Patrick McGee (11:08)

San Francisco. I just got back from sort of a two week book tour in New York and London, but this is where I live, San Francisco.

Patrick McGee (11:14)

So let's bust right into it. Your new book, Apple in China tells the story of how China essentially was built as a country by Apple. Well, let's start there. I've seen you cite some incredible statistics. Of course I discovered you on TikTok, where I discover everything now, where you cited some just amazing stats. Give us some of those stats and tell us how intertwined Apple has become with China.

Patrick McGee (11:41)

So just before I Give you the numbers. I should just very briefly say that the sort of pushback I'm getting right is the line that Apple built China. Right. The book doesn't sort of so stridently say that. It says it was the biggest contributor to the high tech electronics industry, which has been described by scholars like Barry Naughton as Xi Jinping's most important thing. So, you know, obviously I'm not claiming that like they built everything. It's just that their efforts in China really are that of a nation building effort.

Patrick McGee (12:09)

No, I'm going with China owes everything to Apple. I think that's more dramatic. Anyways, Go ahead. Yeah.

Patrick McGee (12:15)

Okay. The numbers are phenomenal. Right? So. And it's worth knowing what the numbers mean as well. So since 2008, Apple has trained 28 million people in the supply chain. Apple would push back and say that that's not all in China, but they also won't tell you which percentage is in China because they know that it's very, very high. Maybe it's 27 million, maybe it's 26 million. The numbers are astonishing. It's a bigger labor force than all of California in 2015. Apple is sort of on the back foot with Beijing and provincial officials. They're trying to demonstrate how influential they are to the country largely as an effort have to do joint ventures, which is what Beijing has wanted from Western companies for decades. So they do their own supply chain study and realize that they're sitting on real political capital. So what they realize is that they're investing $55 billion a year and that they basically go to Zhangnang Hai, Tim Cook and two top deputies. That's the citadel of Chinese communist power in Beijing, Forbidden City. And they pledge that they will spend that amount for the next five years, totaling $275 billion. This is mostly training and wages, in addition to really sophisticated machinery that they put on other people's production lines. So if the 28 million workers line sounds like dramatically high or too high, Tim Cook's own estimate for how many workers they have in any given year is 3 million. And the churn in Apple's supply chain is ridiculous. And the other interesting thing to know about this is Apple does not work like other companies, where they're just hoping that component makers innovate on their own initiative, you know, come up with lighter materials, more durable materials. Apple is sending people by the plane load to engineer those materials, invent those materials, do the production processes behind the parts. And so they take dramatic control of their supply chain on a level and scale that I don't think any other company in the world matches at all.

Patrick McGee (14:06)

Essentially, Tim Cook is caught between two lovers, if you will, between Xi and Trump. Describe the relationship to the best of your kind of ability or knowledge between Cook and Xi and Cook and Trump right now.

Patrick McGee (14:23)

So when Xi Jinping comes into power in 2013, he doesn't understand what Apple's contributions to the country are. And we know this because within 36 hours of him being appointed president, CCTV sort of state sponsored CNN of China attacks Apple. And there's many reasons to think of Apple as an exploitative power in the country. For instance, their margins go from something like 1.1% I think in 2003 to above 25% by 2012. And yet from Beijing's perspective, this massive success is all on the back of China, right, in two respects. One, they know better than anybody that Apple wouldn't have another place to ship the quality and quantity of products that they're shipping at that point. And two, it's the Chinese market, the Chinese buyers that are accounting for a dramatic, Tim Cook's word is mind boggling share of Apple products. Right? And there's this dramatic narrative in the book where Apple really does not think China is going to be a market. In 2008, they build their first retail store there purely because of the Beijing Olympics. And then without really even trying, in a certain sense, the iPhone becomes this spectacular success story in 2010. And it continues forward to such a degree that hardliners in Beijing are upset with Apple because it sort of represents the materialism, the individualism of Western culture. And that's not really something they're in favor of. So the relationship with Xi and Cook begins on a really rocky patch because Apple represents so many things that Xi Jinping doesn't like. And Apple begins this effort, two or three year effort really, to appoint or hire these group of people that call themselves the Gang of Eight. I understand you taught with one of them, is that right, by the way? Doug Guthrie.

Patrick McGee (16:06)

Yeah, yeah, I know Doug well. Good friend, yeah.

Patrick McGee (16:09)

