We've missed covering the biggest story of how Apple makes its products over the last 20 years. If you're looking at all the manufacturing taking place for Apple in like year 2000, it's like nine countries. By the end of the decade, it's basically just in China, which is basically still true today. Oh, it's more true. It was sort of an evolution that, you know, one thing led to another led to another led to another, and oh my god, we're in China.
The story you tell is that Apple basically exported its intellectual property to China. They didn't sell it to them, they trained them. The Chinese are the biggest US adversary in the world. And we're just gifting that, playing the role of Prometheus to the Chinese. So business ties unbreakable. Political ties totally untenable. This should not be going on.
But what China is getting out of it is essentially a national security risk.
Do you think anybody in the US government really understands this?
I think Apple is really in a position where there's no winning formula. There's no obvious move to get out. You encircle your opponent so that they can no longer make any strategic moves. I think that is where Apple is right now. They cannot do anything to move to the US. They cannot make major moves to India. China has them captured.
Wow.
Hi, it's Steve Eisman. Welcome to another edition of my podcast. So, I have a very interesting guest today. Let me tell you the origin of it. Few weeks ago, I interviewed Wolfgang Munchau who wrote a book called Kaput, the end of the German economic miracle. And I learned a lot from reading the book, but I also learned a lot from interviewing him. And I realized that in this time where trade is such a central topic, the details really matter. And we're going to talk about Apple today. We're having Patrick McGee, who is the author of a new book, Apple in China, which I spent the entire weekend reading. Amazing. I basically didn't leave my home. It was that good. Not a spy thriller, but still really good. And we're going to talk about how Apple got into China and what the implications of it are today. So, why don't we go back to 1997? Steve Jobs has just come back and I'm not interested in all the innovation that took place. I'm interested in something much more mundane which is tell us how did Apple make stuff back then actually manufacture it, how was it done?
Is it fine if I go back to 1996? The reason why is I think if we're doing 97 we're already falling into sort of the Apple trap. Go where you want to go. Steve Jobs is the person who says that 1997 is the nadir of Apple, right? And that's because he's there so he's the guy who pulls it out of the brink, right? I give him credit for that. But the worst time is the year before. Spring of 1996, this is when they're days away from meeting payroll and when they've hired a Chapter 11 lawyer, which I think was revealed for the first time in the opening chapter of the book.
Yeah. I'd never heard of that before. I didn't know it was that.
No, I don't think anybody knew it was quite that bad. Yeah. And I named the law firm. Just to give us...
It's Harvey Miller, the famous bankruptcy lawyer.
Yeah, exactly. So, yeah. I mean, I say that in a footnote that I think I'm revealing that it's, you know, not totally clear to me, but I've never seen it anywhere else and it was news to me when I received it. So, let's see. They so they have this like triple consonant strategy, right? So Apple's founded in 1976 and the ethos back then really is that you build your own computers. I mean just out of necessity to some degree. I mean there isn't globalization of electronics at that time. And if you remember like how Steve Jobs and Wozniak really become friends, it's that they're going to these like um what are they called like the these like Homestead Steve Brew meetings or what have you where they're tinkering with computers and sort of imagining what the future might be and stuff. So once Apple develops after a few years, they've got factories in California, in Ireland, and in Singapore. So they're sort of having like a at the continental level localized production and distribution. And they are really doing what you would now associate with someone like Foxconn.
But that idea was just beginning to sort of come into existence for electronics. Certainly didn't. Just tell everybody who Foxconn is. Everybody knows who that is.
Well, let's come back to that later. We'll come back to Foxconn. Foxconn is not in the story yet. I'm overcomplicating things just to say that Apple built their own computers. They made them themselves in their own circuit boards. They designed it. They made it. They manufactured it.
Yeah. I mean, the first person making their circuit boards is literally Steve Jobs's pregnant sister. She's employee number one or number two. I love that part of the story.
She's doing in her living room. She's, yeah, while she's on the phone, you know, sort of like if you can picture like a 1980s phone like on your shoulder while she's jamming these things together. Like not well at all, but like well enough.
Okay. Okay. Okay, so Jobs comes in and tell us how it starts to evolve.
