How Apple Became So Reliant on China & What it Means For Their Future

0:00If you look back in 1999, it's like completely upside down from today. As Tim Cook says, people think that China is about cheap manufacturing. But it's the skills they have. For the global view of trade, it was working exactly as planned for everybody. All the experts in 1999 were like two things. Yay for global trade. This is what we all want. And also, don't worry. China, they're going to stay a third world dictatorship forever. They couldn't have been more wrong. What if the rise of Apple also built modern China? Today's guest is Steven Sinovsky, board partner at A16Z in former president of Microsoft's Windows division.

0:43He led major efforts behind office, Windows, and introduction of surface, and he's one of the sharpest minds in tech. We kick off with reactions to WWDC, Apple's new UI, the iPad's big software shift, and why Apple's AI story still feels unfinished. Then we dive into the heart of the conversation, Apple's entanglement with China, how it started, what it enabled, and whether it's now a strategic liability. Let's get into it. As a reminder, the content here is for informational purposes only, should not be taken as legal business, tax, or investment advice, or be used to evaluate any investment or security, and is not directed at any investors or potential investors in any A16Z fund.

1:23Please note that A16z and its affiliates may also maintain investments in the company's discussed in this podcast. For more details, including a link to our investments, please see A16z .com forward slash disclosures.

1:40Steven, I've been looking forward to this episode because this is a full circle moment for me. You were how I got introduced to A16z. You were on the board of product -tunt over 11 years ago, which is how I was introduced to you in the firm and I'm glad to be back in business together. I could be more excited for us to be working together on this one and then more in the future, I hope. Exactly. And yeah, definitely a reunion of the sorts. Absolutely. So for those who haven't been longtime fans of the podcast or the firm, you've been aces to see for over a decade as a partner, etc. And before that, you spent many years at Microsoft helping lead both office and windows.

2:14And you helped to choose the service PCs, which is relevant to the conversation we're about to have. So we're here to talk about Apple, you know, it's part of the book Apple and China, but first let's briefly cover WWDC what reactions are how it takes what we have from it one of the exciting things about this book is that you know Lots of interesting things to talk about with Apple But WWDC is you know, they're big yearly developer event. Of course, it's always disappointing You know, we're here to talk about supply chains on China and gadgets, but there's never any gadgets at WBC really but Lots of big things to talk about.

2:46I mean, it's a remarkable event It's a remarkable platform that's been doing yearly releases for 26 years. It blows my mind. What they've done in the scale that they operate at. But I think there are three big things that came out of it. The first was obviously the big push. It was also the big reaction, which was called liquid glass. And it's the new user interface design. So having gone through multiple big user interface redesigns of widely used products, although to be humble about it, not one used by a billion people. The reaction is extremely predictable, which is a bunch of people that has just explode and they don't want it, they don't like it.

3:27You could always tell they dive in immediately to what problem does it solve? So if there's change, it must solve a problem. But there are lots of reasons that designs change. And then there's the reality, this was the developer conference. So it's not done. and Apple is very, very good at finishing these things. And all the bugs and all the issues I can't read it, it's blurry, it's noisy, those will all get fixed. You know, and what's left is it great and is it unique enough. And time will tell, I basically have reserving judgment and not joining in the hysteria on either side. I have no need to defend it.

4:04And no need to say it's the worst thing to happen to computing, you know, since turnery processors or something. The second thing that I thought was huge personally was just that the iPad gets windows with a lower KsW And I think that's just Fast -sounding like 12 different ways, you know, it goes back to the original toaster refrigerator comment or the iPad is different or Steve holding the iPad only like this because it was a book and It's just a recognition of who uses it and what they use it for I worry. It's a little late like I think a lot of people have made up their minds about what to use where.

4:42Now the iPad sells an enormous number of units and people who don't use them don't understand that they sell more iPads, you know, than the laptop run rate in the US. It's a big number and they're enormously popular with different segments. It'll be interesting to see how this plays out. The weirdest thing about it is, you know, the iPad is a Mac. Yeah. The Mac is an iPad in terms of the hardware. And so you're really talking about a difference in software and how they deal with that over time and what apps run where and where is the experience is going to be super interesting. The third thing was more an active omission and commission in which was AI right and the whole event sort of started with Craig like apologizing not really apologizing but in an apple way which was like it took more time than we planned.