So I would love to hear about that. So Doug Guthrie is the guy that's leaving China University, sorry, Apple University within China. And so they come up with this, this narrative that sort of flips the narrative on its head of saying we're not exploiting China, we are actually contributing in a great way by having our engineers work in hundreds of factories hand in glove, training them, auditing them, supervising them, and installing machinery on a totally epic scale. And this is where some of the Numbers are just astounding. That really changes the relationship. So Tim Cook basically goes with this message to Chongnang High, the citadel of communist power, and, and tells the Chinese leadership about this. And aside from content, let's say, of having to ban VPNs, having to ban WhatsApp in the new York Times, Apple really hasn't had any problems in China since then. We can maybe unpack that a little bit. But that was the winning formula to get over Xi Jinping. This is my language, not Apple's, of course, But Apple realizes it's the biggest supporter of made in China 2025, which is Beijing's directive in 2015 for the company to become self sufficient in robotics, in automation, in high end electronics. And so App ends up being this massive supporter of that and gives rise to, you know, Huawei, Oppo, Xiaomi, et cetera. Because when Apple is training hundreds of their suppliers, they basically say go forth and multiply to them so that they're not so dependent on Apple. And so they basically give birth to the Chinese smartphone market. And those numbers too are pretty astounding. So that, in a nutshell, I would say, is the Cook Xi relationship, the Cook Trump relationship is really quite different because when Tim Cook is telling the Beijing government how much they're investing, it's real substance. I mean, there's ways that they're calculating the figures and one could question them on accounting basis or whatever, but the result, the reality is that, you know, Apple is doing 90% of their production in China. So when they say we're investing this much, we're training this number of people, these are accurate figures. Right? When Apple is conducting the same lobbying effort with Washington, the numbers are pretty fanciful. So I mean, if your listeners don't really agree with me or think it's, it's a number that's too high. When I say they're investing $55 billion a year, just remember that in February, Apple said that it's going to put in $500 billion investment and spend into America over the next four years. So just, just sort of suspend your disbelief here for a second. I'm saying they're, they're investing this crazy amount in a country where there's 90% of their production and Apple's own figure that they're trying to convince everybody of is even higher in a country where 0% of their production takes place. So something is amiss here. And it's not me being bad with the figures, it's that Apple is making a lo effort that's based on sleight of hand and sort of magician trick, misleading information. So what I'm saying there is that Cook's relationship with the Trump administration is based on a lack of substance and a sort of political window dressing because they know what a threat Donald Trump is. I mean, Xi Jinping is not as big a threat as Donald Trump is. And you could just sort of see that in a commonsensical way, which is that broadly speaking, Xi Jinping and Tim Cook have their interests aligned. If they can both have Apple producing in China, that works wonders for both of them. That does not work wonders for Donald Trump. He does not want production to be in China. In China. And so the push to make iPhones in the US which is fanciful for all reasons we can get into, is really what books Tim Cook in a buy in tier.

Patrick McGee (19:37)

I think fanciful is the right word. The estimates I've seen is that a US produced iPhone would be $3,500. Is that accurate?

Patrick McGee (19:44)

I would just push back on that number because that itself is a fanciful figure. I mean, the problem isn't that they'd be more expensive. The problem is that they couldn't be buil. We have no idea how much an iPhone would cost if it were built in America. It's more that we just completely lack the capability. The line I like to use is an iPhone has 1000 components in it being produced. And like the logistics, the production, the just in time manufacturing for those phones, up to a million a day. So that means a billion parts a day. And good luck finding an American corporation that can do one of those components at a million a day, let alone hundreds of factories that can do all of it. We're just 15, 20 years behind. And that even is assuming that we would have the sort of nietzschean will to power that China has for its manufacturing sector. I mean, we can go into it and I keep getting asked the question, but it's sort of a useless exercise. I mean, there are at least 15 to 20 reasons why iPhone manufacturing en masse is never going to happen in America. It really just is a fantasy.

Patrick McGee (20:41)

So in sum, at any price, it's just not feasible.

Patrick McGee (20:46)

The thing that people don't get is just the volumes that are involved. So Tim Cook is under such political pressure that I could see some final assembly taking place in America just because it makes such a great press release. But it's never going to be in consequential numbers. It's certainly not going to be cost competitive. And frankly, if you think of who would have to work in these factories. It's totally antithetical to the MAGA crowd. In other words, it's the people fleeing Honduras that would be ripe for these factories. I mean those are the sort of people that could work a 12 hour day and have this sort of desperation because you're trying to find the equivalent equivalent of what does America have in terms of labor support that would be equivalent to people working 14 hour days in the hot fields in western China that go find a life in Shenzhen instead. It's not going to be American born people, it's going to be the people that are trying to get over the Trumpian wall if you will, to get into the country. So there's a contradiction in terms. Even if you really wanted to fulfill.

Patrick McGee (21:35)

The scenario, the message I got from your book was that was eye opening was not only the sheer scale of Apple training 25 million people and making what you described as Marshall Plan like investments in China, but just how good Apple's presence has been in China that it has planted acorns in terms of human capital and manufacturing prowess that has just infected and given rise to this manufacturing juggernaut or what I'll call advanced manufacturing. I think in the US we have a tendency to think of Apple as a bunch of low end manufacturing. Excuse me, China is the host to a bunch of low end manufacturing. The reality is their manufacturing on many levels, much more sophisticated than ours is all a long winded way of saying or prelude speaking purely as what's best for or would have been best for America, the rail politic. If you could go back in time, would American interests have been best served if Apple. And no one can predict the future, but if Apple, if we could go back 30 years and Apple could make a similar investment and say Mexico, which doesn't have the low cost back then of a China but has much lower costs but isn't seen as an adversary or competitor. Would we do it over? Would we do it differently?

Patrick McGee (22:53)

So let me give you the answer I've gotten from a very senior person who used to work at Apple and then I'll sort of give you my answer. So his answer, and I'm sorry I can't name this person, but he's someone that you would know. He said what else would you have us do? Like if we knew in 2008 that Xi Jinping was the next leader and was going to take China in an authoritarian direction, okay, that's harsh but there's still no place to build at the quality scale et CETERA that we needed to build at. So short of just saying don't make the iPhone in such numbers, this person just said there was really no alternative. I like the Mexico question. So if we go back 30 years, I mean, one thing that people don't quite understand about NAFTA is it's quite successful between 1993, its signing and 2001. And in America we have this parochial view and we talk about the China shock, right? And what's the China shock? It's the impact of China entering the WTO on American jobs and so forth. But the China shock is even bigger in Mexico, right? Because Mexico is more of a competitor in terms of, you know, actually being a mass producer of things than China was or sorry, than America was. So, you know, Mexico gets hit harder by this than than America. But when you are building something in Mexico, right. Politically this is a taboo thing, right? Politically, if you can shun a factory or shame a factory rather because they're going from Ohio to Mexico, it's a politically winning strategy. But if that factory goes to China instead of Mexico, it's actually far worse because the intermediary trade, think of something like the automotive industry cross borders between Mexico and us is quite substantial. So when you have a product quote unquote made in Mexico, it's often 20 to 25% made with American can support in terms of the intermediate goods, right. The content that's actually in that product. Once it's in China, there's basically no intermediary trade. Right. It goes down from like 20 to 25% to 5%. So I'm really in supporter of what we used to call nafta because when jobs go to Mexico, you're actually leveraging the sort of low wage competitiveness of an allied nation that's on our border. And then you would do so in such a way that there's still trade with something like the aerospace sector centered around San Diego for higher value add. When it goes to China, it all goes. So I think there's a substantial difference there. And therefore I'm a big advocate of friend shoring or near shoring. But reshoring isn't going to happen for a company the size of Apple.

