June 13, 2025 • 35 mins
In this episode, we talk to award-winning investigative journalist Patrick McGee, who for years led the Financial Times’ reporting on the meteoric rise of Apple Inc to become the world’s most valuable company after being on the brink of bankruptcy in 1996. As the iPod, iPhone and iPad revolutionised the way we live, Apple injected eye-watering amounts into China – more than $US50 billion a year by 2015 – training millions of engineers and assembly-line workers and endowing them with the skills to help propel China into the advanced manufacturing powerhouse it is today. While Apple cracked the code of making billions of dollars without actually owning the factories that produced its products, it became beholden to the Chinese once Xi Jinping came to power. With Xi weaponising the technology – and its supply chains – against the West, China now has, in McGee’s words, Apple “by the balls”. Hosting this conversation is Good Weekend acting editor Greg Callaghan.
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Episode Transcript
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S1 (00:13):
Hi, I'm Konrad Marshall and from the Sydney Morning Herald
and The Age. Welcome to Good Weekend Talks, a magazine
for your ears, featuring in-depth conversations with fascinating people from
sport and politics, science and culture, business and beyond. Every week,
you can download new episodes in which top journalists from
across our newsrooms talk to compelling people about the definitive
(00:35):
stories of the day. In this episode, we talk to
award winning journalist Patrick McKee, who for years led the
Financial Times reporting on the meteoric rise of Apple Incorporated
from the brink of bankruptcy in 1996 to becoming the
world's most valuable company in the early 2000. As the iPhone,
iPad and iPod revolutionised the way we live. Apple injected
(00:58):
eye watering amounts into China's supply chains. Over $50 billion
a year training millions of engineers and assembly line workers
and endowing them with the skills to help propel China
into the highly advanced manufacturing powerhouse it is today. In
McKee's new book, he explains how Apple cracked the code,
(01:18):
making billions of dollars without actually owning the factories that
produced its products, but also became beholden to the Chinese.
Once XI Jinping came to power and hosting this conversation
about how China weaponized Apple's technology and now has the
company by the balls is good weekend acting editor Greg Callahan.
S2 (01:39):
Thanks, Conrad, and welcome, Patrick. Hello. Now, you write in
your book that Apple wouldn't be Apple today without China.
There's no other place on Earth that could have provided
similar cost efficiency and scale in the manufacturing of its products.
But you also say that China wouldn't be China today
without Apple. How so?
S3 (02:00):
Yeah. So this is the biggest untold story in tech
in the 21st century, I think, which is that when
Apple moves to China in the early 2000, it is
not lured at all by technical competence in the country.
It comes up with spectacular designs in California. And in
order to actually execute that, especially at the scale that
it eventually needs, once the iPod mini, the iPod nano
(02:22):
go into the millions. Certainly, once the iPhone goes into
the tens and then the hundreds of millions per year
it sends by the planeload, America's best engineers, people coming
out of Caltech, MIT, Stanford to train the Chinese how
to do all of this. And the numbers and investments
are stunning. I'll just give you one. The number of
people Apple has trained in the supply chain is 28
(02:45):
million since 2008. That is more than the labor force
of California. Correct me if I'm wrong. I believe that's
more than the population of Australia.
S2 (02:53):
It is. That's a staggering figure. 28 million.
S3 (02:57):
Yep. On any given year, they have 3 million people
working for Apple. Indirectly, of course, because they they don't
they don't, you know, they orchestrate the production of their
products rather than they build them themselves. But the orchestration
that they do is just phenomenally like obsessive and maniacal. So,
you know, I'll jump around in time a little bit here.
But in the early 2000, when they're building this out
(03:17):
in China, they're sort of figuring out how to manufacture
without owning any of the factories. And you might say, well,
that's just outsourcing. That's normal. It's not normal. They're not
just saying, here's a blueprint of what we need. Let
us know when it's ready. They are inventing the processes,
the components. You know, think of something like multi-touch. Multi-Touch
(03:38):
as it exists on the smartphone does not exist until
Apple invents it. But there's inventing it in a lab
and there's inventing it in the millions at scale. And
neither of those things exists. So for China to be
able to do that, Apple begins sending its engineers to
create those competencies in in China. So it's it's an
astonishing story. And in a sense, my thesis sounds ludicrous
(04:01):
until I give you the numbers, which is that Apple
has had more of an impact on China than the
Marshall Plan had on Europe after World War two.
S2 (04:09):
It truly is astonishing. Now, in 1999, none. None of
Apple's products were in fact made in mainland China. But
within ten years, by 2009, virtually all were and and
profits for Apple went into the stratosphere. Um, it was
an amazing ascent. And, um, you know, for a company
(04:30):
particularly that was, as you say, in your book, was
on the brink of bankruptcy in 1996. So in that
short period, it became the richest company in the world,
thanks to sales of iPhone and iPad. What did China
actually offer that no other country could?
S3 (04:49):
So China had, like, policies tailor made for the electronics industry.
So they created something called bonded zones in places like Shenzhen,
which is just across the harbor from Hong Kong. And
in the 1980s, like just after Mao has died. Shenzhen
isn't really a city. It's a series of fishing villages. Today,
it's a city of more than 7 million people, so
(05:10):
twice the size of New York City. Um, I mean,
just basically a city of skyscrapers. And so how that
gets changed is that by being a bonded zone, they
are open to foreign investment in a way that the
rest of the country was not? Uh, you could import
things without any sort of, uh, tax. Um, and there
were just a whole bunch of policies that encouraged investment.
(05:30):
I mean, the people I spoke to at Foxconn who
described this said people in the West will never understand
just how easy it is to go build something in
a place like Shenzhen. The government will provide you the
labor that's coming from, you know, the western part of
the country where people are leaving in the literal hundreds
of millions, you know, backbreaking agricultural jobs to go work
12 hour days at the factories. You can get free land.
(05:53):
You can get free cutting edge machinery. I mean, there's
a certain sense and I go into the book about
this a little bit, that China almost invents a new
form of capitalism, where instead of just having dynamism on
the private side, you have dynamism on the public side.
So local cadres in the political system are incentivized to
build factories and get growth in their particular region. And
(06:16):
so you have one region vying off another. And so,
you know, when people talk about bureaucracy in China, they're
thinking maybe that it's a negative force, but you have
a certain form of bureaucracy in China that acts more
like a venture capitalist. The kind that purchases a stake
in your company sits on the board and looks for
new revenue. So China, I mean, you know, it's funny.
I don't know if this story is going to be
(06:37):
translated into Mandarin. I mean, there's all sorts of things
about the country being an authoritarian surveillance state that they
won't like. But I also give credit to China for
basically playing its long term interests off the short term
corporate interests of of Apple and becoming the absolute manufacturing
electronics powerhouse that they are today.
S2 (06:55):
It's astonishing, isn't it? You talk about the the private
entrepreneurial side that that America has excelled at and it's
built its economy on. But there's this other side that, um,
China through its some state incentives has basically outpaced America,
hasn't it? It's doing something that America and Western capitalism
(07:17):
just don't tend to do.
S3 (07:18):
I mean, I keep thinking that people are spending way
too much time specifically in the geopolitical realm thinking, oh,
when is China going to eclipse America when it comes
to GDP? I mean, that's sort of an arbitrary mark. And,
you know, if you're thinking military might and that sort
of thing, think about what matters. It matters how quickly
you can build things like drones, tanks, ships, that sort
(07:40):
of thing. China is way ahead of America in all
those crucial sectors. I mean, if we find ourselves in
a war, The advertising capabilities of Google and Facebook are
going to mean nothing. The capabilities of building ships and
tanks and drones are going to mean everything. So never
mind some arbitrary marker of when China, you know, eclipses
the US in pure raw GDP numbers. Let's think more
(08:01):
about what they actually have in hardware capability. I mean,
not to go off into some big digression about the
American history, but, you know, Alexander Hamilton really fought in
the late 18th century for America to become a manufacturing
power to, quote unquote, cement its democracy. And after World
War two, or, sorry, during World War Two, it's the
industrial might of America that allows them to beat the,
(08:23):
you know, twin economies, Germany and the Japanese. Detroit, if
you remember, was called the Arsenal of democracy because they
went from carmaking to tank making. Right. That's in effect
what we've given away the last 30 years by allowing
to have this sort of golden age where we do
the software and China does the hardware, and the big
unintended impact there is the Chinese were never content to
(08:43):
only play the role of low value assembly. And so
they moved up the value chain. And Apple played an
unheralded role doing that on an unprecedented degree that I
don't think anybody understands.
