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- [00:00]
Patrick McGee
This is an iHeart podcast.
- [00:04]
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This episode is brought to you by Charles Schwab. When is the right time to sell a stock? How do you protect against inflation? Financial decisions can be tricky. Your cognitive and emotional biases can lead you astray. Financial Decoder, an original podcast from Charles Schwab can help listen@schwab.com financial decoder.
- [00:27]
Patrick McGee
When.
- [00:27]
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- [00:57]
Joe Wiesenthal
I'm Joe Wiesenthal.
- [00:58]
Tracy Alloway
And I'm Tracy Alloway.
- [00:59]
Joe Wiesenthal
Tracy, we're doing another live show and it's right here in New York City.
- [01:03]
Tracy Alloway
Yeah, this one should be our biggest yet, and we're gonna have a bunch of Odd Lots favorites and do something maybe a little different to some of our previous live podcast recordings.
- [01:14]
Joe Wiesenthal
When the guests are revealed. The show is gonna sell out right away, so you should really just go get your ticket right now. It's June 26th. It's at Reckitt NYC and you can find a ticket link at bloomberg.comoddlots or bloombergevents.com oddlots liveny.
- [01:30]
Tracy Alloway
We hope to see you there.
- [01:34]
Joe Wiesenthal
Bloomberg Audio Studios Podcasts Radio News hello and welcome to another episode of the welcome to Odd Lots podcast. I'm Joe Weisenthal.
- [01:55]
Tracy Alloway
And I'm Tracy Alloway.
- [01:56]
Joe Wiesenthal
Tracy, I'm gonna confess something. I've kind of hinted it's not that big of a confession, and I've kind of hinted it already, which is that if Trump wants to impose a bunch of tariffs on a bunch of cheap, random plastic goods from China, I'm fine with that. That's cool. 50%, 100%, 149%. I'll consume less. I'll be a little bit more of a monk or something like that. I'm fine with that.
- [02:21]
Tracy Alloway
Okay, but isn't the argument not necessarily the cost? Although there is a cost on individual consumers? But the argument is why do we want to focus on shifting plastic production and toy manufacturing to the U.S. that's the criticism, right? Like, why specifically focus on cheap goods made in factories?
- [02:41]
Joe Wiesenthal
Yeah, no, you might be right. Like, I don't think there is much value in, say, you Know, moving a plastic step stool factory or a stroller factory or whatever to the US I don't. I don't really see the point. I want there to be affordable strollers, obviously, just, by and large, a lot of this stuff. Yeah, it's fine. We'll just. We'll just put it.
- [03:01]
Tracy Alloway
This is not much of a confession.
- [03:02]
Joe Wiesenthal
Okay. But I will confess too, that if the price of a new iPhone went up a lot, I would be pretty annoyed. I tend to notice these things. I tend to replace mine every two or three years or something like that. There are areas that we do import significantly from China that are not cheap chot skis, cheap junk, as people like to fantasize that. That's all China produces. There are areas that I would be very upset to pay a significantly higher price.
- [03:30]
Tracy Alloway
Well, getting back to the goal of tariffs and protectionist trade policies, I assume, you know, putting tariffs on iPhones would be about moving some of the production closer to home. And I think there, there's an open question about whether we want that as well, because for most of our lifetimes, the stories we've been hearing about iPhones in China are all about how terrible the labor conditions are and how difficult it is to actually make these things. So I can see, you know, some strategic argument. Obviously, semiconductors are considered a very important strategic goal nowadays, but the actual manufacturing, you know, there. There is that China story out there.
- [04:10]
Joe Wiesenthal
Anyway, I think the administration is very sensitive to people like me. One of the first things, even in the midst of the heat of the trade war, and should note we're recording this May 29th. It could be that the whole trade war is illegal. There was that court ruling made last night. We really don't know where things can end up. They're clearly sensitive to the iPhone thing. And so there were some carve outs specifically related, more or less related to that. I think during the first Trump administration, Apple got some reprieve. These are sensitive areas. Yes, we want to build up the capacity to expand technological production, high tech things, high value add things and so forth. But we don't want the sticker shock. This explains, of course, some of the sort of multiple personalities of this administration, if you will.
- [04:58]
Tracy Alloway
Well, there's also the added complexity of building up these very, very advanced supply chains. Right. And if you look at Apple and what they did in China, that was built over the course of many, many years, decades even, and the idea that the US Is suddenly going to flip a switch, a terrible SW and move all that production elsewhere seems a little optimistic.
- [05:19]
Joe Wiesenthal
Right. And then there might be flipping a switch, but not in the full direction. Maybe there are multiple dials on the switch.
- [05:24]
Tracy Alloway
Sure.
- [05:25]
Joe Wiesenthal
So then one possibility that you hear is, okay, maybe we move more to India, but I don't think Trump likes that. But maybe that would be a little bit better from the US Perspective in the sense that we're not contributing as much to Chinese economic development. And so, okay, it's not bringing jobs back. And Trump said move it to the US from time to time. You hear about maybe they could be built in Brazil or something. But all of these raise the question. There's two things. It's like a, is, is this realistic at all? If there were a switch that you could pull, it's like move to the US Move to the India, that switch would have been moved. And then the other thing too is what does it even mean to build the iPhone in India or the US because there's final assembly, et cetera. But of course, component parts within the iPhone themselves. Also much of it is actually made in China. And you know, I'm sure there's thousands of tiny pieces of various things doing things, and there are many of them are built in China. So even the idea of like, we're going to move X production to X country is not a clear statement because it could just be the final packaging or whatever. And that's not really where the value add lies, which means we really have to more deeply understand how and what gets built in China and what it would mean to even move that or even talk about when we're talking about moving these things.
