Fairphone has pulled off the impossible by selling a phone that makes social responsibility its flagship feature. Here's the unlikely story of how the team did it, and what's next.
Right now, you're nowhere. Tomorrow, your aim is to persuade consumers that they shouldn't buy an iPhone, or a Samsung Galaxy, or any number of well-known smartphones.
How can you do it? Can it even be done?
You've got to think about the hardware itself — the specs, the materials, the look and feel of the handset. You've got to find someone to build it, someone you trust. Then there's the OS, of course, maybe with a custom UI on top too. Then there's the question of after-sales — the helpdesk, the support, the marketing. You've got to handle the finance side of things too, taking payments for the devices and taxes, making sure you're on the right side of the law in all the countries where your customers are.
For the likes of Apple and Samsung, making all that mobile hardware is the matter of thousands of employees and years of work.
Imagine instead undertaking the whole enterprise with a tiny team, and no partners, and a brand no one's heard of. And you have to get all your customers to pay up, in full, for their phone before they've ever seen a working prototype of the handset, let alone another model on the shelves. And, you've got to do all that while making sure your device is as ethical as it can be, and as transparent as you can make it.
That's the situation Amsterdam-based Fairphone found itself in when, in 2010, it launched a plan to make its own socially conscious smartphone and sell it across Europe.
In the beginning
The company started life as an advocacy group, initially aiming to raise awareness among Dutch consumers and telcos about the issue of conflict minerals in mobile devices and then subsequently about the sustainability of mobile supply chains as a whole.
Raising awareness is one thing, but sometimes a little skin in the game is what's needed. In order to make the issue of fairness and sustainability in the mobile industry more tangible, the decision was taken for Fairphone to enter the mobile market proper.
Its first toehold came when Fairphone was accepted by Bethnal Green Ventures, a London-based accelerator that takes on tech startups with a social conscience, in 2012.
By moving from being an NGO to a phone manufacturer, Fairphone was aiming to get a better insight into the mobile supply chain. By being part of it, the organisation hoped to get more of an idea about why the supply chain was the way it was, and then work out how to change it for the better from the inside.
"It was scary. We had a team at the time that had never made a phone before. The team, including myself, had never done any hardcore commercial business before, and we were still a startup — so starting a company, approaching the market, setting up all the systems, the logistics, that was all a first time thing for us," Fairphone CEO Bas van Abel said.
In January last year, it became a social enterprise, a startup with a handful of staff and the ambition to build a fairer phone — a device that put the social aspects of mobile hardware front and centre, that opened up the mobile supply chain, and that would be funded purely by the public.
Rather than seeking funding from or operators or others in the mobile industry, Fairphone went directly to end users, asking them to pay for their devices up front, with none of the usual discounts for signing up to a two-year network contract or trading in their old device that carriers usually offer.
Almost a year ago, Fairphone opened up its crowdfunding appeal, seeking 5,000 people willing to pony up €325 for a mid-range Android device, with no specs that would catch the eye of a technophile. Its primary feature was a social message that exceeded other phones.
While the odds were stacked against Fairphone's success, three weeks after pre-sales opened, the company not only hit its self-imposed 5,000 target — the amount of sales needed to pay for the first down payment to the manufacturer — it reached 10,000. And that's when the fear kicked in.
"When we sold the 10,000 phones, that was the point where it really became real," van Abel said. "Before that, we were a campaign. We did have a lot of advisors that could help us with it, but still it was a bold statement to say 'we're going to make a phone'. After the crowdfunding campaign, I kind of panicked."
Even for an established smartphone maker, negotiations with suppliers can be an elaborate dance where both parties seek to gain as much of the upper hand as they can. For a new player like Fairphone, there were additional difficulties — not only did the company have to find a supplier, they had to convince them to take on a company they'd never heard of with a business model that was far from commonplace.
"We did have a lot of meetings in China with the factory," van Abel said. "You can imagine, you go to a factory and you say 'we'd like a cellphone, we'd like 25,000 of them, and we don't have any money yet, but it will come'. And the Chinese businessmen were like, 'Erm, OK. What exactly is your proposition?'"