S2 (08:53):
Yes, it's it's astonishing. You you write that Apple basically
I love the the use of these words, cracked the
code on how to manufacture the world's best products without
doing any of the manufacturing itself. So it's just what
you've just said about, um, America producing the, the software,
(09:14):
China producing the hardware. But how did it actually do that?
You've mentioned the training of engineers. You've mentioned exporting all
that expertise to China. You've mentioned the, um, you know,
the state incentives. But was something else going on? Were
they cranking out hundreds of thousands of engineers for, for
argument's sake, from their universities and colleges?
S3 (09:36):
Um, I would just say, let's look philosophically at what
Steve Jobs and Jony Ive sort of quote unquote, discovered
in China because, you know, there's nothing unique whatsoever about
an electronics company in the late 90s or early 2000
going to China, right? But whereas Dell, HP and the
PC industry look at what China offers and says, wow,
(09:56):
at great volume, we can really cut our costs here.
For Apple, the lower costs are baked in. But instead
of seeing what's available in China, they realize what's potentially
available or what's possible in China. So, you know, Jony
Ive and the team are coming up with spectacular designs
for translucent plastic computers, for sexy iPhones that have a
(10:17):
chrome back and an unapologetically white front. Right. And what
they're realizing is that we can come up with anything.
And an army of workers being paid $0.50 an hour,
working 12 hours a day on a conveyor belt production design,
are going to conjure into reality at great volumes, anything
we come up with. So my joke is, tell me
your favorite Dell computer in the early 2000. I mean,
(10:41):
good luck even remembering one. They weren't focused on design.
But tell me your favorite Apple computer, and we could
probably spend the rest of the podcast just discussing all
the cool designs that they did. But the only way
those cool designs came into reality was that China was
investing massively in supply chains, in infrastructure, in ports, but
particularly they were learning from Apple how to do this
(11:03):
stuff from like what one engineer called to me, the
Ivy League equivalent of hardware engineering.
S2 (11:09):
China itself in terms of its this, you know, its
manufacturing emergence has been, as you know, been truly astonishing.
But what is the next step for them? You just
mentioned how Apple, uh, have this amazing expertise, um, matched
by none in terms of design and, um, the actual
(11:32):
selling of the products. But does China present a threat
in that regard now as well, now that it's moving so,
so swiftly into the into the high tech realm.
S3 (11:43):
Massive threat. Easiest place you can see this is in
electric vehicles where the car is coming out of China
now are frankly far better than certainly the German EVs,
certainly the Ford and General Motors EVs. Maybe they're not
touching Tesla, but they're more numerous and they're at a
lower cost. Now, interestingly, they're also at a higher cost, right?
(12:05):
There's a portfolio of cars here. So the days that,
you know, Chinese companies just imitate and then undercut on price,
they're over. I mean, that still exists, but you still
but you've got EVs coming out of China that are
more expensive than Tesla's. And people are buying them. Now,
they're not available in America because even before Trump came along,
Biden slapped 100% tariffs on them. Okay, but think of
why you're having to slap tariffs on Chinese products. It's
(12:27):
because they're doing something that we haven't seen in 20 years. Sorry.
It's not that we were saying it 20 years ago,
but we haven't we haven't seen this at all in
the sort of engagement of China being in the WTO,
where they're actually beating us on quality and offering higher prices.
They're not just beating us on, on, on low cost competitiveness.
So that's the EV sector, the phone sector, which is
obviously what my book is more about is I mean,
(12:48):
it's fascinating. In 2014, Jony Ive, the chief designer of
basically every Apple product you can think of, um, you know,
talked about the brazen theft of Xiaomi phones that were
basically mimicking the iPhone. And he said, it's not right
and I don't like it. By 2018, the Chinese handset
makers weren't just mimicking Apple, they were truly matching them
in both quality of design and in manufacturing. And in 2019, Huawei,
(13:12):
Apple's the sort of national champion of of China and
Apple's biggest rival. They really penetrate the luxury sector and
on a volume basis worldwide, they outsell the iPhone. So
that's a massive deal. Different narrative as to why Huawei
doesn't make it for the next four years. It's because
Trump kneecaps them by not allowing them to have 5G technology.
So we can come back to that if we need to.
But Huawei is now back with a vengeance and really
(13:36):
outselling them in China. So, um, you know Apple earnings
just came out I suppose this is being released a
little bit afterwards. But today Apple earnings came out and
China was the only region where Apple um revenue is declining.
And it's because Xiaomi Oppo vivo they're now producing frankly
better phones and at sometimes lower prices sometimes higher prices
than Apple. And I think Apple really is stuck and
(13:59):
is facing a wave of competition. But of course, the
irony is the competition is based on all the things
that Apple taught them the last 20 years.
S2 (14:06):
JD Vance not so long ago referred to the, um,
the Chinese advantage in, in terms of having these millions
of peasants working in factories. But even that's not that's
not true anymore. As patronizing as that statement was correct,
it's not true because they've moved heavily into robotics, so
they're not as dependent. Am I right in, uh, low
(14:28):
cost labor as they used to be?
S3 (14:30):
It's one of those like yes and answers or are
but and, or either or where the answers are both true.
So China still still has hundreds of millions of people.
I mean, just we just forget how big of a
country this is. There are still hundreds of millions of
people living in impoverished lifestyle and still going out to
cities like Shenzhen and Zhengzhou to work these jobs. So,
(14:50):
I mean, everything that can be automated in the Apple
supply chain absolutely is automated. But there are still hundreds
of thousands of workers who are doing temporary work for Apple, where,
you know, they're only coming to the factory to take
these jobs when there's a new iPhone. And so, like,
I have some documents that are a little bit dated.
But in March, Apple only requires about 900,000 workers through
(15:13):
its supply chain, and by September they need 1.7 million.
So when people think, oh, like, if we could just
get over the density of population problem, we could have
iPhones built in America or someplace else. What they're missing
is that it's not just the density of population, it's
the dynamism of that population. It's the fact that an
entire western city's worth of people. You know, 500,000 people
(15:35):
in Boston are willing to relocate for a few months
at a time to assemble iPhones and then go someplace else.
We just have nothing like that. It's not going to
change anytime soon. Even if it could, we wouldn't want
that to change, because that's not what anybody really wants
to do with their life. Um, and in addition to that,
China has robotics and automation on a scale that we
(15:56):
completely lack. I mean, it's an order of magnitude greater
than what America has. And of course, the population there
is four times as great as America's. So it's not competitive.
I mean, you know, like people keep asking me, well,
what's the way out of this? You know, you've studied
this for two years. What's the way out? Well, if
there was an easy way out, my book wouldn't be compelling.
My point is that Apple's stuck. That. You know, if
(16:17):
I can say this on the on on the Australian radio.
China has apple by the balls here. Uh, there is
not some easy move they can make. And even if
you say, well, why don't they just ramp up investment
in India? Well good luck, but what if your factory
runs out of electricity one day. That's going to be
Beijing behind the scenes, making it difficult to to make
those moves. And Apple's going to be stuck figuring out, well,
(16:38):
wait a minute, was that a real problem with the
electricity grid or is someone getting a message to us?
And this is basically what happened in 2013, when Apple
was sort of falling victim to a belligerent XI Jinping,
and it had to figure out who's upset with us
and why, and how do we get them to get
off our back.
S4 (17:03):
Now, your book.
S2 (17:04):
Provides a great historical trajectory and shows exactly how Apple
made so much money, particularly, um, you know, after about 2010. But, uh,
they received a really big wake up call in March 2013,
just one day after XI Jinping was inaugurated. What happened?
