Patrick McGee on Apple in China

Yeah, we thought we'd do as much Q&A as possible, but I don't want anyone to be totally lost as to what this book is about. And so maybe I'll give like a five-minute introduction, but I get excited about my own topic. So if you need to shut me up, that's perfectly fine. It won't be rude.

Already given him permission. In a sense, I was trying to... so I was the Financial Times reporter for Apple for four years, and I realized sort of in the final months of that role before going on book leave that there were three books on Apple that I really wanted to read, and the problem was none of them existed. One of them would be Apple going from near bankruptcy in 1996 before Steve Jobs comes back to being the world's most valuable company by the time of Steve Jobs's death. You would think that book exists, but unless you're counting Walter Isaacson's biography of Steve Jobs, a person rather than the full history of the company, that doesn't exist. The second book would be how does Apple actually make its products? Aside from the most superficial understanding of how they do them, I don't think that really exists or fully does not exist as a book. And then the third one is how did Apple respond to a changing China where Xi Jinping becomes the ruler in 2013 and takes China in a pretty different direction. And to know anything about China is like if you're going to have a big Apple store in prime real estate on a corner in Shanghai, it's not just that you found a good deal and paid the price. You have to have political connections for that to take place. And that didn't seem to exist.

And not only were there no books about this, there wasn't really a whole lot of reporting in terms of magazines or whatever. There are a few good reporters. I don't want to say there was nothing on this at all, but it strikes me that in the last 25 years, the only stories we were telling about Apple in China were to explain problems. So problems of allegations of Uyghur labor, problems of overage... sorry, underage workers or over... you know, what am I trying to say? More hours than you're allowed to legally do. So China was always entering the picture to explain problems, and like China's the secret sauce of how Apple operates and sells 230 million iPhones, let alone all their other products per year. So why weren't we asking the questions of like how is this partnership working? Right? If this is a marriage, what is its success based on? And basically we just weren't asking that question, let alone answering it.

And the more that I began to talk to Apple people that worked there in the 90s and 2000s, I realized that I didn't just have contemporary questions, I had questions about what did they, quote unquote, discover in China in the early 2000s, what did they see that Dell and HP didn't see? And then as I began to understand things like the candy colored iMac that people might remember from 1998, like that product is not made in China. It's made in Korea. It's also made in Wales. It's made in Mexico. It's made in the Czech Republic. It's made in Ireland. It's made in Singapore. There's this big experimentation stage where Apple's sort of like looking around the world for how it can build its products. And nobody had really covered that either. And then they consolidate into China later on.

The other thing was like how cognizant was Steve Jobs about all of this? It turns out that he really wasn't on board with outsourcing and offshoring in general, but it was out of complete financial desperation that they had to have somebody else build their products. And then Tim Cook, who's now the CEO, really convinces Steve Jobs that like this is what we have to do. And then the biggest contribution the book makes to Apple history is it essentially makes the argument—maybe it's not really even an argument, it's just the demonstration from all the sourcing—that when Apple moves to China in the early 2000s, it's not lured by a whole bunch of tech competence that's already existing in the country and can therefore fulfill Apple orders. It's other things. It's industrial policy. It's an ability to scale. It's hundreds of millions of migrant laborers that are sort of accessible to factories to build in a sort of proprietary sense. And Apple realizes they can build the tech competence that they need.

And so they end up sending over what eventually is plane loads of Apple engineers to hundreds of factories across the country to basically get up to the spec, get up to what Apple demands in terms of quality and then to ramp up the scale into enormous quantities. And so the amount of labor in any given year taking place in China is 3 million people making Apple products. And the turnover in these factories is extraordinary. So maybe I'll just cut it off there, but that would be sort of like the basics of what we're talking about tonight.

Yeah. So China—sorry, Apple is actually late to going to China, but in the same way that they're late to MP3 players but they dominate with the iPod, they're late to smartphones but they dominate with the iPhone. That's sort of the supply chain story writ large. I mean, there are companies like HP that have a presence in China going back to the mid-1980s, and Apple's not really building there until the first year of the 21st century. So it's not a novel idea to go make things in Asia, certainly not, and definitely not in China. But Apple has this pyramid structure within the company that becomes pretty fundamental to how it operates.