5:31So we're not gonna talk about it anymore. Yeah. And I personally think that, you know, months ago when they, with a great fanfare launched all these AI features, that was out of character for them. They announced a bunch of stuff that they weren't done with yet, that they hadn't baked. It was the right stuff, but they didn't capitalize on it to be polite. And I think what they're probably doing is saying, we're not really good at this pre -announce, catch up to our own announcements thing, which of course I grew up doing. So I'm like completely comfortable in that world of just make stuff up and hope you catch up where people forget And so I think that they're back to like we're not the first mover company We're the first integrator company and they're gonna just sit back and watch the technology mature a little bit more, but they do have a Whole in a perception sense, which is Siri and what they're gonna do about that and to not talk about it very much is interesting A lot of people commented on those sort of the failures of Apple intelligence or just Apple's sort of inability to capitalize on this innovation.

6:34We just saw Meta, you know, purchase 49 % of scale. So they're making some big moves. How do you make sense of Meta's move and could we see Apple do a similar type of play where they sort of buy the talent in house? How do you think about that? I think what Meta is doing at the very least, it's great for AI. Yeah. You know, I'll let Meta decide how great it is for Meta or whatever. But it's great for AI. And the reason is is that if you go back, the way platforms have been evolving, you know, in mainframes IBM had 100 % in PCs, Microsoft had 95%. Then you start getting out there and then in servers actually ended up being like a best case 5050 and it's been downhill and it's all Linux.

7:14Now in phones, you have this split, you know, 80 20 globally, but you have to really dig down by country where it's 80, 20 the other way. And in cloud, it's very likely we're going to end up in a 40, 40, 20 kind of world. And so AI, it's almost inconceivable that there'll be one winner. And the overlay is China and how that plays out. And the mobile industry is a really good example of how difficult it is. You know, the smartphones, so to speak, Japan had this huge lead in this thing called eye mode, but it only existed in Japan. And so they were leaders in technology and experience. They had all these micro payments, all this stuff, but it didn't go anywhere outside of the country.

8:02And so the biggest risk to AI is that either someone tries to think it's only one player, which at times the federal government has acted like that, or one player says it should only be us, which there is a player sort of claiming that, or it gets geographically constrained. It doesn't matter which one of those might happen. To prevent any one of them, you just need a lot of players operating a huge scale. And so in the startup world, you have Anthropic and you have OpenAI, you know, and you have pure open source, you have Meta, then you have Microsoft off and Google. So we have like innovation happening on all cylinders and all fronts, which is great because the competition, you know, is basically making the call that it's going to be one and it's sort of going to be this government driven approach.

8:51It might not be one company, but it will be one approach that sort of sanctioned in some way. It'll be interesting to see how that plays out. There's nothing better than more and open for AI right now. It's worth just commenting on the market structure point because when we look back at the last few years of our sort of growth investing in this category, we've been very aggressive, but we regret not being even more aggressive. And because one of those principles was, hey, we want to back the market leader. And so when you see a second -place company, we're like, hey, it's not the market leader, but in this market, as you mentioned, it's not winner -take -all, or just the market is so big that even the second place, the third place can be, you know, generational companies.

9:27Right. And we're not even at the point yet where I believe we'll get, which is the initial go -to -market has all been this cloud -based thing, but there's all these challenges with that, like privacy and security and cost. And so the idea that we would voice variable cost on the entire world of software, very tough for me as a fixed -cost low -price volume mindset to think we'll sustain. So I think there's a whole wave of AI on the edge that's going to happen, which only benefits from open. There's nothing but positive to say. Does it make sense to look at this Alexander Wang or this sort of scale as something of like a $15 billion aqua hire of Alex plus the top talent at scale?

10:07And if you're advising Apple, do they? Or even some of the other big incumbents need to do something similar. Obviously, Microsoft is listed with OpenAid to begin with. But if you're Apple, how do you think about how to play here? Well, I think, you know, the two plays are three. One is going to be the sort of the weird partnership dance play that Microsoft and OpenAI have. It seems obvious that at some point, Microsoft will have much more first -party software. We have always made our play by just having everything, which is Amazon. Anything that comes out, they're going to end up supporting, which is just how retail works.

