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The Monopoly Report
Episode 51: What does "Apple in China" have to do with the digital media regulatory space?
00:57:36
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- [00:01]
A
This podcast is brought to you by Adelaide Media verification and measurement are undergoing major disruption. Legacy players are pivoting to performance, advertising AI is reshaping brand safety and attention is replacing viewability. Adelaide is leading the shift with au, a new way to assess media quality that scores placements based on their potential to drive attention and outcomes. Before your ads run, think of it like a credit score for media. Finally, a clear view of quality. Before you buy, take the guesswork out of your investment strategy and try Adelaide AU on your next campaign. Market Live is back and better than ever. Our first show was a sold out hit with 450 attendees and an action packed agenda. We even got an NNPS score of 40 which means people would actively recommend it to their friends. We're back on October 27th in New York City and the theme is the Age of Outcomes. We're deep diving on everything that makes great advertising accountable and measurable with speakers like Eric Seufert, Dr. Mark Grether from PayPal, and Jenny Wall from Videoamp. Plus our popular AI Startup Showcase and a live recording of Markitecture Live. All that and no panels. Go to marketlive.com to register now. Early bird pricing ends September 2nd. That's marketecturelive all1word.com.
- [01:30]
B
Welcome to the Monopoly Report the Monopoly Report is dedicated to chronicling and analyzing the impact of antitrust and other regulations on the global advertising economy. If you are new to the Monopoly Report, you can subscribe to our bi weekly newsletter@monopoly-report.com and you can check out all of the Monopoly Report podcasts @monopoly report pod.com I'm Alan Chappelle. This week my guest is Patrick McGee, author of the absolutely Mind Blowing book Apple in China. Patrick is a journalist who has written for the financial times since 2013. He led their Apple coverage from 2019 to 2023 and he won a San Francisco Press Club Award for the best tech article for a newspaper in 2023 for his deep dive into Apple's HR problems. Patrick's focus over the past decade has been on Apple digital advertising and Robo Taxis, electric vehicles, the Volkswagen Diesel scandal, and Connected Fitness. His writing has appeared in the Times of London, the New York Times, the Wall Street Journal, the Irish Times, the Straits Times, and the Toronto Star. I wanted to have Patrick on this podcast because I think it is the most important business book written in a long time and while it may seem as if the premise, you know, supply chain and product development might not be directly related to the digital media space, well, I think that Apple is such a big player in this space that it's critical to understand Apple's motivations and what's driving Apple's decisions. Also, it's just such a fascinating story. All credit to Patrick, but it's kind of amazing how undercovered this story was. For the past 15 years, Patrick has given a bunch of interviews on Apple in China. And I recently had the opportunity to meet Patrick when he was giving an interview at an independent bookstore in Sausalito in late August. So what I'm hoping to cover that perhaps other interviewers have not, is to place Apple's offshoring of device manufacturing in some historical context. I'd also like to discuss the precarious situation that Apple is now in and see if Patrick is still as optimistic about Apple's future as he once was. And also I think that there's something for the regulatory folks to learn from Patrick's book as ultimately he's taking this dry topic of the supply chain and making it sexy. So let's get to it. Hey Patrick, thanks for coming on my pod. How are you?
- [03:57]
C
I'm good, Alan. How are you?
- [03:58]
B
I'm doing great. How was the rest of your summer?
- [04:01]
C
Oh, it's been great. I mean, a little bit exhausting answering lots of questions about the book that's honestly been most of the summer. But I've also got kids and I've been able to have lots of little fun trips with them. Yeah, no, on the whole good summer.
- [04:15]
B
We met a month and a half ago while I was enjoying sort of the end of my summer in Sausalito. I think we were at Sausalito Books by the Bay, a little plug for them. I love independent bookstores, so I think many within my audience are at least familiar with your book Apple in China. But would you mind sharing the main premise?
- [04:34]
C
I mean, to some extent, I just, I might just say the premise is it just tries to be the first 21st century history of Apple. But in order to do that, it takes a look at how Apple actually makes its products. I still even, you know, a year after submitting the manuscript, find it strange that that hadn't really been covered before. But I mean it legit hadn't been certainly in a book, but there's not even much articles that really describe how they actually build their products. So I think the best answer you sort of get from people is like, well, why would that be a story? You know, that doesn't sound like anything we need to pay attention to. And yet in a Way what the book ends up being is just using Apple as an example of something that's happened in the last three or four decades, which is that we didn't just get out competed by China. I mean, that happened, but we also got outcompeted by China because western companies effectively just gave them all the tools and skill sets in order to build things better than we can. Right, so in other words, labor rates and ubiquity of labor and the hard workingness of the labor, you know, that was fundamental 25 years ago. But China could only get where it was or where it got to rather by understanding the skill involved and actually deploying that at scale. And Apple ends up playing this just like monumental role, really, teaching, training, supervising, and even installing literally tens of billions of dollars worth of machinery over the last 20 years into factories that of course are not. It's because it doesn't build things itself. And so it ends up being this geopolitical story, not just a corporate history. And it took me a while to figure out that you could sort of tell that story through one company, but indeed you can. So it's a story about Apple. But if you don't care about Apple per se, I think it would still be just as relevant because you can't quite substitute any western corporation like Dell operating in China. I mean, there are things about Apple in terms of its size itself, maniacal obsessiveness over how it makes its products, et cetera, that make it a unique case study. But nevertheless, it's a case study that reverberates widely into sort of anything that says Made in China on the back.
- [06:37]
B
So what is your sense of China's appeal to Apple and others? I mean, conventional wisdom would suggest that it was the low cost of labor, but you had suggested that it had at least as much to do with the flexibility of the labor pool in China. Can you walk us through that?
