Speaker 1: Hello, Odd Lots listeners.
Speaker 2: I'm Joe Wisenthal and I'm Tracy Alloway.
Speaker 3: Tracy.
Speaker 1: We're doing another live show and it's right here in
Speaker 1: New York City.
Speaker 2: Yeah, this one should be our biggest yet, and we're
Speaker 2: going to have a bunch of Odd Lots favorites and
Speaker 2: do something maybe a little different to some of our
Speaker 2: previous live podcast recordings.
Speaker 1: When the guests are revealed, the show is going to
Speaker 1: sell out right away, so you should really just go
Speaker 1: get your ticket right now. It's June twenty sixth. It's
Speaker 1: at Recket, NYC, and you can find a ticket link
Speaker 1: at Bloomberg dot com slash odd Lots or Bloomberg Events
Speaker 1: dot com slash odd Lots Live and.
Speaker 2: Why we hope to see you there.
Speaker 4: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 1: Hello and welcome to another episode of the Oudlots podcast.
Speaker 2: I'm Joe Wisenthal and I'm Tracy Alloway.
Speaker 1: Tracy. I'm gonna confess something I've kind of hinted it.
Speaker 3: It's not that big of a confession, and.
Speaker 1: I've kind of hinted it already, which is that if
Speaker 1: Trump wants to impose a bunch of terrorists on a
Speaker 1: bunch of cheap, random plastic goods from China.
Speaker 3: I'm fine with that. That's cool.
Speaker 1: Fifty one hundred percent, one hundred and forty nine percent.
Speaker 1: I'll consume less. I'll be a little bit more of
Speaker 1: a monk or something like that.
Speaker 3: I'm fine with that.
Speaker 2: Okay, But isn't the argument not necessarily the cost, although
Speaker 2: there is a cost on individual consumers. But the argument
Speaker 2: is why do we want to focus on shifting plastic
Speaker 2: production and toy manufacturing to the US. That's the criticism, right, Like,
Speaker 2: why specifically focus on cheap goods in factories?
Speaker 3: Yeah?
Speaker 1: No, you might be right, Like, I don't think there's
Speaker 1: much value in safe, you know, moving a plastic stepstule
Speaker 1: factory or a stroller factory or whatever to the US.
Speaker 3: I don't.
Speaker 1: I don't really see the point. I want there to
Speaker 1: be affordable strollers obviously, just buy and large a lot
Speaker 1: of this stuff.
Speaker 2: Yes, fine, this is not much of a confession, Okay, but.
Speaker 1: I will confess too that if the price of a
Speaker 1: new iPhone went up a lot, I would be pretty annoyed.
Speaker 1: I tend to notice these things. I tend to replace
Speaker 1: mine every two or three years or something like that.
Speaker 1: There are areas that we do import significantly from China
Speaker 1: that are not cheap child skis, cheap junk is. People
Speaker 1: like to fantasize that that's all China produces. There are
Speaker 1: areas that I would be very upset to pay a
Speaker 1: significantly higher price.
Speaker 2: Well, getting back to the goal of tariffs and protectionist
Speaker 2: trade policies, I assume, you know, putting tariffs on iPhones
Speaker 2: would be about moving some of the production closer to home,
Speaker 2: and I think there there's an open question about whether
Speaker 2: we want that as well, because for most of our lifetimes,
Speaker 2: the stories we've been hearing about iPhones in China are
Speaker 2: all about how terrible the labor conditions are and how
Speaker 2: difficult it is to actually make these things. So right,
Speaker 2: I can see, you know, some strategic argument. Obviously, semiconductors
Speaker 2: are considered a very important strategic goal nowadays, but the
Speaker 2: actual manufacturing, you know, there is that China story out there.
Speaker 1: Anyway, I think the administration is very sensitive to people
Speaker 1: like me. One of the first things, even in the
Speaker 1: midst of the heat of the trade war, and I
Speaker 1: should note we're recording this May twenty ninth, it could
Speaker 1: be that the whole trade war is illegal. There was
Speaker 1: that court ruling made last night. We really don't know
Speaker 1: where things got to end up. They're clearly sensitive to
Speaker 1: the iPhone thing, and so there were some carve outs
Speaker 1: specifically related more or less related to that. I think
Speaker 1: during the first Trump administration, Apple got some reprieve. These
Speaker 1: are sensitive areas. Yes, we want to build up the
Speaker 1: capacity to expand technological production, high tech things, high value
Speaker 1: add things, and so forth, but we don't want the
Speaker 1: sticker shock. This explains, of course, some of the sort
Speaker 1: of multiple personalities administration, if you will.
Speaker 2: Well, there's also the added complexity of building up these
Speaker 2: very very advanced supply chains, right, and if you look
Speaker 2: at Apple and what they did in China, that was
Speaker 2: built over the course of many, many years, decades even,
Speaker 2: And the idea that the US is suddenly going to
Speaker 2: flip a switch, a terriff switch and move all that
Speaker 2: production elsewhere seems a little optimistic, right.
Speaker 1: And then there might be flipping a switch, but not
Speaker 1: in the full direction. Maybe there are multiple dials on
Speaker 1: the switch. Sure, so then one possibility that you hear
Speaker 1: is okay, maybe move more to India. But I don't
Speaker 1: think Trump likes that. But maybe that would be a
Speaker 1: little bit better from the US perspective, in the sense
Speaker 1: that we're not contributing as much to Chinese economic development,
Speaker 1: and so, okay, it's not bringing jobs back, and Trump
Speaker 1: said moving to the US. From time to time you
Speaker 1: hear about maybe they could be built in Brazil or something.
Speaker 1: But all of these raised the question. There's two things.
Speaker 1: It's like, hey, is this realistic at all? If door
Speaker 1: is switch that you could pull is move to the US,
Speaker 1: move to India, that switch would have been moved. And
Speaker 1: then the other thing, too is what does it even
Speaker 1: mean to build the iPhone in India or the US,
Speaker 1: because there's final assembly, et cetera. But of course component
Speaker 1: parts within the iPhone themselves. Also, much of it is
Speaker 1: actually made in China. And you know, I'm sure there's
Speaker 1: thousands of tiny pieces of various things doing things, and
Speaker 1: there many of them are built in China. So even
Speaker 1: the idea of like we're going to move X production
Speaker 1: to X country is not a clear statement because it
Speaker 1: could just be the final packaging or whatever, and that's
Speaker 1: not really where the value add lies, which means we
Speaker 1: really have to more deeply understand how and what gets
Speaker 1: built in China and what it would mean to even
Speaker 1: move that. Well, we're even talked about when we're talking
Speaker 1: about moving these things, let's do it. Well, I'm very
Speaker 1: excited to say we do indeed have the perfect guest.