So I'll try not to go through the whole pyramid here, but essentially the tip of the pyramid is how do we conceive of products, and this is Jony Ive sort of interacting with the industrial design team and Steve Jobs. So if you ever wondered like why is the iPod sort of unapologetically white with a chrome back, that's Jony Ive, but then he throws it over the fence to a team called PD, product design. They're the ones that have to sort of create one of what has come out of Jony Ive's imagination. So you know what circuit board is required, what battery is required, so forth, how can we make one of these things, right? And then the third element of the pyramid is the team that sort of like without them I wouldn't have written a book. This is what got me really excited about the topic. They're called MD or manufacturing design, and their job is to go find the factories that are going to be able to sort of like meet Apple's demands in terms of quality and then later in terms of quantity.

So, just to give one of my favorite anecdotes in the book, United Airlines in 2014 and 2016 is literally convinced by Apple to begin flying to two different cities, Chengdu and Hangzhou, cities that United had never been to before, and to fly there three times a week because Apple says, "We will purchase enough first class seats three times a week to these cities that even if the rest of the plane is empty, you will still make money." So add airlines to the list of industries that Apple has disrupted. Nobody else is doing anything like this. And the reason why I like to joke that like, what's your favorite Dell computer from the early 2000s? What's your favorite HP computer from late 1999? I mean, the room is just silent because nobody remembers any of these products. They were boring as hell. It wasn't what they were trying to do. Those PC companies did well because they could do logistics and distribution and just in time manufacturing in proficient ways, but design aesthetics was not part of their thing.

When Apple introduces the iMac, they set the sort of the whole course on such a different path where if you understand the design to be conceptually completely different from any other computer you could buy at the time. We in the journalist world have just sort of failed to understand that if the design is different, the manufacturing is different. And so to get the manufacturing right, Apple has to send people over to train everybody. Because if you're Foxconn and you've been building beige boxes, that gives you like almost zero of the skill sets to do a translucent plastic computer more in the shape of an egg than a box. So there's really nobody else. And I mean, the book has been out for months. I've spoken to people from Dell, Motorola, HP, Palm, all sorts of companies, and none of them were asking of their suppliers what Apple was asking. And you were saying that if you were a tech company, they are so paying so much attention to details of your product, then you will inevitably end up in China. Is that right?

Wait, one more time.

Yeah. So some of the early chapters or I'll give you some behind the scenes moment here. The first like 95 pages barely mentioned China. I mean, sort of the prologue and I had when I submitted the manuscript, I sort of just was in my own little rabbit hole for like a year writing this book and then I just submitted the entire thing to my publisher. And my biggest fear was that my publisher would call me up and be like, "Where's China? I'm a hundred pages into this book and we're in Korea right now. What's going on? This is a book called Apple in China. We need to get rid of this." And that was my biggest fear. So thankfully they never said anything like that. They sort of got it.

But the reason is that from 1996 to 2003, Apple is in all these different countries, but as they begin to have success, especially with the iPod mini but also the iMac G4. I should really have some images for this. The iMac G4 is this computer that looked like a sunflower. It sort of floats towards you. It actually is a little bit anthropomorphic and the first commercial was it like looking like it was about to break dance, like it's nodding to the beat and stuff. It's a remarkable computer. And it was built in Taiwan by a company called Quanta. And the trouble was Quanta just couldn't get enough employees on the production line. They literally had to import people from the Philippines just to sort of man the line. And then you had things like metal stamping was done in Japan. The wiring was done in mainland China. They relied on like a Singapore Airlines-based blade fabrication place... manufacturer, fabricator I guess in Singapore.

So basically the value of China in these early years of the 21st century was to replicate or sort of lure in the supply chain that was fragmented and scattered mostly across Asia, Southeast Asia, but living all the way up to Japan, and basically say we're going to have next door manufacturing facilities where instead of having to fly across a body of water to sort of work on a new prototype, you'd like walk up the block. And so China just offered like the scale, let alone the low labor costs, in a way that really nobody could compete with. But one thing that's maybe worth noting, Apple isn't really the entity and Tim Cook really isn't the guy who made that decision. The suppliers themselves were making those decisions. They were the ones waking up to the opportunity of what was possible in China. And Tim Cook and Apple just sort of rode that wave better than anybody else.