- [06:53]
C
Yeah, flexibility definitely is underrated. Let's see. There's quite a lot to unpack here. Let me just give the simple answer and if you want more details, you can, you can ask for them. I think most western corporations, probably all of them, went to China in the mid-90s to mid-2000s, let's say, purely because of cost and the ability to scale, just the ubiquity of labor. And I think Apple looked at the same conditions and found something different, which was that, you know, they were sort of anti automation in a certain sense. They, they saw automation as a constraint. And the way that a jony I've would want to build products and design products from the get go is to have as few constraints as possible. And so what China offered was so many people in, you know, factories the size of football stadiums that you could sort of conjure into reality anything that the minds of Jony IV and Steve Jobs came up with with these conveyor belt production lines. And so they sort of understood that they could rethink what was possible not in manufacturing, but in design. Right. And then how the design leads to manufacturing. And so that's like a real leap that the likes of Dell and HP didn't take. And I think that'll be pretty obvious to anyone considering what their favorite computer is coming out of Dell or HP or Compaq in the early 2000s, which is to say they all look the same, they're all forgettable. They didn't care about aesthetics. And I don't know if you attribute it to the visionary appeal of Steve Jobs or somebody else, but he somehow understood that computers were really becoming part of your life and that it was moving out of the stage where you had a computer just sort of relegated to the basement, right. Or in some corner room, they might be adjacent to your kitchen. And in the same way that, like, people care, like what their kettle looks like, they're going to care what their computer looks like. And with Moore's Law, you know, sort of allowing computers to go into your pocket where you get the ipod and eventually the iPhone, you know, you were getting to a stage where your electronics played the role of conspicuous jewelry. And so Apple really has this design first esthetic, first mentality, but they can only pull it off with what's available in China.
- [09:03]
B
So at what point do you think Apple became aware of some of the risks around and training the workforces of your competitors?
- [09:11]
C
I mean, it's worth knowing that. I mean, I, you know, I was told directly that, that Tim Cook was reluctant to move things to China in the late 90s, early 2000s, specifically because of IP risk. Right. The, the, the idea that as you're operating there, you are inherently leaking to competitors what you're up to. Right. And that's what Steve Jobs cared about as well. I mean, for, for Steve Jobs, from 1976, when he's founding Apple in a garage, all the way until about 2003, 2004, he wants to control the manufacturing, whether that's at Apple or at Next, Indeed, even when that's at Pixar, because they used to be building computers. And the whole idea there was to own your own destiny through manufacturing. And Tim Cook, who's of course now the CEO, is hired as the operations guy in 1998. And he's really the person that, that really convinces Steve Jobs that you can retain your nimbleness. The quality control, basically, like all the things you associate with manufacturing, you can do that through a supply network and through outsourcers in particular. So he really wins that argument. And I think over the following years, especially with the ipod Mini, then Nano and then leading through, through the iPhone, I mean, the argument seems to be so one, right, that what China is capable of, or what the Apple engineers end up calling China speed just blows them away. I mean, what is possible in China is just extraordinary. And, and it helps them so, so, so, so much. Then in terms of where's the sort of wake up call that happens in stages and you get different answers when you speak to different people. But a lot of the people on the ground say we just weren't thinking about this at all. And I would speak to people who would say things like, everywhere we went in China, the red carpet was rolled out for us, right? They would be stunned as to how slim the margins might be if a supplier wanted to win their order. And the reasons are sort of multiple, but among them is just that the Chinese suppliers, the Taiwanese suppliers operating in China, they wanted to win the orders because they understood that working with Apple provided more than just revenue. It provided training. And Terry Guo is really the first person to figure this out. That's the founder of Foxconn. And I don't think actually mainline Chinese suppliers really wake up to it en masse until 2016. So there's various sort of signposts along the way. But I would say the most tangible evidence for it is when the Chinese smartphone makers really begin to mimic and then turn into great rivals, arguably even today, outmaneuvering Apple in terms of the iPhone. I mean, there's no Chinese competitor to the ipod, right? In the mid 2000s, this is not happening. Nobody's keeping up with the ipod. And if you remember, I mean, you know, the Shuffle, the ipod video, the Mini, the Nano, I mean, they are just extraordinary in terms of miniaturizing things and coming out with this ubiquity of products. And I think the ipod has something like 85% market share among MP3 players, you know, in 2005. But the iPhone era is very different. By 2014, Jony I've is on stage with the Vanity Fair editor, you know, complaining about the outright mimicry of Xiaomi phones and, you know, it's basically what's happening is the likes of Foxconn are either on their own volition making iPhone like products, or they're being told to make iPhone like products by government officials. Right. So that the Chinese aren't being left behind in the low value areas of the product. And then by 2018, 2019, some of my favorite chapters in the book are all based not on interviews with people, but based on internal documents that I was able to get through court discovery where Apple is basically panicking that Huawei phones and other phones coming out of China are denting their sales. And in their own sort of spec sheets, they're determining that the Huawei phones are frankly, better, better features and at a lower price. And you know, while they're realizing this, so are the Chinese consumers. And Huawei overtakes Apple in smartphone sales globally in 2019. And the only reason that doesn't continue is that of course Donald Trump goes after Huawei and deprives them of a bunch of US made technology. So Huawei no longer has 5G phones. And if you're selling luxury phones in China and you don't have 5G, then no one's going to buy them. And then of course, we can fast forward into the narrative now. So anyway, it's a story simple question, but the complicated answer is that it happens in stages. But if I'm simplifying greatly, I would say 2014 is when Chinese smartphones are really mimicking Apple in a quite an irritating way. 2018 is when they're matching their quality. And today I think, is when the Chinese smartphone makers are outmaneuvering Apple.
- [13:37]
B
So I'm probably oversimplifying a bit, but your central thesis can be sort of boiled down to Apple is stuck. And my question is, is China equally stuck here? Is there something that you can see that would prevent China from, you know, gradually turning the screws on Apple and eating more into Apple's profits over time?
