What happened.
Financial Times' Patrick McGee made China Boss gush over his fabulous, two-part series on the China-sized hole that Apple, under Tim Cook's leadership, spent decades digging itself into: “The first part demonstrates how Apple entrenched its operations in China in order to build the most successful consumer product in history, while the second examines “whether it can ever disentangle”.
To place Apple’s “big conundrum” in its proper context, McGee spoke to a supply chain researcher who explained that the global tech giant has never “really ‘outsourc[ed]’ production to China, as commonly understood.” Rather, Tim Cook, “master of supply chain” laid the foundation “for a supply and manufacturing operation of such complexity, depth and cost that the company’s fortunes have become tied to China in a way that cannot easily be unwound.”
FT:
Over the past decade and a half, Apple has been sending its top product designers and manufacturing design engineers to China, embedding them into suppliers’ facilities for months at a time. These Apple employees have played integral roles co-designing new production processes, overseeing the minutiae of manufacturing until things were up and running, and keeping close tabs on suppliers to ensure compliance.
Apple has also spent billions of dollars on custom machinery to build its devices, developing niche expertise that its rivals did not even know about, let alone compete with. It has transformed the company and the country. “All the tech competence China has now is not the product of Chinese tech leadership drawing in Apple,” O’Marah says. “It’s the product of Apple going in there and building the tech competence.”
Then McGee got personal.
FT:
These operations played such a salient role that the unassuming character behind them, chief operating officer Tim Cook, would succeed Steve Jobs as CEO in 2011. It was Cook who shifted Apple’s production from the US to China, where he established unparalleled efficiencies that underpinned Apple’s ascent.
Why it matters.
Apple’s China problems are monumental
Apple’s China problems may be bigger than the company itself. They are political, geopolitical, reputational, operational, logistical, and legal. While China Boss thinks they deserve a tome, here’s a quick rundown.
Political
Xi Jinping’s state creep into private, including foreign-owned, business administration*; industrial espionage; US Congressional disdain for Apple’s subservience to the CCP
FT:
The relationship between Apple and Beijing has brought benefits for both.
According to three people that worked with Apple and its rivals, other smartphone makers came under tremendous pressure to keep up, but they lacked a playbook. So they turned to Chinese suppliers for help, giving over intellectual property in exchange for a speedy response.
“They all completely abdicated,” adds Dediu, the head of Asymco and former Nokia executive.
Apple, in other words, set in motion a series of events that helped Chinese suppliers win more orders and advance their understanding of cutting-edge manufacturing. At the same time, western manufacturing of electronics atrophied.
*Another good read: Influence without Ownership: the Chinese Communist Party Targets the Private Sector (Jerome Doyon, Departmental Lecturer at The School of Global and Area Studies, Oxford University, 2021)
Geopolitical
Xi Jinping’s conflict with Taiwan, India, Japan, Vietnam & the Phillippines - any of which could lead to world war (McGee says Apple’s business risks becoming trapped in China’s “red supply chain.” )
FT:
Even as Apple is attempting to diversify its supply chain internationally, its ties to China are simultaneously becoming stronger.
For years, the tech giant has been establishing closer ties with mainland Chinese companies in exchange for concessions to operate more freely.
Cook even personally forged a five-year agreement in 2016 to spend more than $275bn to help advance China’s economy and workforce, according to specialist tech publication The Information.
Apple has since given lucrative orders to Chinese contract manufacturers Luxshare, Goertek and Wingtech, helping to establish a so-called “red supply chain” at the expense of Taiwanese suppliers Foxconn, Wistron and Pegatron.
JPMorgan now forecasts Chinese companies’ share of iPhone manufacturing will rise from 7 per cent last year to 24 per cent by 2025.
Luxshare, run by billionaire chair Grace Wang, has been the biggest beneficiary. Since winning an order to produce AirPods in 2017, its revenues have soared from less than $2bn in 2016 to more than $31bn, and it now assembles Apple Watches and iPhones.
Emphasis added.
Reputational
(China & USA) Apple’s partnership with manufacturers who fail to uphold worker well-being and safety; Apple’s complicity in Chinese censorship of free speech and protests
FT:
“Gou said, ‘Foxconn is going to underwrite the investment. I’ll build two campuses with Chinese government partners. And when your volume is there, I’m going to build the products for you,” . . .