So, I like to joke that Apple and China are married. And so I often talk about their meet-cute moment when it wasn't really the Apple that we think about today. It was a struggling company that was nearly bankrupt in 96, 97, and again in 2000. And it wasn't really China on the other end because it was basically in Shenzhen. And Shenzhen, I probably don't have to tell this crowd, was basically like this capitalist experimentation zone that wasn't really sort of like, at best the policy of Beijing was sort of just like let things rip and turn a blind eye to it. So they didn't necessarily understand what was going on. And in fact it sort of leads up to what happens in 2013 when Xi Jinping quite suddenly really does want to know what's going on.

So anyway, the marriage reference I bring up because it's like sort of saying who's more important in your marriage, the husband or the wife? That's a contentious question to answer. And so I don't know that I could do it for Apple and China. But I would say that I try to give enormous credit to Foxconn. I think Apple in a sense exploits the hell out of them. But Foxconn is instrumental to the narrative. And maybe, just in case, I want to make sure we're sort of all on the same page here because I haven't mentioned this. Foxconn is Taiwanese. And that's incredibly important to understand because when China is really coming out of the Mao era, they don't have the skills to manufacture things. And so the reason Shenzhen becomes this experimentation zone is to basically lure in capital from Hong Kong, Taiwan, and Japan, and hopefully the skill sets as well, to sort of teach the Chinese like how to do apparel, how to do textiles, and all this sort of thing, and electronics, as you can guess, would be a little bit later.

And then you know by the late 1990s Foxconn is pretty influential but they're not the Foxconn that we think of today. That happens pretty quickly in the 2000s, but they're not particularly special in the late 1990s. And for me, Foxconn and founder Terry Gou is particularly important because what he understands is that the other Taiwanese don't really want to work with Apple. And it's understandable why they wouldn't want to work with Apple. Apple is absolutely ruthless when it comes to the negotiations. And this is when they're like little, right? I mean, let alone now, but they are little and they're ruthless about caring about every penny in the supply chain. And then they send their engineers over. And I've been portraying this as a positive thing, but this wasn't considered a positive thing if you were a Taiwanese supplier because they have these engineers who are like breathing down your neck to make sure everything is up and running. And so companies like Quanta actually didn't want to work with Apple. But Terry Gou understands, and I'm sorry that this sounds a little bit like a cliché thing that you would have in high school, the challenge is the opportunity.

So basically Terry Gou's understanding is like if we can please Apple, we can please anybody because if you have a whole crew of people that are supplying Apple with the plastic injection molding required for the candy colored iMac, Dell is going to be a field day. And so he actually sort of plays against this in some respect. So I have this great anecdote from Tony Fadell, who people might remember as the Podfather, former senior vice president at Apple. And he says, "You know, sometimes after working with a bunch of Foxconn engineers for 12 weeks, we would come into work one day and find out we don't recognize a single person on the production line, right, or in the factory." And it's because Foxconn had basically taken the engineers and put them on a production line where they're actually going to make money for Dell. And so it was like a new semester at Apple University had started and these engineers for Apple would have to train a whole new cohort of people. And that, I think, is where it comes in where one of the biggest contributions Apple has made to China is basically training the workers, training the factories into how to make world-class electronics, which at a time China does not know how to do, right?

Yeah. Yeah. Yeah. Because sometimes in social media clips of mine, this has been sort of taken the wrong way as if I'm not crediting China. And the funny thing is I'm trying to credit the hell out of China. My whole point is that Apple can't do this anywhere else. Only China is capable of providing this. And not just because of the population but because of their hardworkingness, because of their industrial policy, because of their ability to scale. And so Apple's just a company that recognizes this more than anybody else. And in the earliest years, it really is through Terry Gou's sophistication. And one thing people don't understand is Apple is outsourcing production to Terry Gou. They're also outsourcing the politicking to Terry Gou. Terry is brilliant at understanding that there's something different about Chinese communism as it's emerging after around 1993 versus Soviet communism. Soviet communism is very top-down. Chinese communism—I'm hesitating to say this in front of a scholar like Orville Schell—but it's almost grassroots, right? So there might be a very top-down five-year plan, but to enact the plan, local cadres in various jurisdictions are wanting to sort of bend over backwards, do whatever they want to do so that they can lure in the capital and basically show that their region is achieving to that plan better than anybody else, right?

