June 2, 2025 • 46 mins
President Trump wants Apple to make iPhones in America. The company itself has talked about — and to some extent already has been — moving more of its production to other countries, like India. But in reality, Apple remains deeply, deeply enmeshed in the Chinese supply chain. In fact, the rise of Apple, and the iPhone specifically, is the ultimate example of the link between the American and Chinese economies. And while this has been fruitful for shareholders all around the world, and contributed greatly to Chinese economic development, this relationship is also now perceived to be a huge source of geopolitical vulnerability for the United States. On this episode, we speak with Patrick McGee, a reporter at the Financial Times and the author of the new book Apple In China: The Capture of the World's Greatest Company. He talks to us about how Apple discovered the opportunity of doing more manufacturing in China, and how close the company has become with Chinese political leadership. We walk through both the politics and the economics that makes it almost impossible to imagine the company building its products anywhere else at significant scale.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Hello, Odd Lots listeners.
Speaker 2 (00:01):
I'm Joe Wisenthal and I'm Tracy Alloway.
Speaker 3 (00:03):
Tracy.
Speaker 1 (00:04):
We're doing another live show and it's right here in
New York City.
Speaker 2 (00:07):
Yeah, this one should be our biggest yet, and we're
going to have a bunch of Odd Lots favorites and
do something maybe a little different to some of our
previous live podcast recordings.
Speaker 1 (00:18):
When the guests are revealed, the show is going to
sell out right away, so you should really just go
get your ticket right now. It's June twenty sixth. It's
at Recket, NYC, and you can find a ticket link
at Bloomberg dot com slash odd Lots or Bloomberg Events
dot com slash odd Lots Live and.
Speaker 2 (00:33):
Why we hope to see you there.
Speaker 4 (00:38):
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 1 (00:54):
Hello and welcome to another episode of the Oudlots podcast.
Speaker 2 (00:57):
I'm Joe Wisenthal and I'm Tracy Alloway.
Speaker 1 (01:00):
Tracy. I'm gonna confess something I've kind of hinted it.
Speaker 3 (01:03):
It's not that big of a confession, and.
Speaker 1 (01:05):
I've kind of hinted it already, which is that if
Trump wants to impose a bunch of terrorists on a
bunch of cheap, random plastic goods from China.
Speaker 3 (01:15):
I'm fine with that. That's cool.
Speaker 1 (01:16):
Fifty one hundred percent, one hundred and forty nine percent.
I'll consume less. I'll be a little bit more of
a monk or something like that.
Speaker 3 (01:24):
I'm fine with that.
Speaker 2 (01:25):
Okay, But isn't the argument not necessarily the cost, although
there is a cost on individual consumers. But the argument
is why do we want to focus on shifting plastic
production and toy manufacturing to the US. That's the criticism, right, Like,
why specifically focus on cheap goods in factories?
Speaker 3 (01:45):
Yeah?
Speaker 1 (01:46):
No, you might be right, Like, I don't think there's
much value in safe, you know, moving a plastic stepstule
factory or a stroller factory or whatever to the US.
Speaker 3 (01:56):
I don't.
Speaker 1 (01:57):
I don't really see the point. I want there to
be affordable strollers obviously, just buy and large a lot
of this stuff.
Speaker 2 (02:03):
Yes, fine, this is not much of a confession, Okay, but.
Speaker 1 (02:07):
I will confess too that if the price of a
new iPhone went up a lot, I would be pretty annoyed.
I tend to notice these things. I tend to replace
mine every two or three years or something like that.
There are areas that we do import significantly from China
that are not cheap child skis, cheap junk is. People
like to fantasize that that's all China produces. There are
(02:30):
areas that I would be very upset to pay a
significantly higher price.
Speaker 2 (02:34):
Well, getting back to the goal of tariffs and protectionist
trade policies, I assume, you know, putting tariffs on iPhones
would be about moving some of the production closer to home,
and I think there there's an open question about whether
we want that as well, because for most of our lifetimes,
the stories we've been hearing about iPhones in China are
(02:55):
all about how terrible the labor conditions are and how
difficult it is to actually make these things. So right,
I can see, you know, some strategic argument. Obviously, semiconductors
are considered a very important strategic goal nowadays, but the
actual manufacturing, you know, there is that China story out there.
Speaker 1 (03:14):
Anyway, I think the administration is very sensitive to people
like me. One of the first things, even in the
midst of the heat of the trade war, and I
should note we're recording this May twenty ninth, it could
be that the whole trade war is illegal. There was
that court ruling made last night. We really don't know
where things got to end up. They're clearly sensitive to
the iPhone thing, and so there were some carve outs
(03:35):
specifically related more or less related to that. I think
during the first Trump administration, Apple got some reprieve. These
are sensitive areas. Yes, we want to build up the
capacity to expand technological production, high tech things, high value
add things, and so forth, but we don't want the
sticker shock. This explains, of course, some of the sort
(03:58):
of multiple personalities administration, if you will.
Speaker 2 (04:02):
Well, there's also the added complexity of building up these
very very advanced supply chains, right, and if you look
at Apple and what they did in China, that was
built over the course of many, many years, decades even,
And the idea that the US is suddenly going to
flip a switch, a terriff switch and move all that
production elsewhere seems a little optimistic, right.
Speaker 1 (04:23):
And then there might be flipping a switch, but not
in the full direction. Maybe there are multiple dials on
the switch. Sure, so then one possibility that you hear
is okay, maybe move more to India. But I don't
think Trump likes that. But maybe that would be a
little bit better from the US perspective, in the sense
that we're not contributing as much to Chinese economic development,
and so, okay, it's not bringing jobs back, and Trump
(04:45):
said moving to the US. From time to time you
hear about maybe they could be built in Brazil or something.
But all of these raised the question. There's two things.
It's like, hey, is this realistic at all? If door
is switch that you could pull is move to the US,
move to India, that switch would have been moved. And
then the other thing, too is what does it even
mean to build the iPhone in India or the US,
(05:06):
because there's final assembly, et cetera. But of course component
parts within the iPhone themselves. Also, much of it is
actually made in China. And you know, I'm sure there's
thousands of tiny pieces of various things doing things, and
there many of them are built in China. So even
the idea of like we're going to move X production
to X country is not a clear statement because it
(05:30):
could just be the final packaging or whatever, and that's
not really where the value add lies, which means we
really have to more deeply understand how and what gets
built in China and what it would mean to even
move that. Well, we're even talked about when we're talking
about moving these things, let's do it. Well, I'm very
excited to say we do indeed have the perfect guest.
(05:51):
We're going to be speaking with Patrick McGee. He's at
the FT but he has a new book out came
out May thirteenth called Apple in China Like the Capture
of the World's Greatest Company, And it is a book
about the history of Apple's deep relationship with the state
of China, with the economy of China, the sort of
co evolution of these entities. So much of the iPhone
(06:12):
story we know is sort of inextricably connected with the
rise of Chinese manufacturing. This is what Tim Cook is
known for in the very beginning. So Patrick, thank you
so much for coming on outlaws my pleasure.
Speaker 3 (06:25):
Hi Joe, Hi Tracy.
Speaker 1 (06:26):
What does it mean if Apple says, oh, we're moving
more production to India or we want to what does
that term mean to you?
Speaker 3 (06:33):
Ah? Well, cleverly, they don't say that. They say they're
moving assembly because they they know, but the reader probably doesn't,
the lister probably doesn't. There's a massive distinction between assembly
and production. So I think Apple is sort of orchestrating
this effort. Right, There's no press release that says anything
from Apple, so you can't quote Apple. But insofar as
the word got out, you know, my money's on Koupatino
being behind this. So yeah, I mean put it this way,
(06:54):
if there are a thousand steps in making an iPhone
and the final one is now being done in India,
that's enough to have a quote unquote substantive change to
the product, and therefore the box can say made in India.
Nothing about that phone is any less dependent on the
China centric supply chain than any other phone you have
ever purchased.
Speaker 2 (07:11):
Okay, so on this note, maybe a good place to
start is walk us through your typical iPhone, the one
that Joe is buying every two or three years. What's
its I guess birth process, Like, where do iPhones come from?
And what is the actual supply chain that creates them.
Speaker 3 (07:27):
That's such a funny question. I'll tell you one funny answer,
which is that I asked, you know, a very senior
person at Apple how an iPhone is made, and he said,
have you seen the I Love Lucy clip of them
making chocolate have you ever seen that? Yeah, of course
I actually hadn't. So Okay, so picture of its conveyor
belt and the chocolate is coming so fast that eventually
they just start heating them rather than packaging them up. Okay,
So there's a method to the madness here. I mean,
(07:49):
Apple is able to take Adam Smith's idea the division
of labor and put it to the hilarious degree that
out does Nathan Field with the comedian trying to do
this with house cleaning two decades after the fact. So
it is often the fact that on a conveor belt
you have nine to eleven seconds to perform your task,
you know, putting a module in the left hand corner
or whatever, before the next iPhone comes over. So that's
the final assembly process, and that's really what is taking
(08:11):
place now in India ramping that up to avoid tariffs.
But the actual production we're talking one thousand components and
Apple works with the tightest engineering tolerances possible, only high
quality materials. That you put this in car terms, they
are making ten million porsches a year rather than ten
million volkswagons, right, and the numbers are just staggering. Right.
So if you're doing one thousand components a day, and
(08:33):
you're shipping one million iPhones a day. That means at
peak season, you were doing the manufacturing, the logistics, the
just in time production of one billion parts per day.
So find me an American factory that can do one
of those parts, because China has factories that can do
it for all one thousand. That's why nothing is moving
here anytime soon. It's the combination of Apple's imperfection for
(08:53):
defects quality and Apple's gar gantu and titanic like quantity.
Speaker 1 (08:59):
There is producttion of Apple products and I believe iPhones
in India or sorry, assembly of Apple products in India.
What do we know about the efficiency or the relative
efficiency because obviously the company has been thinking about these
risks for years and years and years, and I'm sure
would love to not be this tightly linked to one country,
(09:20):
which we know, for all the reasons we don't need
to get into is risky. What do we know about
the efficiency of its assembly in India?
Speaker 3 (09:28):
Let me just give you sort of objective numbers and
then we'll go from there. So the first iPhones made
in India were actually in twenty seventeen, OK, and by
twenty twenty three, India was assembling about twenty five million iPhones.
Go back a decade. The first iPhones were made in
China in two thousand and seven, and by two thousand
and fifteen you had two hundred and thirty million iPhones
(09:48):
being built. So roughly speaking, the quote unquote diversification in
India is happening at one tenth the pace of the
original creation and scale of the iPhone, and even that
vastly over the speed of development in India because, of course,
in the early years of the iPhone, I mean you're
literally inventing things like multi touch glass, right, you were
inventing and redesigning the iPhone every single year, whereas India
(10:11):
is basically just having to do the final steps in
the process, and it's still not happening very quickly. Now, really,
what changes is that in Shanghai twenty twenty two, the
city enters lockdown, and that's a city of more than
twenty five million people. It really is the first time
in Apple's two decade history in China where did the
government provincial officials in this case, really had made a
decision diametrically opposed to Apple's interests and that's when Plan
(10:33):
b Let's really ramp up in India went into effect.
