Patrick McGee and Greg Gretsch: Apple in China

Uh, I'm trying to figure out how in depth to go. I went Tangerine iMac when I was in high school. This is sort of embarrassing, but because I liked iMovie and I thought I was going to go to university to study film. I was making sort of terrible just teenage boy videos. I mean, literally like shopping cart 2 a.m. tying it to a rope, tying it to a car through a rope and then riding on the shopping cart, you know, and taking videos of that and then editing them. But really enjoying that. So I guess that was my I got really interested in Apple and what they were doing at the time. I remember reading The Second Coming of Steve Jobs. That must have been 1998, 1999 sort of thing. But I ended up taking a gap year, spent part of the year in Asia, part of the year in Australia, and that sort of got me interested in anthropology, which for reasons we didn't need to go into, morphed into a degree in religious studies. So I spent four years saying, 'No, I'm not going to be a priest.' So I was an atheist studying religious studies. So not theology, sort of like the outsider's view, psychology, anthropology, of religion.

Yeah, which is fascinating. And it doesn't lead to job offers. But in a sense it's, you know, what is it? It's writing, reading, it's thinking. And so that sort of led me into a job in journalism. So I'm from Canada. I got a job at a Canadian magazine. It collapsed through no fault of my own within four months of me getting the job. I had a girlfriend in New York at the time and I was in Washington. So when I lost that job, I actually just delayed going back to Canada thinking there's a bigger media landscape here. And I sent out 25 resumes to different places. Anyway, I ended up at a Canadian newswire that was just establishing itself in Washington. And then long story short, the credit crisis was just beginning. This was 2007, 2008. So I sort of got an early inkling into macroeconomics and whatnot. And then yeah, that led to being a bond reporter at the Wall Street Journal after a few years and then the FT sort of hired me to go to Hong Kong and then in Hong Kong for three years covering sort of everything that was going on in Asia. But that was Xi Jinping's first term and when you really had a sense that China was going in a different direction. So that sort of meant more to me after than it did in the present. And then I moved to Germany to cover the auto sector. That was really being in and out of factories all the time and really learning the basics of supply chains. You know, like in my ignorance I would have assumed that a Porsche was like literally 100% made by Porsche. I just had no idea that there was this vast supply chain that they relied on for everything. And that was just all new to me and that was kind of fascinating. And then I moved to California to cover Apple, but I sort of unsuccessfully covered Apple for four years. I realized I didn't care about most Apple stories. You know, if you can figure out that the next iPhone has square corners instead of curved ones, like that's a big scoop. I don't give a damn. And I feel like most reporters are caught up in the Apple narrative, and a scoop is actually just pressing fast forward on Apple's own press releases. And so I began to realize that we really didn't have an understanding of how their products were made. And that was like the little budge that became a big idea as to is there a whole book in figuring out how they do it and why that hasn't been told.

There's lots of different origin stories, but one I would say it was just that I discovered the position within Apple called manufacturing design engineer. Okay, so MD, and they had never really been written about before. And this is the significant position that brings in the geopolitics of what was going on in Apple. MD is just the position of okay, someone else has come up with the idea of a product and what it's going to look and feel like. And MD is the position of engineer that goes off to Asia, in particular China over the years, to find the factories that can actually do what is necessary to actually build this thing. So it's actually before operations, which is sort of scaling that into gargantuan proportions. And so the very idea that Apple engineers are sort of in the factories in Asia training the people on the production line, setting up the production line, in fact buying the machinery on the production line and spending gargantuan sums to do that. I just didn't know anything about that. And when I figured out that they were doing that, I wanted to just educate myself and read the book that had obviously been written about it, right? Or read the great articles that had obviously been written about it and then realized that nobody had written about it.

And my concern, I shared this with you earlier, my original concern in the book is this is going to be a hit piece. It's not worth reading.

Yeah, I think so, too. I think part of that is just being at the Financial Times. I mean, my favorite description of the FT is that it's a paper written by liberals for conservatives. You know, but it's very unlike the New York Times or the Wall Street Journal wherein it's not terribly clear where the FT is going to stand on some global issue when they're writing the editorials, let alone who they're going to have writing for their op-eds or whatever. It's a paper that can continue to surprise you. Whereas, you know, the New York Times is going to be sort of predictably liberal and the Journal will be predictably conservative and the FT just isn't like that. So I think part of like just the balanced reporting comes out of that. The other thing is that I was telling the narrative through the eyes of Apple people. And so you're not going to get a bunch of Apple people to talk to you if you're like, I'm writing the ultimate hit piece on Apple. So there's that. Then there's just the fact that I'm just a golden retriever Canadian who's just nice to people and stuff. So I think that probably plays a role. And then the final thing is just that if you just sort of think that Apple is, you know, a normal company that just has great marketing, let's say, you just wouldn't get the narrative because in order to understand just what an impact it had on hundreds of Chinese suppliers, you have to sort of get and not sort of just be all cynical about it that Apple really does put more design thought and manufacturing thought into their products than virtually anybody else. So in other words, you have to have like a really positive view of how Apple sort of conjures these things into reality to understand what an impact it would have, right? And then we can get more into the complexity of like I think they sleepwalked into this crisis. But my point is that a lot of people like in YouTube comments or whatever or just that I meet on the street just don't think that Apple is all that different from other companies, right? That if they didn't invent the iPhone, someone was going to do it within six months or something like that. And I think if you just have that view, you're just not going to understand the significance of what they were able to achieve.