He was right. Annual iPhone shipments nearly quadrupled to 93mn from 2009 to 2011, while the first iPad shipped 15mn units in its first nine months.
By October 2010, Foxconn’s factories in Shenzhen alone had as many as 500,000 workers churning out products on gruelling schedules. When it emerged that year that more than a dozen employees had died of suicide at the facilities, Apple suffered international blame amid headlines about “iSlavery.”
Emphasis added.
And much more recently:
FT:
When Tim Cook visited Capitol Hill to meet privately with senior lawmakers in early December [2022], his company’s relationship with China was high on the agenda.
In the prior month, Beijing’s strict Covid-19 policies had led thousands of workers to flee the Zhengzhou megafactory known as “iPhone City” run by Foxconn, Apple’s manufacturing ally for a quarter of a century. When those trapped at the factory protested, police responded with violence in riot gear.
But when a Fox News reporter put him on the spot in Washington, he declined to answer. “Do you support the Chinese people’s right to protest? Do you have any reaction to the factory workers that were beaten and detained for protesting Covid lockdowns?” asked Hillary Vaughn, as Cook walked through the building. “Do you think it’s problematic to do business with the Communist Chinese party when they suppress human rights?”
Cook ignored Vaughn, eyes cast downward as he changed direction to avoid her. The clip was played repeatedly on US cable news, and the Wall Street Journal highlighted it in an op-ed entitled, “Tim Cook’s Bad Day on China.” One supply chain executive, who declined to speak on record, characterised the confrontation as “the worst 45 seconds of Cook’s career”.
Operational
Manufacturing concentration even as Covid and geopolitical alerts flashed red:
FT:
More than 95 per cent of iPhones, AirPods, Macs and iPads are made in China, where Apple also earns about a fifth of its revenue — $74bn last year. That contrasts with rivals such as Samsung, which have sharply cut back manufacturing in China.
Even in recent years, as competition between Washington and Beijing has escalated sharply, Apple has continued to invest in China and further cement its connections with the country.
Cook and his company are now under intense pressure from investors and US politicians to “decouple” from China and accelerate a diversification strategy that already has some products assembled in Vietnam and India.
And operational control:
FT:
A second loss of control was the result of Covid. Blair says “a huge, huge part of [Apple’s] secret sauce” is how frequently its top talent from California would travel to China and spend months at its suppliers’ plants. Pre-pandemic, such trips had become so common that the company was booking “50 business class seats daily” from San Francisco to Shanghai, according to an accidental leak from United Airlines.
But since 2020, Apple has been unable to send troops of engineers to China.
Two former Apple manufacturing engineers say the company’s Chinese engineers really stepped up and proved themselves. “Apple provided a training ground for Chinese manufacturing engineering that was second to none,” one person says. Apple, in turn, raised their pay and has been able to retain most of the team despite frequent recruiting efforts from rivals.
However, two people familiar with Apple’s operations say that giving up control risks slowing innovation and leaking intellectual property. “The Cupertino guys stood back and let the Chinese take the lead,” says one. “The Chinese guys completely control the product now.”
Legal
Cook can’t use the “black swans” excuse.
FT:
“Supply chain all goes back to one guy: Tim Cook,” says a former Apple veteran. “This mess is his fault. This isn’t just ‘the buck stops at the top’, it’s that ‘the buck stops with the guy who headed the supply chain.’ And Tim is the master of supply chain.”
. . . Cook should not be blamed by politicians for enmeshing Apple’s supply chain operations in China two decades ago, says Aaron Friedberg, author of Getting China Wrong. Washington was then encouraging companies to engage with China in the hopes that it would inculcate democratic values.
Where Cook erred, he adds, is by doubling down over the past decade despite mounting evidence that Xi was ramping up repression at home and taking a more combative stance in international affairs.
“The fact that Apple has allowed this to go as far as it did, as long as it did, has created this massive problem of disentangling itself,” Friedberg says. “I have no doubt they just wish all of this would go away, and they could go back to business as usual. Because there is just no obvious way out.”
Emphasis added.
Watch on YouTube.
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Have a great weekend.