Speaker 1: We're going to be speaking with Patrick McGee. He's at
Speaker 1: the FT but he has a new book out came
Speaker 1: out May thirteenth called Apple in China Like the Capture
Speaker 1: of the World's Greatest Company, And it is a book
Speaker 1: about the history of Apple's deep relationship with the state
Speaker 1: of China, with the economy of China, the sort of
Speaker 1: co evolution of these entities. So much of the iPhone
Speaker 1: story we know is sort of inextricably connected with the
Speaker 1: rise of Chinese manufacturing. This is what Tim Cook is
Speaker 1: known for in the very beginning. So Patrick, thank you
Speaker 1: so much for coming on outlaws my pleasure.
Speaker 3: Hi Joe, Hi Tracy.
Speaker 1: What does it mean if Apple says, oh, we're moving
Speaker 1: more production to India or we want to what does
Speaker 1: that term mean to you?
Speaker 3: Ah? Well, cleverly, they don't say that. They say they're
Speaker 3: moving assembly because they they know, but the reader probably doesn't,
Speaker 3: the lister probably doesn't. There's a massive distinction between assembly
Speaker 3: and production. So I think Apple is sort of orchestrating
Speaker 3: this effort. Right, There's no press release that says anything
Speaker 3: from Apple, so you can't quote Apple. But insofar as
Speaker 3: the word got out, you know, my money's on Koupatino
Speaker 3: being behind this. So yeah, I mean put it this way,
Speaker 3: if there are a thousand steps in making an iPhone
Speaker 3: and the final one is now being done in India,
Speaker 3: that's enough to have a quote unquote substantive change to
Speaker 3: the product, and therefore the box can say made in India.
Speaker 3: Nothing about that phone is any less dependent on the
Speaker 3: China centric supply chain than any other phone you have
Speaker 3: ever purchased.
Speaker 2: Okay, so on this note, maybe a good place to
Speaker 2: start is walk us through your typical iPhone, the one
Speaker 2: that Joe is buying every two or three years. What's
Speaker 2: its I guess birth process, Like, where do iPhones come from?
Speaker 2: And what is the actual supply chain that creates them.
Speaker 3: That's such a funny question. I'll tell you one funny answer,
Speaker 3: which is that I asked, you know, a very senior
Speaker 3: person at Apple how an iPhone is made, and he said,
Speaker 3: have you seen the I Love Lucy clip of them
Speaker 3: making chocolate have you ever seen that? Yeah, of course
Speaker 3: I actually hadn't. So Okay, so picture of its conveyor
Speaker 3: belt and the chocolate is coming so fast that eventually
Speaker 3: they just start heating them rather than packaging them up. Okay,
Speaker 3: So there's a method to the madness here. I mean,
Speaker 3: Apple is able to take Adam Smith's idea the division
Speaker 3: of labor and put it to the hilarious degree that
Speaker 3: out does Nathan Field with the comedian trying to do
Speaker 3: this with house cleaning two decades after the fact. So
Speaker 3: it is often the fact that on a conveor belt
Speaker 3: you have nine to eleven seconds to perform your task,
Speaker 3: you know, putting a module in the left hand corner
Speaker 3: or whatever, before the next iPhone comes over. So that's
Speaker 3: the final assembly process, and that's really what is taking
Speaker 3: place now in India ramping that up to avoid tariffs.
Speaker 3: But the actual production we're talking one thousand components and
Speaker 3: Apple works with the tightest engineering tolerances possible, only high
Speaker 3: quality materials. That you put this in car terms, they
Speaker 3: are making ten million porsches a year rather than ten
Speaker 3: million volkswagons, right, and the numbers are just staggering. Right.
Speaker 3: So if you're doing one thousand components a day, and
Speaker 3: you're shipping one million iPhones a day. That means at
Speaker 3: peak season, you were doing the manufacturing, the logistics, the
Speaker 3: just in time production of one billion parts per day.
Speaker 3: So find me an American factory that can do one
Speaker 3: of those parts, because China has factories that can do
Speaker 3: it for all one thousand. That's why nothing is moving
Speaker 3: here anytime soon. It's the combination of Apple's imperfection for
Speaker 3: defects quality and Apple's gar gantu and titanic like quantity.
Speaker 1: There is producttion of Apple products and I believe iPhones
Speaker 1: in India or sorry, assembly of Apple products in India.
Speaker 1: What do we know about the efficiency or the relative
Speaker 1: efficiency because obviously the company has been thinking about these
Speaker 1: risks for years and years and years, and I'm sure
Speaker 1: would love to not be this tightly linked to one country,
Speaker 1: which we know, for all the reasons we don't need
Speaker 1: to get into is risky. What do we know about
Speaker 1: the efficiency of its assembly in India?
Speaker 3: Let me just give you sort of objective numbers and
Speaker 3: then we'll go from there. So the first iPhones made
Speaker 3: in India were actually in twenty seventeen, OK, and by
Speaker 3: twenty twenty three, India was assembling about twenty five million iPhones.
Speaker 3: Go back a decade. The first iPhones were made in
Speaker 3: China in two thousand and seven, and by two thousand
Speaker 3: and fifteen you had two hundred and thirty million iPhones
Speaker 3: being built. So roughly speaking, the quote unquote diversification in
Speaker 3: India is happening at one tenth the pace of the
Speaker 3: original creation and scale of the iPhone, and even that
Speaker 3: vastly over the speed of development in India because, of course,
Speaker 3: in the early years of the iPhone, I mean you're
Speaker 3: literally inventing things like multi touch glass, right, you were
Speaker 3: inventing and redesigning the iPhone every single year, whereas India
Speaker 3: is basically just having to do the final steps in
Speaker 3: the process, and it's still not happening very quickly. Now, really,
Speaker 3: what changes is that in Shanghai twenty twenty two, the
Speaker 3: city enters lockdown, and that's a city of more than
Speaker 3: twenty five million people. It really is the first time
Speaker 3: in Apple's two decade history in China where did the
Speaker 3: government provincial officials in this case, really had made a
Speaker 3: decision diametrically opposed to Apple's interests and that's when Plan
Speaker 3: b Let's really ramp up in India went into effect.
Speaker 3: But it's been almost three years since then, and even
Speaker 3: so you don't have a whole lot going on there.
Speaker 3: And yeah, I've talked to the engineers. They're called manufacturing
Speaker 3: design engineers. These are the people who sort of do
Speaker 3: the handholding the engineering one zho one in different countries,
Speaker 3: and they've been ramping up in India, and what they
Speaker 3: find is that the ecosystem isn't there, the industrial clusters
Speaker 3: aren't there. You don't have eight lane highways to and
Speaker 3: from the factories. You often sometimes don't even have stable
Speaker 3: Wi Fi in the taxi the cab on the way
Speaker 3: to the factory. Engineers are sometimes staying two hours away,
Speaker 3: which means four hours of their day is just going
Speaker 3: to and from the factory. And if they don't have
Speaker 3: a stable cellular connection along the way, it can be
Speaker 3: a little bit maddening. So many things you don't have.