S3 (17:26):
So this is the prologue to the book, and I
think I separate this narrative into three different sections, as
it were. And I guess if I'm trying to give
you the sort of quick and dirty version, this actually
there's a bit of a detour in my narrative that
even when I was writing it, it was just so
colorful I couldn't avoid it. And yet it ended up
sort of solving a mystery for me. Which is why
(17:46):
did XI Jinping get angry with Apple? Okay, so what
we have to understand is that Apple did not expect
to sell iPhones in China, right? It wanted to make
them there. It didn't see there being a big market
and for obvious reasons. I mean, Steve Ballmer thought the
iPhone was too expensive in America. So why would people
in a developing country buy them en masse? But for
the 2008 Olympics, purely as a marketing opportunity, because so
(18:10):
many international people were going to be in Beijing and
because someone unsolicited offered some real estate in Beijing, they
opened an Apple store. Okay. It does pretty well. But
then in 2010, the iPhone four becomes the status symbol
across China. And By that point, there are only four
stores in China. Okay. So think about that one store
per 350 million people. Okay. And the population is going
(18:34):
gaga for this device. And Apple is unable to keep
up with demand. And these quasi gangsters, known as the
yellow cows figure out that, ooh, there's a big play here.
So what do they do? They try to buy as
many iPhones as possible. Problem? You can only buy two
solution you bus in migrant workers from outside of Beijing.
(18:54):
From outside of Shanghai. You pay them ¥100. About 15
American dollars to stand in line for however long is possible.
And you amass the world's most iconic device at unprecedentedly
large levels, and you go to a tier two city
that you and I had never heard of before called Chongqing,
population 32 million. And guess what? You are the sole
vendor at inflated prices of the world's most iconic item.
(19:17):
So sales of the iPhone go from the hundreds of
thousands in 2009in China alone, to more than 20,000,000 in 2012.
So these yellow cows are literally finding ways to make
more money per device than Apple is on the same
devices right to distribute the iPhone across the country. I'm
realizing I'm giving you the longer version than what I promised,
(19:39):
but isn't it just fascinating? I mean, it's just this
untold and crazy story. Okay. But here's what happens. They
get greedy. They start doing things like going to Verizon
and T-Mobile in the United States, and with fake IDs,
they're able to purchase an iPhone on a 24 month
contract with no expectation that they're going to pay the
other 23 months. So illegally, they are acquiring iPhones at
(19:59):
less than $100. Still going to a city like Chongqing
and selling them for 1000. Okay, so they're making incredible
margins at this point. The problem with those phones is
they are carrier locked. They will only work in the
United States for T-Mobile or Verizon. So the yellow cows,
because there's lots of money at stake here, find ways
to zap the processor. Okay, so they're deliberately breaking the phone,
(20:22):
but in the process they are masking the the CPU. Uh,
details about where this phone has been sold. So then
instead of big lines going into the Apple Store to
purchase the phone, you've got the same line ups, but
they're at the Genius Bar to return the phone. Okay?
And eventually we get to the point where people are
holding backpacks full of these phones getting their returns. And Apple,
(20:45):
unaware of what's going on at first, begins to give
them replacement iPhones. Here's a brand new phone sealed in
box with an Apple receipt. So, as one source described
to me, this was like cocaine to the yellow cows
because then they could go to wherever they needed, and
they had a brand new iPhone to sell. When Apple
catches wind of this, they start sending the tampered with
(21:06):
phones to Singapore to refurbish the unit. Okay, now this
is the political awakening for Apple. March 15th, 2013 the
morning after XI Jinping comes into office, Apple gets attacked
by Chinese media for refurbishing broken phones instead of replacing them,
because globally they replace phones in China. They're refurbishing them
(21:28):
with parts, and the reasons they're going into that has
never been disclosed, but they're doing it because they're being
scammed right at massive, unprecedented rates. So Apple, of course,
had to make this policy change. But what happens is
they're accused of having these different warranties. Apple tries to
clarify and says it's not really the case. And, you know,
a bunch of coordinated state backed medias, media, uh, posts
(21:51):
go after Apple, the most famous of which is the
People's Daily. Let's just call it the Sydney Morning Herald
of Australia, of China. Okay. And they attack Apple for
quote unquote, unprecedented arrogance. Tim Cook has to post a
letter in Chinese on Apple's China website apologizing to consumers.
And he tweaks the, uh, the return policy to give Chinese, uh,
(22:14):
brand new phones in this instance, okay, instead of refurbishing.
So the scam gets accelerated. It's just like pouring fuel
on a fire. So you get to the point where
people are actually stealing phones just to go return them
en masse. And Apple is having a massive problem where
not only are they yellow cows still still doing this grift,
but they're also taking the phones apart, replacing the expensive
(22:37):
components with lookalike parts that don't actually work. And they're
selling the innards of the parts, things like memory chips
and so forth, batteries. And they're making money on that
as well. So the yellow cows are making loads of money,
and Apple has all these political problems. And basically they
have this like realization where they're saying, oh shit, we
don't have anybody senior in China. We were in way
(22:57):
over our heads. We don't understand the culture. We don't
understand the politics. We're having all these problems. And once
XI Jinping attacks them through the People's Daily, through the
Consumer Day episode, Apple goes from feeling untouchable to feeling
its products will be blacklisted in a matter of weeks.
S2 (23:13):
And what's more, Tim Cook effectively as you've just described it,
are apologizing for something Apple wasn't responsible for apologizing for. Um,
a scam that, um, was, um, nonetheless diminishing their their brand.
So the apology was all all all about brand control
(23:35):
rather than, um, you know, admitting to any direct fault
of their own.
S3 (23:39):
Yes. There's a show trial element to all this.
S2 (23:42):
So for the book you interviewed about 200 former employees
of Apple. That's astonishing, including executives and engineers. And the
book really shows that because you go into this, you know,
granular detail, um, in terms of the history of Apple,
where it came from. Um, it's, um, it's a scent
and it's, um, you know, amazing, uh, list of, um,
(24:05):
challenges and troubles. Well, how did you what drew you
to to Apple in the first place? And from all
these people you spoke to. What was some of the
most surprising things that you learned about the inner workings
of the company?
S3 (24:20):
So the slightly boring answer to how I got into
this was that I was the Financial Times reporter for
four years, but I did for the first three years,
what most reporters do, which is I focus too much
on the end product and just thought about how it worked.
You know, what their advertising ambitions were, you know, what
are they going to do in a world where iPhone
sales aren't actually going up? You know, they're increasing the
prices and things like that. But I, like everybody else,
(24:41):
basically ignored the question of who makes these up and
what is Apple's strategy, and how is it distinguished from
anyone else who's operating in China. So you know, the
line in the book that I, that I sort of
forms the thesis is that everyone's familiar with the tedium
of apple jobs, the fact that iPhones are made in China,
and there have been loads of accusations that Apple exploits workers.
(25:04):
And my take on it is that that's true. But
Beijing allows Apple to exploit its workers so that it
can in turn exploit Apple. And what I'm getting at
there is the technology transfer that Apple's policies engender is
made known through political channels to be tremendous. And this
is how sort of they get out of the the
web of XI Jinping's making, where they're feeling like they're
(25:25):
going to be blacklisted. So they basically are able to show, okay,
it's true that any supplier you go find is going
to be making very little money from us, but we
are teaching them, teaching them, teaching them on a scale
that is unprecedented and they can take those lessons and
go get contracts with other companies. And so Apple ends
up being basically by accident. But the biggest supporter of
(25:49):
Chinese indigenous innovation operating in the country.
S2 (25:51):
Is part of the problem here that Apple was so
focused on the on short term business opportunities and was
missing the the long game.
S3 (26:00):
Yeah, absolutely.
S2 (26:01):
The long term picture. Yes.
S3 (26:03):
So if you see a chart, I mean, first of all,
if you understand the complexity of making the iPhone, I mean,
there are a thousand parts in every iPhone and at
times they make up to a million devices per day. Right.