Nevertheless, Fairphone found a Chinese contract manufacturer, GuoHong, to take up its order — a company willing to take a risk on a startup with what seemed an unconventional business model. With a desire to break into international markets, GuoHong signed on the dotted line, even if "breaking into Europe" was initially a matter of a few thousand phones. Fairphone signed a memorandum of understanding with the factory, agreeing if Fairphone managed to raise the money, the project would go forward.
Once the company hit double its initial target, Fairphone's CEO found himself staring down the barrel of millions of euros in the company bank account, and thousands of expectant customers waiting for their devices.
"Once we had the money, we had to go forward. But as you can imagine if you have €3.5m in your bank account from 11,000 people, I kind of panicked," said van Abel. "The first reaction you have is to refund all the money, close down the operation. It's too much responsibility."
It took van Abel a month to work up the courage to press that button and send the money onto GuoHong. Only when he did, he found that a single push was not enough.
"We don't have a financial department. It was just me with my bank card and my internet banking, putting the card in the reader, and then finding out you cannot transfer more than €250,000 in one go. Then it was me pushing the button several times because I wasn't able to transfer the money in one batch.
"It felt like the panic had settled at that point, I felt comfortable with it, and it was almost like a relief," said van Abel.
With the vital button pushed — and pushed, and pushed — manufacturing could begin.
The Fairphone design
Rather than go for a handset of its own creation, Fairphone chose a reference design from GuoHong's owner A'Hong. A small team with a small budget simply couldn't hope to design its own handset from scratch, and initially approached suppliers with the view that only two key changes were made — conflict-free tin and tantalum from Congolese mines would be used.
But as the relationship developed, the phone strayed a little further from the reference design, with the hardware brought more up to date in order to make sure the device could compete — adding a scratch-resistant screen, a faster processor, and a better image sensor, for example — so buyers wouldn't feel like they had to make a choice between a decent phone and something with a social conscience.
"It had to work. I think that's the ugly truth of hardware development — we are victims of always wanting updates, always wanting to be at the top of the wave, and that's something that's difficult to change, so we had to be there in the market with an interesting offer," Miquel Ballester, Fairphone's head of product, said.
While choosing a reference design normally means using suppliers the manufacturers already has relationships with, Fairphone wanted to make further changes to the roster of companies whose products would end up in its phone.
In order to make the transition to new suppliers as easy as possible for the factory, Fairphone would help by sourcing potential suppliers. "We did a lot more work ourselves," Ballester said.
In one case, Fairphone became a components buyer itself — sourcing its chargers from a company called Salcomp, which makes products that have a low power consumption when left in the socket.
Other changes were made with sustainability in mind, such as using a post-consumer polycarbonate housing, for example. Before it entered production, Fairphone had considered the idea of having a recycled plastic case, but was unsure if that would be possible.
Word of the project spread to Samsung Chemicals, which approached Fairphone informally and offered the company its plastics to experiment with. That experiment later led to Samsung's post-consumer recycled plastics making its way into the case.
That's not the only way that Fairphone's larger competitors made the company's life easier, however. Due to the size of Fairphone's production batches, it had to rely on other mobile makers placing similar orders to get its own device made.
Fairphone's screens, made by LG, come via one of its suppliers who has to place a minimum order of 100,000 to get the screens delivered. Fairphone's few thousand wouldn't make much of a dent in that, so it has to hope that another handset maker takes a shine to those screens at the same time, too.
"What you do is you wait til someone orders the same screens, then you piggyback. Right now, with the production of this phone, we're piggybacking a lot on other orders, or we wouldn't be able to produce it," van Abel said.
After the enthusiastic initial response from consumers, Fairphone decided to up its order with GuoHong by a quarter — from 20,000 phones to 25,000.
The factory management were watching the orders rack up along with Fairphone's execs. "They looked at the website, and they asked me several times 'Is it really real that people have paid?' For them it was impossible that people had paid for something we still had to produce, and that we were were taking the risk on the one hand, and that people were taking the risk on something that wasn't there yet on the other," van Abel said.