Speaker 3: And the other thing you just don't have is the
Speaker 3: sort of Nietzschean will to power on the part of
Speaker 3: New Delhi to make manufacturing their thing. And you don't
Speaker 3: have what engineers call quote unquote China speed, which is
Speaker 3: just like this inexplicable, speedy development that would wow Apple
Speaker 3: engineers in the earliest years. So, just to give one
Speaker 3: example that's not in the book, there was this example
Speaker 3: where these engineers from Apple are in this factory that
Speaker 3: needs to be sort of retooled for the Apple line,
Speaker 3: and it's the size of a football field. It's enormous,
Speaker 3: and they estimate, okay, it's going to take two to
Speaker 3: three weeks to get this machine removed. They come back
Speaker 3: the next day it's all been moved, and it's totally
Speaker 3: blows their minds. All they've done is gone to sleep,
Speaker 3: head breakfast, and come back and everything is complete. And
Speaker 3: that which is happening in China all the time, and
Speaker 3: it just is not happening in India.
Speaker 2: I like the idea of just one more lane bro
Speaker 2: will solve our domestic iPhone assembly production problems. That's pretty funny. Okay,
Speaker 2: So I want to back up a little bit, but
Speaker 2: can we talk a little more about Apple strategy in
Speaker 2: China specifically, So how much of that was a deliberate,
Speaker 2: conscious decision versus something that just kind of happened alongside
Speaker 2: I guess the wave of outsourcing and globalization that we
Speaker 2: saw in the late nineteen nineties early two thousands.
Speaker 3: Yeah, great question. And what I like about your intro
Speaker 3: tracy is that I really do think the story of
Speaker 3: Apple and China over the last twenty years has really
Speaker 3: just been about the tedium of assembly. A journalists have
Speaker 3: won prizes for this kind of thing, right, and it's
Speaker 3: set into motion this cat and mouse pattern where a
Speaker 3: journalist goes into a factory and says, all these workers
Speaker 3: are working too hard, there's underage employees, et cetera. And
Speaker 3: then Apple is shame into making changes and it sort
Speaker 3: of plays the role of White Knight improving factory conditions
Speaker 3: across China's supply chain, and then journalist win's an award,
Speaker 3: and then two years later someone does the next thing
Speaker 3: in a different factory, and so on and so forth.
Speaker 3: But we're totally overlooking questions of Apple strategy, like what
Speaker 3: did they quote unquote discover in China that nobody else discovered?
Speaker 3: And so really the book is an attempt to do that.
Speaker 3: So the first thing I'd push back on is Tim
Speaker 3: Cook is very often called the architect of the China strategy,
Speaker 3: and it's not to discredit him to say that he
Speaker 3: is not the architect. Nobody is the architect. Basically, what
Speaker 3: happens is really the supply chain itself, with or without
Speaker 3: Apple was moving to China. And so the basic history
Speaker 3: of the eighties and nineties PC boom, like predating Windows
Speaker 3: ninety five and then coming after, is that the fight
Speaker 3: for computer dominance is exclusively based on things that are
Speaker 3: boring logistics, manufacturing, distribution, right, because everybody's using Windows, everybody's
Speaker 3: using Intel chips, and nobody's thinking about design. There is
Speaker 3: no equivalent of Johnny I've at Dell, at Compac, at
Speaker 3: any of these companies, and so it's really this mundane war,
Speaker 3: and it's driven by largely American and later Taiwanese contract manufacturers,
Speaker 3: and so they are the ones who, in competition with
Speaker 3: each other, start going to Asia to sort of oust
Speaker 3: each other right and gain market share, and eventually they're
Speaker 3: the ones who really find China. So when Apple is
Speaker 3: doing their own outsourcing moves, they're working in multiple countries
Speaker 3: before the armies of flexible, ubiquitous, low paid labor in
Speaker 3: China really win out. So my story has this five
Speaker 3: part chapter called Apple's Long March to China. It really
Speaker 3: tells you that the candy called iMac that I'm sure
Speaker 3: both of you and all of your listeners remember, like
Speaker 3: that was made out of Korea by LG who then
Speaker 3: expanded to Mexicali and Wales. Fox Con is brought on
Speaker 3: as a second supplier, and that's in China, but it's
Speaker 3: also in the Czech Republic, and it's also curt in California.
Speaker 3: But when you've got these operations in multiple countries, especially
Speaker 3: once China enters the World Trade Organization two thousand and one,
Speaker 3: all you have to do is look at an Excel
Speaker 3: sheet and realize that the efficiency, cost, the scale and
Speaker 3: anything China is winning. And so Apple begins to really
Speaker 3: consolidate everything into China. And around two thousand and three
Speaker 3: when the iPod Mini becomes the most ubiquitous product Apple's
Speaker 3: ever created, and then there's just no question that when
Speaker 3: the iPod nano is invented, that's where it's going to
Speaker 3: be built, and when the iPhone comes out, that's where
Speaker 3: it's going to be built. So it really is just
Speaker 3: like stumbling into greater and greater volumes and success in China.
Speaker 3: And I give all sorts of credit to China. I mean,
Speaker 3: people think it's an anti China book. If they haven't
Speaker 3: read it, it really isn't. There's only one place that
Speaker 3: Apple could have succeeded the way they did, and it's
Speaker 3: because China had tailor made policies. We're leading industrial clusters,
Speaker 3: we're leading industrial policy and hardworking people that would do
Speaker 3: this for twelve hours a day, six days a week.
Speaker 1: Is the book an anti Apple book? I mean you
Speaker 1: say it's not an anti China book. Apple who's created
Speaker 1: literally trillions of dollars in value for Americans. It's created
Speaker 1: thousands and thousands of amazing, high paid jobs that are
Speaker 1: much better than the jobs that are at the assembly
Speaker 1: or factories that exist in China. Is it an anti
Speaker 1: Apple book?
Speaker 3: No. Anyone thinking it's an anti Apple book will be
Speaker 3: in for a rude awakening because you'll quickly realize that
Speaker 3: for starters, when I say I spoke to more than
Speaker 3: two hundred people, I'm only counting the people with Apple experience.
Speaker 3: Then I spoke to other people as well, in supply chain, academics, journalists,
Speaker 3: that kind of stuff. But it is told through the
Speaker 3: eyes of the people in the weeds on the grounds,
Speaker 3: you know, directing Apple's success. Right, So the first chapters
Speaker 3: in particular, I mean, the first part is called Saving
Speaker 3: Apple is really just a story of Apple's genius in
Speaker 3: pulling off these maneuvers and coming off the brink of bankruptcy.
Speaker 3: They are literally days away from missing payroll. In nineteen
Speaker 3: ninety six, I think I reveal for the first time
Speaker 3: they'd even hired a Chapter eleven lawyer. And then as
Speaker 3: the sort of hail Mary move, once they've got a
Speaker 3: bit more money after selling a factory in Colorado, they
Speaker 3: bring back Steve jobs. And really the first narrative is
Speaker 3: just like this raw raw, go Apple, Can they do it?
Speaker 3: And even in two thousand with the dot com bust,
Speaker 3: like they're close to bankruptcy again and Gateway literally tries
Speaker 3: to acquire them. So the story is one of sleepwalking
Speaker 3: into a geopolitical reality. Really, as China changes, I mean,
Speaker 3: I don't criticize anyone at Apple for moving to China
Speaker 3: in the early two thousands. That's what everybody was doing.
