How China Captured Apple - Patrick McGee

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1:19We're back this week to talk with journalist and author Patrick McGee about his book, Apple in China. Patrick takes a fresh look at Apple, focusing on the company's supply chain in China, a side of the story most people overlook. We dig into Apple's comeback, how they train Chinese workers, and the political and economic forces that shape their growth. We get into Tim Cook's legacy and the state of innovation at Apple and the challenges facing the company. By the way, sounds like it's a book about a supply chain. Oh, ho-hum. That sounds super boring, but that's not what this is. This is the history of Apple.

1:55It's the history of a dynamic relationship with the Chinese government. And it's an allegory or cautionary tale about how the Chinese government took advantage of many companies, not just Apple, but took advantage of the technology that we were bringing into their country and used it to their great advantage relative to the West. So a phenomenal story. It's one of innovation. It's one of resilience. It's one of survival of what went on to become one of America's greatest companies, if not its greatest company. And there's also lessons in here for the future of American manufacturing and global trade.

2:30So let's go right to the conversation.

2:36Welcome to Open Book. I am your host, Anthony Scaramucci. Joining us now is Patrick McGee. He's the San Francisco correspondent for the Financial Times. He's a bestselling author. The title of the book is Apple in China, The Capture of the World's Greatest Company. What a phenomenal book. And I'll just tell you, Patrick, I was at the Chalk History Festival in England. Okay. So this would be like Southwest England. I was at a table. I gave a presentation. I was at a table. There was a gentleman across from me and said, what are you reading now? And I said, blah, blah. And he said, well, you should add Apple in China to your list.

3:18And so I downloaded it on my Kindle and my Audible. And I started listening to it on the flight back home and didn't stop listening. I thought it was probably the best. It's the best business book of the year. Thank you. Okay, I'll tell you that. And I tell you, I've read a lot of really good business books. So congratulations on that. But let's go to you. You are a reporter and you write books. And you've got the New York Times and The Economist saying that this is one of the best books in the year. I'm saying I think it's the best business book of the year. So what's the formula, Patrick? We have a lot of writers that listen.

3:57What are we doing wrong as a group of writers? Oh, that's funny. I mean, well, the premise of the book was in a sense to take a company that I think we all think we know because of bestselling biographies of Steve Jobs and Johnny Ive and to lesser degree, Tim Cook, but to be able to sort of reframe the whole story just by asking, well, how do they actually make their products? And to be honest, I think it's bizarre. And I indict myself here, along with basically every other journalist that covers Apple, because I didn't do it for four years, with not covering that story. I mean, I think everyone knows that Apple products are built in China, but I don't think anyone's really asked the proper questions.

4:38Well, why are they built there? What did China offer? And frankly, where was Apple building them beforehand? And also, what can we learn from Chinese industrial policy? I mean, there was just so many things that were unanswered. So, I mean, my favorite reviews of the book are people saying, like, why would I want to read a book about supply chains? Or I already know the Apple history. And then just being stunned at the level of sort of novel detail that's introduced really just in the opening pages. But then I think that cadence kind of keeps up the whole time. But to answer your question more directly, I think because the book is really interview based more than anything else, I'm asking people that worked at Apple and often were in the weeds on the ground, you know, actually performing the task.

5:24So it's less about sort of the grand strategy, the likes of Jeff Williams or Tim Cook. It was the people that had to enact the policies on the ground. And I'm sorry, I probably think too many books are based on just like the top five or 10 people who are making the decisions and not on who's actually being deployed into the field making those decisions. And that's basically where the where the whole story is for my book. But it's probably the case for really any business. Well, I mean, there's so much there. I guess what I would say that I loved about the book, in addition to everything you just said, is there's an improbable outcome here.

5:57Apple's not doing well. Emilio's got Apple on the ropes. He's trying to get Steve back to the company. Of course, people are ambivalent about jobs coming back to the company. Michael Dell, who helped me get Skybridge started my company, always regrets saying, if you remember a Comdex. What did he say famously a Comdex in 1970? Do you remember what he said? He was asked, what would you do if you were in charge of Apple? He basically said, I'd sell all the factories, all the assets, and give the money to shareholders. I mean, he thought the company was dead. He said the cash is on the balance sheet.

6:31And of course, what Steve Jobs famously did is when he crossed the market capitalization of Dell, he took those statements and he put them out to all at Apple because that was Steve's personality. But what I mean by the book, though, is this is an improbable story. If you landed from Mars and you started the book, didn't know who Apple was, you said, okay, this company is going bankrupt. This company is in disrepair. It's got a great operating system. It's had some neat forward-thinking technology, but the company is going bankrupt. And then these guys revitalized the company and they returned to the ethos of what made Apple great.