Well, so basically when they're days away from bankruptcy, they sell this factory that they have in Colorado, Fountain, Colorado, and it nets them around $200 million. And it basically buys them some time. So while they're buying time, they're also doing an oversubscribed bond sale. And that's the origin story really of them heavily investing in outsourcing. So they're basically taking it off the balance sheet, their own manufacturing facilities, right? their own workers that are dealing with manufacturing and they're beginning to work with these companies that offer manufacturing as a service, right? So, you're only paying for the manufacturing when you need it. So, it's no longer a fixed cost. It's a variable cost and that's like substantial savings. And the sort of quip that I use is that, you know, Apple is late to building MP3 players. Apple is late to building phones, but when they do it, they do so better than everybody else. The supply chain story is essentially the same thing. They're not early in going to Asia. They're not early in going to China, but what they do when they make those moves is just better than anybody else.
Okay, so Jobs dies, Tim Cook takes over and Tim Cook is not an innovator. And but that's not important because from what the book you're basically telling us is that Tim Cook took Apple to a whole other level of manufacturing and mass production that probably was unimaginable when Jobs came back in 1997.
Yeah. So we're skipping ahead quite a bit here, right? So this is 1997. So Steve Jobs hires Tim Cook who's a veteran of IBM. He's coming from Compaq. He's only been at Compaq a matter of 6 months before he moves to Apple. And that's fascinating. And Compaq is the largest PC maker at the time and Tim Cook's in a really cushy role. I remember I had one in law school. Yeah. But there's something appealing about going to a company that's a total mess, right? Because if it's a logistical nightmare, but think of the influence Tim Cook can have, right? He comes in as a senior vice president. So it's sort of a dream if you're like he was known as the Attila the Hun of inventories. And so you know in a sense you would rather be at war if that's your sort of persona than be at a complacent company where maybe Compaq is already doing it. They maybe don't need Tim Cook's expertise to some degree whereas Apple really needs it desperately. I mean they really are close to bankruptcy and even when they come out of it in the late 90s they're once again close to bankruptcy in the dotcom crash. So yes, so Tim Cook, I mean, in a sense, there's this narrative of mine that's like four or five chapters. I call it the long march to China. And it's telling in just like intimate detail that's just never we've never bothered to really think about before, which is that there's this long experimentation stage where Apple is getting to know how to work with outsourcers. And China's not really in the picture right away. No, they're in Japan. They're in Taiwan. Where else?
Where else were they? South Korea is basically the home of the Translucent iMac. And then LG, who's the builder of it, they expand. So they replicate this Apple tri-continent strategy and so LG expands to Wales and to Mexico and then Foxconn does come on board but China is only one of the three areas they're also doing Fullerton California and Czech Republic and you know this is just one product then you've got iPods and other products being made out of Taiwan and they're relying on so they're all over the place they're really it's like nine countries if you look at all the manufacturing taking place for Apple in like year 2000 it's like nine countries by the end of the decade it's basically just in China so let's talk about that migration because one thing I found fascinating in the book was that what did not happen was there was no meeting where you know the senior people at Apple got together in a room and somebody had a deck and made a presentation and argued that we should move our production to China. Correct. That decision was never made like that.
It was sort of an evolution that that you know one thing led to another led to another led to another and oh my god we're in China and that's kind of what it felt like.
Absolutely. I'm so glad you picked up on that point because Tim Cook is always called the architect of the China strategy and I'm not trying to discredit that idea like you could call him an admiral like he navigated like something that was already happening. He didn't make a decision. He was not the decision maker. If anyone was a decision the suppliers were the decision makers.
So explain that. So understand how did these suppliers you you describe in the book an evolution of of companies that originated mostly in Taiwan. Basically gradually migrated their entire manufacturing to China and it felt like tell me if you agree with this that Apple followed them.
I mean so for the iPod narrative for instance the the first three generations of the iPod are made by a company called Inventec in Taiwan. Interestingly, the reason so good at doing miniatures and why they're chosen in 2001 is that Apple had trained them in the '90s to build the Newton. So, there is a sort of full circle moment there where when they need the iPod to be built six years later, they go back to the very company that's good at what they're doing because Apple trained them.
