How Apple Redefined ‘Made In China’

>> As President Trump prepares to meet with Xi Jinping this week,

“technology and trade will be top of mind.”

American tech giant Apple supercharged the Chinese tech sector over the past two decades, but with a new CEO taking over, it's unclear if the dynamic will continue. >> In this episode, we speak with journalists Patrick McGee of the free press, who has spent years digging into the complicated relationship between Apple and China, and its effect on the world on Georgia Howe with daily wire executive editor John Bickley,

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Joining us now is Patrick McGee, columnist at the free press and author of Apple in China. Patrick, thanks for coming on. My pleasure. Now, Apple recently announced that Tim Cook is going to be stepping down as CEO. We have John Ternus, who's going to be filling in in that role.

You wrote the other day that Tim Cook was great for Apple, but he wasn't necessarily great for America. What made you define his legacy in those terms?

“I think his legacy is undefined to be clear.”

So if you use the metrics that Wall Street uses, then clearly this guy is a rock star. He added $3.5 trillion to Apple's value. Since it became CEO, I mean, that's remarkable achievement. And even if people say, oh, he wasn't much for product innovator or whatever, I mean, you know, filling the shoes of the greatest product visionary of the last century

is no small feat, and he deserves all sorts of credit. But the decisions that he made from senior operations person from 1998 onwards, before he even becomes CEO, is just a massive trade-off in which Apple didn't just go to China because there was tech competence offered to Apple. Apple really went there to build the tech competence.

And I argue in my book that Apple is the biggest supporter of Made in China, 2025 inadvertently to be clear, but that's the program that Xi Jinping developed more than 10 years ago for China to become self-sufficient in a range of electronics and other categories

to basically sever its dependence on the West.

So what was the state of China's tech industry before Apple went in?

“I mean, when you were never kids, Made in China was synonymous with poorly made, right?”

And it was a place where like Mattel went to build toys. It was not really the place of high-end electronics. It certainly, Apple wasn't early in terms of outsourcing, even within the computer industry. But the computers that were made there from Dell and HP and Compac, you know, these were things that really didn't have any design aesthetic to them.

They were really easy to assemble. Apple really introduced a design aesthetic that redefined how plastic injection molding or metal stamping or all kinds of tooling could actually be implemented at enormous scale. The impact of that is that Apple sent over thousands upon thousands of engineers to train up hundreds of factories across China to get up to Apple levels of competence.

And then as the iPod, particularly than many in the nano and then followed by the iPhone, really exploded in global popularity, they trained those factories to scale up in terms of Apple levels of quantity as well.

Barry Naughton, trying to expert, has said that the most important thing to Xi Jinping

no bigger company sort of pursuing that achievement and forcing a whole host of suppliers to get up to those levels of quality than Apple, the world's most iconic company. Now, has China used those trained up employees that Apple paid for and then moved them

“into other high-tech domains or has Apple still the biggest game in town there?”

As much as Apple wanted to have this sort of asset manufacturing model, inherently if you're training up these teams to work on the iPhone, they look for something to do to keep their capacity running when they're not working on the Apple iPhone. And so the result of that is that the same factories that Apple trained up sort of turned around and then supported Xiaomi, Oppo, Vivo, and Huawei.

And those companies collectively have about 60% of the global market share for the smartphone, which is the world's most iconic product for the 21st century. And then, of course, they also took those skillsets and they developed other things. So, you know, what's an electric vehicle? It's a smartphone on wheels. What's a drone? It's a smartphone with propellers.

Basically, if you could master these sort of like glass ceramics, the camera, the battery,

all the things that go into a smartphone, you're being equipped with skillsets that are necessary for like any number of other industries that basically define our era. Now, when Apple went into China, it made great business sense for them at that time. But did it at some point become risky? Has Apple ever actually experienced risk from being so

“much in China? Or is it more just Americans that are experiencing a secondary risk?”

So, I really hold no blame whatsoever for anyone at Apple who moved to China. I think back then, it wasn't just bipartisan. Arguably, it was the entire American world view that we sort of had figured out where like human society was going. You know, think of Francis Fukyama, Charles Krautheimer would have made this argument as well. That a sort of small, ell liberal capitalism was the way that all societies were going to go.