Patrick McGee (25:17)

We'll be right back after a quick break. Support for Prof. G comes from Built Rewards. Attention renters. If you haven't heard of Built Rewards, you're about to thank me. You already earn reward points on groceries, travel and nearly everything else else. But there's a crucial expense that you should be earning points on too. Your rent with Built Rewards. Now you can Paying Rent with Built Rewards earns you flexible transferable points and unlocks exclusive benefits along the way. First the points. Just by paying rent, you unlock flexible points that can be transferred to your favorite hotels and airlines, a future rent payment, your next Lyft ride, and more. No matter where you live or who your landlord is, your rent now works for you. But that's not not all. With Bilt, you gain access to exclusive neighborhood benefits in your city. Bilt's neighborhood benefits are things like extra points on dining out, complimentary post workout shakes, and unique experiences only available to build members. And there's no cost to join. Start Paying rent through BILT and take advantage of your neighborhood benefits by going to joinbuilt.com propg that's J-O-I-N-B-I-L-T.com propg make sure to use our URL else they know we sent you. Join bilt.com profg to sign up for BILT today.

Scott Galloway (26:36)

Support for the show comes from Charles Schwab at Schwab. How you invest is your choice, not theirs. That's why when it comes to managing your wealth, Schwab gives you more choices. You can invest and trade on your own, plus get advice and more comprehensive wealth solutions to help meet your unique needs. With award winning service, low costs and transparent advice, you can manage your wealth your way at Schwab. Visit schwab.com to learn more.

Patrick McGee (27:08)

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Patrick McGee (27:58)

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Patrick McGee (28:48)

Let me back up a little bit. What everyone knows about Apple is industrial design. That's Jony I've creating the look, feel and substance of a product. But Apple operates in a pyramid structure and as the pyramid goes wider the more and more employees you have. I mean it's been described as an upside down funnel rather than a pyramid. So at the very top, two dozen people maximum is Jony I've's team coming up with a translucent imac, coming up with multi touch glass for the phone, that sort of thing. They sort of throw it over the fence to product design or pd. These are geniuses of a different sort who have to sort of respond to Jony I've's godlike demands and make sure that all the components and everything fit into the very thing that he has dictated. Right. And so that's its own problem. What we don't know is sort of the next level of the pyramid. This is manufacturing design or md. These are the people who then make sure that that prototype can actually be built, built at scale. And so in order to do that they go to Asia, primarily China today, but historically Asia to work hand in glove with dozens and later hundreds of factories to actually build the capabilities that are there. So in a sense a key contention of my book, and it's really demonstrated rather than really argued, is that China doesn't have the tech competence in the early 2000s to respond to what Jony I've studio is coming out with. That's not a knock against China. Nobody has had that. Nobody had the tech competence to respond to what they were doing. And so Apple had to go build it there. And because volumes of the ipod go from a few million to dozens of millions and then you get the iPhone where you go from 5 million in 2007 to a quarter billion by 2015, the numbers are just staggering. And Apple is maniacally obsessed about quality in a way that really no other company is. So you've got that combination of insane world beating quantity with insane world beating Quality. And in order to actually execute the plans coming out of Steve Jobs and Johnny Ives mind, you need someone like Tim Cook to operationally scale it. Right? So my line about this is like, Jony, I've and Steve Jobs are what make Apple products unique. Tim Cook is what makes Apple products ubiquitous. And this manufacturing design element of the pyramid is a part of operations which is in the product cycle, the fourth element of the pyramid. So then someone like Tim Cook and his team take what MD has created in Asia and they get other factories involved to build resiliency and to push down costs and drive competition between suppliers. So they have this huge, huge impact. Okay, now here's where this goes. Once you are teaching a supplier how to do advanced electronics in any number of degrees, they're not necessarily going to stay with building smartphones. I mean, first of all, that is what they do in the first stage. And so you see this huge localized smartphone ecosystem build up not just for Western companies, but for Chinese companies. So Huawei, Xiaomi, Oppo vivo now have 55% global market share. I mean, really, the only companies in the world doing smartphones are Samsung, Samsung from Korea, iPhone from America, and a bunch of Chinese companies. Pixel and everyone else is so small that they get categorized as other. But once you have those skills, what else do you do with them? Well, you do the most sort of obvious adjacent tasks in electronics. The same skill sets will help build you drones. The same skill sets will help you build military weaponry. I mean, chips are the foundation of the modern world. And Apple helps these companies with chips. And to the degree that Congress has had to basically intervene Marco Rubio a few years ago, threatening them with fire and fury essentially if they continued working with a company called ytmc which was making memory. And Apple wanted those chips to be in its own smartphones for China. So that's the. I guess just to simplify, once you understand how intolerant of defects Apple culture is and that they are not working with suppliers who are already competent and they are not going after price, they are going after quality. And they are sending people by the literal plane load to four different industrial clusters in China to do all of this, you'll begin to sort of understand how they have such an impact on the country and then they're not really in control of what the country does does with those skill sets afterwards. And so of course, China has funneled it into other things that they're interested in, which is electric vehicles, drones and military weaponry.