Yeah, totally. But we'll get into that. So what I want to do is the book you broke the book down into six different sections. And what I've done is I've sort of broken my discussion with you into kind of three.

And the first one is Apple the innocent.

And the third one is Apple the complicit.

Yeah. And then after that we'll talk a little bit about kind of what comes next because interestingly when you and I talk, you know, you were pens down in February or so. A lot's happened since February and you know, have we learned more about this story since then and stuff, but we'll get to that at the end.

Yeah, so I mean Apple's founded by two guys named Steve in a garage and their first employee is Steve Jobs' pregnant sister who is just assembling the circuit board that is the Apple 1. So the Apple 1's not a famous computer. The Apple 2 becomes famous and it's their biggest revenue driver for 10 years even after the Macintosh has come out with a mouse and a graphical user interface and so forth. But the first Apple computer is literally a circuit board and you have to bring your own monitor and keyboard and mouse doesn't even exist. And what's interesting is Steve Jobs has this like in his DNA. He wants to control the product and so for him that means manufacturing the product but separate from that I think is there was no alternative. I mean the PC barely exists. You could kind of argue that the Apple 2 is the first PC and so there is no supply chain. You have to build on your own. That is not true of the PC companies that come to dominate. So company like Dell, I don't think it's founded until 1985. And in a sense, Dell doesn't have to do anything significant in terms of the aesthetics of the computer or the interface, right? They're obviously relying on Windows and Intel. And the computer is a beige box.

Yeah, I'm sorry. Windows comes later. But so their rise in prominence and ubiquity is really a story of mundane things that Steve Jobs didn't care about and granted if he gets ousted from the company and so forth but it's like distribution logistics just in time production and it's these companies that are in fierce competition with one another that are relying on a supply chain that's in fierce competition with one another and those are the companies like down multiple chains in the supply chain they're the ones who are making the decisions to go to Asia and then within Asia to go to China. So I'm always asked who's the architect of Apple's decision to move to China. And the answer is there is no architect. Tim Cook was not the architect. If you want to give him a title, you could say he's the admiral, right? He's sort of navigated the macroeconomic changes or whatever. But essentially, there's all this stuff going on in the PC world that's sort of making Apple less and less relevant because Apple trying to create their own computers just can't keep up with the standardized interchangeable parts. So by the time Apple in 1997 is nearly bankrupt, for me at least, and this I sort of laid this out in the narrative, they're bankrupt not because they haven't sort of innovated on the graphical user interface, they're bankrupt because almost bankrupt because they can't keep up with the prices, the competitiveness in the PC industry. And Gil Amelio, who's the CEO before Steve Jobs comes back after being in exile for 12 years, he's trying to standardize the parts and make it more like the PC. And the people that I talked to from the time are just like that was only going to accelerate Apple's demise because if you have 3% market share, you're just not going to be able to compete with 97% of the market. In terms of Steve Jobs' big realization is to differentiate the product and that's sort of the birth of the iMac, this translucent computer. And then you can work out how do we build this at scale? How do we outsource? How do we offshore? How do we keep up with it with everyone? But they are late to the party in terms of late to outsourcing, late to offshoring, late to China. The story in a nutshell is that they just do a better job than anybody else once they adopt that.