7:11There's a story in the book I'd like you to recant for my viewers and listeners, if you don't mind. And that is the production of the multiple color Macintoshes and how they've got to get them up on the assembly line and then they got to figure out which colors are going where and how masterful that was done by these engineers. That's funny. I've never been asked to recount this question. So how many of the details I know? There's a reason because I'm going to add some narrative to it. But yeah, okay. Tell us about what they did there. So let me say because this is also a Michael Dell story. So let me just say two things about Michael Dell.

7:45So one, I think the reason why Michael Dell's comments hurt Steve Jobs is really that they were accurate. I mean, he was pinpointing something that was really quite true. And I was able to sort of verify that myself. Because one riddle I was trying to solve is that Steve Jobs is actually offered the Apple CEO position, a position he had never had before, right? Lots of people think he was CEO in the late 70s, early 80s. He never was. So when he's offered the Apple CEO role in July 1997, he doesn't want it. He won't take the role. And it's because he thinks the company is about to die and he doesn't want to be burdened with the death of the company.

8:20And then what changes his mind is sort of the subsequent narrative that I'll skip over for now. But that's why Michael Dell's comments hurt. Okay. Dell was the logistics champion at the time. And And this sort of like is the culminating thing that happened over the course of 10 or 15 years where the IBM PC, the whole revolution that comes out of the 1981 computer is that Apple is being bested by companies that are not playing Steve Jobs's game. What he cares about is user interface, the graphic computer, the GUI, the graphic user interface, you know, the usability of it all and all that. And nobody else is playing that game.

8:58They're all doing logistics and distribution on a scale and at a sort of efficiency that Apple's unable to compete with. And that's what's going to kill the company in 96. So when Apple really gets its stuff together and begins making the first Bondi blue transparent computer, but then a whole rainbow of colors based on the Lifesaver colors to some extent. Yeah, Foxconn is able to really engineer the hell out of this and really help Apple. So they sort of out Dell Dell. So Dell would sell a bunch of computers in the same format. But if you wanted to customize them, their distributor would have to sort of take them off the production line and then tweak them on a different production line.

9:37And Foxconn found a way to basically do all the customization on a single line. So it was a big upgrade. But it was an upgrade born out of necessity, because of course, none of the Apple computers really looked alike. You have these five different colors. Nobody had ever done that before. So they found ways of basically like starting the plastic injection molding only when the order was actually placed. So instead of doing like 100 blueberry computers and 100 strawberry variants, you could just do the orders as they came. I mean, this is sort of typical in the automotive industry, but nobody had really done it for the PC industry.

10:09You didn't have to do it in the PC industry because there wasn't enough variation. Apple demanded it. The reason I'm bringing it up is I feel like it gave the company its mojo back in terms of product design and the implementation of the product design through the supply chain and gave them more confidence to explore other products that ultimately became the reason why they're one of the most, if not the most successful company in the world. And so that's the reason I wanted you to bring it up. But you do something else in this book, and that is you explain the people's party. You explain the Chinese Communist Party in the book.

10:52And I'm going to test something on you. I'd like you to either push me back or agree with me or disagree with me. So the United States, we allow China to the World Trade Organization. We're now going to offshore to them because they're effectively the Saudi Arabia of manufacturing. We're going to get a low cost labor from them. They're going to pump out products the way Saudi pumps out oil. But it's good because we've won. It's the end of history. Francis Fukuyama, it's good. And even though they're a one party system, they're embracing American style capitalism and they're going to converge with us.

11:27And we're all going to be one big happy family in the mercantilist capitalist system. But the Chinese have other designs. They end up taking the technology. When I visited China in my 30s, I'm 61 now, but in my 30s, they say, okay, we want to do technology transfer. You've heard that buzzword all the time. That's what Apple did for China. They opened the door to all of this wonderful engineering and all of this technology, and they knocked it off. They've done things, frankly, better than we do. And by your book, I think the number was 28 million. You said that the 28 million people were trained, which is greater than the entire workforce of California.

12:12So react to that. Do I have that right? The Americans thought, hey, we'll use them as a manufacturing center. They'll never grow into a competitive economy. Or did we always think they were going to be a massive economy like they are today? there's a lot of short-sightedness of course on the part of the uh the american politicians but also the american um engineers and and the apple team in particular i don't think we think in terms of 20 25 year increments and i think that actually comes pretty naturally to to china um so that's one thing but it was also that you have to remember there was great success in integrating the world i like this quote where commerce doesn't cross through borders armies do and that was sort of what Pax Americana was built on after World War II.

