Transcript of How Apple Redefined ‘Made In China’ New

As President Trump prepares to meet with Xi Jinping this week, technology and trade will be top of mind. American tech giant Apple supercharged the Chinese tech sector over the past two decades, but with a new CEO taking over, it's unclear if the dynamic will continue.

In this episode, we speak with journalist Patrick McGee of the Free Press, who has spent years digging into the complicated relationship between Apple and China and its effect on the world. I'm Georgia Howe with Daily Wire Executive Editor John Bickley, and this is a weekend episode of Morning Wire.

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Joining us now is Patrick McGee, columnist at the Free Press and author of Apple in China. Patrick, thanks for coming on.

My pleasure.

Now, Apple recently announced that Tim Cook is going to be stepping down as CEO. We have John Ternus who's going to be filling in in that role. You wrote the other day that Tim Cook was great for Apple, but he wasn't necessarily great for America. What made you define his legacy in those terms?

I think his legacy is undefined, to be clear. So if you use the metrics that Wall Street uses, then clearly this guy's a rock star. He added $3.5 trillion to Apple's value since he became CEO. Um, I mean, that's a remarkable achievement. And even if people say, oh, he wasn't much of a product innovator or whatever, I mean, you know, filling the shoes of the greatest product visionary of the last century is no small feat and he deserves all sorts of credit. But the decisions that he made from senior operations, um, person from 1998 onwards, before he even becomes CEO, is, is just a massive trade-off in which, um, Apple didn't just go to China because there was tech competence offered to Apple. Apple really went there to build the tech competence. And, um, I argue in my book that Apple, um, is the biggest supporter of Made in China 2025, inadvertently, to be clear. But that's the program that Xi Jinping developed more than 10 years ago for China to become, um, self-sufficient in a range of electronics, um, and other categories to basically sever its dependence on the West.

So what was the state of China's tech industry before Apple went in?

I mean, when you and I were kids, made in China was synonymous with poorly made, right? Um, it was a place where like Mattel went to build toys. Um, it was not really the place of high-end electronics. Certainly, um, Apple wasn't early in terms of outsourcing, um, even within the computer industry. But the computers that were made there from Dell and HP and Compaq, you know, these were things that, um, really didn't have any design esthetic to them. Uh, they were really easy to assemble. Apple really introduced a design esthetic that redefined how plastic injection molding or metal stamping or all kinds of tooling could actually be implemented, um, at enormous scale. The impact of that is that, um, Apple sent over thousands upon thousands of engineers to train up hundreds of factories across China to get up to Apple levels of competence. And then as the iPod, particularly the mini and the nano, and then followed by the iPhone, really exploded in global popularity, um, they trained those factories to scale up in terms of, um, Apple levels of quantity as well. Barry Naughton, China expert, has said that the most important thing to Xi Jinping is the high-end electronics industry, and there's been no bigger supporter, no bigger player, no bigger company sort of pursuing that achievement and forcing, um, a whole host of suppliers to get up to those levels of quality than Apple, the world's most iconic company.

Now, has China used those trained-up employees that Apple paid for and then moved them into other high-tech domains? Or is Apple still the biggest game in town there?

As much as Apple wanted to have this sort of like asset-light manufacturing model, inherently, if you're training up these teams to work on the iPhone, they look for something to do to keep their capacity running, uh, when they're not working on the Apple iPhone, right? And so the result of that is that the same factories that Apple trained up sort of turned around and then supported Xiaomi, Oppo, Vivo, uh, and Huawei. And those companies collectively have about 60% of the global market share for the smartphone, which is the world's most iconic product for the 21st century. Um, and then of course they also took those skill sets and they developed other So, you know, what's an electric vehicle? It's a smartphone on wheels. What's a drone? It's a smartphone with propellers. Basically, if you could master the sort of like glass, ceramics, the camera, the battery, all the things that go into a smartphone, um, you're being equipped with skill sets that are necessary for like any number of other industries that basically define our era.

Now, when Apple went into China, it made great business sense for them at that time, but did it at some point become risky? Has Apple ever actually experienced risk from China? Being so much in China, or is it more just Americans that are experiencing a secondary risk?

