Patrick McGee - "Apple in China: The Capture of the World's Greatest Company" | The Daily Show

The book is called Apple and China. Uh the capture of of the world's greatest company. I I've got to tell you something.

You know, I I'm not much of a reader. I was going to wait for the movie to come out, but honestly, like this is jaw-dropping. Yeah.

This book is jaw-dropping and and so well researched. It's not a pmic. It's not hyperbole.

It's the story of how China how China basically was built as a country by Apple. Is that Yeah, that sound like I say that sometimes and it sounds totally unhinged and I get that right. And yet like what happened is like I came across internal documents after speaking with 200 people and I figured out that Apple was investing by 2015 $55 billion a year into China.

So this is mostly like they spend loads of money, billions of dollars on machinery that they put on Apple's sorry on production lines that are sort of orchestrated by Apple but not owned by them. So they're they're in they're building the machinery. Yeah.

But they're outsourcing that they're they're hiring companies to build this. Like they they like outsourcing is the word and yet there's something so um they own the means of production with it. They own is so I compare it to like the way Uber is the largest taxi provider in the world without owning any cars.

It's the same thing for manufacturing. So none of the factories are owned by Apple and yet they have like maniacal control over the machinery within those factories, right? And so they're and then they're doing like I quote someone saying we treat the workers like our arms and legs like you do this and you do that.

And the number of people they've trained like that is 28 million. So larger than the labor force of California since 2008. And the number of billions of dollars they spend on machinery is you know 14 billion I think is the peak year.

So some of that's public and other this material. these documents the the numbers seem fantastical of course and well they do and they don't right so so 55 billion is a year 55 billion is per year that's the investment a lot of that is training costs for the employees in China and the number of employees like per Tim Cook's public estimate right is 3 million people are assembling iPhones and other Mac products in China but these aren't just low-level like oh it's a million people doing lots of unskilled jobs the ones that Howard Lutnick wants to bring back to America yes and lots of PhDs at Foxcon, really sophisticated, right? But my point is like lots of times people think uh there's great vocational training in China.

The vocational school in China is Apple. They've trained all these workers. Yes, they've done a huge job.

So, so let me just put the 55 billion in context. I could not find any corporate equivalent for how much someone is would is investing in another country. So, I had to go to government efforts.

So, you look at something like the chips act, right? Biden's flagship plan. Let's bring chip fabrication back to America.

That's 53 billion over four years, right? Another way of saying that Apple is investing quadruple what the commerce secretary called a once in a generation investment in America. So that's nuts.

And then you go back to then you go back to the Marshall Plan and you're thinking, okay, so maybe it's like half of the Marshall Plan, something like that. Like that's going to be crazy. People are going to relate to that.

So I take the Marshall Plan spending from 1948 to 1952, right? This is sort of like America saving saving Europe after after the World War II. And you convert it to $215 and it's half the annual spending of what Apple's investing in China.

This and this is $130 billion in 16 countries. 16 countries versus one versus one country. Yeah.

Ver and it's not one, right? It's like the modern equivalent of the Soviet Union. Like it's our biggest adversary.

And so, you know, I sort of ends the book, not to sort of like get so ahead of myself here. No spoilers. Yeah.

Oh my god, does Apple die? Well, paperback version. I don't want to tell people.

So, I say that as China, you know, as their GDP eventually overtakes America and especially because they're doing so good in the advanced electronic sector, more people are going to ask how did they do it? Like, how did they go from such poverty 50 years ago into the world's greatest maker of like military weaponry and advanced electronics? And a big portion of the disquing answer is year in year out Apple taught them.

They do this. By the way, this is China and this is not to single out. This was a decision that that Apple made not with this uh intention.

No, not at all. It it was, you know, it it began, I guess, well, it began with shareholder capitalism, I guess, in the 80s. Yeah.

I mean, not to back its very much in the book. Yeah. Absolutely.

Right. I mean, it's that ethos of you do what's best for the shareholder. So you're it's you're searching out the cheapest labor, the lowest uh products, but it really it seemed like Xi Jinping in was it 2013 is what made this so fraught.