And so in the west, if you're a businessman and you're talking to a bureaucrat, the bureaucrat is probably somebody that is like putting things in your way, environmental standards or any number of things, right? A bureaucrat in the Chinese system is actually someone that's more like a venture capitalist that sits on your board and promotes growth, right? And so Terry understands that. And so he's actually sort of working with the local governments to get the quid pro quo so that like we can lure in the Apple orders, but we're going to sort of give all sorts of jobs to your community. So you local cadre, you need to provide me with free land, subsidized machinery, and any number of things to sort of help me get done what I need to do. And the caveat is you better deliver on your orders. And what Terry understands is if I bet on Apple, I'm always going to deliver on my orders.

Yeah. So within 36 hours of Xi Jinping coming to power in March 2013, Apple is attacked by CCTV. This is actually a news story worldwide. But I don't think we as journalists ever really realized why Apple was being attacked. Ostensibly they are being attacked for warranty differences. The allegation by CCTV—and they actually had sort of like secret footage in places like Paris and then comparing it to Beijing—was that the Chinese warranty policy on behalf of Apple was different and it was treating the Chinese in an inferior way. And the most exciting thing I did in the book was solve the riddle of what the hell was going on here. And I'll try to give a succinct answer, but I get excited about this narrative because it's part four of the book. This is literally five chapters. It's my favorite part of the book and it seems like a real diversion because most of the book is about supply chain, manufacturing, technology transfer, and this is all about retail sales.

So the most basic version I can tell you is that Apple in 2008 has no faith that anyone in China is going to buy the iPhone. If you remember Steve Ballmer thought no one was going to buy the iPhone in America because it was $600. And so you can think that well why would anyone in China be buying it? Basically there's not enough people with enough income to afford it. Instead, it becomes a wild success. So the first Apple store in San Li Tun, Beijing is opened only because the Beijing Olympics are happening in 2008. And the sense is this is going to lose money for years, but it's a great marketing opportunity. Let's do it. By 2010, there are four Apple stores in the country and the iPhone 4, I think, becomes the most conspicuous product that everybody in China wants to have.

And it's hard to overstate what the demand is. Some of these examples are tragic. There's a 17-year-old who underwent black market surgery to sell a kidney in exchange for an iPod, an iPhone, and an iPad. There are thousands of people taking out loans at 45% interest rates in order to acquire Apple products. And Apple is totally taken aback and flummoxed by this demand. One of my favorite examples is they begin surveying people as they leave the store as to their basic income and things like that. And they find a mailman who had spent 30% of his annual salary to buy an iPhone. And so they say, "Why would you do that?" Kind of funny thing to say. And he says, "When people see me with the iPhone, I'm not a mailman." It's hard to overstate how much people wanted to have the phone. It was a way of showing I've made it. I can think for myself. All sorts of things.

I'm trying to keep this succinct, but again, it's really exciting. So anyway, this cohort of people known in China as the yellow cows, they're scalpers. They have this history going back to 1990 where they understand market dynamics and inefficiencies and then they exploit them. So the example I cite in the book is that in the early 1990s, traveling by rail becomes popular in China, but the government wasn't all that quick in developing enough rail car capacity. And so the yellow cows figure this out. They buy up all the rail car tickets and then they just stand beside the official booth and they sell the tickets at inflated prices. But interesting for our narrative is then they get greedy and they start working with factories to forge the tickets and then sell those. And that's a little foreshadowing of what happens with the iPhone.