And for a certain period, if American companies were investing in other countries,

you were basically accelerating their pathway to get there.

So, what really changed is that in the late 90s and early 2000s, people forget. But Apple was almost bankrupt in '96, '97, and again after the dot com crisis in 2000. They really moved to outsourcing and offshoring because of financial desperation. What really changes is in late 2012, early 2013, when Xi Jinping comes in. And this is a period in which Apple experiences its political awakening.

It has cracked the Chinese market, both as a retail giant and as an operator, and yet it knows surprisingly little in 2013 about Chinese politics, about Chinese culture. When Xi Jinping comes in, and this is the prologue to my book, Apple is basically attacked on the second day of his presidency. And it's this moment where Apple begins to worry that his products might be blacklisted in the country,

which was no sort of idle threat, Facebook and Google were both already blacklisted. And so, Apple basically begins to court local politicians, federal politicians, to basically get people off of their backs. And the result of that was that in May 2016, Tim Cook and a trio of top executives at Apple, go to Jiangnan High, which you can consider the equivalent of the White House.

And they basically make this enormous pledge to spend an invest $275 billion into Chinese factories

over the following five years.

“So, Apple's influence on China is just absolutely enormous, and I think pretty unheralded.”

So, just for clarity, what did Xi Jinping have against Apple? Because it would seem like this is a boon for China. They're bringing in all this money, a lot of their citizens are being trained up. Why did Xi Jinping see them as such a threat? Because Apple is such a secretive company that not even Beijing understood

what Apple's impact in the country was. So, for instance, Foxconn, which is the Taiwanese assembler of most Apple products, it was actually a larger company, both in terms of profit margins and absolute profits in dollars. In the first four years of their partnership in the early 21st century, then the iPod Nano takes off, and Apple margins within a decade go from about 1% to 26%.

And Foxconn margins go from double digits to about 3%. Right? So, one company's margins go up by 25 times, the others fall by 2/3. So, if you are Xi Jinping's lawyer at your thinking, well, this is a company that's just absolutely taking advantage of us and exploiting us at every turn. And so, this accusation essentially puts Apple on the back foot,

and they're the ones who then come up with the idea of, let's do our own supply chain study to analyze what our impact in the country is, and then they're able to basically turn the tables on the argument and say, "Look, you have no idea how much we're impact in the country. We're sending America's top engineers,

basically having them sleep on the factory floor." And the result is that the entire smartphone competence that Apple has embedded, basically, is giving rise to China's own global leading companies. So, the impact that Apple's had has been enormous, nobody knew about it, and it was Apple's job to basically market their own impact on the country.

To Xi Jinping and to his top echelon of Chinese leaders.

but they haven't really spoken much about China,

“and I think China is actually something that a lot of Americans”

on both side of the aisle are concerned about. So, how can we interpret Apple's silence on that issue? Let's just go right to the top. Tim Cook has said silence is the ultimate consent. Find me an issue in China where he's been vocal.

I don't know of any, you know. Someone like Jimmy Lai, an outspoken advocate of democracy in Hong Kong, was sentenced to 20 years, Apple had nothing to say. Steve Jobs is actually Jimmy Lai's hero. I mean, Jimmy Lai is a guy who has companies called Apple Daily.

He has another media organization called Next. I mean, these are named after Steve Jobs' organizations. You know, I still live in Hong Kong, and in 2019, Hong Kong had these protests. You can say for democracy, you could just say for a sort of one country, two systems approach where Hong Kong wanted to retain some of its autonomy.

And the way that Hong Kong protesters were communicating was using air drop. The sort of encrypted service on the iPhone.

Well, Beijing basically asked Apple to get rid of air drop and Apple complied.