But it's been almost three years since then, and even
so you don't have a whole lot going on there.
And yeah, I've talked to the engineers. They're called manufacturing
design engineers. These are the people who sort of do
the handholding the engineering one zho one in different countries,
and they've been ramping up in India, and what they
find is that the ecosystem isn't there, the industrial clusters
aren't there. You don't have eight lane highways to and
(10:56):
from the factories. You often sometimes don't even have stable
Wi Fi in the taxi the cab on the way
to the factory. Engineers are sometimes staying two hours away,
which means four hours of their day is just going
to and from the factory. And if they don't have
a stable cellular connection along the way, it can be
a little bit maddening. So many things you don't have.
And the other thing you just don't have is the
sort of Nietzschean will to power on the part of
(11:16):
New Delhi to make manufacturing their thing. And you don't
have what engineers call quote unquote China speed, which is
just like this inexplicable, speedy development that would wow Apple
engineers in the earliest years. So, just to give one
example that's not in the book, there was this example
where these engineers from Apple are in this factory that
needs to be sort of retooled for the Apple line,
and it's the size of a football field. It's enormous,
(11:38):
and they estimate, okay, it's going to take two to
three weeks to get this machine removed. They come back
the next day it's all been moved, and it's totally
blows their minds. All they've done is gone to sleep,
head breakfast, and come back and everything is complete. And
that which is happening in China all the time, and
it just is not happening in India.
Speaker 2 (12:10):
I like the idea of just one more lane bro
will solve our domestic iPhone assembly production problems. That's pretty funny. Okay,
So I want to back up a little bit, but
can we talk a little more about Apple strategy in
China specifically, So how much of that was a deliberate,
conscious decision versus something that just kind of happened alongside
(12:34):
I guess the wave of outsourcing and globalization that we
saw in the late nineteen nineties early two thousands.
Speaker 3 (12:41):
Yeah, great question. And what I like about your intro
tracy is that I really do think the story of
Apple and China over the last twenty years has really
just been about the tedium of assembly. A journalists have
won prizes for this kind of thing, right, and it's
set into motion this cat and mouse pattern where a
journalist goes into a factory and says, all these workers
are working too hard, there's underage employees, et cetera. And
then Apple is shame into making changes and it sort
of plays the role of White Knight improving factory conditions
(13:04):
across China's supply chain, and then journalist win's an award,
and then two years later someone does the next thing
in a different factory, and so on and so forth.
But we're totally overlooking questions of Apple strategy, like what
did they quote unquote discover in China that nobody else discovered?
And so really the book is an attempt to do that.
So the first thing I'd push back on is Tim
Cook is very often called the architect of the China strategy,
(13:25):
and it's not to discredit him to say that he
is not the architect. Nobody is the architect. Basically, what
happens is really the supply chain itself, with or without
Apple was moving to China. And so the basic history
of the eighties and nineties PC boom, like predating Windows
ninety five and then coming after, is that the fight
for computer dominance is exclusively based on things that are
(13:48):
boring logistics, manufacturing, distribution, right, because everybody's using Windows, everybody's
using Intel chips, and nobody's thinking about design. There is
no equivalent of Johnny I've at Dell, at Compac, at
any of these companies, and so it's really this mundane war,
and it's driven by largely American and later Taiwanese contract manufacturers,
and so they are the ones who, in competition with
(14:09):
each other, start going to Asia to sort of oust
each other right and gain market share, and eventually they're
the ones who really find China. So when Apple is
doing their own outsourcing moves, they're working in multiple countries
before the armies of flexible, ubiquitous, low paid labor in
China really win out. So my story has this five
part chapter called Apple's Long March to China. It really
(14:31):
tells you that the candy called iMac that I'm sure
both of you and all of your listeners remember, like
that was made out of Korea by LG who then
expanded to Mexicali and Wales. Fox Con is brought on
as a second supplier, and that's in China, but it's
also in the Czech Republic, and it's also curt in California.
But when you've got these operations in multiple countries, especially
(14:53):
once China enters the World Trade Organization two thousand and one,
all you have to do is look at an Excel
sheet and realize that the efficiency, cost, the scale and
anything China is winning. And so Apple begins to really
consolidate everything into China. And around two thousand and three
when the iPod Mini becomes the most ubiquitous product Apple's
ever created, and then there's just no question that when
(15:13):
the iPod nano is invented, that's where it's going to
be built, and when the iPhone comes out, that's where
it's going to be built. So it really is just
like stumbling into greater and greater volumes and success in China.
And I give all sorts of credit to China. I mean,
people think it's an anti China book. If they haven't
read it, it really isn't. There's only one place that
Apple could have succeeded the way they did, and it's
because China had tailor made policies. We're leading industrial clusters,
(15:34):
we're leading industrial policy and hardworking people that would do
this for twelve hours a day, six days a week.
Speaker 1 (15:39):
Is the book an anti Apple book? I mean you
say it's not an anti China book. Apple who's created
literally trillions of dollars in value for Americans. It's created
thousands and thousands of amazing, high paid jobs that are
much better than the jobs that are at the assembly
or factories that exist in China. Is it an anti
(16:01):
Apple book?
Speaker 3 (16:03):
No. Anyone thinking it's an anti Apple book will be
in for a rude awakening because you'll quickly realize that
for starters, when I say I spoke to more than
two hundred people, I'm only counting the people with Apple experience.
Then I spoke to other people as well, in supply chain, academics, journalists,
that kind of stuff. But it is told through the
eyes of the people in the weeds on the grounds,
you know, directing Apple's success. Right, So the first chapters
(16:24):
in particular, I mean, the first part is called Saving
Apple is really just a story of Apple's genius in
pulling off these maneuvers and coming off the brink of bankruptcy.
They are literally days away from missing payroll. In nineteen
ninety six, I think I reveal for the first time
they'd even hired a Chapter eleven lawyer. And then as
the sort of hail Mary move, once they've got a
bit more money after selling a factory in Colorado, they
bring back Steve jobs. And really the first narrative is
(16:47):
just like this raw raw, go Apple, Can they do it?
And even in two thousand with the dot com bust,
like they're close to bankruptcy again and Gateway literally tries
to acquire them. So the story is one of sleepwalking
into a geopolitical reality. Really, as China changes, I mean,
I don't criticize anyone at Apple for moving to China
in the early two thousands. That's what everybody was doing.
I would even say there was an American consensus rather
(17:09):
than some bipartisan effort, that going to China was good
because you were going to inculcate the next great democracy,
you know, and maybe in a hubristic or arrogant way.
But like Americans would have said, that's what we did
for Taiwan, that's what we did for Korea, Germany, et cetera.
I mean after World War Two. So there was all
sorts of reasons to move to China. The problematic decision
was that once Xijinping comes into power, Apple is not
(17:30):
an innocent bystander. As Xixhinping hardens his tone and becomes
more belligerent, he attacks Apple within thirty six hours of
taking the reins in March twenty thirteen, and that was
the point at which Apple could have made a strategic
decision to diversify its supply chain to India or something. Instead,
they ramp up their rewards for shareholders in the form
of buybacks and dividends, and they doubled down in China,
(17:52):
appointing a team to basically understand Chinese culture, understand Chinese politics,
and come up with a way of demonstrating to the
country and it's efficial. Look, we're really really in this
for China, as it were.
Speaker 2 (18:03):
What exactly was Apple's pitch to Chinese leadership? And I
guess how did it change over time? How much of
it was about, Oh, we're going to create jobs that
will pay more than agricultural wages, better standards of life,
maybe relatively, versus the strategic value of building up China's
tech sector and all this strategic semiconductor technology and things
(18:27):
like that. How did it shift over time?
Speaker 3 (18:30):
So it's a fascinating narrative, And really the first four
parts of the book leading up to twenty thirteen are
just foundation buildings, so you sort of understand the history
of Apple and what sort of problems they're having. Essentially,
what happens is when chies in paying at tax Apple,
you can understand why he's upset with the company. It
looks like an exploitative power because their margins. Apple margins
have gone from something like one percent in two thousand
(18:52):
and three to twenty five percent in twenty twelve. But
at the same time, if you look like a company
like Fox con foxhon in absolute dollars made more money
than Apple for each of the first four years of
the twenty first century. But as they get more involved
with Apple, their margins collapse from double digits to about
one or two percent. And so you can just do
this with really any company working with Apple, and it
looks like they're not in it for China, right, They're
(19:14):
not doing anything for the country. And Apple it takes
them two or three years, but they totally flip this
narrative on its head. So out of fear that Beijing
is going to force Apple to operate a bunch of
joint ventures, right, these fifty to fifty companies where China
owns the other half, and then they mimic the technology
and eventually oust you. I mean, this is what happened
in high speed rail for instance. Beijing has advocated joint
ventures for decades, really going back to the nineteen eighties.
(19:35):
So this is where a Western company is allowed to
be in the Chinese market. But the quid pro quo is, look,
if you want access to our operational efficiency, if you
want access to more than a billion people, you have
to operate in a joint venture where the Chinese half
of the company is going to learn everything they can
and then thrive on their own. Apple doesn't have any
joint ventures, and so they look like this anti China
(19:57):
model that's just exploiting the country. Is able to really
flip this on its head and say, look, it might
be the case that Samsung has three dozen joint ventures
and we have zero. But you need to understand we
work with hundreds of factories across the country. And the
reason they're only getting paid one percent margin, two percent margin,
the reason they're sometimes even losing money on their partnerships
with Apple is that we are offering them the equivalent
(20:20):
of Ivy League hardware engineering training. We are sending people
over by the literal planeload to China America's best engineers,
where they train, audit supervised, install hundreds of millions of
dollars worth of machinery. They train the line, they supervise
the line. And once those companies have these skills that
Apple gives to them, they are basically able, at least
(20:41):
after some time of exclusivity, they are able to supply
somebody else. So who's just like Apple, but in China, Huawei, Apo, Vivo,
Chaome and so those companies today have fifty five percent
global market share of the smartphones. And the reason that
they're so good is that Apple trained all of their suppliers.
So that's the message Apple gives to Beijing, and essentially
they've they sort of had a free ride ever since.
(21:01):
It would be insane for Beijing to go after Apple
in some direct way because Apple is the great teacher
of China. They offer way too much and the numbers
we can get into are staggering.
Speaker 1 (21:11):
Tracy real quickly before we move on. So Apple has
a three trillion dollar market cap. Do you want to
take a stab at what the market cap of Hanahei,
which is the company that owns Fox Hanhai Precision Industry.
Do you want to get guess what its market cap is?
Speaker 2 (21:25):
No, I absolutely do not. Just tell me so I
don't want to embarrass myself.
Speaker 1 (21:29):
Seventy two billion, three trillion versus Now, granted they're not
the only company that makes them, but yeah, these are
not as these are nowhere near as profitable industries use
this term. Apple is the great has been a great teacher,
and I want to get into what people have learned
from Apple development and then built competitive companies. But you
mentioned those old and I hadn't thought about them in
(21:50):
a long time, those old iMacs that were multicolor, that
called a lot of attention. Some of them were really
not trivial at all to build with the existing man
manufacturing technology that existed in the world at the time.
