How China Trapped Apple | Patrick McGee

The result of investing so much into China over the last 25 years is that there's no other country on the planet that has the same combination of ultra low cost, ultra high efficiency, quality, and quantity of Apple standards to basically be able to make these products, right? I mean, arguably Taiwan has a lot of the capability, but it's a little island. I mean, it's literally the size of a Chinese city. So, they're not going to do it. Singapore is even smaller. Um, no place in Europe, right? I mean, certainly you have great capabilities in places like Austria or Germany, but they don't have industrial clusters and the access to migrant labor that the way China does. Mexico, for a whole host of reasons, doesn't come close. America's laughingstock when it comes to manufacturing these days. I mean, it's just not going to happen there. Where is it going to happen?

My pleasure, Marcel. Thank you for having me.

Yeah. Complete financial desperation. I mean the company was nearly bankrupt in '96, which is just before the comeback of Steve Jobs again in '97 as Steve Jobs takes reign, and then after the dot com crisis in 2000. So you know when Steve Jobs and Johnny Ive together come up with the idea of the candy colored iMac, right? The first one was named after a beach in Sydney, Bondi blue iMac. I mean Apple honestly just didn't have the resources to build it. They did have their own factories for basically let's say the first quarter century of their existence, and even though they still were around at this point, they just didn't have the balance sheet to support the manufacturing, and most people think so they turned to China, but they didn't turn to China. This is 1996-'97; they don't really consolidate into China until 2003. And so the book allowed me the opportunity to really tell the first narrative of how they quote unquote discovered outsourcing and offshoring, and it turns out that it involved experimentation with various products in Taiwan, Singapore, Korea is really important for the iMac, the Czech Republic, Wales, Ireland, California, and Mexico.

Yeah. I mean what basically happens is that there are a little bit of operations in China in 2000, but it's not that Apple is deciding to move to China. It's all of their suppliers, right. So even if you're quote unquote manufacturing the computer, you're relying on all kinds of components, modules, chips that are coming from somebody else. And it's the companies making those chips and frankly the companies supplying the companies making those chips that are all moving to China for reasons of cost, abundance of labor, the fact that factories are just sort of being custom made to order with help of local governments and places like Shenzhen, these sort of like capitalist experimentation zones within China. And so, you know, Apple has often been called, or maybe Tim Cook, the CEO, has often been called the architect of the move to China. And I actually don't think he was. It was just like there was no architect. The whole industry was moving. And when Apple goes there in 2003, you know, it's not like they've counterintuitively chosen China. They're actually late to the party in a certain sense. They think more with more complexity, with more imagination than other companies about, okay, this isn't just a country with huge factories and these industrial ecosystems and cheap wages. Frankly, it is. But that means that we can design our products like from the first time the pen hits the paper in a different way to take into account what's possible in the manufacturing sense. And you just didn't have that from other companies because a lot of the companies didn't really care about design the way Apple cared about, and they didn't necessarily do their own manufacturing. A lot of the PC companies born out of the '90s were just relying on the Taiwanese from the get-go. So it was the sort of like ownership approach, you know, the maniacal obsessiveness of Steve Jobs, thinking about every facet of the company that allowed them to sort of discover what was possible in China and sort of exploit it to full potential.

I might counterintuitively question the idea that the conditions and such are terrible. Um, they're terrible from our perspective, right? Because by a Chinese perspective, even today, we have a fairly decadent culture. They are not terrible for the migrants who are deciding to leave the agricultural toiling fields in the western hinterlands where you might have a 14-hour day under the hot sun and instead you're in a facility that may or may not be air conditioned and you're doing monotonous work and it's not great, but you know your dorm is effectively taken care of, food is taken care of. In the early years of the iPhone like 2007 to 2010, the people are making actually so much money that they're sending back like the equivalent of a dowry back to their village. So they're sort of putting in four really tough years, maybe like working in places like Dongguan or Shenzhen, but it's having a benefit for like their entire family or their entire lives for the next 10, 20 years kind of thing. So it's terrible by our standards, but you have to understand just how impoverished China was in the cultural revolution and even in the early years of the 80s and 90s. The other thing that's worth knowing is this isn't really Beijing. Beijing doesn't really enter the picture until in a certain sense Xi Jinping takes power in late 2012, early 2013. Um, a lot of the processes are taking place in Shenzhen and then other capitalist experimentation zones. And so it's basically by design that it's kind of like an anything goes type mentality and that these regions, not all of China, but these regions in China are like multinational playgrounds where they can kind of do anything. And as sort of haphazard as this looks, it was kind of a honeypot strategy at the beginning. Meaning that when Deng Xiaoping comes into power, he takes these famous visits to places like Singapore or places like Japan and he visits factories and he says like we need this, right? Like our people are impoverished. The type of socialism, communism that we have under Mao has not functioned. And so the particular policy is we need to rely on the Chinese diaspora essentially lure in capital, lure in expertise, and have people build these factories. So there's a whole host of people from Hong Kong in the 80s and '90s and then later in Japan, you know, beginning with the textile industry then moving over to electronics and stuff. I have, I think, two chapters on the Taishang, which is the Taiwanese entrepreneurs who come over. This is why companies like Foxconn, Quanta, Pegatron, etc. are all Taiwanese. They're the ones with the capital and the expertise, and they're sort of taking full advantage of what's possible in China. And then Apple just ends up being like the biggest force sort of behind Foxconn making all this stuff happen. So, you know, to the simple answer, I mean, I think China has this recognition that, you know, in a world of comparative advantage, they don't have a lot in terms of industry that's competitive, but what they do have is people. And they can make these five year plans where they're going to go after one industry after another and sort of train up their people to be experts in all these different sectors. And so once the western industries are all basically there and are investing loads and loads of money, Xi Jinping is the person who sort of begins to recognize we need these companies in China for China. We're not allowing them to exploit our companies. In effect, we're going to exploit them because where else are they going to go at this point? And so he sort of initiates this drive called Made in China 2025 that China is going to move up the value chain. We are not going to be a forever haven for low value jobs on the assembly line. Yes, we're going to do that, but we're going to learn everything else as well and sort of become masters in chips and pharmaceuticals and all sorts of stuff. And that's sort of the driving narrative where Apple kind of has to play this game because otherwise there's no place else to go and this is why they're captured.