Speaker 3: I would even say there was an American consensus rather
Speaker 3: than some bipartisan effort, that going to China was good
Speaker 3: because you were going to inculcate the next great democracy,
Speaker 3: you know, and maybe in a hubristic or arrogant way.
Speaker 3: But like Americans would have said, that's what we did
Speaker 3: for Taiwan, that's what we did for Korea, Germany, et cetera.
Speaker 3: I mean after World War Two. So there was all
Speaker 3: sorts of reasons to move to China. The problematic decision
Speaker 3: was that once Xijinping comes into power, Apple is not
Speaker 3: an innocent bystander. As Xixhinping hardens his tone and becomes
Speaker 3: more belligerent, he attacks Apple within thirty six hours of
Speaker 3: taking the reins in March twenty thirteen, and that was
Speaker 3: the point at which Apple could have made a strategic
Speaker 3: decision to diversify its supply chain to India or something. Instead,
Speaker 3: they ramp up their rewards for shareholders in the form
Speaker 3: of buybacks and dividends, and they doubled down in China,
Speaker 3: appointing a team to basically understand Chinese culture, understand Chinese politics,
Speaker 3: and come up with a way of demonstrating to the
Speaker 3: country and it's efficial. Look, we're really really in this
Speaker 3: for China, as it were.
Speaker 2: What exactly was Apple's pitch to Chinese leadership? And I
Speaker 2: guess how did it change over time? How much of
Speaker 2: it was about, Oh, we're going to create jobs that
Speaker 2: will pay more than agricultural wages, better standards of life,
Speaker 2: maybe relatively, versus the strategic value of building up China's
Speaker 2: tech sector and all this strategic semiconductor technology and things
Speaker 2: like that. How did it shift over time?
Speaker 3: So it's a fascinating narrative, And really the first four
Speaker 3: parts of the book leading up to twenty thirteen are
Speaker 3: just foundation buildings, so you sort of understand the history
Speaker 3: of Apple and what sort of problems they're having. Essentially,
Speaker 3: what happens is when chies in paying at tax Apple,
Speaker 3: you can understand why he's upset with the company. It
Speaker 3: looks like an exploitative power because their margins. Apple margins
Speaker 3: have gone from something like one percent in two thousand
Speaker 3: and three to twenty five percent in twenty twelve. But
Speaker 3: at the same time, if you look like a company
Speaker 3: like Fox con foxhon in absolute dollars made more money
Speaker 3: than Apple for each of the first four years of
Speaker 3: the twenty first century. But as they get more involved
Speaker 3: with Apple, their margins collapse from double digits to about
Speaker 3: one or two percent. And so you can just do
Speaker 3: this with really any company working with Apple, and it
Speaker 3: looks like they're not in it for China, right, They're
Speaker 3: not doing anything for the country. And Apple it takes
Speaker 3: them two or three years, but they totally flip this
Speaker 3: narrative on its head. So out of fear that Beijing
Speaker 3: is going to force Apple to operate a bunch of
Speaker 3: joint ventures, right, these fifty to fifty companies where China
Speaker 3: owns the other half, and then they mimic the technology
Speaker 3: and eventually oust you. I mean, this is what happened
Speaker 3: in high speed rail for instance. Beijing has advocated joint
Speaker 3: ventures for decades, really going back to the nineteen eighties.
Speaker 3: So this is where a Western company is allowed to
Speaker 3: be in the Chinese market. But the quid pro quo is, look,
Speaker 3: if you want access to our operational efficiency, if you
Speaker 3: want access to more than a billion people, you have
Speaker 3: to operate in a joint venture where the Chinese half
Speaker 3: of the company is going to learn everything they can
Speaker 3: and then thrive on their own. Apple doesn't have any
Speaker 3: joint ventures, and so they look like this anti China
Speaker 3: model that's just exploiting the country. Is able to really
Speaker 3: flip this on its head and say, look, it might
Speaker 3: be the case that Samsung has three dozen joint ventures
Speaker 3: and we have zero. But you need to understand we
Speaker 3: work with hundreds of factories across the country. And the
Speaker 3: reason they're only getting paid one percent margin, two percent margin,
Speaker 3: the reason they're sometimes even losing money on their partnerships
Speaker 3: with Apple is that we are offering them the equivalent
Speaker 3: of Ivy League hardware engineering training. We are sending people
Speaker 3: over by the literal planeload to China America's best engineers,
Speaker 3: where they train, audit supervised, install hundreds of millions of
Speaker 3: dollars worth of machinery. They train the line, they supervise
Speaker 3: the line. And once those companies have these skills that
Speaker 3: Apple gives to them, they are basically able, at least
Speaker 3: after some time of exclusivity, they are able to supply
Speaker 3: somebody else. So who's just like Apple, but in China, Huawei, Apo, Vivo,
Speaker 3: Chaome and so those companies today have fifty five percent
Speaker 3: global market share of the smartphones. And the reason that
Speaker 3: they're so good is that Apple trained all of their suppliers.
Speaker 3: So that's the message Apple gives to Beijing, and essentially
Speaker 3: they've they sort of had a free ride ever since.
Speaker 3: It would be insane for Beijing to go after Apple
Speaker 3: in some direct way because Apple is the great teacher
Speaker 3: of China. They offer way too much and the numbers
Speaker 3: we can get into are staggering.
Speaker 1: Tracy real quickly before we move on. So Apple has
Speaker 1: a three trillion dollar market cap. Do you want to
Speaker 1: take a stab at what the market cap of Hanahei,
Speaker 1: which is the company that owns Fox Hanhai Precision Industry.
Speaker 1: Do you want to get guess what its market cap is?
Speaker 2: No, I absolutely do not. Just tell me so I
Speaker 2: don't want to embarrass myself.
Speaker 1: Seventy two billion, three trillion versus Now, granted they're not
Speaker 1: the only company that makes them, but yeah, these are
Speaker 1: not as these are nowhere near as profitable industries use
Speaker 1: this term. Apple is the great has been a great teacher,
Speaker 1: and I want to get into what people have learned
Speaker 1: from Apple development and then built competitive companies. But you
Speaker 1: mentioned those old and I hadn't thought about them in
Speaker 1: a long time, those old iMacs that were multicolor, that
Speaker 1: called a lot of attention. Some of them were really
Speaker 1: not trivial at all to build with the existing man
Speaker 1: manufacturing technology that existed in the world at the time.
Speaker 1: And I remember sometimes they would announce a new one,
Speaker 1: and they're like, but we're really sorry to tell you
Speaker 1: we're not going to be able to produce this one
Speaker 1: in the emerald green yet because we haven't perfected how
Speaker 1: to bend the plastic or whatever the material was, the
Speaker 1: glass of emerald green, whatever that color is. It creates
Speaker 1: an issue and all the people in the audience will
Speaker 1: go boo.