And I remember sometimes they would announce a new one,
and they're like, but we're really sorry to tell you
we're not going to be able to produce this one
in the emerald green yet because we haven't perfected how
(22:13):
to bend the plastic or whatever the material was, the
glass of emerald green, whatever that color is. It creates
an issue and all the people in the audience will
go boo.
Speaker 3 (22:22):
But then they'd get.
Speaker 1 (22:22):
There like six months later. And then you mentioned the
multi touch glass, which didn't originally exist at the time.
How much is it co learning? You know, we have
this divide of there the designers and coopertinos and the
assemblers and the builders somewhere in Asia. But something also happens,
And there's a theme repeatedly on the show where innovation
happens at the shop floor, and the idea of cleanly
(22:45):
drawing the line between the designers and the building is
a fallacy. It must be the case that at least
in some of these realms, whether we're talking about the glass,
whether we're talking about the ability to bold plastic green
plastic into a pretty iMac that innovation also happens in China,
and the Apple benefits from that learning as well.
Speaker 3 (23:05):
Yeah, I'm wondering if the right analogy would be something
like a graduate student at Harvard writing a paper with
their professor. Right, it is something along those lines, like
the Apple engineers by the planeload are going over there,
but they're absolutely co inventing something. Right. So I was
told that like the ideal manufacturing design engineer right would
look at what Johnny I had come up with and say,
I have no idea how to build that, but I'm
(23:27):
going to do my best to find out. Right, So
they would have a certain skill set and with a
whole team of people, of course, and they would go
to the Chinese factories and they find the suppliers who
might have some background in multi touch glass, let's say, right,
or we're adding electrical circuits to the glass, and then
they would train and co invent the next processes. So
they're not just co inventing the parts, they're co inventing
(23:47):
the processes that make the parts. Right, what Elon Must
sometimes calls the machine that creates the machine. So I'm
glad you brought this up, just because in no way
am I saying like the Chinese offered them nothing or
something like that, right, Like, it's not like to say
that Carvard it's a great school. Isn't to say that
like the students that go there don't deserve loads of credit.
Of course they do. And the same way like Apple
is a teacher of the Chinese and to be fair,
(24:08):
like the founder of Huawei has called Apple the teacher.
But that's not to say that they could have done
this anywhere. In fact, if anything, I think Apple has
a bit of hubris, believing that they can replicate their
twenty five year investment into China and go do it
in India. And it's like, guys do not understand like
the degree to which China was a once in a
century partner with all these tailor made policies, they would
(24:28):
just build factories at the time that you and I
would still be doing the environmental paperwork. I just don't
think you see that in India, and you don't see
that in America either. So China is not just like
a blank slate with lots of people. They offer all
kinds of things to Apple and Apple, and to be fair,
they offer all kinds of things to anybody. But Apple
understands the opportunity just better than anybody else.
Speaker 2 (25:03):
So you make the point in the book that there's
I guess a tension between a company like Apple and
they're very very sharp focus on shareholder returns and quarterly
profits and continued growth and just throwing off loads and
loads of cash. There's a tension with I guess nationalism
(25:24):
and economic and strategic development. And so Apple's focus on
growth has been to China's strategic and developmental benefit and
maybe less or so to America's at least in terms
of strategic things. And what's funny is right after this interview,
we're actually going to speak to Avadao, who wrote a
(25:44):
book on Huaii, and she makes the point. Yeah, she
makes the point it really dovetails with your book, but.
Speaker 1 (25:50):
We didn't mean to schedule like that.
Speaker 2 (25:51):
Yeah, yeah, But she makes the point that stock prices
and balance sheets can't fully capture the societal value of
a nation's technological competency. And this is something that maybe
Huawei understands better than an Apple. Where do you see
I guess the key differences in sort of corporate culture
between a Huawei and an Apple.
Speaker 3 (26:15):
So I might be taking this in a slightly different
direction than you're thinking. So if I need to re
answer in a second, let me know, but the Chinese
don't prioritize profits or margins the way that we do.
They prioritize control of the industry because if the Chinese
can take over something like electric vehicles, they in effect
de industrialize all their rivals and really gain dominance. The
(26:36):
place that you can see this most clearly is solar panels.
Nobody in China is making thirty percent margins on solar panels,
but more than ninety percent of solar panels are now
made in China. This is a technology that America invented
in the nineteen fifties and itself had eighty to ninety
percent market share of in the eighties, but we cannot compete.
That is basically what's happening with electric vehicles right now. Hence,
even before Donald Trump became president, Joe Biden put one
(26:58):
hundred percent tariffs on Chinese made evs, and I think
it was just a few days ago that BYD slashed
the prices of their evs in a bid for greater competitiveness.
So look, I think China has a state sponsored form
of capitalism. I'm emphasizing that it is a form of capitalism,
but it's not a shareholder maximization form of capitalism. It's
a command and control form of capitalism.
Speaker 1 (27:18):
You mentioned, and I had never I had either forgotten
about it, didn't realize that Shujinpin called out Apple very early,
within thirty six hours of taking power in twenty thirteen.
Can you talk a little bit about the sort of
evolution of the CCP and Apple's relationship with it over time.
There is obviously this perception then she specifically has taken
(27:40):
on this more nationalist, ambitious edge versus his predecessors. Can
you talk a little bit just more about that specific
relationship with Apple and the CCP itself, beyond just the
economic capacity on the ground.
Speaker 3 (27:57):
So Apple gets in a sense a misleading picture of
what it's like to operate in China because when they
really consolidate production, it's two thousand and three, and that's
the beginning era of Hu Jintao. Key later is nicknamed
the Woman with bound feet. His presidency is sometimes called
the collective presidency because there was really an inability for
just him alone to make decisions, and so it ends
(28:19):
up being this like ten year period of China being
a multinational playground where rules aren't really enforced, just like.
Speaker 1 (28:25):
This Honeymoon, this Honeymoon Golden Era, where like sort of
China on easy mode.
Speaker 3 (28:31):
Absolutely, yeah, and so Apple's really taken aback to the
point of just total confusion and having an inet response
when Xijinping really comes in and as I said, what
happens is like CTTV, which you could think of as
like a state sponsored CNN of the country, attacks Apple
for warranty differences of all things. It basically excuses Apple
of treating the Chinese customers in an inferior way by
(28:53):
refurbishing phones rather than giving them new phones when certain
problems are happening with them. And I have to say
this is the prologue to the book because basically opened
the book and in the first paragraph apples and crisis.
And so I'm trying to go for like a white
lotus opening, if you will, before it becomes like this
nice beach read with the overhang of suspense that you
know that you know it's going to hit the fan
by twenty thirteen. But I have to say the narrative
(29:14):
leading up to it is wild, which is that in
two thousand and eight, for the Beijing Olympics, Apple opens
its first store in China, purely as a marketing opportunity
for the Olympics. I mean they're actually happy that the
site they've been given is small, because everybody assumes it's
going to lose money. You have to remember that for
the first iPhone, Steve Bomber, Microsoft's CEO, laughed at the price,
and he's referring to American buyer saying, no one's going
(29:36):
to pay six hundred dollars for an iPhone. So if
you can understand like that, nobody thought it was going
to work in America. Why would there be a retail
sector in China, a country with developing wages and no
appetite for such an expensive product. Well, by twenty ten,
the iPhone just becomes the most conspicuous symbol of I've
made it in China, and to such an extent that,
like the lines outside what are now four stores in
(29:57):
China at the time, there's thousands of people. They're snake
climbing around these stores. But the thing is they're not
like Joe and Tracy excited for the next iPhone and
just camping out overnight because I have to have it.
It's migrants that have been trucked in like by the
bus load to buy as many iPhones as possible. So
these quasi gangsters, these scalpers known as yellow cows, can
(30:19):
a mass, let's say, ten thousand phones and go to
a city where there is no Apple store, and they
sell them at hawked up inflated prices because it's such
a conspicuous status symbol. I don't want to go on
and on about this, but essentially what happens is you
have to understand these gangsters are connected with the triads,
and they begin finding ways to make more money per
iPhone than Apple, but they're illegal ways. They're buying phones
(30:39):
in the US using fake IDs, so they're buying them
for less than one hundred dollars because they're buying a
twenty four month contract but only paying the first month.
They're smuggling them into the country, they're zapping the processor,
rendering the damn thing irre inoperable, but at the same
time masking that it's a stolen phone essentially, and Apple
is totally flum mixed, not understanding what's going on, not
understanding Chinese culture, certainly not understanding Chinese politics. And this
(31:02):
is the origin story of the warranty differences. It's because
Apple was trying to clamp down on these illegal practices,
and that story sort of gets lost in translation. But
that's why China's so upset with Apple in twenty thirteen.
Speaker 1 (31:13):
I want to.
Speaker 2 (31:13):
Correct the record here, which is I do not, in
fact camp out in front of an Apple stores waiting
for the latest iPhone. I think my iPhone is like
seven or eight years old. It works so well these days,
you really don't want to play exactly. I am the
customer that Apple hates because I am very satisfied with
my ancient phone.
Speaker 3 (31:31):
Okay, seriously, what model of iPhone you have? Is it
really an eight? Or well?
Speaker 2 (31:34):
This is I really don't I don't know either.
Speaker 1 (31:36):
If you had asked me ten years ago, what model
iPhone do you have? I would have been able to
answer right away. If you asked me right now, I
have no idea.
Speaker 3 (31:44):
I bought it.
Speaker 1 (31:45):
That's years ago. It's been so long since I've thought
that it was important to know the differences. You know,
at one point I was like, oh, that's a lot different.
Now it's like, there's the game seems so marginal at
this point from each generation, at least as someone.
Speaker 3 (31:59):
That's not you know, it's just cringing right now, I
hear that. Yeah, I don't care.
Speaker 1 (32:03):
Yeah, you said something interesting that at the time of
the rush to China, there was this sort of consensus
in the West that this was a good thing because
it would accelerate the process of democratization of liberalization, the
likes of which maybe we've seen in Korea, Taiwan, so forth.
On the other hand, in theory, one of the things
(32:23):
that business leaders really liked about doing business in China
was the fact unions aren't legal. There's this heavy hand
of the state that keeps wages in check, and keeps
organizations in check, and probably keeps environmental groups in check,
et cetera.
Speaker 3 (32:38):
How much was this.
Speaker 1 (32:39):
Tension not appreciated that this phenomenon that we may be
expected to see play out in China of liberalization and
democratization would have been explicitly not what the business leaders
going to this country would have wanted to see.
Speaker 3 (32:51):
I mean, there's absolutely a sense that business people had
just like agreed sense of why they wanted to be
in China. But I guess what I'm trying to push
back against is because it's like obviously a strategic error
in retrospect and obviously we experienced the China shock and
our own industries got hollowed out. I feel like now
there's just like a revisionist sense that like, we were
never doing this for valid reasons. There was never a
(33:13):
sort of like real geopolitical strategic sense, right that Bill
Clinton or Larry Summers were just like in the pocket
of business people and so forth. I just don't really
find that convincing. Taiwan was under martial law until the
late nineteen nineties, effectively, maybe it was the nineteen eighties,
but then in the late nineteen nineties they had their
first democratic elections. This is of course an ethnically Chinese island,
(33:34):
and you know, it was very much used. I mean,
however problematically, it was used as an example of we
could export democracy through capitalism. I do think there was
a track record and people made that argument in good faith,
in addition to business people who saw it for their
own purposes.
