Welcome to Build Better, where we're having conversations explicitly trying to help engineers, manufacturers build better electronics products. My name is Anna Shitzky. I'm the CEO and founder of a company called Instrumental, where we build AI-empowered technologies to build better electronics. I'm joined here today by Patrick McGee, who's formerly part of the Financial Times and has been covering Apple for a large part of his career and has recently published a new book called Apple and China. And I think one of the main theses of the book is that Apple and China are pretty inextricably linked. That Apple's investment into China was massive and essentially maybe had a hand in making China what it is today, but also at the same time kind of allowed Apple to lose a lot of control over what itself does. And so they are tied together in a way where they've made each other, and divorcing those two could be very challenging. So that was at least one of my takeaways. I'm sure there's others and we'll talk about them here.
Yep. One of the exciting parts about my job is that I get to see inside of a lot of different electronics companies. I am ex-Apple so I have some Apple context as well. But one of the things that I was thinking while I was reading this book about how Apple kind of sleepwalks into essentially teaching an entire nation how to compete with it, and to effectively very effectively compete with it, is how we may be doing that still with other parts of the process. Not just teaching suppliers to manufacture products or to manufacture products and bringing them up to speed, but also like the continued abdication of ownership of the innovation or the engineering of the actual devices that are supposed to be what we're building and engineering as part of electronics companies here in the United States. And so, I think that's like actually a concerning trend that I've seen and maybe we can use this conversation as a jumping off point to talk about what we can learn from the historical analysis that you've done of what Apple's done and maybe project forward to where there could be concerns as it relates to further abdication of design and innovation of even just the ownership going more towards a 'I just buy a box and put a label on it' kind of model, and how that I think is quite threatening to at least the US electronics and tech industry.
All right. So, you argue that Apple kind of sleepwalked, I think is words I've heard you use, which I like, into making China indispensable, and that this has become a strategic liability, not just for Apple, but for the entire electronics industry. Are other companies today repeating that same sleepwalk or have they also been sleepwalking or maybe more? What's your take?
So I've burrowed into my own little rabbit hole that I don't have expertise outside of that. So Tesla is a section in the book as well and I think they've basically, I mean it's not that they've made the same mistake and now I'm realizing it. They intentionally do what Apple does, right? I mean, they're basically told by the mayor of Shanghai like, 'We want you to do for the EV industry what Apple has done for the phone industry, of the computer industry.' And to set that plan into motion, they literally hire a bunch of people in China that have Apple experience to do that and I think very successfully. And you know, this is the origin of why Tesla's able to become the first wholly owned foreign automaker in China. You know, no JV and you know, they're operating within 12 months of setting up of like, you know, cutting the ribbon on the factory as it were, instead of the 24 months that Elon Musk had proposed. So they're able to get these subsidies and such and it's really the quid pro quo of that Tesla is going to train up the supply chain.
And I think you know within 24 months of the Model Y, the Model 3 being made out of Shanghai suddenly Chinese EVs like across the board are really good. I mean even before Trump 2.0 comes into power, Biden puts 100% tariffs on Chinese EVs. I mean I was a German auto reporter until 2019. The Chinese EV story was not a story, right? And that's how quickly it shifts.
So I think, well, and there have been US automakers who've been trying to like catch up to Tesla. And as someone who has purchased an EV in the last five years, like there was a decade, like you could tell like sitting in these different cars that there is a decade of difference between like what you can buy from even Korean automakers, US automakers versus Tesla in terms of like what the product offering is to the consumer. But I've been very impressed to see like we have Chinese wholly foreign-owned entity as well and we have Chinese team and they have bought Chinese EVs and I've ridden in them and they're amazing. Like there is not that delta. These are on-par vehicles that have been developed.
Yeah. So the marriage of Apple and China is really one of skill and scale and I think you could say the same of Tesla. Whether there's a whole range of other companies, I don't know. But there's, I mean there's only so many companies that are even at that level, right? Most companies aren't doing joint development where they essentially gave some IP, right? And that wasn't sleepwalking. That was like part of the bargain.
But it kind of feels like, well it certainly seems like the Apple model was more successful for both China and for Apple versus like those JV style models, such that you know what your argument is like that the Shanghai leader actually like wanted to replicate that as it related to Tesla.
And one thing I just want to clarify is when I say sleepwalking I think sometimes it sounds like a biting remark and it's actually sort of intended to be the opposite because my point is that the executives in the early 2000s who made the decision I don't really hold their feet to the fire.
Well they were chasing, they were chasing shareholder value, right? Which is what they should be doing.