10:41You get all the cereals, not just fruit loops. Then I think there's just where we're going to go it our own way in a sense, which is Gemini taking their approach or open AI itself or anthropic itself. And I think that Apple needs to pick one. You know, they did announce like, Hey, you can call any model through our API. But the real thing that Apple needs to do is figure out what model is going to be tuned to run on their unique hardware on the edge and their unique offering or constraint, depending on privacy, and how that plays out. And just to evaluate one of those paths, if Satya could go back in time knowing what he knows now, do you think he might have done something, or would you have considered doing something different?

11:22I should be thinking about how this has worked out for Microsoft. Oh, these are tricky things. You can't ask me questions about my friends, but I wouldn't, putting you aside as advice. I would say, I genuinely, to those listening, I do not know anything that's going on. But Microsoft has been involved in AI research. Since 1993, they were the first hires into Microsoft Research when the labs were formed. I was working for Bill way back then. And, you know, Sacha worked closely with those researchers when he was the manager of the Bing team for a while because that was the cornerstone of what Bing was doing because that's what Google was doing in say, 2006, 2007 and something like that.

12:01And I think that I would not be at all surprised. I don't know anything. I swear people, you know, that there's some first party thing that they're just trying to figure out when and how good does it have to be. because if you are Microsoft, it turns out that like the strength of Microsoft is that you never have to be best. You just have to be included. Yeah. And so it's likely that that will be their play. That's generally how enterprise software works. It's the inclusion and the bundle that customers value and pay lots of money for. Yeah. Not being the very, very best in a given moment. Right.

12:35It's fascinating how all the big players have kind of crystallized their approaches and response to each other. Oh, yeah. as a pro -gag... Anyway, I want to segue it to the main focus of our conversation today, which is not a book review of Apple and China, though. It's a great book, but inspired by the book. There's a few things I just want to say. First, just the notion that I believe they said Apple invests $55 billion a year in China, and I think the author said that's equivalent, or maybe even bigger than the entire of the Marshall Plan. This is just astronomical. This book talks about how Apple not only built its company in China, but also helped build China itself.

13:07China's sort of manufacturing economy and introduced the level of talent and knowledge or sort of taught China not just how to build phones but that same sort of knowledge then led then to help build Tesla, which are phones on wheels and then led to other technologies used for the military, which we'll get to. But first I just want to ask, was this inevitable? Did this make sense at the time? How do we make sense of this 20 years later? How did this all happen? It is crazy how it all happened. I mean, I think you go back. Of course, Apple, we all know it was in the garage in Palo Alto. So they famously built the computers there.

13:38But the thing was from the very beginning, Apple itself was all about super tight control. I mean, first you had Waz basically creating works of art on the motherboard. And then they built a factory. There was the factory right here, and that's where they built computers. And they just kept doing more of that. Tight control, build the whole computer. Then Steve left Apple. Macintosh of course was famously the same thing. and Steve pushed and pushed on costs and the shape of it made the famous poster that you carry around and things like that. But after Steve left, the company had enormous difficulty competing with the IBM PC.

14:16One of the things that it did later in the late 1990s was a super innovative laptop. Now everybody's like, what is the innovative laptop? Me and well, it turns out in the late 1990s, laptops, nobody bought them. Yeah, they were slow, expensive, bad computers. They were just portable. That was their big thing. And if you had to have one, you did. But they built a thing that was the original portable for Mac, called PowerBook. And they tried to cram a lot. They tried to make the best laptop possible. And in order to do that, they ultimately were hitting the limits of manufacturing in the US. And so, Jean -Louis Guasset, who was running the Macatosh business at the time, He was very famous French executive for Apple, that Steve hired to run Apple France, working for Scully.