Okay. So, that's kind of a funny irony, but yeah, no, the Taiwanese become just really proficient in electronics that, you know, they begin with parts, they begin with motherboards, and then once you sort of begin to put those together, you're really doing final assembly test and pack, which is like the whole shebang. And they get to the point where they're literally competing with their clients. And often their clients don't like this very much, right? So you have someone like Asus assembling a computer for you, but then ASUS begins marketing their own computers, right? So they're stamping some boxes, you know, IBM, and they're stamping their other boxes ASUS, and they're basically the same product. And they're going maybe to different countries or what have you, but like it's a precarious position. Apple is never like that, right? So they choose someone like Foxconn who would never do that. Foxconn is never going to have a phone that rivals the iPhone. Pure contract manufacturer there and it's a really unsexy thing to do. So this is the difference between an OEM which is what Foxconn was doing and an ODM. An ODM (original design manufacturer) means that the companies were trying to offload from the brands like IBM or Gateway more of the fixed costs, right? So in other words, if I could give you my research and development budget, if I could give you my design budget and just pick things out of a catalog created by the Taiwanese, then it was even easier for me as a Western company. But of course, Apple is this really innovative company who's more controlling. They would never stand for that. So I guess the to sort of answer the question of the 2000s, the simplest thing to do is to point out that in the '80s and '90s, like the reason why computers go from thousands of dollars to just like, you know, $800 in the course of 15 or 20 years is not really the likes of IBM and Gateway. It's that they're all relying on contract manufacturers. And those companies are in absolutely fierce battle to win these orders. And in order to do that, they're getting all sorts of M&A financing. So they become like a dream of the M&A bankers in the '90s because like Selectron alone acquires 20 companies in that decade to become more efficient. Well, to become more efficient because it's so low margin. So the only way you can have like a big staff and then make sure they're always doing something is by having more and more clients. So, it's cutthroat efficiency and it means that you need to sort of be ultra agile with making sure that your teams are doing this product and that product and especially if you're doing that against someone who's trying to do their own products themselves. I mean, you're just way way better at allocating the resources. So, because they're competing with them with each other in their own industry, this just causes the prices to fall and so forth. But what they do is they're the ones who go to Asia and so which say they who goes to Asia?
So, Selectron, Celestica, Jabil, SEI, these are sort of the early companies that pioneer electronics manufacturing in the United States. Okay. And then there's like the Compaq shock. I think this is in 1992 or so. It's actually not in the book. But this is when Compaq shocks the industry by having prices that are all of a sudden something like 20 to 30% lower than everybody else. And how did they do it? They did it because they were the first to make this big push into Asia. So the contract manufacturers are the ones that sort of outsource the jobs to Asia. And I guess what that means for the 2000s is that when Apple is nearly bankrupt in 1996, it's because Windows has caught up with them. And so there's nothing you can't do on a Windows machine once Windows 95 comes out that you can't do on a Mac, which is sort of true for multiple years until Windows 95 comes out. So the extra premium that you're paying for a Mac, no longer makes sense.
Okay. Yeah. And so when Apple is then moving things to Asia, they're really just following everybody else. Taiwan is the place to be. But as Taiwan experiences labor constraints, you know, rising value of the currency and so forth, they h they speak the same language as the mother of all development. So they basically move to China.
Yes. So I think I've got this great quote. It's on the record from Jon Rubinstein saying basically what happened is when you had extra capacity who was Jon Rubinstein Jon Rubinstein I'm sorry he was the senior vice president of hardware. Okay I mean even Jony Ive reported to him very senior reported to worked with Steve Jobs for 16 years at several companies. So the suppliers in Taiwan when they needed more factory lines they would say we're going to open a factory in China and be doing it together. Right? So they sort of tiptoe to China is what his quote is is in the book. And then as things go better as volumes grow, you're no longer just tiptoeing. You're just building first in China and you're sort of leaving Taiwan behind. So there's this sort of natural consolidation. So as things go to China, other things go to China because you've got next door manufacturing and the idea that, you know, if you've got assembly in one plant, it really makes sense to sort of, you know, pepper and salt. Sorry, that's the wrong metaphor. Dot dot around. No, I understand.
