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Chapter 1: What role did Apple play in China's manufacturing growth?
Apple went to China to make its products, but it may have helped build something much bigger, China as a manufacturing superpower. So what did Apple actually help create in China and who holds the leverage now? Hi, everyone. I'm Lynn Thoman, and this is Three Takeaways.
On Three Takeaways, I talk with some of the world's best thinkers, business leaders, writers, politicians, newsmakers, and scientists. Each episode ends with three key takeaways to help us understand the world and maybe even ourselves a little better.
Today, I'm thrilled to be with Patrick McGee, journalist, author of Apple in China, and one of the most clear-eyed observers of the Apple-China relationship. Patrick, welcome to the show.
Thanks, Lynn. Thrilled to be here.
Chapter 2: What were Apple’s initial motivations for entering China?
It's my pleasure. Most people assume that Apple went to China for one simple reason, cheap labor. You say that's not really the full story. What were they actually after?
Yeah, cheap labor is certainly a part of it. I would say it's baked into the cake. It was far more that there was like a certain dynamism. You had this forceful state that was deploying what was at the time the world's largest population. And yes, they had low wages, but it was more that they could move around.
So within China, you have something called the floating population, which is essentially these rural migrants who go to places like Shenzhen, right, this special economic zone that just grows like wildfire.
Chapter 3: How did Apple misinterpret the Chinese market dynamics?
And it grows so quickly because China has a specific industrial policy to lure in foreign expertise, foreign capital. People forget how poor China was when Mao had died in 1976. And so there's this will to power that China wants to achieve. And they're going to do it through manufacturing, but they don't have their own capital.
They need to rely on, at first, the Chinese diaspora, Hong Kong, later Taiwan, and then later the Japanese through Panasonic and then the Americans. And so Apple sort of fits into this role where they realize that as their suppliers move They can move more and more of their operations there. And yes, it's cheap, but it's more that things will be built really quickly.
The local governments are working hand in hand with the entrepreneurs, right? I compare government bureaucrats in China to like a venture capitalist who sits on your board and drives growth, but actually directs policy for you. And then Western corporations like Apple are able to take advantage of that.
Apple got attacked on Chinese state television and they responded with a calm, factual rebuttal. Completely reasonable, right? Except that it backfired spectacularly. What did Apple fundamentally misread?
So this happens in March 2013, and it's within 36 hours of Xi Jinping fully taking the presidency in China. Apple at that time had a business worth more than $20 billion of revenue a year, which is far bigger than anybody else. And that was the least significant thing. They're also the world's most sophisticated operator in China.
The iPhone is growing exponentially at that stage to something like 160 countries around the world.
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Chapter 4: What backlash did Apple face on Chinese state television?
So in a certain sense, they had cracked... China in two ways, both as an operator and as a retail giant. And you would assume, wrongly, but you would assume that Apple had really understood the local political scene and the cultural scene and knew what they were doing, et cetera. And what this episode exposed is that they really didn't.
There had actually been a cover story at Time magazine around this time that basically said, you know, Apple had sort of accidentally become a giant in China. In other words, the local population just loved the iPhone, but it wasn't that there were particular advertisements directed to them or something. So, yeah, the assumption would be that Apple really knew what they were doing in China.
And in fact, they sort of didn't. And one reason they didn't is that Foxconn, the Taiwanese company that they rely on for much of their assembly, they hadn't just outsourced the manufacturing to Foxconn. They'd outsourced their like political relationship building to Foxconn.
One thing that Foxconn founder Terry Guo was just brilliant at was building these local connections and getting subsidized machinery into his factories and so forth. The quid pro quo was that he was going to build these enormous campuses where he was literally employing hundreds of thousands of local Chinese people.
Apple wasn't necessarily involved in really any of those negotiations and didn't have all the political and cultural wherewithal to drive those negotiations, but Foxconn had done it for them.
In 2013, when Apple has this like wake up moment where they're basically attacked on a major television show seen by millions, if not tens of millions of people, it's when they realize they need to take ownership of those relationships. Otherwise, they fear being blacklisted in the country.
What were they slammed for on Chinese state television?
They were accused of treating the Chinese people in an inferior way by not having the same warranty policy. There had actually been, as part of the TV show, footage of someone returning an iPhone in Paris and then someone returning an iPhone in China. And the customer is just being treated differently. And there's complicated reasons why that was actually true.
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Chapter 5: How did Apple’s response to criticism impact its reputation in China?
But that was the allegation.
And was that the moment that Apple finally realized, oh, this isn't business anymore. This is politics.
Apple basically just said, what are you talking about? Our policies are the same everywhere. And they sort of wrote this benign statement. And then they signed it off by saying in an offhanded way, Apple makes incomparable products, something like that.
And the big editorial in the People's Daily, you can think of that as like state-sponsored New York Times for the country, sort of riffed off of that statement and derided Apple for its incomparable arrogance instead. And that, I think, is the moment when Apple realizes, oh, our statement didn't do very well. This isn't going to go over the way we think it is.
