RED APPLE
“If you see something going on that’s not right, the most powerful form of consent is to say nothing. And I think that’s not acceptable to your company, to the team that works so hard for your company, for your customers, or for your country. Or for each country that you happen to be operating in.” -Tim Cook, Apple CEO (2017)
On page 360 of Patrick McGee’s “Apple in China: The Capture of the World’s Greatest Company,” he references a moment in December, 2022 when a reporter corners Tim Cook on Capitol Hill and asks, “Do you think it’s problematic to do business with Communist China when they suppress human rights?”
Cook ignored the question, eyes cast downward, as he changed directions to avoid the reporter.
One of Apple’s supply chain executives characterized the confrontation as “the worst forty-five seconds of Cook’s career.”
Cook’s silence, writes McGee, “was highly indicative of just how beholden America’s most valuable company had become to an authoritarian state.”
And McGee’s book traces Apple’s naive, greedy, ambitious, almost inevitable path into the dragon’s lair.
The naivete was the generally accepted belief that the introduction of laissez-faire capitalism will inevitably produce a more liberal society inculcated with the rule of law.
From the outset, Apple had a fundamental misunderstanding of China.
It thought that creating jobs was enough.
But a better understanding of Chinese culture, as explained by John Ford, who opened the first Apple Store in Beijing, yields a more nuanced view.
“They call it big potato, small potato,” he’s quoted as saying. Sure Apple was creating a lot of jobs, but they were also making a lot of money and those two things tend to balance out, so China didn’t owe Apple anything and the job creating conferred no leverage.
“We approach everything from this Western mindset of fairness,” said Ford. “The Chinese approach it from positional power – who’s got more strength?”
China’s end game has never been capitalism.
“The party’s whole reform program was meant to lure in capital and Western businesses as a way of learning, so China could reverse-engineer the technology, replicate it and then replace it.”
“I don’t ever remember a strategic withholding of information,” said one former Apple industrial engineer. All we cared about was making the most immaculate thing … we were inventing every day. It was abolutely wonderful as an experience. But I guess we were unwittingly tooling them up with incredible know-how and experience.”
By 2015, Apple’s investment in China amounted to $55 billion per year.
To put this number in context, the U.S. investment in Europe post-WWII was $131 billion over four years in today’s dollars.
“One of the great ironies of our time,” said Doug Guthrie, one of Apple’s key players in China, “is that the largest Communist society in the world is also the most dynamic capitalist economy in the world.”
In 2000, Apple had manufacturing operations in the US, Mexico, Wales, Ireland, Czech republic, Singapore, South Korea, Taiwan, and starting in China.
Within a decade, virtually all production had shifted to China with much of the final assembly done by a single partner (Foxconn).
How did this happen?
As McGee writes, “It was the ubiquity of labor, workers’ flexibility, the presence of ‘next door’ suppliers and tailor-made export policies.”
As one engineer explains, “Any time you had some problem or change, you could get a mountain of people to follow you down to the X-ray room or to the testing lab or to the sourcing lab to get materials or parts, or to try some machining or something. It was all right at your fingertips. Anything we wanted we could get … if they didn’t have it, they’d go buy it. We’d send ‘em out to the store at 2 a.m. to get some measurement device or material to remove something or to apply something so it would work better.”
Meanwhile, they were putting up massive factories in a matter of months.
“China is building the square-foot equivalent of Rome every two weeks,” said one observer.
And how did they figure out where to install the air-conditioning?
“Well, whichever facilities have the equipment that needs air-conditioning.”
Labor, it goes without saying, did not need air-conditioning.
So what’s happening now? Apple’s made a big splash in recent weeks touting its plan to make a $600 billion investment in America.
But one thing you learn in reading this book is how complex supply chains are, and nothing is ever quite as simple as plug ’n play, no matter how much money you toss at a problem.
In short, you don’t just replace 25-years of built-up manufacturing expertise overnight, never mind trying to find willing American labor.
Apple’s other big interim risk as it attempts to decouple and deleverage is Taiwan.
Chinese leader Xi Jinping has pledged to resolve [annex] Taiwan within this generation.
And if anything happened to Taiwanese chip maker TSMC, “the impact would be the equivalent of a meteor strike,” to Apple.
Why has Warren Buffett been selling off his Apple stake? “TSMC is one of the best managed and most important companies in the world,” he said in 2023. “But I don’t like its location and I reevaluated that”
