Shownotes Transcript
What's up, everybody? My name is Demetri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world.
My guest in this episode is Patrick McGee, a Financial Times correspondent and author of Apple in China, a book that tells two parallel and symbiotic stories. The first is about the consumer electronics and services firm Apple and its rise from near bankruptcy in the mid 1990s to becoming the world's most valuable company in a span of only 15 years.
The second story is about China and its historic transformation from being an underdeveloped economy with third world cost structures and armies of unskilled laborers to becoming the world's largest economy when measured by purchasing power parity with the most advanced manufacturing base in the world.
By the time this episode is over, you will have learned exactly how Apple offloaded almost all its manufacturing base to Asia by the late 1990s and early 2000s, and then consolidated that entire operation inside mainland China. You will also learn how the same supply chain mastery that turned Apple into the world's most valuable company has left it existentially dependent on a single authoritarian state whose political goals now diverge sharply from Washington's.
It's an incredible story with profound implications for not just Apple, but all of us who depend on China's manufacturing prowess and intricate supply networks to sustain our way of life. Whether we can extricate ourselves from this web of interdependency and the extent to which we should even want to is one of a number of topics we explore extensively in the episode's second hour.
If you want access to all of this conversation, go to hiddenforces.io slash subscribe and join our premium feed, which you can listen to on your mobile device using your favorite podcast app, just like you're listening to this episode right now.
If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, which includes Q&A calls with guests, access to special research and analysis, in-person events and dinners, you can also do that on our subscriber page. And if you still have questions, feel free to send an email to info at hiddenforces.io and I or someone from our team will get right back to you.
And with that, please enjoy this remarkably timely and profoundly eye-opening conversation with my guest, Patrick McGee. Patrick McGee, welcome to Hidden Forces. Thanks, Dimitri. I'm excited to have you on. Are you excited? I'm really pumped. I mean, I've just started giving book talks and I think this is my first podcast, but I mean, this book has been in my head for two years.
And for six months, we've been going through various edits and just playing this long waiting game that if you're a newspaper journalist, you're just not familiar with. You write something and it comes out in the newspaper the next day. So to finally be able to sort of go through everything and express myself about it, I'm absolutely thrilled. Oh, I know you're excited. I deal with a lot of authors and guests, and I can tell you're especially excited. And I'd be excited if I was you too, because as I was telling you, I think this book is, besides the fact that it's obviously timely...
It also addresses a very important blind spot in the public's understanding of not only Apple, its history, its identity, which I think is fascinating we'll get into, and the sources of its rise to become the largest company by market capitalization in the world. But also it fills very important or it illuminates a very important blind spot in people's understanding of China.
and the supply chains that feed its ecosystem of advanced manufacturing that are really, in my opinion, this book does a great job of showing this, not only the most advanced in the world, but they are the only game in town. There is no substitute. And then I think it's one thing to conceptually be aware of that idea. It's something that's talked about by some folks in the media.
It's another thing to really take the time to read the book and to understand not just how that's the case, but how it got to be the case and why that is a long process that needs to happen. And what's fascinating also is because Apple plays a central role in that story. Not only is the story of Apple's rebirth after Steve Jobs' return in the mid to late 1990s
of a way of tracing the industrialization and rise of China as this, not just industrial powerhouse, but again, the only game in town for advanced manufacturing of this sort.
It also played an integral role in actually seeding that knowledge into China's domestic ecosystem and creating the demand pull. I mean, that's the other thing, the demand pull that created the competitive pressures for companies like Foxconn to become such huge players in the space. Absolutely. So before we get into all of that, which is, I think, just very exciting to get into, and I think also one more thing I should say is that there'll be an opportunity, especially in the second hour, to reckon with, and I want people to actively reckon with
soberly, the implications of what we're talking about here. Because we're in the midst of a trade war with China and the rest of the world. There's a lot of talk about deglobalization, re-industrialization, bringing jobs back home. And I just want people to really have that top of mind as we're going through step by step the story of Apple and the story of China. So before we get into all that, Patrick, what's your story?
Tell us a little bit about you and how you got into this business as a journalist and also this business of investigating and coming to understand the rise of Apple as a international juggernaut. I'll make my first 25 or so years really quick, which is just that I'm Canadian. I was raised in Calgary, Alberta, sometimes known as Canada's Texas.
I went to University of Toronto where I studied religion and anthropology, but I was a Mac person from the earliest days. I mean, we got the Tangerine iMac in 1999 and I wanted to go to film school at the time. I was using iMovie, which is like a sort of unimpressive asset of knowledge, if you will, for making films. But that's where I was starting as a 16 year old.
And the problem with studying religion is when you graduate, you know, there's no job offers, right? I spent four years declining the question, you know, I'm not going to be a priest. I was not studying theology. I was studying religion. Religion is a really interesting lens to view art history, you know, history wars, the 20th century. I studied a lot of Sigmund Freud, Claude Levi Strauss, these sorts of big thinkers, you
And then I became a journalist just because reading and writing was sort of the only thing I was interested in. And at first I was a financial reporter, a bond reporter. And eventually I got plucked to go work for the Wall Street Journal in New York and
And after just 18 months of being there, the Financial Times sort of came calling and sent me to Hong Kong to cover Asian markets. And that was really my big introduction to China. I mean, I was in Hong Kong when the umbrella revolution took place, right? Where for the first time in my life, I was looking up to people that were a decade younger than me as they protested in the streets for democracy. And it was heart wrenching to watch because you supported them so much, but you also knew this just is not going to turn out well. And it hasn't.
you know, I mean, that was the best city I've ever lived in Hong Kong. And it breaks my heart that it's been really taken over by Beijing. But in retrospect, right, a great introduction to the real China, if you will. Then I spent three years reporting on the Volkswagen scandal, living in Germany, reporting on German car industry. That was important for the sort of foundation for this book, because that was the first time I was going in and out of factories all the time. And understanding that even if you were buying something like a Porsche,
Maybe 25% of that car is actually built, something like the engine and maybe some of the detailing of the seats and things like that are done by Porsche, but it's a supply chain, right? It's a global supply chain. And I just didn't have an understanding of how that operated. So I sort of took that knowledge. And when I came to California to cover Apple, it sort of laid the foundation that I was already interested in China and China's authoritarian turn under Xi Jinping. And I was interested in how things got made through my work on German industry.