From the the beginning, the company had wanted to make sure worker wages were reasonable. But because of the size of the order, simply offering higher wages for those assembling the device wouldn't be of long-term benefit to those at the factory — too few of the factory's workers would be involved, and given how small the order was, the wage increase would only be for the few short weeks it would take to build the entire run of devices.
The idea of a worker's welfare fund was hatched — a scheme whereby Fairphone would stump up an extra $2.50 per device made at the factory on top of the normal production costs, and the factory would do the same.
"The idea emerged quite organically," said Bibi Bleekemolen, impact development at Fairphone. "At first, we had the idea of paying out a bonus, more or less, to the people that worked on the phone itself. Then we started thinking with some NGOs and labour unions, and we discussed that wasn't really a fair way of benefitting the workers in the factory, because you only benefit one production line — another production line standing two feet away from them, doing the same job only for a different phone, would not receive that.
"We basically quickly decided in order to really benefit workers at the factory you have to give them some sort of ownership about the spending of that fund. What do they themselves think is fair to do with that kind of money?"
The $5 extra raised on each device ($2.50 from Fairphone and $2.50 from the factory) is put into a fund — a separate legal entity to the factory — with the workers then able to vote on how the money should be spent.
When it first began negotiations with A'Hong, much of the initial discussion was around the social aspects and transparency of the project, rather than the hardware itself. The worker welfare fund, for example, had to be a central part of the talks from the get-go, to make sure it would form part of the contracts.
Despite the prospect of paying staff more, the factory was open to the scheme. "We were all surprised by how quickly they were interested in and adopted the idea," Sean Ansett, Fairphone's chief sustainability officer, said. In electronics manufacturing, where staff churn is high, manufacturers are always on the hunt for new ideas to keep workers from moving on.
"I think in general, the management understands [the fund] and they understand the value, but on the other hand, workers probably don't get the deepest value of what we're trying to do. If we're talking about accomplishing the goals of fairness or responsible manufacturing, they probably don't get the detail as much, but they feel 'Okay, someone is trying to help me get more pay'. It's a good start from there. It's a good opening way for them to see what we're actually trying to do," Mulan Mu, Fairphone project manager, added.
The governance structures that will underpin the scheme are still being set up, and this month workshops began to let the staff know more about the fund and how it will work. It will also cover how workers can stand for election to the board that will manage the fund's use — a board that will be composed of individuals from the factory's shop floor, its management, and Fairphone.
In a country where trade unionism is something of a monoculture, the fate of worker representation is mixed. Nonetheless, trade union representatives have been involved in the set up of the fund, and the fund will offer a way for management and staff to get around the table in a different way. The fund will offer training for workers to identify and formulate needs, as well as guided discussions between management and staff.
While wages for production workers in China vary, the base wage is around $170 per month, with extra bonuses based on performance, or related to holidays, on top. From the first run of devices, around $125,000 has been put into the fund, and more will come in from the second batch of devices later this year.
Whether it's used to boost wages temporarily, to establish a training program, or just to throw a massive party, as long as it's not illegal, what happens to the money will be decided by the staff.
"If they decide that urgent wages is the most urgent thing they want to address, that's OK.
We have at least given them some experience and some awareness in worker interests, in collective bargaining, and identifying needs, and for us that's the most important," Bleekemolen said.
Working with operators
For most phone makers, mobile operators are the keys to the market — offering discounts on hardware when consumers sign up to long term contracts, getting their sales teams to push devices to corporate customers, and putting marketing collateral in retail shops have always been understood parts of how manufacturers sell their devices.
Such agreements are common for the Apples and Samsungs of this world, but even smaller companies can strike such deals. Take Finnish smartphone startup Jolla's recent agreement with local operator DNA for example.
But it's that power that the operators have to make or break a handset that means Fairphone has been keeping them at arm's length until recently.
Earlier in 2014, the company did a small deal with KPN — the biggest mobile operator in Fairphone's home market of the Netherlands — which saw the carrier take one thousand Fairphones. It's also in talks with Deutsche Telekom, the German mobile giant with operators across Europe, as well as UK carrier Vodafone, which has similar pan-EMEA interests.