And in fact, the iPhone had really stalled. People stopped going to the stores during this time. And that's when Tim Cook issues an apology in Mandarin on the Apple China website. And that would be the first real reportable concession on the part of Apple of there's a political awakening taking place.
And I think it takes them several years to really get to grips with what it means to be operating in China.
You argue that China wouldn't look the way it does today without Apple. That's such a wild idea. What did Apple actually help build in China?
It is a wild idea. And I have to say, manufacturing is the thing that Xi Jinping cares most about.
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Chapter 6: What significant changes occurred in Apple’s operations in China?
That is the way that China creates its power and that creates choke points in the world economy where other nations are dependent on China. And the electronics industry in particular is the most important industry. Inherently, almost everything in electronics has a dual use, meaning that it's helpful for consumers. It's also helpful for the military. You think of what a drone is.
It's a smartphone with propellers. You think of what an EV is, right? A very important industry for China. It's a smartphone on wheels. If you can understand to do the logistics of high volume production of iPhones, you absolutely can transfer that technology to building anything involving chips, cameras, GPS, etc., which, of course, means military technology.
Apple just played an instrumental role in what Xi Jinping calls Made in China 2025. This was a program from 11 or 12 years ago, which is in a sense to sever China's dependence on the West, to sort of be a vertically integrated country that could do all of the things necessary for 21st century technologies on its own.
And Apple basically realizes around 2015, not only that they could help China in that way that they already were doing so. They just hadn't sort of put it in that language. But the result of this is that Apple, as I said, had no vice presidents in the country around 2013. Within a few years, they have several. The key eight people call themselves the Gang of Eight.
And they're able to basically come up with their own study to realize that Apple's contributions to Chinese factories is in the realm of $55 billion a year. And Apple realizes they're sitting on political capital that they hadn't executed before.
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Chapter 7: How has China's manufacturing evolved since Apple's involvement?
It does not make sense to us to be secret. Maybe we shouldn't be singing this from the hilltops, but we need to get the most senior people in the Chinese government understanding that we are sending America's top engineers. And actually, I would go further than that.
They're not only just sending America's top engineers, they're sending the best engineers from Korea, from Japan, people that they hire in their display units and their chips units and so forth. They would send them to the Chinese factories and train up these people. It's not even a story of transfer of technology from America to China.
It's actually transfer of technology from around the world to China.
Apple trained tens of millions of workers, not just in assembly, but in precision manufacturing, logistics and quality control. At some point, does China just not need Apple the way it used to?
There's certainly a sense that the student has become the master. One has to assume there are diminishing returns in what Apple can teach China. And China is just very hungry. And so it's hard to know. The question is, if you get to that moment, it's not clear to me that Beijing or local governments just kick Apple out of the country.
Because their economy really is dependent on exports to the rest of the world. If, for whatever reason, Apple all of a sudden had its license to build and export in China canceled, that would just be a real own goal on the part of China. Because every board member around the world that does anything to do with hardware would say, oh, we need a contingency plan ASAP.
Because if Apple's not safe in China, nobody is. So China doesn't really get a whole lot from kicking Apple out of the country. China knows better than anyone how instrumental Apple has been to its own industrial prowess and that they wouldn't go after them because they get too much out of it.
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Chapter 8: What are the long-term implications of Apple's influence on China’s economy?
Apple always insisted that it doesn't manufacture, that it just designs. But in practice, they were embedding engineers on factory floors, helping build manufacturing facilities, shaping production processes. Did they convince themselves they weren't creating something when they actually were?
What Apple really figured out 25 years ago is that it's more important to own the process than it is to own the factory. The narrative is really of a company figuring out how to separate knowing how from actually doing it. In the 1950s, 60s, 70s, and 80s, there's competition between Japanese and American companies at a firm level of who can build more quality products.
And Apple basically outcompetes the Japanese by coming at them at a sideways way, by, in a way, using the supplier's own skill sets against them. I'll give you an analogy. The original iPod, that product is like 70% Japanese componentry, but wrapped in an American design.
It's this American company that figured out how to sort of like give the logistics together, design it really well with Johnny Ive and have brilliant software that the Japanese couldn't compete with. But they're using Japanese companies to do the hardware. They're not building anything, but they're designing things and they're specifying things.
And then really importantly, then they structure deals where when they co-create something with, let's say, a Sony or a Samsung, they will use their leverage to own the IP behind a co-creation. So once Apple owns the intellectual property, they can share that process with another company.
So if Lynn creates this brilliant thing for me, but I own our joint creation, I can tell your colleagues how to do it, which basically is an abuse of power to some extent, although it's legal, because you're losing your secret sauce. I'm extracting the manufacturing DNA from you, and I'm sharing it with your direct rivals, which diminishes the leverage that you have against me.
Now, the good thing is we are working together. I am teaching you, but I'm also learning from your rivals and then teaching that back to you so that there's no differences between the various parts that I'm getting from three strategic partners. So Apple was brilliant in a way because they didn't outcompete others by building quality products.
They just owned the processes, the specifications and the equipment behind all of it.
There's a line that haunts me from your book. We trained a whole country and now that training is being used against us. Is that hyperbole or is it basically the honest summary of what you believe happened?
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