Would that be correct to say? Well, yes, because I would say so my thesis is really that they sleepwalked into this crisis. I mean, you cannot blame Apple for moving into China in the early 2000s.

For starters, the American consensus with that was that we're going to inculcate the next WTO. They came in. I mean there was broad political support to do that.

The problem was when Xiinping really turns China in an authoritarian direction. It's not like Apple was on the sidelines not noticing. They were attacked within 36 hours of she ascending to the presidency.

Tell them about consumer day. Consumer day is something that happens March 15th every year in China and basically it goes back to 1991. And there's someone in the audience like I know consumer day.

Yeah. I have read this. Beware the eyes of consumer day.

Okay. So companies are called out for like not living up to the socialist ethos. Okay.

And it's increasingly western companies in the in the mid200s. Uh and in McDonald McDonald's is 2012 and the book opens with 2013 Apple is attacked on consumer day and it's for warranty differences of all things. The story it turns out to be not actually true, right?

Well, it's okay. So little little the How much time do we have? The it's it's the most fascinating part of Central has no other program.

Literally there's no other program. Is it chickens? Nothing.

I'm going to give you the 30 secondond version, but this is four chapters in the book. Okay. Demand for iPhone in China after 2010 is wild.

Okay. There are four stores for for 1. 4 billion people.

Okay. So, one store per 350 million people. And the iPhone becomes the most conspicuous like status symbol imaginable on the country in the country.

And so what happens is these gangsters called yellow cows notice this imbalance and they begin paying migrants by the bus load to come over to the store and snake around the store 67,000 people at times to buy as many iPhones as possible and then they go to a city like Chongqing population 32 million number of Apple stores zero and they find ways legal and illegal to sell iPhones at more money they're making more money than Apple per iPhone right okay so it's absolutely wild what happens is Apple eventually catches on to this a little bit because they're doing nefarious things they're buying phones in the US, they're using fake ID. They're buying phones for less than $100 so that they can, you know, make even more fat margins on them and stuff. And so they begin actually burning out the CPU of the phone, deliberately breaking it in the process, but rendering it.

Um, you can't, you can no longer see where it's come from, right? So they're masking the retail origin. Okay?

So what happens is Apple catches wind of this and they begin refurbishing these deliberately broken units rather than replacing them. Right? By refurbishing it, they're doing something that they're not doing in other countries, right?

So they're actually So they take that as an insult to China. Yeah. Exactly.

So without probably knowing the full story, CCTV, which is like the state sponsored CNN of of China, attacks Apple for treating the Chinese in a way that's inferior to the rest of the world. Okay. That was 12 years ago, reported by every media outlet.

And like they never figured out what the story was with the yellow cows and how it came to be. So that's why it's so significant. That's why it's the prologue.

And so at that moment, shares of Apple then start to go down. It becomes less popular in China. Yes.

Uh it's so I don't I honestly don't remember if shares really fall down to be honest. The media's like eyeballs were not on China at all during this time. I mean in China but sales in China.

Sales in China. Yeah. They first they sort of freeze and then they actually sink.

That's right. Yeah. So Apple's response to that is what plate local officials um hire a team of people that call themselves the gang of eight.

These are the first senior people title. Yeah. And uh yeah.

So these are sort of eyes and ears of Certino living in China. First time they've had senior people that there. And they basically strategize like what's our message to Beijing.

Like why are we in the country and how do we demonstrate to them we're not this exploitative power? Look at how much we're doing for you. They're the ones who come up with we're investing like a nation building effort in China.

Like get off our back. You have no idea how much we're helping you. And the fruit really is in the pudding.

Fruit in the pudding. Whatever. Um proof is in the pudding.

Proof is in the pudding. The top smartphone makers in the world these days are all are all Chinese, right? So OPPO, Vivo, Huawei, Xiaomi, they have 55% global market share.