- [06:41]
Tracy Alloway
Let's do it.
- [06:42]
Joe Wiesenthal
Well, I'm very excited to say we do indeed have the perfect guest. We are going to be Speaking with Patrick McGee. He's at the FT, but he has a new book out, came out May 13th called Apple in China the Capture of the World's Greatest Company. And it is a book about the history of Apple's deep relationship with the state of China, with the economy of China, the sort of co evolution of these entities. So much of the iPhone story we know is sort of inextricably connected with the rise of Chinese manufacturing. This is what Tim Cook is known for in the very beginning. So, Patrick, thank you so much for coming on odd lots.
- [07:20]
Patrick McGee
My pleasure. Hi, Joe. Hi, Tracy.
- [07:22]
Joe Wiesenthal
What does it mean if Apple says, oh, we're moving more production to India or we want to. What does that term mean to you?
- [07:29]
Patrick McGee
Ah, well, cleverly, they don't say that. They say they're moving assembly because they, they know. But the reader probably doesn't. The Lister probably doesn't. There's a massive distinction between assembly and production. So I think Apple is sort of orchestrating this effort. Right. There's no press release that says anything from Apple, so you can't quote Apple. But insofar as the word got out, you know, my money's on Cupertino being behind this. So, yeah, I mean, put it this way, if there are a thousand steps in making an iPhone and the final one is now being done in India, that's enough to have a quote unquote substantive change to the product. And therefore the box can say made in India. Nothing about that phone is any less dependent on the China centric supply chain than any other phone you have ever purchased.
- [08:07]
Tracy Alloway
Okay, so on this note, maybe a good place to start is walk us through your typical iPhone, the one that Joe is buying every two or three years. What's its, I guess, birth process? Like, where do iPhones come from and what is the actual supply chain that creates them?
- [08:24]
Patrick McGee
That's such a funny question. I'll tell you one funny answer, which is that I asked a very senior person at Apple how an iPhone is made, and he said, have you seen the I Love Lucy clip of them making chocolate? Have you ever seen that?
- [08:34]
Tracy Alloway
Oh, my gosh, yeah, of course.
- [08:36]
Patrick McGee
I actually hadn't. So, okay, so picture of its conveyor belt, and the chocolate is coming so fast that eventually they just start eating them rather than packaging them up. Okay, there's a method to the madness here. I mean, Apple is able to take Adam Smith's idea, the division of labor, and put it to a hilarious degree that outdoes Nathan Fielder, the comedian trying to do this with house cleaning two decades after the fact. Love it. So it is often the fact that on a conveyor belt, you have 9 to 11 seconds to perform your task, you know, putting a module in the left hand corner or whatever, before the next iPhone comes over. So that's the final assembly process, and that's really what is taking place now in, in India, ramping that up to avoid tariffs. But the actual production, we're talking a thousand components, and Apple works with the tightest engineering tolerances possible. Only high quality materials, if you put this in car terms, they are making 10 million Porsches a year rather than 10 million Volkswagens. Right. And the numbers are just staggering. Right, so if you're doing a thousand components a day and you're shipping 1 million iPhones a day, that means at peak season, you are doing the manufacturing, the logistics, the just in time, production of 1 billion parts per day. So find me an American factory that can do one of those parts because China has factories that can do it for all 1000. That's why nothing is moving here anytime soon. It's the combination of Apple's imperfection for defects, quality and Apple's gargantuan, titanic like quantity.
- [09:55]
Joe Wiesenthal
There is production of Apple products and I believe iPhones in India or, sorry, assembly of Apple products in India. What do we know about the efficiency or the relative efficiency? Because obviously the company has been thinking about these risks for years and years and years. And I'm sure we'd love to not be this tightly linked to one country, which we know for all the reasons we don't need to get into, is risky. What do we know about the efficiency of its assembly in India?
- [10:24]
Patrick McGee
Let me just give you sort of objective numbers and then we'll go from there. So the first iPhones made in India were actually in 2017. And by 2023 India was assembling about 25 million iPhones. Go back a decade. The first iPhones were made in China in 2007. And by 2015 you had 230 million iPhones being built. So roughly speaking, the quote unquote diversification to India is happening at one tenth the pace of the original creation and scale of the iPhone. And even that vastly overstates the speed of development in India. Because of course, in the early years of the iPhone, I mean, you were literally inventing things like multi touch glass, right? You were inventing and redesigning the iPhone every single year. Whereas India is basically just having to do the final steps in the process. And it's still not happening very quickly. Now really what changes is that in Shanghai 2022, the city enters lockdown and that's a city of more than 25 million people. It really is the first time in Apple's two decade history in China where the government, provincial officials in this case really had made a decision diametrically opposed to Apple's interests. And that's when plan B, let's really ramp up in India went into effect. But it's been almost three years since then and even so, you don't have a whole lot going on there. And yeah, I talked to the engineers, they're called manufacturing design engineers. These are the people who sort of do the hand holding, the Engineering 101 in different countries. And they've been ramping up in India and what they find is that the ecosystem isn't there, the industrial clusters aren't there. You don't have eight lane highways to and from the factories. You often sometimes don't even have stable WI fi in the taxi or the cab on the way to the factory. Engineers are sometimes staying two hours away, which means four hours of their day is just going to and from the factory. And if they don't have a stable cellular connection along the way, it can be a little bit maddening. So many things you don't have and the other thing you just don't have is the sort of Nietzschean will to power on the part of New Delhi to make manufacturing. And you don't have what engineers call, quote unquote, China speed, which is just like this inexplicable, speedy development that would wow Apple engineers in the earliest years. So just to give one example that's not in the book, there was this example where these engineers from Apple are in this factory that needs to be sort of retooled for the Apple line. And it's the size of a football field. It's enormous. And they estimate, okay, it's going to take two to three weeks to get this machine removed. They come back the next day, it's all been moved and it's totally, it blows their minds. They've. All they've done is gone to sleep, had breakfast and come back and everything is complete. And that which is happening in China all the time and it just is not happening in India.