So I really hold no blame whatsoever, uh, for anyone at Apple who moved to China. I think back then it wasn't just bipartisan, arguably it was the entire American worldview that we sort of had figured out where like human society was going. You know, think of Francis Fukuyama, Charles Krauthammer would've made this argument as well, that a sort of small L liberal capitalism was the way that all, all societies were going to go. And for a certain, uh, period, if American companies were investing in other countries, you were basically accelerating their pathway to get there. So what really changed is that in the late '90s and early 2000s— people forget, but Apple was almost bankrupt in '96, '97, and again after the dot-com crisis in 2000— they really moved to outsourcing and offshoring because of financial desperation. What really changes is in late 2012, early 2013, when Xi Jinping comes in. And this is a period in which Apple experiences its political awakening. It has cracked the Chinese market both as a retail giant and as an operator, and yet it knows surprisingly little in 2013 about Chinese politics, about Chinese culture. Once Xi Jinping comes in, and this is the prolog to my book, Apple is basically attacked on the second day of his presidency.

And it's, it's, it's this moment where Apple begins to worry that its products might be blacklisted in the country. Which was no sort of idle threat. Facebook and Google were both already blacklisted. And so Apple basically begins to court local politicians, federal politicians to basically get people off of their backs. And the result of that was that in May 2016, Tim Cook and a trio of top executives at Apple go to Zhongnanhai, which you could consider the equivalent of the White House. And they basically make this enormous pledge to spend and invest $275 billion into Chinese factories over the following 5 years. So Apple's influence on China is just absolutely enormous and I think pretty unheralded.

So just for clarity, what did Xi Jinping have against Apple? Because it would seem like this is a boon for China. They're bringing in all this money. A lot of their citizens are being trained up. Why did Xi Jinping see them as such a threat?

Because Apple is such a secretive company that not even Beijing understood what Apple's impact in the country was. So for instance, Foxconn, which is the Taiwanese assembler of most Apple products, It was actually a larger company, both in terms of profit margins and absolute profits in dollars in the first 4 years of their partnership in the early 21st century. Then the iPod Nano takes off and Apple margins within a decade go from about 1% to 26%, and Foxconn margins go from double digits to about 3%. Right. So one company's margins go up by 25 times, the others fall by two-thirds. So if you are Xi Jinping's lawyer, you're thinking, well, this is a company that's just absolutely taking advantage of us and exploiting us at every turn. And so this accusation essentially puts Apple on the back foot, and they're the ones who then come up with the idea of, let's do our own supply chain study to analyze what our impact in the country is. And then they're able to basically turn the tables on the argument and say, look, you have no idea how much we're impacting the country. We're sending America's top engineers, we're basically having them sleep on the factory floor.

And the result is that the entire smartphone competence that, that Apple has embedded basically is giving rise to China's own, uh, global leading companies. So the impact Apple's had has been enormous. Nobody knew about it. And it was Apple's job to basically market their own impact on the, on the country to Xi Jinping and, and his, his, his, the top echelon of Chinese leaders.

Now, Apple has been notoriously outspoken about some domestic political issues, but they haven't really spoken much about China. And I think China is actually something that a lot of Americans on both sides of the aisle are concerned about. So how can we interpret Apple's silence on that issue?

Let's just go right to the top. Tim Cook has said, "Silence is the ultimate consent." Find me an issue in China where he's been vocal. I don't know of any. You know, someone like Jimmy Lai, an outspoken advocate of democracy in Hong Kong, was sentenced to 20 years. Apple had nothing to say. Steve Jobs is actually Jimmy Lai's hero. I mean, Jimmy Lai is a guy who has companies called Apple Daily. He has another media organization called Next. I mean, these are named after Steve Jobs' organizations. You know, I used to live in Hong Kong, and in 2019, Hong Kong had these protests, you could say for democracy, you could just say for a sort of one country, two systems approach where Hong Kong wanted to retain some of its autonomy. And the way that Hong Kong protesters were communicating was using AirDrop, the sort of encrypted service on the iPhone. Well, Beijing basically asked Apple to get rid of AirDrop and Apple complied. I mean, this was compared— I think it was Mark Warner, Democratic senator, who said Apple is doing the bidding of the Chinese Communist Party. Um, you know, there's a bipartisan view within Congress that Apple has basically, uh, been asked to jump by the Communist Party and, and Apple has said, how high?