So do the math. That means your manufacturing and handling
logistics for 1 billion parts a day. So the volumes
that they are working at are just extraordinary. And then
(26:23):
you've got a couple with that that there's a zero
tolerance for defects. Right. Apple has the highest quality standards
of consumer products. I mean, it's sort of up there
with like medical devices where if there's a problem, the
patient could die. I mean, Apple really aspires to that
sort of thing. So it's not just the quantity, it's
the quality as well. So if you just think about
going from 5 million iPhones in 2007 to 230 million
(26:44):
in 2015, they are so relentlessly focused on reinventing the
iPhone every year and doing it at an insane scale
that they are not really sitting around pontificating. Matters of state.
The manufacturing design engineers who were routinely sent to China
would tell me that they lived a Groundhog Day existence, right?
(27:04):
Same meals each day, same phone call time, same meeting times,
and they're just sort of beating up on suppliers to
improve this and prove that everything else other than, um,
you know, experiencing what they would call OIC events only
in China, events they really weren't noticing the changes on
the ground politically and obviously the communist power, the Communist Party,
I should say, um, is quite an opaque organization. And
(27:27):
so I can't really blame Apple for not understanding that
XI Jinping was going to be a very different force.
I mean, I think I quote someone in the book
saying that like, you know, Jack Ma from Alibaba, he
got China wrong. So even if you can say Tim
Cook got China wrong, you've got to realize that. So
did some of China's biggest entrepreneurs. So did maybe the
West writ large.
S2 (27:46):
But you spoke to 200 odd people. Surely 1 or
2 of those people would have seen, or perhaps had
an inkling that that China was not just learning this
technology from the West, from from Apple, but weaponizing that
technology against the West and weaponizing it, for that matter,
(28:08):
against Apple's competitors.
S3 (28:09):
You'd be surprised. Uh, and how that's not necessarily the case, right?
Apple felt that. Well, hey, because we're teaching them they
have no reason to go after us. So certainly they'd
be familiar with something like high speed rail, uh, being
an instance of sort of textbook example, if you will,
where Beijing sort of put a prisoner's dilemma situation onto Kawasaki, Siemens,
(28:33):
Alstom and Bombardier, sort of the biggest for, you know,
high speed rail or even rail groups in the world
and basically offered them the biggest contract that they'd ever
seen in their life as as China was building out
rail car capacity. And each of those companies had to think, well,
if I say no because I'm worried about IP theft,
what happens when Kawasaki says yes, right. And so they
(28:56):
basically all say yes. And China is able to take
everything they need from them in a matter of years,
synthesize it into something. Let's use quote marks here new
and then oust those, those, those companies to such an
extent that within about eight years, it's the Chinese company
that's bidding for the high speed rail contract in California.
So they were very aware of the risks of IP theft,
(29:16):
and certainly they saw it in other sectors. But again,
these are great engineers. These aren't necessarily geopolitical strategists. I mean,
that's quite a different effort. And for the longest time
Apple has nothing like that. And let me just segue
into one thing. My favorite quote in the book was
something that someone said to me, um, over coffee in California,
(29:37):
and they said, you keep talking about geopolitics, but aren't
you overthinking your thesis? Because I was there in the
early 2000 when we were setting up the supply chain
in China. And I can tell you, we weren't thinking
about geopolitics at all. And I just end that section
by saying precisely.
S2 (29:53):
Which brings me to politics. Funnily enough, um, Donald Trump's
made a pledge to bring back manufacturing to the US.
And you talk about his first term in the book. Um, he, um, claimed, um,
more than once that Apple was, uh, reinvesting in America
during his first term. Um, did that happen?
S3 (30:12):
Oh, gosh, this is complex. A couple months ago, Apple,
you know, trying to get ahead of what they knew
would be, uh, some kind of tariff battle, even if
they didn't know the details, pledged that they would invest
$500 billion into the US over the next four years. Now,
most analysts have read this and they think, okay, the
math doesn't add up. So what it must mean is
(30:34):
that Apple's making this pledge, but they're not really going
to follow through on it. I think that's incorrect. I
think Apple is following through on that pledge. What we
don't know, and what I think Apple is obfuscating is
what they are counting as this $500 billion. So if
you read the press release really quickly, let's say you
would think, okay, this is a press release that basically
(30:55):
implies we're going to build iPhones and such in America,
because $500 billion is a massive amount. And it talks
about from the headline to the Tim Cook quote, you know,
building in America and bringing jobs here. Um, I believe
and I should say, I don't know this for a fact,
but if you do the math, there's only four initiatives
that are announced. Be generous with your math. You will
(31:16):
only get to $30 billion, maybe $50 billion. It's hard
to know how this goes up by another order of magnitude.
So I'm pretty confident that what Apple is counting here
is buybacks and dividends. So Apple spends about $100 billion
a year on share buybacks okay. This is purchases of
their own stock. $100 billion a year is so difficult
(31:38):
it's hard to comprehend. It's basically equivalent to Wall Street's
top seven banks combined in terms of what they buy
on buybacks. Now this this is just money that goes
to Apple shareholders. This has literally nothing to do with
reshoring or building in America or whatever. So if they
are indeed counting that, that alone would account for some
400 to 450 billion of the 500 billion, and then
(31:59):
I think the other 50 billion, you know, is about
building things like data servers for AI, you know, some
new facilities for training, this, that and the other thing.
But I think there's a massive bait and switch going
on here. But again, this is opinion. I don't have
it sort of leaked to me. Uh, but good luck
finding another explanation that's remotely credible.
S2 (32:17):
Well, I saw that press release you're talking about and
it talked about, um, um, AI server production, a massive
investment in that, which made me think, um, that this
money is all about in my naivety, you're the expert
was is all about, um, servers and AI software rather
than actually making the the phones in America.
S3 (32:40):
Yeah. So again, it does include that, but you're just
not going to get to $500 billion. For what? For
what is required by Apple. So I mean, for instance,
you know, this is not some new thing. Apple um,
because of iCloud, um, already has big server farms in America,
and we are talking about the tens of billion dollars
for that, but it's not as though they're adding to
that by, you know, ten times or 15 times. Um,
(33:04):
and frankly, if they were, that would actually be fairly
compelling as an investment and they could just flat out
say it, but they don't.
S2 (33:09):
Now I'm going to wind up with a big, um,
very big question. And that is, can companies like Apple
maintain their technological edge moving forward, or is the West
really losing the tech race now?
S3 (33:24):
Um, so let me give, I guess, two answers, an
Apple answer and then a wider answer. So the Apple
answer is Apple still has all the technical expertise in
order to make its phones and knows what to do.
The problem is there's no place on the planet to
actually execute on those plans. So if for some reason
China decided decided to, you know, cancel Apple's export license, right?
(33:47):
Or just close its factories? I mean, honestly, there is
no plan B. It is astonishing that a company that
built the world's most sophisticated supply chain made the calamitous
and rookie mistake of concentrating all its eggs in one basket.
I mean, just crazy. There really is no plan B,
and we can talk about India if you'd like. So
my answer for Apple is they still retain the technical
(34:09):
know how. They just can't do it without China. Uh,
more broadly yeah. I mean, we're absolutely losing losing out
on on how to actually make this stuff. And the
EVs are the best example that even before Trump, we've
got 100% tariffs on EVs. I mean, you only do
that if you realize that if there are no tariffs, GM, Ford,
(34:29):
probably even Tesla are all going to have their lunch
taken away by an onslaught of Chinese EV makers if
we come back to the smartphone sector. China already is
shipping more than 50% of all phones. That's before counting
all the phones that they're making for Apple. The only
real exception to global smartphone output that's not done in
China is Samsung.
S2 (34:50):
Extraordinary. Look, it's a fascinating subject and we could talk
for hours. Some great book. Thank you so much for
your time, Patrick.
S3 (34:57):
Thank you. I really appreciate it.
S1 (35:01):
That was Patrick McKee with Good Weekend. Acting Editor Greg
Callahan on the latest Good weekend talks. If you enjoyed
this episode, please remember to subscribe, rate and comment wherever
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Good Weekend Talks is brought to you by the Sydney
(35:23):
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to support independent journalism. Search, subscribe Sydney Morning Herald or
The Age? This episode of Good Weekend Talks is produced
by Konrad Marshall and edited by Tim Mummery, with technical
assistance from Josh towers. Tami Mills is our executive producer.
