Apple in China: The Capture of the World's Greatest Company | Patrick McGee

0:00If you think about that Peter Drucker statement, what gets measured gets managed. I think Tim Cook is the epitome of that. Tim Cook is known as Mr. Spreadsheet. But things that can't be measured, I think that's the big blind spot. Apple's not big enough to have killed Nokia. Market share-wise, the iPhone has never been more than 20 % of the global market. So who has more than 20 % that they can actually take on Nokia? If you remember 1990s computers, usually they were even made such that if you got the parts backwards, like, it would still fit. It's an idiot-proof manufacturing assembly. Apple is nothing like that.

0:28Apple makes things that are actually opposed to sort of general manufacturing standards because they want to make things so difficult to copy and redefine the aesthetics of a computer. What attracted Apple to move to China in the 2000s was not tech competence. It was just abundant labor, the cost of that labor, and an industrial policy that was very welcoming to foreign direct investment. Tim Cook actually goes to Zhang Lenghai, I could think of it as the White House of China, to demonstrate that. And then they multiply that number by five with$275 billion. and they say that's how much we'll invest over the next five years.

0:58And those numbers are so staggeringly large that I compare them to the Chips Act. That's$52 billion over four years. So Apple is spending a Chips Act per year. There was another stat that there are over 350 million floating workers around China.

1:21Patrick McGee, welcome to Sorcery. Thanks, Molly. We have another Irish tech media person in the building. I guess so. Later today, we have Paki McCormick, and there's like a running joke online that Will O 'Brien started that there's an Irish cabal trying to take over tech. It's funny. When I've actually been in Ireland, my Irish credentials go out real quick. I don't feel very Irish when I'm there. Me neither. My accent isn't too good anymore. Yeah, knowledge of history and everything. So we have a lot to talk about today. We're at Reindustrialize. We're talking about America and rebuilding the American industrial base.

2:02For you, you wrote Apple in China. So you know firsthand the magnitude of scale of what real manufacturing could look like if taken completely seriously. I think to start, I want to put it all in perspective. One of the glaring stats that I got from your book and some of the research around it was how much Apple has invested in China. Could you put some dollars behind that? Yeah, it's hard for me to do it without giving a bit of narrative. So stop me if I'm giving too much of a whole story here. But basically what happens is that when Xi Jinping comes into office in 2013, Apple is by far the biggest retail company operating in China.

2:42and more importantly it's the biggest operators the biggest production giant so it's sort of cracked the market in two different um cases but xi jinping and the hardliners in beijing sort of don't understand uh what they're contributing to the country and they're basically like threatening to blacklist apple um and so apple begins this like apple sort of has a wake up where they realize that we don't understand china we don't understand the politics we don't understand the culture and so they send over or hire like China experts and people that know China for the first time ever. So at that point they'd been in China for two decades, but they'd just been flying in and out of the country, having these engineers fly into factories, sort of teach engineering 101, build up all these products and really train, train, train, audit, supervise, put in the machinery.

3:27And we're spending billions of dollars on this sort of stuff, but no one in Beijing really knew that because Apple's a secretive company. And so when the hardliners come in and begin sort of threatening Apple, it's a real wake-up call and they basically spend a few years figuring it out and then they flip the script and instead of basically like saying okay we'll set up these joint ventures where we're specifically sort of having like a 50 50 company that's that's half chinese and then you'll learn that way they do their own supply chain study sort of apple internally and realize that they're investing 55 billion dollars a year into chinese factories and once they've sort of established this and they realize like how much that could mean to local and federal officials, they sort of present that.

4:11So Tim Cook actually goes to Zhang Nanghai, the sort of citadel of Chinese communist power, you could think of it as the White House of China, to demonstrate that. And then they multiply that number by five, so$275 billion. And they say that's how much we'll invest over the next five years. And those numbers are so staggeringly large that I compare them to the CHIPS Act. If you remember, that's Joe Biden's plan to bring back chip fabrication to America. that's$52 billion over four years. So Apple is spending a chips act per year, you could say. And I compare it to the Marshall Plan, because if you take the four-year spending of the Marshall Plan and convert to$2015, you get to$130 billion.