So when I got to reporting on Apple, Apple is a really tough company to report on. I mean, the PR spokespeople are sort of hostile to you in a certain sense. I sort of compare them to intelligent agencies where they extract information from you, but offer nothing in return. And it took a while to learn how to report on them. And it was only late in my four years as an Apple reporter that I really got invested in the Achilles heel of the company, which is that everything is built in China.
And even when you hear a statistic like 90%, it's really more than 90%, really all roads lead through China. So that just felt like an incredible story where I was sort of leveraging the knowledge I gained as a reporter for the previous 12 years in three different continents. And it just all came together really well into a wonderful book pitch two years ago. And then it's been sort of off to the races since then. Excellent. So a couple of things I want to mention, then we'll continue with the questions.
I also grew up with Macs. And in fact, in high school, up until maybe the very end of high school, I had an Apple Duo, a Mac Duo, which was this... Then it was considered very thin, a very thin laptop. It was black and white in order to save...
But eventually, it just became too difficult having Macs because there was a compatibility issue, which Steve Jobs began to address when he came back with his famous partnership with Microsoft. Remember that speech he gave where he said, we have to get over this idea that in order for Apple to win, Microsoft has to lose. Yes. Also, people are interested in the whole Hong Kong story. We had Joshua Wong on during the protest movements, who was one of the lead sort of... Indeed. ...who has since been one of the lead advocates in the pro-democracy movement in Hong Kong. He's since been imprisoned.
Wolfgang Schäuble was on the show, and that's a great episode if you want to learn about the whole German predicament since we brought that up. This is very interesting. One more observation and question before we get into the book, or maybe it's a good way to start the book, I guess, instead of asking a general question about it, which is that Apple was always a company that prided itself on being vertically integrated and building with the two Steve Jobs and Steve Wozniak called the whole banana. When did that change?
So it's a great question. And my answer, I think, is pretty nuanced, which is that it changed before Steve Jobs came back in 1997. So Apple adopted a global outsourcing strategy in 1996. So that's before Steve Jobs comes back. It's before the acquisition of Next. And it's crucially before Tim Cook comes back. And nobody seems to be familiar with that. So after my introduction, the first chapter is laying out just how close Apple came to bankruptcy in the spring of 1996.
We've always thought 1997 was the worst year. That's because we're taking Steve Jobs' word for it. He does this thing when he tells stories that he puts himself at the center of every story. People think he came up with multi-touch glass and things like that. The more people have digged into really any of these things, the more you realize he's a real genius and he pushes people beyond their limits and such, but he's not.
the originator of so many of these ideas. Including the original graphical user interface. Oh, yeah. I mean, that's probably the most famous example. So yeah, if you take that idea or that sort of anecdote in history, you can just understand that actually that can sort of be copy and pasted to any number of things where you think Steve Jobs is at the center. And I don't want to discredit the guy. He's obviously brilliant. But nevertheless, there's too much credit given to him.
So basically what happens is, I mean, Apple is four or five days away from even making payroll in 1996. And they have to sell this facility that they have in Colorado, Fountain, Colorado, where they're making Macs and some of the laptops. And they sell it for around $200 million. And it's just enough to buy a couple of months of time because they're so close to being bankrupt. I think the book reveals for the first time that Apple had actually hired Chapter 11 lawyers to at least go through what the possibilities were.
And it's the sale of that factory that buys them some time. And then they do an oversubscribed bond sale and are able to sort of negotiate with some Japanese lenders to stave off, you know, buy themselves a few more weeks. And then it's in that crisis period that the CEO at the time, Gil Emilio, ends up buying next. And that's what brings back Steve Jobs.
So I don't want to give too much credit to Gil Emilio, but he's probably been discredited more than he deserves. He actually did some major things in finance. Under him, they adopted the global outsourcing strategy, and he realized they need a new operating system. And that's why they brought back Steve Jobs through the acquisition of Next.
Yeah. How important was that acquisition as well? I mean, you don't really talk about it much in the book, but the acquisition of Next just in order to obtain its operating system, was that also in any way consistent with the future actions and strategy of the company to focus on the software and outsourcing the hardware? Well, not to blow your mind, I think it's probably the most consequential acquisition in American corporate history.
Apple is dead without that acquisition. I mean, not only do they not have an operating system, which is the whole way you distinguish yourself as Apple, but you don't get Steve Jobs and you don't get 300 employees. I mean, one of the employees compared these 300 to like the ones that, you know, the Spartans that saved Greece, right? Like we're talking about handpicked people that made it through the next era with Steve. Some of these people are absolutely foundational to the turnaround that Apple is able to orchestrate in the early 2000s.
Now, the only caveat I should say is the joke was that Next acquired Apple for negative $400 million, right? Because Next was so powerful under Steve Jobs that they all got elevated. And I think it's something like in 1998, like five of the seven executive team members are from Next. You know, one of the non-Next people is Tim Cook. But I mean, that's how it's sort of a reverse takeover. Right.
Yeah, I remember actually Walter Isaacson recounting this part of Apple's history in his book and describing Jobs as being rather Machiavellian in the way that he befriended Gil Amelio and sort of stabbed him in the back by siding with the board to replace him.
Yeah, that's quite tricky. I mean, Gil Emilio is so clearly not the right person. He has certain skill sets, but he's got no charisma. He's not a product guy. And the thing that Steve Jobs does, which is he lies about it, which is really what makes us bad. You know, like when you say the cover up is worse than the crime. Well, the crime in this case was Steve Jobs as part of the acquisition got 1.5 million shares of Apple shares.