Patrick McGee (32:51)

I'll put forward a thesis and you respond to it. I think these Apple tariffs or threats of tariffs on Apple are nonsense. And the idea of the relationship between Apple and China somehow devolving and digressing to a point of no return, I don't think either of those are realistic. My sense is that Apple in many ways is bigger than China or the US right now, or bigger than Trump and Xi. And that is, I don't know if she can afford to lose Apple. And I don't think Trump can challenge the cult of iOS. I think it's bigger than Maga. Your thoughts?

Patrick McGee (33:28)

Well, I think you're getting really towards my thesis, which is that Apple is stuck here. I mean there is no obvious move where they're going to move to India or move to the US particularly because neither of the superpowers wants them to do that. That right. Xi Jinping can easily put up blockers for Chinese visas that would be required for people to go to India to sort of replicate this skill set in India. And he also put up blockers for Chinese made machinery to go to the Indian production lines. Meanwhile, Trump has just made it clear in sort of less sophisticated sense of just, I don't want you doing that. So, you know, the thesis of the book is really that Apple is stuck, it's stuck in a quagmire of its own making to some degree. Degree. I wouldn't quite agree that Apple is sort of bigger than either of those companies. I think if it's a bargaining chip between them, it's Beijing's bargaining chip rather than Washington's, which maybe takes a moment to digest, but that's an astonishing state of affairs. It's not really an astonishing statement. It's a banal statement, but it's an astonishing state of affairs that America's greatest company is really more in the hands of our greatest adversary than anyone else. But I really don't know what the counter argument would be. I mean, 90% of the production is in China.

Patrick McGee (34:34)

But it strikes me that if we just start to game theory this out. The pivot point here, the fulcrum or the agent of chaos here is Trump. Apple's humming along. They have kind of a mutually beneficial ecosystem, a relationship with Xi and China. Actually something that, if I read your stuff correctly, has been enormously mutual beneficial. It's kind of the probably the most productive, effective, profitable form of capitalism in history is the one between Apple and an autocracy that's created the most profitable product in history, that each brought unique skills to IP design on the part of Apple and advanced manufacturing Capability to scale we've never seen before in any other product. I'm not even sure World War II could match some of the production capabilities that have been demonstrated by Apple in China. And that Tim Cook, let me ask you this. I'm getting into geopolitics right now, but we're talking about what is oftentimes or has been the world's most valuable company. Isn't Tim Cook's play here just to kiss his ass or pretend to kiss Trump's ass and wait him out and everything stays the same?

Patrick McGee (35:45)

So certainly, I mean, that was Cook's strategy in Trump 1.0. Right. Trump sort of famously said that Cook had promised three big, beautiful plants in America. It's been, what, eight years? Zero such plants have emerged. He just ran out the clock on Trump's presidency. And I think that's what they're trying to do again, because, you know, if you're Cupertino, I think you realize to some extent that that Trump is a, is a press release sort of president. Right. He likes the optics of things. He doesn't necessarily need to be patient and wait for the reality of it. So in February, you know, getting ahead of the tariffs, Tim Cook and Apple put out a statement saying they were investing $500 billion in America. The. This is basically nonsense. I don't know how exactly it is nonsense, but my running theory is that what they are counting as $500 billion includes buybacks and dividends. So if you look at how big Apple is, they literally spend more than $100 billion of their own money each year on share buybacks. So you multiply that by 4, you've already accounted for 80% of the investment. Now maybe they have to do some math to figure out what, you know, 65, 70% of shareholders are in America, so it doesn't count for that whole figure. Figure. But there's way less than meets the eye than the idea of $500 billion being reinvested in America to reshore jobs here. If that were a figure, that was as clear as the White House has taken it to be. Right. Howard Lutnick, Scott Besant, the White House press secretary and Trump have all said that this is quite a coin of change. What's the change of coin? I'm trying to think of what the press secretary said. She's a chunk of change. Chunk of change. She said it's quite a chunk of change, right. For Apple to be investing in America. So in other words, they have very much taken it to be a half trillion dollar investment. In the country for reshoring jobs. The press release is very careful. It never accurately says that. But unless you're reading it with an air of there's something off here, that is the message you would come away thinking. And it's not the first such press release. A few years before that, Apple had said they would spend $430 billion on the same thing. So I'm just mentioning that because it's not a factor of, oh, we'll just give them some time. It's only been a few months. If this number was credible, you'd see Apple factories and entire industrial clusters being brought up everywhere, probably needing so many jobs that people would be like, you know, flooding into the country. I mean, this is, none of this is happening. And so if my buybacks theory is wrong, fine, tell me what the other theory is, because the math doesn't add up.

Patrick McGee (38:06)

My sense is that if you look at Apple stock, all right, since the election, it's okay inauguration, so it's off about 15%, I think it was about, or 20% percent. So it has taken a hit since Trump became elected. And some of that is the broader market, but some of it is also the existential risk to Apple. But when you, if you really think about what would be, what would be involved, it sounds to me like almost near impossible for Apple to divest from China at this point. And that if they were forced to do that, or if his largest market, which I think is like half the revenue, Apple's, half the revenue, is usually aggressive. I just don't think the market is taking Trump that seriously right now. For me, I look at how the market's reacting and the market is saying, yeah, this is a pain in the ass. It's a distraction. It'll cost them some share and some valuable management bandwidth. But we don't believe this is really an existential threat. That the economics here are so lucrative and that Trump has such a lack of focus and will given, oh, it's 150, 45% on China. Just kidding. It's 30%. It's that the market seems to be saying, yeah, this is a nuisance and annoyance, but it's not really an existential threat to Apple. Your thoughts?