- [13:57]
C
I don't know. I mean, the case that Apple is stuck, I think is pretty clear. Even people within Apple have said, well, where would, where else should we go? Like, there's no place that offers the same combination of cost, quantity and quality that we need. But of course, the way China got there was that Apple trained up so many people over, over 25 years. It's such a difficult case to make that, that, that Apple's just going to be able to move to India. And I know people think they're moving to India, but that's far more hype than it is the substance. You're just not seeing them really make the effort. You're seeing them play the PR game. Right? So, so you know, Tim Cook is in the Oval Office putting a hunk of gold on the Resolute desk and pledging nonsense numbers about $600 billion over four years pretending that that's investment in America when it encompasses so many other things. And frankly, journalists are doing the work of Apple's PR department by saying investing in America when not even Apple's saying that. Apple is implying that without actually saying it because they'd be sued properly if, if they did say it. But you can't sue CNBC just for, for sort of being fawning over Apple. But so that, that's what keeps happening. You know the narrative is the student has become the master. So the likes of Huawei, Oppo, Vivo, Xiaomi, I mean they, they, they every two smartphones sold globally, I mean this is the most iconic device of the 21st century. And for basically all of them to be made in China is, is, is, is pretty stunning. That would not change if Apple were to just go bankrupt tomorrow. Right? Or some fanciful notion in which you just took them out of the equation. They don't need Apple's training anymore. They know how to make great phones. So I, I guess I would just contest the idea of well, what does it mean to say that they're stuck. Only other thing I would add is that's not to say that Apple's about to get kicked out of the country. You know, I've talked to people at Apple about this who they'd say, well we're pretty safe because Apple has really demonstrated all the ways in which they are investing in China. So if you are China, why would you go after someone who's actively investing tens of billions of dollars into your country each year? And you know, by Apple's own metrics, has 3 million people in China operating on making their hardware. I mean that would just be a silly thing to do. So it's less about is the Apple China marriage about to break up? It's more about all the negative externalities, right? Or collateral damage. The fact that Apple used to be a company that made all its own stuff and now makes it all in China. Right? The loser there is not China or Apple. They've been both big winners. The losers. The fact that we no longer had know how to make stuff in the high end electronics world all across America, we have no capacity. It's been completely hollowed out. I don't blame Apple. For that in the late 90s and early 2000s, if they didn't make the decisions they did, they'd be bankrupt. There would be no Apple, There would have been no ipod, there would have been no iPhone. But that's why I say it's a story not just about Apple, it's a story about the entire Western electronics industry. So if you're going to put blame on someone, it's going to go all the way up to shareholder first capitalism. Certainly a political framework coming out of Washington. And so in a certain sense, I do think, like the best defense you could give of Apple is to say hate the game, not the player. They just happen to perform at a LeBron James level in a game that someone else devised. But it was a game that was being created when none of us were really paying attention. You know, the US began to focus its attention on the wars in Afghanistan and Iraq after 2001 and then the financial crisis. And while that was all going on, this entirely different geopolitical development was taking place, which I think in retrospect is probably the biggest story of the last 75 years. The rise of a very competent China held by an authoritarian party that has sort of strengthened its grip over the last ten years in particular.
- [17:52]
B
Yeah. So as I think about this book, on some level, or at least what came to mind for me was the Michael Moore documentary Roger and Me, you know, which of course focuses on GM's movement of automotive plants to Mexico back in the 80s. And I'm curious if you think there's any parallels between that story and the Apple and China story in terms of, you know, any larger parallels.
- [18:15]
C
So I'm sure there is. And you mentioned this in an email. I haven't seen the documentary. I've seen other Michael Moore films. That was his first, I think, before he was famous. Maybe that's what made him famous.
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B
I think so.
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C
And I've never seen it, so I need to go do my homework and check that out. But it sounds obviously like there are some parallels. The only thing I would say is that I'm a big fan of what might be called regionalization. In other words, America working with Canada working with Mexico and having a sort of NAFTA on steroids. You know, I'm aware that that, that that causes factory closures and whatnot, but if the factories closing in Ohio are going to Mexico, you still end up with a bunch of intermediary goods trade between the nations. If it goes to China, essentially you don't. And so the bigger, like protectionism that we have against China or even under Trump against Canada, the more corporations just make the decision to just put everything in China because it's easier. Even with a 20% tariff, a 25% tariff, it's still going to be economical. So I think it's a total fantasy, in other words, to sort of have the political message that everything could be built in America. That's just. First of all, if anyone's read my book and comes away with that interpretation, it's a really lazy reading of the book because you have to contend with just how much China offered. I mean, it was so much competence, there was so much hunger to create the scale and the quality that they created. They were like the perfect students. Right. For Apple. So, you know, yeah, I realize that it's a, it can be a politically messy message to say that, you know, to be pro factories moving to Mexico, but in the real world, if you're not supporting factories in Mexico, ipso facto you're supporting them in China. And frankly, Mexico factories are better for America than Chinese factories are.
- [20:06]
B
So it's funny, there was one part of the book where I think you gave the example of if it found out that you needed a 910 millimeter screw versus an 810 millimeter screw, know how do you get a half million of those made in a day? And China seems like they're the only game in town for that.
- [20:25]
C
Yeah, this kind of thing would happen all the time. And in a way, you know, my. It's funny, some reviews have mentioned that, you know, the term China barely comes up in the first hundred or even 120 pages. Why, why are these chapters here? Right. And, and the chapters are here to answer this kind of question. Right. Which is that, you know, Apple had this like seven year period between 96, when they launched their global outsourcing strategy to 2003, when they really began to consolidate production of the ipod, Mini and their computers into China. In those seven years, they're manufacturing stuff in Mexico, Wales, Singapore, Korea, the Czech Republic. I think I'm even missing two or three countries. I mean, it just, it's all over the place. And when you're doing that, you're just running into cost constraints, labor constraints, the fact that if you want to make that sort of tweak, you're flying over an ocean with some samples of some new screws, right? And then you're flying back and then you're ordering them and then you're flying back over. And in a sense, what China was able to offer was just like the virtues and benefits of what was taking place in, let's say, Singapore, Taiwan and Korea and just putting it all in like one district in China, right. And often with those Singaporean Korean companies, right, just setting up divisions, you know, so, so the origins of some of the most successful factories operating in China are, are actually Apple just telling a Taiwanese supplier, you need to go make this in Shanghai. And they're able to do that in multiple industrial clusters in China. So that's called next door manufacturing. Just the idea that the assembler is, you know, across the street from, and maybe there's not even a street, right, but just, just a few yards away from the plastic injection molding, the metal stamping. I mean, it's just all in one place and it's just all synced up there. And that's what makes it so difficult to move, right? Because you know, so often I'm going off on a tangent here, but it's probably worth it. You know, Donald Trump or someone will say, you know, Tim to Tim Cook, why don't you build factories in America? And among the things they're missing is that for starters, there's no such thing as an Apple factory. So it's not, it's not as though Apple is going to open a factory somewhere. It needs to convince a supplier. But for the supplier to be successful, they can't just have Apple as a client, they need to have loads of clients. So it's multiple companies that need to be sort of like urging them to move. But then for the supplier to be successful, it needs to be next door to another supplier that does something and another supplier that does something. So you, so it's not about opening one factory and then calling it quits. It's like dozens, if not hundreds of factories need to be moving to some area. But they all need to have multiple reasons to think that they're going to be successful. And when you look at the cost in the us, it's not going to happen. When you look at the flexibility of labor, it's not going to happen. When you look at how many people are involved with manufacturing or who want to be involved in manufacturing, it's not going to happen. So frankly, I'm sympathetic of the things that Tim Cook is being asked to do because, like, none of this makes any sense. And so therefore it's not going to happen. And instead you get a PR move instead, which is itself distasteful. And yet how do I, as a sort of independent critic, go after Apple for the PR move when they're being put in an impossible position. Sorry about the tangent.