And I think it's July 1997, maybe it's May 1997, he sells all but one of those 1.5 million shares. I mean, it's a huge vote of unconfidence in Gil Emilio, but when Gil Emilio confronts him about it, he lies about it. Yeah. I remember there's actually a part of your book where he threatens to sell his one remaining share because he was having a fight with some of the employees. That's later. Yeah. But that's a hilarious anecdote. All right.
Walk me through now, Jobs comes back to Apple. He takes over the reins in 1997 when he was made official CEO. 1997, yes. How do we go from there? And Tim Cook was hired, I believe, in 1998. How do we go from there to where we are today? In other words, what is Apple's initial foray into China? And maybe even before that, what is its initial foray into outsourcing manufacturing, moving away from trying to make the whole banana?
So what people don't understand, because it generally what happens if you're doing a quick review of Apple is people will say Tim Cook came in 1998, sold off all of Apple's manufacturing assets and moved everything to China.
That's kind of true, but that actually took place over seven years. So as I said, before Steve Jobs even came on board, they already adopted a global outsourcing strategy. So at the time, like from the early 1980s up until really into the early 2000s, Apple had facilities in California, Singapore and Ireland.
It sort of had this like tri-continent strategy where you were like at the continent level assembling things locally. And they also made their own processors at the time. It was the PowerPC. That was before even Intel, the relationship with Intel. It's a partnership with Motorola, I believe. Yeah, I don't go into huge detail into it, but you're right. They were doing their own circuit boards. So in 1996, that's when they begin to sell that stuff off. So big assembly lines in Ireland, big assembly lines in Singapore, that all gets shifted to companies like NatSteel in Singapore. But they're sticking with this triple continent strategy.
And so what happens is when they build the candy colored iMac, Steve Jobs wants to build it himself, right? He wants Apple to build it. And,
And they don't have the capability of doing that. I mean, Apple has no experience building a CRT, a cathode ray tube. And so they use their analog television supplier, which is LG in South Korea. And for a time, Apple is doing some of the assembly itself. But basically, once it becomes successful, they take themselves out of the equation. And LG is asked to replicate the triple continent strategy.
So LG in Korea plays this unheralded and major role building the iMac. In fact, they designed so much of the manufacturing processes that a Korean executive says that they basically designed it and Steve Jobs demands a retraction. But LG then sets up facilities in Wales. This is basically to take over from Apple's Ireland operations and it sets up in Mexicali and that's basically to take over Apple's California operations.
And this is sort of crucial because basically what happens is their international expansion is a fiasco. So in Wales, the production line becomes known by the Welsh workers as the toaster line for its propensity to catch fire. And in Mexico, there's a literal fire where production is shut down for an entire month. Basically, what happens is a guy named Terry Guo of Foxconn calls up Tim Cook and says, let me fix this.
And my argument is the meeting of the minds between Johnny Ive and Steve Jobs is what makes Apple products unique. The meeting of the minds between Tim Cook and Terry Guo is what makes them ubiquitous. So it's a totally critical phone call. And Foxconn is basically asked to do the triple continent strategy as well. So they come on as a second supplier to the candy-colored iMac.
And they end up building them in China in 2000. So that's pretty crucial. But also in the Czech Republic, a history that really nobody knows anything about, and Fullerton, California. And then basically what happens is for several years...
you have a host of production in those three countries, but you also have even more for other computers, the iMac G4, which some people might remember looks like a sunflower. That's happening in Taiwan. The first iPod, first, in fact, three iPods are made by InvenTech in Taiwan. And basically what happens is the more you're comparing internationally
the rates of labor, the flexibility of labor, the ubiquity of that labor. China is just winning out here, there, everywhere. They are giving away free land, free machinery. They are making it so, so easy to choose China. And so as China enters the World Trade Organization in 2001, it just becomes this totally obvious thing where, well, of course we should choose
replicate operations in China. And then once you've done that, well, of course, we should close down these other facilities. And so between really 2000 and 2004, Apple really begins to consolidate everything into China. So just to sort of finish this off, in 1999, zero products are made in China. By 2009, virtually all of them are. And my argument of the book is that that 10-year process is a geopolitical event on the scale of the Berlin Wall falling. But it's
It's happened in a place where there's no real media. It's a censored media landscape. And all the people involved on the Apple side are stricken by NDAs and haven't really told their story. And of course, my point is until now. You know, I love this. I mean, I'm trying to think about, as you were talking there, I was trying to think about how did I want to phrase the next question?
Because one of the things that comes across while reading the book that's, I think, really important to understand is that this is not a story about margins. Yes. It's a story about margins, but it's not fundamentally a story about margins. Most of the way that we think about globalization and outsourcing is companies looking to lower their costs.
But actually what seems to have been the primary driver here was almost even, not even Apple, it was really Steve Jobs' maniacal perfectionism around design and manufacturing and wanting it the way he wanted it.
And China was able to give him what he wanted. Those supply chains, that ecosystem that was built out there was in many ways sort of the response of being in the pressure cooker. I'm not saying all of what happened in China. I'm talking about specifically here, the part that played a role for Apple, which bled into so many other manufacturing chains, was really a sort of response of being in the Jobsian pressure cooker.
Do you agree with that? So absolutely. This is fundamental to the book. And I think this is something that nobody really understands. So let me just quickly lay it out. Year in, year out, nobody had the skills in China to execute what Steve Jobs and Johnny Ive wanted for their products.
I mean, they just did not have that skill set. Most of these products are being put together by migrants coming from the hinterlands who, instead of working 14 hours under the hot sun toiling in the agricultural fields, they come to work in the factories. Well, they don't have the skill set. It's not like they have experience with translucent plastics and miniaturizing circuit boards into making it into the iPod.
