(Preview) ‘Protracted War’ and ‘Struggle’; The Looming Risks for the PRC; A Politburo Study Session on AI; Apple’s Attempt to Pivot
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Hello and welcome to Sharp China. I'm Andrew Sharp and you are listening to a free preview of today's episode. The theme of the inspection tour was around building Shanghai into an international center for scientific and technological innovation with a heavy focus on AI. And so, you know, there's even a great in the CCTV report Tuesday evening, you know, you got Xi Jinping with these dark AR glasses on. Great.

Looks cooler than Zuckerberg. Embracing the future. No, no. He looks cooler than Zuckerberg does in that recent podcast where he's wearing those big meta VR glasses or whatever. Oh, boy. Yeah. I don't know if anybody's ever going to look cool in VR glasses, but I haven't seen the photo of she. Maybe he's pulling them off. The AR glasses out there.

But no, no. So but again, it's just, you know, this is a but it's it's a natural competitive strategy and a competitive response from the PRC. Yes. And it makes it makes total sense. And again, it's and so I think, you know, it goes back to I mean, they're they're like, yes, they'll want as many chips as they can get from the U.S. and as much semiconductor manufacturing equipment as they can get from the U.S.,

But they're fully decoupling to the extent that they can. Well, and to the extent that this is critical to economic security and national security for the next several decades, they can't afford to be reliant on the whims of the United States. No, and I mean, the U.S. is right. I mean, that's been demonstrated over the last several years. And so...

I think in my note on Saturday, when I had some commentary on the readout of the meeting and a translation of the readout, I just concluded, basically said, I think that this meeting really is more evidence the US and China have reached the point of no return in building bifurcated AI systems. No matter how much the US might sort of say, oh, whoopsie, we made a mistake with expert controls, let's pull back.

I think the Chinese will be happy to buy as many chips as they can while they're bridging the gap towards building their own independent, secure, controllable systems. But they are not going to rely on the US. And so again, I do think this may take some time for it to sort of sink in. But I think this meeting was...

really a pretty bad sign for Nvidia. No, exactly. And I mean, speaking of, I guess this is the theme of the day, inevitably fruitless negotiations. I don't know what Jensen Huang could have said in his meeting with Premier Lee Chong or whoever else he met with with his trip a couple of weeks ago.

to reverse the trends of what China was trying to accomplish in AI and the ultimate goal of self-reliance. I mean, that's just sort of where things have been headed for a while now. But while we're talking tech, we can close with two Apple stories from last week.

First was the FT. They said Apple plans to shift the assembly of all U.S. sold iPhones to India as soon as next year, according to people familiar with the matter, as President Trump's trade war forces the tech giant to pivot away from China. And the goal that Apple has laid out is to have all of it moved by the end of 2026. We'll see how far they get on that front.

But then the information also had a story about the efforts to shift some of the production to India. And they wrote, for several years, Apple has been working hard to make more of its iPhones in India so it can reduce dependence on China, where around 80% of its smartphones are currently made.

Increasingly, though, just getting that manufacturing equipment to India is a hassle. In many cases, Chinese authorities are delaying or blocking shipments of iPhone equipment to India without explanation, according to multiple people involved in iPhone production. Foxconn has seen approval times from Chinese authorities for exporting iPhone-making equipment from its China factories to those in India rise from two weeks

to as long as four months, one of the people said. They are also rejecting some export applications without explanation, the person added. The equipment Chinese authorities are scrutinizing includes high-precision lasers that weld metal parts to the frames of iPhones.

Air leak test stations that measure how waterproof the devices are and machines that can identify, grab and move parts from one location to another, known as pick and place machines, according to three people involved in iPhone manufacturing.

So I don't have a question here, but that information report dovetails with reporting earlier this year from the rest of the world. Had a good story. Exactly. December. Yeah. They were first on the Fox equipment issues. But I do think just watching what happens to Apple over the next couple of years will be a great window into.

into the future of the US-China relationship and maybe globalized trade in general. Do you have any thoughts on the Apple efforts there? So a couple of things. One, I'm really looking forward to Patrick McGee's book, Apple and China, the Capture of the World's Greatest Company. It comes out in about two weeks. Oh, wow. Okay. He's a Financial Times reporter and it's going to be a really interesting book. I'm getting an advanced copy. I've not seen it yet. I'm going to hope to have a conversation with him. I think...

I hope we'll talk to Ben too. I mean, he's, it'll be interesting to really talk about. He's done great work on this story for a while now. Yeah. The only thing I'll say is I know you and, you know, Ben wrote about it and you and Ben talked about it on Sharp Tech and Ben wrote about it on Techery, sort of the, the,

broader question of does Apple need new leadership because of all the challenges it seems to be having in AI. And I think Ben made the point, which I agree with, is in this moment of just increasing tensions between the US and China and the really fraught state of the relationship, Tim Cook has been here and he managed to... He knows the people. He knows the people. He managed through the first...

Trade war in the first Trump administration. He knows he has access to the top leadership in China. He has access to the top leadership here. I think it was Banner who suggested if they were to make a switch, you know, keep him as executive chairman and have him be the head diplomat. Right. Because so much of Apple's future is still tied into how well they navigate the economy.

