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China tech

Cotton to iPhones: Xinjiang labor casts shadow over electronics

Former Apple supplier Ofilm sells Guangzhou factory to Wingtech for $375m

China's Ofilm had been a major supplier of smartphone camera modules to Apple. (Photo by Rie Ishii)

GUANGZHOU -- The first thing that stood out when arriving at the sprawling factory formerly owned by Ofilm Group, a Chinese supplier of Apple smartphone components accused of using Uyghurs as slave labor, was a new sign that bore the name, "Wingtech."

The Guangzhou plant located in the heart of China's Greater Bay Area was buzzing with 4,000 employees not that long ago. Now, a skeleton crew dots the massive grounds.

"The production line has stopped," said a source at the plant during last month's visit. "Only the managers and maintenance staff come to work."

The plant was one of the most important for Ofilm. But it was forced to sell the facility after reportedly losing business with Apple because of allegations that members of China's Uyghur Muslim minority were used as forced labor at its plants.

Just as many leading apparel manufacturers have stopped using cotton from China's Xinjiang region -- amid allegations of Uyghur forced labor -- the sale of the Ofilm plant suggests similar dynamics at play in the electronics sector.

Ofilm was founded in 2002 in Shenzhen and attained rapid growth by supplying touch panels for smartphones. The company scored a coup in 2017 when it bought the plant that was then operated by Sony.

Thanks to the Guangzhou site, Ofilm expanded production of smartphone camera modules containing image sensors and lenses. The company came to be known as one of Apple's main suppliers.

Wingtech Technology bought this Guangzhou plant from Ofilm Group as part of a $374 million deal. (Photo by Takashi Kawakami)

The situation changed last July when the U.S. Commerce Department slapped trade restrictions against an Ofilm subsidiary, Nanchang O-film Tech, along with 10 other Chinese enterprises. The agency cited the companies' involvement in the forced labor of Uyghurs.

Although the details over the forced labor charge are murky, the Australian Strategic Policy Institute said in a March 2020 report that Uyghurs were reportedly transferred from their home in China's Xinjiang region to the O-film Tech factory in Jiangxi Province.

Ofilm has rejected the allegations raised by the U.S. Commerce Department's decision. "Ofilm has always abided by the laws and regulations of the nations where we operate," the company said in a release. "We treat our employees equally and protect their rights and interests."

"Ofilm employees are never coerced to work for us," the group added.

Nevertheless, industry observers suspected that Apple would cut business ties with Ofilm considering the U.S. tech giant's sensitivity to human rights issues. Despite Ofilm's repeated denials, the company announced this March that it received notice from a "certain overseas client" that business orders will cease. Chinese media outlets have reported that the client is Apple.

Ofilm ultimately sold the operator of its Guangzhou plant, as well as corporate assets in Jiangxi, to Wingtech Technology in a transaction valued at roughly 2.4 billion yuan ($375 million).

Although none of the units have been cited for ties to the Uyghur problem, they are involved in manufacturing Apple components, so Ofilm apparently had no choice but to unload the assets.

Wingtech, a major Chinese contract manufacturer of smartphones, has not been targeted for trade sanctions by the U.S. Commerce Department. With Ofilm's Guangzhou factory in hand, Wingtech seems to be angling for a contract with Apple.

"I heard that [the plant] will be audited by Apple, and if there are no problems it will restart operations this summer," said a security guard at the facility.

The loss of Apple is a crisis that puts Ofilm's status as a viable business into question. Ofilm's transactions with the "certain client" amounted to 11.7 billion yuan in 2019, or more than 20% of revenue.

Furthermore, Ofilm's revenue declined 7% in 2020, and 25% over the year in the first quarter of 2021. Because business with the "certain client" ended in March, the impact will intensify.

Ofilm continues to supply camera components to other smartphone manufacturers, and the company says it is pouring resources into other areas such as automobile parts. But the stock market remains unconvinced. Ofilm's share price on the Shenzhen Stock Exchange is 60% lower than the high logged in mid-July 2020, right before the U.S. announced trade sanctions.

A cotton factory in China's Xinjiang region: Many leading apparel manufacturers have stopped using cotton sourced from Xinjiang.   © Reuters

Washington has stepped up pressure on China over the Uyghur problem. The Commerce Department has implemented three rounds of trade controls since 2019, targeting 48 entities.

From late 2020, the administration under former President Donald Trump engaged in a series of import curbs, including those of cotton products tied to Xinjiang Production and Construction Corps (XPCC).

A shipment of shirts from Uniqlo, the clothing chain run by Japan's Fast Retailing, was blocked in January by U.S. Customs and Border Protection over suspicion that they were made by XPCC, according to a disclosure released last month.

"No Uniqlo product is manufactured in the Xinjiang region," Fast Retailing said in May.

Sweden's H&M faced backlash from Chinese consumers after it moved quickly to suspend ties with companies operating factories in Xinjiang.

Ofilm appears to be the first major Chinese electronics company to suffer severe consequences over the Uyghur problem. Meanwhile, seven other Apple suppliers are alleged to be involved in Uyghur forced labor, according to U.S. tech news site The Information.

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