4:49So Apple was pledging two Marshall Plans, if you will, to China. And one thing that people don't understand when they hear that figure is that's only the five-year figure. I mean, you would get to closer to a trillion dollars if you just sort of took 22 % of revenue, which is what$55 billion was in that year, and just sort of use that as a sort of, you know, back of the envelope math, back to 2007, the birth of the iPhone, and you took it all the way to 2025. You'd get above$800 billion. So Apple's investment into China has been absolutely staggering. And sort of the basis of the book is that that's quite a geopolitical thing once you consider that China's like America's great adversary in the 21st century.

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6:02With same day and even same hour liquidity, access your funds anytime. Companies like Scale AI, DoorDash, Service Titan, HIMSS, Anthropic, Flexport, Robinhood, and Plaid trust and use Brex. Start today at brex.com slash sorcery. That's B-R-E-X dot com slash sorcery. There are many ways we can go off of this, but I think to start, it would be good to lay out why Tim Cook made that decision in the early days. Some people would think it's like directly related to margins, but I think there was more to that. Yeah, to be fair, I'm actually pretty sympathetic to why Apple is manufacturing in China at all, and then sort of why they get squeezed in the early 2010s and make those decisions.

6:47So I like to say about my book that there's no villains in the book. If it's an indictment of anything, it's of shareholder-first capitalism, a sort of operating paradigm that probably goes back to Milton Friedman in the 1970s. You know, just the idea that what a business is meant to do is to make profits. But I mean, in the early 2000s, when China entered the World Trade Organization, it was not even just like a bipartisan consensus. It was like the American worldview, that it was perfectly okay to send your manufacturing abroad, because by having that sort of trade, you were building this like integrationist world where we were sort of all working together.

7:19And that was going to be good for everybody. So like, there's this nice quote, it goes back decades, I don't remember who said it, where commerce doesn't cross borders, armies do, right? And so that was sort of instrumental to the building of Pax Americana, you know, why we invested in Germany, Japan, Korea, Taiwan, and turned those countries, helped turn those countries, I should say, from authoritarian countries in various ways, to thriving democracies. And the idea was that we're going to do that in China as well. So Apple is just caught up in that trend. If anything, they're late to that trend.

7:51And you can't really blame them at all for adopting the outsourcing model, because without it, they would be bankrupt. I mean, the book begins after a pretty fun prologue. They're days away from bankruptcy. And it's because they're building everything themselves. That's in the DNA of the company. And they have to make a change. Otherwise, we wouldn't know who Apple is today. In terms of what that has resulted in, and kind of an effect of the severely intense manufacturing capabilities of China. There was another stat I pulled that there are over 350 million floating workers around China. So could you explain what that means and what a floating worker is and like the real depth of their capabilities?

8:35So the capability question, let me come back to that because I would sort of push back on it or try to elaborate a little bit. Well, actually, maybe I'll address that quickly. Really what the novel sort of narrative take of the book is, and I really didn't know this until I sort of published an article that became the kernel of the basis of the book pitch, is that what attracted Apple to move to China in the 2000s was not tech competence. It was just abundant labor, the cost of that labor, and an industrial policy that was very welcoming to foreign direct investment. And so they would build factories very quickly.

9:10But it wasn't like they knew what to do. Nobody could respond to Apple's demands, even in the more sophisticated countries at the time, like Japan and Taiwan. But China certainly couldn't. And so Apple's solution wasn't like, well, we'll just wait for them to get better. It was, why don't we send plane loads of engineers to dozens, and then today hundreds of factories across the country to train all these people to get to our level. And so they will sleep on the factory floor. In fact, someone with Apple experience at Reindustrialize talked about sleeping on the factory floor yesterday for the building of the Apple Watch in 2015.

9:39So this is how they got the Chinese up to the level of competence that they needed. So to some extent, you can think of the Hollywood version of Steve Jobs, who like yells and bullies and berates people, but he also brings up everybody's competence around him. My book is that, but instead of it being 12 people sort of in Cupertino, it's that they had to do that across hundreds of factories in China. So when you talk about the tech capabilities, I just want to be clear. The tech capabilities aren't there. Apple builds them. So that's sort of the fundamental part of the narrative. Now, what was the other part of the question?