12:57We didn't have to help Germany after defeating the Nazis. We didn't have to help the Japanese. But we did. You know, the Brits set up Volkswagen, essentially. Volkswagen was born in Germany before the war, but it only became sort of the hippie company that we all know it to be with the with the rise of the beetle and everything afterwards. And it's because the Brits went in and really trained the German factory workers and sort of kept everything going and injected capital where needed. And America did that with West Germany, with Taiwan, with Korea, with Japan. And the result was really building up this like thriving global capitalist world.

13:27We thought we were going to do the same thing with China. But China is a proud country with 5000 year history, with a population that's three to four times the size of that of America, they were just never going to fit into the picture the way that we thought, you know, we thought they're a little puzzle piece that would fit in. They're a puzzle piece that's like bigger than the puzzle, right, or at least half the size. And so I just think that China has a certain pride that never was going to sort of accept the terms of Pax Americana. They want their own system. And it's hard to begrudge them for that.

13:58I mean, it's kind of proper for them to think of themselves the way they think of themselves. And so I do think we sort of made this historic error. But the other thing worth knowing is that we also totally took our eye off the ball. I mean, throughout the 2000s, we could have been holding China to account and really emphasizing the spirit and the words of the World Trade Organization. But instead, the whole decade was spent on war in the Middle East and then reacting to the financial crisis. And during that time, China was just able to think about the one thing, the Nietzschean rise to power through manufacturing.

14:28And in a sense, nobody was particularly paying attention. And I don't even think Apple was really paying attention until Xi Jinping sort of forces them to in March 2013.

14:41It's rough, though. It's a rough story because you have got a Mormon missionary, forgive me, Patrick, I can't remember his name. John Ford, my favorite character. Okay. So he's going to open these stores. And then you have the Gang of Eight, who is trying to figure out a way to placate the Beijing government or the Chinese government. And they're losing. They realize that they have to do backflips for China, and they have to conform and comport to China. So much so that they're telling Jon Stewart, when he joins Apple Studios or Apple Plus, leave the Chinese jokes out of the equation, right? I mean, this is what's going on.

15:22So it's a Gordian knot, the story. It's a story about two people that need each other, but the Apple executives really don't understand the size and scope and the levers that the Chinese government has over them. Do I have that wrong? No, I think that's all right. And I think the thing that people that maybe haven't read the book, but still have thoughts about what's inside the book get wrong, is they'll say, well, look at the iPhone Air, right? And Apple's doing so well. It is the third world's most valuable company. You know, why are you saying that this is wrong? And of course, my point is not that this hasn't worked out for Apple or China.

16:00It's worked out brilliantly for both of them. But during the last 30, 40 years, we've completely hollowed out our own manufacturing capacity. We frankly have hollowed out Mexico's manufacturing capacity. And so there's all this collateral damage or negative externalities to the successful relationship. And the result is that not only is Apple reliant on Chinese high end manufacturing, but basically all Western corporations are. And even when it comes to something like warfare, if it's going to be drones, if it's going to be other forms of gadgetry that involve fabricating semiconductors, you know, Apple's played a large role in facilitating the transfer of knowledge on just a totally epic scale.

16:38And just to sort of throw in the number that if readers aren't familiar with it. Yeah. So Apple has said in its own public documents that it's trained 28 million people since 2008. And actually, the number was updated a few months ago. And I just hadn't noticed. It's now 30 million people because they added 2.5 million, which gives you a sense of a how magnificently large the workforce in hardware, sub suppliers and suppliers working for Apple is. but also the churn, right? If you had 3 million people in the Apple supply chain, but it was only going up by 100 ,000 each year in terms of how many people have been trained, that would tell you that the vast majority of people are staying on every year.

17:14But actually, they're not. You tend to work for an Apple supplier for 8, 12, 16 weeks, and then you move on to something else, and then they have to train somebody else. That's how the numbers get so ridiculously high. I mean, it's mind-blowing when you really think about it. And I don't want to make this political, but unfortunately, there's a little bit of politics in this. And that is the politics, in my opinion, of irresponsibility. And so whatever you think of Donald Trump, there is some kernels of truth in what he's saying. Certainly. That over the last 30 years, we sort of abdicated our manufacturing.

17:51We offshored into places that have made it, I guess, suspect from a national security perspective. One, do you agree with that? And then two, what should we do about it now? So I absolutely agree with that. I like to say that I have a no villains narrative. I mean, if I introduced Tim Cook a few chapters in, it's not a negative portrait. It's an understanding of him being this like master of minutiae who, yes, is the opposite of Steve Jobs in certain ways. But they have some similarities where you can see how they would really work together. A total zero tolerance for B players. An obsessiveness over details where Steve Jobs might be in the product conception.