And they were doing so at a time when Washington would have frankly encouraged, I mean, maybe not flat encouraged, but the whole American consensus, the paradigm, if you will, was we're going to inculcate the next great democracy. So, I'm saying sleepwalked because we didn't really understand the political dynamic at play. And maybe China did. That's not entirely clear to me either. Like the newest books on China basically say China was never going to be a democracy or whatever. I actually don't really agree with that. I think it was possible, but we sort of took our eyes off the ball by, you know, after September 11th, America really focused on the Middle East. After Lehman Brothers, we focused on the financial crisis. So I think there was, you know, I don't think history is so linear or what am I trying to say, like materially going in one direction. I hold out hope for alternative, well not hope but the prospect, alternative paths that could have been taken and I think you know China is sort of building a middle class that overthrew...
You don't believe in providence.
Yeah exactly. Yeah, there was nothing inevitable about Xi Jinping, right? That the previous decade really shapes the dynamics for a hardliner to come into power. And so I disagree with that. So anyway, so just the point on sleepwalking.
Well, nobody, I interpret it to mean like nobody made the strategic decision that we're going to like train up an entire nation of people and that we should talk about that. And like at the time the business was just trying to survive and it was trying to find suppliers who could, it was trying to compete and like it actually never had like a significant portion of market share in those early days.
This is an argument you make in the book. People either forget or they're just too young and don't know just how precarious Apple's position was. So, the reason the book after the prologue begins in 1996 is because even before Steve Jobs has come back, I mean, they're days from missing payroll and the company is going to be over.
And so, you know, they almost die in '96, they almost died in '97, they almost die in 2000. And so, you have to understand that when they're going off to China, it's not the powerful Apple that we know now. It is just this scrappy company that's doing, you know, in retrospect hilarious things like when they're working in Taiwan and Southeast Asia, like they're hand-carrying prototypes from one place to another. Like this is not doing that in the...
Okay well this is not strictly speaking legal, but they were a scrappy company. [laughter] Commercial samples. Yeah, okay. I think I'm not a lawyer. [laughter]
Yeah, so yeah, no, I think it's like a really fascinating thing and as an entrepreneur myself, are you really a real company if you haven't had a near-death experience at least one, maybe more? [laughter] Okay. So, from your reporting, what second or third order consequences of outsourcing kind of surprised you the most? So, you know, Apple outsources to this set of supply chain within China, many many different vendors. And maybe they're ones that are like less obvious from the start. Just kind of interested like what were things that you found that surprised you that you think might be interesting for our audience?
So I wonder if I can reframe the question a little bit just to say like what are the second order consequences of having an aesthetic like design-first mentality at Apple because then it's less direct. In other words, by having Jony Ive, you know, Steve Jobs tells Jony Ive about the iMac, make it lickable, right? Like he really wants this computer to look nothing like any computer has had before. And so I think we in the media and probably investors and others have only sort of looked at the first order consequence which is that you know you design this brilliant computer and so consumers are able to get something that doesn't look like anything else. And the second order impact is that we've forgotten that in order to build it in the hundreds of thousands you had to effectively transplant that like Hollywood version of Steve Jobs that we all know who like yells at everyone but brings up everybody around him, and you have to transplant that whole sort of paradigm into in this case Korea but later China, right? So it's like having this design-first zero tolerance for defects that in Cupertino ends up having this huge effect on like four major industrial clusters in China, like that's nuts. But I'm almost creating like the distance between like if you ask the second order impact of the outsourcing, well I don't know because then I'm making something that's too direct which is that it has this big impact in Asia, so I'm not even sure what the other possibilities would be. There's probably several.
Well, I think it's interesting that you view Apple. I mean, it's true. Like, I'm not saying it's not true. It's interesting your perspective as like a design-focused company because as someone from the inside of Apple, like I was there from 2009 to 2015, I was a low-level engineer, not a lot of power. So, like, you know, was not in the smoky room when things were happening in product design. And so like I, you know, certainly we were very hard on suppliers and brought everybody up around us. And it's not that like when you know I'm like 21 years old I don't know how to run a factory. I don't know how to make an iPod either. I just like was bestowed with the authority to go make it happen. And to work with a team of smart and dedicated people to make it happen and invent what we needed to make happen. And one of the best parts of being at Apple was I felt like, I mean for me the massive impact was like you'd sit on the line and your stuff is not working and you could literally like take a Sharpie and like you know make a change and five minutes later that's what's coming off the end of the line and those units can go into tests and it's just like this fantastic idea that you could like literally make a change and have this influence. You'd have 20,000 people who are like at the beck and call to like make it happen. And you know we'd have impossible things we were trying to do and we were actually not allowed to use the word impossible. You could only use the word challenging.