What you're describing is that over something like a 10-year period, an entire electronic manufacturing ecosystem was created in China. Yes. Where there was just empty fields. Yes.
Yes. And nobody's really calling the shots. It's just it makes sense for everybody on their own, you know, narrow purposes that we're going to do this in China. Because if you have a factory in China, one in Europe, and one in the US, and you're just sort of sitting back somewhere in the US and comparing your costs, China's winning every time, right? So nobody at Apple makes the decision. It just sort of accretes over time and consolidates.
And why do you think China not India or some other country with a large population?
I mean the opening epigraph in my book is from Made in China 2025 and it's without manufacturing there is no country there is no nation. I point that out because the reason it's the epigraph is because China just really prioritizes manufacturing more than anybody else. That's just not what Narendra Modi or any of the previous prime ministers of India are really focused on. I'm not saying they don't accept the orders or whatever. Obviously, there's a manufacturing sector there. But for China, they really see it as the way out of the poverty trap and they really see it today as a way to get out of the middle income trap and to be dominant.
You know, some of the things that you describe in the book that you get in China, there are things in China you get that you don't get anywhere else even without that push. So, example, there are no labor problems in China because if there are labor problems in China, the Chinese government suppresses it. That doesn't happen that so easily in other countries.
I'm struggling to think of what you mean by there's no labor problems because there I mean, first of all, there are riots, right? And they do get suppressed, but that's like that's different from saying there's no problem. They can deal with it in a way.
Yes, they deal with it in a way that a democratic country cannot deal with. And if inflation of wages is a problem, you know, that also happens in China. So I it's too simplistic to say there's no wages or there's no labor problems, but they can deal with them because they're an authoritarian government without a free media that you cannot do in South Korea where Samsung is made. You cannot do it in India where other products are made. So by I think you said by 2009 basically Apple's making everything in China.
Yeah. Which is basically still true today. Oh, it's more true. I mean so the actually the big distinction between let's say 2009 and today and this is so, contrary to the general thing you believe about Apple, like Apple's line is no longer that their products are made in China. Like their marketing spiel is they're made everywhere. And what they try to focus on is that there are components and parts coming from all sorts of different countries. There's a real slight of hand here. They're not really coming from all these different countries. There are a whole bunch of multinationals, but over time they have all set up shop in China. And like you can take my word for it, and I can cite documents if I need to, but I would just say run a common sense experiment here. You're doing almost a quarter billion iPhones a year. So at sometimes peak season, you know, an iPhone has a thousand components and you're building 1 million a day. It would be ridiculous if you were waiting for components coming from 50 countries on a daily basis, hoping that they get through customs, hoping that the ships make it on time, etc. Clearly, they have been making them more and more in China year in year out. So the location, the geography has definitely shifted to China over time. And then within China, it's become more and more local homegrown competitors that they're using. So everybody knows Foxconn, but you probably don't know so much about Pegatron, Wistron, and Quanta. Those are Chinese companies. These are Taiwanese companies. Taiwanese companies who have all been squeezed out. So Foxconn is also being squeezed, but the other three have really been sort of taken out of the Apple supply chain in favor of Luxshare, Goertek, Wingtech, and BYD. Chinese companies. These are the red supply chain, homegrown Chinese companies who have better local connections. who are able to get, you know, the lands, the tooling, the machinery from the government and and crucially things like labor, right? I mean, if you want pools and pools of labor to fill in your factories, that is part of the state sponsored repertoire of what China can give you.
So, I wanted to um there was a there's a line in your book that I want to explore a little bit more because you're hinting at it right now where you say that China made Apple into what it is, but it's also true that Apple made China into what it is.
Yeah. I think it's like I was about mispronouncing this word. It's Banal or Banal or Banel. How do you say it? Banal. Banal. Banal. I feel like it might if you go to good schools, it's banal. I feel like Yeah. I feel it's like one of the words where we think it's banal and that's how I say it, but I think actually it might be banal. Anyway, the point is it's totally banal to say that Apple wouldn't be Apple without China. I mean, I don't think there's any counterargument at all. The novelty of my book is I say that China really wouldn't be China without Apple.