- [23:31]
B
No, it's, it's. Well, so you're, you're making a point that, that I like to make a lot, which is that politically we like really easy solutions. We want an easy button. Now, I do a lot of my work in privacy and regulatory stuff. And so you have things come down from the mountain. It's just like, hit this button and this behavior should stop. And it's like, nobody bothers to define what the behavior is. And if you get 20 people in a room, you're going to have 20 different definitions of what the behavior is that need to stop. And it's sort of a similar thing here. It's very easy to say, bring jobs back to America. It's a very different thing to say, well, how does that work logistically, given that there's a physics in play here.
- [24:14]
C
Yeah. And, you know, the most sort of creative answers where you'd be solving multiple things at once are sort of politically taboo. I mean, to such a degree that I hesitate bringing it up on a podcast. But, you know, I like to think about. For any question, I think you need to think about, like, what are our assets, what are our differentiators, and how can we use those? You know, one of the most politically charged topics in America is immigration. Right. And illegal immigration. And you just think how strange that is from a sort of global standpoint. How many countries are having to put up walls because literally hundreds of thousands or millions of people want to move here? Well, they're often fleeing pretty desperate conditions. And in a very vague sense, and I want to be clear about that, that's not terribly different from the internal migration that you get in China, where people are leaving the sort of agricultural fields in the rural hinterlands of western China and moving to a city like Shenzhen. And so, at least as a starting point, I would love to hear the notion of some idea of a certain district in America being termed a special Economic zone and migrants that are fleeing various countries across the southern border that are wanting to have the opportunity here, could they go to that zone? Right. And I guess they would be restricted in some sense. I mean, I'm saying they wouldn't go to New York City, but would they accept the factory conditions and would that align with a Made in America philosophy, etc. There's a lot of problems there. I mean, you'd be navigating all sorts of landmines. I want to be clear about that. But in the end, it's good if America has A bigger population in terms of its global might, in terms of its power, in terms of its demographics, um, if there's ways of assimilating people from foreign cultures into living in America, but they've got jobs and opportunities, which therefore means they're much less likely to be involved in any of the things that people don't want illegal immigrants in the country doing, I. E. Crime. You know, there's just a number of things. I mean, this is way above my pay grade to sort of come up with some grand policy here. I'm. I'm talking magic wand type stuff in terms of my fanciful ideas here, but I just think politicians could be a lot more creative because I don't know, when I think about that idea, I don't know that it is pure fantasy. I think there's something there and we do need to be thinking, how do we learn from China? How can we replicate what China was able to do? And so I'm open to ideas of Chinese investment into the country. For instance, if BYD wants to open a factory in Pittsburgh, like, I'm all for it. There needs to be some contours of what's happening with the data and that sort of stuff. And ev, after all, is the smartphone on wheels. A lot of data coming out of that. And so you need to have some protections there. But I just think, you know, just the blunt tool of tariffs just is such a elementary starting point. I'm not against tariffs, but the idea that they're the be all, end all and that it's going to bring back manufacturing in the United States is ridiculous notion. We need to be thinking way outside the box and far more creatively about this.
- [27:05]
B
So you talk about ensuring data stays in the US and you're familiar there's now currently a deal. I think there's a deal where TikTok is going to remain sort of in the U.S. and their algorithm going to be controlled by the U.S. we think these things are going to continue to happen where intellectual property is such that any country is going to want to keep that intellectual property. And so I'm not saying that the whole TikTok thing was that there were not some legitimate concerns there. But I guess I'm saying that I don't feel like we as a country are dealing with those concerns in an honest and straightforward way.
- [27:43]
C
Yeah, I agree. I don't have much to add. I just think we're not thinking seriously and long term about a host of issues that are ridiculously important for my generation and the next generation.
- [27:53]
B
Agreed. So, speaking of privacy. So Apple has, you know, often positioned itself as a champion of user privacy globally, and even famously pushing back on FBI requests to unlock an iPhone. So how does the book portray the tension between Apple's privacy zeal and. And some of the compromises that Apple's had to make in China?
- [28:13]
C
That's a great question. I mean, look, privacy is something where I would legit give Apple the points. Apple could be making a hell of a lot more money if they were really monetizing their 1.5 billion iPhone users and treating users as the product. Right? I mean, this is among the reasons why they're. They're not doing very well in generative AI, which is that the companies that are doing well, like Meta or like Xai, the Elon Musk company, they have access through Facebook posts, Instagram posts that are public, or X posts to sort of understand the language of Gen Z, right? And then generate their LLM models based off of that. If Apple were doing the same thing with, like, I don't know, Apple notes or any input into the iPhone, I mean, they would have access to 1.5 billion people texting and stuff, right? I mean, that would be amazing for them, but it's a total violation of their privacy stance. And so they, therefore, not only do they not do it, I don't even think they contemplate it. And on the one hand, that puts them at a massive disadvantage, right? Like a boxer with his gloves behind his back or something. But on the other hand, it's. It's. It's a virtue, and one that I would want to support. You're right that there's a China angle, which is a little bit different, but I don't think it's completely clear what the truth is. In other words, there's been a big deep dive on the part of the New York Times several years ago that basically said, you know, Apple had to set up a joint venture. It's the only joint venture they have in the country, or at least the only one that I'm aware of, the only one that's public, where data from iPhone users in China has to be housed within the country. And they had to set up these data factories, right, These facilities to house that data. Those buildings had to be in a jv, so they have a government partner setting that up. And that certainly raises questions of. Of who sort of has the keys. And Apple's statements are a little bit strange about it, right? They say that there's no back door for the government to get in, and Honestly, Apple's the kind of company that will say things that are, like, deliberately misleading, even though legally they're correct. And you have to reread a lot of Apple press releases with that vein. So it may very well be true that there is no back door. But there is a front door. Right. And, and so, so, so Apple's a clever company in that respect. So anyway, my point is I don't definitively know that the Chinese government has access to that data whenever they see fit. If I were to guess, I do think that's the case. The New York Times basically made that accusation and Apple responded vociferously. And I don't really know what the entire truth is.