So what happens is Apple begins to send plane loads of engineers eventually, you know, first into dozens of factories, but eventually into hundreds of factories. And if you think about the caliber of talent at Apple, we are talking about the best employees, the best engineers in America coming out of places like Caltech, Stanford, MIT, hired from Dell, Motorola, etc. And they are just doing the Ivy League equivalent of hardware engineering training, which
and teaching the Chinese how to do this, that, and the other thing. So, you know, the term for this is tacit knowledge, difficult to define tacit knowledge, difficult to write it down, but we're talking about experiential know-how in the art of making things, in the logistics and orchestration of these things. And of course, none of this investment is taking place in America. So we're taking the talent of America and we're scaling it all in China. And
I can make that point over and over, and I do in lots of interesting ways. And if we go into the 2010s, obviously, it just radically accelerates because the iPhone becomes so big. But the key thing I want the listener to understand is not that China offered tech competence. Apple had to go build the tech competence in China. And now it's being weaponized against us if we fast forward two decades. What they offered was a radical willingness.
Oh my gosh, yes. To do what jobs wanted and what jobs needed. And there's another great story in the book about how United Airlines set up dedicated flights to China. Yes, both to Chengdu and to Hangzhou. Yep. Reflecting the number of engineers that Apple needed to send to China on a regular basis. Yeah, United is basically told by Apple, "Look, we will book enough first class seats three times a week for you to fly." Essentially the longest flights that United offers on the planet.
we will buy enough first class tickets that if the rest of the plane is empty, you will still make a profit. Yeah. So I just really want people to really sit with that for a moment. Like what was the competitive advantage? It wasn't even cheap labor. It was a willingness to do it, a willingness to actually develop the skill set to sort of
actualize and manifest the vision of this company and its unique founder and leader? If I could add one thing, because on the one hand, yes, that's China, but in particular, that's Foxconn. That's Terry Guo. Terry seems to understand better than anybody else, okay, I might actually lose money on this deal. And in a great scenario, I'm earning two or 3% margins, but oh my God, are we getting the training of a lifetime?
And so he even plays Apple to some degree where, you know, this is an anecdote from Tony Fadell. If people don't know, that's a senior vice president, sometimes known as the pod father, right? If there's one guy behind the iPod, it's Tony Fadell. John Rubenstein won't be happy with me for saying that, but that's what I would say. And what he finds is that they would train a bunch of engineers to do, you know, X, Y, and Z. And then...
they would come back to the factory or whatever and find that it's a whole new cohort of engineers that are there. And Apple has to train that team as well because Terry has taken them and put them on the Compaq line, right? Put them on the HP line. And so Terry understands the value of the training. And so he's routinely switching up who Apple is training as if a new semester has started. Well, we're going to get into Foxconn because it's such an important part of the story. And
I love how Guo is always sort of there to say, "I got this. Just give me the opportunity. Put me in coach." I mean, you really get that sense of him as a character. Absolutely. You mentioned a number of the pieces of the important sort of products that we're familiar with. You didn't mention iPhone, but it's there obviously. This is the single most important thing that Apple has ever created and we're going to talk about that and the ecosystem that came out of it. You mentioned the iPod, you mentioned the G4, which had this very difficult long sunflower like neck.
that Jobs wanted again, his sort of obsession with design. But the most important story that sort of kicks off all of this is the iMac. Talk to me about the story of the iMac and tell the story from soup to nuts and how that integrates and folds into this larger story of offshoring manufacturing to Asia and eventually to China.
So Apple, again, almost fails in 1996. And it almost fails again in 1998. Because the iMac, and nobody really knows this, the iMac almost doesn't make it. I mean, the first Johnny Ive design of the iMac, and Johnny Ive, if he needs an introduction, this is the chief designer for industrial design, the person that really, you know, made the look and feel of all your favorite Apple products between the late 90s and I think 2019. So
is when he left, right? He is knighted in the UK. His importance is hard to overstate. He's like the spiritual partner, if you will, of Steve Jobs. And he was there before Jobs came back. Jobs hadn't hired him.
No. And the funniest thing is, well, first of all, the person who did hire him said that on his own tombstone, it's going to say, herein lies the man who hired Johnny Ive, right? Just to give you a sense of how important Johnny Ive is. It was almost kind of like his relationship with John Lasseter in the way that he sort of found somebody who was almost kind of like an intellectual partner or someone that shared his values. Yeah. My own analogy is, now I'm thinking of their name, Paul McCartney and
John Lennon. Right. They just have that sort of tennis match, you know, mental exchange and all these brilliant ideas come out of that. The iMac. So the original design for the iMac is,
is kind of a catastrophe. I mean, my chapter on it is called Unmanufacturable. And it's a pretty detailed narrative of how close this computer came to not being built at all. And you alluded to this a few minutes ago. Basically, what happens is in March 1998, this is originally the idea that Steve Jobs wants this computer shipping.
It's at a total standstill where the ID designers have requested this, this, and this, and the product designers are unable to execute what they want. They can't build them in. It's not that they can't build them in mass quantities. They can't build one of these things in the lab.
And so Steve Jobs sort of catches wind of this and attends a meeting that he wasn't scheduled to come in. And he goes on a tirade that one of the participants described as he compared it to a mob run fish market in New Jersey. So he's just yelling at these people. And can I swear on your podcast, Dimitri? Absolutely. OK, so he threatens to sell his one fucking share of Apple stock.
And he just complains about the engineer's unseriousness and all this kind of stuff. And an untold story is in the Walter Isaacson telling, I should perhaps say, he alludes to this meeting and says that, you know, what Steve Jobs said is like, look, it has to be this way. And the engineers say, we don't want to do it. And he says, well, I'm the CEO. And so they do it. I mean, that's nonsense. What actually happens is that Steve Jobs says,
sends the blueprints and sends a team of engineers to his favorite design consultancy called Acorn. And Acorn spends a few hours with it and concludes, you don't have a quality product. Like they list all these reasons why it cannot be built. And so Johnny Ive is humbled a little bit
And they come up with a new design and they change a bunch of things. So, you know, the reasons we can go into in the book, I don't think you wanted me to talk about plastic injection molding, but there's a bunch of reasons why it just can't be built. And the people I spoke to, I probably spoke to 14 people who worked on this product. I mean, none of these people have been talking to the media for the last two decades. There's just never been questions about how do you actually make this stuff?