(35:43):
Tom McKendrick is head of audio and Greg Callahan is
the acting editor of Good Weekend.
Hi, I'm Konrad Marshall and from the Sydney Morning Herald
and The Age. Welcome to Good Weekend Talks, a magazine
for your ears, featuring in-depth conversations with fascinating people from
sport and politics, science and culture, business and beyond. Every week,
you can download new episodes in which top journalists from
across our newsrooms talk to compelling people about the definitive
(00:35):
stories of the day. In this episode, we talk to
award winning journalist Patrick McKee, who for years led the
Financial Times reporting on the meteoric rise of Apple Incorporated
from the brink of bankruptcy in 1996 to becoming the
world's most valuable company in the early 2000. As the iPhone,
iPad and iPod revolutionised the way we live. Apple injected
(00:58):
eye watering amounts into China's supply chains. Over $50 billion
a year training millions of engineers and assembly line workers
and endowing them with the skills to help propel China
into the highly advanced manufacturing powerhouse it is today. In
McKee's new book, he explains how Apple cracked the code,
(01:18):
making billions of dollars without actually owning the factories that
produced its products, but also became beholden to the Chinese.
Once XI Jinping came to power and hosting this conversation
about how China weaponized Apple's technology and now has the
company by the balls is good weekend acting editor Greg Callahan.
S2 (01:39):
Thanks, Conrad, and welcome, Patrick. Hello. Now, you write in
your book that Apple wouldn't be Apple today without China.
There's no other place on Earth that could have provided
similar cost efficiency and scale in the manufacturing of its products.
But you also say that China wouldn't be China today
without Apple. How so?
S3 (02:00):
Yeah. So this is the biggest untold story in tech
in the 21st century, I think, which is that when
Apple moves to China in the early 2000, it is
not lured at all by technical competence in the country.
It comes up with spectacular designs in California. And in
order to actually execute that, especially at the scale that
it eventually needs, once the iPod mini, the iPod nano
(02:22):
go into the millions. Certainly, once the iPhone goes into
the tens and then the hundreds of millions per year
it sends by the planeload, America's best engineers, people coming
out of Caltech, MIT, Stanford to train the Chinese how
to do all of this. And the numbers and investments
are stunning. I'll just give you one. The number of
people Apple has trained in the supply chain is 28
(02:45):
million since 2008. That is more than the labor force
of California. Correct me if I'm wrong. I believe that's
more than the population of Australia.
S2 (02:53):
It is. That's a staggering figure. 28 million.
S3 (02:57):
Yep. On any given year, they have 3 million people
working for Apple. Indirectly, of course, because they they don't
they don't, you know, they orchestrate the production of their
products rather than they build them themselves. But the orchestration
that they do is just phenomenally like obsessive and maniacal. So,
you know, I'll jump around in time a little bit here.
But in the early 2000, when they're building this out
(03:17):
in China, they're sort of figuring out how to manufacture
without owning any of the factories. And you might say, well,
that's just outsourcing. That's normal. It's not normal. They're not
just saying, here's a blueprint of what we need. Let
us know when it's ready. They are inventing the processes,
the components. You know, think of something like multi-touch. Multi-Touch
(03:38):
as it exists on the smartphone does not exist until
Apple invents it. But there's inventing it in a lab
and there's inventing it in the millions at scale. And
neither of those things exists. So for China to be
able to do that, Apple begins sending its engineers to
create those competencies in in China. So it's it's an
astonishing story. And in a sense, my thesis sounds ludicrous
(04:01):
until I give you the numbers, which is that Apple
has had more of an impact on China than the
Marshall Plan had on Europe after World War two.
S2 (04:09):
It truly is astonishing. Now, in 1999, none. None of
Apple's products were in fact made in mainland China. But
within ten years, by 2009, virtually all were and and
profits for Apple went into the stratosphere. Um, it was
an amazing ascent. And, um, you know, for a company
(04:30):
particularly that was, as you say, in your book, was
on the brink of bankruptcy in 1996. So in that
short period, it became the richest company in the world,
thanks to sales of iPhone and iPad. What did China
actually offer that no other country could?
S3 (04:49):
So China had, like, policies tailor made for the electronics industry.
So they created something called bonded zones in places like Shenzhen,
which is just across the harbor from Hong Kong. And
in the 1980s, like just after Mao has died. Shenzhen
isn't really a city. It's a series of fishing villages. Today,
it's a city of more than 7 million people, so
(05:10):
twice the size of New York City. Um, I mean,
just basically a city of skyscrapers. And so how that
gets changed is that by being a bonded zone, they
are open to foreign investment in a way that the
rest of the country was not? Uh, you could import
things without any sort of, uh, tax. Um, and there
were just a whole bunch of policies that encouraged investment.
(05:30):
I mean, the people I spoke to at Foxconn who
described this said people in the West will never understand
just how easy it is to go build something in
a place like Shenzhen. The government will provide you the
labor that's coming from, you know, the western part of
the country where people are leaving in the literal hundreds
of millions, you know, backbreaking agricultural jobs to go work
12 hour days at the factories. You can get free land.
(05:53):
You can get free cutting edge machinery. I mean, there's
a certain sense and I go into the book about
this a little bit, that China almost invents a new
form of capitalism, where instead of just having dynamism on
the private side, you have dynamism on the public side.
So local cadres in the political system are incentivized to
build factories and get growth in their particular region. And
(06:16):
so you have one region vying off another. And so,
you know, when people talk about bureaucracy in China, they're
thinking maybe that it's a negative force, but you have
a certain form of bureaucracy in China that acts more
like a venture capitalist. The kind that purchases a stake
in your company sits on the board and looks for
new revenue. So China, I mean, you know, it's funny.
I don't know if this story is going to be
(06:37):
translated into Mandarin. I mean, there's all sorts of things
about the country being an authoritarian surveillance state that they
won't like. But I also give credit to China for
basically playing its long term interests off the short term
corporate interests of of Apple and becoming the absolute manufacturing
electronics powerhouse that they are today.
S2 (06:55):
It's astonishing, isn't it? You talk about the the private
entrepreneurial side that that America has excelled at and it's
built its economy on. But there's this other side that, um,
China through its some state incentives has basically outpaced America,
hasn't it? It's doing something that America and Western capitalism
(07:17):
just don't tend to do.
S3 (07:18):
I mean, I keep thinking that people are spending way
too much time specifically in the geopolitical realm thinking, oh,
when is China going to eclipse America when it comes
to GDP? I mean, that's sort of an arbitrary mark. And,
you know, if you're thinking military might and that sort
of thing, think about what matters. It matters how quickly
you can build things like drones, tanks, ships, that sort
(07:40):
of thing. China is way ahead of America in all
those crucial sectors. I mean, if we find ourselves in
a war, The advertising capabilities of Google and Facebook are
going to mean nothing. The capabilities of building ships and
tanks and drones are going to mean everything. So never
mind some arbitrary marker of when China, you know, eclipses
the US in pure raw GDP numbers. Let's think more
(08:01):
about what they actually have in hardware capability. I mean,
not to go off into some big digression about the
American history, but, you know, Alexander Hamilton really fought in
the late 18th century for America to become a manufacturing
power to, quote unquote, cement its democracy. And after World
War two, or, sorry, during World War Two, it's the
industrial might of America that allows them to beat the,
(08:23):
you know, twin economies, Germany and the Japanese. Detroit, if
you remember, was called the Arsenal of democracy because they
went from carmaking to tank making. Right. That's in effect
what we've given away the last 30 years by allowing
to have this sort of golden age where we do
the software and China does the hardware, and the big
unintended impact there is the Chinese were never content to
(08:43):
only play the role of low value assembly. And so
they moved up the value chain. And Apple played an
unheralded role doing that on an unprecedented degree that I
don't think anybody understands.