I think around 2003, 2004 is when the Foxconn in, sorry, the facility in what's now northern Shenzhen began to be called Foxconn City. And in 2010 when Terry Guo makes these major bets to take on future Apple orders, you know, they build a facility. It's actually a campus in Chengdu and that becomes known as iPad City. And they go to Zhengzhou, which is where half of iPhones today are built. Um, and that's called iPhone City. I mean, we're talking hundreds of thousands of people just in the Foxconn part of things. And then in a sense, the model of Foxconn is a sort of hub and spoke type model, right? Where the final assembly is happening in one facility but then it's the Chinese will call this next door manufacturing where an entire industrial cluster sets up where around the assembly is the plastic ejection molding, the CNC machining, the metal stamping, and so forth. So you know if you just take one of those like the CNC machines, right? It's this famous anecdote in 2008 where Apple decides to build MacBooks using CNC machines. CNC machines go back decades. I actually don't know their origin story, but the fact is that they were already part of the landscape but people use them for prototypes. Um, it's just a way of taking a 3D file and conjuring something into reality. And Apple decides to buy 10,000 of these and for the first time really in any industry ever, they begin to use them for mass manufacturing. And they only bought 10,000. I mean 10,000 is an enormous number. They just boggled the mind of every industry executive in that entire sector. But 10,000 was like the minimum. Like that was all they were allowed to buy. They tried to scour the globe for other people making CNC machines to buy so many of these things. Um, and these are used today in iPhones and all sorts of stuff. So even in the CNC machine factory, which again this is not even like the assembly part, this is like one of the spokes. I would talk to Apple executives who would talk about being in a room. You picture CNC machine sort of like the size of a pizza oven if you're at a trendy pizza place in hipster San Francisco or something, and you know they would just see one after the another like as far as the eye can see, right? Just down a factory. So like the factories can be the size of a football stadium. And in the assembly portion where it's a lot more labor intensive, this is where everything's coming together. You have a conveyor belt production line where someone might have 9 to 11 seconds to put their, you know, the camera module in the left-hand corner or something. And you know what you would just have is just one person after another in these little stations, maybe 800 people in a single line, right? For an Android phone, it's only 50 to 100 people. For iPhone, it's upwards of a thousand. And that's a single line. And then there's just one line after another after another after another. And this is how a place like Foxconn at times has 500,000 people working in a single factory. So yeah, the numbers are just mind-blowing. I once quoted someone who had toured these factories saying it would be like describing New York City to someone who's never left the village, right? Where do you even start?

Yeah. An example I love that I didn't put in the book was I was talking to this manufacturing design engineer. Which by the way, I might have to back up a little bit because it's possible that the listener is lost because I would say in a sense the biggest contribution the book makes to how Apple operates is that they don't go to China because the tech competence exists there; they go to China to build the tech competence. And so how do they do this? There's a unit within Apple technically it's part of operations called manufacturing design wherein basically you know people are coming out of Caltech, coming out of MIT, being hired from Motorola, and they're on their introduction to Apple and Cupertino, and they're sent to China the following day and their job is to go find factories that have some degree of competence and facility, and then just train them, right? Engineering 101 but over and over, and get them up to Apple quality standards. And then a bigger operations team comes in and they help them scale at Apple quantity without sacrificing that quality. And the razor thin margins just force them to be like, you know, world-class businesses because if you're not responding to Apple in a way that's going to be ridiculously efficient, I mean, you're just going to be losing money and you're going to be out of business. Like Apple is ruthless with its negotiations. So, when we're talking about investing in Apple, investing from Apple into China, that's what we're talking about. It's that they don't outsource to companies that are already fluent in the ways of manufacturing and know how to respond to like a blueprint. Apple is handholding. Um, they're in the factories, you know, sort of I don't know about 24/7, but they're often sleeping in the factories to get everything up to speed. Now, sorry, I've taken us on that tangent to say that and now I'm trying to come back with the question, but remind me what the question was.