Why It's So Hard for Apple to Move Production from China to India

24:45But something also happens, and it's a theme repeatedly on the show, where innovation happens at the shop floor, and the idea of cleanly drawing a line between the designers and the building is a fallacy. It must be the case that at least in some of these realms, whether we're talking about the glass, whether we're talking about the ability to mold plastic, green plastic into a pretty iMac, that innovation also happens in China and that Apple benefits from that learning as well. Yeah, I'm wondering if the right analogy would be something like a graduate student at Harvard writing a paper with their professor, right?

25:19It is something along those lines, like the Apple engineers by the plane load are going over there, but they're absolutely co-inventing something, right? So I was told that like the ideal manufacturing design engineer, right, would look at what Johnny Ive had come up with and say, I have no idea how to build that, but I'm going to do my best to find out, right? So they would have a certain skill set and with a whole team of people, of course, and they would go to the Chinese factories and they find suppliers who might have some background in multi-touch glass, let's say, or adding electrical circuits to the glass.

25:48And then they would train and co-invent the next processes. So they're not just co-inventing the parts. They're co-inventing the processes that make the parts, what Elon Musk sometimes calls the machine that creates the machine. So I'm glad you brought this up just because in no way am I saying like the Chinese offered them nothing or something like that, right? Like it's not like to say that Harvard's a great school isn't to say that like the students that go there don't deserve loads of credit. Of course they do. And in the same way, like Apple is a teacher of the Chinese. And to be fair, like the founder of Huawei has called Apple the teacher.

26:19But that's not to say that they could have done this anywhere. In fact, if anything, I think Apple has a bit of hubris believing that they can replicate their 25 year investment into China and go do it in India. And it's like, guys, do you not understand like the degree to which China was a once in a century partner with all these tailor made policies? They would just build factories at the time that you and I would still be doing the environmental paperwork. I just don't think you see that in India and you don't see that in America either. So China is not just like a blank slate with lots of people.

26:47They offer all kinds of things to Apple and Apple. And fair, they offer all kinds of things to anybody. But Apple understands the opportunity just better than anybody else.

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28:36Brokerage services for U.S.-listed registered securities, options and bonds, and a self-directed account are offered by Public Investing, Inc., member FINRA and SIPC. Crypto trading provided by Backed Crypto Solutions, LLC. Complete disclosures available at public.com slash disclosure. So you make the point in the book that there's, I guess, a tension between a company like Apple and their very, very sharp focus on shareholder returns and quarterly profits and continued growth and just throwing off loads and loads of cash. There's a tension with, I guess, nationalism and economic and strategic development.

29:10And so Apple's focus on growth has been to China's strategic and developmental benefit and maybe less or so to America's, at least in terms of strategic things. And what's funny is right after this interview, we're actually going to speak to Ava Dow, who wrote a book on Huawei. And she makes the point. Yeah, she makes the point. It really dovetails with your book. We didn't mean to schedule it like that either. Just sort of. But she makes the point that stock prices and balance sheets can't fully capture the societal value of a nation's technological competency. And this is something that maybe Huawei understands better than an Apple.

29:50Where do you see, I guess, the key differences in sort of corporate culture between a Huawei and an Apple? So I might be taking this in a slightly different direction than you're thinking. So if I need to re-answer in a second, let me know. But the Chinese don't prioritize profits or margins the way that we do. They prioritize control of the industry. Because if the Chinese can take over something like electric vehicles, they in effect de-industrialize all their rivals and really gain dominance. The place that you can see this most clearly is solar panels. Nobody in China is making 30 % margins on solar panels, but more than 90 % of solar panels are now made in China.

30:28This is a technology that America invented in the 1950s and itself had 80 to 90 % market share of in the 80s. but we cannot compete. That is basically what's happening with electric vehicles right now. Hence, even before Donald Trump became president, Joe Biden put 100 percent tariffs on Chinese made EVs. And I think it was just a few days ago that BYD slashed the prices of their EVs in a bid for greater competitiveness. So, look, I think China has a state sponsored form of capitalism. I'm emphasizing that it is a form of capitalism, but it's not a shareholder maximization form of capitalism. It's a command and control form of capitalism.

