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- [00:00]
Patrick McGee
With a Venmo debit card, you can Venmo more than just your friends. You can use your balance in so many ways. You can Venmo everything. Need gas? You can Venmo this. How about snacks? You can Venmo that. Your favorite band's merch? You can Venmo this or their next show. You can Venmo that. Visit Venmo Me Debit to learn more. The Venmo MasterCard is issued by the Bancorp bank in a pursuant to license by Mastercard International, Inc. Card may be used everywhere. MasterCard is accepted. Venmo purchase restrictions apply. Foreign.
- [00:36]
Film Kahn
Hey, welcome to Politico Tech. I'm filmkind filling in for Stephen Overle today while he takes a much deserved vacation. I'm POLITICO's D.C. based China and Indo Pacific affairs correspondent and today I want to talk about Apple and how its China production lines have been an essential component of its global success. The best person I could think of to talk about this dynamic is Patrick Magee. After all, he wrote the book on it. Patrick's the author of Apple in the Capture of the World's Greatest Company. You've definitely seen this book in your local bookstore. It published in May and has been an immediate bestseller. I wanted to talk to Patrick about how one of the keys to Apple's success was outsourcing. Production to China for export has become a liability in the midst of a worsening US China trade war and President Donald Trump's demand that US Firms produce their products in America or else. Here's our conversation. Patrick, welcome to Politico Tech.
- [02:00]
Patrick McGee
My pleasure.
- [02:02]
Film Kahn
So Apple is unquestionably this globally iconic tech brand whose products dominate almost every aspect of our lives. And it's inseparable from this idea of Silicon Valley and the genius and creativity of it. But how much does Apple owe its success to to its relationship with China rather than Silicon Valley?
- [02:26]
Patrick McGee
Yeah, I mean, I would joke that a lot of jony I've designs would be found in the Museum of Modern Art if it were not for China and if it were not for the specific marriage between the Foxconn founder Terry Guo and the senior Vice President of operations, who then become CEO, Tim Cook. So, you know, what my book is really trying to grapple with is that this is not just a design and a conception company, which is basically how it's been portrayed in Hollywood and in previous histories of Apple. Right. We really focus on the design, the aesthetics of the products. But of course they have to be made in the hundreds of millions for Apple to be successful. So the story that I wanted to tell is that when Apple adopts a model to outsource and offshore their products in the late 1990s, they do so in a way that no one other company had really done before. And the reason is that, like, they're founded so early, right? 1976. I mean, this is a whole decade before Dell. That manufacturing is in their DNA.
- [03:20]
Film Kahn
Right?
- [03:20]
Patrick McGee
It's in their ethos. So. So Steve Jobs is only willing to outsource if they find a way to maintain the control you have, as if you manufacture the products even while you go overseas. And so we call this outsourcing, just because there's no other term for it. But I think they actually fundamentally come up with a better model where you're getting the best of both worlds. It's as if Apple does own the manufacturing, but it's not on their balance sheet. And there's like, this long march to China where they're experimenting with contract manufacturers in eight or nine countries before they find China. And then when you find China, it sort of takes. Takes you off to the races, because that's when the ipod, mini and then the iPhone becomes so successful. And then you have this political awakening period where, you know, Xi Jinping wants companies to be in China for China, and Apple doesn't really have a plan for that. And so the story gets really geopolitical really fast. So sometimes it can sound a little bit dull, like it's about the supply chain. But as people pointed out, it's very much a book about a Faustian bargain that the world's greatest company made to ensure its success in China.
- [04:20]
Film Kahn
You're right, Patrick. You reference China's leader, Xi Jinping. He came on the scene in 2012. And the rise of Xi Jinping to the top of China's leadership has led to more aggressive Chinese foreign and trade policies that have soured ties with the US Even before Trump's trade war. How have Apple's fortunes in China changed under Xi? You touched on it there, but could you go a little deeper?