And while an operator can mean a just-add-water helpdesk for a manufacturer, Fairphone is keeping support all in house for now, fielding the hundreds of messages that come in each day itself, with repairs carried out by a third-party service centre.
It plans to keep doing that for the foreseeable future — an aim that's aided by Fairphone's emphasis on repairability. It has a replaceable battery, for example, a piece of kit most mainstream manufacturers had removed years ago. It's also working with iFixit to help consumers with repairability.
However, there's a natural limit to when that helpdesk will grow beyond what the eight Fairphone employees tasked with support duties can handle.
"We're involving the operators a lot into our next steps. We know at a certain point we want to work with them to make the scale possible, because direct sales of 25,0000 phones — I don't even want to think about it. Then you get to 'We need a bigger helpdesk'," van Abel said.
The ideal would be to get to the situation where an operator such as Swisscom would take care of the repairs customers need and handle their support queries, and Fairphone would just arrange shipments of spare parts on a regular basis.
No one in a business, even a business with a social mission, approaches the company with anything other than growth as an aim. However, in the case of Fairphone, any significant growth automatically threatens the work the company is doing by putting as yet uncalculated pressures on its suppliers.
"We're being very conscious of how our ramp-up time and phone practices can impact overtime and those issues [at Fairphone's Chinese supplier], which is often what happens in ramp-up," Ansett said. "While technically it can be manageable at 25,000 or 30,000 phones, we might run into more complications when we build to scale. That's something we have to be more conscious of going forward."
At the moment, because the devices are in batch production, Fairphone staff are able to be present at all stages of production, but once its supplier's factory starts continuous production, it may not be able to have representation on site all the time.
The legislation governing working practices in the country are far from bad, but practices in factories often fail to live up to what the law stipulates.
Fairphone's project manager, Mu, is on site while the phone is in production, working to ensure that factory staff stick to their mandated 10 hours a day and that production goes smoothly.
The two go hand in hand, according to Mu, with operational hiccups often behind the overtime that workers are called upon to do. If delivery of components needed for a device doesn't turn up on time or there's a quality issue that means some parts will need to be reassembled, the customer's deadline can't be put back to accommodate that. Instead, typically workers will have to work longer hours to make up the lost time.
With the same time pressure as any other manufacturer — Fairphone's customers were waiting for delivery — the startup asked the factory for more resources to verify that the materials and components going into the device were up to snuff, while Fairphone representatives did similarly on the supplier side in an effort to prevent issues cropping up down the line.
After the passing of the Dodd-Frank Act in 2010, some tech companies decided to stop using minerals from the Democratic Republic of Congo, a war-torn country that contributes a lot of minerals used in mobile hardware. The legislation brought in an obligation for SEC-registered companies to verify the source of the minerals in their supply chain and if they're in conflict zones, in the DRC or neighbouring countries, to demonstrate what action they're taking to ensure the mines they're using aren't in the control of armed groups.
Fairphone, however, decided to stick with supplies from the country, working with the Conflict Free Tin Initiative and Solutions for Hope. It did so knowing that sourcing its tantalum and tin from the DRC could mean using mines with poor working conditions or child labour. Many other tech companies have opted to use minerals from conflict-free areas like Australia, which means they meet their Dodd-Frank obligations, but has caused the bottom to drop out of the mineral market in the DRC, which is unlikely to lead to an easing of conflict in the region.
"We said, we're going to join initiatives that put economic perspectives into the region, otherwise people will join the militia because they don't have any work any more," van Abel said.
The situation "is not black and white", he added. "There should be a discussion so people should be able to judge for themselves if Fairphone is fair enough or not for them — [basically] if they're going to invest in something that will create a lot of improvements, but it's not there yet."
For minerals in the current generation of Fairphone, only two (tin and tantalum) are conflict free, out of a possible four — a fact that its detractors haven't been shy to point out, along with the canard that the company, like similar initiatives, are trying to solve problems caused by people buying mobile phones by encouraging people to buy more mobile phones.