31:01You mentioned and I had never I had either forgotten about it, didn't realize that Xi Jinping called out Apple very early, within 36 hours of taking power in 2013. Can you talk a little bit about the sort of evolution of the CCP and Apple's relationship with it over time? There is obviously this perception that Xi specifically has taken on this more nationalist, ambitious edge versus his predecessors. Can you talk a little bit just more about that specific relationship with Apple and the CCP itself, beyond just the economic capacity on the ground. So Apple gets, in a sense, a misleading picture of what it's like to operate in China, because when they really consolidate production, it's 2003.

31:49And that's the beginning era of Hu Jintao. He later is nicknamed the woman with bound feet. His presidency is sometimes called the collective presidency, because there was really an inability for just him alone to make decisions. And so it ends up being this like 10 year period of China being a multinational playground where rules aren't really enforced. So just like this honeymoon golden era where like it's sort of China on easy mode. Absolutely, yeah. And so Apple's really taken it back to the point of just total confusion and having an inept response when Xi Jinping really comes in. And as I said, what happens is like CTTV, which you could think of as like a state-sponsored CNN of the country, attacks Apple for warranty differences of all things.

32:31It basically excuses Apple of treating the Chinese customers in an inferior way by refurbishing phones rather than giving them new phones when certain problems were happening with them. And I have to say, this is the prologue to the book because basically you open the book and in the first paragraph, Apple's in crisis. And so I'm trying to go for like a white lotus opening, if you will, before it becomes like this nice beach read with the overhang of suspense that you know that, you know, it's going to hit the fan by 2013. But I have to say the narrative leading up to it is wild, which is that in 2008 for the Beijing Olympics, Apple opens its first store in China purely as a marketing opportunity for the Olympics.

33:08I mean, they're actually happy that the site they've been given is small because everybody assumes it's going to lose money. You have to remember that for the first iPhone, Steve Ballmer, Microsoft CEO, laughed at the price. And he's referring to American buyers saying no one's going to pay$600 for an iPhone. So if you can understand that nobody thought it was going to work in America, why would there be a retail sector in China, a country with developing wages and no appetite for such an expensive product? Well, by 2010, the iPhone just becomes the most conspicuous symbol of I've made it in China.

33:37And to such an extent that the lines outside what are now four stores in China at the time, there's thousands of people that are snakelining around these stores. But the thing is, they're not like Joe and Tracy excited for the next iPhone and just camping out overnight because they have to have it. It's migrants that have been trucked in like by the busload to buy as many iPhones as possible. So these quasi gangsters, these scalpers known as yellow cows, can amass, let's say, 10 ,000 phones and go to a city where there is no Apple store. And they sell them at hawked up inflated prices because it's such a conspicuous status symbol.

34:11I don't want to go on and on about this, but essentially what happens is you have to understand these gangsters are connected with the triads and they begin finding ways to make more money per iPhone than Apple, but they're illegal ways. They're buying phones in the US using fake IDs, so they're buying them for less than$100 because they're buying a 24-month contract but only paying the first month. They're smuggling them into the country. They're zapping the processor, rendering the damn thing inoperable, but at the same time masking that it's a stolen phone, essentially. And Apple is totally flummoxed, not understanding what's going on, not understanding Chinese culture, certainly not understanding Chinese politics.

34:45And this is the origin story of the warranty differences. It's because Apple was trying to clamp down on these illegal practices. And that story sort of gets lost in translation. But that's why China is so upset with Apple in 2013. I want to correct the record here, which is I do not, in fact, camp out in front of Apple stores waiting for the latest iPhone. I think my iPhone is like seven or eight years old. They work so well these days. You really don't need to replace them. I am the customer that Apple hates because I am very satisfied with my ancient phone. Okay. Seriously, what model of iPhone do you have?