- [30:53]
B
Yeah, well, it's difficult because there's a certain. There certainly, as you, as you point rightly pointed out, there's certainly a double speak. So I had read somewhere that you were really bullish on Apple, at least as of, you know, 2022. So are you still bullish? Because it seems like the supply chain issues are a big problem, you know, but that's only one of their risks. I mean, you've got App Store revenues, you know, are at risk. I'll just put it, due to antitrust concerns, you've got some risk, although Judge Meta seems to have lowered that risk dramatically. But there is still some risk to Apple losing their 20 billion a year payoff from Google. And then there's what I think might be the biggest risk is that China's device manufacturers may or are overtaking Apple in terms of features and functionality. And so it seems like that's just a matter of time before that becomes more cost affordable. So I'm just curious, like, in light of all that, are you still bullish on Apple?
- [31:51]
C
So for starters, you know, I just want to be clear. I'm, I'm a journalist. I don't pick stocks.
- [31:55]
B
Oh, I'm sorry, I didn't mean like that.
- [31:56]
C
Yeah, no, no, no, I know, I know. I just want to be clear to anyone who might be thinking along those lines. You know, when I say bullish, I just mean in terms of like Apple sales and market share. But like, I'm totally agnostic and I certainly don't want to be seen giving advice, you know, and, and I think, you know, the general sense is that I've written this book with a, you know, dragon biting an apple, that the author's thesis is a short apple, and that's, that's not the case at all. I don't even think about the question, to be honest. Let's see, it's kind of complicated. I think I should explain where my bullishness came from and because none of that has actually been diminished, which is to say that in the summer of 2022 I faced this problem as a journalist where I was continually wanting to write about all the ways in which Apple was likely to become the next, you know, I think at the time $3 trillion company and probably $4 trillion company and so forth, clearly wasn't paying enough attention to Nvidia at the time. But what I meant by that was that I once quoted someone saying that your preference for your, the platform you use, either Android or iOS, is about as sticky as a religion, right? In other words, you might meet people in life that, you know, were born in one faith and adopted another, but on the whole people just adopt the ones that their parents have. And so when I was looking at all these statistics, it was like the people that are already in the iOS universe, they're not really going anywhere. Most people that have Apple devices don't sort of run the gamut of looking at the latest Samsung and, or let alone Huawei or Xiaomi and deciding which phone they want. They buy the new iPhone. They just hope that it's, that it's good and maybe that they get excited by the September marketing or whatever. But they're not really thinking, you know, what phone should I get? They're thinking what iPhone should I get? And I think if you look at like statistics of teenagers in America, it's something like 87% of them have an iPhone, right? And you've got the whole blue bubble phenomenon that sort of treats Android users as like second class citizens in a certain sense. They actually screw up. People don't necessarily know this. Android users, because of Apple's designs, to be clear, screw up the entire chat for everybody so that videos shared between them, for instance, are in a lower resolution. And so teenagers have reacted the way that teenagers should react to this, which is that they've actually excluded the Android people just created a new chat where everything's in high resolution and stuff. So Apple sort of orchestrated things in a certain way once. They sort of understood, because it was unintentional at the beginning what the blue bubble phenomenon meant. So anyway, when those high schoolers are coming out of high school and going to college, let's say I don't think they're thinking what laptop should I buy? I think they're thinking what MacBook should I buy? Increasingly when you're thinking about smartwatches, they're Thinking about what Apple watch should I buy? If they're thinking about headphones, it's should I get the over the ear AirPods or the Pro or the. Or the ordinary ones. Right. And it just struck me that if you've got that sort of generational divide where it's 85, 90% of teenagers in America are using iPhone, Whereas it's only 50, 50 for my generation, that that was just going to have a shift, just a slow and steady one. Not some explosion in the next quarter or whatever, but just over the years, it just seemed like Apple really had a lock on the next generation. And then you look sort of like worldwide. I remember I couldn't find any markets where Android was increasing its market share. In other words, you got loads of markets where Android has 90%, 80% market share, but there's a steady erosion of their market share in favor of iOS. And so I just was trying to play that out over the next five, 10, 15 years. You know, whether that's a good analysis or not, I don't know. But that's where my bullishness stemmed from. As a journalist, it's not a great idea to just be super bullish on the company that you're following. And so I just made the natural sort of thought experiment which was, if this isn't going to play out, like if I had a time machine, went forward in 10 years and I saw that that didn't play out at all, what was the most likely outcome or catalyst that that prevented that scenario from playing out? And just the answer was increasingly that something went awry in China. Right. China annexed Taiwan and Apple is unable to get any of its chips. And that, you know, increased the competitive factor on the part of Samsung, which of course builds its own devices, but also sources its own chips in Korea. Right. Pretty independent from what's going on in Taiwan. So it was that sort of thinking. So in the certain sense, I am still bullish. You know, I don't sort of look at the Pro and the Air that just came out with disappointment or something, because it dents my thesis. Like, it doesn't dent my thesis. I think they make incredible hardware and yet again, they've done it. I do think they've sort of lost a certain creative edge. I don't think they're reconceiving products. You know, one could say that the iPhone Air is basically a derivative of the MacBook Air that Steve Jobs took out of an envelope way back in 2008. Right. So I don't know how much creativity points they should get for just slimming it down. But you know, the existential risk, it remains China. I mean, that's what, that's why the book is about that. And I don't see how they're, how they're getting out of that anytime soon. I think the general sense from people is that, well, they're slowly building up their operations in India and eventually India will be able to match China. I think if you look at the investments in China, you would see that they're actually running away from the competition. In other words, they're getting deeper into China and China is getting more superior in high end electronics and even adding fabrication of chips in a way that they weren't doing five, 10, 15 years ago. So I don't, I don't see India catching up really at all. I would love to be wrong about that and bullish on or I want to be bullish, I want to say sentimentally I'm bullish, but I'm not sort of in real terms bullish on, on India. And then the last thing I should point out is AI really not a part of my book until the conclusion is something where Apple isn't doing a great job of. And they do AI in certain respects, I want to be clear, like the translation and the new AirPods or whatever. Right, that's AI but they're not doing anything with, with large language models. That's, that's sort of impressive or front of the pack, generative AI in general. And I worry about that in China where you do have a bunch of great competitors. And as long as those competitors are working with the Chinese homegrown giants like Huawei and Vivo and stuff, I could see Chinese consumers in time turning to those companies at the expense of Apple. So yeah, my prediction is that Apple goes back to single digit share in China in about three years. We'll see if that pans out.