Speaker 3: But then they'd get.
Speaker 1: There like six months later. And then you mentioned the
Speaker 1: multi touch glass, which didn't originally exist at the time.
Speaker 1: How much is it co learning? You know, we have
Speaker 1: this divide of there the designers and coopertinos and the
Speaker 1: assemblers and the builders somewhere in Asia. But something also happens,
Speaker 1: And there's a theme repeatedly on the show where innovation
Speaker 1: happens at the shop floor, and the idea of cleanly
Speaker 1: drawing the line between the designers and the building is
Speaker 1: a fallacy. It must be the case that at least
Speaker 1: in some of these realms, whether we're talking about the glass,
Speaker 1: whether we're talking about the ability to bold plastic green
Speaker 1: plastic into a pretty iMac that innovation also happens in China,
Speaker 1: and the Apple benefits from that learning as well.
Speaker 3: Yeah, I'm wondering if the right analogy would be something
Speaker 3: like a graduate student at Harvard writing a paper with
Speaker 3: their professor. Right, it is something along those lines, like
Speaker 3: the Apple engineers by the planeload are going over there,
Speaker 3: but they're absolutely co inventing something. Right. So I was
Speaker 3: told that like the ideal manufacturing design engineer right would
Speaker 3: look at what Johnny I had come up with and say,
Speaker 3: I have no idea how to build that, but I'm
Speaker 3: going to do my best to find out. Right, So
Speaker 3: they would have a certain skill set and with a
Speaker 3: whole team of people, of course, and they would go
Speaker 3: to the Chinese factories and they find the suppliers who
Speaker 3: might have some background in multi touch glass, let's say, right,
Speaker 3: or we're adding electrical circuits to the glass, and then
Speaker 3: they would train and co invent the next processes. So
Speaker 3: they're not just co inventing the parts, they're co inventing
Speaker 3: the processes that make the parts. Right, what Elon Must
Speaker 3: sometimes calls the machine that creates the machine. So I'm
Speaker 3: glad you brought this up, just because in no way
Speaker 3: am I saying like the Chinese offered them nothing or
Speaker 3: something like that, right, Like, it's not like to say
Speaker 3: that Carvard it's a great school. Isn't to say that
Speaker 3: like the students that go there don't deserve loads of credit.
Speaker 3: Of course they do. And the same way like Apple
Speaker 3: is a teacher of the Chinese and to be fair,
Speaker 3: like the founder of Huawei has called Apple the teacher.
Speaker 3: But that's not to say that they could have done
Speaker 3: this anywhere. In fact, if anything, I think Apple has
Speaker 3: a bit of hubris, believing that they can replicate their
Speaker 3: twenty five year investment into China and go do it
Speaker 3: in India. And it's like, guys do not understand like
Speaker 3: the degree to which China was a once in a
Speaker 3: century partner with all these tailor made policies, they would
Speaker 3: just build factories at the time that you and I
Speaker 3: would still be doing the environmental paperwork. I just don't
Speaker 3: think you see that in India, and you don't see
Speaker 3: that in America either. So China is not just like
Speaker 3: a blank slate with lots of people. They offer all
Speaker 3: kinds of things to Apple and Apple, and to be fair,
Speaker 3: they offer all kinds of things to anybody. But Apple
Speaker 3: understands the opportunity just better than anybody else.
Speaker 2: So you make the point in the book that there's
Speaker 2: I guess a tension between a company like Apple and
Speaker 2: they're very very sharp focus on shareholder returns and quarterly
Speaker 2: profits and continued growth and just throwing off loads and
Speaker 2: loads of cash. There's a tension with I guess nationalism
Speaker 2: and economic and strategic development. And so Apple's focus on
Speaker 2: growth has been to China's strategic and developmental benefit and
Speaker 2: maybe less or so to America's at least in terms
Speaker 2: of strategic things. And what's funny is right after this interview,
Speaker 2: we're actually going to speak to Avadao, who wrote a
Speaker 2: book on Huaii, and she makes the point. Yeah, she
Speaker 2: makes the point it really dovetails with your book, but.
Speaker 1: We didn't mean to schedule like that.
Speaker 2: Yeah, yeah, But she makes the point that stock prices
Speaker 2: and balance sheets can't fully capture the societal value of
Speaker 2: a nation's technological competency. And this is something that maybe
Speaker 2: Huawei understands better than an Apple. Where do you see
Speaker 2: I guess the key differences in sort of corporate culture
Speaker 2: between a Huawei and an Apple.
Speaker 3: So I might be taking this in a slightly different
Speaker 3: direction than you're thinking. So if I need to re
Speaker 3: answer in a second, let me know, but the Chinese
Speaker 3: don't prioritize profits or margins the way that we do.
Speaker 3: They prioritize control of the industry because if the Chinese
Speaker 3: can take over something like electric vehicles, they in effect
Speaker 3: de industrialize all their rivals and really gain dominance. The
Speaker 3: place that you can see this most clearly is solar panels.
Speaker 3: Nobody in China is making thirty percent margins on solar panels,
Speaker 3: but more than ninety percent of solar panels are now
Speaker 3: made in China. This is a technology that America invented
Speaker 3: in the nineteen fifties and itself had eighty to ninety
Speaker 3: percent market share of in the eighties, but we cannot compete.
Speaker 3: That is basically what's happening with electric vehicles right now. Hence,
Speaker 3: even before Donald Trump became president, Joe Biden put one
Speaker 3: hundred percent tariffs on Chinese made evs, and I think
Speaker 3: it was just a few days ago that BYD slashed
Speaker 3: the prices of their evs in a bid for greater competitiveness.
Speaker 3: So look, I think China has a state sponsored form
Speaker 3: of capitalism. I'm emphasizing that it is a form of capitalism,
Speaker 3: but it's not a shareholder maximization form of capitalism. It's
Speaker 3: a command and control form of capitalism.
Speaker 1: You mentioned, and I had never I had either forgotten
Speaker 1: about it, didn't realize that Shujinpin called out Apple very early,
Speaker 1: within thirty six hours of taking power in twenty thirteen.
Speaker 1: Can you talk a little bit about the sort of
Speaker 1: evolution of the CCP and Apple's relationship with it over time.
Speaker 1: There is obviously this perception then she specifically has taken
Speaker 1: on this more nationalist, ambitious edge versus his predecessors. Can
Speaker 1: you talk a little bit just more about that specific
Speaker 1: relationship with Apple and the CCP itself, beyond just the
Speaker 1: economic capacity on the ground.
Speaker 3: So Apple gets in a sense a misleading picture of
Speaker 3: what it's like to operate in China because when they
Speaker 3: really consolidate production, it's two thousand and three, and that's
Speaker 3: the beginning era of Hu Jintao. Key later is nicknamed
Speaker 3: the Woman with bound feet. His presidency is sometimes called
Speaker 3: the collective presidency because there was really an inability for
Speaker 3: just him alone to make decisions, and so it ends
Speaker 3: up being this like ten year period of China being
Speaker 3: a multinational playground where rules aren't really enforced, just like.