Patrick McGee (39:24)

I agree. But I quote someone saying the relationship Apple has with China could blow up any day. Well, good luck sort of pricing that into your models because we don't know when it's going to blow up. And Trump's such an erratic character that, I mean, honestly, how do you put him into an Excel sheet of what the value should be in a year. Um, I mean, the, the scariest thing in a sense of, of Trump's tweet the other day, or Truth Social, when He talked about 25% tariffs on a specific product, you know, the iPhone, I don't think that's ever been done in history before, was at least 25%. In other words, if Tim Cook isn't playing ball, then the figure could go up quite a bit. And obviously, you know, Trump has to some extent added credibility to that claim by, by playing with tariffs so much. To some extent, of course, he's also destroyed that claim by offering 90 day reprieves and such. And, and I mean, Tim Cook is in such a bind here because you've got to remember a couple things. Like one, Trump has said that this will take place, I think, at the end of June. I mean, supply chains do not move at the speed of weeks. I mean, this is a ludicrous demand, obviously. I mean, I assume the Trump administration doesn't actually expect the factories to be built by then, so much as there's a concept of a plan to use Trump's language by then. But the other thing is that Apple doesn't manufacture anything themselves. So it's not only that you have to convince Tim Cook, it's that Tim Cook would have to convince Foxconn and probably hundreds of other suppliers if you genuinely wanted to build things here. And of course, none of them see the certainty of, you know, the Trump presidency lasting, of the tariffs on China lasting, or any number of things. And they would know that we're not going to be able to fill our, our factories if they're placed in Pittsburgh, because that's nothing like Zhengzhou or Shenzhen or Suzhou. So there's just so many complicated factors here that basically favor the status quo, I suppose you could say. And I guess the timing of my book, which obviously not through anything I did, is, is sort of insane, is that I'm pointing out that not only are the business ties between Apple and China unbreakable, but the political ties are totally untenable. I mean, your average American just should not be happy with the idea that we are still sending America's best engineers to hundreds of factories across the country to train them up on a host of electronics, which, as we've already spoke about, can go well beyond the China's dominance in EVs and iPhones and a number of other things. So, so what are they supposed to do here? That's at all a good move. And if you'd like an analogy that I'm sort of stealing from Henry Kissinger. He points out that Westerners play chess. And when you play chess, you do something like Trump did about Huawei. He tried to go after Huawei, sort of take out China's biggest company, deprive them of 5G access, deprive them of Google services. And that company nearly collapsed, but unfortunately came back with a vengeance for the current administration. But China plays a game called called Go. And in go, there is no final move. You instead encircle your enemy to such a degree that they're basically unable to make any meaningful moves. And that is where I see Tim Cook and Apple right now. They do not have any meaningful moves other than digest a 25% tariff and hope that Trump doesn't raise it even further.

Patrick McGee (42:27)

You brought us something I hadn't considered and that is China might get or is getting in the way of a transition of any production to any India. And my understanding is China sees themselves as a very strong ally of Pakistan, India less so. I would imagine that China and India see themselves as the same type of competitive threat as the US now perceives China. I hadn't considered that. So China is purposely getting in the way of the transition of manufacturing capability to India. And how real or illusory or jazz hands is Apple's statement that they're trying to divest out of China into India India.

Patrick McGee (43:03)

So a couple things to unpack there. So the reporting that China was putting up all these blockers came out of publications like Rest of World and Bloomberg in January. So that's, that's certainly happening. The line that I would use is that China wants technology transfer to be a one way gate. The information comes in, it does not leave insofar as it leaves at all. They want it to be Chinese companies like Lux, Share, Gorech, byd, those are the companies that are doing some work in India. But even. And they are not really finding it all that easy to do. So there's that. And then when we're talking about iPhone assembly going to India, people are often conflating and Apple in a sense I think knows that they're going to conflate this and therefore it helps their pr. They're conflating assembly with genuine production. So if there are a thousand steps in building an iPhone and the final one is now happening in India, India, that is enough legally to say made in India on the box. All you need is a substantive change to the product for that, for that to be the case. But the phone is not any less dependent on the China centric supply chain than any other iPhone you've ever seen or purchased. So this is really just about tariff reduction. And Apple has been doing iPhone assembly in India since 2017. That was always about tariff reduction. It was just about Narendra Modi's tariff tariffs on products coming to China. And now it's about Donald Trump's tariffs. But if you're looking for real substantive moves that demonstrate Apple understands there's a geopolitical threat in Xi Jinping and they've de risked honestly there is nothing. There's tariff reduction and there's moving some assembly to Vietnam because it's cheaper and they and they face some labor issues a decade ago. But in terms of have they really de risked because they seem to a threat? I don't see any meaningful moves anywhere.

Patrick McGee (44:56)

We'll be right back. Support for PRPG comes from HubSpot. HubSpot is taking on the fundamental myth in business software that you need dozens of different tools to succeed. You don't. You only need one that actually works. With HubSpot's powerful AI solution, Breeze, built right into their customer customer platform, you have everything you need all in one place. Breeze co Pilot acts like a digital wingman that keeps you two steps ahead while Breeze agents take entire work streams off your plate. That's not AI vaporware, that's leverage. We're talking about real roi, cutting sales cycles in half, resolving service tickets fasters and working less hours every week to make it all happen, go to HubSpot.comai to get started today.