Speaker 2 (33:49):
So one way of describing that Apple China relationship is
they're sort of frenemies, right. There is a tension built
into the relationship, but both sides got something out of it.
If we fast forward to today's environment, we have tariffs
in the US obviously, although no one knows what's going
to happen with those. You have China making a very
(34:12):
conscious decision to build up its tech sector. Who has
the upper hand in the relationship right now? Who is
the power?
Speaker 3 (34:20):
So I would push back, I would not call them frenemies.
Tim Cook and Chiesiping, broadly speaking, have the same interests,
which is to say, the more that Apple is allowed
to have its production consolidated into China, the better their
scale is, the better their margins are, et cetera. That's
what Chijinping wants as well, because he understands, basically because
Apple taught him that having Apple production in the country
(34:41):
engenders a form of technology transfer that helps the rest
of the electronic sector, which is a quote China scholar
an economists very not and that is the most important
thing that Chijinping wants, right. I mean, I compare Apple's
presence in China to something like that of the Marshall Plan,
something that sounds insane until you look at the numbers
and you realize that it's bigger than Marshall Plan. So
(35:01):
the problem is actually that Donald Trump and Tim Cook
have diametrically opposed interest which is to say that if
Donald Trump could move all production out of China, he will. Well,
Apple doesn't want that. That's an existential threat quite. I
really mean that that's an existential threat to a three
trillion dollar company. So that's where the tension is. The
tension really isn't between Cook and she, as strange as
that is, it's between Cook.
Speaker 2 (35:22):
You really don't think there's tension between Apple and China,
even with the tech crackdown, even with Xijinping coming out.
One of the first things that he says is that
criticism of Apple, and clearly he's trying to like extract
some things from the company that the company is maybe
reluctant to give up.
Speaker 1 (35:40):
And the rise of really good Chinese competitors that are
winning market share all around the world, maybe outside the US.
Speaker 3 (35:47):
Yeah, so Tracy's examples are historical, right, So I'm not
saying there's never been tension. Of course, there's been loads
of tension, but the way that Apple responded was in
effect to playcate federal and provincial officials so that they
haven't really had any problem. Right. So there's a tension relationship,
let's say, But insofar as it's a marriage, I think
it's actually a pretty it's a Catholic marriage. There's not
(36:08):
going to be a divorce. It's going pretty well. The
problem isn't really between Apple and China. The problem is
to use the economic jargon, the negative externalities of the relationship. Right.
So the problem is that for everybody else this is
actually deeply problematic because if you have America's top engineers training,
a manufacturing supply chain that in effect can be weaponized,
(36:30):
and world's dominance, that's not a great place for Washington
or just your average American citizen. It's nice that this
relationship gives us relatively sophisticated and affordable iPhones, but the
downside here is that China is absolutely dominant in high
end electronics, and you can use those skills to build drones,
you can use those skills to build military weaponry. And
(36:50):
Apple would frankly be training their chip makers if it
weren't for a Senate coming down on them pretty hard
a couple of years ago. So that's the problem, right.
The problem isn't that something stops in the relationship between
Apple and China. The problem is that it continues.
Speaker 1 (37:04):
Just good to push back on this framing a little
bit and I certainly there is much that I find
very compelling.
Speaker 3 (37:11):
About this story.
Speaker 1 (37:13):
But you talk about the beginning of when the US
and Chinese economies really got integrated in the late nineties
early two thousands, sometime around Chinese ascension into the WTO,
Like everyone recognizes in retrospect that it's been a mistake,
and has it been?
Speaker 3 (37:28):
I mean again, the other thing is.
Speaker 1 (37:30):
That Apple is worth three trillion dollars. Almost every American
with any investment probably has some exposure to it. It's
been incredible for the development and the alleviation of poverty
in China. We've never gone to war with China. It
doesn't seem like you know, in the modern era, it
hasn't come close to happening, at least so far. Like,
(37:51):
isn't there a version of this story that as long
as we trust each other, Chinese students could come to
the US and we could have the good jobs of
like professorships at schools and so forth, and designers in California.
And isn't there a story where this has made the
world wealthier and more peaceful.
Speaker 3 (38:12):
So let me start just by completely agreeing with most
of the points you just made. I think the poverty
alleviation in China has been really important and a net
good for humanity, and I think we have over the
last twenty years been a sort of golden age of
you know, Silicon Valley works on the software, works on
the design, and China takes care of the hardware. And
insofar as there's like a mutually symbiotic relationship, there no
(38:32):
one fits that build better than Apple. So look, a
lot of good has come out of it. I mean
that that's absolutely true. I would totally disagree that we're
not seeing harbingers of war coming right. I mean, Chijinping
has literally said we will not leave the question of
Taiwan to the next generation. I think he's gone so
specific as to say that twenty twenty seven might be
the year that Beijing and exes Taiwan. I mean, that's
(38:53):
really troubling, especially if you're Taiwanese. But it's really troubling
if you understand the chip sector, because ninety percent of
advanced chips come out of the country, and American military
officials have said that like in the event that somehow
Beijing was able to take control of the FABS in Taiwan,
like we would go bomb them. We would bomb the FABS.
I mean they would like if somehow TSMC survived the war,
which is basically untenable, but if somehow they did, the
(39:15):
American military would see fit to destroy them, because the
idea that they would be in Chinese hands without exporting
to America would be existential. So there's that, and then
there's just you don't have to be anti CCP, you
don't have to be anti China to recognize that this
is clearly America's biggest rival really since the founding. It's
the USSR was never such an economic rival, never sort
(39:35):
of like rivaled America in terms of high end electronics.
I mean absolutely there was like a nuclear arms battle,
but the Chinese are far more sophisticated. And like I
wrote my thesis on a Grand Strategy in America, and
what I would point out is that like in the
nineteen eighties, America started spending more or on its military,
understanding that the Soviet economy was not as dynamic, right,
(39:56):
and so it wasn't growing as quickly, and so you
were going to accelerate their own dem eyes if you
sort of set up a military in which the Soviets
were likely to respond to the same vein. You cannot
apply that strategy to a country that is three or
four times the population and has literally been growing faster
than America for the last four decades. So it really
is a massive threat. And the idea that in the
event of some sort of battle, we're not able to
(40:17):
make stuff because we outsourced it all to China over
the last twenty five years is pretty dramatic. I just
think of World War two. Hitler was really concerned about
the US coming in because of their industrial capacity. We
used to call it Detroit, the arsenal of democracy. We
don't have an arsenal democracy anymore, but we have trained
up China to be an arsenal of communism. That's I
(40:37):
don't think you have to be hyperbolic to realize that
that's a big deal.
Speaker 2 (40:41):
I have just one more question, and I'm going to
ask it very very briefly, because we're getting squeezed for
a time. But to what degree does AI and the
rise of this new technology complicate the Apple China relationship.
Speaker 3 (40:55):
Really complicates it? So for two reasons. One is that
I would argue, or actually I could just demonstrate with
internal documents and some public documents that the iPhone has
become more Chinese with time. In other words, the number
of Chinese suppliers involved in the process is now much
greater than the number of Taiwanese or American multinationals operating
in the country or operating in their home countries. That
(41:15):
is put on steroids in the AI era because Chat,
TBT and other Western AI clients are not allowed on
the iPhone in China, and so Apple has to work
with the likes of bayd or Ali Baba to have AI,
let's say, displacing Siri or augmenting Siri. So that I
think is quite problematic because that means that Apple will
be in effect doing what they did for hardware, but
for AI. In other words, you'll have Apple software engineers
(41:38):
helping by Do, helping Ali Baba whoever their Chinese partner is,
to make sure that they have cutting edge AI in
the country. If it wasn't bad enough that Apple was
training up their hardware engineering to be world class, we're
now in a situation where Apple software engineers are going
to be training Chinese AI to be best in class.
Speaker 1 (41:54):
Very interesting stuff. Patrick McGee, thank you so much for
coming on Oline. That was a fantastic really fascinating conversation.
Urge everyone to check out the book. Appreciate you coming
on my pleasure, Tracy. I thought that was really good,
(42:20):
and I agree with that last point in the fundamental
sense that you know, I think arguably the relationship definitely
has been win win on multiple fronts, from the US,
from the Apple shareholders, from the Apple workers, from the
Chinese workers' perspective. But this idea there are now so
much risks concentrated under a specific dimension. Yeah, I take
(42:42):
that pretty seriously.
Speaker 2 (42:43):
Yeah, the negative externality point makes a lot of sense,
although I still think there are some tensions between Apple
and the CCP itself. The other thing I was thinking
about was, I guess we're hearing this repeatedly on the show,
and I probably don't even need to say it at
this point, but it is. It's so difficult to replicate
China's industrial strategy and its industrial management in other countries,
(43:07):
and I kind of at this point I wonder if
we'll ever get there.
Speaker 1 (43:11):
No, I don't think anyone will ever get there. In
some sense, what I suspect is the story is that
some of the Chinese industrial behemoths will slowly develop ecosystems
in other countries, but the companies are downstream from China,
and so I imagine, you know, you see more foreign outbound
investment from Chinese giants into Vietnam, into Cambodia, into Brazil,
(43:34):
et cetera. That might pose other risks and they're never
going to be the next China in some sense, but
you still get that capital deepening and wealth creation outside
of China, but likely driven by Chinese industrial giants.
Speaker 2 (43:48):
Also, Joe, yeah, I looked up my iPhone. Yeah, oh
it's an iPhone eleven. So I guess it's what are
we all years old?
Speaker 1 (43:56):
I have no idea what we're even on now, like
only the biggest iphe nerds. And I don't mean that
pejoratively maybe like I have. I just I used to
know these I think it's really important. I used to
know these things, and I don't at all.
Speaker 2 (44:08):
Where are at all iPhone sixteen.
Speaker 1 (44:12):
And iOS eighteen.
Speaker 2 (44:14):
Do you think one day we're going to get to
like iPhone two hundred and ninety eight, it'll just keep going.
Speaker 1 (44:18):
I don't know, but I think I saw our colleague
Mark German, who is And now you say again, say
this lovingly and Apple NERD. I think apparently, at least
with the software, they're going to change their naming conventions
at some point. Yeah, so that it doesn't end.
Speaker 3 (44:31):
That makes sense.
Speaker 1 (44:32):
Yeah, I think I saw him tweet that last night.
Speaker 2 (44:34):
Okay, well, shall we leave it there.
Speaker 3 (44:35):
Let's leave it there.
Speaker 2 (44:36):
This has been another episode of the Add Thoughts podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 1 (44:42):
And I'm Jill Wisenthal. You can follow me at the Stalwart.
Follow Patrick McGee He's at Patrick McGee Underscore and check
out his new book. Follow our producers Carmen Rodriguez at
Carman armand dash, Ol Bennett at Dashbot and kel Brooks
at Cale Brooks. From our odd Lots content, go to
Bloomberg dot com slash odd Lots, where the daily newsletter
and all of our episodes, and you can chat about
(45:03):
all of these topics twenty four to seven in our
discord Discord dot gg slash odlock.
