Apple in China: Tim Cook’s $275B Pledge | Patrick McGee

If you think about that Peter Drucker statement, what gets measured gets managed. I think Tim Cook is the epitome of that. Tim Cook is known as Mr. Spreadsheet, but things that can't be measured, I think that's the big blind spot. Apple's not big enough to have killed Nokia. Market share wise, the iPhone has never been more than 20% of the global market. So, who has more than 20% there to actually take on Nokia? If you remember 1990s computers, usually they were even made such that if you got the parts backwards, it would still fit. It's an idiot-proof manufacturing assembly. Apple is nothing like that. Apple makes things that are actually opposed to general manufacturing standards because they want to make things so difficult to copy and redefine the aesthetics of a computer. What attracted Apple to move to China in the 2000s was not tech competence. It was just abundant labor, the cost of that labor, and an industrial policy that was very welcoming to foreign direct investment. Tim Cook actually goes to Zhongnanhai. Think of it as the White House of China to demonstrate that. And then they multiply that number by five with $275 billion. And they say that's how much we'll invest over the next 5 years. And those numbers are so staggeringly large that I compare them to the Chips Act. That's $52 billion over 4 years. So Apple is spending a Chips Act per year.

Thanks, Molly.

I guess so.

It's funny, when I've actually been in Ireland, my Irish credentials go out real quick. I don't feel very Irish when I'm there.

My accent isn't too good anymore.

Yeah, it's hard for me to do it without giving a bit of narrative. So, stop me if I'm giving too much of a whole story here. But basically what happens is that when Xi Jinping comes into office in 2013, Apple is by far the biggest retail company operating in China. And more importantly, it's the biggest operator, the biggest production giant. So, it's sort of cracked the market in two different cases, but Xi Jinping and the hardliners in Beijing sort of don't understand what they're contributing to the country and they're basically threatening to blacklist Apple. And so Apple begins to have a wakeup where they realize that we don't understand China. We don't understand the politics. We don't understand the culture. And so they send over or hire China experts and people that know China for the first time ever. So, at that point, they'd been in China for two decades, but they'd just been flying in and out of the country, having these engineers fly into factories, teach engineering 101, build up all these products, and really train, train, train, audit, supervise, put in the machinery, and were spending billions of dollars on this sort of stuff. But no one in Beijing really knew that because Apple's a secretive company. And so, when the hardliners come in and begin threatening Apple, it's a real wakeup call. And they basically spent a few years figuring it out and then they flipped the script. Instead of basically saying, "Okay, we'll set up these joint ventures where we're specifically having a 50/50 company that's half Chinese and then you'll learn that way," they do their own supply chain study sort of Apple internally and realize that they're investing $55 billion a year into Chinese factories. And once they've sort of established this and they realize how much that could mean to local and federal officials, they present that. So Tim Cook actually goes to Zhongnanhai, the sort of citadel of Chinese Communist power. You can think of it as the White House of China, to demonstrate that. And then they multiply that number by five, so $275 billion. And they say that's how much we'll invest over the next 5 years. And those numbers are so staggeringly large that I compare them to the Chips Act. If you remember, that's Joe Biden's plan to bring back chip fabrication to America. That's $52 billion over four years. So, Apple is spending a Chips Act per year, you could say. And I compare it to the Marshall Plan because if you take the four-year spending of the Marshall Plan and convert to dollars, you get to 130 billion. So, Apple was pledging two Marshall Plans to China. And one thing that people don't understand when they hear that figure is that's only the five-year figure. I mean, you would get to closer to a trillion dollars if you just took 22% of revenue, which is what 55 billion was in that year, and just used that as a back-of-the-envelope math back to 2007, the birth of the iPhone, and you took it all the way to 2025, you'd get above $800 billion. So, Apple's investment into China has been absolutely staggering. And sort of the basis of the book is that that's quite a geopolitical thing. Once you consider that China's like America's great adversary in the 21st century.

Yeah, to be fair, I'm actually pretty sympathetic to why Apple is manufacturing in China at all and then sort of why they get squeezed in the early 2010s and make those decisions. So, I like to say about my book that there's no villains in the book. If it's an indictment of anything, it's of shareholder-first capitalism, a sort of operating paradigm that probably goes back to Milton Friedman in the 1970s. You know, just the idea that what a business is meant to do is to make profits. But I mean, in the early 2000s when China entered the World Trade Organization, it was not even just like a bipartisan consensus. It was like the American worldview that it was perfectly okay to send your manufacturing abroad because by having that sort of trade, you were building this integrationist world where we were sort of all working together and that was going to be good for everybody. So like there's this nice quote that goes back decades. I don't remember who said it. Where commerce doesn't cross borders, armies do, right? And so that was sort of instrumental to the building of Pax Americana, you know, why we invested in Germany, Japan, Korea, Taiwan, and turned those countries, helped turn those countries, I should say, from authoritarian countries in various ways to thriving democracies. And the idea was that we're going to do that in China as well. So Apple is just caught up in that trend. If anything, they're late to that trend. And you can't really blame them at all for adopting the outsourcing model because without it, they would be bankrupt. I mean, the book begins after a pretty fun prologue. They're days away from bankruptcy and it's because they're building everything themselves. That's in the DNA of the company and they have to make a change. Otherwise we wouldn't know who Apple is today.