So, let's explore that. That can sound absolutely ludicrous and and I'm aware of that, but it's like a it's funny. I keep having to say cuz in in in in conversation I'm obviously argumentative because I'm trying to consolidate, you know, loads of research into just a few points, right? But you'll know cuz you've read the book. The book is not like that. The book isn't an argument. The book is just a story demonstration. This book is is an evolution.
Yeah. But I'm you'll notice I'm never batting you over the head with anything. No. You're just slowly being convinced. But that is one of the points. Okay. So, I want for my listeners, I want you to elaborate on that.
I mean, it's obvious that without China, there's no way that Apple could have mass-produced all its products to the degree that it has. And one thing that is great that you described in the book, it's not just mass production. It's almost custom mass production because the intricacies of what is being made is so complicated that it's there's a quote there's a line in your book where you say it's not that Apple was making 10 million Volkswagens. It was making 10 million Ferraris. Right. So that could not have happened except in China. That I think everybody accepts. But I want you to explore the opposite is that because of Apple's influence and impact on China, yes, China is what it is today. So let me allude to what we do know about Apple and then what I sort of bring it's sort of someone called it like the missing anthropological element to the Apple story that I think the book elucidates. So what we do know about Apple is that Steve Jobs and Jony Ive were maniacal and obsessive and detail oriented about how their products would look and feel. Right? So we know that that's accepted that everybody knows. What we don't know is that that's the top of the pyramid called industrial design. The next pyramid, the next part of the pyramid is called product design or PD. That's another team of brilliant people. But their job is not to question anything Jony Ive's done is it's to sort of fulfill his wishes. And so if an iPod no matter how difficult, correct? And if if if Jony Ive's design is going to be, you know, this many centimeters across and this many centimeters wide or whatever, you have to fit all the components in there, you know, in a beautiful fashion and have to do all sorts of things. It takes a different level of genius. And then what we've ignored and what I sort of go into great detail and it's in to some extent this is the origin story of the book when I figured this out and that it hadn't been written about. The next stage is manufacturing design or MD and these are the guys who go to Asia with the prototype. Sort of I suppose well the guys who you the level above they made the prototype to show that now you got to mass-produce it
or am I missing something?
Yeah, I I I I guess I'm I'm sure there's some cases where that's possible. In some cases, it would just be a blueprint. I actually have some drawings and stuff that I was given. So, it wasn't a prototype that I'm thinking of. It was actually some etches. But nevertheless, they're the ones who go and build the parts that are needed. So, in other words, the thing that makes Apple really different is they are not relying on component makers to come up with the next innovations and they say, "Oh, that's great. We could probably use that in our next product." No, they are going to the suppliers and inventing those parts. So so many things in the Apple products are custom and proprietary. And then it's not just the parts that they're being built. They're designing the machines that produce those parts. And you and there's a part in the book where you describe how this I never heard of this before that Apple would at least in the beginning 10 years with China. They actually bought all the equipment for the contract manufacturers in China, the special equipment, and they would put it in the factory. Yes. And then then they would let these contract manufacturers operate it. But the actual equipment they bought for them. Yes. And they would tag it for Apple use only. And even the software that is running on those machines is is Apple's, right? So we think of them as doing software for the devices that we have. They do the software for these machines as well. I mean that just hasn't been written about is a little bit crazy because you know my analogy is that like in the same way that Uber runs the largest taxi network in the world without owning any cars. Apple had really cracked the code on how to manufacture everything to the precision and quality and maniacal obsessive detailness as if you owned the factory without owning the factory. And so they're really orchestrating things from afar. And then just to skip ahead in the narrative a little bit here, Beijing doesn't know this, right? Like nobody knows this. Apple's not issuing press releases about this. Other companies don't know this. So in 2007 like Apple is basically like winning this award for supply chain efficiency and the very researchers basically giving this giving them this award. It's like how did Apple even do this like on the peer ranking score of other companies rating each other like nobody was rating Apple well because nobody knew that they were doing anything. It was all secretive and so you get into this really interesting part of the story and this is to some extent how the book opens that Xi Jinping comes into office. Let's let's hold up on that for a second.