Speaker 1: This Honeymoon, this Honeymoon Golden Era, where like sort of
Speaker 1: China on easy mode.
Speaker 3: Absolutely, yeah, and so Apple's really taken aback to the
Speaker 3: point of just total confusion and having an inet response
Speaker 3: when Xijinping really comes in and as I said, what
Speaker 3: happens is like CTTV, which you could think of as
Speaker 3: like a state sponsored CNN of the country, attacks Apple
Speaker 3: for warranty differences of all things. It basically excuses Apple
Speaker 3: of treating the Chinese customers in an inferior way by
Speaker 3: refurbishing phones rather than giving them new phones when certain
Speaker 3: problems are happening with them. And I have to say
Speaker 3: this is the prologue to the book because basically opened
Speaker 3: the book and in the first paragraph apples and crisis.
Speaker 3: And so I'm trying to go for like a white
Speaker 3: lotus opening, if you will, before it becomes like this
Speaker 3: nice beach read with the overhang of suspense that you
Speaker 3: know that you know it's going to hit the fan
Speaker 3: by twenty thirteen. But I have to say the narrative
Speaker 3: leading up to it is wild, which is that in
Speaker 3: two thousand and eight, for the Beijing Olympics, Apple opens
Speaker 3: its first store in China, purely as a marketing opportunity
Speaker 3: for the Olympics. I mean they're actually happy that the
Speaker 3: site they've been given is small, because everybody assumes it's
Speaker 3: going to lose money. You have to remember that for
Speaker 3: the first iPhone, Steve Bomber, Microsoft's CEO, laughed at the price,
Speaker 3: and he's referring to American buyer saying, no one's going
Speaker 3: to pay six hundred dollars for an iPhone. So if
Speaker 3: you can understand like that, nobody thought it was going
Speaker 3: to work in America. Why would there be a retail
Speaker 3: sector in China, a country with developing wages and no
Speaker 3: appetite for such an expensive product. Well, by twenty ten,
Speaker 3: the iPhone just becomes the most conspicuous symbol of I've
Speaker 3: made it in China, and to such an extent that,
Speaker 3: like the lines outside what are now four stores in
Speaker 3: China at the time, there's thousands of people. They're snake
Speaker 3: climbing around these stores. But the thing is they're not
Speaker 3: like Joe and Tracy excited for the next iPhone and
Speaker 3: just camping out overnight because I have to have it.
Speaker 3: It's migrants that have been trucked in like by the
Speaker 3: bus load to buy as many iPhones as possible. So
Speaker 3: these quasi gangsters, these scalpers known as yellow cows, can
Speaker 3: a mass, let's say, ten thousand phones and go to
Speaker 3: a city where there is no Apple store, and they
Speaker 3: sell them at hawked up inflated prices because it's such
Speaker 3: a conspicuous status symbol. I don't want to go on
Speaker 3: and on about this, but essentially what happens is you
Speaker 3: have to understand these gangsters are connected with the triads,
Speaker 3: and they begin finding ways to make more money per
Speaker 3: iPhone than Apple, but they're illegal ways. They're buying phones
Speaker 3: in the US using fake IDs, so they're buying them
Speaker 3: for less than one hundred dollars because they're buying a
Speaker 3: twenty four month contract but only paying the first month.
Speaker 3: They're smuggling them into the country, they're zapping the processor,
Speaker 3: rendering the damn thing irre inoperable, but at the same
Speaker 3: time masking that it's a stolen phone essentially, and Apple
Speaker 3: is totally flum mixed, not understanding what's going on, not
Speaker 3: understanding Chinese culture, certainly not understanding Chinese politics. And this
Speaker 3: is the origin story of the warranty differences. It's because
Speaker 3: Apple was trying to clamp down on these illegal practices,
Speaker 3: and that story sort of gets lost in translation. But
Speaker 3: that's why China's so upset with Apple in twenty thirteen.
Speaker 1: I want to.
Speaker 2: Correct the record here, which is I do not, in
Speaker 2: fact camp out in front of an Apple stores waiting
Speaker 2: for the latest iPhone. I think my iPhone is like
Speaker 2: seven or eight years old. It works so well these days,
Speaker 2: you really don't want to play exactly. I am the
Speaker 2: customer that Apple hates because I am very satisfied with
Speaker 2: my ancient phone.
Speaker 3: Okay, seriously, what model of iPhone you have? Is it
Speaker 3: really an eight? Or well?
Speaker 2: This is I really don't I don't know either.
Speaker 1: If you had asked me ten years ago, what model
Speaker 1: iPhone do you have? I would have been able to
Speaker 1: answer right away. If you asked me right now, I
Speaker 1: have no idea.
Speaker 3: I bought it.
Speaker 1: That's years ago. It's been so long since I've thought
Speaker 1: that it was important to know the differences. You know,
Speaker 1: at one point I was like, oh, that's a lot different.
Speaker 1: Now it's like, there's the game seems so marginal at
Speaker 1: this point from each generation, at least as someone.
Speaker 3: That's not you know, it's just cringing right now, I
Speaker 3: hear that. Yeah, I don't care.
Speaker 1: Yeah, you said something interesting that at the time of
Speaker 1: the rush to China, there was this sort of consensus
Speaker 1: in the West that this was a good thing because
Speaker 1: it would accelerate the process of democratization of liberalization, the
Speaker 1: likes of which maybe we've seen in Korea, Taiwan, so forth.
Speaker 1: On the other hand, in theory, one of the things
Speaker 1: that business leaders really liked about doing business in China
Speaker 1: was the fact unions aren't legal. There's this heavy hand
Speaker 1: of the state that keeps wages in check, and keeps
Speaker 1: organizations in check, and probably keeps environmental groups in check,
Speaker 1: et cetera.
Speaker 3: How much was this.
Speaker 1: Tension not appreciated that this phenomenon that we may be
Speaker 1: expected to see play out in China of liberalization and
Speaker 1: democratization would have been explicitly not what the business leaders
Speaker 1: going to this country would have wanted to see.
Speaker 3: I mean, there's absolutely a sense that business people had
Speaker 3: just like agreed sense of why they wanted to be
Speaker 3: in China. But I guess what I'm trying to push
Speaker 3: back against is because it's like obviously a strategic error
Speaker 3: in retrospect and obviously we experienced the China shock and
Speaker 3: our own industries got hollowed out. I feel like now
Speaker 3: there's just like a revisionist sense that like, we were
Speaker 3: never doing this for valid reasons. There was never a
Speaker 3: sort of like real geopolitical strategic sense, right that Bill
Speaker 3: Clinton or Larry Summers were just like in the pocket
Speaker 3: of business people and so forth. I just don't really
Speaker 3: find that convincing. Taiwan was under martial law until the
Speaker 3: late nineteen nineties, effectively, maybe it was the nineteen eighties,
Speaker 3: but then in the late nineteen nineties they had their
Speaker 3: first democratic elections. This is of course an ethnically Chinese island,
Speaker 3: and you know, it was very much used. I mean,
Speaker 3: however problematically, it was used as an example of we
Speaker 3: could export democracy through capitalism. I do think there was
Speaker 3: a track record and people made that argument in good faith,
Speaker 3: in addition to business people who saw it for their
Speaker 3: own purposes.