China and the US-China relationship. Yeah, I mean, he was very clear throughout that conversation. Don't kick Tim Cook out the door right now because you're going to need him to navigate any of this. 100% agree. It would be a disaster to try and bring in someone new to focus on that. Yeah. Well, I mean, with Cook...

It's interesting because I actually didn't mention this during my conversation with Ben on Sharp Tech, but I always looked at Tim Cook as foolish and maybe a little reckless for not diversifying the supply chains earlier.

But one of the questions I have now and looking at a report like that from the information or rest of world, like I wonder whether there would have been consequences for Apple in China if the local authorities sensed that Apple was really trying to leave and really trying to diversify its supply chains in earnest. Do you think that was a meaningful risk that may have animated some of the decisions that were made in China?

let's say 2019, when there were still trade tensions and still existential risks to the company.

Again, I think no company is saying, "Hey, I'm leaving China," and then starts leaving China. They all do it quietly and then say, "Hey, I'm over here now." Yeah. Or, "X% of my production is over here now." I mean, you'd be crazy to telegraph what you're doing. I think that that may have been a consideration. I do also think though that they really thought they could just navigate through it. Yeah. And what's interesting, I think the information report, it was good.

It's pretty funny. They said, you know, one of the ways one of the companies was able to get some of this machinery outside of China is they set up like a shell company. A dummy company. A dummy company. And it's like, oh, you mean how some of the Chinese firms buy chips in Southeast Asia? That's the playbook, man. That is the playbook. They know what they're doing. And so, I mean, I think, you know, you can do that stuff. You can do, you know, I don't want to say subterfuge, but you can certainly, you know, do things quietly. But

Apple being Apple, it's hard to not be noticed fairly quickly if you're moving significant parts of production. And I think what's happening is it's not like they move to India and then get a bunch of Indian suppliers. They need the Chinese suppliers to go with them. Right. Yeah. So it's going to be hard to hide what you're doing. And that's part of what's such a monumental challenge for Apple moving forward because this is all about assembly in India, but...

every component of the supply chain is now related to Chinese suppliers. That's why this, the subtitle of this, of Patrick and his book, I think is great. The capture of the world's greatest company. That's, I mean, that is what's happened. Well, I can't wait to read the book because it's been a very profitable capture, but,

but it still is capture. I mean, it's arguably the ultimate success story for American companies doing business in China, both on the consumer side for Apple and the manufacturing side. What they've been able to accomplish on the manufacturing side would not have been possible without Chinese manufacturing and without Tim Cook, who led that effort. But I think one of the things that will be in this book is also it would not have been possible had Apple really...

building up all these manufacturers. Totally. And Ben's talked about this a bit, specifically finding really struggling Chinese firms and really propping them up so that they could then produce at a lower cost than any of the foreign competitors. So it improves Apple's margins. Totally. So it was great in the short term, but actually they created this... They helped damage some of the foreign...

Some of the people, the alternatives that they might lean on. Right. The foreign alternatives. Right. Exactly. Exactly. Yeah. Well, and I would say the PRC has promoted Apple as a success story every step of the way, but the story isn't finished yet. And so whether Apple can successfully de-risk and diversify its supply chains remains a completely open question. And I'm

On one hand, I think reading that information story, it's possible that the process will get even messier than people expect because this is another point of leverage that in terms of escalation options that both sides have, who knows what the PRC might want to do to Apple in the next couple of years. And also...

I would argue that the friction that Apple's encountering now is a good example of why the effort to decouple is reasonable. And the notion that the PRC stands for openness and free trade all over the world, like that should ring hollow. Well,

I think someone else had used this, and I forget where, but the newsletter last week, I think it was Thursday, talked about this information story. I just said Hotel China-fornia. Put your money in, but good luck. That in some ways is what it is for Apple. Yeah. No, exactly. It's a really wonderful hotel that's really luxurious. Yeah.

you know, throws off a lot of cash, but. And literally elemental to the story for the most valuable company in the world. Yeah. Yeah. No, it's, it's a, it's, it's,

Again, it's all part of the great unwind. Yeah. Well, it seems to be accelerating. One tech story that really amused me was Netflix CEO Ted Sarandos. Good for him. He was in D.C. last week and he said 15 years ago, everyone thought it was existential. You had to get to China. For us, I put a couple of years of trying to do it.

And then he explained that Netflix had made a deal with a third party company that would give them a license to operate in China and not be blocked on the Internet. But it didn't get much further than that. The content had to clear the censorship board to make it to air. And in three years, he said, not a single episode of a Netflix show cleared the censorship board.

Not one. They had no interest in us being in China. I watched everyone spend the next decade grinding out all their time to get into China. Totally true. And ultimately they ended up in the same place I did. And then he was boasting that Netflix is one of the only companies in the U S without exposure to China. So which, which means they actually have put on programs that portray China in a negative light. It could be, um,

Or, I mean, it seems like the censorship board wasn't really greenlighting anything back then. But by the same token, the censorship board maybe saved Netflix a lot of headaches in this environment.

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