There's there's I I there was something I wanted to emphasize. You there's a quote in the book. I forget what year it was. Um but you say that iPhones represented 20% of the volume but 80% of the profits. Yes. And what correct? I want to make sure I get this right and add anything you like. Basically what you say is Apple is just so much better at manufacturing because of other things as you just said and their profit therefore their profit margins are so much bigger that they make 80% of the profits but they only sell 20% of the phones.
Yeah. I mean so what I say I maybe I don't say this in the book but I allude to it at least like find me another industry where that's remotely true. I never heard of anything like that before. I mean it's absolutely exceptional and the crazy thing is just that we sort of accept like well yeah I guess they're expensive. That makes sense. Like it's not the expense. We need to think about how insane this statistic is, right? I mean, it's not that they're charging an extra hundred bucks, right? All the other phone makers have expensive phones. It's not just that they're selling them at an expensive level. I mean, you know, the statistics today are basically that like the average Android cost $300. The average iPhone costs about $1,000. I might be off by $50 here or there, but like that's basically the gist, right? They do charge about triple the average cost. That wouldn't be the case, by the way, if you went down to the local store. But globally, a lot of phones in India, a lot of phones in China are costing, you know, $150 or $200. And so that's how you get to those levels. The reason here, and I'm trying to coin a term, we'll see if anyone picked up on it. This is not the term used within Apple, is called the Apple squeeze. I was about to bring that up. The Apple squeeze. So, the understanding is basically that when they go to their supplier, right, Apple has all sorts of, you know, brands behind it, but the main thing is they have crazy orders, right? And so they're
uh, this is the anchor segment for the second part.
in a real position of leverage to say, "If you want to work with us, we're going to need you to build 230 million of whatever component it is you make cuz that's how many iPhones we have, right? So the order volume is enormous." And so they're able to say like, "We're basically going to give you almost zero margin and you might get rich just based off the volumes, but the other thing is that we are going to train the hell out of your entire workforce." And so instead of thinking of it as you're getting low margin and this isn't a good business, you should be thinking of it we're giving you free tuition for brilliant training. And that's the part of the book where you're saying this is how Apple made China.
Yes. So that's what Terry Guo, the founder of Foxconn, a Taiwanese contract manufacturer that becomes like really the big partner of Apple to build all the products that you've basically been buying the last 20 years. Um that's what he understands from the get-go. I mean he does it to such an extent that he's almost like playing Apple a little bit, right? So like Tony Fadell told me, Tony Fadell being like the pod father, right? Senior vice president of iPod in the you know mid-2000s. I mean he said like Apple engineers would come in one day to like you know work with the manufacturing force that they've been training for the last few months and lo and behold it's a whole new cohort of people because Terry Guo basically like took those people who now have all these Apple skills and he wants them to go do what they can do for Dell for Compaq for all the companies where they can actually make money right and so it's like a new semester had started and people like Fadell be like oh god we have to train these guys again.
So there's something fascinating about that and then again I'm skipping ahead of the narrative a little bit. A lot of the Chinese suppliers don't get that point until 2015, 2016 when I'm skipping ahead but like Tim Cook makes it explicit to Chinese officials. So let's come to that.
So 2013 there's a new President Xi Jinping and all of a sudden the tone changes in China like so abruptly like we're here and then what happened?
Yes. So what tell tell us what happened with Xi Jinping and and and how did how did Apple react?
So, oh gosh, it's such a complicated narrative and I don't know how much I need to emphasize like the retail story, but like basically this story only makes sense if you have the most basic understanding that in the in 2010 the iPhone becomes the conspicuous must-have product all across China, right? So, I think it's from 2009 to 2012, Apple revenue in the country goes from about 1 billion to like 22 billion. And so China very much sees like we are the reason Apple is growing so fast because not only are we providing a base for their worldwide service. So the way they see it is we gave all this to you. What do you give us?
Yes. And that's that's kind of their attitude. And the hardliners in Beijing don't really like that the the the next generation loves this western company. Right. Right.