S2 (08:53):
Yes, it's it's astonishing. You you write that Apple basically
I love the the use of these words, cracked the
code on how to manufacture the world's best products without
doing any of the manufacturing itself. So it's just what
you've just said about, um, America producing the, the software,
(09:14):
China producing the hardware. But how did it actually do that?
You've mentioned the training of engineers. You've mentioned exporting all
that expertise to China. You've mentioned the, um, you know,
the state incentives. But was something else going on? Were
they cranking out hundreds of thousands of engineers for, for
argument's sake, from their universities and colleges?
S3 (09:36):
Um, I would just say, let's look philosophically at what
Steve Jobs and Jony Ive sort of quote unquote, discovered
in China because, you know, there's nothing unique whatsoever about
an electronics company in the late 90s or early 2000
going to China, right? But whereas Dell, HP and the
PC industry look at what China offers and says, wow,
(09:56):
at great volume, we can really cut our costs here.
For Apple, the lower costs are baked in. But instead
of seeing what's available in China, they realize what's potentially
available or what's possible in China. So, you know, Jony
Ive and the team are coming up with spectacular designs
for translucent plastic computers, for sexy iPhones that have a
(10:17):
chrome back and an unapologetically white front. Right. And what
they're realizing is that we can come up with anything.
And an army of workers being paid $0.50 an hour,
working 12 hours a day on a conveyor belt production design,
are going to conjure into reality at great volumes, anything
we come up with. So my joke is, tell me
your favorite Dell computer in the early 2000. I mean,
(10:41):
good luck even remembering one. They weren't focused on design.
But tell me your favorite Apple computer, and we could
probably spend the rest of the podcast just discussing all
the cool designs that they did. But the only way
those cool designs came into reality was that China was
investing massively in supply chains, in infrastructure, in ports, but
particularly they were learning from Apple how to do this
(11:03):
stuff from like what one engineer called to me, the
Ivy League equivalent of hardware engineering.
S2 (11:09):
China itself in terms of its this, you know, its
manufacturing emergence has been, as you know, been truly astonishing.
But what is the next step for them? You just
mentioned how Apple, uh, have this amazing expertise, um, matched
by none in terms of design and, um, the actual
(11:32):
selling of the products. But does China present a threat
in that regard now as well, now that it's moving so,
so swiftly into the into the high tech realm.
S3 (11:43):
Massive threat. Easiest place you can see this is in
electric vehicles where the car is coming out of China
now are frankly far better than certainly the German EVs,
certainly the Ford and General Motors EVs. Maybe they're not
touching Tesla, but they're more numerous and they're at a
lower cost. Now, interestingly, they're also at a higher cost, right?
(12:05):
There's a portfolio of cars here. So the days that,
you know, Chinese companies just imitate and then undercut on price,
they're over. I mean, that still exists, but you still
but you've got EVs coming out of China that are
more expensive than Tesla's. And people are buying them. Now,
they're not available in America because even before Trump came along,
Biden slapped 100% tariffs on them. Okay, but think of
why you're having to slap tariffs on Chinese products. It's
(12:27):
because they're doing something that we haven't seen in 20 years. Sorry.
It's not that we were saying it 20 years ago,
but we haven't we haven't seen this at all in
the sort of engagement of China being in the WTO,
where they're actually beating us on quality and offering higher prices.
They're not just beating us on, on, on low cost competitiveness.
So that's the EV sector, the phone sector, which is
obviously what my book is more about is I mean,
(12:48):
it's fascinating. In 2014, Jony Ive, the chief designer of
basically every Apple product you can think of, um, you know,
talked about the brazen theft of Xiaomi phones that were
basically mimicking the iPhone. And he said, it's not right
and I don't like it. By 2018, the Chinese handset
makers weren't just mimicking Apple, they were truly matching them
in both quality of design and in manufacturing. And in 2019, Huawei,
(13:12):
Apple's the sort of national champion of of China and
Apple's biggest rival. They really penetrate the luxury sector and
on a volume basis worldwide, they outsell the iPhone. So
that's a massive deal. Different narrative as to why Huawei
doesn't make it for the next four years. It's because
Trump kneecaps them by not allowing them to have 5G technology.
So we can come back to that if we need to.
But Huawei is now back with a vengeance and really
(13:36):
outselling them in China. So, um, you know Apple earnings
just came out I suppose this is being released a
little bit afterwards. But today Apple earnings came out and
China was the only region where Apple um revenue is declining.
And it's because Xiaomi Oppo vivo they're now producing frankly
better phones and at sometimes lower prices sometimes higher prices
than Apple. And I think Apple really is stuck and
(13:59):
is facing a wave of competition. But of course, the
irony is the competition is based on all the things
that Apple taught them the last 20 years.
S2 (14:06):
JD Vance not so long ago referred to the, um,
the Chinese advantage in, in terms of having these millions
of peasants working in factories. But even that's not that's
not true anymore. As patronizing as that statement was correct,
it's not true because they've moved heavily into robotics, so
they're not as dependent. Am I right in, uh, low
(14:28):
cost labor as they used to be?
S3 (14:30):
It's one of those like yes and answers or are
but and, or either or where the answers are both true.
So China still still has hundreds of millions of people.
I mean, just we just forget how big of a
country this is. There are still hundreds of millions of
people living in impoverished lifestyle and still going out to
cities like Shenzhen and Zhengzhou to work these jobs. So,
(14:50):
I mean, everything that can be automated in the Apple
supply chain absolutely is automated. But there are still hundreds
of thousands of workers who are doing temporary work for Apple, where,
you know, they're only coming to the factory to take
these jobs when there's a new iPhone. And so, like,
I have some documents that are a little bit dated.
But in March, Apple only requires about 900,000 workers through
(15:13):
its supply chain, and by September they need 1.7 million.
So when people think, oh, like, if we could just
get over the density of population problem, we could have
iPhones built in America or someplace else. What they're missing
is that it's not just the density of population, it's
the dynamism of that population. It's the fact that an
entire western city's worth of people. You know, 500,000 people
(15:35):
in Boston are willing to relocate for a few months
at a time to assemble iPhones and then go someplace else.
We just have nothing like that. It's not going to
change anytime soon. Even if it could, we wouldn't want
that to change, because that's not what anybody really wants
to do with their life. Um, and in addition to that,
China has robotics and automation on a scale that we
(15:56):
completely lack. I mean, it's an order of magnitude greater
than what America has. And of course, the population there
is four times as great as America's. So it's not competitive.
I mean, you know, like people keep asking me, well,
what's the way out of this? You know, you've studied
this for two years. What's the way out? Well, if
there was an easy way out, my book wouldn't be compelling.
My point is that Apple's stuck. That. You know, if
(16:17):
I can say this on the on on the Australian radio.
China has apple by the balls here. Uh, there is
not some easy move they can make. And even if
you say, well, why don't they just ramp up investment
in India? Well good luck, but what if your factory
runs out of electricity one day. That's going to be
Beijing behind the scenes, making it difficult to to make
those moves. And Apple's going to be stuck figuring out, well,
(16:38):
wait a minute, was that a real problem with the
electricity grid or is someone getting a message to us?
And this is basically what happened in 2013, when Apple
was sort of falling victim to a belligerent XI Jinping,
and it had to figure out who's upset with us
and why, and how do we get them to get
off our back.
S4 (17:03):
Now, your book.
S2 (17:04):
Provides a great historical trajectory and shows exactly how Apple
made so much money, particularly, um, you know, after about 2010. But, uh,
they received a really big wake up call in March 2013,
just one day after XI Jinping was inaugurated. What happened?