- [37:56]
B
All right, well, so first there's a lot, lot to unpack there. But first I just want to observe that. Thank you for getting me to relive an uncomfortable part of high school. For me, in terms of being excluded, there's, you know, it's funny, back when I was in high school you might be excluded because that somebody didn't like the color of your sneakers. But, but now that the new technology is just taking it to an entirely.
- [38:15]
C
Different level, I mean, if you haven't seen these videos, Alan, they're really funny where on TikTok someone will say, you know, she's a 10. But the messages come as A green bu. Right. And then you're supposed to go like, oh no, I wouldn't date her. I mean, that's what people are like these days. It's, it's hilarious. There's a sense in which having a green bubble, like indicates poverty or something, which is hilarious because the person might have a Samsung phone that costs more than an iPhone. Right. And has a better camera and so forth. But that's not the perception, and perception is reality.
- [38:43]
B
Yeah. And, and you also raise an interesting point regarding AI. I mean, it does strike me that, you know, Apple's never really been a data company and I think you kind of have to be a data company to, to succeed in AI. And so that may be. You know, I think I gave three reasons why I think, you know, Apple may be in trouble over the long term. And the fourth one is certainly AI. Although in the short term it seems like they're just going to partner their way in and maybe that's enough.
- [39:09]
C
What's worth knowing is that Apple does have this tremendous advantage, right, which is that in a value neutral way, they are a monopolist of their own users, right? They own the hardware, the software, the operating system. And so Siri, if it gets its act together, can go mine your emails, can mine your photos, right? Can go cross apps in a way that ChatGPT or any other app is never going to be allowed to do. So that doesn't change even when they partner. That doesn't change in the next five years and doesn't really change for China as well. So if they're just able to sort of hire the right teams, acquire the right teams, and then eventually turn Siri into this like AI juggernaut. Siri doesn't really have to be best in class. It's the only person or the only entity in class that's even able to work cross platform. Right? ChatGPT will never be embedded in the OS the way or like the degree of depth that the, that Siri will be able to. So as behind as they are, that's a huge advantage. And if you just give them three years, I don't know how they haven't figured it out within three years.
- [40:15]
B
Yeah, fair enough. Although at some point with the whole integration into the OS thing, you start raising competition concerns. Although again, we seem to have hit the pause button on those in the US at least, so you're right.
- [40:28]
C
But I've never found the antitrust arguments against Apple to be particularly compelling, and I don't think they are for that either. I mean, Like Apple as a company has been coupling together the hardware and software and the operating system since 1976. That's just their whole basis of the company, you know, so you can be a monopoly legally, you just can't act as a monopolist. And so I think they're able to sort. But it's also worth knowing that they have the best lawyers that money can buy. Right. So even when someone goes after them, it's really hard to pinpoint, like, well, at what point did Apple become a monopoly, etc. And their argument as to why chat, GBT or whoever shouldn't be allowed to have access to your text, to your photos, whatever, is a very strong privacy argument that works especially well in a place like Brussels, where a lot of the antitrust sentiment against Apple is. So I just don't see it as a good argument. And that's not to say people won't try, they won't be bound up in it. But effectively nothing has happened in the last 10 years against Apple in terms of antitrust, despite all sorts of attempts on multiple continents.
- [41:34]
B
Yeah, I think the most compelling avenue, if you're going to go there, would be around the App Store because, you know, clearly with EU's DMA and then some decisions in what, Korea? I thought there was a decision in California against Apple. So I think that there's some surface area there. But I think you're probably right when it comes to the overall os.
- [41:59]
C
Yeah, I mean, I'm aware of each of these things. I had to report on them for years. You know, sometimes I'd get excited about them, most times not. But even when Apple loses, it's the court process. Right. There's an appeal and then another appeal. I mean, it just takes years and it's usually at the edges. So like EPIC put what I think $1 billion into going after Apple and they effectively didn't get much at all, except. Well, unless you really think that that the reason Apple, this is probably true, cut their fee for a lot of developers from 30% to 15%. Right. They did that sort of ostensibly on a voluntary basis, but probably to sort of reduce some of the ammunition that was coming at them and maybe that's a big win. There's exclusions that frankly I don't remember all the details about who gets 30%, who gets 15%. I think most companies are still actually being charged 30% and it's sort of a PR thing where now journalists have to say between 15 and 30%, even though most times the fee is 30%. But yeah, that that could be considered a win, but I just don't think it's this big, nefarious thing that. That Apple owns the operating system and therefore collects a bit of a fee. I. I understand why it's scandalous, and it frustrates me at times, but legally, I don't think it's a great argument against Apple.
- [43:11]
B
Okay, I've got one more question for you. This has been a great discussion, Patrick, and I really appreciate you coming on. One of the things that I think can't be overstated is that you've managed to take an incredibly dry topic, global supply chains, and make it kind of riveting, almost sexy. And so, as somebody who's been focusing on privacy and regulatory issues over the last 20 years, I found myself feeling the energy going out of the room if I go too deep on these types of issues. So, like, what's your secret? You know, how would you suggest that my audience, which is largely regulatory nerds, you know, work to work to make these types of these X's and O's types of things sexy?