Speaker 2: So one way of describing that Apple China relationship is
Speaker 2: they're sort of frenemies, right. There is a tension built
Speaker 2: into the relationship, but both sides got something out of it.
Speaker 2: If we fast forward to today's environment, we have tariffs
Speaker 2: in the US obviously, although no one knows what's going
Speaker 2: to happen with those. You have China making a very
Speaker 2: conscious decision to build up its tech sector. Who has
Speaker 2: the upper hand in the relationship right now? Who is
Speaker 2: the power?
Speaker 3: So I would push back, I would not call them frenemies.
Speaker 3: Tim Cook and Chiesiping, broadly speaking, have the same interests,
Speaker 3: which is to say, the more that Apple is allowed
Speaker 3: to have its production consolidated into China, the better their
Speaker 3: scale is, the better their margins are, et cetera. That's
Speaker 3: what Chijinping wants as well, because he understands, basically because
Speaker 3: Apple taught him that having Apple production in the country
Speaker 3: engenders a form of technology transfer that helps the rest
Speaker 3: of the electronic sector, which is a quote China scholar
Speaker 3: an economists very not and that is the most important
Speaker 3: thing that Chijinping wants, right. I mean, I compare Apple's
Speaker 3: presence in China to something like that of the Marshall Plan,
Speaker 3: something that sounds insane until you look at the numbers
Speaker 3: and you realize that it's bigger than Marshall Plan. So
Speaker 3: the problem is actually that Donald Trump and Tim Cook
Speaker 3: have diametrically opposed interest which is to say that if
Speaker 3: Donald Trump could move all production out of China, he will. Well,
Speaker 3: Apple doesn't want that. That's an existential threat quite. I
Speaker 3: really mean that that's an existential threat to a three
Speaker 3: trillion dollar company. So that's where the tension is. The
Speaker 3: tension really isn't between Cook and she, as strange as
Speaker 3: that is, it's between Cook.
Speaker 2: You really don't think there's tension between Apple and China,
Speaker 2: even with the tech crackdown, even with Xijinping coming out.
Speaker 2: One of the first things that he says is that
Speaker 2: criticism of Apple, and clearly he's trying to like extract
Speaker 2: some things from the company that the company is maybe
Speaker 2: reluctant to give up.
Speaker 1: And the rise of really good Chinese competitors that are
Speaker 1: winning market share all around the world, maybe outside the US.
Speaker 3: Yeah, so Tracy's examples are historical, right, So I'm not
Speaker 3: saying there's never been tension. Of course, there's been loads
Speaker 3: of tension, but the way that Apple responded was in
Speaker 3: effect to playcate federal and provincial officials so that they
Speaker 3: haven't really had any problem. Right. So there's a tension relationship,
Speaker 3: let's say, But insofar as it's a marriage, I think
Speaker 3: it's actually a pretty it's a Catholic marriage. There's not
Speaker 3: going to be a divorce. It's going pretty well. The
Speaker 3: problem isn't really between Apple and China. The problem is
Speaker 3: to use the economic jargon, the negative externalities of the relationship. Right.
Speaker 3: So the problem is that for everybody else this is
Speaker 3: actually deeply problematic because if you have America's top engineers training,
Speaker 3: a manufacturing supply chain that in effect can be weaponized,
Speaker 3: and world's dominance, that's not a great place for Washington
Speaker 3: or just your average American citizen. It's nice that this
Speaker 3: relationship gives us relatively sophisticated and affordable iPhones, but the
Speaker 3: downside here is that China is absolutely dominant in high
Speaker 3: end electronics, and you can use those skills to build drones,
Speaker 3: you can use those skills to build military weaponry. And
Speaker 3: Apple would frankly be training their chip makers if it
Speaker 3: weren't for a Senate coming down on them pretty hard
Speaker 3: a couple of years ago. So that's the problem, right.
Speaker 3: The problem isn't that something stops in the relationship between
Speaker 3: Apple and China. The problem is that it continues.
Speaker 1: Just good to push back on this framing a little
Speaker 1: bit and I certainly there is much that I find
Speaker 1: very compelling.
Speaker 3: About this story.
Speaker 1: But you talk about the beginning of when the US
Speaker 1: and Chinese economies really got integrated in the late nineties
Speaker 1: early two thousands, sometime around Chinese ascension into the WTO,
Speaker 1: Like everyone recognizes in retrospect that it's been a mistake,
Speaker 1: and has it been?
Speaker 3: I mean again, the other thing is.
Speaker 1: That Apple is worth three trillion dollars. Almost every American
Speaker 1: with any investment probably has some exposure to it. It's
Speaker 1: been incredible for the development and the alleviation of poverty
Speaker 1: in China. We've never gone to war with China. It
Speaker 1: doesn't seem like you know, in the modern era, it
Speaker 1: hasn't come close to happening, at least so far. Like,
Speaker 1: isn't there a version of this story that as long
Speaker 1: as we trust each other, Chinese students could come to
Speaker 1: the US and we could have the good jobs of
Speaker 1: like professorships at schools and so forth, and designers in California.
Speaker 1: And isn't there a story where this has made the
Speaker 1: world wealthier and more peaceful.
Speaker 3: So let me start just by completely agreeing with most
Speaker 3: of the points you just made. I think the poverty
Speaker 3: alleviation in China has been really important and a net
Speaker 3: good for humanity, and I think we have over the
Speaker 3: last twenty years been a sort of golden age of
Speaker 3: you know, Silicon Valley works on the software, works on
Speaker 3: the design, and China takes care of the hardware. And
Speaker 3: insofar as there's like a mutually symbiotic relationship, there no
Speaker 3: one fits that build better than Apple. So look, a
Speaker 3: lot of good has come out of it. I mean
Speaker 3: that that's absolutely true. I would totally disagree that we're
Speaker 3: not seeing harbingers of war coming right. I mean, Chijinping
Speaker 3: has literally said we will not leave the question of
Speaker 3: Taiwan to the next generation. I think he's gone so
Speaker 3: specific as to say that twenty twenty seven might be
Speaker 3: the year that Beijing and exes Taiwan. I mean, that's
Speaker 3: really troubling, especially if you're Taiwanese. But it's really troubling
Speaker 3: if you understand the chip sector, because ninety percent of
Speaker 3: advanced chips come out of the country, and American military
Speaker 3: officials have said that like in the event that somehow
Speaker 3: Beijing was able to take control of the FABS in Taiwan,
Speaker 3: like we would go bomb them. We would bomb the FABS.