Patrick McGee (45:44)

Foreign.

Patrick McGee (45:50)

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Patrick McGee (48:19)

Yes. Short answer. So when Tesla wants to expand manufacturing to Shanghai in particular, they propose, this is in the book, by the way, we'll build a factory in 24 months. And the mayor of Shanghai says essentially make it 12. We'll do whatever we can to accelerate this shift. This is all happening within 24 months of Tim Cook explaining to top leaders in China just how the Apple model works and why it is superior to the joint venture model. So, so Shanghai officials basically want Tesla to be the Apple of the electric vehicle world. Sometimes when people push back about this, they'll say that doesn't make sense. You didn't need Tesla for the EV market in China. EVs go back to 2001 in China. That's true. They do not successfully. By 2012, 2013, there are something like 30,000 EV buses in Shenzhen alone. So one city has more EV buses than the rest of really the world. Certainly there's not anything like that in North America or Europe at the time time. But even by 2019, the share of EVs for the China market is less than 5%. So EVs might have a long history in China, they don't have a successful history. What really changes the game is that Tesla adopts the Apple model. I speak to someone that runs Capex for the Shanghai Gigafactory in the book who specifically says he hired Apple people to execute the same playbook. And they go to a whole bunch of factories to improve and localize the supply chain. BYD is one of those suppliers. Catl, battery giant, is one of those suppliers. And so they train them how to do everything that's necessary to build a Tesla. And then those companies use the upskilling that they've received to improve the rest of the Chinese market. So in China, this is actually called the catfish effect. It's sort of misleading, but it's interesting enough that I'll quickly go through it for you. So the idea, it's sort of based on a myth, is that a Norwegian fisherman realized that catfish. No. Am I getting this right? Have you read the book? Now I'm wondering if I'm getting it wrong. Catfish and no sardines. Okay, so sardines, if they're kept alive when you catch them and bring them back to shore, are tastier and therefore more expensive if they're kept alive. The problem is they just sit in a tank and die as you take them back. So the catfish effect is throwing a catfish into the tank, and then they sort of Darwinian style, struggle for their own survival, keep themselves alive, and therefore they're a tastier bacteria. So the catfish effect in China is, why don't we throw Tesla into the mix and through a sort of inspiration of doing a better job, they will improve the whole ecosystem. Great analogy. I think it's somewhat misleading because it's missing the fact that this isn't just inspiration, this isn't just people think EVs writ large are cool because Tesla's cool. They're missing the Apple playbook, which is that Tesla is literally upskilling all of the suppliers and then, frankly, for its own benefit, but then it benefits the entire ecosystem. So at what point do EVs really take off? It's within 24 months of Tesla setting up the Shanghai gigafactory to such a degree that even before Tariffman became president, Biden put 100% tariffs on Chinese EVs. So in other words, the influence of Apple and Tesla on the EV sector, I think, is deserving of academic scrutiny and so forth, and I would love for someone to be able to pinpoint it more. But I think it's extraordinary.

Patrick McGee (51:30)

I mean it all comes down to this tension between short term capitalism or believing in free trade and thinking that you want China to succeed and that if they can make products more inexpensively and we can focus on the ip, the average assembly worker, I think at Foxconn makes I don't know, five or six grand a year or ten grand and the average person at Apple makes 200 grand a year. That this is a mutually beneficial ecosystem with comparative advantage or and I'm curious if you were advising US policy or we are trading off long term strategic advantage by upskilling an adversary and we should bite the bullet and have higher costs and maintain that IP and that manufacturing domain expertise domestically or at least amongst, as you said, French shoring. What would you advise? Because I can argue both, and I mean this sincerely, I'm asking this question to learn, not because I have a viewpoint here. Here I see really solid arguments on both sides.

Patrick McGee (52:30)

So if you look back at the last 20 years, it really has been the golden age where a company like Apple can work on the design, you know, the software and outsource all of their hardware manufacturing to a company, sorry, a country, and many companies ready and willing and able to do it. The problem is the Chinese, and obviously, I mean you can't begrudge them for this, have no desire to stay at the low end value of everything. Right? So if people are familiar with the smiley curve of product development, this is where like the two ends of the smile are, you know, product conception and design and then you dip down into all the low value manufacturing stuff and then it comes back up for, you know, retail and branding and so forth. Well, the Chinese don't want to just stay at those levels and so they're not. Right. So that's why you have companies like Huawei that now do brilliant industrial design on par with and perhaps better than what you're getting out of Apple. And we can come back to that if you, we need to. And so if we are just doing the design and the branding, but all of our manufacturing is dependent on obliterant country who would rather be hosting the whole supply chain, the whole smile, if you will, it puts Apple in a really precarious position because, you know, if, if new roadblocks come up for Apple production or you know, things we've seen like Chinese officials aren't supposed to use the iPhone, like Apple or Apple is just an, such a, a, a place where at any given point, if the Chinese leadership really wants their own companies to be dominant, not just in China, but Globally, there's not a hell of a lot stopping them. And Apple really does have no plan B. And if you think of India as plan B, but understand that actually it's a bunch of sub assembled phones from China just being put for, put in for final assembly, that's not really a plan B at all. Now maybe that's the first step and in five, 10 years they have a plan B. Except the problem of course is that Beijing knows this and so Beijing is going to make it difficult for them to do it. So they're in a really difficult spot. I think I had a second answer to that which is that on the one hand you've got the 20 year look back and on the other hand, oh yeah, this is where I get back to the integrationist world. I mean I don't have an issue at all with Apple or any number of multinationals working with India, with Taiwan, with South Korea, with Mexico, I mean that's fantastic. I think it's a total fantasy that we're going to sort of vertically integrate all this stuff just in America. America. But America is a nation that has many allies and free trade is a great thing. The trouble is you're doing free trade with a company that sort of uses and abuses free trade, you know, exploits their own workers and treats these individuals as second class citizens. And Apple is sort of doing this for the benefit of its own company. But yeah, at the, at the absolute long term loss of all these skills. I mean I quote someone in the book Michael Hillman saying Apple has done a tremendous job of maintaining the experiential know how. I mean they know how to build this stuff, they've got proprietary processes for it. The trouble is the only place to actually execute the plans are in China. So I don't think it's a big deal if the plans are sort of like resiliently based in India and Taiwan, sort of allied nations where we can use Apple's presence as a sort of bargaining chip and hopefully get Narendra Modi to stop playing footsie with, with Putin, things like that. But when everything's in China, I mean not only is it a belligerent nation, but it's so large that it doesn't participate participate in Pax Americana, it seeks to overthrow it.