- [13:05]
Charles Schwab Ad
This episode is brought to you by Charles Schwab. When is the right time to sell a stock? How do you protect against inflation? Are you taking the right risks with your portfolio? Financial decisions can be tricky and often your own cognitive and emotional biases can lead you astray. Financial Decoder, an original podcast from Charles Schwab can help join host Mark Reap as he offers practical solutions to help overcome the cognitive and emotional biases that may affect your investing decisions. Listen@schwab.com FinancialDecoder Thrivent can help you plan.
- [13:40]
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- [14:01]
Tracy Alloway
I like the idea of just one more Lane bro will solve our domestic iPhone assembly production problems. That's pretty funny. Okay, so I want to back up a little bit, but can we talk a little more about Apple's strategy in China specifically? So how much of that was a deliberate conscious decision versus something that just kind of happened alongside, I guess, the wave of outsourcing and globalization that we saw in the late 1990s, early 2000s.
- [14:32]
Patrick McGee
Yeah, great question. And what I like about your intro, Tracy, is that I really do think the story of Apple in China over the last 20 years has really just been about the tedium of assembly. And journalists have won prizes for this kind of thing, right? And it's that set into motion this cat and mouse pattern where a journalist goes into a factory and says all these workers are working too hard, there's underage employees, etc. And then Apple is shamed into making changes and it sort of plays the role of white knight, improving factory conditions across China's supply chain. And then journalist wins an award and then two years later someone does the next thing in a different factory and so on and so forth. But we're totally overlooking questions of Apple strategy, like what did they quote, unquote, discover in China that nobody else discovered? And so really the book is an attempt to do that. So the first thing I would push back on is Tim Cook is very often called the architect of the China strategy. And it's not to discredit him, to say that he is not the architect, nobody is the architect. Basically what happens is really the supply chain itself, with or without Apple, was moving to China. And so the basic history of the 80s and 90s PC boom, like predating Windows 95 and then, and then coming after, is that the fight for computer dominance is exclusively based on things that are boring. Logistics, manufacturing, distribution, right? Because everybody's using Windows, everybody's using intel chips, and nobody's thinking about design. There is no equivalent of Jony, I've at Dell, at Compaq, at any of these companies. And so it's really this mundane war and it's driven by largely American and later Taiwanese contract manufacturers. And so they are the ones who, in competition with each other, start going to Asia to sort of oust each other, right, and gain market share and eventually they're the ones who really find China. So when Apple is doing their own outsourcing moves, they're working in multiple countries before the armies of flexible, ubiquitous, low paid labor in China really win out. So my story has this five part chapter called Apple's Long March to China that really tells you that the candy colored imac that I'm sure both of you and all of your listeners remember, like that was made out of Korea by lg, who then expanded to Mexicali and Wales. Foxconn is brought on as a second supplier and that's in China, but it's also in the Czech Republic and it's also in California. But when you've got these operations in multiple countries, especially once China enters the World trade organization in 2001, all you have to do is look at an Excel sheet and realize that the efficiency, the cost, the scale, just anything China is winning. And so Apple begins to really consolidate everything into China around 2003, when the iPod Mini becomes the most ubiquitous product Apple's ever created. And then there's just no question that when the Ipod nano is invented, that's where it's going to be built. And when the iPhone comes out, that's where it's going to be built. So it really is just like stumbling into greater and greater volumes and success in China. And I give all sorts of credit to China. I mean people think it's an anti China book if they haven't read it. It really isn't. There's only one place that Apple could have succeeded the way they did and it's because China had tailor made policies. World leading industrial clusters, world leading industrial policy and hard working people that would do this for 12 hours a day, six days a week.
- [17:30]
Joe Wiesenthal
Is the book an anti Apple book? I mean, you said it's not an anti China book. Apple has created literally trillions of dollars in value for Americans. It's created thousands and thousands of amazing high paid jobs that are much better than the jobs that are at the assembly or factories that exist in China. Is it an anti Apple book?