15:04He actually pushed to do an experiment of partnering with Sony in Japan to build a power book. And so the original power book line had sort of three computers of different sizes, power, or whatever. And the one model was done as a joint design effort, which was just incredibly brazen for Apple culture to like break out like that. And they did. And like it came back and the people Apple were like, wow, man, this is not so bad. You know, and it wasn't the best selling model a lot of complexity. And you could read all about it in this book or other places. But a light bulb went off. Maybe this helps us solve some of our constraints.

15:40Now they had other constraints. Like the chips were wrong for the Mac. The PC was like half the price. Like a lot of problems they had. But it was like a wow moment. And that was really interesting. But they were failing at computers. Tim Cook joins Apple in like 1997 and he comes from IBM and at IBM he was about making PCs and He shows up and he's already working this whole kind of world of supply chain and all the social media then later goes to Compact which is a famous Texas -based computer maker and Really helps them drive that whole motion of building in China and I'll talk about that maybe in a minute but The thing that gets built by Apple then in 1999 is this iMac G3.

16:30Now, most people aren't old enough to remember it, but it was this sort of gum drop shape, translucent, Johnny I've creation. And you look at that and you're like, wow, that's neat. And you're like, no, no, you don't understand. It was impossible. Like every element of that computer couldn't be built. Not just the stuff that they left off, like it didn't have serial ports and parallel ports and all this other stuff, but it was like clear plastic. The computers came in gray, stamped aluminum metal boxes with screws, and this was like a toolless, fanless, like amazing thing. And it was all done through this kind of China -based manufacturing stuff, but it was done in a very unique way at the time, which was the Apple people just went there and smothered the manufacturing line every step and samples back and forth, and this whole deal.

17:17And I'm glossing over a very complex timeline of events. It sounds a little bit more all -or -nothing in sudden, but it's a very gradual transition. But this product was huge. And then the next one was the iPod. And so now they're already comfortable with this model a little bit, but the iPod, all of a sudden the assembly of it starts to look like almost go war games, screen of all these incoming things. Because it's like a described invented in Japan, manufactured in Thailand, and all the stuff is coming together and all the parts that click wheel and everything are in China. And it's all of a sudden being made in one place in this incredible form factor.

17:55If you were to look at the other media players at the time, they were these big honken plot. They look like game console things like not this solid deck of cards glued together with no tolerances. I mean, it's incredible. And so that was really the start of designed in Cupertino manufactured in China. And that whole process. And that was celebrated at the time, right? Because we were excited about sort of more integration with China. And so that wasn't seen as such a problematic thing at the time, right? Absolutely. It's even more than that. This was like hailed as like, this is the modern way to do business.

18:33An example of this that's just super close to home about how things have changed was that in 1999, the World Trajan Organization gathered in Seattle to ratify China as a member of the World Trade Organization. And this is the organization that sort of navigates tariffs and trade rules between countries. All the cool countries were in it, but not like communist socialist China with, you know, a totalitarian government all that. And so the Clinton administration had really pushed for China to come in. And it actually split the Democratic Party. People today, their heads would explode if you tried to sell it.

19:09And it turns out the Republicans were split too. Yeah. Because half the Republicans were like, free trade, free trade, free trade. And the other half were like, we hate communism. Yeah. So the whole world, if you look back in 1999, it's like completely upside down from today. And there were huge riots in Seattle. Like the city was like a mess over this moment. Because it was viewed as this pro -business, anti -labor kind of thing. Because it just meant cheap outsourcing in China. Now the reason for that was because Because that was the whole direction of American business. There's a very famous book in the 80s called In Search of Excellence.

19:44In search of excellence is sort of this Jack Welchian GE Management mantra of what you do, you stick to your knitting. You do the stuff that you're good at and you outsource everything else. You figure out that core part of your company. That was what you just did. You don't have full -time people to water the plants. You don't have full -time people to cook in the kitchen. You don't have full -time people manufacturing. You just do that elsewhere. And that was the state of American business. It was like, let's get it into China. We got the support of the president. It's the whole global market.

20:17Let's reduce trade barriers between countries. And so it was celebrated as the start of a whole new industrial era. So at what point did that change? Both for Apple as a company that they realized, hey, maybe we have some risks here, but also from a geopolitical standpoint. Was it when she came to power? Was it when Trump was elected? How did things start to change? It helps on this one to go a little bit backwards. Sure. I think because before we get to like, when did Apple recognize? We should say there are other examples of everybody doing this. And the reason it's important is because it contrasts with Apple, which is the PC industry created what enabled Apple to do what Apple did.