Because the iPhone I mean it's the most capitalist thing in the world. Right. It's a little emblem of capitalism and people love it so much that there's literally like a black market across the country to buy iPhones at inflated prices and you know there's editorials in the Beijing papers like against this kind of thing and they can't stop their own people from buying these devices. So they sort of have a bone to pick with Apple over that but again they don't understand the way Apple's contributing. And so um what happens is you know every March in in in China is something called consumer day which is when companies get scolded for not living up to like the socialist values of of the country and Apple gets scolded and Apple gets scolded March 20 March 2013. This is literally within 36 hours of Xi Jinping ascending to the presidency. And you know the idea that Apple like the biggest you know um manufacturer in the country like through its indirect ways of course and the biggest western company operating as a retail presence the idea that they would be attacked without Xi Jinping giving the clearance I think impossible impossible impossible to know anything about China is to know that I don't know about it's impossible. So I don't think it's unfair at all to say Xi Jinping directly attacks Apple.
Yes. And so Apple is put into this position of thinking, "Oh my, are we going to be blacklisted?" And that's not an idle threat. Facebook is blacklisted. Google is blacklisted. That is a real threat. And so it takes them a few years to basically come up with a counternarrative, if you will. But it's like a how do we convince Beijing and provincial policy makers that we are a mass contributor of what China calls indigenous innovation? How do they do that?
Well, so they believe at first the team tasked with doing this that we're going to have to bring joint ventures to the country. And a joint venture is what the Chinese have been wanting for decades, which is that, you know, Steve, you want to bring your business over to China? Great. Half of the business is going to be Chinese. They're going to learn everything you know so they can learn, mimic. But Apple didn't have to do that and they basically ousted you.
Well, the reasons they didn't have to was sort of again because they were doing stuff under the radar for a long time. That was like a joint venture.
No, no, not like a joint venture at all. Apple had enormous control, but they were orchestrating things from afar. They just had people coming in on flights and then going to various factories and sort of taking indirect control of these factories and training people, but everything was sort of happening at a distance, right? They were they weren't setting up facilities. So, they had a business license to do this kind of thing, but nobody knew what they were doing. I mean, until 2012, that's the first year that Apple actually puts out a document saying, "Here are our main suppliers." You didn't know which suppliers were working for Apple. And it's not hard to it's not difficult. Sorry, it's not easy to tell. We're talking about a country where there are just factories producing electronics all over the damn place. So, how did Apple convince China that they were good corporate citizens?
So, you have this team of people known internally as the gang of eight. And this is the first time Apple has senior people living in the country before 2013. They're going back and forth. There are about a thousand local engineers, but they're not vice presidents or anything. This is a team that has two vice presidents. that has a, you know, head of local Apple University, people running procurement, people running, uh, retail sales, people running channels, you got the first person really running government affairs. Um, and so it's this team that comes up with the idea of if Beijing understands how intimately we are working hand in glove with all of these suppliers and then sort of saying go forth and multiply so that they bring their skill sets to a next generation of Huawei, OPPO, Vivo, etc. then they will understand that the Apple model is actually better for China than the joint venture model they want us to do. And this really culminates with Tim Cook going to Zhongnanhai, the Citadel of Communist Power. You could call it the White House of Beijing um in May 2016 with two other top Apple executives and they submit this memorandum of understanding that basically commits to spending or sorry I should say investing crucial distinction investing $275 billion over the next 5 years basically telling them all the ways in which we are contributor we are contributors to massive innovation in China. So, in a sense, get off our back. Don't don't put up obstacles in what we're trying to do because we're so helpful to you. We're so helpful to you, right? And China accepted it.
Sounds like I mean, yeah. I mean, Apple hasn't really had any major problems in China since then, for the exception that the more Apple tries to sort of take control of content on the iPhone, you know, iTunes store and, you know, music plus and all these kind of things that they like to do that have to do with content, like China's not game with that sort of stuff. So the you know fast forwarding to their predicament now with AI like they need a local partner and that's going to cause them all sorts of problems. But in terms of like you know manufacturing and like fines for doing things like they haven't had to do that but they have had to accede to requests to ban the New York Times you know ban WhatsApp ban VPNs. Apple doesn't really have any political capital to expend there. So let's fast forward to now.
Um, I mean, Apple was so successful in teaching China its skills that China makes phones now as good as Apples.
I think they're better. You think they're better?
I think they're demonstrably better.