- [04:47]
Patrick McGee
Well, there's this pretty amazing narrative where the story is mostly about operations, but actually, my favorite section of the book is about the really unexpected birth of China as a retail market. Loads of Western companies in the mid-2000s made the mistake of just having people in Shanghai and Beijing and then extrapolating from there to a country of more than a billion people and getting way over their skis in terms of how big their product would be. Apple made the opposite error, which is that they Just saw the country as a big country with depressed wages, a wonderful place to make your products, but was probably never going to sell them in large numbers. So when the iPhone4 comes out, the product just goes absolutely gangbusters. I mean, it really does just become the conspicuous product, the status symbol that everybody wants to have. This causes sort of political problems because in Beijing you have all these hardliners who don't really like that the younger generation is expressing a love for Western products, a love for capitalism. When Xi Jinping comes into the presidency in early 2013, he basically is part of this hardliner group in Beijing that sees Apple as exploitative of the country because their success is so dependent on Chinese operations and their margins are going sky high. But companies like Foxconn, which is Taiwanese but is operating in the mainland, their margins have gotten lower and lower the more closely they work with Apple. And then on top of that, you have this antipathy towards Apple because it's like the product of choice among the younger generation that Xi Jinping is sort of fighting against. So the most thesis driven narrative of the book is how Apple begins to fear its products would be blacklisted in the country when Xi Jinping comes into power. And then what they do to sort of get the political points, you know, to score on their side, that has allowed them to succeed over the last decade.
- [06:32]
Film Kahn
Yeah. Picking up on that, this idea of Apple trying to score or accumulate political points with the Chinese government to ensure the success of its operations in China, you write that Apple has repeatedly made ethically dubious decisions in order to stay on the right side of the Chinese leadership and ensure that success in China. What exactly has Apple done in that regard and what has it got in return?
- [07:04]
Patrick McGee
For instance, among the things they've had to acquiesce to are Chinese local laws, so that they banned VPNs. Right. So in other words, everyone within China is behind the great firewall. That wasn't the case before. Around 2016, they banned WhatsApp and encrypted messages, they banned the New York Times. So they very much had to acquiesce to local laws. Some of the more interesting things is that Apple realizes with this team of experts, federal laws have to be enforced at the local level. And so if there's a law that's passed that's antithetical to your interests, China operates in such a way that the law doesn't necessarily have to be followed. It's more that you have to have a relationship with the local enforcement division, with the local mayor. Mayor let's say with the local cadres. So then the laws don't apply to you. So, for instance, a major law that takes place that's antithetical to Apple's interests is called the dispatch labor law. I believe it's passed in 2014 and to go into effect in 2016. And what this does is it limits the number of temp workers you can have in factories to just 10% of the worker labor force. And Apple responds by doing its own internal survey and realizes that it has dozens of factories where at peak season, 80% of the workers are temp workers, and in many cases, 50% of the workers are temp workers. So the sort of secret sauce of why China is such a great place to build products is something called the floating labor population, or the floating population. There are 350 million people in China with a rural household registration, but who work in urban areas like Shenzhen or Suzhou. Now, they're not allowed to raise their children there. They don't have access to welfare benefits there. And so that's what makes them floating. They go from sort of one town to another or from one factory to another, and they're following sort of seasonal work. Not seasonal in the sense of the seasons, but seasonal in the sense of iPhone demand. So in March, Apple's quote, unquote, labor demand in China is around 8 or 900,000 people. That's how many people are assembling their products at that time for September, for an iPhone launch, it ramps up to 1.8 million. To be able to ramp up to that sort of level, you need access to this floating migrant labor force. Right. And so when. When the law basically says you can no longer use these workers for more than 10% of your factories, and Apple's using them for 80% at peak iPhone season, it's a real conundrum. But the realization is you don't need to follow that law. You just need to figure out what the mayor of Zhengzhou wants from you. And that's where iPhone City exists, where 400,000 people are assembling iPhones at Foxconn alone. And so you just have to have a relationship with that mayor. You have to open an R and D center, you have to make nice with politicians, and then you're going to be okay. Now, I'm just coming back to your question. Whether that's an ethical compromise, I don't know. Maybe that's in the eye of the beholder. And you could sort of say that every decision that's made over the last 30 years has a rationale behind it. It's actually not really a matter of one unethical decision after another. These are reasonable decisions, but in an overarching paradigm where I think a corporation with short term interests gets outplayed by a nation with long term interests. And so in the early 2000s, Apple very much thought it was calling the shots because suppliers would bend over backwards to win any order that Apple was trying to have fulfilled in the country. And I think with 2020 hindsight, it's more like you weren't calling the shots. You were being lured by the siren call of an EM superpower.