Yeah. Among the things I love about this narrative is that it's never been highlighted before in any Apple book as a significant thing at all. Even in Gil Amelio's memoir, the Fountain episode is a half a paragraph or something. Whereas for me, this is instrumental to the saving of Apple. So if you have read the book, apologies for retelling the story here, but if you haven't, Apple was making computers in Fountain, Colorado, and they're days away from not being able to afford payroll. In the spring of 1996, I believe I revealed for the first time that they actually hired a Chapter 11 lawyer. I mean, they're really close to bankruptcy. And so I had this great phone call between these two people where the guy negotiating to sell this factory to a company called SCI, which you could think of as the Foxconn of its day. It comes out of Alabama. And he's trying to get the best possible deal and his boss tells him, 'No, I don't care what the terms are. Sign the deal now or you won't be paid on Thursday.' And the guy's like, 'Whoa, whoa, whoa. Like, how did we get to like me losing my job over this?' And he's like, 'You don't understand. Nobody will be paid on Thursday if you don't get this deal done. We're running out of money.' And so that's instrumental to Apple then adopting. So they sell this factory. They net $200 million and they're able to pay their employees of course but immediately they have to adopt a global outsourcing strategy for the first time. The other significant thing about this is Steve Jobs is not at the company. So before the book all the attention has always been on that Steve Jobs sort of comes back with a plan. He hires Tim Cook. Tim Cook closes all the Apple factories, moves everything to China. And instead I tell this seven-year narrative where from 96 to 2003 Apple products are being made in about eight maybe nine countries. And I just think that narrative hadn't really been told. And when I was pitching the book or getting involved in the pitching of the book, it just seemed crazy to me that we didn't know anything about Apple making iPods in Taiwan by Inventec before Foxconn comes aboard. Apple was making the iMac in Korea, Wales, Czech Republic, Mexico, California, and I might even be missing one. So there was just incredible supply chain story before they quote unquote discovered China. And you know, so that just becomes like an entire like four or five chapter part of the book.

Yeah, he's a turnaround artist.

The best thing he does obviously is he buys NeXT.

Then Steve Jobs, you know, eventually Amelio's gone. Steve Jobs is CEO.

So, I mean, in a really famous anecdote that's not unique to the book, Steve Jobs, you know, at the time Apple is creating something like 40 projects in the pipeline. I mean, this is they've got the Newton, they've also they're doing printers. They're actually early on digital cameras in a kind of strange, funny sense. There's so many different computers that consumers really struggle to understand which was the better one aside from the price tag. I mean the Performa and all these things that even I as a journalist struggle to really comprehend what the hell they were doing. And even Steve Jobs basically said like I'm confused by this. How do we expect our retail people to understand this? And so he famously just drew like a quadrant, right? Sort of like a tic-tac-toe board or whatever, but with four parts. And he basically said, 'Every other product is dead. We're doing desktops, we're doing laptops, and there's like pro user and lay person, consumer. If you're working on anything else, the project has just ended.' And literally, someone described it as a Matterhorn of products. And so, you know, all these digital cameras and stuff were just laid out in a public setting like intentionally just to say that these are all the dead products and like if people just wanted to take them home as prototypes, like fine, but it was all dead. So he simplified the hell out of the portfolio and really concentrated all the energy into a single product which becomes the iMac.

I got way ahead of myself.

Yeah. So this, to be fair, Tim Cook does deserve a bunch of credit here, which is that even in 2000, so this is a year after the iMac is being made by LG in Korea, but also in Wales and also in Mexico, Steve Jobs is considering sort of taking them out of the equation and really ramping up what he called 'Mac factories.' He actually handed out t-shirts to all the senior people that said 'Mac factories.' I haven't been able to get my hands on one of these things, unfortunately. And it's really Tim Cook that is able to convince him that not only can we achieve better cost and scale by working with these other companies, but we can maintain the quality and the control. And this is where the whole idea of MD is sort of born. It's not even called MD at the time. But in a sense they invent a new form of outsourcing. I don't even think outsourcing is the right word. I just don't have another term for it. You could maybe call it like the Apple way. But the idea is that we're going to exert an insane degree of control over these factories as if we run them even though we don't. So that's very much a Tim Cook argument with Steve Jobs that takes years to sort of manifest. And in a way I think if things had gone better under Steve Jobs in the first three or four years, maybe he would have won the argument and you would have had a bunch of Apple factories and maybe they wouldn't have gone to China. I don't know. But instead you have the dot-com crisis and in a single day Apple loses 50% of its value and they're seen as such an acquisition target that Gateway of all companies. Who the hell knows what happened to Gateway? Gateway tries to acquire Apple. So they almost go bankrupt in 96-97 and again in 2000. And this is when the chief negotiator for like 20 years joins the company named Tony Blevins. He's in the book as like one of my favorite characters. I mean I have a pretty favorable profile of him even though I also have someone calling him a sociopath. So this goes back to the fairness of it all, but he's someone that is just ruthless in getting the best deal. But as I talk to people, it's like if you're looking back on your Apple career, the companies that you dealt with were either just as ruthless or they don't exist anymore. And that's the reality. That was just the game that was played. And so anyway, so Blevins was at IBM. Many people that came over from operations were from IBM. So much so that IBM called Apple 'IBM West.' You're poaching all of our people. Tim Cook obviously being the most prominent example. But IBM's manager to Tony Blevins says undoubtedly you're making the worst decision of your life when he joins Apple. And I'm pointing that out just because you have to understand that like the meet cute moment between Apple and China before they get married is that Apple is really quite in a precarious position. And so Steve Jobs sort of loses that argument because they have no money to build their own factories. So they sort of have to outsource. They have to continue the trajectory of outsourcing. And it's in that period where Steve Jobs needs to be convinced that they begin to consolidate everything into China. And China just absolutely wows the Apple engineers with how quickly they can do things and frankly how diligently they can do things. The workers are like sponges.