18:31but Tim Cook is in the operations, how it all gets done, right? Pages and pages and pages of Excel sheets where everybody's going through every number to make sure that it's all going on the trajectory that I want it to go on. Yeah, look, if there's an indictment, it's not really of Apple per se. I mean, the history is really a series of defendable, rational decisions. It's just where they all sort of culminate and where they all end up. But if there's an indictment of something. It's not so rather it's not Apple. It's shareholder first capitalism, really an idea that comes out of like Milton Friedman and the University of Chicago in the 70s and 80s and gets embraced, I guess, initially by Margaret Thatcher and Ronald Reagan.

19:13But really, I think is later embraced by Bill Clinton and a whole host of other people. It really becomes the American consensus. Where we are now is so tricky because I'm like this, you know, happy, happy-go-lucky, you know, golden retriever Canadian. And yet the book is pretty pessimistic. I mean, I just don't think we're going to compete with China in terms of manufacturing anytime soon. And so, you know, my advice to the administration is that, like, take India as a win. Like, I get it that it's perfect if you can decouple from China and the jobs go back to like a district where, you know, you need more votes and such.

19:48But just decoupling from China alone is a win. So if you can get stuff made in India or made in Mexico, like that's that's sort of good enough, as it were. So I highly disagree with the idea that if it's going to India, we're not benefiting. I think we are because we do care about the global order, not just the 50 states. So so there's there's that. The other thing is just a recognition of all the ways in which the jobs just aren't going to come back here. I mean, Zhengzhou alone, what what I what Apple calls iPhone City has 400000 people assembling iPhones. Like there's just no place in America where that's remotely even close to happening and it's never going to happen.

20:23Maybe, maybe you could talk about special economic zones where people that are fleeing Honduras wanted to get over the Trumpian wall and need a need a job in a desperate place or in a desperate situation. Maybe they could go set some special economic zones where that kind of work could be done. But I don't hear anything about that sort of thing. Um, so I think the quicker we realize that the jobs aren't coming back to America, the more we're going to have practical policies in place. And so unless you want China being absolutely dominant and even more dominant into the future, then I think we need to be supporting efforts in Mexico and the and in India.

20:58Some of it should be in the United States, to be clear, but the whole gamut is not going to be there. And and and I don't like the idea that that has to be the answer because it's such a fanciful answer that it's just never going to happen. You're just setting yourself up for failure. So listen, it's very well said. And you make these points in the book brilliantly. Let's go to the apple squeeze, as you call it. What is the apple squeeze? Explain it to us. And what's the significance of it? Yeah, this might be the sort of biggest contribution to Apple history in the book. And it sort of takes place in a slow burn way until eventually I coined it the apple squeeze.

21:32But I go back in history a little bit. It's Terry Guo of Foxconn. And he founds this Taiwanese assembly giant in 1974. And he is the first person to really understand that working with Apple is ridiculously difficult because of the challenge of their aesthetics and the demand for no tolerance in engineering, etc. But he understands that the challenge is the opportunity, because in order to get to Apple quality levels, Apple will train your entire workforce to get there. And so, yes, they have these ruthless negotiators that really negotiate a hell of a deal. So your company is really not going to be paid very much.

22:14But the intangible payments of the training, right, the sort of tuition free on the ground hardware equivalent of Ivy League training that's going on. That's the value. And I don't think the Chinese suppliers really get that writ large until 2016. And the value of this is massive for Apple politically, because when Xi Jinping comes into power in 2013, it really goes after Apple through the CCTV. So this is a big episode where Apple gets scolded for three continuous weeks, where they really worry that they're going to be blacklisted like Facebook or Google. They're worried about all their operations in the country, plus a$20 billion business that they built up at the time.

22:49And the Apple squeeze is Apple's argument to Beijing, which is it's true that loads of suppliers are being treated in a really dictatorial way and they're not getting much money out of it. But you don't understand we're training the hell out of hundreds of factories across the country. So, no, we don't have a technical joint venture where sort of half the company is Apple, half the company is Chinese, and they're learning the ins and outs. But while Samsung has maybe 35 of those relationships, we have hundreds of relationships where we're training up all these factories. And the result of those factories training is that they are going on to then use those skill sets, right, use that machinery in some cases, and they are supplying to Huawei, to Oppo, to Vivo, to Xiaomi, etc.

23:33And so my argument is essentially that Apple ends up being the biggest supporter of Made in China 2025, which is Xi Jinping's ambitious plan to sever dependence on the West. That's sort of an extraordinary claim. I think it's pretty well backed up in the book. And so just to simplify greatly, the Apple squeeze is we're not going to pay you much, but we're going to train the hell out of your entire workforce. Yes. And it's going to lead to tremendous amounts of positive externalities for the Chinese government and the Chinese workforce and disposable income in China. So it worked out really well.