We spent so much time on how it functions and, you know, reviewing that. And we obviously spend time on the original design conception, but we just completely missed the story of how do you actually build these things? So I was saying 10 minutes ago that LG built it. Nobody knows that LG built it. People at Apple don't know that LG built it. And they certainly don't know that they built it on three continents. And so...
The foundational understanding that I'm trying to bring the reader for the first several parts of this book is to get you up to speed on just how maniacal and obsessive Apple is over these designs and that this total intolerance of imperfection, intolerance for defects,
begins with Johnny Ive and of course Steve Jobs, and then it cascades across the entire product development cycle. So you take that mentality, that sort of famous Apple mentality, and you necessarily have to bring it to Asia. So we're not really in China at this stage, but we're bringing it to Korea. And people from the 1990s will say,
you know, the reason why ASUS is so good at making laptops today, it's because Apple trained them in the 1990s. The reason LG is who it is today and LCD television is because Apple trained them in the 1990s. I mean, people that worked at Apple will say the training that we gave these companies is like unparalleled.
So, I have two questions there. Maybe I'm going to have a question, but here's an observation. Again, because Walter Isaacson's book is such an important book in terms of telling us who Steve Jobs is and his story and everything else. But here's a good example of where your book illuminates parts of stories that previously remained occluded. And that is, I famously learned in... Maybe it was an Isaacson book or maybe I learned in other places that in one of the particular MacBooks,
Or one of the particular, maybe it was in the IMAC, I don't remember where it was. Steve Jobs was incensed that he didn't want any of the screws located outside of the unit. He didn't want to be able to actually see some external... And what you don't realize, you get a sense in the previous history that I'm familiar with, that the force of Jobs' demands motivated his team to figure out a solution. But again, what you realize, especially while reading this book, is there's a whole hidden story here.
which is how all this stuff was actually manufactured and that so many of the solutions actually didn't come from Apple, but came from their partners in Asia and eventually specifically in China. So let's continue this story. So we've got the story of the iMac. Eventually the iMac becomes a success and it's kind of Apple's coming out party or Steve Jobs' coming out party. And it also reemphasized and put design at the center of the company.
Where do we go from here? We mentioned Korea, we've mentioned Ireland. How do we eventually get into China? And what are the initial partnerships that Apple engages in China?
So through Taiwan is the short answer, but let me unpack that a little bit. The book doesn't quite get into this, but the reason Japan becomes an electronics powerhouse is really that when America wins World War II and is in control of more than 50% of the world's manufacturing, it begins sending engineers, okay, Washington is sending engineers to Japan to build up their electronics industry as a way of integrating the world.
So if you go back to 1776, essentially, Alexander Hamilton has this idea that America needs to be a manufacturing master, right? His quote is that it's going to cement our independence. And that idea after World War II is sort of tweaked a little bit. And the idea is we're going to cement interdependence through manufacturing and globalization. This is really the birth of Pax Americana. I would love to say the system that is still with us, but it's sort of on a teetering edge right now. We
We can maybe talk to that later. So essentially, Japan becomes really, really good. Companies like Sony and whatnot are all born out of this era. But what happens is Japan's a fairly small island. I mean, we're talking 100 million people. And so much goes there that the yen becomes overvalued. There are labor shortages and so forth. And so Japanese companies themselves start training their former colonies. So before World War II, Korea and Taiwan are both
Japanese colonies. If you're older than 35, you probably speak Japanese. And so to save on labor, to save on cost, they begin executing in those countries. And then what does Taiwan do two decades later when it's hitting its own capacity constraints? It goes to the mother of all developing countries, China.
So Terry Guo, founder of Foxconn, you know, founds it in a shed, 1976, a little city called Dirt City in Taiwan. I mean, I don't speak Mandarin, but Dirt City is the English equivalent. And, you know, 1976, that's two years before Apple, just to sort of be clear on that. And he really gets in on the ground floor of electronics manufacturing. Taiwan and China are estranged, right? There's a civil war. I mean, the sort of foundation of modern Taiwan is that the losing side of the civil war, the losers to the communists.
basically set up a new government that lays claim to the entire area of China.
But by 1987, I think it is, they had a bit of a detente. And so businessmen from Taiwan are able to go to China, and they end up playing this massive four-decade role, building up factories and training workforces and such. And that story is pretty well told. And I think in a sense, what I'm bringing to the table is that the most successful of those companies is Foxconn, and Foxconn's biggest client is Apple. So if you already have an inkling that Taiwan played this massive role...
you know, sort of building up the manufacturing sector in China, it's not much of a leap for you to understand that Apple is the one calling the shots, as it were. So let's talk about Foxconn. You mentioned it a little earlier when you sort of
described the coming together of two important minds, Tim Cook and Perry Guo. What was the origin of that relationship? Let's flesh it out and let's tell the story of Foxconn and Apple's relationship and foray into China. So Tim Cook is hired by Steve Jobs in 1998. This is pretty significant because Tim Cook spent, I believe, 12 years at IBM, might be 14 years.
And you have to remember that Steve Jobs hated IBM, right? The most famous ad in the computer industry ever is 1984. And it's basically portraying IBM as this Orwellian big brother that needs to be destroyed. So it's really interesting that the mature, older Steve Jobs actually begins hiring so many people out of IBM when he comes back in 1997, that IBM itself refers to Apple as IBM West, right?