Right. Now, with John Ternus stepping in as CEO, do you anticipate any major changes to the company's direction? Do we know anything about him in particular or how this change could affect Apple's position towards China?

So my biggest question for John Ternus, who by all accounts is a likable guy, you know, competent guy, collegial guy. Um, is whether he's genuinely the CEO. Um, so he comes in in September, but Tim Cook, of course, is not retiring. Tim Cook is becoming executive chairman. And, um, Apple's been explicit that the main thing that they want to keep Tim Cook around for is dealing with Washington, Brussels, and Beijing. But that's the biggest open question I have about what's going to happen. My best guess, and it is only an educated guess, is that Apple knows that there are two major things it needs to do over the next 10 to 20 years. One is that they are very behind in AI and they need a better strategy. If something's going to take 5, 10, 15, 20 years, you don't necessarily want someone who's 65 leading the charge. You want someone who's 50 and can see it through for the long haul. And the other thing is that if they really are going to undo, or at least replicate, let's say, their China operations in another country, that also is a 10, 15, 20-year effort.

And why would you have the architect of the China strategy in the hot seat making those decisions? It makes more sense for John Ternus to do it.

Now you mentioned AI. Former Apple CEO John Sculley says OpenAI could be Apple's biggest competitive threat. Is that your opinion as well?

No, I mean, look, you know, if Apple falls behind in AI, it's still the case that, um, people are paying Apple a 15 to 30% subscription fee every time they use the iPhone to subscribe to Claude or ChatGPT or any number of the others. What's unclear is whether Apple is behind— Apple being behind actually is going to be a boon to them. So for instance, it's obviously clear that they blew a lead with Siri. I mean, Siri came out, I want to say, in 2011, and, um, the only time anyone uses Siri now is by accident. The fact that they haven't spent and spent and are not spending tens or hundreds of billions of dollars on data centers, um, is looking pretty smart right now as the market gets, um, pretty worried about how much spending is going on at basically every other company. So if they can just be the hardware vehicle for other AI systems to operate on, then they're going to be looking pretty for quite some time. The risk, of course, is that AI really is the biggest thing since the web, if not bigger than the web, bigger than the personal computer.

And if that's the case, then it's sort of a disaster that such a creative, forceful, and $4 trillion company is, um, basically just relying on others to do the innovation, uh, while they focus on hardware. So honestly, that's a tough decision. I, I'm sort of skeptical of anyone who has a strong opinion one way or the other. I think it's a big unknown.

So now as John Ternus is stepping in as CEO, what are you going to be watching for first? Kind of help us read the tea leaves.

I can give you my, like, unhinged, you know, fanciful, fanciful wish, which is like, Apple spends more than $100 billion a year on share buybacks and dividends. The buybacks alone are more than $100 billion. That's such a hard number to comprehend. I have to give you an analogy. If you take all share buybacks at Wall Street's top 7 banks, It's a little bit less than what Apple spends. Apple is enormous and it's hard to get one's mind around it. I think if Apple were to take a quarter of that and even better, half of that to have a fund that builds resiliency into their supply chain, that would be my dream press release. That I would absolutely love to see that Apple is making major investments to some extent in America. But realistically, iPhones aren't going to be made in Pittsburgh. It's going to be in Karnataka. It's going to be in Tamil Nadu. Maybe it's going to be in Mexico. That's, that's what I would love to see.

Hmm.

All right. Well, last question. Tell us about your book.

So Apple in China: The Capture of the World's Greatest Company is, um, like a 400-page narrative that really spells out how the world's greatest, uh, company built the world's most sophisticated supply chain, but in the process made the rookie and amateur mistake of putting all its eggs in one basket, just as that basket became a surveillance state. That sounds deep and heavy, and yet I have to say it's a really fun book. It's like this rah-rah, go Apple narrative in the early chapters because, you know, they're experimenting in Mexico and in Taiwan, in Wales, in the Czech Republic, trying to build their computers. And they slowly get lured over to China where things just get better and better and better.

All right. Well, Patrick, thank you so much for coming on.

Thanks, Georgia.

That was journalist and author Patrick McGee. And this has been a weekend edition of Morning Wire.