Speaker 2 (45:09):
And if you enjoy odd Lots, if you like it
when we talk about Apple in China, then please leave
us a positive review on your favorite podcast platform. And remember,
if you are a Bloomberg subscriber, you can listen to
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to do is find the Bloomberg channel on Apple Podcasts
and follow the instructions there. Thanks for listening
Speaker 3 (46:00):
And
Hello, Odd Lots listeners.
Speaker 2 (00:01):
I'm Joe Wisenthal and I'm Tracy Alloway.
Speaker 3 (00:03):
Tracy.
Speaker 1 (00:04):
We're doing another live show and it's right here in
New York City.
Speaker 2 (00:07):
Yeah, this one should be our biggest yet, and we're
going to have a bunch of Odd Lots favorites and
do something maybe a little different to some of our
previous live podcast recordings.
Speaker 1 (00:18):
When the guests are revealed, the show is going to
sell out right away, so you should really just go
get your ticket right now. It's June twenty sixth. It's
at Recket, NYC, and you can find a ticket link
at Bloomberg dot com slash odd Lots or Bloomberg Events
dot com slash odd Lots Live and.
Speaker 2 (00:33):
Why we hope to see you there.
Speaker 4 (00:38):
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 1 (00:54):
Hello and welcome to another episode of the Oudlots podcast.
Speaker 2 (00:57):
I'm Joe Wisenthal and I'm Tracy Alloway.
Speaker 1 (01:00):
Tracy. I'm gonna confess something I've kind of hinted it.
Speaker 3 (01:03):
It's not that big of a confession, and.
Speaker 1 (01:05):
I've kind of hinted it already, which is that if
Trump wants to impose a bunch of terrorists on a
bunch of cheap, random plastic goods from China.
Speaker 3 (01:15):
I'm fine with that. That's cool.
Speaker 1 (01:16):
Fifty one hundred percent, one hundred and forty nine percent.
I'll consume less. I'll be a little bit more of
a monk or something like that.
Speaker 3 (01:24):
I'm fine with that.
Speaker 2 (01:25):
Okay, But isn't the argument not necessarily the cost, although
there is a cost on individual consumers. But the argument
is why do we want to focus on shifting plastic
production and toy manufacturing to the US. That's the criticism, right, Like,
why specifically focus on cheap goods in factories?
Speaker 3 (01:45):
Yeah?
Speaker 1 (01:46):
No, you might be right, Like, I don't think there's
much value in safe, you know, moving a plastic stepstule
factory or a stroller factory or whatever to the US.
Speaker 3 (01:56):
I don't.
Speaker 1 (01:57):
I don't really see the point. I want there to
be affordable strollers obviously, just buy and large a lot
of this stuff.
Speaker 2 (02:03):
Yes, fine, this is not much of a confession, Okay, but.
Speaker 1 (02:07):
I will confess too that if the price of a
new iPhone went up a lot, I would be pretty annoyed.
I tend to notice these things. I tend to replace
mine every two or three years or something like that.
There are areas that we do import significantly from China
that are not cheap child skis, cheap junk is. People
like to fantasize that that's all China produces. There are
(02:30):
areas that I would be very upset to pay a
significantly higher price.
Speaker 2 (02:34):
Well, getting back to the goal of tariffs and protectionist
trade policies, I assume, you know, putting tariffs on iPhones
would be about moving some of the production closer to home,
and I think there there's an open question about whether
we want that as well, because for most of our lifetimes,
the stories we've been hearing about iPhones in China are
(02:55):
all about how terrible the labor conditions are and how
difficult it is to actually make these things. So right,
I can see, you know, some strategic argument. Obviously, semiconductors
are considered a very important strategic goal nowadays, but the
actual manufacturing, you know, there is that China story out there.
Speaker 1 (03:14):
Anyway, I think the administration is very sensitive to people
like me. One of the first things, even in the
midst of the heat of the trade war, and I
should note we're recording this May twenty ninth, it could
be that the whole trade war is illegal. There was
that court ruling made last night. We really don't know
where things got to end up. They're clearly sensitive to
the iPhone thing, and so there were some carve outs
(03:35):
specifically related more or less related to that. I think
during the first Trump administration, Apple got some reprieve. These
are sensitive areas. Yes, we want to build up the
capacity to expand technological production, high tech things, high value
add things, and so forth, but we don't want the
sticker shock. This explains, of course, some of the sort
(03:58):
of multiple personalities administration, if you will.
Speaker 2 (04:02):
Well, there's also the added complexity of building up these
very very advanced supply chains, right, and if you look
at Apple and what they did in China, that was
built over the course of many, many years, decades even,
And the idea that the US is suddenly going to
flip a switch, a terriff switch and move all that
production elsewhere seems a little optimistic, right.
Speaker 1 (04:23):
And then there might be flipping a switch, but not
in the full direction. Maybe there are multiple dials on
the switch. Sure, so then one possibility that you hear
is okay, maybe move more to India. But I don't
think Trump likes that. But maybe that would be a
little bit better from the US perspective, in the sense
that we're not contributing as much to Chinese economic development,
and so, okay, it's not bringing jobs back, and Trump
(04:45):
said moving to the US. From time to time you
hear about maybe they could be built in Brazil or something.
But all of these raised the question. There's two things.
It's like, hey, is this realistic at all? If door
is switch that you could pull is move to the US,
move to India, that switch would have been moved. And
then the other thing, too is what does it even
mean to build the iPhone in India or the US,
(05:06):
because there's final assembly, et cetera. But of course component
parts within the iPhone themselves. Also, much of it is
actually made in China. And you know, I'm sure there's
thousands of tiny pieces of various things doing things, and
there many of them are built in China. So even
the idea of like we're going to move X production
to X country is not a clear statement because it
(05:30):
could just be the final packaging or whatever, and that's
not really where the value add lies, which means we
really have to more deeply understand how and what gets
built in China and what it would mean to even
move that. Well, we're even talked about when we're talking
about moving these things, let's do it. Well, I'm very
excited to say we do indeed have the perfect guest.
(05:51):
We're going to be speaking with Patrick McGee. He's at
the FT but he has a new book out came
out May thirteenth called Apple in China Like the Capture
of the World's Greatest Company, And it is a book
about the history of Apple's deep relationship with the state
of China, with the economy of China, the sort of
co evolution of these entities. So much of the iPhone
(06:12):
story we know is sort of inextricably connected with the
rise of Chinese manufacturing. This is what Tim Cook is
known for in the very beginning. So Patrick, thank you
so much for coming on outlaws my pleasure.
Speaker 3 (06:25):
Hi Joe, Hi Tracy.
Speaker 1 (06:26):
What does it mean if Apple says, oh, we're moving
more production to India or we want to what does
that term mean to you?
Speaker 3 (06:33):
Ah? Well, cleverly, they don't say that. They say they're
moving assembly because they they know, but the reader probably doesn't,
the lister probably doesn't. There's a massive distinction between assembly
and production. So I think Apple is sort of orchestrating
this effort. Right, There's no press release that says anything
from Apple, so you can't quote Apple. But insofar as
the word got out, you know, my money's on Koupatino
being behind this. So yeah, I mean put it this way,
(06:54):
if there are a thousand steps in making an iPhone
and the final one is now being done in India,
that's enough to have a quote unquote substantive change to
the product, and therefore the box can say made in India.
Nothing about that phone is any less dependent on the
China centric supply chain than any other phone you have
ever purchased.
Speaker 2 (07:11):
Okay, so on this note, maybe a good place to
start is walk us through your typical iPhone, the one
that Joe is buying every two or three years. What's
its I guess birth process, Like, where do iPhones come from?
And what is the actual supply chain that creates them.
Speaker 3 (07:27):
That's such a funny question. I'll tell you one funny answer,
which is that I asked, you know, a very senior
person at Apple how an iPhone is made, and he said,
have you seen the I Love Lucy clip of them
making chocolate have you ever seen that? Yeah, of course
I actually hadn't. So Okay, so picture of its conveyor
belt and the chocolate is coming so fast that eventually
they just start heating them rather than packaging them up. Okay,
So there's a method to the madness here. I mean,
(07:49):
Apple is able to take Adam Smith's idea the division
of labor and put it to the hilarious degree that
out does Nathan Field with the comedian trying to do
this with house cleaning two decades after the fact. So
it is often the fact that on a conveor belt
you have nine to eleven seconds to perform your task,
you know, putting a module in the left hand corner
or whatever, before the next iPhone comes over. So that's
the final assembly process, and that's really what is taking
(08:11):
place now in India ramping that up to avoid tariffs.
But the actual production we're talking one thousand components and
Apple works with the tightest engineering tolerances possible, only high
quality materials. That you put this in car terms, they
are making ten million porsches a year rather than ten
million volkswagons, right, and the numbers are just staggering. Right.
So if you're doing one thousand components a day, and
(08:33):
you're shipping one million iPhones a day. That means at
peak season, you were doing the manufacturing, the logistics, the
just in time production of one billion parts per day.
So find me an American factory that can do one
of those parts, because China has factories that can do
it for all one thousand. That's why nothing is moving
here anytime soon. It's the combination of Apple's imperfection for
(08:53):
defects quality and Apple's gar gantu and titanic like quantity.
Speaker 1 (08:59):
There is producttion of Apple products and I believe iPhones
in India or sorry, assembly of Apple products in India.
What do we know about the efficiency or the relative
efficiency because obviously the company has been thinking about these
risks for years and years and years, and I'm sure
would love to not be this tightly linked to one country,
(09:20):
which we know, for all the reasons we don't need
to get into is risky. What do we know about
the efficiency of its assembly in India?
Speaker 3 (09:28):
Let me just give you sort of objective numbers and
then we'll go from there. So the first iPhones made
in India were actually in twenty seventeen, OK, and by
twenty twenty three, India was assembling about twenty five million iPhones.
Go back a decade. The first iPhones were made in
China in two thousand and seven, and by two thousand
and fifteen you had two hundred and thirty million iPhones
(09:48):
being built. So roughly speaking, the quote unquote diversification in
India is happening at one tenth the pace of the
original creation and scale of the iPhone, and even that
vastly over the speed of development in India because, of course,
in the early years of the iPhone, I mean you're
literally inventing things like multi touch glass, right, you were
inventing and redesigning the iPhone every single year, whereas India
(10:11):
is basically just having to do the final steps in
the process, and it's still not happening very quickly. Now, really,
what changes is that in Shanghai twenty twenty two, the
city enters lockdown, and that's a city of more than
twenty five million people. It really is the first time
in Apple's two decade history in China where did the
government provincial officials in this case, really had made a
decision diametrically opposed to Apple's interests and that's when Plan
(10:33):
b Let's really ramp up in India went into effect.
But it's been almost three years since then, and even
so you don't have a whole lot going on there.
And yeah, I've talked to the engineers. They're called manufacturing
design engineers. These are the people who sort of do
the handholding the engineering one zho one in different countries,
and they've been ramping up in India, and what they
find is that the ecosystem isn't there, the industrial clusters
aren't there. You don't have eight lane highways to and
(10:56):
from the factories. You often sometimes don't even have stable
Wi Fi in the taxi the cab on the way
to the factory. Engineers are sometimes staying two hours away,
which means four hours of their day is just going
to and from the factory. And if they don't have
a stable cellular connection along the way, it can be
a little bit maddening. So many things you don't have.