- [10:25]
Film Kahn
So Apple's experience in China, from a distance, it looks like the ultimate corporate win win. Apple became this cool tech colossus by tapping China's loose regulatory structure, the low cost workforce, that floating population you referenced, and a government that in many ways pulled out the stops to cater to foreign investors over a period of time. Now, in return, China got jobs for those migrant laborers. They honed the know how that allowed it to dominate global manufacturing across almost every industrial sector. So how does that add up to what you describe as Beijing's quote unquote capture of Apple?
- [11:09]
Patrick McGee
Yeah, so great question. So first I should point out that within China there was a phrase that when corporations say win win, it really means that China wins twice. And so the way I would put this is that if we were living in a simulation and things ended today, and then we got to assess the last 25 years, how you just portrayed the situation is exactly how I would portray it as well. And I'd give a golden star to Apple and say, look, you became the world's most valuable company by having everything outsourced to China. You sort of found what was in China more than, you know, in a better way than everybody else. And it was sort of the perfect marriage of skill and scale. The trouble is we don't live in a simulation. And so because Apple ended up being so powerful, because the technology transferred their processes engendered to China was so powerful, it has made China the unquestioned leader in high end electronics, which can be not just used for building smartphones where, you know, the Chinese has had 55% market share of the smartphone, which is the most iconic device of the 21st century. It also translates into EVs. I think this is why China is so good at making EVs. After all, their nickname is a smartphone on wheels. It also translates into drones. It also translates into military weaponry. I mean, the epigraph to the book is from a 2015 document in Beijing and it says without manufacturing there is no country, there is no nation. I mean technology and high end electronics in particular is how Beijing sort of looks the leaderboard of where nations are at. And it's like they're sort of, they're parlaying those tech orders into, you know, sort of supremacy, let's say, or like who's going to have hegemony in the 21st century. And so my disquieting conclusion is just what a role a single corporation played in putting China into that place. They don't want to stay in the low value end of just doing the assembly for a western corporation. So in the last 10 years, you know, they've developed companies like Huawei, Oppo, Vivo, Xiaomi who can do the industrial design, the product design, the manufacturing design in addition to shipments, logistics and manufacturing. We can't do that. We can do the first three things and we can't do the fourth. And so we're in a position where our dependence on China, a fairly belligerent nation for building high end electronics, is near total. So you know, if someone wants to say I don't think that's a problem, I mean that's fine. But I would say it's not a great place to be if like Apple has some of the experience or know how, how to build an iPhone, but they can't execute any of the plans to actually do it if it's not in China. Foreign this episode is brought to you by Polestar. There's only one true way to experience the all electric luxury SUV Polestar 3. And that's to take a test drive. It can go from 0 to 60 in as little as 4.8 seconds with the dynamic handling of a sports car. But to truly understand how it commands the road, you need to be behind the wheel up to 350 miles of range. The 3D surround sound system by Bowers and Wilkins. It's all something you have to experience to believe. So book your Test drive for Polestar 3 today@Polestar.com.
- [14:15]
Film Kahn
So picking up on that point, this idea of capture, you write, and I quote, the iPhone maker's relationship with China has become politically untenable. Yet the business ties are unbreakable.
- [14:28]
Patrick McGee
Unquote.
- [14:28]
Film Kahn
Now we know that foreign companies are now scrambling to diversify their production lines out of the country due to concerns about US tariffs and increasingly hostile Chinese government policies toward foreign firms. How is Apple immune to that wider corporate move to decouple from China and relocate its production lines to places Like India or Vietnam.