And my sort of, you know, comment on this is like we think iPhone killed Nokia. iPhone never had more than 20% global market share. They're not big enough to have killed Nokia.

Who killed Nokia? The Chinese competition. Why did the compet Chinese competition do so well?

Because Apple trained all their suppliers. So they trained their competitors to build a product that would be commensurate with their product, but would be a Chinese-owned company. And those companies start to gain Apple uh start to gain market share on Apple.

Yes. So the early years of making the iPhone, Apple was really proprietary about all its processes. It would not want those suppliers to like market their opportunities, their their technical capabilities to everybody else.

But what happens is when they like obiate the need for a new design by Johnny Iive taking a corner and like getting rid of aluminum or something like that. And that's the whole deal for Apple. Like it's beautiful.

The shit's beautiful. Yeah. But if you sort of remove some some aspect of the phone and you no longer need that supplier and they're so dependent on you, well, what happens?

They go bankrupt. So instead, Apple begins to say that's a problem for us. So we deliberately say to our suppliers, uh, uh, however fast you're growing with us, with Apple, grow that fast with somebody else because otherwise you're going to be too dependent because they don't want to get blamed for Exactly.

But if I'm building a component for an iPhone, what is the skill set I have and what can I do with it? Of course, I'm going to supply Huawei and Oppo and Vivo. That's the only logical thing to do.

So, they now have a real problem on their hands. They have trained their competitors and made it part of their business model that their competitors get healthy and do that. And they're about to face a real struggle and someone saves them.

Who is it that saves them? Patrick, what? Patrick, I read your book.

So I so my my thesis what did they declare about Huawei? Who somebody declared something about Huawei that puts Apple back on? Somebody declared something about Huawei.

That's when uh the Trump administration said that Huawei was a security game. Oh yes. Okay.

Right. So in 200 Don't you read the books I give you? So, in 2019, Huawei, China's national champion, outs sells the iPhone globally.

Apple uh is panicking about this. And I've got all these internal emails that have never been reported on where I mean Tim Cook and others basically understand for weeks ahead of an earnings call, right, that uh Huawei is the reason why their phone isn't selling well and they deliberately obiscate this from That's one of my favorite parts of the book. I mean the chapter is called five alarm fire because a VP at Apple that's what he describes the situation like how do we get sales to be better and Tim Cook tells deputies quote this is a disaster we need all hands on deck now and then when he speaks to investors a week or two later all is fine internally China's sales forecast is actually shrinking it's not not growing slowly it's shrinking and they don't tell investors any of this um so that's some that's a crazy thing now Trump comes into office basically saying he's going to get his users his um consumers, his his citizens.

What am I trying to say? His his his fans to boycott Apple. Yes.

He's really harsh on Apple. That's right. Wants everything to be built in America.

That's right. Wants them to come back. He's laying the wood on them.

Instead, he totally saves them. Yes. Because when Huawei's at its peak, he goes after Huawei, deprivives them of using Google, which of course makes Android.

Declares them a security threat. Declares them a security threat. And deprivives them of using, you know, wonky things like Qualcomm 5G chips.

Huawei's business nearly collapses. is they lose $30 billion of revenue in a year and their market share really tanks. They have to like hive off assets and stuff.

Great for a while. I mean, the only company that really benefits from that is Apple. So, their market share in China like doubles from 9% to 17%.

So, they do really well. But now in Trump 2. 0, Huawei's had all this time to really work hard.

And so, they're now they're sort of back with a vengeance. So, now in the global smartphone world, there's iOS, there's Android, and there's Harmony OS. This is my guess.

Harmony OS will become the deacto standard for all operating system phones in China. Wow, that's a guess, right? I think an educated one.

And then the question is, do they then market that overseas and you sort of have like a Chinese firewall iPhone becoming, you know, Huawei phone? What what I find so interesting about so we think about step out now in a macro view. We think about these companies as kind of monoliths as monopolies and all this sort of thing.

And the American uh viewpoint is always trust busting. We got to go in and break up these companies. This is a somewhat of a monopolistic operation and but they are going to break themselves up by training competitors to compete with them.