S3 (17:26):
So this is the prologue to the book, and I
think I separate this narrative into three different sections, as
it were. And I guess if I'm trying to give
you the sort of quick and dirty version, this actually
there's a bit of a detour in my narrative that
even when I was writing it, it was just so
colorful I couldn't avoid it. And yet it ended up
sort of solving a mystery for me. Which is why
(17:46):
did XI Jinping get angry with Apple? Okay, so what
we have to understand is that Apple did not expect
to sell iPhones in China, right? It wanted to make
them there. It didn't see there being a big market
and for obvious reasons. I mean, Steve Ballmer thought the
iPhone was too expensive in America. So why would people
in a developing country buy them en masse? But for
the 2008 Olympics, purely as a marketing opportunity, because so
(18:10):
many international people were going to be in Beijing and
because someone unsolicited offered some real estate in Beijing, they
opened an Apple store. Okay. It does pretty well. But
then in 2010, the iPhone four becomes the status symbol
across China. And By that point, there are only four
stores in China. Okay. So think about that one store
per 350 million people. Okay. And the population is going
(18:34):
gaga for this device. And Apple is unable to keep
up with demand. And these quasi gangsters, known as the
yellow cows figure out that, ooh, there's a big play here.
So what do they do? They try to buy as
many iPhones as possible. Problem? You can only buy two
solution you bus in migrant workers from outside of Beijing.
(18:54):
From outside of Shanghai. You pay them ¥100. About 15
American dollars to stand in line for however long is possible.
And you amass the world's most iconic device at unprecedentedly
large levels, and you go to a tier two city
that you and I had never heard of before called Chongqing,
population 32 million. And guess what? You are the sole
vendor at inflated prices of the world's most iconic item.
(19:17):
So sales of the iPhone go from the hundreds of
thousands in 2009in China alone, to more than 20,000,000 in 2012.
So these yellow cows are literally finding ways to make
more money per device than Apple is on the same
devices right to distribute the iPhone across the country. I'm
realizing I'm giving you the longer version than what I promised,
(19:39):
but isn't it just fascinating? I mean, it's just this
untold and crazy story. Okay. But here's what happens. They
get greedy. They start doing things like going to Verizon
and T-Mobile in the United States, and with fake IDs,
they're able to purchase an iPhone on a 24 month
contract with no expectation that they're going to pay the
other 23 months. So illegally, they are acquiring iPhones at
(19:59):
less than $100. Still going to a city like Chongqing
and selling them for 1000. Okay, so they're making incredible
margins at this point. The problem with those phones is
they are carrier locked. They will only work in the
United States for T-Mobile or Verizon. So the yellow cows,
because there's lots of money at stake here, find ways
to zap the processor. Okay, so they're deliberately breaking the phone,
(20:22):
but in the process they are masking the the CPU. Uh,
details about where this phone has been sold. So then
instead of big lines going into the Apple Store to
purchase the phone, you've got the same line ups, but
they're at the Genius Bar to return the phone. Okay?
And eventually we get to the point where people are
holding backpacks full of these phones getting their returns. And Apple,
(20:45):
unaware of what's going on at first, begins to give
them replacement iPhones. Here's a brand new phone sealed in
box with an Apple receipt. So, as one source described
to me, this was like cocaine to the yellow cows
because then they could go to wherever they needed, and
they had a brand new iPhone to sell. When Apple
catches wind of this, they start sending the tampered with
(21:06):
phones to Singapore to refurbish the unit. Okay, now this
is the political awakening for Apple. March 15th, 2013 the
morning after XI Jinping comes into office, Apple gets attacked
by Chinese media for refurbishing broken phones instead of replacing them,
because globally they replace phones in China. They're refurbishing them
(21:28):
with parts, and the reasons they're going into that has
never been disclosed, but they're doing it because they're being
scammed right at massive, unprecedented rates. So Apple, of course,
had to make this policy change. But what happens is
they're accused of having these different warranties. Apple tries to
clarify and says it's not really the case. And, you know,
a bunch of coordinated state backed medias, media, uh, posts
(21:51):
go after Apple, the most famous of which is the
People's Daily. Let's just call it the Sydney Morning Herald
of Australia, of China. Okay. And they attack Apple for
quote unquote, unprecedented arrogance. Tim Cook has to post a
letter in Chinese on Apple's China website apologizing to consumers.
And he tweaks the, uh, the return policy to give Chinese, uh,
(22:14):
brand new phones in this instance, okay, instead of refurbishing.
So the scam gets accelerated. It's just like pouring fuel
on a fire. So you get to the point where
people are actually stealing phones just to go return them
en masse. And Apple is having a massive problem where
not only are they yellow cows still still doing this grift,
but they're also taking the phones apart, replacing the expensive
(22:37):
components with lookalike parts that don't actually work. And they're
selling the innards of the parts, things like memory chips
and so forth, batteries. And they're making money on that
as well. So the yellow cows are making loads of money,
and Apple has all these political problems. And basically they
have this like realization where they're saying, oh shit, we
don't have anybody senior in China. We were in way
(22:57):
over our heads. We don't understand the culture. We don't
understand the politics. We're having all these problems. And once
XI Jinping attacks them through the People's Daily, through the
Consumer Day episode, Apple goes from feeling untouchable to feeling
its products will be blacklisted in a matter of weeks.
S2 (23:13):
And what's more, Tim Cook effectively as you've just described it,
are apologizing for something Apple wasn't responsible for apologizing for. Um,
a scam that, um, was, um, nonetheless diminishing their their brand.
So the apology was all all all about brand control
(23:35):
rather than, um, you know, admitting to any direct fault
of their own.
S3 (23:39):
Yes. There's a show trial element to all this.
S2 (23:42):
So for the book you interviewed about 200 former employees
of Apple. That's astonishing, including executives and engineers. And the
book really shows that because you go into this, you know,
granular detail, um, in terms of the history of Apple,
where it came from. Um, it's, um, it's a scent
and it's, um, you know, amazing, uh, list of, um,
(24:05):
challenges and troubles. Well, how did you what drew you
to to Apple in the first place? And from all
these people you spoke to. What was some of the
most surprising things that you learned about the inner workings
of the company?
S3 (24:20):
So the slightly boring answer to how I got into
this was that I was the Financial Times reporter for
four years, but I did for the first three years,
what most reporters do, which is I focus too much
on the end product and just thought about how it worked.
You know, what their advertising ambitions were, you know, what
are they going to do in a world where iPhone
sales aren't actually going up? You know, they're increasing the
prices and things like that. But I, like everybody else,
(24:41):
basically ignored the question of who makes these up and
what is Apple's strategy, and how is it distinguished from
anyone else who's operating in China. So you know, the
line in the book that I, that I sort of
forms the thesis is that everyone's familiar with the tedium
of apple jobs, the fact that iPhones are made in China,
and there have been loads of accusations that Apple exploits workers.
(25:04):
And my take on it is that that's true. But
Beijing allows Apple to exploit its workers so that it
can in turn exploit Apple. And what I'm getting at
there is the technology transfer that Apple's policies engender is
made known through political channels to be tremendous. And this
is how sort of they get out of the the
web of XI Jinping's making, where they're feeling like they're
(25:25):
going to be blacklisted. So they basically are able to show, okay,
it's true that any supplier you go find is going
to be making very little money from us, but we
are teaching them, teaching them, teaching them on a scale
that is unprecedented and they can take those lessons and
go get contracts with other companies. And so Apple ends
up being basically by accident. But the biggest supporter of
(25:49):
Chinese indigenous innovation operating in the country.
S2 (25:51):
Is part of the problem here that Apple was so
focused on the on short term business opportunities and was
missing the the long game.
S3 (26:00):
Yeah, absolutely.
S2 (26:01):
The long term picture. Yes.
S3 (26:03):
So if you see a chart, I mean, first of all,
if you understand the complexity of making the iPhone, I mean,
there are a thousand parts in every iPhone and at
times they make up to a million devices per day. Right.
So do the math. That means your manufacturing and handling
logistics for 1 billion parts a day. So the volumes
that they are working at are just extraordinary. And then
(26:23):
you've got a couple with that that there's a zero
tolerance for defects. Right. Apple has the highest quality standards
of consumer products. I mean, it's sort of up there
with like medical devices where if there's a problem, the
patient could die. I mean, Apple really aspires to that
sort of thing. So it's not just the quantity, it's
the quality as well. So if you just think about
going from 5 million iPhones in 2007 to 230 million
(26:44):
in 2015, they are so relentlessly focused on reinventing the
iPhone every year and doing it at an insane scale
that they are not really sitting around pontificating. Matters of state.