- [14:57]
Patrick McGee
Okay, there's. So I think there's maybe two things to unpack there. So if you wanted to make the argument that Apple is relatively safe, that however authoritarian, you know, one views Xi Jinping, he's not going to go after Apple. There's not a bad argument there. I mean basically what Apple has done with China and for China for the last 25 years is really built a lot of political clout because the original iPhone is really just assembled in China. It's not really built using a whole bunch of Chinese made components. But the quote unquote real estate of the iPhone over the last 15 years has become very Chinese. You know, it's either Chinese companies operating in China or US multinationals or Korean multinationals operating in China. But like all the processes are very much taking place on the mainland today that has scored Apple all sorts of political points. So you know, Xi Jinping is very unlikely, let's say to cancel the export license of Apple and prioritize Huawei. Even the founder of Huawei has called Apple the great teacher. And so, you know, they employ indirectly 3 million people in the country within any 12 month period. They've done a lot for China and I think they're sort of safe in that sense. On the other hand, China wants technology transfer to be a one way gate. The technology transfer comes in, it does not go out. So insofar as like the natural order of things, if you will, if you sort of follow manufacturing over the last 75 years is for things to now move to a place like India, which is what people think Apple is doing. And they're, they're only really kind of doing it. It's really mostly assembly rather than the depth and breadth of the supply chain. Like Beijing doesn't want that to happen. And so if you're going to move to India, the two things you would really need are Chinese people that have experiential know how to get visas to go over to Karnataka and begin setting up the production lines and sophisticated machinery, right. Automation and robotics also largely made in China, that would go over there. Well, Beijing has blocked the visas and it's blocked the exports of those of that machinery. So something like Liberation Day, you know, where Trump imposed not just tariffs on China, but tariffs on Vietnam, tariffs on India, that really short circuited Apple's plans to quote unquote, decouple from China just by having some of the assembly done in these other countries. So I think Apple's actually in a major bind if those tariffs sort of are imposed at the level that they were threatened at in early April. And I think we're going to find out in a matter of two weeks whether or not Trump is going through with that. So it makes it difficult for Apple to move. And the other thing is that even if you could have a magic wand and have everything set up in India, you know, you had all the experiential, know how you had all the machinery. I'm not sure Apple understands the extent to which China was just a once in a century partner for getting everything done. Because it's not just the production lines, it's the eight lane highways that China would build from the factories, right. The industrial clusters to the ports. And they have like world leading logistics and runways. I mean that's not so easy to do in India. And so I worry about Apple's ability to move production to another country. And we haven't even got into all the ways in which Beijing can make that difficult and the way that Chinese consumers could make that difficult. Because Apple doesn't want to become the poster child for western corporations de risking from China. That would be really bad for their image in the country.
- [18:01]
Film Kahn
Right. So picking up on this point of the feasibility of Apple to sort of relocate its production lines, President Donald Trump has threatened to impose a tariff of at least 25% on iPhones unless Apple shifts production to the US could you walk me through the economics and feasibility of those two options in terms of Apple and its operations?
- [18:28]
Patrick McGee
I mean, the easiest answer would just be to say that it's far easier to pay the 25% tariff than it would be to set up production in Pittsburgh, where the premium, let's say, of making the iPhone there is going to be far higher than 25%. I mean, it's going to be far higher than 100%. I don't know what the multiple would be, but it would be extraordinary. And in fact, that's assuming it can be done at all. I mean, if you're really talking about the entire breadth and depth of the supply chain, you're talking about more than a thousand factories that are involved, right? I mean, there are a thousand parts within just the iPhone alone. And at peak season they ship them for at the rate of more than 1 million a day. Right? So that's 1 billion parts per day that you're having to make, handle the logistics for, and do it all in a just in time manufacturing method. You know, the result of that is really four decades of investment on the part of China and two decades of investment in China on The part of Apple, the idea that you're going to do this within a matter of weeks, which is sort of what Trump is hoping for, is a little bit preposterous. I mean, it's really not going to happen in a presidential term. Now I do want to say I'm very much in favor of a re industrialization of America. I would love to see that. But the iPhone, a really complex product made at a rate of more than 200 million a year, is not the product that you start with. Right. It's a little bit preposterous that our discussions of this actually revolve around the iPhone. You need to start with a much more complicated product and in particular something that's not made in such volumes. Right. SpaceX is a great example. They're making, I don't know, a dozen rockets a year. I mean, if not millions, it's very complex. But that's something that Texas can handle. I would hope for someone like the Jony I've and Sam Altman partnership where they're wanting to make an AI first hardware device, I would love to hear, love to hear that they're going to make that in the United States and God knows to do that you would be importing a lot of parts. But at least we could have the sort of the jobs here, the technical know how here, etc. But even that's difficult, right?
- [20:17]
Film Kahn
So staying on this idea of US production of tech devices that Apple specializes in. Last month the Trump Organization announced that it would market a quote unquote made in USA gold colored smartphone called the T1 that would retail for $499. References to the T1's US production has been dropped from the website and replaced with the phrase quote unquote American proud design that will be brought to life right here in the usa. How worried should Apple and its China based contract manufacturers be about this T1 product?