They're actually creating a far more competitive market than ever would have given our standard business practices. So that the irony is they create a more competitive market in an author authoritarian state. Yes.

It's so much worse than that. Come on. Come on.

Okay. So, talk to me. So much worse than that.

Really? Okay. The reason it's worse than that, yes, because they're not just creating phones.

What else can you do if you've got like worldleading electronic skills? Oh, first of all, what's an EV? It's a smartphone on wheels.

So, the reason why EVs in China are so damn good is that Apple taught all their suppliers and the suppliers of phones like Huawei and Xiaomi. Tesla did the same with their factories. And I have a fascinating section on Tesla who specifically hires Apple people in China to run the same playbook.

Where? Like, so okay. Yeah.

And and and sorry, the reason why I said it was worse, I haven't gotten to that point. Oh god. All right.

What else can you build? Drnes, military weaponry. Right.

So you're sort of facilitating the potential annexation of Taiwan by giving out these skill sets for the last quarter century. You know, you could have said that in the book. I didn't see that.

It's it's it's it's fascinating. But here's the other part that I think is that's when you realize this whole idea of reshoring and industrialization that the idea that tariffs this weirdly simplistic you know cudgel that we're going to do there is so woefully short as far as this this is the result of years of intense state-run industrial planning that was intentional it was purposeful it is I mean it's literally called project 2025 in China. It's China's project 2025.

Yeah. So, when you think now and Apple says, "Oh, we're going to spend 500 billion back in the United States where and how. " So, so I'm so glad you mentioned this.

It's such ludicrous nonsense. Okay. It has to be.

The press release that says that we're going to spend $500 billion in US uh literally says and we'll create 20,000 jobs. Like, how bad would a government program be if it spent $500 billion and all it got was 20,000 jobs? Right.

Right. So the money that makes no sense, right? If it were true, nice money.

Um, if it were true, then you would have factories springing up in every state you could think of with jobs for engineers here, there, and everywhere. This is only my my my like educated guess, but I can't think of how the math adds up anywhere else. They are counting in the $500 billion share buybacks and dividends because Apple spends more than $100 billion a year on share buybacks.

70% of their investors are in America. IPSO facto that's a kind of an investment in America, right? So that's the only way that because we are now living through an announcement presidency because that really is what we are living through.

This presidency is the mission accomplished presidency. It's just a dude on a destroyer with a giant banner behind him that says mission accomplished even though it has no basis in reality. And and that's how we get things done.

And so this idea of like $15 trillion dollars in investment coming back to America, you're like where? How? But what's so despicable about the entire thing is we could have done all this here.

All of it. You know, I'd actually disagree. Um, we were so close to being best friends.

What is happening? So, China has things we'll never compete with like density of population. Yes.

and the way that the rural population sort of is actually not allowed to raise their children in places like Shenzhen. So they have to be floating around. We can do that here.

So So like I'm a big fan of friend shoring rather than reshoring, right? We should be doing what we did in China but with allied nations like India, like Mexico, but it's probably not going to happen in Pittsburgh. But we have to also build up though those ancillary businesses.

It's our by allowing this we really did hollow ourselves out. Oh, absolutely. I'm convinced.

The only thing I would say is that that really happened in the 80s and 90s and I mean Apple was the last hold out that did not do that by the way to be so hyper critical of Apple. This is the example but this is merely one of myriad examples of of how our industrial policy got the way it got. So completely I sort of refer to the book sometimes as a Trojan horse where what I'm trying to sell you on is the sex appeal of the world's greatest company but what you're actually going to learn about is some Chinese history.

the importance of the US China tech battle and things like supply chains. But if I said, "John, can you have me on the show? I've got a great book about supply chains.

" You'd be like, "No thanks. " Yeah, I'm sorry. You were you were saying something about something, but I don't remember what that was.

Uh the the the book is is phenomenal. Truly like jaw-dropping and uh and like generally true. Uh thank you so much for being here.

Apple and China available now.