Well engineers have lots of funny things. Right. So in the book people joke about Steve Jobs asking that the next laptop would be made out of unobtanium. Right, there's lots of funny jokes about Apple. You probably know a lot more of them than I do that come out of this. But I guess what I find interesting about that, I don't quote Steve Jobs saying this but he was known for giving a... And there was this in a recent interview someone used a Mandarin phrase in China obviously where like it basically means 'good enough', you know, and that would never be a phrase within Apple, right? You always had to push to the limit. So even if you're not sort of training the Chinese something that you know already came out of grad school, you are sort of transplanting a little bit of Steve Jobs' DNA just by having that high expectation.
Yes. And then as a result, I would say it's like an execution-focused organization or at least it was in the time that I was there. Like I think what Apple has that it's world-class is its ability to execute at scale. And that's in partnership with all of its vendors that it's like invested over decades in building.
Okay. So in the 90s and 2000s, Apple's strategy was deeply co-developed with partners and suppliers, building know-how into their products and process. I kind of alluded to this in the intro, like I'm seeing something that I view as kind of dangerous. I think it's dangerous because I'm a product design engineer by training and I like to imagine that my role is important. [laughter] And you know, as a product design engineer, you work the CAD, but you're also responsible for knowing how the parts are going to interact, knowing the process on the line. You go and you spend time on the line, wherever that line is, to actually understand how you're going to build this thing and get to mass production yields at mass production speeds. And that level of like high ownership and understanding of your product and high ownership of like even if you own a part in the product that like my part needs to meet my specs, be awesome, be robust, etc. I feel like I've seen a shift in some companies today towards more and more outsourcing of the ownership mentality. And so like I talk internally here about like we can often tell how a conversation with different potential company will go by looking at where their executives come from. Are they going to follow the Apple way, the Amazonian way, the Google way, the Microsoft way? There's a different flavor depending on like what cultural ethos someone brings to an organization. And I'm just worried that there seems to be this change that's happening in the industry towards even outsourcing the understanding and the innovation of the parts themselves. So if you're building, you know, some cutting edge new system that has new optics or, you know, like wearables is probably now going to be a whole thing with agentic AI. What are the devices that enable AI to go with you everywhere? And so like we may be doing, I read this whole book as like we did this before with like all the knowledge on how to build the products, but I worry that we may also be outsourcing now even the know-how of like, you know, this part goes next to this part because of this or like when there's this problem here's the five different ways that we could fix it, like the expertise of even understanding our own products, like as American electronics industry, as American technology industry, we no longer have a lot of interest in having that expertise here.
And so like I think you know you deeply studied what happened when some of this expertise was essentially transferred in a massive transfer into another location. Like can you extrapolate or pontificate on what you think could happen with the abdication of even like the design knowledge itself? Like is there even then an electronics industry in the United States? Like are we just then brands that we just slap our names on things?
Right. Which is interesting because that's where the PC industry was in the 90s when the Taiwanese would just say here's a catalog of designs, pick one and then we'll badge it IBM. And Apple was so anti, totally antithesis of that. And yet the irony that that's what you're worried about as the next Apple person 25 years later is kind of fascinating.
I'm not saying that Apple is doing this. I'm just saying in general across the market I have seen teams where I am surprised to find a lack of ownership and kind of an abdication. There's been like an interesting time in high volume consumer electronics in the pandemic period or the during and post-pandemic period where, you know, like during the pandemic there wasn't a lot of travel back and forth, there was a lot of abdication of like ownership to local in-region teams and what I've seen is that that has continued and persisted versus like ownership and expertise being valued in the headquarters of wherever that company is, like the innovation of the core technology of that device.
So, okay. So, I'll give a few answers. So one, I don't know this for a fact, but someone that worked on the Portal, the Facebook device, good example because it's dead now, so I can't offend anyone. I mean, I was told nobody in Facebook knows how to make the Portal. In other words, they designed it and then they just had teams in Asia that could just take care of it. So, if you're sort of pointing to is that the future?
So, that would be like a JDM model. We call that a JDM model maybe. Or I mean, maybe it goes as far to say ODM. Do they just put their label on it? Like I imagine they had a design, they had the CAD, right? I think one of the important pieces is like who owns the CAD. And so like if your company, if you're the technology company and you own the CAD, like you have some amount of ownership of like that thing, right? But like if you've abdicated even the CAD, you are now just like mostly an ODM putting your label on something.
That's a great specific question because I might be able to go find the answer and I don't know that the answer is obvious. Okay. The Apple answer is I was told that pre-pandemic, yeah, for a new iPhone launch, it would be common for 500 people to go off to Asia to be there, you know, days in advance, weeks in advance, months in advance, working with all the suppliers hand-in-hand to make sure that they're up to the, you know, scale challenge.