So in 2010, four stores for 1.4 billion people. That would be the equivalent of there being one Apple store in all of America and we all want to buy the iPhone, right? So just think of the chaos that would ensue. But there ends up being five, six, seven thousand people snaking around the store for each of these four stores. And what's interesting about them is the image that you would have would be if you saw some relatively impoverished people outside of Tiffany's and like by the thousands and you'd be like, what's going on here? And it's because the yellow cows are hiring migrants from rural areas to come in because there's a limit to purchase two phones per person. And so each of these migrants is buying two phones, getting paid a small fee. And then like an entire bus is going to a city like Chongqing, population 32 million, number of Apple stores zero. And they're hawking the phones at like double the retail price.

So that's good enough. But then they find ways of hollowing out the components and then resealing the box. So they're actually selling the memory into markets in Shenzhen and so forth. And then to go even further, they're buying phones outside of China where there's no value added tax, places like Hong Kong, places like Oregon, and then smuggling them in. And some of the stories of smuggling are insane. And then to take things even further, they realized that wait a minute, if we buy phones at T-Mobile in the US on a 24-month contract using a fake ID, we can pay for an iPhone at one month versus of the 24-month contract. So in other words, you can acquire an iPhone at less than $100. You can still go to Chongqing after hollowing out the components and sell it for $800 or $900.

So to put this succinctly, the yellow cows figure out of making more money per iPhone than Apple. Okay? And these are the years in which Apple is becoming the most valuable company on the planet because of how successful the iPhone is. On top of that, again, this is four or five chapters. There are fake Apple stores all across the country. Apple actually at one point commissioned a study and the number that came back was so outlandish that they just rejected it. It was 16,000. That was the number of fake stores in Apple according to this study. I don't know what to do with that. Apple didn't know what to do with that, but that's what this third party said. The problem with these stores is that not only did you going to the store not know that it was a fake Apple store, the employee with their blue shirt with a big Apple logo there also thought it was a real store. But then if I broke the phone or I had a faulty phone because it had been tampered with and I went back to the store, I'm obviously not getting Apple's courteous service, right?

And so in addition—well, no, I'm skipping ahead. So okay, so one thing happens. One—oh god, I haven't even brought up.

This is such a long answer, but again, it's just my favorite part of the book. Okay, in addition to selling the phones made by T-Mobile, or some of you, if you're tech-savvy, might realize, wait a minute, you can't just get a phone at T-Mobile in Portland and then have it run in China. It doesn't work like that. True, not a fault in the story. They were using their factory connections to literally zap out the processor. Okay, so they'd render the phone inoperable, but by doing so, they're also masking the retail origin of where the phone came from. And aside from some computer digits or whatever inside, the phones are identical. So the lines that had been snaking outside of the San Li Tun store, let's say, go to the other side of the store, the Genius Bar, the return side.

And I talked to someone at Apple who said, "You would have people coming up with an entire backpack full of phones and saying, 'I bought these for my whole village, but none of them work. I need replacements.'" And the Genius Bar in Beijing is now looking at them and being like, "I don't know what's going on here. I can confirm these are all new phones, but they don't work. Here is 15 new phones. We are so sorry." Right? Apple thinks it has a supply chain problem. They don't realize they're being scammed. So eventually Apple catches wind that there's something amiss here and they begin holding on to the phones for 30 days. They begin using sophisticated machinery to look at a near atomic level of what's going on to figure out which phones have been tampered with which haven't been and so forth.

This is longer than my intro by the way. And then hopefully you can understand why. And so once Apple realizes there's something going on here, they institute these policies and there's this cat-and-mouse game between Apple and—this is the origin, sort of hitherto unsolved, of why there was a warranty difference, right? This is the thing that CCTV attacked Apple for. They were treating the Chinese in a different way but it's because they were being scammed and they were trying to figure out what was going on. They've given refurbished phones rather than brand new ones because they were beginning to understand that there's this lucrative gray market where people are literally making like hundreds of millions of dollars. Okay. So then CCTV, sort of the state sponsored CNN of China, goes after Apple and Apple in a sense doesn't know enough about China to even be worried or fearful. They're kind of flummoxed and they basically deny that there's a warranty difference. The thing I'm talking about wouldn't be well known within Apple. And they issued this benign apology—or not an apology, a benign explanation—and there's what I call a digital blitzkrieg for three weeks where social media, a whole bunch of papers including the People's Daily, sort of attacks Apple for its incomparable arrogance, and Apple begins to be really fearful about its business.