As interest in the company and press coverage grew, so did expectations for the product. "It kind of exploded in terms of people's perceptions of what we could do," said van Abel. "People's expectations were so high and they were getting higher every moment, because we had ambitions. We still have lots of ambitions, but the reality is that you can only take little steps as a startup. I'm not saying in the impact of what we can do through the industry and that's done through the statement people make, through the campaigns, is little — but on the real phone, on the interventions you can do, and changing a whole factory into a fair factory, that's not possible.
"We had published our vision on where we wanted to go to gradually step-by-step but that step-by-step end goal had already become a reality to a lot of people, and that put a lot of pressure on the team — a team of not even 10 people at that point."
Gold for example had been one mineral that the company had hoped to use a fair trade version of in its phone, but the economics got in the way. Gold is used in tiny quantities in the printed circuit boards (PCBs) of smartphones, and for a tiny company like Fairphone, that tiny amount is tinier still — perhaps in the region of 100g or 200g in total. To keep the fair trade gold traceable, the machine that makes PCBs — which run 24 hours a day normally — would have to be stopped, and cleaned out, and the fair trade gold added in. Fairphone would have to get its PCB maker to effectively shut down its production lines that make hundreds of thousands of PCBs a year — causing costly downtime — while the traditional gold was swapped for its fairer counterpart. Perhaps unsurprisingly, no supplier willing to halt and restart production for such a small order was found.
The nature of fairtrade certification is changing, and in the future a compromise looks set to be found. Instead, Fairphone will share the fairtrade love using a mass balance system — where the quantity of fair trade gold that would cover all of Fairphone's order is fed into the system without the stopping and cleaning process. The gold may not end up in the company's devices — it could be used for any PCB the factory prints — but it ensures that an equivalent amount of non-fairtrade gold is taken out of the system overall.
However, the company is more hopeful that fair-trade gold will be used in the next device, scheduled for release in 2015, and it's already struck up relationships with organisations to get the supply chain in place ahead of that.
Further on down the line, it hopes to expand the the amount of conflict free and fairly traded minerals that are included in the phone — beyond gold, fairly traded or conflict free tungsten and cobalt are likely to be next on its agenda. In the case of cobalt, for example, Fairphone had already collaborated with the charity Actionaid, which has done some feasibility work on a fairly-traded cobalt scheme. However far more work — and time - lies ahead before the supply chain is as well developed as that for tin and tantalum.
Software too has been put under the microscope with regard to its fairness.
Fairphone hopes to eventually allow other operating systems to be ported to the phone, and has been in talks with the likes of Mozilla and Ubuntu on the subject.
Currently, Fairphone's ODM GuoHong has access to the development environment for MediaTek, the chipset supplier for the phone. The ability to port other OSes to Fairphone devices will come when Fairphone secures a development licence itself directly from MediaTek.
The two companies are already in discussions on the matter: while Fairphone's CEO says it's a matter of not having enough resources rather than a lack of enthusiasm on MediaTek's part, some in the the developer community have been rather unforgiving about the wait. Nevertheless, van Abel remains hopeful that it can be done if not for the current generation of device, then for its successor due in 2015.
Meanwhile, Fairphone OS, while based on stock Android Jelly Bean, has been updated by software house Kwarmecorp to include additional elements such as better information on battery usage, and the "Edge Swype" - a function whereby favourite apps are hidden and can be brought to the fore by swiping from the right. It also includes the "peace of mind" feature - a "conceptual exercise" where users can turn off all incoming notifications and, apparently, be left in peace. The OS and its widgets have been open sourced, and the source code is available on GitHub, proprietary MediaTek code aside.
So far, Fairphone has taken over €7m, shipped over 25,000 phones, and is planning a second manufacturing run in 2014 that will see it put 35,000 more devices in consumers' hands.
"Besides the numbers, the really great thing was that it showed exactly why we started Fairphone: to show people do care about this stuff, that people were ready to make a statement that was more than just buying a phone. They bought an idea," van Abel said.