35:16Is it really an 8 or a 10? Well, this is the funny thing. I really don't know. I don't know either. If you had asked me 10 years ago, what model iPhone do you have? I would have been able to answer right away. If you ask me right now, I have no idea. I bought it - That's hilarious. 40 years ago. It's been so long since I've thought that it was important to know the differences. You know, at one point, I was like, oh, that's a lot different. Now it's like, oh, there's the gains seem so marginal at this point from each generation, at least as someone who's not super plugged in. Someone like Cupertino is just cringing right now.

35:45Yeah, that's true. I don't care. Yeah. You said something interesting that at the time of the rush to China, there was this sort of consensus in the West that this was a good thing because it would accelerate the process of democratization, of liberalization, the likes of which maybe we've seen in Korea, Taiwan, so forth. On the other hand, in theory, one of the things that business leaders really liked about doing business in China was the fact unions aren't legal. There's this heavy hand of the state that keeps wages in check and keeps organizations in check and probably keeps environmental groups in check, etc.

36:21How much was this tension not appreciated that this phenomenon that we maybe expected to see play out in China of liberalization and democratization would have been explicitly not what the business leaders going to this country would have wanted to see? I mean, there's absolutely a sense that business people had just like a greed sense of why they wanted to be in China. But I guess what I'm trying to push back against is because it's like obviously a strategic error in retrospect and obviously we experienced the China shock and our own industries got hollowed out. I feel like now there's just like a revisionist sense that like we were never doing this for valid reasons.

36:56There was never a sort of like real geopolitical strategic sense, right? That Bill Clinton or Larry Summers were just like in the pocket of business people and so forth. I just don't really find that convincing. Taiwan was under martial law until the late 1990s, effectively. Maybe it was the 1980s, but then in the late 1990s, they had their first democratic elections. This is, of course, an ethnically Chinese island. And, you know, it was very much used. I mean, however, problematically, it was used as an example of we could export democracy through capitalism. I do think there was a track record and people made that argument in good faith, in addition to business people who saw it for their own purposes.

37:32Hmm. So one way of describing the Apple-China relationship is they're sort of frenemies, right? There is a tension built into the relationship, but both sides get something out of it. If we fast forward to today's environment, we have tariffs in the U.S., obviously, although no one knows what's going to happen with those. You have China making a very conscious decision to build up its tech sector. Who has the upper hand in the relationship right now? Who has the power? So I would push back. I would not call them frenemies. Tim Cook and Xi Jinping, broadly speaking, have the same interests, which is to say the more that Apple is allowed to have its production consolidated into China, the better their scale is, the better their margins are, etc.

38:18That's what Xi Jinping wants as well, because he understands basically because Apple taught him that having Apple production in the country engenders a form of technology transfer that helps the rest of the electronic sector, which to quote China scholar and economist, very not. And that is the most important thing that Xi Jinping wants, right? I mean, I compare Apple's presence in China to something like that of the Marshall Plan, something that sounds insane until you look at the numbers and you realize that it's bigger than the Marshall Plan. So the problem is actually that Donald Trump and Tim Cook have diametrically opposed interests, which is to say that if Donald Trump could move all production out of China, he would.

38:54Well, Apple doesn't want that. That's an existential threat. I don't really mean that. That's an existential threat to a$3 trillion company. So that's where the tension is. The tension really isn't between Cook and Xi, as strange as that is. It's between Cook and Trump. You really don't think there's tension between Apple and China, even with the tech crackdown, even with Xi Jinping coming out. One of the first things that he says is that criticism of Apple. And clearly he's trying to like extract some things from the company that the company is maybe reluctant to give up. And the rise of really good Chinese competitors that are winning market share all around the world, maybe outside the U.S.