Sales, I think in the prior December quarter, had gone up almost 70% and then they begin to freeze and then actually fall during this three-week period, and Apple begins to be worried that we're the next Google, we're the next Facebook, i.e., banned in the country. So this is the origin of Xi Jinping sort of going after them through CCTV. And Apple has a real wake-up call and realizes like we don't understand this country. We don't understand the culture. We're the biggest operator in the country. We're the biggest retail sales company and yet we're missing something here. We don't know what to do. And I feel like the other big picture factor that goes into that is Apple, unlike a lot of the auto companies or other foreign companies coming to China, has never formed a joint venture with any Chinese company. Yes.

Yes. Yes. So what we talked about earlier where Apple was sending in their engineers, they're totally operating under the radar, and again for the first years they were really just in Shenzhen. So like nobody really knew what they were up to. So my sort of thought experiment is that if you were Xi Jinping's lawyer in March 2013 and you were told to build the case against Apple, the evidence would be everywhere because the companies that are working for Apple aren't really being paid. Sometimes they're losing money, and Foxconn is like the archetypal example of like a great partnership and they're earning like 2.5% margins. The astonishing thing about Apple and Foxconn is in the first four years of their partnership, Foxconn actually earned more money in absolute dollars and they earned more margin. And then the iPod mini followed by the iPhone go wild and Apple margins literally go from 1% to 26%. Okay? And Foxconn margins fall from above 10% to 2.5%. So Apple is squeezing the hell out of its supplier, and that's its best supplier, its best known supplier. You can imagine that the other suppliers are being squeezed even further.

Now again, Terry understands this. I mean, Terry was upset. Terry had meetings all the time with Tim Cook trying to sort of get this change. To be clear, he's not happy about this, but he understands that the value of working with Apple is the learning, not the profits. Other Chinese companies—they're Taiwanese companies in China—don't understand that. And actually, a lot of companies in China in the 2000s do not want to work with Apple because they're seen as overbearing and they don't understand the technology transfer that's involved. So when Xi Jinping comes in, he's emphasizing "China for China." I think you can rightfully call that the equivalent of America First. And he's emphasizing what he calls Made in China 2025, an ambitious plan in 2015 for basically China to sever itself from the west. And what this team within Apple—the first senior people living in the country that jokingly call themselves the Gang of Eight—they realize, hold for laughter, they realize that we don't have any joint ventures in the country and that's why Apple's upset. But if we weren't so secretive, Beijing would understand that we are doing phenomenal things for the country.

Because you have to understand, the iPhone is built in a way that Nokia phones are not. I mean, to quote John Stewart, the shit's beautiful. Right? I mean, it's just made really, really well. And the tolerances that you have to achieve require all sorts of training and investment. And if I'm skipping ahead a little bit here, the number that Apple released in February for how many people they've trained in their supply chain since 2008 is 30 million, greater than the labor force of Canada or California. So the training that's taking place is monumental. And the problem in 2013, 2014, 2015 is Beijing doesn't know this because Apple's not advertising it. And so they basically flip the narrative on its head and they basically say, "It's true that Samsung has 35 joint ventures in the country and we have zero, but you don't understand our business model. We are training the hell out of hundreds of factories to get up to our level of quality and then we're helping them scale to world-leading volumes."

This is... yeah, and so they gave that number to the Chinese government, and I think it really helped them understand, like, we are doing something here. We are not just taking profits. And that was a turning point in the relationship."

Purely the construction costs of Apple stores. That's a small figure. The machinery that it places on other people's production lines that sometimes is huge. So, like the MacBook in 2008, the one that could fit into a little envelope, the MacBook Air. That was built in a process that required CNC machines. They cost upwards of a million dollars each. Apple bought 10,000 of them and put them in Chinese factories. And only bought 10,000 because they couldn't buy more. They had to secure the supply chain, basically corner the market on CNC machines for years. But of course, they weren't building anything themselves. This was all for their Chinese factories. So, they're building up world-leading capacity. I've totally lost the thread of what I was going on about.