- [17:54]
Patrick McGee
No. Anyone thinking it's an anti Apple book will be in for a rude awakening because you'll quickly realize that for starters, when I say I spoke to more than 200 people, I'm only counting the people with Apple experience. Then I spoke to other people as well in supply chain, academics, journalists, that kind of stuff. But it is told through the eyes of the people in the weeds on the ground, you know, directing Apple's success. Right. So the first chapters in particular, I mean the first part is called Saving Apple is really just the story of Apple's genius in pulling off these maneuvers and coming off the brink of bankruptcy. They are literally days away from missing payroll. In 1996, I think I reveal for the first time they'd even hired a Chapter 11 lawyer. And then as the sort of Hail Mary move, once they've got a bit more money after selling a factory in Colorado, they bring back Steve Jobs. And really the first narrative is just like this, rah rah go, Apple can They do it. And even in 2000, with the dot com bust, like they're close to bankruptcy again, and Gateway literally tries to acquire them. So the story is one of sleepwalking into a geopolitical reality, really, as China changes. I mean, I don't criticize anyone at Apple for moving to China in the early 2000s. That's what everybody was doing. I would even say there was an American consensus, rather than some bipartisan effort, that going to China was good because you were going to inculcate the next great democracy, you know, and maybe in a hubristic or arrogant way, but like Americans would have said, that's what we did for Taiwan. That's what we did for Korea, Germany, et cetera. I mean, after World War II. So there was all sorts of reasons to move to China. The problematic decision was that once Xi Jinping comes into power, Apple is not an innocent bystander. As Xi Jinping hardens his tone and becomes more belligerent, he attacks Apple within 36 hours of taking the reins in March 2013. And that was the point at which Apple could have made a strategic decision to diversify its supply chain to India or something. Instead, they ramp up their rewards for shareholders in the form of buybacks and dividends, and they doubled down in China, appointing a team to basically understand Chinese culture, understand Chinese politics, and come up with a way of demonstrating to the country and its officials, look, we're really, really in this for China, as it were.
- [19:53]
Tracy Alloway
What exactly was Apple's pitch to Chinese leadership? And I guess how did it change over time? How much of it was about, oh, we're going to create jobs that will pay more than agricultural wages, better standards of life, maybe relatively, versus the strategic value of building up China's tech sector and all this strategic semiconductor technology and things like that. How did it shift over time?
- [20:21]
Patrick McGee
So it's a fascinating narrative, and really the first four parts of the book leading up to 2013 are just foundation building. So you sort of understand the history of Apple and what sort of problems they're having. Essentially, what happens is when Xi Jinping attacks Apple, you can understand why he's upset with the company. It looks like an exploitative power, because their margins, Apple margins have gone from something like 1% in 2003 to 25% in 2012. But at the same time, if you look like a company like Foxconn, Foxconn, in absolute dollars, made more money than Apple for each of the first four years of the 21st century. But as they get more involved with Apple, Their margins collapse from double digits to about 1 or 2%. And so you can just do this with really any company working with Apple. And it looks like they're not in it for China, right? They're not doing anything for the country. And Apple, it takes them two or three years, but they totally flip this narrative on its head. So out of fear that Beijing is going to force Apple to operate a bunch of joint ventures, right, these 5050 companies where China owns the other half, and then they mimic the technology and eventually oust you. I mean, this is what happened in high speed rail, for instance. Beijing has advocated joint ventures for decades, really going back to the 1980s. So this is where a Western company is allowed to be in the Chinese market. But the quid pro quo is, look, if you want access to, you know, our operational efficiency, if you want access to more than a billion people, you have to operate in a joint venture where the Chinese half of the company is going to learn everything they can and then thrive on their own. Apple doesn't have any joint ventures, and so they look like this anti China model that's just exploiting the country. Apple is able to really flip this on its head and say, look, it might be the case that Samsung has three dozen joint ventures and we have zero. But you need to understand we work with hundreds of factories across the country. And the reason they're only getting paid 1% margin, 2% margin, the reason they're sometimes even losing money on their partnerships with Apple is that we are offering them the equivalent of Ivy League hardware engineering training. We are sending people over by the literal planeload to China, America's best engineers, where they train, audit, supervise, install hundreds of millions of dollars worth of machinery. They train the line, they supervise the line. And once those companies have these skills, that app gives to them, they are basically able, at least after some time of exclusivity, they are able to supply somebody else. So who's just like Apple, but in China, Huawei, Oppo, Vivo, Xiaomi. And so those Companies today have 55% global market share of the smartphones. And the reason they're so good is that Apple trained all of their suppliers. So that's the message Apple gives to Beijing. And essentially they've, They've sort of had a free ride ever since. It would be insane for Beijing to go after Apple in some direct way, because Apple is the great teacher of China. They offer way too much and the numbers we can get into are staggering.
- [23:02]
Joe Wiesenthal
Tracy, real quickly before we move on. So Apple has a $3 trillion market cap. Do you want to take a stab at what the market cap of Han Hai, which is the company that owns Fox Hon Hai Precision industry. Do you want to guess what its market cap is?
- [23:16]
Tracy Alloway
No, I absolutely do not. Just tell me. I don't want to embarrass myself.
- [23:20]
Joe Wiesenthal
72 billion 3 trillion versus now granted they're not the only company that's that makes them. But yeah, these are not as these are nowhere near as profitable industries. You use this term. Apple is the great. Has been a great teacher and I want to get into what people have learned from Apple development and then built competitive companies. But you mentioned those old. I hadn't thought about them in a long time. Those old imacs that were multicolor that caught a lot of attention. Some of them were really not trivial at all to build with the existing manufacturing technology that existed in the world at the time. And I remember sometimes they would announce a new one and they're like, but we're really sorry to tell you we're not going to be able to produce this one in the emerald green yet because we haven't perfected how to bend the plastic or whatever the material was or the glass of emerald green, whatever that color is. It creates some issue and all the people in the audience will go boo. But then they'd get there like six months later. And then you mentioned the multi touch glass which didn't originally exist at the time. How much is it co learning? You know, we have this divide of there are the designers and Cupertinos and the assemblers and the builders and somewhere in Asia. But something also happens, and it's a theme repeatedly on the show, where innovation happens at the shop floor and the idea of cleanly drawing a line between the designers and the building is a fallacy. It must be the case that at least in some, some of these realms, whether we're talking about the glass, whether we're talking about the ability to mold plastic, green plastic into a pretty imac, that innovation also happens in China and that Apple benefits from that learning as well.