Even Jeff Williams, who's now the chief operating officer, Tim Cook's old job, he came from IBM and loads of people did. So loads of the big names came from IBM. But the operations group writ large has, I think, hundreds and hundreds of people that come from IBM. So there's a maturing of Steve Jobs that's notable there. Now, by the time he's plucked to run operations for Apple, Tim Cook has been at Compaq.
Compaq at the time in 1998 is the world's best computer maker. So, you know, the PC wars have been going on for 15 years. IBM has actually been sort of taken out of the equation at this point. And Compaq has emerged as the winner. And, you know, they've done it for reasons that like from a Steve Jobsian perspective are kind of boring, right? Did Compaq have a better user interface, a better design? No, nothing like that. They all relied on Intel chips. They all relied on Microsoft Windows.
the PC game had become kind of boring in the sense that it was all about logistics, distribution and manufacturing. And the 1990 story of the PC boom is that as these contract manufacturers are fiercely competitive on price with each other, more and more of that work shifts to Asia. So Apple is actually kind of the last holdout
I mean, if you want to say Apple, you know, sort of gave up on America or something, it's actually pretty unfair. They're the ones that bet on America more than anybody else until because everybody else had moved to Asia, they just couldn't compete at all. And they were near bankruptcy. So that decision to outsource is made out of complete desperation at the lowest point. So it is quite unfair, I think, to portray Apple in a negative light for adopting the outsourcing model. If they hadn't, they would have died.
And if you want to blame somebody, it's the PC industry. I don't know that you want to blame someone, but it's just worth knowing that Apple is sort of off scot-free if that's the allegation. Also, the success of Microsoft Windows and the disintermediation of the PC in general made that even more difficult to resist for Apple. Yeah. I mean, the 1981 IBM PC is the catalyzing event for electronics globalization.
So I don't know how much further we want to go, but basically like Steve Jobs dissects an IBM PC in 1981 when it just came out. He's fearful that it's going to have all these advantages that Apple has dismisses it as a piece of junk. He completely misses that the significance of the IBM PC is how it is put together.
And how it's put together, it's sort of bandaged together with all these existing parts. It basically allows for what Thomas Friedman later calls the world is flat, meaning that instead of doing things in some proprietary in-house way, it builds these huge competitive advantages by basically allowing anybody to create this, that or whatever part.
And as a result, there's all sorts of competition that's not happening on its balance sheet and it reaps the rewards. The problem, of course, is that it didn't have an exclusive arrangement with Microsoft and it gets cloned like literally within a year. And so IBM sort of like the key decision that sort of makes IBM such a great builder of PCs is also the thing that leads to its own demise. So there's all sorts of irony and great examples there. Anyway, my point is that
By the time Tim Cook comes on board, he's been at Compaq for six months. Compaq is at the time the largest client of Foxconn. So Foxconn's Terry Guo and Tim Cook already know each other. And so when Tim Cook makes this pretty mysterious move to go to a company that still looks like it's going to be bankrupt, Terry Guo is intrigued.
And when you get those fires of the iMac, the toaster line in Wales and the literal fire in Mexico, Terry Guo senses opportunity and he realizes sort of better than anybody, probably even better than Apple. This company is different. We need to learn from them. We need to win those deals and see who he offers like unprecedentedly low margins to take over those orders. And, you know, people from ID, people from PD within Apple begin to train the hell out of Foxconn.
So, obviously, Terry Gou himself was an important part of Foxconn's secret sauce. I mean, again, another leader with incredible will and determination and vision, incredible vision, and a willingness to sacrifice and take risks because he could see the long term way ahead of everybody else. Yeah.
What else was it that made Foxconn such a special company that made them so unique and that ultimately explains why Apple wanted to partner with them? So the answer is a little bit wonky. So this is the difference between OEM and ODM. So in the late 1990s, all the Taiwanese manufacturers of computers...
aren't content just assembling computers. That's really low margin. So what they want to be is an ODM, which is original design manufacturer. What that means is that they do R&D and they hire more expensive engineers and they do more of the design. So imagine if you're Dell, if you're HP, if you're any PC clone, this is kind of brilliant. Not only have you outsourced and offloaded from your balance sheet manufacturing, but the Taiwanese companies are basically giving you a literal catalog and saying, which design do you want?
So if you're Dell, you don't need Johnny Ive. The Taiwanese are doing it for you. And they're doing it for you in ways that are really helpful and efficient for them. And yes, it's higher cost for them, but the margins on design and R&D are much, much higher. So basically everybody is going in that direction. So the companies in question here are Quanta, Inventek, Asus. Companies like Pegatron aren't yet born yet, but they have predecessor organizations and they're all going in that direction. Terry Guo says no.
I'm going to move heaven and earth to do whatever the manufacturer wants for me, but only in this like assembly and assembly adjacent tasks. So Foxconn becomes really vertically integrated to take on anything that the client wants, but they're not going to compete with them ever. So the problem with the ODM model is those companies begin to brand PCs themselves, right? And then they're actually competing directly with HP, with IBM, etc.,
And so during times of component shortages, the PC brands from the West begin to complain, wait a minute, you seem to be giving the scarce parts that you have to yourself rather than to us. And Foxconn is never going to do that. There's never going to be a computer that says Foxconn on the outside, right? Competing with Apple. So it's more of this like strategic decision. And in explaining this, I say, you know, there's not that Foxconn is really interested in low margin assembly. It's not.
but it lures you in with that idea. And then by doing more and more vertical integration, it's sourcing the parts itself. And so there's something called PPV. I think it's product purchase variance. So what happens is Foxconn would say, yep, we bought all these, you know, nuts and bolts for a dollar each. So please pay us a dollar each. But actually Foxconn was able to buy them at scale for 30 cents each and they're making that 70% margin. So they really try to like lure you in and then sort of change the script later.