Oh, the 55 billion. Oh, yeah. So, the machinery and then the third thing is the labor cost, right? So the 3 million people that they have in their supply chain, some of them are only working for Apple for 8, 12, 16 weeks to be clear. But they're counting the wages of those people as training costs which calculates as something called registered capital within China. Anyway, and so Beijing is so convinced by this that just a year and a half or so later, Tesla comes calling. Elon Musk saying, "I'm thinking about building a factory in Shanghai. We think we could do it in 24 months." And the mayor of Shanghai says, "Make it 12." And they basically give them subsidized land, machinery, and so forth. And Tesla copies the Apple model. I mean, they're basically told, "Do for EVs what Apple has done for smartphones." And so Tesla's a little bit different. Obviously, they do manufacture themselves, but they have to rely on a supply network. And so they localize the supply chain by copying the Apple model. They literally hire people from Apple that have China experience to basically train up all the suppliers to get to Tesla's level. So all the things that Apple had done over the previous 10, 15 years were basically replicated by Tesla and by 2023, I think it is, Joe Biden is slapping 100% tariffs on Chinese EVs. So, I'm simplifying a little bit here, but I think it's hard to denigrate or understate what Tesla's impact was on EVs in terms of how they were built, but also sort of the allure of them. And also, one of the small anecdotes I want to add is that Apple also personally contributed to the rise of BYD because when it was still trying to make a car, it actually worked with BYD on better batteries and that, you know, BYD now becomes like this the most powerful battery company in the world. I mean maybe rivaling with CATL. But oh I want to come back to the name the game of eight because I've been dying to ask you is that a word play of the game of four from culture revolution.

Okay.

Uh operations is one person. Okay. Procurement, Apple University, research and development, retail sales, third party marketing. So, yeah, the gamut.

Oh, wow. That's interesting.

Okay. So, we're going to open the floor to questions in about five minutes. But before that, I want to bring us to the current day. One of the biggest questions coming out of this book is where does Apple go from now? And one specific question I want to ask is that as we've seen the first 90 pages of the book, Apple has made a lot of pivots away from Singapore, away from Korea and finding itself eventually in China. Why can't Apple just pivot itself away from China again? What's the obstacles there?

So yeah, the argument is essentially that Apple has just invested so much in China and not really anywhere else in the same degree that no other country exists that has the same capabilities, the same tech competence. Right? So when I talked about 25 years ago made in China was synonymous with poorly made, nobody would make that argument now. I mean, China's superiority in advanced manufacturing is so hard to fathom that experts in the field struggle to really comprehend it and you have to do so in, like, weird ISO documentations and stuff. I mean, I would just say China installed more industrial robots on its production lines last year than the rest of the world combined.