And the other thing you just don't have is the
sort of Nietzschean will to power on the part of
(11:16):
New Delhi to make manufacturing their thing. And you don't
have what engineers call quote unquote China speed, which is
just like this inexplicable, speedy development that would wow Apple
engineers in the earliest years. So, just to give one
example that's not in the book, there was this example
where these engineers from Apple are in this factory that
needs to be sort of retooled for the Apple line,
and it's the size of a football field. It's enormous,
(11:38):
and they estimate, okay, it's going to take two to
three weeks to get this machine removed. They come back
the next day it's all been moved, and it's totally
blows their minds. All they've done is gone to sleep,
head breakfast, and come back and everything is complete. And
that which is happening in China all the time, and
it just is not happening in India.
Speaker 2 (12:10):
I like the idea of just one more lane bro
will solve our domestic iPhone assembly production problems. That's pretty funny. Okay,
So I want to back up a little bit, but
can we talk a little more about Apple strategy in
China specifically, So how much of that was a deliberate,
conscious decision versus something that just kind of happened alongside
(12:34):
I guess the wave of outsourcing and globalization that we
saw in the late nineteen nineties early two thousands.
Speaker 3 (12:41):
Yeah, great question. And what I like about your intro
tracy is that I really do think the story of
Apple and China over the last twenty years has really
just been about the tedium of assembly. A journalists have
won prizes for this kind of thing, right, and it's
set into motion this cat and mouse pattern where a
journalist goes into a factory and says, all these workers
are working too hard, there's underage employees, et cetera. And
then Apple is shame into making changes and it sort
of plays the role of White Knight improving factory conditions
(13:04):
across China's supply chain, and then journalist win's an award,
and then two years later someone does the next thing
in a different factory, and so on and so forth.
But we're totally overlooking questions of Apple strategy, like what
did they quote unquote discover in China that nobody else discovered?
And so really the book is an attempt to do that.
So the first thing I'd push back on is Tim
Cook is very often called the architect of the China strategy,
(13:25):
and it's not to discredit him to say that he
is not the architect. Nobody is the architect. Basically, what
happens is really the supply chain itself, with or without
Apple was moving to China. And so the basic history
of the eighties and nineties PC boom, like predating Windows
ninety five and then coming after, is that the fight
for computer dominance is exclusively based on things that are
(13:48):
boring logistics, manufacturing, distribution, right, because everybody's using Windows, everybody's
using Intel chips, and nobody's thinking about design. There is
no equivalent of Johnny I've at Dell, at Compac, at
any of these companies, and so it's really this mundane war,
and it's driven by largely American and later Taiwanese contract manufacturers,
and so they are the ones who, in competition with
(14:09):
each other, start going to Asia to sort of oust
each other right and gain market share, and eventually they're
the ones who really find China. So when Apple is
doing their own outsourcing moves, they're working in multiple countries
before the armies of flexible, ubiquitous, low paid labor in
China really win out. So my story has this five
part chapter called Apple's Long March to China. It really
(14:31):
tells you that the candy called iMac that I'm sure
both of you and all of your listeners remember, like
that was made out of Korea by LG who then
expanded to Mexicali and Wales. Fox Con is brought on
as a second supplier, and that's in China, but it's
also in the Czech Republic, and it's also curt in California.
But when you've got these operations in multiple countries, especially
(14:53):
once China enters the World Trade Organization two thousand and one,
all you have to do is look at an Excel
sheet and realize that the efficiency, cost, the scale and
anything China is winning. And so Apple begins to really
consolidate everything into China. And around two thousand and three
when the iPod Mini becomes the most ubiquitous product Apple's
ever created, and then there's just no question that when
(15:13):
the iPod nano is invented, that's where it's going to
be built, and when the iPhone comes out, that's where
it's going to be built. So it really is just
like stumbling into greater and greater volumes and success in China.
And I give all sorts of credit to China. I mean,
people think it's an anti China book. If they haven't
read it, it really isn't. There's only one place that
Apple could have succeeded the way they did, and it's
because China had tailor made policies. We're leading industrial clusters,
(15:34):
we're leading industrial policy and hardworking people that would do
this for twelve hours a day, six days a week.
Speaker 1 (15:39):
Is the book an anti Apple book? I mean you
say it's not an anti China book. Apple who's created
literally trillions of dollars in value for Americans. It's created
thousands and thousands of amazing, high paid jobs that are
much better than the jobs that are at the assembly
or factories that exist in China. Is it an anti
(16:01):
Apple book?
Speaker 3 (16:03):
No. Anyone thinking it's an anti Apple book will be
in for a rude awakening because you'll quickly realize that
for starters, when I say I spoke to more than
two hundred people, I'm only counting the people with Apple experience.
Then I spoke to other people as well, in supply chain, academics, journalists,
that kind of stuff. But it is told through the
eyes of the people in the weeds on the grounds,
you know, directing Apple's success. Right, So the first chapters
(16:24):
in particular, I mean, the first part is called Saving
Apple is really just a story of Apple's genius in
pulling off these maneuvers and coming off the brink of bankruptcy.
They are literally days away from missing payroll. In nineteen
ninety six, I think I reveal for the first time
they'd even hired a Chapter eleven lawyer. And then as
the sort of hail Mary move, once they've got a
bit more money after selling a factory in Colorado, they
bring back Steve jobs. And really the first narrative is
(16:47):
just like this raw raw, go Apple, Can they do it?
And even in two thousand with the dot com bust,
like they're close to bankruptcy again and Gateway literally tries
to acquire them. So the story is one of sleepwalking
into a geopolitical reality. Really, as China changes, I mean,
I don't criticize anyone at Apple for moving to China
in the early two thousands. That's what everybody was doing.
I would even say there was an American consensus rather
(17:09):
than some bipartisan effort, that going to China was good
because you were going to inculcate the next great democracy,
you know, and maybe in a hubristic or arrogant way.
But like Americans would have said, that's what we did
for Taiwan, that's what we did for Korea, Germany, et cetera.
I mean after World War Two. So there was all
sorts of reasons to move to China. The problematic decision
was that once Xijinping comes into power, Apple is not
(17:30):
an innocent bystander. As Xixhinping hardens his tone and becomes
more belligerent, he attacks Apple within thirty six hours of
taking the reins in March twenty thirteen, and that was
the point at which Apple could have made a strategic
decision to diversify its supply chain to India or something. Instead,
they ramp up their rewards for shareholders in the form
of buybacks and dividends, and they doubled down in China,
(17:52):
appointing a team to basically understand Chinese culture, understand Chinese politics,
and come up with a way of demonstrating to the
country and it's efficial. Look, we're really really in this
for China, as it were.
Speaker 2 (18:03):
What exactly was Apple's pitch to Chinese leadership? And I
guess how did it change over time? How much of
it was about, Oh, we're going to create jobs that
will pay more than agricultural wages, better standards of life,
maybe relatively, versus the strategic value of building up China's
tech sector and all this strategic semiconductor technology and things
(18:27):
like that. How did it shift over time?
Speaker 3 (18:30):
So it's a fascinating narrative, And really the first four
parts of the book leading up to twenty thirteen are
just foundation buildings, so you sort of understand the history
of Apple and what sort of problems they're having. Essentially,
what happens is when chies in paying at tax Apple,
you can understand why he's upset with the company. It
looks like an exploitative power because their margins. Apple margins
have gone from something like one percent in two thousand
(18:52):
and three to twenty five percent in twenty twelve. But
at the same time, if you look like a company
like Fox con foxhon in absolute dollars made more money
than Apple for each of the first four years of
the twenty first century. But as they get more involved
with Apple, their margins collapse from double digits to about
one or two percent. And so you can just do
this with really any company working with Apple, and it
looks like they're not in it for China, right, They're
(19:14):
not doing anything for the country. And Apple it takes
them two or three years, but they totally flip this
narrative on its head. So out of fear that Beijing
is going to force Apple to operate a bunch of
joint ventures, right, these fifty to fifty companies where China
owns the other half, and then they mimic the technology
and eventually oust you. I mean, this is what happened
in high speed rail for instance. Beijing has advocated joint
ventures for decades, really going back to the nineteen eighties.
(19:35):
So this is where a Western company is allowed to
be in the Chinese market. But the quid pro quo is, look,
if you want access to our operational efficiency, if you
want access to more than a billion people, you have
to operate in a joint venture where the Chinese half
of the company is going to learn everything they can
and then thrive on their own. Apple doesn't have any
joint ventures, and so they look like this anti China
(19:57):
model that's just exploiting the country. Is able to really
flip this on its head and say, look, it might
be the case that Samsung has three dozen joint ventures
and we have zero. But you need to understand we
work with hundreds of factories across the country. And the
reason they're only getting paid one percent margin, two percent margin,
the reason they're sometimes even losing money on their partnerships
with Apple is that we are offering them the equivalent
(20:20):
of Ivy League hardware engineering training. We are sending people
over by the literal planeload to China America's best engineers,
where they train, audit supervised, install hundreds of millions of
dollars worth of machinery. They train the line, they supervise
the line. And once those companies have these skills that
Apple gives to them, they are basically able, at least
(20:41):
after some time of exclusivity, they are able to supply
somebody else. So who's just like Apple, but in China, Huawei, Apo, Vivo,
Chaome and so those companies today have fifty five percent
global market share of the smartphones. And the reason that
they're so good is that Apple trained all of their suppliers.
So that's the message Apple gives to Beijing, and essentially
they've they sort of had a free ride ever since.
(21:01):
It would be insane for Beijing to go after Apple
in some direct way because Apple is the great teacher
of China. They offer way too much and the numbers
we can get into are staggering.
Speaker 1 (21:11):
Tracy real quickly before we move on. So Apple has
a three trillion dollar market cap. Do you want to
take a stab at what the market cap of Hanahei,
which is the company that owns Fox Hanhai Precision Industry.
Do you want to get guess what its market cap is?
Speaker 2 (21:25):
No, I absolutely do not. Just tell me so I
don't want to embarrass myself.
Speaker 1 (21:29):
Seventy two billion, three trillion versus Now, granted they're not
the only company that makes them, but yeah, these are
not as these are nowhere near as profitable industries use
this term. Apple is the great has been a great teacher,
and I want to get into what people have learned
from Apple development and then built competitive companies. But you
mentioned those old and I hadn't thought about them in
(21:50):
a long time, those old iMacs that were multicolor, that
called a lot of attention. Some of them were really
not trivial at all to build with the existing man
manufacturing technology that existed in the world at the time.
And I remember sometimes they would announce a new one,
and they're like, but we're really sorry to tell you
we're not going to be able to produce this one
in the emerald green yet because we haven't perfected how
(22:13):
to bend the plastic or whatever the material was, the
glass of emerald green, whatever that color is. It creates
an issue and all the people in the audience will
go boo.
Speaker 3 (22:22):
But then they'd get.
Speaker 1 (22:22):
There like six months later. And then you mentioned the
multi touch glass, which didn't originally exist at the time.