Actually, that seems low if you're also including suppliers and weeks and months in advance. But yes, yeah, it's large.
Okay. And then, you know, all of that really came to a standstill during COVID. So the number fell to I'm told 30 to 50 people and then my lazy assumption is well once COVID ended of course you went back to the old model and I was told no absolutely not because basically the Chinese teams, right, there's now five R&D hubs in China for Apple, you know, they were able to prove that they could step up and so you know the company's led by Tim Cook, right, he's like a cost cutter, he's an Excel sheet guy and so if you've proven that you can do it then you don't go back to the old model. And so you know as critical as I am of the old model, which is that the Americans as it were have the experiential know-how but they're flying in and out and you know embedding that transfer of knowledge into the Chinese factories.
Or the cultural know-how maybe is the other way of putting it. Like again, 21 years old I did not know better than my factory counterparts how to build an iPod. Yeah, that's fair. I think I would embed the cultural know-how in the engineering, like we need something awesome, right? And that was like my role I think to play.
Okay. [laughter] So I totally understand. But as problematic, let's say, as I view that model to be in terms of the geopolitical repercussions that I don't think anyone really saw coming, at least it's in the know-how of the people that are basically based in Cupertino where they can then pontificate about what the next device is going to be, meet Jony Ive or whatever and do it. If you are basically losing that, then that really does worry me about Apple's long-term future for 5, 10, 15 years from now. And, you know, there was a recent job ad for another PD position in China and someone emailed it to me and they said, you know, I wonder how long until ID jobs are being made in China, right? And then you'd be really saying like the logo...
Essentially a company though.
Well, yeah. And people have made that argument and I sort of don't go that far, but I certainly understand where people are going from. I mean, Apple has 160,000 employees roughly globally, right? And actually, most of those are in retail, but you know, indirectly in China alone, it supports three million jobs. So, like I think it's an open question as to like, well, how American is this company? But yeah, no, I really worry about that experience.
Think about like other companies, which I know you didn't research, but like, you know, the rest of FAANG or like other companies that are building technology products who are ostensibly American technology companies or yeah, based here, they're multinationals but they're like based here. Like if you build in-region teams, which many of them did during the pandemic, and those in-region teams don't have to be in China, some are in China, some Vietnam, other places in greater Asia as well, there was like this kind of everybody experimenting with that and it's been interesting to see some of those companies have like kept that model and continue to invest in region because that can be cheaper and others kind of pull back from that model. We saw an interesting kind of thing where a lot of people tried to go, they try to go JDM, which is joint development manufacturing. So that's where a lot of you share the engineering between the brand and the factory partner, right? And so that means there's engineers who are changing things on the CAD who are there at the vendor at the factory partner. And that's kind of on the spectrum of how much ownership you have. That's a low ownership kind of model. Just one step above like putting your label on something someone else made. And then there's the contract manufacturing models like where you just hired the vendor, you have the design, you own the design, you're hiring the vendor to make it, you're collaborating, there's collaboration, there is like, you know, you're paying them for certain types of expertise maybe that they're selling you as part of this. But it's not joint development. It is more like I am a customer. You know I'm the brand and I am the customer and you are building this thing for me. We saw a big swing where during the pandemic a lot of companies went kind of JDM thinking that this would be a way to cut cost and then they didn't get the quality they wanted, right, because they lost control. And for some businesses that was fine because maybe the quality of their product wasn't a core part of the value proposition, but then we saw a big swing back into CM, like we saw multiple companies in that like mid-market pull back into CM model which means they have more ownership and they are staffing appropriately to have that ownership.
So I think that's kind of an interesting thing. And in that JDM model, I think a lot of companies forgot that like the D stands for development. It doesn't stand for production and you still need to support production and quality and production. So I think there's been like an interesting thing where there's like abdication to varying degrees. But what I've seen very recently has been like we don't even have engineers who can understand like what kinds of defects, how you even do failure analysis on this type of defect. And that just like shook me to my core. Because that really means you really then don't understand the product that you're supposedly owning and building. And then why even have the engineering team like in the United States if essentially the only people who know how to actually fix anything with a product or anything in the design are elsewhere.
Which I think gets to one other problem that Apple's facing which is that there's like attrition, right? Like the people have aged and you've had a lot of VPs leave in the last four or five years and I'm sure a bunch of senior directors and others, but a lot of those people, you know, if you like someone like Deirdre O'Brien, right, who's been in Tim Cook's inner circle for years, I mean she joined the company in 1988. I mean those types of people have so much like negotiating power, supply chain expertise, manufacturing expertise and some of it comes from like you think of that her first 15 years would have been a time when Apple was really building its own products, right? So she's like a fingers-in-the-pie type person that can really figure things out.
