Long read: How Apple helped China become America’s biggest tech rival

Earlier this week, Trump was offended by a journalist’s remark on TACO trade. TACO stood for ‘Trump Always Chickens Out’ with reference to his pulling back on tariff threats, most notably with China. Reports suggest it was a result of Apple’s lobbying given its dependence on Chinese production. How serious is this dependence after all that even Trump had to ‘chicken out’? A new book titled Apple in China: The Capture of the World’s Greatest Company by Patrick McGee answers the question. In what looks like a riveting read, the author gives us a glimpse of the book in this piece for The Times.

For all of us here in India excited about Apple moving its production base to India, the author reckons there is “Zero chance that Apple will ever leave China”.

“Apple is utterly dependent on China for the vast bulk of its manufacturing. Even recent moves to India are mostly confined to assembly — a tariff-avoiding tactic distinct from the complex processes needed to tool, stamp, machine, cut, etch and shape all the components before final assembly. The grand irony, though, is that Apple isn’t dependent on the advantages it found in China; Apple is dependent on the capabilities it created there.

…The truth is Apple wouldn’t be Apple without China. No other place on Earth comes remotely close to offering the right combination of quality, scale and flexibility needed to ship close to half a billion luxury products each year.

…Beijing allowed Apple’s activities so that China could exploit Apple and become a tech powerhouse in its own right.

Indeed, China wouldn’t be China today without Apple. The California tech giant’s investments in the country have been spectacular, exceeding even that of the Marshall Plan — America’s four-year effort to revive Europe after the Second World War — in cost, man-hours and impact. Apple estimates that since 2008 it has trained at least 28 million workers, the vast bulk of whom were in China — that’s more than the entire labour force of California.”

Whilst Steve Jobs gets a lot of credit for Apple’s iconic products, it is Tim Cook, the operations genius who succeeded Jobs as CEO, who took the company to unprecedented dominance and scale. Part of this genius was to create the supply chain in China:

“Cook didn’t mastermind the move to China — nobody did. As global electronics suppliers competed to win orders based on price, they were increasingly attracted to the world’s most populous nation by the promise of cheap and abundant labour, aided by Chinese government policies meant to lure in multinational corporations with depressed salaries, a suppressed currency and relaxed labour laws.

By 2003 all kinds of western companies were outsourcing operations to China. But whereas Apple’s rivals manufactured there because of what was available, Apple shifted to China because of what was possible.”

However unlike others, Apple’s unique designs by its iconic designer Jony Ive made it leverage China better than anyone else:

“…What Apple realised better than anyone was that thousands of labourers cheaply handcrafting hardware on a conveyor-belt production line allowed its designs to be increasingly intricate. Rivals looked at China and saw low cost; Apple saw unconstrained design.

…The northeast London-born Ive, son of a silversmith, and his team could conceive of anything and an army of determined workers would see to its creation. The trouble was, migrant labourers within China didn’t have the required skills or expertise, particularly as quarterly demand for iPods climbed from tens of thousands to millions. The difficulty in building at these quantities was amplified by Apple’s perfectionist culture and Ive’s desire to miniaturise each unit’s dimensions while coating them in a dazzling array of colours.

The company’s solution to this had world-changing consequences. Apple flew in American engineers by the planeload so they could mentor, finance, train, supervise and supply Chinese workers, enabling them to vastly exceed their previous capabilities.

It wasn’t “outsourcing” in the normal sense — that would imply Apple was sending blueprints to companies capable of taking the orders and executing them. In dozens and then hundreds of factories across the country, Americans worked side by side with Chinese labourers promoting an obsessive attention to detail and teaching problem-solving techniques. If the factories didn’t have the right equipment, Apple would spend hundreds of millions of dollars to buy it and install it for them.

One former manufacturing design engineer likens Apple’s tireless training to attending an Ivy League university for hardware. Indeed, these (mostly male) Apple engineers began flying to China so often that some of their wives took to calling themselves “Apple widows”. So many marriages failed that the company had to hand out bonuses and allow some employees extra days off — policies that engineers nicknamed the DAP, or divorce avoidance programme.

…By 2014 Apple was so frequently sending America’s best engineers to China — what one Apple veteran calls “an influx of the smartest of the smart people” — that the company convinced United Airlines to fly 6,857 miles from San Francisco to Chengdu three times a week, pledging to buy enough first-class seats to make it profitable.”

Xi Jinping, upon his ascent to power in 2012 was keen to get a better deal for China without realising that Apple was already doing it for him:

“Apple, however inadvertently, was operating in ways that were immensely supportive of Beijing’s “indigenous innovation” directive. Chinese officials just didn’t know it because the company was so secretive about how it developed its products.
Although suppliers resented the intense pressure and the soul-crushingly low margins offered by Apple, they put up with it because they derived something far more valuable than profits. The deal — let’s call it the Apple Squeeze — was that Apple would exert enormous power over its suppliers multiple hours a day, for weeks and months leading up to a product launch, and in return, the suppliers would absorb cutting-edge techniques.
…When staffers added up Apple’s investments in China — mainly the salaries and training costs of three million workers in the supply chain, as well as sophisticated equipment for hundreds of production lines — they realised the company was contributing $55 billion a year to China by 2015: a nation-building sum.”

Yet, what benefited China most seems to be a bit of an own goal by Apple’s policy:

“The ripple effect from Apple’s investments across Chinese industry was accelerated by a rule imposed by Apple that its suppliers could be no more than 50 per cent reliant on the tech giant for their revenues. This was to ensure that a supplier wouldn’t go bust overnight if a new Apple design did away with components it manufactured. So as iPhone volumes soared from under ten million units on its launch in 2007 to more than 230 million in 2015, Apple would encourage its suppliers to grow their non-Apple business just as quickly. The upshot of this policy was that Apple gave birth to the Chinese smartphone industry.

In 2009 most smartphones sold in China were produced by Nokia, Samsung, HTC and BlackBerry. But as Apple taught China’s supply chain how to perfect multi-touch glass and make the thousand components within the iPhone, those suppliers took what they knew and offered it to Chinese companies led by Huawei, Xiaomi, Vivo and Oppo. Result: the local market share of such brands grew from 10 per cent in 2009 to 35 per cent by 2011, and then to 74 per cent by 2014, according to Counterpoint Research. It’s no exaggeration to say the iPhone didn’t kill Nokia; Chinese imitators of the iPhone did. And the imitations were so good because Apple trained all its suppliers.”
So, just as China helped Apple become the world’s most valuable company, Apple helped China become the technological superpower, at least according to this book.

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