39:30Yeah. So so Tracy's examples are historical. Right. So I'm not saying there's never been tension. Of course, there's been loads of tension. But the way that Apple responded was in effect to placate federal and provincial officials so that they haven't really had any problems. So, right, so there's a tension relationship, let's say, but insofar as it's a marriage, I think it's actually a pretty, it's a Catholic marriage. There's not going to be a divorce. It's going pretty well. The problem isn't really between Apple and China. The problem is, to use the economic jargon, the negative externalities of the relationship, right?

40:02So the problem is that for everybody else, this is actually deeply problematic. Because if you have America's top engineers training a manufacturing supply chain that in effect can be weaponized and world's dominance, that's not a great place for Washington or just your average American citizen. It's nice that this relationship gives us relatively sophisticated and affordable iPhones. But the downside here is that China is absolutely dominant in high-end electronics. And you can use those skills to build drones. You can use those skills to build military weaponry. And Apple would frankly be training their chip makers if it weren't for the Senate coming down on them pretty hard a couple of years ago.

40:40So that's the problem, right? The problem isn't that something stops in the relationship between Apple and China. The problem is that it continues. Just to push back on this framing a little bit, and I certainly, there is much that I find very compelling about this story. But you talk about the beginning of when the U.S. and Chinese economies really got integrated in the late 90s, early 2000s, sometime around Chinese ascension into the WTO. And you look like everyone recognizes in retrospect that it's been a mistake. And has it been? I mean, again, the other thing is that Apple is worth$3 trillion.

41:16Almost every American with any investment probably has some exposure to it. It's been incredible for the development and the alleviation of poverty in China. We've never gone to war with China. It doesn't seem like in the modern era. It hasn't come close to happening, at least so far. Like, isn't there a version of this story that as long as we trust each other, Chinese students could come to the U.S. and we could have the good jobs of like professorships at schools and so forth and designers in California? And isn't there a story where this has made the world wealthier and more peaceful? So let me start just by completely agreeing with most of the points you just made.

41:59I think the poverty alleviation in China has been really important and a net good for humanity. And I think we have, over the last 20 years, been a sort of golden age of, you know, Silicon Valley works on the software, works on the design, and China takes care of the hardware. And insofar as there's like a mutually symbiotic relationship there, no one fits that bill better than Apple. So, look, a lot of good has come out of it. I mean, that's absolutely true. I would totally disagree that we're not seeing harbingers of war coming. I mean, Xi Jinping has literally said we will not leave the question of Taiwan to the next generation.

42:30I think he's gone so, so specific as to say that 2027 might be the year that Beijing annexes Taiwan. I mean, that's really troubling, especially if you're Taiwanese. But it's really troubling if you understand the chip sector, because 90 percent of advanced chips come out of the country. And American military officials have said that, like, in the event that somehow Beijing was able to take control of the fabs in Taiwan, like we would go bomb them. We would bomb the fabs. I mean, they would be like if somehow TSMC survived the war, which is basically untenable. But if somehow they did, the American military would see fit to destroy them because the idea that they would be in Chinese hands without exporting to America would be existential.

43:05So there's that. And then there's just you don't have to be anti-CCP. You don't have to be anti-China to recognize that this is clearly America's biggest rival really since the founding. The USSR was never such an economic rival, never sort of like rivaled America in terms of high-end electronics. I mean, absolutely, there was like a nuclear arms battle, but the Chinese are far more sophisticated. And like I wrote my thesis on the grand strategy in America. And what I would point out is that like in the 1980s, America started spending more on its military, understanding that the Soviet economy was not as dynamic, right?

43:40And so it wasn't growing as quickly. And so you were going to accelerate their own demise if you sort of set up a military in which the Soviets were likely to respond in the same vein. You cannot apply that strategy to a country that is three or four times the population and has literally been growing faster than America for the last four decades. So it really is a massive threat. And the idea that in the event of some sort of battle, we're not able to make stuff because we outsourced it all to China over the last 25 years is pretty dramatic. Just think of World War II. Hitler was really concerned about the U.S.