But they meet their match in Apple, who really doesn't allow them to do that. And if you just, you know, go find a Bloomberg terminal and look at Foxconn margins from the time they partnered up with Apple in 2000 to the time, you know, the iPhone goes ubiquitous. I mean, their margins fall something like 80%.
Well, to be clear, when you're saying Apple didn't allow them to do that, Apple did allow them to source the materials themselves eventually. For a time. And then what happens is Apple takes unprecedented control of its supply chain and it begins making sure that all the raw materials and all the procurement is done on Apple's behalf to such an extent that the prices are actually obfuscated.
to Foxconn or to the supplier. So Apple gets in this weird, like unprecedented control sort of stage where it has a better understanding of the cost of manufacturing than the very manufacturers it's working with.
And they have to do that for two reasons. This is not just like a control thing. This is, I should say it is a control thing, but I don't just mean in a negative sense. Like once you're making iPhones in the tens of millions, you cannot just rely on a supplier's word that they are going to get enough copper or whatever, right? So Apple has to make damn sure we're going to get all the copper. And they have to do that for the thousand components within the iPhone. And then the second thing is Apple believes in their negotiating power better. So they believe they can get better prices than the supplier can. I mean, they did something also interesting
Somewhat similar though with also some different implications when it came to advanced machinery. Not only did they purchase the machinery and physically place it within Foxconn's facilities themselves, which was a sort of form of foreign direct investment into China, which also had huge- Not just Foxconn, hundreds of factories. Exactly. It had a huge impact on the flywheel of innovation. But also they importantly took that machinery away from their competitors.
They were ordering equipment and basically housing it within their own factories and not allowing other companies to be able to use it, which allowed them to also keep one step ahead. Is that fair? Is that a fair description? Yes. So we're jumping ahead a little bit, right? This is more when they're in China. So then maybe instead of jumping ahead, walk me through that process. Do we want to jump directly to the iPhone? Do we want to talk about some of the other products like the iPod or the G4?
So I would just say, just to finish off the iMac narrative, I would just say basically what happens is Foxconn is able to come in as a second supplier to LG. And, you know, as one rival supplier says, Foxconn kicked our rice bowl. They just offered better pricing, you know, more abundant labor. What was the product there? Was the G4 was the first time that they really...
And so even though LG is doing it for the first two years, Foxconn comes on board, does it more cheaply and really wins out on those orders. The next major product is the iPod. And I don't know that we have to go into it in great detail other than to note that it was not made by Foxconn originally. It was made by InvenTech in Taiwan. And the iPod almost failed. It took more than two years before it sold in big numbers. And during that two years, Apple considered canceling the product.
Again, something that's not really known at all. The way Foxconn gets involved is that, and this is pretty fascinating, they create a replica of
unbidden by Apple. But at the time, they're worried about losing Apple as a client. So the iMac is the big product that they're making, but it's sort of dwindling in importance. When Apple comes out with that Sunflower iMac G4, that's built by Quanta in Taiwan. And then the iPod goes to Inventic in Taiwan. So it's like the two major areas of growth are happening outside of Foxconn's walls. And they're thinking, well, what do we do to get Apple back?
So they create a replica iPod and they bring in a bunch of people from product design and operations, invite them to their factory. And they basically do a show and tell where, A, they show them the product and say, look at what we've done, even without you training us. Imagine what it would be like if we actually worked together on this. And B, they show them a factory of just like unprecedented space machinery and say, we're willing to do all of this for you.
And so that's when they sort of really hook in Apple as a major partner. None of this is told, by the way. This is all based on the 200 interviews I did with the people who were actually in the meetings and stuff. So you interviewed people that were actually in the meeting when Foxconn revealed this reverse engineered iPod. What was the level of shock in the room from Apple engineers?
Oh, the Apple engineers, like it had a different skin on the outside. So you could tell it wasn't made by Apple. But the way that it functioned, the way that like the statistics of how it would work, but also the software, basically, the person said it was like our own hardware and software teams had built this. So we were just totally wowed by Foxconn. So for different reasons, because Apple was also working with Foxconn to build like aluminum clad cinema displays.
Apple throws in a whole bunch of money to make Foxconn like the master of making things out of aluminum. And so the idea is formed that the iPod Mini is going to be made out of aluminum. And if you are able to do, gosh, the term is escaping me right now. But the way that aluminum is made is you can code it in colors. And so the iPod Mini is born and they do it in five different colors. And that becomes the hit product for Apple. I mean, Apple has never had a cultural relevance in the
in the what, three decades at that point until the iPod comes out such that, you know, SNL is parodying Steve Jobs. Everyone remembers the advertisements with the sort of like white silhouette and colorful background. I mean, the iPod mini just goes nuts. And the iPod mini is only around for about a year because then the iPod Nano comes out.
And so Foxconn is able to really miniaturize the technology. And Apple and Foxconn are really working hand in glove at this point, so that when the idea for the iPhone is borne out, even though Apple technically interviews four or five different Taiwanese suppliers, it is clear as day that Foxconn is going to be the company that does it for them. Yeah, I remember all those. I mean, I went down memory lane a number of times during the course of reading this book. And I remember...
What it was like to walk down the streets of Manhattan and to see all these silhouettes with their candy colored iPod minis or iPod nanos. Yes. It was a cultural moment. So what came next? Again, let's walk through this progression because I want to use it as an opportunity to tell the story of the integration of these supply chains and the advancement of Chinese manufacturing. So the iPod is so successful that it basically becomes more than 50% of revenue, right? I mean, just a fun way of putting that is iPod revenue is basically...
making Apple Computer, what it's called at the time, really not Apple Computer. When did they drop the computer in the name? I think it's in 2007. So yeah, there's this idea that, you know, Apple is going to be the company that makes the center of your digital hub. Originally, they're thinking that's the computer. Clearly, the iPhone becomes that later on.