- [20:57]
Patrick McGee
My laughter isn't coming through on the microphone, but of course not at all. I mean there was no chance that this phone was going to be made in the usa. And that's not sort of a matter of pessimism, pessimism about the usa. It's just a recognition of the reality. I mean if you just look component by component, like there is no American company in America building the right memory that would go in the phone and you could just go down the line and show that's the same thing for really every component. So it was never going to be made in the USA. And once you take out the made in the USA part. There's nothing implausible about selling that phone for $499. I mean, the average Android phone is sold for around $300. There are decent Android phones sold in India for less than $100. So the only implausible thing about the announcement is that it's made in the US Everything else makes sense, but it's not going to be made in high numbers. I highly doubt people are going to be buying it. Most people, especially if you're on an iPhone already locked into the phone that they have, it's not going to be a better phone in any meaningful sense. So I highly doubt this thing still exists in two or three years, let alone it's threatening Apple.
- [21:54]
Film Kahn
Patrick, what lesson should other companies take from Apple's experience in China that you outline in such detail in your book? Is capture by the Chinese government sort of the price of admission? Or did Apple just make errors in judgment and strategy along the way that other firms can avoid?
- [22:17]
Patrick McGee
I've been thinking about this a lot and one thing I think about is, you know, there's this statement in business. It goes back a couple of decades. It's what gets measured, gets managed. And Tim Cook is known to be someone who really looks at the Excel sheets, right? I mean, I have this funny anecdote where within five years of him taking over as he senior vice president of operations, everybody on the team has glasses and they didn't all have glasses when he joins, but it's because so many sheets of paper would be printed out for their weekly meetings when they would look at this, that and the other thing to understand how the business was performing. And I'm bringing this up because where do you put on the Excel sheet? Hey guys, are we up arming America's biggest rival in high end electronics? There's something very tangible about that as an impact, and yet it's intangible in terms of having an actual number that would suffice to demonstrate it, right? So like my favorite quote in the book was talking to a former vice president over coffee and he says, are you sure you're not overthinking the thesis? Because you keep telling me about geopolitics, but I can tell you I was there in the early 2000s when we were setting up the supply chain in China and we weren't thinking about geopolitics at all. And so if there's a lesson, and I think there's many lessons, but I think one of them is just the blindness, right? The sort of like what you can look at is what you measure. And if you can put things on an Excel sheet and demonstrate that you're getting higher margins, then lots of things that actually are not good begin to look good. The other thing I would point out is in the last 10 years, Apple has made this real concerted effort to rely on what's called the red supply chain. And this is like homegrown companies within China that have learned what they need to learn by hiring from Foxconn, let's say, and then taking over the orders of groups like Foxconn. And so that's why I say the real estate within the iPhone is becoming more Chinese. So if you think of something like the Vision Pro, the headset, leave aside that it's not a massive success that's assembled by luxshare, a Chinese company, rather than Foxconn, a Taiwanese company. And you can sort of go down the line. You'll see more and more of that in Apple's supply chain. Now again, those companies, they have better political connections, they have better access to migrant labor, they can get free tooling and free machinery. Ipso facto, they can rely on Apple or they can offer to Apple lower margins. Put that on an Excel sheet and it looks good. Of course, we should give more business to the local Chinese companies, but it gives rise to all sorts of unanswered questions about Apple's dependence on, on Chinese companies in the supply chain. In other words, these companies operate within a paradigm of capitalism, state run capitalism that operates differently. Right. Often in Chinese capitalism, your role is to command and control industries, not, you know, produce, shareholder dividend. And so I think there's a lot of unanswered questions about what it means for Apple's future to be more and more reliant on those companies that have all these political connections to Beijing rather than a bunch of multinationals that happen to be operating in the country.
- [25:12]
Film Kahn
Patrick McGee, thank you for joining Politico Tech.
- [25:16]
Patrick McGee
Thanks, Vil.
- [25:20]
Film Kahn
That's all for today's Politico Tech. For more tech news, subscribe to our newsletters, Digital Future Daily and Morning Tech. Our producer is Nirmal Muleichel. I'm Film Kahn. See you back here next week.