“I mean, this was compared, I think, who's Mark Warner, Democratic Senator, who said Apple”

is doing the bidding of the Chinese Communist Party. This is a bipartisan view within Congress that Apple has basically been asked to jump by the Communist Party and Apple has said, how high? Right. Now, with John Turner stepping into CEO, do you anticipate any major changes to the company's direction? Do we know anything about him in particular, or how this change could affect Apple's

position towards China? So my biggest question for John Turner, who by all accounts is a likable guy, you know, competent guy, collegial guy, is whether he's genuinely the CEO. So he comes in in September. But Tim Cook, of course, is not retiring. Tim Cook is becoming executive chairman. And Apple's been explicit that the main thing that they want to keep Tim Cook around for is dealing with Washington Brussels and Beijing.

But that's the biggest open question I have about what's going to happen. My best guest in it is only an educated guest is that Apple knows that there are two major things that need to do over the next 10 to 20 years. One is that they are very behind in AI, and they need a better strategy. If something's going to take five, 10, 15, 20 years, you don't necessarily want someone who's 65 leading the charge. You want someone who's 50 and can see it through for the

long haul. And the other thing is that if they really are going to undo or at least replicate, let's say, they're trying to operations in another country, that also is a 10, 15, 20 year effort. And why would you have the architect of the China strategy in the hot seat, making those decisions, it makes more sense for John Turner to do it? Now, you mentioned AI, former Apple CEO John Scully says, "Open AI could be Apple's biggest

competitive threat." Is that your opinion as well? No, I mean, look, if Apple falls behind an AI, it's still the case that people are paying Apple, a 15 to 30% subscription fee every time they use the iPhone to subscribe to Claude, or a CHPT, or any number of the others. What's unclear is whether Apple is behind, Apple being behind actually is going to be a boon to them. So, for instance, it's obviously

clear that they blew a lead with Siri. I mean, Siri came out, I want to say in 2011, and either only time anyone uses Siri now is by accident. The fact that they haven't spent and spent and are not spending tens or hundreds of billions of dollars on data centers is looking pretty smart right now, as the market gets pretty worried about how much spending is going on at basically every other company. So, if they can just be the hardware vehicle

for other AI systems to operate on, then they're going to be looking pretty for quite some time. The risk, of course, is that AI really is the biggest thing since the web, if not bigger than the web, bigger than the personal computer. And if that's the case, then it's sort of a disaster that's such a creative forceful and virtually dollar company is basically just relying on others

“to do the innovation while they focus on hardware. So, honestly, that's a tough decision. I'm”

sort of skeptical of anyone who has a strong opinion one way or the other. I think it's a big unknown. So, now is John Ternis, a stepping in a CEO. What are you going to be watching for first? Kind of help us read the tea leaves? I can give you my unhinged, you know, a fan support.

Yeah, we want that. Fanciful wish, which is like Apple spends more than $100 billion a year

on share buybacks and dividends. The buybacks alone are more than $100 billion. That's such a hard number to comprehend. I have to give you an analogy. If you take all share buybacks at Wall Street's top seven banks, it's a little bit less than what Apple spends. Apple is enormous and it's hard to get one's mind around it. I think if Apple were to take a quarter of that and even better half of that to have a fund that builds resiliency into their supply chain, that would be my dream

pressurly. So, that's I would absolutely love to see that Apple is making major investments. Just some extent in America, but realistically, iPhones are going to be made in Pittsburgh. It's going to be in Carnotica. It's going to be in Tamilnadu. Maybe it's going to be in Mexico.

So, Apple and China, the capture of the world's greatest company, is like a 400-page narrative

“that really spells out how the world's greatest company builds the world's most sophisticated supply”

chain. But in the process, made the rookie and amateur mistake of putting all its eggs on one basket,

just as that basket became a surveillance state. That sounds deep and heavy and yet I have to say

“it's a really fun book. It's like this raw, raw, go Apple narrative in the early chapters because,”

you know, they're experimenting in Mexico and in Taiwan in Wales, in the Czech Republic,

trying to build their computers and they slowly get lured over to China where things just get

“better and better and better. All right. Well, Patrick, thank you so much for coming on.”

Thanks, Georgia. That was journalist and author Patrick McGee, and this has been a week into the show today.