The manufacturing design engineers who were routinely sent to China
would tell me that they lived a Groundhog Day existence, right?
(27:04):
Same meals each day, same phone call time, same meeting times,
and they're just sort of beating up on suppliers to
improve this and prove that everything else other than, um,
you know, experiencing what they would call OIC events only
in China, events they really weren't noticing the changes on
the ground politically and obviously the communist power, the Communist Party,
I should say, um, is quite an opaque organization. And
(27:27):
so I can't really blame Apple for not understanding that
XI Jinping was going to be a very different force.
I mean, I think I quote someone in the book
saying that like, you know, Jack Ma from Alibaba, he
got China wrong. So even if you can say Tim
Cook got China wrong, you've got to realize that. So
did some of China's biggest entrepreneurs. So did maybe the
West writ large.
S2 (27:46):
But you spoke to 200 odd people. Surely 1 or
2 of those people would have seen, or perhaps had
an inkling that that China was not just learning this
technology from the West, from from Apple, but weaponizing that
technology against the West and weaponizing it, for that matter,
(28:08):
against Apple's competitors.
S3 (28:09):
You'd be surprised. Uh, and how that's not necessarily the case, right?
Apple felt that. Well, hey, because we're teaching them they
have no reason to go after us. So certainly they'd
be familiar with something like high speed rail, uh, being
an instance of sort of textbook example, if you will,
where Beijing sort of put a prisoner's dilemma situation onto Kawasaki, Siemens,
(28:33):
Alstom and Bombardier, sort of the biggest for, you know,
high speed rail or even rail groups in the world
and basically offered them the biggest contract that they'd ever
seen in their life as as China was building out
rail car capacity. And each of those companies had to think, well,
if I say no because I'm worried about IP theft,
what happens when Kawasaki says yes, right. And so they
(28:56):
basically all say yes. And China is able to take
everything they need from them in a matter of years,
synthesize it into something. Let's use quote marks here new
and then oust those, those, those companies to such an
extent that within about eight years, it's the Chinese company
that's bidding for the high speed rail contract in California.
So they were very aware of the risks of IP theft,
(29:16):
and certainly they saw it in other sectors. But again,
these are great engineers. These aren't necessarily geopolitical strategists. I mean,
that's quite a different effort. And for the longest time
Apple has nothing like that. And let me just segue
into one thing. My favorite quote in the book was
something that someone said to me, um, over coffee in California,
(29:37):
and they said, you keep talking about geopolitics, but aren't
you overthinking your thesis? Because I was there in the
early 2000 when we were setting up the supply chain
in China. And I can tell you, we weren't thinking
about geopolitics at all. And I just end that section
by saying precisely.
S2 (29:53):
Which brings me to politics. Funnily enough, um, Donald Trump's
made a pledge to bring back manufacturing to the US.
And you talk about his first term in the book. Um, he, um, claimed, um,
more than once that Apple was, uh, reinvesting in America
during his first term. Um, did that happen?
S3 (30:12):
Oh, gosh, this is complex. A couple months ago, Apple,
you know, trying to get ahead of what they knew
would be, uh, some kind of tariff battle, even if
they didn't know the details, pledged that they would invest
$500 billion into the US over the next four years. Now,
most analysts have read this and they think, okay, the
math doesn't add up. So what it must mean is
(30:34):
that Apple's making this pledge, but they're not really going
to follow through on it. I think that's incorrect. I
think Apple is following through on that pledge. What we
don't know, and what I think Apple is obfuscating is
what they are counting as this $500 billion. So if
you read the press release really quickly, let's say you
would think, okay, this is a press release that basically
(30:55):
implies we're going to build iPhones and such in America,
because $500 billion is a massive amount. And it talks
about from the headline to the Tim Cook quote, you know,
building in America and bringing jobs here. Um, I believe
and I should say, I don't know this for a fact,
but if you do the math, there's only four initiatives
that are announced. Be generous with your math. You will
(31:16):
only get to $30 billion, maybe $50 billion. It's hard
to know how this goes up by another order of magnitude.
So I'm pretty confident that what Apple is counting here
is buybacks and dividends. So Apple spends about $100 billion
a year on share buybacks okay. This is purchases of
their own stock. $100 billion a year is so difficult
(31:38):
it's hard to comprehend. It's basically equivalent to Wall Street's
top seven banks combined in terms of what they buy
on buybacks. Now this this is just money that goes
to Apple shareholders. This has literally nothing to do with
reshoring or building in America or whatever. So if they
are indeed counting that, that alone would account for some
400 to 450 billion of the 500 billion, and then
(31:59):
I think the other 50 billion, you know, is about
building things like data servers for AI, you know, some
new facilities for training, this, that and the other thing.
But I think there's a massive bait and switch going
on here. But again, this is opinion. I don't have
it sort of leaked to me. Uh, but good luck
finding another explanation that's remotely credible.
S2 (32:17):
Well, I saw that press release you're talking about and
it talked about, um, um, AI server production, a massive
investment in that, which made me think, um, that this
money is all about in my naivety, you're the expert
was is all about, um, servers and AI software rather
than actually making the the phones in America.
S3 (32:40):
Yeah. So again, it does include that, but you're just
not going to get to $500 billion. For what? For
what is required by Apple. So I mean, for instance,
you know, this is not some new thing. Apple um,
because of iCloud, um, already has big server farms in America,
and we are talking about the tens of billion dollars
for that, but it's not as though they're adding to
that by, you know, ten times or 15 times. Um,
(33:04):
and frankly, if they were, that would actually be fairly
compelling as an investment and they could just flat out
say it, but they don't.
S2 (33:09):
Now I'm going to wind up with a big, um,
very big question. And that is, can companies like Apple
maintain their technological edge moving forward, or is the West
really losing the tech race now?
S3 (33:24):
Um, so let me give, I guess, two answers, an
Apple answer and then a wider answer. So the Apple
answer is Apple still has all the technical expertise in
order to make its phones and knows what to do.
The problem is there's no place on the planet to
actually execute on those plans. So if for some reason
China decided decided to, you know, cancel Apple's export license, right?
(33:47):
Or just close its factories? I mean, honestly, there is
no plan B. It is astonishing that a company that
built the world's most sophisticated supply chain made the calamitous
and rookie mistake of concentrating all its eggs in one basket.
I mean, just crazy. There really is no plan B,
and we can talk about India if you'd like. So
my answer for Apple is they still retain the technical
(34:09):
know how. They just can't do it without China. Uh,
more broadly yeah. I mean, we're absolutely losing losing out
on on how to actually make this stuff. And the
EVs are the best example that even before Trump, we've
got 100% tariffs on EVs. I mean, you only do
that if you realize that if there are no tariffs, GM, Ford,
(34:29):
probably even Tesla are all going to have their lunch
taken away by an onslaught of Chinese EV makers if
we come back to the smartphone sector. China already is
shipping more than 50% of all phones. That's before counting
all the phones that they're making for Apple. The only
real exception to global smartphone output that's not done in
China is Samsung.
S2 (34:50):
Extraordinary. Look, it's a fascinating subject and we could talk
for hours. Some great book. Thank you so much for
your time, Patrick.
S3 (34:57):
Thank you. I really appreciate it.
S1 (35:01):
That was Patrick McKee with Good Weekend. Acting Editor Greg
Callahan on the latest Good weekend talks. If you enjoyed
this episode, please remember to subscribe, rate and comment wherever
you get your podcasts and keep tuning in for more
compelling conversations coming soon. We talk with crime author Mark Brandy.
Good Weekend Talks is brought to you by the Sydney
(35:23):
Morning Herald and The Age. Proud newsrooms powered by subscriptions
to support independent journalism. Search, subscribe Sydney Morning Herald or
The Age? This episode of Good Weekend Talks is produced
by Konrad Marshall and edited by Tim Mummery, with technical
assistance from Josh towers. Tami Mills is our executive producer.
(35:43):
Tom McKendrick is head of audio and Greg Callahan is
the acting editor of Good Weekend.
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