apple is winning the battle with Samsung for sustainability leadership of the smartphone market.

Sustainability pays off in the ICT industry

Sustainability issues present not just reputation risks, but also regulatory risks. For example, EU legislation such as RoHs (Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment) and REACH (Regulation on Registration, Evaluation, Authorisation and Restriction of Chemicals) has already banned the use of various hazardous substances in electronics products that are dangerous to human health and the environment. The disclosure of conflict minerals (Dodd Frank Act) as well as measures to prevent forced labour and human trafficking are other noteworthy steps towards improving working conditions.

Sustainability can therefore help to reduce financial risks and/or create opportunities for growth and returns. A rough comparison of the performance of sustainable ICT companies illustrates this: Shares of companies with a "high" or "above average" sustainability rating have returned approximately 20% over the past three years, while the industry as a whole, as measured by the MSCI World Technology Hardware index, only gained 2%.


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