No, and I don't even know that anyone could have done it besides Foxconn. So the language used within Apple, they call it time to money. A textbook would call it time to volume. So sometimes the metric that's used outside of Apple is, what's it called? Time to product or something. So the idea is like you measure the time that you can go from like product conception to building something. And Apple didn't care how quickly you went from having an idea to building it in general. They wanted to know how quickly you could go from having an idea to building 100,000 a day. So that's what they call time to volume or time to money. And Foxconn just sort of wiped the floor with everyone in that respect. And I want to give in a sense huge credit to Foxconn because they sort of understand, you know, if you know who Foxconn is in the late 90s and 2000s, they're working with all kinds of companies. And when they're working with Apple, what they realize is, damn, this company is pushing us, right? They are asking for things that nobody else is asking. And so all the other Taiwanese suppliers that have set up shop in mainland China, they don't want to work with Apple. They see Apple as this arrogant company that asks too much and has engineers on the production line breathing down people's necks and is making them work beyond their perceived capabilities and stuff and so they don't like the challenge.

Oh yeah. And they're ruthless again going back to Tony Blevins with how much you're actually getting paid. So it's like why am I in this business? I'm not getting paid. The hours are terrible. You're asking too much. You're demanding clients and you're arrogant. And Foxconn sees all of those things and recognizes that's the opportunity because if we can please Apple, we can please anybody because if you learn from Apple, pleasing Dell is no big deal. And so Terry Gou was actually brilliant. I have this funny anecdote from Tony Fadell where they'd be working with these Taiwanese engineers for 3 months or something and then one day the Apple engineers show up and they don't recognize a single face and they're like where did our team go? And Terry Gou had just rotated them as if a new semester at Apple University had started because he just understood the value of training up the workforce. So Terry sort of understands Apple's trajectory in a way that Apple doesn't understand. So in multiple instances in Apple history, Apple would realize like, oh this product is way more popular than we thought. We need like an entire other production line to get this in order. And they'd find that Foxconn intuiting that had already built it. And so Foxconn's being selfish and smart and savvy because they're worried that if Apple sort of gets to that realization before them, then they'll move their orders to a Pegatron or something like that. But if Foxconn has already set it up for them, it's just so easy for them to say, 'Okay, let's do more with Foxconn.'

I hope I'm getting this right. So two things happen in the final three months of 2001. So China enters the World Trade Organization and Steve Jobs stands on stage and says this little thing will hold 1,000 songs in your pocket.

Yeah. I mean, you know, in a certain product sense, let's say Apple is late to MP3 players, but they build the iPod. They're late to smartphones, but they build the iPhone. The story of the supply chain is essentially the same thing, just writ large. They are late to outsourcing and offshoring. They're late to discovering China, but they do better than anybody else. And the most simplistic way I could put this is that the likes of Dell and HP are in China well before, I mean HP goes back to like 1985 or something in China. But they're not recognizing what China offers. So in a certain sense it's a failure of imagination on their part or you could say it's a success of the imagination on the part of Apple which is to say that if you understand that pyramid structure, when I was talking about it I think it's necessary to sort of say it this way the first time you describe it that ID does something throws it over the fence to PD throws it over the fence to MD, the thing that's most difficult to understand about that whole process is that it's not throwing it over the fence it's concurrent, it's a concurrent engineering idea. So as operations was figuring out how to do certain things, it was feeding back into how ID would do certain things. So the structure of the company was just able to take advantage of what was possible in China in a way that the other companies just didn't have an imagination for. In other words, if you look at Dell computers in the late 90s and then a few years later when they've made this big consolidation into China, nothing has happened, right? What's your favorite Dell computer from 2001? What's your favorite HP computer from 2003? Nobody knows what the hell I'm even talking about. But if we talk about this with Apple, we could spend the rest of the interview just going through the G4 Cube and things like that, right? So Apple was just really understanding what was possible. It's an imagination accomplishment.

Yeah. And that's exactly what fed back up and what allowed Apple to do the mini, the nano, the shuffle.

The iPhone fully designed and built from the beginning mostly in China, right?

iPod but not iPhone.