- [43:50]
C
I don't know that I have an answer. I mean, as much as the book is about supply chains, it doesn't get into, like, a granularity of detail that would bore anyone. And if I felt like a paragraph was doing that, I would end the paragraph and just make sure that the next paragraph moved on a little bit. You know, the chapters are short, right? Each one, I want to say, is between 2,000, maybe 3,500 words. Right. The book is, what, less than 400 pages, but it's divided into 41 chapters, I think, plus an intro and conclusion. So there's a sense of accomplishment. You know, if you just sit down and read for 25 minutes, you'll probably get through a chapter maybe. Maybe quite a bit less than that. And even the chapters are divided, right? Each chapter has two or three subheadings. And so I feel like there's always kind of something new. And the book isn't really a repetitive book. I mean, maybe the introduction, you know, has some elements that get repeated, but, like, sort of for proper reasons. But, you know, the first chapters are kind of crisscrossing continents as Apple tries to sort of escape what's. What seems to be like, clear bankruptcy. And those chapters are about sort of the problems of the supply chain. And then you move to what China offers in terms of, like, the. The values of. Of a better supply chain. And then there's just like a massive detour with the birth of the iPhone, right? So it becomes a retail story, and then it becomes more of a political story. So it's. It's sort of like multiple book themes packaged as one. But you could cover the same book, but in a totally different way. Right. In other words, you could sort of flip it around a little bit, where all the engineering and supply chain stories were actually being told about the iPhone era from 2007 to the present. Whereas for me, that's more of the political era. But there's a whole bunch of engineering stories during that time, and I only tell a few of them, but there's probably hundreds to uncover. I mean, you can't imagine the complexity that goes into. To a lot of this stuff. And even I'm sitting on a bunch of stuff that I just didn't use either because my editor was like, this is not a supply chain 101 book. Right. Or just the sense that the book was too long and I needed to cut it down. I mean, I. I cut 20,000 words after the manuscript, which is like six chapters, you know, if you were to cut it all from the same place. So I don't know. I don't have any sense of. I. I don't know if you're a Seinfeld fan or. And certainly if the readers are Seinfeld fans, but there's a time in which George Costanza is pitching a television show, right, With Jerry. And the NBC producer says, why would I watch this show, right? It sounds boring. And George says, well, because it's on tv. And the producer says, not yet. And I love that. And I feel like so many books are written with the idea that, okay, maybe the first couple of chapters are dry, but then the reader's really going to get into it. It's like, yeah, but no, because they probably not going to get through those first dry chapters. And so I frankly hate a lot of business books. Maybe I don't hate, and I'm just not interested in them. And I hate. I am reserving the term hate here. I hate when authors of a big topic make themselves the center of the story. In other words, if I was doing this, like, where was I when I determined that, like, supply chains were the untold story of Apple? And why don't I tell the reader about that awakening? Like, no, sorry. Apple and China is a big enough story that, like, my own personal, like, situation or relationship with Apple is, like, good stuff for podcasts, but it is not part of the text at all. And so when you open the book, you know, it basically says, for my family There are some chapter titles and then the narrative just starts and Apple's in crisis. And I think when people give the first couple paragraphs a go, they just get hooked. Because within pages I'm already telling you a whole bunch of stuff that you didn't know and leading you on that I'm going to unpack quite a bit. And when I, you know, looked at reviewing other business books or nonfiction titles, so often there's just not much happening. And they write these boring academic intros where they say in chapter one we're going to deal with this. And then in chapter two and it's just this laundry list and you're just like, for God's sake, would you start the narrative? Who are the characters? What's going to happen in this book? Give me some statistics where I'm saying, oh. And so as a writer, I'm just thinking all the time about what are the lines that people would underline, what are the things where they would highlight. Would they write haha, in the margins? You know, you just want to be active with what it's going to be. And you know, the only thing I would say is like, that was quite a sort of privileged position because I took 12 months off and it ended up really being like 18 months off to really have the time to do the research.
- [48:00]
B
And Doug, here we have the Limu.
- [48:03]
C
Emu in its natural habitat helping people customize their car insurance and save hundreds with Liberty Mutual. Fascinating. It's accompanied by his natural ally, Doug Limu is that guy with the binoculars watching us. Cut the camera. They see us. Only pay for what you need@liberty mutual.com savings very underwritten by Liberty Mutual Insurance Company affiliates, excludes Massachusetts. And to write it. And I get that a lot of writers, if you're writing for a paper, maybe you get three months off to write it. And so you're just doing your best to sort of pad out some successful magazine articles into a book. But you know, I just thought my topic was absolutely enormous, that I had a big opportunity to do it well. And so I was just spending a lot of time thinking about how to hook the reader, keep them engaged. And if things got dull, then I'd be cutting things or moving on real quick. But I don't know, the nice thing about Apple and China is that the numbers are so large that they always require comparisons, analogies, metaphors. And often I think writers just think if you give a big number, the reader's just going to go, oh wow, that's a big number. No, we need far more handholding. Right. When I talk about Apple's investments being $55 billion a year a decade ago, no person on the planet really understands the difference between, let's say 55 billion and 5.5 billion. The numbers are just too big. You just go, oh, that's a big number. Like your brain doesn't really make the connection. And so that's why I compare it to. This is four times what the Biden administration authorized through Congress on the CHIPS Act. Right. And then you're getting a sense of, okay, it's not just a big number, it's quadruple, what the Commerce Secretary at the time called a once in a generation investment. And people have given me the notes. That's what they've highlighted. Right. It's not the number, it's like the, the explanation of the number. And so, I don't know, so many instances in other books, I just find numbers are presented and there's no context, there's no analogy. Is that big? Is that a lot? I don't know. You know, if I tell people that Apple buys a hundred billion dollars of their shares each year. Okay, I don't know, is that a lot?
- [50:07]
B
Does Google do the same?
- [50:08]
C
Does Mike, what is Microsoft's finger? Unless you show people. Yeah, they don't know what that means.
- [50:14]
B
Yep. So for me, and just let me gush a little bit, if you, if you wouldn't mind, I think the secret to the book, it really was dozens and dozens and dozens of little stories that tells a huge story. And so it was very easy to just, you know, over. I actually listened to it while I was running and, you know, you just kind of over the course of like, I don't know, a month and, but you, it wasn't like I had to worry about, oh, wait, what happened last chapter. Because it, what happens in each chapter is almost not that important. It's really about the totality of the, the, all the stories that tell the big picture.