- [24:56]
Patrick McGee
Yeah. I'm wondering if the right analogy would be something like a graduate student at Harvard writing a paper with their professor. Right? It is something along those lines. Like the Apple engineers by the plane load are going over there, but they're absolutely co inventing something. Right? So I was told that like the ideal manufacturing design engineer, right, would look at what Jony I've had come up with and say I have no idea how to build that, but I'm going To do my best to find out. Right. So they would have a certain skill set and with a whole team of people, of course. And they would go to the Chinese factories and they find the suppliers who might have some background in multi touch glass, let's say. Right. Or adding electrical circuits to the glass and then they would train and co invent the next processes. So they're not just co inventing the parts, they're co inventing the processes that make the parts. Right. What Elon Musk sometimes calls the machine that creates the machine. So I'm glad you brought this up just because in no way am I saying like the Chinese offered them nothing or something like that. Right. Like it's not like to say that Harvard's a great school isn't to say that like the students that go there don't deserve loads of credit. Of course they do. And in the same way, like Apple is a teacher of the Chinese and to be fair, like the founder of Huawei has called Apple the teacher. But that's not to say that they could have done this anywhere. In fact, if anything, I think Apple has a bit of hubris believing that they can replicate their 25 year investment into China and go do it in India. And it's like, guys, do you not understand, like the degree to which China was a once in a century partner with all these tailor made policies, they would just build factories at the time that you and I would still be doing the environmental paperwork. I just don't think you see that in India and you don't see that in America either. So China is not just like a blank slate with lots of people. They offer all kinds of things to Apple and Apple and to be fair, they offer all kinds of things to anybody. But Apple understands the opportunity just better than anybody else.
- [26:54]
Charles Schwab Ad
This episode is brought to you by Charles Schwab. When is the right time to sell a stock? How do you protect against inflation? Are you taking the right risks with your portfolio? Financial decisions can be tricky and often your own cognitive and emotional biases can lead you astray. Financial Decoder, an original podcast from Charles Schwab can help join host Marc Reape as he offers practical solutions to help overcome the cognitive and emotional biases that may affect your investing decisions. Listen@schwab.com FinancialDecoder Thrivent can help you plan.
- [27:29]
Thrivent Ad
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- [27:49]
Tracy Alloway
So you make the point in the book that there's, I guess, a tension between a company like Apple and their very, very sharp focus on shareholder returns and quarterly profits and continued growth and just throwing off loads and loads of cash. There's a tension with, I guess, nationalism and economic and strategic development. And so Apple's focus on growth has been to China's strategic and developmental benefit and maybe less or so to America's, at least in terms of strategic things. And what's funny is right after this interview, we're actually going to speak to Ava Dow, who wrote a book on Huawei. And she makes the point. Yeah, she makes the point. It really dovetails with your book.
- [28:36]
Joe Wiesenthal
But we didn't mean to schedule it like that either. Just sort of.
- [28:38]
Tracy Alloway
Yeah, but she makes the point that stock prices and balance sheets can't fully capture the societal value of a nation's technological competency. And this is something that maybe Huawei understands better than an Apple. Where do you see, I guess, the key differences in sort of corporate culture between a Huawei and an Apple?
- [29:01]
Patrick McGee
So I might be taking this slightly different direction than your thinking, so if I need to re answer in a second, let me know. But the Chinese don't prioritize profits or margins the way that we do. They prioritize control of the industry. Because if the Chinese can take over something like electric vehicles, they in effect deindustrialize all their rivals and really gain dominance. The place that you can see this most clearly is solar panels. Nobody in China is making 30% margins on solar panels, but more than 90% of solar panels panels are now made in China. This is a technology that America invented in the 1950s and itself had 80 to 90% market share of in the 80s. But we cannot compete. That is basically what's happening with electric vehicles right now. Hence, even before Donald Trump became president, Joe Biden put 100 tariffs on Chinese made EVs. And I think it was just a few days ago that BYD slashed the prices of their EVs in a bid for greater competitiveness. So look, I think China has a state sponsored form of capitalism. I'm emphasizing that it is a form of capitalism, but it's not a shareholder maximization form of capitalism. It's a command and control form of capitalism.
- [30:04]
Joe Wiesenthal
You mentioned, and I had never, I had either forgotten about it, didn't realize that Xi Jinping called out Apple very early, within 36 hours of taking power in 2013. Can you talk a little bit about the sort of evolution of the CCP and Apple's relationship with it over time? There is obviously this perception that Xi specifically has taken on this more nationalist, ambitious edge versus his predecessors. Can you talk a little bit just more about that specific relationship with Apple and the CCP itself beyond just the economic capacity on the ground?
- [30:43]
Patrick McGee
So Apple gets in a sense a misleading picture of what it's like to operate in China because when they really consolidate production, it's 2003 and that's the beginning era of Hu Jintao. He later is nicknamed the woman with bound feet. His presidency is sometimes called the collective presidency because there was really an inability for just him alone to make decisions. And so it ends up being this like 10 year period of China being a multinational playground where rules aren't really enforced.