So the capability question, let me come back to that because I would sort of push back on it or try to elaborate a little bit. Well actually maybe I'll address that quickly. The really what the novel sort of narrative take of the book is and I really didn't know this until I sort of published an article that became the kernel of the basis of the book pitch is that what attracted Apple to move to China in the 2000s was not tech competence. It was just abundant labor. The cost of that labor and an industrial policy that was very welcoming to foreign direct investment and so they would build factories very quickly. But it wasn't like they knew what to do. Nobody could respond to Apple's demands even in the more sophisticated countries at the time like Japan and Taiwan. But China certainly couldn't. And so Apple's solution wasn't like, well, we'll just wait for them to get better. It was why don't we send plane loads of engineers to dozens and then today hundreds of factories across the country to train all these people to get to our level. And so they will sleep on the factory floor. In fact, someone with Apple experience at Reindustrialize talked about sleeping on the factory floor yesterday for the building of the Apple Watch in 2015. So this is how they got the Chinese up to the level of competence that they needed. So to some extent you can think of the Hollywood version of Steve Jobs who yells and bullies and berates people but he also brings up everybody's competence around him. My book is that but instead of it being 12 people sort of in Cupertino it's that they had to do that across hundreds of factories in China. So when you talk about the tech capabilities I just want to be clear the tech capabilities aren't there. Apple builds them. So that's sort of the fundamental part of the narrative. Now what was the other part of the question? I wanted to answer that too. Floating workers.

Okay. So, in China, and sorry to get all wonky, there's sort of a dual, no, not sort of. There is a dual citizenship structure within China. If you were born in a rural area, you can live temporarily in a place like Shenzhen or Suzhou or Shanghai, but you don't have the access to federal benefits or provincial benefits. You can't raise your children there. And unless you have the money for them to go to private school, they're not allowed to go to public school. And so this population is known as a floating workforce because they're rural. They have a rural hukou, household registration and they can only be in those places at temporary times. And so they tend to follow the work, sort of seasonal work, but I don't mean like autumn versus winter. I mean like iPhone production. And so they'll take a job that might have them working on an iPhone production line for 8 weeks or 12 weeks or something like that. And then either they move within the factory to, you know, Sony production instead of Apple but still at Foxconn, or they just go to an entirely different factory or an entirely different city. So they get called floating for that reason and yeah the number of floating population in China is larger than the number of Americans in the world. So it's really hard to compete with that because these are sort of low labor low cost people that are basically discriminated against at the state level to the benefit of multinationals who are able to exploit them as well. And they're going from one place to another and basically are temp workers. So they're not on your balance sheet the entire time or something like that.

What does it take?

Oh well. Oh, so this is where Apple sort of cracks what's possible in the market. So again, Apple is late to going to China. Companies like Dell, HP, Motorola, some of those companies go back to the 1980s, like well before China enters the World Trade Organization. My argument, which is just coming out of sort of like, you know, like resaying what Apple people told me, is that whereas other companies were building simple products, if you remember 1990s computers, they were just these beige boxes that could easily snap together, in fact, usually they were even made such that if you got the parts backwards, like it would still fit. This was called poka-yoke in Japanese like it's an idiot-proof manufacturing assembly method. Apple is nothing like that. Apple makes things that are like actually opposed to sort of general manufacturing standards like the term that gets used is DFA, designed for manufacturing, right? You design things from the get-go so that they're easy to put together. Apple does like anti-DFA type stuff because they want to make things so intricate, so difficult to copy and they like redefine the aesthetics of a computer. So if you can remember the tangerine colored iMac or the Bondi blue colored iMac. I mean nobody knew how to do plastic injection molding that built that sort of computer before. And so to do that you're not sort of using existing machines or something like that. You're using like the nimbleness of 400,000 people assembling something on a production line. I'm saying 400,000 figure that's more for the iPhone era, not the iMac era to be clear. But basically they exploit the idea of how many people there are at the labor rates that they have, below 50 cents an hour at the time, working 12-hour days and they set up these conveyor belt production lines. So you just didn't need that if you were Dell because you weren't doing anything fancy in terms of how to put together some Latitude computer whereas Apple over and over again was redefining what a computer looked like. My joke about this is to ask people what their favorite HP or Dell computer from the early 2000s was. And of course, their eyes glaze over or they smile because there's no such thing as a favorite computer from that time. Whereas we could spend the rest of the podcast just discussing our favorite Apple computers from the early 2000s. So, they really were doing something fundamentally unique. And that's worth emphasizing because sometimes when people haven't read the book, they say, "But you're picking on Apple. Why don't you just write this about Dell or Motorola or anything?" And it's like, true, they're all in China, are all investing in some degree, but nobody is training the workforces the way Apple was because nobody was designing computers the way Jony Ive was.