So, if you want to know why don't they move to India, it's because India has an order of magnitude less machinery, less robots, and they also don't have the years of experience that the Chinese have. So, India comes up a lot because it's the only country on the planet that at least at a superficial level resembles China or at least resembles China from 25 years ago. In other words, the labor rates are significantly lower. It's got a country of 1.5 billion. Unfortunately, I think the differences between India and China are far more profound than the rather superficial similarities. So, Apple is trying to diversify to India and it's very possible that someone in this room will purchase an iPhone next year and it'll say it's made in India but it's not really made in India. It's made in India in so far as teraflow is concerned but if it takes a thousand steps to build an iPhone and the final step is done in India for teraflow that's a substantive change to the product and it can be considered made in India but it's no less dependent on the Chinacentric supply chain than anything else. And then the other thing is the more successful Apple is in expanding to India, the more it'll face three major problems. One is that Beijing can just tighten the screws, right? So electricity at random factories just goes out on a random Wednesday and Apple engineers are stuck wondering is that because of that press release about India that Tim Cook just made or is that something else? And there doesn't have to be anything explicit on the part of Beijing or Shenzhen. Apple is just in a position to now understand how Chinese politics work a little bit that they would fall in line pretty quick. And actually since the book was published, there have been multiple stories in several different outlets that Foxconn workers that are Chinese that are setting up production lines in India are being recalled. Machinery bound for Tata production lines if the customs understands that this is for iPhone production lines in Karnataka, it's being blocked. And so forth. So that problem one. Problem two is the Chinese rightfully see the iPhone as an indigenous product. This shouldn't be a major claim. I used to live in Germany and I asked my taxi driver why he drove a Ford. And he said, "Well, Ford's been in Germany for seven decades or what have you. This is a German vehicle as much as a Mercedes is." That's how the Chinese view the iPhone. I think appropriately. The more that Apple becomes synonymous with or the poster child for diversifying or de-risking or decoupling from China, the more it puts its $70 billion business in China at risk. The third is that as much as Apple can replicate the playbook and train up a whole bunch of Indian engineers, it can't build the eight lane highways, it can't build the world-leading ports, and it can't be the high-speed rail. So unless India begins knocking it out of the park on those three fronts and there's a whole bunch of others. Those are sort of arbitrarily chosen. India is just not going to be the perfect partner and again India is the only game in town. You can manufacture in Vietnam but Vietnam has one-fifteenth the population of China. You hit your capacity constraints almost immediately. Things are even worse in a place like the US where of course you've got regulations and a labor force that's way overpriced and any number of problems. So that's why the subtitle is captured. Sometimes people have asked if it's in order to sell books. No, I mean I legitimately don't know where Apple can go. Last thing I'll say I talked to a former senior vice president of Apple who after reading the book said, "You know, even if we knew Xi Jinping was coming and taking China in the direction that it took, where else would you have us go?" And he's obviously just confirming my thesis which is that there really is no place else to go. So I think the common lay person understanding is that we're going to see more and more built up over in India over the next few years. And I don't deny that we'll see more and more press releases stating as such. But I think actually the story is that multinationals operating in China are slowly being squeezed out in favor of Chinese companies, homegrown rivals that have learned from these multinationals. And so in a sense even as you have diversification to India you're actually getting more entrenched with Chinese companies not less.

I love the marriage thing. Yeah, you know, I do quote someone in the book saying the relationship Apple enjoys with China could blow up any day. And I think that's a clear risk, but I like to flip this on its head a little bit and say, you know, the other risk is that this continues because this has worked really well for Apple and it's worked really well for China. I don't think it's worked very well for America's industrial base or Mexico's. There's a great paper called NAFTA's uninvited guest about how successful Mexico and US and Canada were from 1993, the signing of NAFTA to 2001. And then once China enters the World Trade Organization, you know, we talk about American jobs being lost to China. Mexican jobs were far more competitive with China and they got throttled. I don't know, something like that. So, yeah, I unfortunately I'm like this gregarious golden retriever Canadian and I'm really optimistic and I've really written a pessimistic book. Which is a strange thing to be associated with.

Okay. Let's open up to questions. If you have a question, please wait for the microphone to come to you and ask the question through the microphone, please.

Microphone is in the back. Does anyone have a question here? Oh, so it's my new front.

Yeah. So, that was 2010. That's exclusively a Foxconn decision. I've got this great anecdote where the iPad and the iPhone 4 are about to come out and Tim Cook and Terry Gou meet and Tim Cook offers these sort of conservative estimates of how big these products are going to be. And Terry Gou, I think the quote is, "You're sandbagging me." I had to look that up. I'm not even sure exactly what it means now, but Terry's basically way optimistic about what the products are going to be globally, not just in China. And Tim Cook doesn't agree. And so Terry Gou sort of bets the company on the spot by saying, "I'm going to build for you two new campuses, Chengdu, which becomes iPad City, and Chongqing, which becomes iPhone City, and if I'm right, I get all the orders for these products." So, it's an instrumental move on behalf of Foxconn and to some extent it comes from Terry's bullishness on Apple. The other thing though is that he was reading the tea leaves of Beijing's 5-year plans and what was going on in the financial crisis in 2008, right? Is that you had this real overheating in the coastal cities of Shanghai and Shenzhen and so forth. And there was real inequality in China between these places. And so Terry Gou understood that his political interests, his business interests would be best if they were really aligned with what Beijing needed. And so that's why he wanted to make these massive investments more than a thousand miles from Shanghai in these two major cities. This is before Apple's political awakening, before they really understand the country. So I would give all credit to Terry.

There's a question in the front. Is that the green lady row?