How much is it co learning? You know, we have
this divide of there the designers and coopertinos and the
assemblers and the builders somewhere in Asia. But something also happens,
And there's a theme repeatedly on the show where innovation
happens at the shop floor, and the idea of cleanly
(22:45):
drawing the line between the designers and the building is
a fallacy. It must be the case that at least
in some of these realms, whether we're talking about the glass,
whether we're talking about the ability to bold plastic green
plastic into a pretty iMac that innovation also happens in China,
and the Apple benefits from that learning as well.
Speaker 3 (23:05):
Yeah, I'm wondering if the right analogy would be something
like a graduate student at Harvard writing a paper with
their professor. Right, it is something along those lines, like
the Apple engineers by the planeload are going over there,
but they're absolutely co inventing something. Right. So I was
told that like the ideal manufacturing design engineer right would
look at what Johnny I had come up with and say,
I have no idea how to build that, but I'm
(23:27):
going to do my best to find out. Right, So
they would have a certain skill set and with a
whole team of people, of course, and they would go
to the Chinese factories and they find the suppliers who
might have some background in multi touch glass, let's say, right,
or we're adding electrical circuits to the glass, and then
they would train and co invent the next processes. So
they're not just co inventing the parts, they're co inventing
(23:47):
the processes that make the parts. Right, what Elon Must
sometimes calls the machine that creates the machine. So I'm
glad you brought this up, just because in no way
am I saying like the Chinese offered them nothing or
something like that, right, Like, it's not like to say
that Carvard it's a great school. Isn't to say that
like the students that go there don't deserve loads of credit.
Of course they do. And the same way like Apple
is a teacher of the Chinese and to be fair,
(24:08):
like the founder of Huawei has called Apple the teacher.
But that's not to say that they could have done
this anywhere. In fact, if anything, I think Apple has
a bit of hubris, believing that they can replicate their
twenty five year investment into China and go do it
in India. And it's like, guys do not understand like
the degree to which China was a once in a
century partner with all these tailor made policies, they would
(24:28):
just build factories at the time that you and I
would still be doing the environmental paperwork. I just don't
think you see that in India, and you don't see
that in America either. So China is not just like
a blank slate with lots of people. They offer all
kinds of things to Apple and Apple, and to be fair,
they offer all kinds of things to anybody. But Apple
understands the opportunity just better than anybody else.
Speaker 2 (25:03):
So you make the point in the book that there's
I guess a tension between a company like Apple and
they're very very sharp focus on shareholder returns and quarterly
profits and continued growth and just throwing off loads and
loads of cash. There's a tension with I guess nationalism
(25:24):
and economic and strategic development. And so Apple's focus on
growth has been to China's strategic and developmental benefit and
maybe less or so to America's at least in terms
of strategic things. And what's funny is right after this interview,
we're actually going to speak to Avadao, who wrote a
(25:44):
book on Huaii, and she makes the point. Yeah, she
makes the point it really dovetails with your book, but.
Speaker 1 (25:50):
We didn't mean to schedule like that.
Speaker 2 (25:51):
Yeah, yeah, But she makes the point that stock prices
and balance sheets can't fully capture the societal value of
a nation's technological competency. And this is something that maybe
Huawei understands better than an Apple. Where do you see
I guess the key differences in sort of corporate culture
between a Huawei and an Apple.
Speaker 3 (26:15):
So I might be taking this in a slightly different
direction than you're thinking. So if I need to re
answer in a second, let me know, but the Chinese
don't prioritize profits or margins the way that we do.
They prioritize control of the industry because if the Chinese
can take over something like electric vehicles, they in effect
de industrialize all their rivals and really gain dominance. The
(26:36):
place that you can see this most clearly is solar panels.
Nobody in China is making thirty percent margins on solar panels,
but more than ninety percent of solar panels are now
made in China. This is a technology that America invented
in the nineteen fifties and itself had eighty to ninety
percent market share of in the eighties, but we cannot compete.
That is basically what's happening with electric vehicles right now. Hence,
even before Donald Trump became president, Joe Biden put one
(26:58):
hundred percent tariffs on Chinese made evs, and I think
it was just a few days ago that BYD slashed
the prices of their evs in a bid for greater competitiveness.
So look, I think China has a state sponsored form
of capitalism. I'm emphasizing that it is a form of capitalism,
but it's not a shareholder maximization form of capitalism. It's
a command and control form of capitalism.
Speaker 1 (27:18):
You mentioned, and I had never I had either forgotten
about it, didn't realize that Shujinpin called out Apple very early,
within thirty six hours of taking power in twenty thirteen.
Can you talk a little bit about the sort of
evolution of the CCP and Apple's relationship with it over time.
There is obviously this perception then she specifically has taken
(27:40):
on this more nationalist, ambitious edge versus his predecessors. Can
you talk a little bit just more about that specific
relationship with Apple and the CCP itself, beyond just the
economic capacity on the ground.
Speaker 3 (27:57):
So Apple gets in a sense a misleading picture of
what it's like to operate in China because when they
really consolidate production, it's two thousand and three, and that's
the beginning era of Hu Jintao. Key later is nicknamed
the Woman with bound feet. His presidency is sometimes called
the collective presidency because there was really an inability for
just him alone to make decisions, and so it ends
(28:19):
up being this like ten year period of China being
a multinational playground where rules aren't really enforced, just like.
Speaker 1 (28:25):
This Honeymoon, this Honeymoon Golden Era, where like sort of
China on easy mode.
Speaker 3 (28:31):
Absolutely, yeah, and so Apple's really taken aback to the
point of just total confusion and having an inet response
when Xijinping really comes in and as I said, what
happens is like CTTV, which you could think of as
like a state sponsored CNN of the country, attacks Apple
for warranty differences of all things. It basically excuses Apple
of treating the Chinese customers in an inferior way by
(28:53):
refurbishing phones rather than giving them new phones when certain
problems are happening with them. And I have to say
this is the prologue to the book because basically opened
the book and in the first paragraph apples and crisis.
And so I'm trying to go for like a white
lotus opening, if you will, before it becomes like this
nice beach read with the overhang of suspense that you
know that you know it's going to hit the fan
by twenty thirteen. But I have to say the narrative
(29:14):
leading up to it is wild, which is that in
two thousand and eight, for the Beijing Olympics, Apple opens
its first store in China, purely as a marketing opportunity
for the Olympics. I mean they're actually happy that the
site they've been given is small, because everybody assumes it's
going to lose money. You have to remember that for
the first iPhone, Steve Bomber, Microsoft's CEO, laughed at the price,
and he's referring to American buyer saying, no one's going
(29:36):
to pay six hundred dollars for an iPhone. So if
you can understand like that, nobody thought it was going
to work in America. Why would there be a retail
sector in China, a country with developing wages and no
appetite for such an expensive product. Well, by twenty ten,
the iPhone just becomes the most conspicuous symbol of I've
made it in China, and to such an extent that,
like the lines outside what are now four stores in
(29:57):
China at the time, there's thousands of people. They're snake
climbing around these stores. But the thing is they're not
like Joe and Tracy excited for the next iPhone and
just camping out overnight because I have to have it.
It's migrants that have been trucked in like by the
bus load to buy as many iPhones as possible. So
these quasi gangsters, these scalpers known as yellow cows, can
(30:19):
a mass, let's say, ten thousand phones and go to
a city where there is no Apple store, and they
sell them at hawked up inflated prices because it's such
a conspicuous status symbol. I don't want to go on
and on about this, but essentially what happens is you
have to understand these gangsters are connected with the triads,
and they begin finding ways to make more money per
iPhone than Apple, but they're illegal ways. They're buying phones
(30:39):
in the US using fake IDs, so they're buying them
for less than one hundred dollars because they're buying a
twenty four month contract but only paying the first month.
They're smuggling them into the country, they're zapping the processor,
rendering the damn thing irre inoperable, but at the same
time masking that it's a stolen phone essentially, and Apple
is totally flum mixed, not understanding what's going on, not
understanding Chinese culture, certainly not understanding Chinese politics. And this
(31:02):
is the origin story of the warranty differences. It's because
Apple was trying to clamp down on these illegal practices,
and that story sort of gets lost in translation. But
that's why China's so upset with Apple in twenty thirteen.
Speaker 1 (31:13):
I want to.
Speaker 2 (31:13):
Correct the record here, which is I do not, in
fact camp out in front of an Apple stores waiting
for the latest iPhone. I think my iPhone is like
seven or eight years old. It works so well these days,
you really don't want to play exactly. I am the
customer that Apple hates because I am very satisfied with
my ancient phone.
Speaker 3 (31:31):
Okay, seriously, what model of iPhone you have? Is it
really an eight? Or well?
Speaker 2 (31:34):
This is I really don't I don't know either.
Speaker 1 (31:36):
If you had asked me ten years ago, what model
iPhone do you have? I would have been able to
answer right away. If you asked me right now, I
have no idea.
Speaker 3 (31:44):
I bought it.
Speaker 1 (31:45):
That's years ago. It's been so long since I've thought
that it was important to know the differences. You know,
at one point I was like, oh, that's a lot different.
Now it's like, there's the game seems so marginal at
this point from each generation, at least as someone.
Speaker 3 (31:59):
That's not you know, it's just cringing right now, I
hear that. Yeah, I don't care.
Speaker 1 (32:03):
Yeah, you said something interesting that at the time of
the rush to China, there was this sort of consensus
in the West that this was a good thing because
it would accelerate the process of democratization of liberalization, the
likes of which maybe we've seen in Korea, Taiwan, so forth.
On the other hand, in theory, one of the things
(32:23):
that business leaders really liked about doing business in China
was the fact unions aren't legal. There's this heavy hand
of the state that keeps wages in check, and keeps
organizations in check, and probably keeps environmental groups in check,
et cetera.
Speaker 3 (32:38):
How much was this.
Speaker 1 (32:39):
Tension not appreciated that this phenomenon that we may be
expected to see play out in China of liberalization and
democratization would have been explicitly not what the business leaders
going to this country would have wanted to see.
Speaker 3 (32:51):
I mean, there's absolutely a sense that business people had
just like agreed sense of why they wanted to be
in China. But I guess what I'm trying to push
back against is because it's like obviously a strategic error
in retrospect and obviously we experienced the China shock and
our own industries got hollowed out. I feel like now
there's just like a revisionist sense that like, we were
never doing this for valid reasons. There was never a
(33:13):
sort of like real geopolitical strategic sense, right that Bill
Clinton or Larry Summers were just like in the pocket
of business people and so forth. I just don't really
find that convincing. Taiwan was under martial law until the
late nineteen nineties, effectively, maybe it was the nineteen eighties,
but then in the late nineteen nineties they had their
first democratic elections. This is of course an ethnically Chinese island,
(33:34):
and you know, it was very much used. I mean,
however problematically, it was used as an example of we
could export democracy through capitalism. I do think there was
a track record and people made that argument in good faith,
in addition to business people who saw it for their
own purposes.
Speaker 2 (33:49):
So one way of describing that Apple China relationship is
they're sort of frenemies, right. There is a tension built
into the relationship, but both sides got something out of it.