Speaker 3: I mean they would like if somehow TSMC survived the war,
Speaker 3: which is basically untenable, but if somehow they did, the
Speaker 3: American military would see fit to destroy them, because the
Speaker 3: idea that they would be in Chinese hands without exporting
Speaker 3: to America would be existential. So there's that, and then
Speaker 3: there's just you don't have to be anti CCP, you
Speaker 3: don't have to be anti China to recognize that this
Speaker 3: is clearly America's biggest rival really since the founding. It's
Speaker 3: the USSR was never such an economic rival, never sort
Speaker 3: of like rivaled America in terms of high end electronics.
Speaker 3: I mean absolutely there was like a nuclear arms battle,
Speaker 3: but the Chinese are far more sophisticated. And like I
Speaker 3: wrote my thesis on a Grand Strategy in America, and
Speaker 3: what I would point out is that like in the
Speaker 3: nineteen eighties, America started spending more or on its military,
Speaker 3: understanding that the Soviet economy was not as dynamic, right,
Speaker 3: and so it wasn't growing as quickly, and so you
Speaker 3: were going to accelerate their own dem eyes if you
Speaker 3: sort of set up a military in which the Soviets
Speaker 3: were likely to respond to the same vein. You cannot
Speaker 3: apply that strategy to a country that is three or
Speaker 3: four times the population and has literally been growing faster
Speaker 3: than America for the last four decades. So it really
Speaker 3: is a massive threat. And the idea that in the
Speaker 3: event of some sort of battle, we're not able to
Speaker 3: make stuff because we outsourced it all to China over
Speaker 3: the last twenty five years is pretty dramatic. I just
Speaker 3: think of World War two. Hitler was really concerned about
Speaker 3: the US coming in because of their industrial capacity. We
Speaker 3: used to call it Detroit, the arsenal of democracy. We
Speaker 3: don't have an arsenal democracy anymore, but we have trained
Speaker 3: up China to be an arsenal of communism. That's I
Speaker 3: don't think you have to be hyperbolic to realize that
Speaker 3: that's a big deal.
Speaker 2: I have just one more question, and I'm going to
Speaker 2: ask it very very briefly, because we're getting squeezed for
Speaker 2: a time. But to what degree does AI and the
Speaker 2: rise of this new technology complicate the Apple China relationship.
Speaker 3: Really complicates it? So for two reasons. One is that
Speaker 3: I would argue, or actually I could just demonstrate with
Speaker 3: internal documents and some public documents that the iPhone has
Speaker 3: become more Chinese with time. In other words, the number
Speaker 3: of Chinese suppliers involved in the process is now much
Speaker 3: greater than the number of Taiwanese or American multinationals operating
Speaker 3: in the country or operating in their home countries. That
Speaker 3: is put on steroids in the AI era because Chat,
Speaker 3: TBT and other Western AI clients are not allowed on
Speaker 3: the iPhone in China, and so Apple has to work
Speaker 3: with the likes of bayd or Ali Baba to have AI,
Speaker 3: let's say, displacing Siri or augmenting Siri. So that I
Speaker 3: think is quite problematic because that means that Apple will
Speaker 3: be in effect doing what they did for hardware, but
Speaker 3: for AI. In other words, you'll have Apple software engineers
Speaker 3: helping by Do, helping Ali Baba whoever their Chinese partner is,
Speaker 3: to make sure that they have cutting edge AI in
Speaker 3: the country. If it wasn't bad enough that Apple was
Speaker 3: training up their hardware engineering to be world class, we're
Speaker 3: now in a situation where Apple software engineers are going
Speaker 3: to be training Chinese AI to be best in class.
Speaker 1: Very interesting stuff. Patrick McGee, thank you so much for
Speaker 1: coming on Oline. That was a fantastic really fascinating conversation.
Speaker 1: Urge everyone to check out the book. Appreciate you coming
Speaker 1: on my pleasure, Tracy. I thought that was really good,
Speaker 1: and I agree with that last point in the fundamental
Speaker 1: sense that you know, I think arguably the relationship definitely
Speaker 1: has been win win on multiple fronts, from the US,
Speaker 1: from the Apple shareholders, from the Apple workers, from the
Speaker 1: Chinese workers' perspective. But this idea there are now so
Speaker 1: much risks concentrated under a specific dimension. Yeah, I take
Speaker 1: that pretty seriously.
Speaker 2: Yeah, the negative externality point makes a lot of sense,
Speaker 2: although I still think there are some tensions between Apple
Speaker 2: and the CCP itself. The other thing I was thinking
Speaker 2: about was, I guess we're hearing this repeatedly on the show,
Speaker 2: and I probably don't even need to say it at
Speaker 2: this point, but it is. It's so difficult to replicate
Speaker 2: China's industrial strategy and its industrial management in other countries,
Speaker 2: and I kind of at this point I wonder if
Speaker 2: we'll ever get there.
Speaker 1: No, I don't think anyone will ever get there. In
Speaker 1: some sense, what I suspect is the story is that
Speaker 1: some of the Chinese industrial behemoths will slowly develop ecosystems
Speaker 1: in other countries, but the companies are downstream from China,
Speaker 1: and so I imagine, you know, you see more foreign outbound
Speaker 1: investment from Chinese giants into Vietnam, into Cambodia, into Brazil,
Speaker 1: et cetera. That might pose other risks and they're never
Speaker 1: going to be the next China in some sense, but
Speaker 1: you still get that capital deepening and wealth creation outside
Speaker 1: of China, but likely driven by Chinese industrial giants.
Speaker 2: Also, Joe, yeah, I looked up my iPhone. Yeah, oh
Speaker 2: it's an iPhone eleven. So I guess it's what are
Speaker 2: we all years old?
Speaker 1: I have no idea what we're even on now, like
Speaker 1: only the biggest iphe nerds. And I don't mean that
Speaker 1: pejoratively maybe like I have. I just I used to
Speaker 1: know these I think it's really important. I used to
Speaker 1: know these things, and I don't at all.
Speaker 2: Where are at all iPhone sixteen.
Speaker 1: And iOS eighteen.
Speaker 2: Do you think one day we're going to get to
Speaker 2: like iPhone two hundred and ninety eight, it'll just keep going.
Speaker 1: I don't know, but I think I saw our colleague
Speaker 1: Mark German, who is And now you say again, say
Speaker 1: this lovingly and Apple NERD. I think apparently, at least
Speaker 1: with the software, they're going to change their naming conventions
Speaker 1: at some point. Yeah, so that it doesn't end.
Speaker 3: That makes sense.
Speaker 1: Yeah, I think I saw him tweet that last night.
Speaker 2: Okay, well, shall we leave it there.
Speaker 3: Let's leave it there.
Speaker 2: This has been another episode of the Add Thoughts podcast.
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 1: And I'm Jill Wisenthal. You can follow me at the Stalwart.
Speaker 1: Follow Patrick McGee He's at Patrick McGee Underscore and check
Speaker 1: out his new book. Follow our producers Carmen Rodriguez at
Speaker 1: Carman armand dash, Ol Bennett at Dashbot and kel Brooks
Speaker 1: at Cale Brooks. From our odd Lots content, go to
Speaker 1: Bloomberg dot com slash odd Lots, where the daily newsletter
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