10:07I wanted to answer that too. The floating workers. Floating workers, yeah. Yeah, this is wild. Okay, so in China, and sorry to get all wonky, there's sort of a dual, not sort of, there is a dual citizenship structure within China. If you were born in a rural area, you can live temporarily in a place like Shenzhen or Suzhou or Shanghai, but you don't have the access to federal benefits or provincial benefits. You can't raise your children there. Unless you have the money for them to go to private school, they're not allowed to go to public school. And so this population is known as the floating workforce workforce because they're rural they have a rural hookah household registration and they can only be in those places at temporary times and so they tend to follow the work sort of seasonal work but i don't mean like autumn versus winter i mean like iphone production and so they'll take a job that might have them working on an iphone production line for eight weeks or 12 weeks or something like that and then either they move within the factory to you know sony production instead of apple but still a foxconn or they just go to an entirely different factory or entirely different city.

11:05So they get called floating for that reason. And yeah, the number of floating population in China is larger than the number of Americans in the world. So it's really hard to compete with that because these are sort of low labor, low cost people that are basically discriminated against at the state level to the benefit of multinationals who are able to exploit them as well. And they're going from one place to another and basically are temp workers. So they're not on your balance sheet the entire time or something like that. In today's high speed business world, Staying ahead means using the smartest tools possible, including the powerful capabilities of artificial intelligence.

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12:18Oh, well, so this is where Apple sort of cracks what's possible in the market. So again, Apple is late to going to China. Companies like Dell, HP, Motorola, some of those companies go back to the 1980s, like well before China enters the World Trade Organization. My argument, which is just coming out of sort of like, you know, like, re-saying what Apple people told me, is that whereas other companies were building simple products, if you remember 1990s computers, they were just these beige boxes that could easily snap together. In fact, usually they were even made such that if you got the parts backwards, like it would still fit.

12:51This was called poké-yoke in Japanese, like it's an idiot-proof manufacturing assembly method. Apple is nothing like that. Apple makes things that are like are actually opposed to sort of general manufacturing standards, like like the term that gets used is DFA designed for manufacturing, right? You design things from the get go so that they're easy to put together. Apple does like anti DFA type stuff, because they want to make things so intricate, so difficult to copy. And they like redefine the aesthetics of a computer. So if you if you can remember the tangerine colored iMac or the Bondi blue colored iMac I mean nobody knew how to do plastic injection molding that built that sort of computer before and so in order to do that you're not sort of using existing machines or something like that you're using like the nimbleness of 400 ,000 people assembling something on a production line I'm saying 400 ,000 figure that that's more for the iPhone era not the iMac era to be clear but basically they exploit the idea of how many people there are at the labor rates that they have, below 50 cents an hour at the time, working 12 hour days.

13:55And they set up these conveyor belt production lines. So you just didn't need that if you were Dell, because you weren't doing anything fancy in terms of how to put together some latitude computer. Whereas Apple, over and over again, was redefining what a computer looked like. My joke about this is to ask people what their favorite HP or Dell computer from the early 2000s was. And of course, their eyes glaze over, they smile, because there's no such thing as a favorite computer from that time. Whereas we could spend the rest of the podcast just discussing our favorite Apple computers from the early 2000s.

14:22So they really were doing something fundamentally unique. And that's worth emphasizing because sometimes when people haven't read the book, they say, but you're picking on Apple, why don't you just write this about Dell or Motorola or anything? And it's like true, they're all in China, they're all investing in some degree, but nobody is training the workforces the way Apple was because nobody was designing computers the way Johnny Ive was. Wow. Yeah. And so within the conditions of those factories, What is that like? Oh, I mean, just in terms of them not being great jobs? Yeah, I mean, a former senior vice president of Apple told me that he would never be able to do the job of a normal laborer in a Chinese factory.