- [31:10]
Joe Wiesenthal
So just like this honeymoon golden era where like sort of China uneasy mode.
- [31:16]
Patrick McGee
Absolutely, yeah. And so Apple's really taken aback to the point of just total confusion and having an inept response when Xi Jinping really comes in. And as I said, what happens is like cctv, which you could think of as like a state sponsored CNN of the country attacks Apple for warranty differences of all things. It basically accuses Apple of treating the Chinese customers in an inferior way by refurbishing phones rather than giving them new phones when certain problems were happening with them. And I have to say this is the prologue to the book because basically you open the book and in the first paragraph Apple's in crisis. And so I'm trying to go for like a white lotus opening, if you will, before it becomes like this nice beach read with the overhang of suspense that you know, that you know is going to hit the fan by 2013. But I have to say the narrative leading up to it is wild, which is that in 2008 for the Beijing Olympics, Apple opens its first store in China purely as a marketing opportunity for the Olympics. I mean, they're actually happy that the site they've been given is small because everybody assumes it's going to lose money. You have to remember that the first iPhone, Steve Ballmer, Microsoft CEO, laughed at the price. And he's referring to American buyers saying no one's going to pay $600 for an iPhone. So if you can understand like that nobody thought it was going to work in America. Why would there be a retail sector in China, a country with developing wages and no appetite for such an expensive product? Well, by 2010, the iPhone just becomes the most conspicuous symbol of I'VE made it in China and to such an extent that like the lines outside what are now four stores in China at the time, there's thousands of people that are snake lining around these stores. But the thing is, they're not like Joe and Tracy, excited for the next iPhone and just camping out overnight because they have to have it. It's migrants that have been trucked in like by the busload to buy as many iPhones as possible. So these quasi gangsters, these scalpers known as yellow cows, can AMASS let's say 10,000 phones and go to a city where there is no Apple store. And they sell them at hawked up inflated prices because it's such a conspicuous status symbol. I don't want to go on and on about this, but essentially what happens is you have to understand these gangsters are connected with the triads and they begin finding ways to make more money per iPhone than Apple. But they're illegal ways. They're buying phones in the US using fake IDs, so they're buying them for less than a hundred dollars because they're buying a 24 month contract, but only paying the first month. They're smuggling them into the country. They're zapping the processor, rendering the damn thing inoperable, but at the same time masking that it's a stolen phone, essentially. And Apple is totally flummoxed, not understanding what's going on, not understanding Chinese culture, certainly not understanding Chinese politics. And this is the origin story of the warranty differences. It's because Apple was trying to clamp down on these illegal practices and that story sort of gets lost in translation. But that's why China is so upset with Apple in 2013.
- [33:59]
Tracy Alloway
I want to correct the record here, which is I do not in fact camp out in front of Apple stores waiting for the latest iPhone. I think my iPhone is like 7 or 8 years old.
- [34:07]
Joe Wiesenthal
They work so well these days, you.
- [34:09]
Tracy Alloway
Really don't need to replace them. Exactly. I am the customer that Apple hates because I am very satisfied with my ancient phone.
- [34:16]
Patrick McGee
Okay, seriously, what model of iPhone do you have? Is it really an eight or It's.
- [34:19]
Joe Wiesenthal
Well, this is the phone.
- [34:20]
Tracy Alloway
I really don't know.
- [34:21]
Joe Wiesenthal
I don't know either. If you had asked me 10 years ago, what model iPhone do you have, I would have been able to answer right away. If you ask me right now, I have no idea. I bought it.
- [34:30]
Patrick McGee
That's hilarious.
- [34:31]
Joe Wiesenthal
Three years ago. It's been so long since I've been thought that it was important to know the differences. You Know, at one point I was like, oh, that's a lot different now. It's like, there's the gain seems so marginal at this point from each generation, at least as someone in Cupertino is.
- [34:46]
Patrick McGee
Just cringing right now as they hear this.
- [34:48]
Joe Wiesenthal
Yeah, I don't care. Yeah. You said something interesting, that at the time of the rush to China, there was this sort of consensus in the west that this was a good thing because it would accelerate the process of democratization, of liberalization, the likes of which maybe we've seen in Korea, Taiwan, so forth. On the other hand, in theory, one of the things that business leaders really liked about doing business in China was the fact unions aren't legal. There is this heavy hand of the state that keeps wages in check and keeps organizations in check and probably keeps environmental groups in check, et cetera. How much was this tension not appreciated, that this phenomenon that we maybe expected to see play out in China of liberalization and democratization would have been explicitly not what the business leaders going to this country would have wanted to see?
- [35:37]
Patrick McGee
I mean, there's absolutely a sense that business people had just like a agreed sense of why they wanted to be in China. But I guess what I'm trying to push back against is because it's like, obviously a strategic error in retrospect, and obviously we experienced the China shock and our own industries got hollowed out. I feel like now there's just like a revisionist sense that, like, we were never doing this for valid reasons. There was never a sort of like. Like real geopolitical strategic sense. Right. That Bill Clinton or Larry Summers were just like, in the pocket of business people and so forth. I just don't really find that convincing. Taiwan was under martial law until the late 1990s, effectively. Maybe it was the 1980s, but then in the late 1990s, they had their first democratic elections. This is, of course, an ethnically Chinese island. And, you know, it was very much used. I mean, however, problematically, it was used as an example of we could export democracy through capitalism. I do think there was a track record and people made that argument in good faith, in addition to business people who saw it for their own purposes.