If we fast forward to today's environment, we have tariffs
in the US obviously, although no one knows what's going
to happen with those. You have China making a very
(34:12):
conscious decision to build up its tech sector. Who has
the upper hand in the relationship right now? Who is
the power?
Speaker 3 (34:20):
So I would push back, I would not call them frenemies.
Tim Cook and Chiesiping, broadly speaking, have the same interests,
which is to say, the more that Apple is allowed
to have its production consolidated into China, the better their
scale is, the better their margins are, et cetera. That's
what Chijinping wants as well, because he understands, basically because
Apple taught him that having Apple production in the country
(34:41):
engenders a form of technology transfer that helps the rest
of the electronic sector, which is a quote China scholar
an economists very not and that is the most important
thing that Chijinping wants, right. I mean, I compare Apple's
presence in China to something like that of the Marshall Plan,
something that sounds insane until you look at the numbers
and you realize that it's bigger than Marshall Plan. So
(35:01):
the problem is actually that Donald Trump and Tim Cook
have diametrically opposed interest which is to say that if
Donald Trump could move all production out of China, he will. Well,
Apple doesn't want that. That's an existential threat quite. I
really mean that that's an existential threat to a three
trillion dollar company. So that's where the tension is. The
tension really isn't between Cook and she, as strange as
that is, it's between Cook.
Speaker 2 (35:22):
You really don't think there's tension between Apple and China,
even with the tech crackdown, even with Xijinping coming out.
One of the first things that he says is that
criticism of Apple, and clearly he's trying to like extract
some things from the company that the company is maybe
reluctant to give up.
Speaker 1 (35:40):
And the rise of really good Chinese competitors that are
winning market share all around the world, maybe outside the US.
Speaker 3 (35:47):
Yeah, so Tracy's examples are historical, right, So I'm not
saying there's never been tension. Of course, there's been loads
of tension, but the way that Apple responded was in
effect to playcate federal and provincial officials so that they
haven't really had any problem. Right. So there's a tension relationship,
let's say, But insofar as it's a marriage, I think
it's actually a pretty it's a Catholic marriage. There's not
(36:08):
going to be a divorce. It's going pretty well. The
problem isn't really between Apple and China. The problem is
to use the economic jargon, the negative externalities of the relationship. Right.
So the problem is that for everybody else this is
actually deeply problematic because if you have America's top engineers training,
a manufacturing supply chain that in effect can be weaponized,
(36:30):
and world's dominance, that's not a great place for Washington
or just your average American citizen. It's nice that this
relationship gives us relatively sophisticated and affordable iPhones, but the
downside here is that China is absolutely dominant in high
end electronics, and you can use those skills to build drones,
you can use those skills to build military weaponry. And
(36:50):
Apple would frankly be training their chip makers if it
weren't for a Senate coming down on them pretty hard
a couple of years ago. So that's the problem, right.
The problem isn't that something stops in the relationship between
Apple and China. The problem is that it continues.
Speaker 1 (37:04):
Just good to push back on this framing a little
bit and I certainly there is much that I find
very compelling.
Speaker 3 (37:11):
About this story.
Speaker 1 (37:13):
But you talk about the beginning of when the US
and Chinese economies really got integrated in the late nineties
early two thousands, sometime around Chinese ascension into the WTO,
Like everyone recognizes in retrospect that it's been a mistake,
and has it been?
Speaker 3 (37:28):
I mean again, the other thing is.
Speaker 1 (37:30):
That Apple is worth three trillion dollars. Almost every American
with any investment probably has some exposure to it. It's
been incredible for the development and the alleviation of poverty
in China. We've never gone to war with China. It
doesn't seem like you know, in the modern era, it
hasn't come close to happening, at least so far. Like,
(37:51):
isn't there a version of this story that as long
as we trust each other, Chinese students could come to
the US and we could have the good jobs of
like professorships at schools and so forth, and designers in California.
And isn't there a story where this has made the
world wealthier and more peaceful.
Speaker 3 (38:12):
So let me start just by completely agreeing with most
of the points you just made. I think the poverty
alleviation in China has been really important and a net
good for humanity, and I think we have over the
last twenty years been a sort of golden age of
you know, Silicon Valley works on the software, works on
the design, and China takes care of the hardware. And
insofar as there's like a mutually symbiotic relationship, there no
(38:32):
one fits that build better than Apple. So look, a
lot of good has come out of it. I mean
that that's absolutely true. I would totally disagree that we're
not seeing harbingers of war coming right. I mean, Chijinping
has literally said we will not leave the question of
Taiwan to the next generation. I think he's gone so
specific as to say that twenty twenty seven might be
the year that Beijing and exes Taiwan. I mean, that's
(38:53):
really troubling, especially if you're Taiwanese. But it's really troubling
if you understand the chip sector, because ninety percent of
advanced chips come out of the country, and American military
officials have said that like in the event that somehow
Beijing was able to take control of the FABS in Taiwan,
like we would go bomb them. We would bomb the FABS.
I mean they would like if somehow TSMC survived the war,
which is basically untenable, but if somehow they did, the
(39:15):
American military would see fit to destroy them, because the
idea that they would be in Chinese hands without exporting
to America would be existential. So there's that, and then
there's just you don't have to be anti CCP, you
don't have to be anti China to recognize that this
is clearly America's biggest rival really since the founding. It's
the USSR was never such an economic rival, never sort
(39:35):
of like rivaled America in terms of high end electronics.
I mean absolutely there was like a nuclear arms battle,
but the Chinese are far more sophisticated. And like I
wrote my thesis on a Grand Strategy in America, and
what I would point out is that like in the
nineteen eighties, America started spending more or on its military,
understanding that the Soviet economy was not as dynamic, right,
(39:56):
and so it wasn't growing as quickly, and so you
were going to accelerate their own dem eyes if you
sort of set up a military in which the Soviets
were likely to respond to the same vein. You cannot
apply that strategy to a country that is three or
four times the population and has literally been growing faster
than America for the last four decades. So it really
is a massive threat. And the idea that in the
event of some sort of battle, we're not able to
(40:17):
make stuff because we outsourced it all to China over
the last twenty five years is pretty dramatic. I just
think of World War two. Hitler was really concerned about
the US coming in because of their industrial capacity. We
used to call it Detroit, the arsenal of democracy. We
don't have an arsenal democracy anymore, but we have trained
up China to be an arsenal of communism. That's I
(40:37):
don't think you have to be hyperbolic to realize that
that's a big deal.
Speaker 2 (40:41):
I have just one more question, and I'm going to
ask it very very briefly, because we're getting squeezed for
a time. But to what degree does AI and the
rise of this new technology complicate the Apple China relationship.
Speaker 3 (40:55):
Really complicates it? So for two reasons. One is that
I would argue, or actually I could just demonstrate with
internal documents and some public documents that the iPhone has
become more Chinese with time. In other words, the number
of Chinese suppliers involved in the process is now much
greater than the number of Taiwanese or American multinationals operating
in the country or operating in their home countries. That
(41:15):
is put on steroids in the AI era because Chat,
TBT and other Western AI clients are not allowed on
the iPhone in China, and so Apple has to work
with the likes of bayd or Ali Baba to have AI,
let's say, displacing Siri or augmenting Siri. So that I
think is quite problematic because that means that Apple will
be in effect doing what they did for hardware, but
for AI. In other words, you'll have Apple software engineers
(41:38):
helping by Do, helping Ali Baba whoever their Chinese partner is,
to make sure that they have cutting edge AI in
the country. If it wasn't bad enough that Apple was
training up their hardware engineering to be world class, we're
now in a situation where Apple software engineers are going
to be training Chinese AI to be best in class.
Speaker 1 (41:54):
Very interesting stuff. Patrick McGee, thank you so much for
coming on Oline. That was a fantastic really fascinating conversation.
Urge everyone to check out the book. Appreciate you coming
on my pleasure, Tracy. I thought that was really good,
(42:20):
and I agree with that last point in the fundamental
sense that you know, I think arguably the relationship definitely
has been win win on multiple fronts, from the US,
from the Apple shareholders, from the Apple workers, from the
Chinese workers' perspective. But this idea there are now so
much risks concentrated under a specific dimension. Yeah, I take
(42:42):
that pretty seriously.
Speaker 2 (42:43):
Yeah, the negative externality point makes a lot of sense,
although I still think there are some tensions between Apple
and the CCP itself. The other thing I was thinking
about was, I guess we're hearing this repeatedly on the show,
and I probably don't even need to say it at
this point, but it is. It's so difficult to replicate
China's industrial strategy and its industrial management in other countries,
(43:07):
and I kind of at this point I wonder if
we'll ever get there.
Speaker 1 (43:11):
No, I don't think anyone will ever get there. In
some sense, what I suspect is the story is that
some of the Chinese industrial behemoths will slowly develop ecosystems
in other countries, but the companies are downstream from China,
and so I imagine, you know, you see more foreign outbound
investment from Chinese giants into Vietnam, into Cambodia, into Brazil,
(43:34):
et cetera. That might pose other risks and they're never
going to be the next China in some sense, but
you still get that capital deepening and wealth creation outside
of China, but likely driven by Chinese industrial giants.
Speaker 2 (43:48):
Also, Joe, yeah, I looked up my iPhone. Yeah, oh
it's an iPhone eleven. So I guess it's what are
we all years old?
Speaker 1 (43:56):
I have no idea what we're even on now, like
only the biggest iphe nerds. And I don't mean that
pejoratively maybe like I have. I just I used to
know these I think it's really important. I used to
know these things, and I don't at all.
Speaker 2 (44:08):
Where are at all iPhone sixteen.
Speaker 1 (44:12):
And iOS eighteen.
Speaker 2 (44:14):
Do you think one day we're going to get to
like iPhone two hundred and ninety eight, it'll just keep going.
Speaker 1 (44:18):
I don't know, but I think I saw our colleague
Mark German, who is And now you say again, say
this lovingly and Apple NERD. I think apparently, at least
with the software, they're going to change their naming conventions
at some point. Yeah, so that it doesn't end.
Speaker 3 (44:31):
That makes sense.
Speaker 1 (44:32):
Yeah, I think I saw him tweet that last night.
Speaker 2 (44:34):
Okay, well, shall we leave it there.
Speaker 3 (44:35):
Let's leave it there.
Speaker 2 (44:36):
This has been another episode of the Add Thoughts podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 1 (44:42):
And I'm Jill Wisenthal. You can follow me at the Stalwart.
Follow Patrick McGee He's at Patrick McGee Underscore and check
out his new book. Follow our producers Carmen Rodriguez at
Carman armand dash, Ol Bennett at Dashbot and kel Brooks
at Cale Brooks. From our odd Lots content, go to
Bloomberg dot com slash odd Lots, where the daily newsletter
and all of our episodes, and you can chat about
(45:03):
all of these topics twenty four to seven in our
discord Discord dot gg slash odlock.
Speaker 2 (45:09):
And if you enjoy odd Lots, if you like it
when we talk about Apple in China, then please leave
us a positive review on your favorite podcast platform. And remember,
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and follow the instructions there. Thanks for listening
Speaker 3 (46:00):
And
Hosts And Creators
Joe Weisenthal
Tracy Alloway
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