Patrick McGee (55:40)

By virtue of this book, I would argue have some domain expertise into US industry, Chinese industry companies that leverage both to their advantage, generally speaking. And I don't want you to make a stock prediction here, but what do you coming out of this book, do you feel more bullish or bearish on the US or the Chinese, Chinese stock market or business more generally?

Patrick McGee (56:06)

Oh, it's an easy question, except that.

Patrick McGee (56:08)

You'Re throwing on Stock Market 20 years henceforth. Are you bearish or bullish on China? And then the same question on US industry.

Patrick McGee (56:17)

So I'm super bullish on Chinese industry. I'm super bullish on their market share. But they practice a form of capitalism that doesn't prioritize profits, they prioritize control. Right. So BYD is actually, actually, you know, collapsing its prices right now, even though they are at a point where they probably could be raising them. So what does that mean for BYD stock price, you know, long term? I don't know. It fell on, on the news of them sinking prices the other day, so. Right. So what I'm saying is I'm bullish on the Chinese industrial sector taking more and more share. I'm bullish on Chinese taking share from iPhone within Apple. What? I'm from Apple. However, I don't know what that means for the stock price of Xiaomi because it's different and it's not their goal. And in fact, I would say to sort of Western listeners, stop looking at industries, looking at the share of American profit and saying, look at how good we're doing. You need to be looking at things like market share, because that's what the Chinese are trying to control. They're not interested in profit in the way that we are. They have a drive for indigenous innovation and control.

Patrick McGee (57:19)

Control.

Patrick McGee (57:20)

And by offering cutthroat prices, they're effectively de industrializing all national competitors.

Patrick McGee (57:26)

So Apple seems to be the tip of the spear, at least from a perception standpoint, that when Trump wakes up with the wrong blood sugar, he goes after Apple and gets angry. It seemed like Biden was putting tariffs on Chinese EVs. We've talked a little bit about Tesla and some of that technology spillover or demand expertise spillover, I think you've said, is also occurring among the Chinese EV market. What are companies 3, 4 and 5, or do you know them? American companies that have really developed a sophisticated supply chain in China.

Patrick McGee (57:57)

My focus has been so much on Apple that I'm not sure. I mean, Tesla would certainly be one of them. Tesla's in a better position because they do build cars, first of all. They do stuff on their own. Right. So yes, they have a supply chain, but they also have a lot of the ip. They actually do build stuff in a way that of course Apple doesn't. But, you know, Gigafactory in Shanghai is their most important factory and accounts for 50% of Apple output. But they do have a localized supply chain in the US they do have a localized supply chain in Germany. So they're far less exposed. They're really the most. The closest to Apple. I mean, a, they adopted the strategy, but B, they're a hardware company worth a trillion dollars. You don't really have any other examples of that, right? Amazon, Google, Meta, These are companies built on things like digital advertising. In the case of Amazon, obviously just selling lots of stuff and being a logistics powerhouse. But nobody else rises to the level that Apple has. Right? So when people say, why are you picking on Apple? Well, it's the only company with $400 billion of revenue. 80% of it is hardware and 90% of that is in China. Find me another company I should be picking on of that size.

Patrick McGee (59:00)

Make some predictions here and I won't. We won't hold you to them. But what if you were to say in one to three years, we make predictions every year. And by the way, we always say we get a lot of them wrong. But if you were to try and say, okay, I'm willing to make a couple speculative bets here about what happens and this can be about Apple or any other companies. But I always think I've written a lot of books. At the end of the book, I feel like for about 10 minutes I know more about one very narrow topic than anyone in the world. And then within 11 minutes, someone else has written something else that I didn't see. You right now at the helm of the bobsled, Looking at the intersection between the US and the Chinese economies and our most important companies, companies. Any thoughts on how you see this playing out?