- [36:35]
Tracy Alloway
So one way of describing the Apple China relationship is they're sort of frenemies, right? There is a tension built into the relationship, but both sides get something out of it. If we fast forward to today's environment, we have tariffs in the US Obviously, although no one knows what's going to happen with those. You have China making a very conscious decision to build up its tech sector. Who has the upper hand in the relationship right now? Who has the power?
- [37:06]
Patrick McGee
So I would push back. I would not call them frenemies. Tim Cook and Xi Jinping, broadly speaking, have the same interests, which is to say, the more that Apple is allowed to have its production consolidated into China, the better their scale is, the better their margins are, etc. That's what Xi Jinping wants as well, because he understands, basically because Apple taught him that having Apple production in the country engenders a form of technology transfer that helps the rest of the. The electronic sector, which to quote China scholar and economist Barry Naughton, that is the most important thing that Xi Jinping wants. Right. I mean, I compare Apple's presence in China to something like that of the Marshall Plan, something that sounds insane until you look at the numbers and you realize that it's bigger than the Marshall Plan. So the problem is actually that Donald Trump and Tim Cook have diametrically opposed interests, which is to say that if Donald Trump could move all production out of China, he would. Well, Apple doesn't that, that's a, that's an existential threat quite really mean that that's an existential threat to a $3 trillion company. So that's where the tension is. The tension really isn't between Cook and Xi, as strange as that is, it's between Cook.
- [38:07]
Tracy Alloway
You really don't think there's tension between Apple and China, even with the tech crackdown, even with Xi Jinping coming out? One of the first things that he says is that criticism of Apple and clearly he's trying to like, extract some things from the company that the company is maybe reluctant to give up.
- [38:26]
Joe Wiesenthal
And the rise of really good Chinese compet that are winning market share all around the world, maybe outside the U.S. yeah, so.
- [38:33]
Patrick McGee
So Tracy's examples are historical. Right. So I'm not saying there's never been tension. Of course there's been loads of tension. But the way that Apple responded was in effect to placate federal and provincial officials so that they haven't really had any problems. So, so, so, right, so there's a tension relationship, let's say. But insofar as it's a marriage, I think it's actually a pretty. It's a Catholic marriage. There's not going to be a divorce. It's going pretty well. The problem isn't really between Apple and China. The problem is, to use the economic jargon, the negative externalities of the relationship. Right. So the problem is that for everybody else, this is actually Deeply problematic because if you have America's top engineers training a manufacturing supply chain that in effect can be weaponized and world's dominance, that's not a great place for Washington or just your average American citizen. It's nice that this relationship gives us relatively sophisticated and affordable iPhones. But the downside here is that China is absolutely dominant in high end electronics. And you can use those skills to build drones, you can use those skills to build military weaponry. And Apple would frankly be training their chip makers if it weren't for the Senate coming down on them pretty hard a couple years ago. So that's the problem, right? The problem isn't that something stops in the relationship between Apple and China. The problem is that it continues.
- [39:49]
Joe Wiesenthal
Hmm. Just to push back on this framing a little bit, and I certainly there isn't much that I find very compelling about this story, but you talk about the beginning of when the US and Chinese economies really got integrated in the late 90s, early 2000s, sometime around Chinese ascension into the WTO. And you look like everyone recognizes in retrospect that it's been a mistake. And has it been? I mean, again, the other thing is that Apple is worth $3 trillion. Almost every American with any investment probably has some exposure to it. It's been incredible for the development and the alleviation of poverty in China. We've never gone to war with China. It doesn't seem like, you know, in the modern era it hasn't come close to happening, at least so far. Like, isn't there a version of this story that as long as we trust each other, Chinese students could come to the US and we could have the good jobs of like, like professorships at schools and so forth and designers in California. And isn't there a story where this has made the world wealthier and more peaceful?
- [40:57]
Patrick McGee
So let me start just by completely agreeing with most of the points you just made. I think the poverty alleviation in China has been really important and a net good for humanity. And I think we have over the last 20 years been a sort of golden age of, you know, Silicon Valley works on the software, works on the design, and China takes care of the hardware. And insofar as there's like a mutually symbiotic relationship there, no one fits the, fits that bill better than Apple. So look, a lot of good has come out of it. I mean, that's absolutely true. I would totally disagree that we're not seeing harbingers of war coming. I mean, Xi Jinping has literally said we will not leave the question of Taiwan to the next generation. I think he's gone so, so specific as to say that 2027 might be the year that Beijing annexes Taiwan. I mean, that's really troubling, especially if you're Taiwanese. But it's really troubling if you understand the chip sector because 90% of advanced chips come out of the country. And American military officials have said that in the event that somehow Beijing was able to take control of the fabs in Taiwan, we would go bomb them. We would bomb the fabs. If somehow TSMC survived the war, which is basically untenable, but if somehow they did, the American military would see fit to destroy them because the idea that they would be in Chinese hands without exporting to America would be existential. So there's that and then there's just. You don't have to be anti ccp, you don't have to be anti China to recognize that this is clearly America's biggest rival really since the founding. The USSR was never such an economic rival. Never sort of like rivaled America in terms of high end electronics. I mean, absolutely, there was like a nuclear arms battle, but the Chinese are far more sophisticated. And like I wrote my thesis on the grand strategy in America and what I would point out is that like in the 1980s, America started spending more on its military, understanding that the Soviet economy was not as dynamic. Right. And so it wasn't growing as quickly. And so you were going to accelerate their own demise. If you sort of set up a military in which the Soviets were likely to respond. In the same vein, you cannot apply that strategy to a country that is three or four times the population and has literally been growing faster than America for the last four decades. So it really is a massive threat. And the idea that in the event of some sort of battle, we're not able to make stuff because we outsourced it all to China over the last 25 years is pretty dramatic. Just think of World War II. Hitler was really concerned about the US coming in because of their industrial capacity. We used to call Detroit the arsenal of democracy. We don't have an arsenal of democracy anymore, but we have trained up China to be an arsenal of communism. That's. I don't think you have to be hyperbolic to realize that's a big deal.