- [50:52]
C
Yeah, no, I think you're right. It is lots of little stories. And so one person criticized me that there's, that there's lots of little stories and there's a big story, but there's not a lot of medium sized stories. And that might be too. But yeah, that was a funny thing. I had, I hadn't thought about that, but I think they're probably right about that. But yeah, it's funny. The stories are basically just vehicles for you to get from one place to the other with some sightseeing along the way. Right. To understand something so that you understand the next story and then the next story. But even if you're just trying to understand, like, I don't know, China's authoritarian turn or whatever, you can't just write, you know, that's what happens. Like, there needs to be a story. There needs to be someone sort of tracking Xi Jinping and then being surprised at what actually happens and so forth. And so everything needs to be told through someone's experience. And I. I guess you would intuit that as just a good reader, but I would say I didn't really learn that or learn how to do that until I had a book contract. And then the books that I was reading, I would sort of mine them for information. Not just details that I might be able to use, but their structure. Right. How do you do a cliffhanger as a conclusion? What is the opening sentence that sort of like, you know, has, like, a jarring experience so that you're sort of focused? There was a lot of that to learn from. And, yeah, one of the things was just like, if you just needed the reader to sort of understand a little bit of Chinese history so that they were in the right context, you had to find a way to tell that story through a character so that you're almost teaching the reader without them realizing that they're teaching a reader. They just think they're reading the biography of some interesting person, but actually, you're giving them all the tools to understand the next chapter. I really enjoy learning how to write a book, as I wrote a book, which sounds a little bit silly, but if you're a journalist, you don't know how to write a book. I mean, that's just not a skill set that we have. And so holding the reader's attention through 400 pages was something that I learned as I did it. And, yeah, it was fascinating to do it, and I hope that's paid dividends to make the next book easier, because this was a really difficult book to write.
- [52:54]
B
Well, that was my last question. I mean, have you started to think about what's next and are you ready to share?
- [53:01]
C
Yeah, the only thing I can really say is I've got. I've got two book ideas. I think there's a sizable chance both will be written. And I think at this point, I know the order that they'll be written, but neither has anything to do with Apple or China. You know, I've been asked so many times if I'm going to write Tesla in China or something like that, and, like, I can't how boring. I mean, I would read that book in a second, to be clear. I mean, if it arrived here, I would spend the rest of the day reading that book. That would be amazing.
- [53:26]
B
I know, but you're not a movie studio.
- [53:28]
C
No. And even when I was getting really interested in industrial statecraft and the ideas, what we could be learning from China and so forth, my publisher was just like, those are all great questions, but like you've got the freedom to just write anything you want rather than sticking in this one topic. Right. And so in the same way that Michael Lewis wrote a book about being a Bond salesman and then he wrote a book about baseball statistics, you know, my publisher was like, that's what you need to do. Like, like go from one thing to another that has really nothing in sync with, with each other. And that's really the opportunity and that's what a journalist in a sense gets to do. It would kind of be tragic if I just sort of tried to write Tesla in China or Apple in India. I wouldn't mind writing Apple in India in 10 or 15 years, but it's too early at this point and hopefully I would be able to write several books in between. Anyway, the only thing I could say is writing a book is that's. I loved it. It was the fate. My, this is my career highlight by far. I really enjoyed, you know, I mean, certainly the publicity and stuff afterwards, that's all great, but the actual writing and research and building the contours of a story and figuring out who all the characters were or whatever, that was just amazing work. I was just sort of on the equivalent of runner's high all the time putting it together. So I would love to write another book rather than go back to day to day journalism.
- [54:46]
B
Well, good. Well, when you write it, we'll, we'll be looking out for it. Patrick McGee, Apple in China. If you haven't bought it, you should buy it. It's a fantastic read.
- [54:55]
C
Thanks, Alan.
- [54:58]
B
That was a great conversation. A few things really struck me. It wasn't just the speed and the size of China's labor force that's the story, but the flexibility of the labor force. Steve Jobs and his team were coming up with design ideas that were often viewed as impossible to implement. Literally no workforce other than China was able to mass produce Apple's ideas. Second, while there were some initial concerns about IP as Apple began its relationship with China, it's really noteworthy how many Apple executives failed to grasp the implications of this relationship. And I think some of that has to do with the degree to which China rolled out the red carpet for Apple. And there's a lesson in there somewhere that if you think you're winning and winning big, there's a chance that you're not seeing the entirety of the chessboard. It seems clear that it took years for Apple executives to realize the implications where they were essentially providing training to their competitors. Third, Patrick gives Apple props for its stance on privacy, and they certainly could make more money by treating Apple users as the product. But I think that view might underappreciate Apple's partnership with Google. So while they're technically correct that Apple doesn't get its hands dirty on privacy, given that Apple continues to push its users over to Google for monetization, means that, you know, Apple's hands aren't entirely clean here either. Fourth, Patrick makes a good point that the roi, at least in terms of what Epic Games and to an extent the EU Commission under the Digital Markets act have spent to democratize the App Store rules, has not been great thus far. Now maybe that's going to change, and I do think that regulators worldwide have started to view some of Apple's privacy justifications with a bit more skepticism. And finally, I think those of us in the regulatory world can learn a lot from Patrick's approach. If you want to hold the interest of an audience with a complicated and perhaps at times dry subject, tell stories to keep things interesting. If you need to go into policy detail for a bit, that's fine, but balance the policy details with something that you're sure is going to be of interest to your audience. And if you're going to share numbers to make your points, be sure to put those numbers into some context. I thought Patrick did all of those things really well in his book. As some of you may know, I spent a fair amount of time in Sausalito, including a few weeks this past summer. I was hanging out at a friend's house and saw the book Apple in China and we got to talking about it and my friend told me that Patrick would be speaking at a wonderful local bookstore called Sausalito Books on the Bay. Fast forward a few weeks and I was appointed as a privacy ombudsman in the bankruptcy of a small Bay Area chain of book scorers called Books Inc. Anyway, that's a long winded way of saying please support your local bookstores when you can. We have a bunch of other fantastic guests coming up on the Monopoly Report podcast over the next few weeks. Please subscribe to the show@monopolyreportpod.com or on Spotify, Apple, YouTube or wherever you listen to your podcasts. And thanks for listening.