Patrick McGee (59:43)

So the ones that I think are clearest, where I don't have to be too crystal ball, like, is that Apple's market share in China is going to fall. It already is on track for a third year of declining share right now. The reasons are actually more to do with AI than anything else because Apple is not allowed to use ChatGPT and Siri IS, to quote Sachet and Della dumb as a rock. So they need a local partner in China. China. But the. The local partners are like the likes of Baidu and Alibaba are going to work more sort of seamlessly and hand in hand with the Chinese competitors. And the Chinese competitors, with or without AI, are really good. I mean, the best phone in the world today is a $2800 Huawei Mate XT and it's a little bit thicker than an iPhone, but it unfolds twice into a 10.2-inch tablet. Apple doesn't have a single foldable phone. Huawei got a double fold right. Trifold is called, but it unfolds twice. I mean that's, it's just a marvel of industrial engineering. And the fact that it's $2,800 has led critics to say, like, oh, no one's going to buy this thing. And they're just missing the whole point. It was only 11 years ago when Johnny I was complaining about Chinese mimicry. The Chinese have really gone from mimicry to doing a better job on both industrial design and manufacturing than Apple. That's a remarkable change in just such a short period. So Chinese market share for Apple will decline. That's prediction one, Prediction two. I mean, honestly, I think it's a status quo in terms of where Apple's building their stuff. Because the most obvious thing that Apple should be doing is doing more assembly in India and they need to be building out the quantities of the depth and breadth of the supply chain with India in itself. I think Apple's sort of pretending to do that rather than really doing it the way that people seem to think. Um, but because Trump is against it, imagine what Tim Cook's options are here. It's a, like give up because you don't want the political backlash from Washington. Well, that's sort of a terrible idea. Or contravene the President who has any number of things he can do against you, even if it's just, you know, tweeting bad stuff about you on Truth Social. So that's a bad decision too. So I think the status quo is most likely just in terms of everything will still be built in China and America will continue to be hollowed out and deindustrialized by lacking the sort of expertise here.

Patrick McGee (61:59)

Patrick McGee is an award winning journalist who covered Apple for the financial times from 2019 to 2023. Previously, Patrick was a Bond reporter at the Wall Street Journal. His book Apple in China the Capture of the World's Greatest Company is out now. Patrick really enjoyed this conversation. Also, I got such a kick out of seeing you on the Daily show and all the tension. It's a nice moment for you. You seem like this really hardworking, super smart young man. It's just nice to see people like you succeeding and getting, getting your kind of moment in the summer. What is the first of many moments?

Patrick McGee (62:31)

Oh, thank you. I mean that was absolutely my career highlight. You know, we had seven people with VIP tickets that had all this isn't.

Patrick McGee (62:37)

Your career highlight, Patrick. This isn't it right here. Close second. Close second.

Patrick McGee (62:44)

Maybe it was in person or something. Maybe that.

Patrick McGee (62:46)

That would.

Patrick McGee (62:46)

That would change things.

Patrick McGee (62:47)

But anyways, Patrick, really appreciate your time. Congrats on the book.

Patrick McGee (62:49)

Thanks, Scott. Appreciate it.

Patrick McGee (63:03)

Algebra of Happiness. You're not your kid's friend. I'm struggling a little bit with my boys, or I should say, I'm not struggling with them. I'm struggling with me as it relates to my boys. And they, that is, I had this vision of what fatherhood would be like, that I'd be their best buddy and that they would come to me for advice, kind of. I'd be like Phil and Luke on Modern Family. My boys are, fortunately a little bit more clued in than Luke, and I'm not nearly as likable as Phil, but I sort of imagine that kind of relationship where they would be fascinated by World War II history and CrossFit and want to watch movies with me because it was a chance to hang out with dad. And my kids at 14 and 17, quite frankly, are just dramatically less interested in hanging out with me than they used to be or that I would like. And quite frankly, it's hurtful, it's upsetting. And what I've realized, and I'm trying to, you know, the bottom line is I'm not their friend. I'm their dad. I'm there to be a consistent source of comfort and security and love and to model good behavior and to provide discipline and hopefully some learnings. But the fact that they're venturing out on their own and into their own things and kind of rolling their eyes a lot at what I do and stuff, say that's healthy. There's a natural instinct across kids as they start getting to the point where they're supposed to separate from the pack, where they start finding everything you do ridiculously lame. And we have definitely checked that box. But what Michelle Obama said, that you're not your kid's friend, is really true. And I'm trying to take it to heart because it is. It has been difficult for me. And what I would say to dads out there, as long as you're present, as long as you're a source of unconditional love, as long as you're a provider, it's okay if they're kind of finding their own gig and they find other things more interesting. You want that. You don't want a kid who is too dependent upon their friendship with you, the crowds out, or that you're sort of the only person they're comfortable around. I don't think that's, I absolutely don't think that's what you want. In sum, you're dad, you're not their best friend, you're their father. And I'm also hopeful that my kids, when they get a little bit older, older, will sort of come back, if you will. What I think what I'm struggling a little bit with is that I don't get as much garbage time with them because I don't take them to school or they're not as sequestered or trapped with me as they used to be. But in sum, if your kids are quote unquote, leaving you with you a little bit from a, from an emotional or a presence standpoint, that's probably a good thing. It means that they're developing into their own men, and that's okay. You're their dad, not their friend. This episode was produced by Jennifer Sanchez. Our intern is Dan Shalon. Drew Burrows is our Technical Director. Thank you for listening to the Property POD from the Vox Media Podcast Network. We will catch you on Saturday for no Mercy, no Malice as read by George Hahn. And please follow our Prophet G Markets POD wherever you get your pods for new episodes every Monday and Thursday.

Claire (66:02)

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Patrick McGee (66:34)

Thanks to Smartsheet for their support. Distraction is the enemy of innovation. It halts good ideas in their tracks, stifles creativity and erodes collaboration. That's why Smartsheet helps innovative brands minimize friction and distractions. Distractions to defy expectations, spur growth and keep work flowing. Whether your team is managing multi stakeholder projects or scaling operations, smartsheet gives you the tools to focus and drive results. Smartsheet Work with flow. Learn more@smartsheet.com Vox.

Claire (67:09)

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