- [43:26]
Tracy Alloway
I have just one more question and I'm going to ask it very, very briefly because we're getting squeezed for time. But to what degree does AI and the rise of this new technology complicate the Apple China relationship?
- [43:40]
Patrick McGee
Really complicates it so for two reasons. One is that I would argue, or actually I could just demonstrate with internal documents and some public documents that the iPhone has become more Chinese with time. In other words, the number of Chinese suppliers involved in the process is now much greater than the number of Taiwanese or American multinationals operating in the country or operating in their home countries. That is put on steroids in the AI era because ChatGPT and other Western AI clients are not allowed on the iPhone in China. And so Apple has to work with the likes of Baidu or Alibaba to have AI, let's say displacing Siri or augmenting Siri. So that I think is quite problematic because that means that Apple will be in effect doing what they did for hardware, but for AI. In other words, you'll have Apple software engineers helping Baidu, helping Alibaba, whoever their Chinese partner is, to make sure that they have cutting edge AI in the country. If it wasn't bad enough that Apple was training up their hardware engineering to be world class, we're now in a situation where Apple software engineers are going to be training Chinese AI to be best in class.
- [44:39]
Joe Wiesenthal
Very interesting stuff. Patrick McGee, thank you so much for coming on Odd lots. That was a fantastic, really fascinating conversation. Urge everyone to check out the book. Appreciate you coming on.
- [44:49]
Patrick McGee
My pleasure.
- [45:03]
Joe Wiesenthal
Tracy. I thought that was really good. And I agree with that last point in the fundamental sense that, you know, I think arguably the relationship definitely has been win win on multiple fronts from the us, from the Apple shareholders, from the Apple workers, from the Chinese workers perspective. But this idea of there are now so much risks concentrated under a specific dimension. I take that pretty seriously.
- [45:29]
Tracy Alloway
Yeah, the negative externality point makes a lot of sense, although I still think there are some tensions between Apple and the CCP itself. The other thing I was thinking about was, I guess we're hearing this repeatedly on the show and I probably don't even need to say it at this point, but it is so difficult to replicate China's industrial strategy and its industrial management in other countries. And I kind of, at this point, I wonder if we'll ever get there.
- [45:57]
Joe Wiesenthal
No, I don't think anyone will ever get there in some sense. What I suspect is the story is that some of the Chinese industrial behemoths will slowly develop ecosystems in other countries, but the companies are downstream from China. And so I imagine, you know, you see more foreign outbound investment from Chinese giants into Vietnam, into Cambodia, into Brazil, et cetera, that might pose other risks. And they're never going to be the next China in some sense, but you still get that capital deepening and wealth creation outside of China, but likely driven by Chinese industrial giants also.
- [46:34]
Tracy Alloway
Joe? Yeah, I looked up my iPhone.
- [46:36]
Joe Wiesenthal
Yeah.
- [46:37]
Tracy Alloway
Oh, it's an iPhone 11. So I guess it's.
- [46:40]
Joe Wiesenthal
What are we on now? I have no idea what we're even on now. Like, only the biggest iPhone nerds. And I don't mean that pejoratively. Maybe like I just, I used to know these. I think it's really important. I used to know these things and I don't at all. I don't pay attention to this stuff at all anymore. We're on iPhone 16 and iOS 18.
- [46:59]
Tracy Alloway
Do you think one day we're gonna get to like iPhone298? It'll just keep going?
- [47:04]
Joe Wiesenthal
I don't know. But I think I saw our colleague Mark Gurman, who is now you say again, say this lovingly, an Apple nerd. I think apparently, at least with the software, they're gonna change their naming convention at some point so that it doesn't end up.
- [47:17]
Tracy Alloway
That makes sense.
- [47:17]
Joe Wiesenthal
Yeah, I think I saw him tweet that last night.
- [47:20]
Tracy Alloway
Okay, well, shall we leave it there?
- [47:21]
Joe Wiesenthal
Let's leave it there.
- [47:22]
Tracy Alloway
This has been another episode of the Oddh Lots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.
- [47:28]
Joe Wiesenthal
And I'm Jill Weisenthal. You can follow me at the stalwart. Follow Patrick McGee, he's PatrickMgee and check out his new book. Follow our producers, Carmen Rodriguez, Armanarmon, Dashiell Bennett at Dashbot & Kell Brooklyn at Kalebrooks. For more Odd Lots content go to bloomberg.com oddlots where the Daily newsletter and all of our episodes and you can chat about all of these topics 24. 7 in our Discord Discord GG oddlots.
- [47:54]
Tracy Alloway
And if you enjoy Odd Lots, if you like it when we talk about Apple in China, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can leave listen to all of our episodes absolutely ad free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.
- [48:32]
Patrick McGee
Saiheart Podcast.