But what are we missing here? Basically, what happens is major products are being built in Taiwan and Taiwan just is not big enough to do it, not at the scale that Apple begins building at. And so Foxconn is able to build their factories in mainland China and they just absolutely wow Apple. So, you know, the term that's used within Apple, instead of time to market, you know, how quickly you can go from product conception to it being in someone's hands, Apple emphasizes something that they call time to money.
The jargon way of putting it is time to volume. So nobody can match Foxconn in how many or how quickly you can go from product conception to building hundreds of thousands or millions of these devices. And so Foxconn just wows the hell out of Apple. And you could also say that China wows the hell out of Apple, right? There's all these anecdotes about what's called China speed. I mean, one example that's not in the book, I talked to an engineer who said,
You know, we were in this big facility and all this machinery needed to be removed. And we thought, OK, yeah, well, they should be able to get it done in two or three weeks. They show up the next morning and it's all gone. And it's just inexplicable speed. The engineers have no idea how the task was accomplished that quickly. But that's the sort of thing that Foxconn was doing routinely when it came to setting up a production line, expanding that line. You know, it'd get to the stage where Apple would realize, oh, we really need another production line for more of these orders and then find out that Foxconn on their own initiative had already done it.
right. Just to make sure that they win those orders. And that gets to the point where in 2010, I mean, you know, Foxconn is able to go sign these deals to move more production in line with Beijing's directive to sort of, you know, make sure that growth is happening across the whole country. And again, I mean, Foxconn is just making bets on Apple success that Tim Cook and top executives at Apple don't yet believe in. And Terry Guo just sees it. And he realizes if I build these factories, I'm going to get the orders.
And so, he's trying to monopolize the supply chain. And the know-how. And the know-how. That's the thing that nobody understands. Yeah, absolutely. So, we haven't really talked much about Tim Cook, but he's there the whole time. And I think this also, again, reading your book is helpful in thinking about why he became CEO of Apple.
you understand how important Tim Cook actually was. It's also interesting. I mean, do you remember when Steve Jobs had that interview that he gave at the time that he was at Next and he talked about why companies sort of go into obsolescence is they go from being product companies to being process companies and they elevate the people that we're going to process? Yeah. That irony is remarkable when it comes to the elevation of Tim Cook as CEO.
Yeah, no, it's a little bit nuts. I mean, I guess one thing like insofar as I have to give a sort of defense as to why I was writing a book about the manufacturing and operations of Apple, like why would you want to look into that area? Just think of who understands this better than anybody. Apple. So when Steve Jobs dies, who's made CEO?
It's the COO, right? It's the operations guru. So Apple understands better than anybody, earlier than anybody, that the success of the company is no longer just about design and product conception. It's scaling and shipping the designs that they've already come up with. So it's totally instrumental that Tim Cook becomes CEO in 2011.
I think very highly of him in certain respects. I mean, I really do think he's competence incarnate. And I have some anecdotes of what he's like in the meeting just to get things done. He really is the sort of operational counterpart of Johnny Ive in the sense of there's no tolerance for mediocrity. But he's also a little bit cold and he doesn't have obviously the same product vision. And then my big
Quota criticism, of course, is that I think Apple sleepwalked into a geopolitical dilemma of their own making. And actually, should I just can I just tell you, I just remember this is I love this. My favorite quote in the whole book is a former VP telling me over coffee. Are you sure you're not overthinking your thesis because you keep talking about geopolitics? And I can tell you, I was there in the early 2000s when we were setting up the China supply chain and we weren't thinking about geopolitics at all.
And in a nutshell, that's my whole thesis. Well, again, so I'm going to mention a few things and then I'm going to move to the second hour. I think that's where the story of Apple dovetails with the story of globalization and the reversal of the political consensus that enabled that.
Something I told you while reading the book, I just found really striking is that the rhetoric in the United States around globalization and trade is so far out of sync with the reality, which looks much more like the consensus of the 1990s and early 2000s. But we'll get into that. So I'm going to move to the second hour, Patrick. I want to talk more about Tim Cook and why, for example, you compare him potentially to someone like Jack Welsh, who was very successful while he was captaining GE, General Electric, but his legacy has since been tarnished for reasons that you think ... I mean,
may be relevant to Tim Cook's story. I also want to talk about the iPhone, of course. This is what's going to be really exciting. We're going to have a chance to talk about the single most important... I think there's not... There probably isn't even a debate on this, right? The iPhone is the single most consequential consumer product ever created by any company ever in the history of time, right? Yes. I mean, it's clearly...
You're going further than me. I would just say it's the most iconic product of the 21st century. But yeah, nothing is in its volumes at all. Even if you're looking at literature or something, like how many books are sold, nothing gets to iPhone. We're talking about $2 trillion of revenue since 2007. Yeah. I mean, even the Ford Model T, which is an iconic product, I think doesn't even begin to compare because again, the scale wasn't available at the time. You didn't have a global marketplace and you didn't have brand power.
That's the other thing that's so important. Exactly. And it's not even the volumes, right? Because the craziest statistic about Apple is that even though the iPhone has never, never been more than 20% global shipments for smartphones, so 20% market share globally, it controls more than 80% of industry profits globally.
Find me a sector where a minority player is having that sort of command. Yeah, it's incredible. And the price of the iPhone, of course, has just gone up and up and up. If you look at the PC from 1990 to the present or 1990 to 2005, I mean, we're just talking about something that falls and falls and falls in values. And yet the iPhone, you know, the original one was $499. Today, you're paying more than $1,000.
Yeah, and you have also platform economics now where you can sell services through these platforms and that changes the game as well. So as I said, I'm going to move to the second hour. We're going to talk about Tim Cook. We're going to talk about the iPhone. We're going to talk about the implications of what has occurred in China over those years. And then also among other things that I'm going to think about when we get to the second
I want to have a conversation about what does this look like moving forward? What does this mean just given the politics in the United States, the direction of travel, the concerns around the scale of our dependency on China and Chinese supply chains? But again, we're going to cover all that in the second hour, Patrick.
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