14:58Yeah, Foxone's not a great place to work. Let's see. You're not allowed to speak. You're not allowed to smile. You often have 9 to 11 seconds to perform your task, and it's just grueling work with a couple 15-minute breaks for 12 hours a day, often six days a week. I do push back against the idea that this is slavery however you know iSlavery became something that that became a term of art after 2010 when there were a number of suicides at Foxconn and the company's response to this was awful I don't know if you know they they built like nets around the factories and basically asked this is Foxconn not Apple asked workers to sign pledges that they wouldn't commit suicide I mean conditions have to be pretty dire and your response has to be pretty awful for that to be the actual policy for a company with literally more than one million workers at the time.

15:49But you have to remember that the people working in those jobs are coming from the rural hinterlands, where if they don't take those jobs, they're working 14 hours a day rather than 12 under the hot sun toiling in the fields. So you can't just sort of put an American perspective on what it's like to work in those jobs, because of course, you and I wouldn't take those jobs. It's quite different if you have a rather desperate circumstance in Western China. So the number of people that would apply for a job, if a factory job, if a Foxconn factory opened, I mean, it would go around the block. So, you know, I think there's something, I don't know, Eurocentric or whatever about thinking of it just as eye slavery.

16:26I mean, after all, my narrative is not a book about Apple exploiting China. It's a book about China exploiting Apple, right, and getting technology transfer through these arrangements. so a certain sense I don't think you have to feel bad it's sort of like understanding our own history of 200 years of industrialization and how China can press that into a single generation or at least into 40 years and sort of the good the bad and the ugly that we talk about going all the way back to Charles Dickens that's what China's done just in the last four decades. Are you worried about their copying strategy do you think that even matters anymore are we just two separate entities.

17:05I absolutely worry about it. I mean, part of the narrative is that Apple didn't worry about it. I think they had a certain hubris that they could always stay one step ahead. And they absolutely could in the early years of the iPhone when Johnny Ive really was changing the design and improving it. But at a certain stage, you got yourself a six inch glowing rectangle with an infinity pool like design. I mean, there's no sort of step beyond that that Apple has to introduce. And so to some extent, it's just easier for the Chinese companies to catch up. But, you know, one argument I make is that we often think of Apple killing Nokia, that Nokia couldn't keep up with the touchscreen and software features and such.

17:42And I say that, like, just look at the numbers. Apple's not big enough to have killed Nokia. Market share wise, the iPhone has never been more than 20 % of the global market. So who has more than 20 % that can actually take on Nokia? It's the Chinese competitors. They have 55 % market share, right? So you couple that with Apple, couple that with Samsung, you basically get to 100. So it's those companies that are able to kill off Nokia. And how do they kill off Nokia? Well, Apple trained all of their suppliers. And then the suppliers in turn supplied Huawei, Xiaomi, Oppo, Vivo. So that's why Nokia couldn't keep up.

18:11It's that China had this amazing ecosystem built for the smartphone industry, all paid for by Apple. Because we've built up so much tension with China over the years. What would you do if you were CEO of Apple right now? What would you do if you were Tim Cook. My subtitle is that Apple's captured, right? So I don't think they have any great moves. To sort of steal a line from Henry Kissinger, we play chess in the West, which means that when we have war, when Trump goes after Huawei, it's sort of like a go after the king mentality. And you want to like knock that piece over and like be done with it.

18:46Like one decisive move. The Chinese don't play chess. The Chinese play Go. And if you're familiar with Go, and there's a great documentary called Alpha Go about computers playing this game from 2016 that I highly recommend to anyone listening. And in Go, you encircle your enemy and there is no decisive move. It gets to the point where the opponent actually just has to give up and realize that they don't have a strategy. That's where I think Apple is right now. I don't think they can move to India. They certainly can't move to the U.S. Their production plants are basically encircled by Chinese competitors that they themselves created.

19:17And they're in a position where they can't make any good moves. I don't know what I would do if I was Tim Cook. What key principles would you take from China's manufacturing strategy buildup for America as we think about reindustrializing? I don't know if this will quite answer your question, but I keep getting asked this question by like MBA type minds. I know we just met, but like I studied religion at university and like global diplomacy. Like I don't have necessarily a business mind. So this is what I've come up with. You tell me if it's any good. Tim Cook is known as like Mr. Spreadsheet.