20:56So Apple was on this path of let's manufacture in China and let's keep very tight control. But the PC industry had a whole different approach, which was this much more classical in search of excellence outsourcing method. So Dell and Compact, which were the two big makers with IBM, were in Texas. And you know, Michael was building PCs in his dorm room and then they had a factory in Texas. Compact were some business guys who like built a whole factory in Texas. And the parts were being flown in from wherever they came from, discharged from this country, CPUs, from Intel in the US, whatever, cables from China and stuff like that, and assembling them in the US.

21:32But the problem was they were all standard parts. When you bought a computer from Dell and from compact, if you open them up, Intel processors, Cgate, disk drive, also from US, and so they were really not competing on who could buy those parts and put them into a gray or beige box more quickly. They were competing on the other three Ps of the marketing mix, which is price, place, and promotion, not just product. And so if you go back to Insertive Excellence, Well, the idea is, well, since we can't compete on manufacturing, let's just make it as cheap as possible. And so the compact lead, they were making the cases for compacts, which were these like 15 pound aluminum.

22:11And like you could, they were like shipping containers, basically, that held the PC. They were making those in China. So it was the biggest, heaviest part. So it sort of made sense to see like how many parts could we get in the box before we ship the box to the US, which was two thirds of the market. And so they just started going to these assembly plants and they went to one and said, we want you to build our PC. And they said, you got it because they are hungry. And they were just having the ability because of WTO and all this other stuff to open up and just do business. And so they were like the capitalists in South China.

22:44And so they were like, whatever you want us to do, we're going to do it. And so compact, they want secrecy and intellectual heart. So they were like, they will build you a building. And so all of a sudden, compact had a building that That was theirs. And then they went to a Dell and they'll build you a building too. And also there's this other company that makes music players, they have a building over here. And all these makers were starting to serve multiple PC companies. And then the PC companies were like, hey, this is kind of working for us because we're crushing Apple in the marketplace.

23:15And our PCs are getting cheaper and people are buying more and the Windows 95 thing is taking off. Everything is just dandy. And so they started just like saying, hey, we don't even need engineers. Whereas Apple was like flying more and more people to do more and more advanced stuff. They were like more gray boxes, more interchangeable parts, more lower cost. We'll just keep selling more and making it up in volume. And that's exactly what was happening. And so these people, which were called ODMs, original design and manufacturers, were saying, you just tell us roughly what you want. We'll make it.

23:48Yeah. And so you'd go to meetings with them. and they would just show prototypes of all the computers they could build. And you pick. You want this one and they're like, I'm a little taller, smaller, thicker, thinner. We want to be able to swap out graphics cards. Yes, yes, yes, and yes. And here's the Dell logo on it. And then they got very, very good. So they were effectively moving up the stack and becoming product makers and designers. And the reason is very simple. They also couldn't compete on labor. Like the way that the government was working, the socialist part of this experiment was you can't live anywhere you want in China.

24:22You live where you're born and if you want to move it's a whole thing. You're not allowed to just move. But what China was doing was taking all the hundreds of millions of poor people and letting them live temporarily in all the factories of all kinds, clothes and cars and computers, and live for part of the year and then bring massive amounts of cash back to the world. And that's how China lifted a billion people out of poverty. Well, those are all the same workers. So you can't get a better deal on labor, right? And then you're all going to the same ODMs who are building the same factory, so it's hard to get a better deal on that.

24:54So the ODMs in order to compete, they were moving up the food chain and the American electronics world, whether it was TVs or whatever, we're like, yeah, or Japan with doing it with Sony, we're like, we love this. Just keep showing us more stuff. We could put our blame on it and we'll just focus on sales and marketing, distribution and branding. We're awesome. And by the way, like little things, like there were all the sudden 50 different music players. Yeah. Because all that knowledge was distributed throughout all these makers. And so it was very, very interesting. Now, what's it like to visit one of these ODMs?