44:09coming in because of their industrial capacity. We used to call Detroit the arsenal of democracy. We don't have an arsenal of democracy anymore, but we have trained up China to be an arsenal of communism. I don't think you have to be hyperbolic to realize that's a big deal. I have just one more question, and I'm going to ask it very, very briefly because we're getting squeezed for time. But to what degree does AI and the rise of this new technology complicate the Apple-China relationship? Really complicates it. So for two reasons. One is that I would argue, or actually I could just demonstrate with internal documents and some public documents, that the iPhone has become more Chinese with time.

44:48In other words, the number of Chinese suppliers involved in the process is now much greater than the number of Taiwanese or American multinationals operating in the country or operating in their home countries. That is put on steroids in the AI era because ChatGPT and other Western AI clients are not allowed on the iPhone in China. And so Apple has to work with the likes of Baidu or Alibaba to have AI, let's say, displacing Siri or augmenting Siri. So that, I think, is quite problematic because that means that Apple will be, in effect, doing what they did for hardware, but for AI. In other words, you'll have Apple software engineers helping Baidu, helping Alibaba, whoever their Chinese partner is, to make sure that they have cutting-edge AI in the country.

45:27If it wasn't bad enough that Apple was training up their hardware engineering to be world class, we're now in a situation where Apple software engineers are going to be training Chinese AI to be best in class. Very interesting stuff. Patrick McGee, thank you so much for coming on OddLots. That was a fantastic, really fascinating conversation. Urge everyone to check out the book. Appreciate you coming on. My pleasure.

46:01Tracy, I thought that was really good. And I agree with that last point in the fundamental sense that, you know, I think arguably the relationship definitely has been win-win on multiple fronts from the U.S., from the Apple shareholders, from the Apple workers, from the Chinese workers' perspective. But this idea of there are now so much risks concentrated under a specific dimension, I take that pretty seriously. Yeah, the negative externality point makes a lot of sense, although I still think there are some tensions between Apple and the CCP itself. The other thing I was thinking about was, I guess we're hearing this repeatedly on the show, and I probably don't even need to say it at this point, but it is so difficult to replicate China's industrial strategy and its industrial management in other countries.

46:50And I kind of, at this point, I wonder if we'll ever get there. No, I don't think anyone will ever get there in some sense. What I suspect is the story is that some of the Chinese industrial behemoths will slowly develop ecosystems in other countries, but the companies are downstream from China. And so I imagine, you know, you see more foreign outbound investment from Chinese giants into Vietnam, into Cambodia, into Brazil, et cetera. That might pose other risks, and they're never going to be the next China in some sense. But you still get that capital deepening and wealth creation outside of China, but likely driven by Chinese industrial giants.

47:31Also, Joe. Yeah. I looked up my iPhone. Yeah. It's an iPhone 11. So I guess it's six years old. I have no idea what we're even on now. Like only the biggest iPhone nerds. And I don't mean that pejoratively. Maybe like I have, I just, I used to know these. I think it's really important. I used to know these things and I don't at all. We're on iPhone 16. And iOS 18. Do you think one day we're going to get to like iPhone 298? It'll just keep going. I don't know. But I think I saw our colleague, Mark Gurman, who is, and I can say, again, say this lovingly, an Apple nerd. I think apparently, at least with the software, they're going to change their naming conventions at some point.

48:14Yeah. So that it doesn't end up. That makes sense. Yeah. I think I saw him tweet that last night. Okay. Well, shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts Podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway. And I'm Jill Weisenthal. You can follow me at The Stalwart. Follow Patrick McGee. He's at Patrick McGee underscore. And check out his new book. Follow our producers, Carmen Rodriguez at CarmenArmand, Dashiell Bennett at Dashbot and Kale Brooks at Kale Brooks. For more OddLots content, go to Bloomberg.com slash OddLots. We have a daily newsletter and all of our episodes.

48:46And you can chat about all of these topics 24-7 in our Discord, discord.gg slash OddLots. And if you enjoy OddLots, if you like it when we talk about Apple in China, then please leave us a positive review on your favorite podcast platform. And remember, If you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

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