19:50I have this funny anecdote where the first time he really took over a meeting that usually spent two hours going through the weekly data, it went for 13 hours because he just had this mind of like insatiable demand for detail. And he taught that to all of his underlings. And not everybody on his team had glasses when Tim Cook arrived in 1998. Within a few years, everybody had glasses. And it's because they were going through this like special larger paper, just going through myriad Excel sheets of like supply demands, you know, not just for products, but intricate components. I mean, there's 1 ,000 components in the iPhone, and they would just be going through all of this stuff to sort of master the global supply chain.

20:27What I worry about is that, you know, where do you put we are uparming America's biggest adversary on the Excel sheet? What column is that, right? So if you think about that Peter Drucker statement, what gets measured gets managed. I think Tim Cook is the epitome of that, both in the sense of they have amazing margins and product portfolio and everything that you can put on an Excel sheet. But things that can't be measured, I think that's the big blind spot of Tim Cook. As we wrap up, I have one question I really want to ask you. So this is a Calci market. What kind of device do you think that Johnny Ive and OpenAI will create?

21:07Yeah, no, it's a great question. So let me first just say something nice before I maybe go the other way, which is just that Sam Altman, in terms of his products over the last three, four years, have blown my mind and probably blown your mind and everyone's mind. So I wouldn't bet against that guy. And Johnny I designs like every product that's on my desk on a daily basis and the computer that you're having right there. So the combination of those two really brings back the vibe of like a Steve Jobs, Johnny I type thing 25 years ago. So I wouldn't want to bet against them. And I'm looking forward to them coming up with something that I cannot imagine as a journalist rather than a technologist with those sort of pedigrees.

21:42On the other hand, the best chips in the world year in, year out are in the iPhone, right? To someone that doesn't know anything about chips, they must think that they're probably in a fighter jet or something like that. But, you know, TSMC is the most sophisticated fabricator of chips in the world. Apple is their largest client. And the most cutting-edge chips every year are in the latest iPhone. So what can Johnny Ive and Sam Altman do that would live and exist in a hardware product that wouldn't actually perform better on the latest iPhone? I don't know the answer to that question. So people have talked about it being a pen, something that goes around your neck, some sort of pendant or whatever.

22:19So I get it. It's not going to have a screen. It's some sort of hardware thing that you can speak to. But why wouldn't it just live as an app? In other words, once they come up with that technology, why would you build prototypes of the hardware and then try to scale to 100 ,000? That would be a big feat. To a million, that would be a big feat. When there's already an existing user base of 1.5 billion iPhones, I don't know the answer to that conundrum. So I'm not saying it as a criticism. I just don't know how they get around that. That's a really interesting answer. I think it becomes an iPhone app.

22:49Okay. Wow. That's a hot take. Yeah, well, okay. I hope so. Straight to iPhone app. Do you think they'll manufacture this in China? That's a huge question. So of all the people that would read my book and probably wouldn't learn much, it's got to be Johnny Ive. I mean, he was in and out of Chinese factories all the time. He would know far better than a journalist merely talking to his underlings what it was like to train these forces and what the impact is today in that we can't build in Texas or Pittsburgh, but the Chinese absolutely can. Whether he thinks that's a problem, I don't know. Whether he thinks it's a political problem, I don't know.

23:26But I would love for them to try to build, if not here, because I'm not all that optimistic that you can build here, unfortunately. I'm hoping to be here this week at Reindustrialized to shake that pessimism out of me. but maybe at least in Mexico, because I would really love to see like a NAFTA on steroids or maybe in India or maybe just in Taiwan. And at the levels that they're going to be doing these things, Taiwan is actually probably a pretty natural choice. But if they were to scale, yeah, I would love for them to come up with something that isn't in China. But imagine what they're trying to do, right?

23:56If they're trying to compete with Apple, it's kind of like fighting with one hand tied behind your back if you're deciding not to build in China. I mean, that's just the reality. Wouldn't that put them at a disadvantage though? because Apple could just copy straight from their factory. But I guess you're assuming that Apple doesn't have the clout to sort of open up whatever device they make and have a deep understanding of how to do it in the first place. I've just heard from people that manufacture in China that people go to different factories and take the patterns, the blueprints, all that.