Apple in China: The Capture of the World’s Greatest Company by Patrick McGee
My rating: 5 of 5 stars
A fairly timely book as well as a very important one as trade and U.S. manufacturing come front and center with the Trump Administration making major changes to U.S. tariff policies. This effort comes from Patrick McGee, an Apple coverage veteran.
The book is important, in my view, because it brings a much fuller understanding of several key issues that frankly have not been well understood in the United States, though they are very well understood in China. Can the United States, simply by imposing tariffs, shift Apple manufacturing back to the United States? What is the nature of the Chinese manufacturing edge, beyond labor costs? How did Apple become so reliant on Chinese manufacturing and is it now possible for them to simply shift manufacturing back to the U.S.?
The author gives us a short history of Apple, including the exile and return of Steve Jobs, and how the old Apple actually manufactured what they sold themselves. Jobs initially believed this to be a necessity, as Apple created products that were not simply utilitarian but designed in a way to make them stand out. Apple’s designs did indeed create “beautiful” products, with that beauty creating significant engineering challenges. Jony Ive did in fact create magnificent designs, and Jobs fought hard with his own engineers to ensure that these designs became real Apple products. Within that Jobs fixation lay the seeds of the ultimate move of manufacturing to China. Jobs believed that this complexity forced Apple to manufacture its own products, and they actually owned factories in the U.S. The author shows us how the turn came, and how big of a turn in was.
The slow turn came after Apple dipped its toes in the contract manufacturing water in Japan and Taiwan and recognized that there were both cost savings and the expertise to build ever more complex products. How did contract manufacturers in Taiwan and China become able to handle the complexity of Apple products? The author shows us that the main way they learned was from Apple itself. Apple had selected Quanta of Taiwan as a back-up manufacturer of Powerbooks:
“At first the quality and capabilities Apple found were subpar. ‘Treachery, ineptitude, sloppy, negligence on every level,’ are the words used by one senior engineer to describe Taiwan at the time. ‘Quanta was not a very good development partner whatsoever,’ says another. ‘The talent to take on manufacturing, part fabrication, assembly, design challenges-the talent to do that with Quanta in Taiwan was not there.’ The role of Apple engineers was to change all that through extensive training. This strategy soon proved to have a profound impact on the country and its neighbors, where Apple sourced many of the components. Apple wasn’t, by any stretch, the largest computer maker working in Taiwan, but its penchant for complex designs and intolerance for defects was unique and over-the-top, necessitating a form of intellectual investment shared by none of its rivals. Apple veterans from the time can’t stress enough that nobody else was embedding dozens of engineers into Taiwanese suppliers, then consistently pushing the envelope on what was possible. ‘Apple is single-handedly responsible for bringing quality into Southeast Asia,’ says Robert Brunner, the director of the ID studio from 1990 to 1997.”
Apple in China: The Capture of the World’s Greatest Company McGee, Patrick pg. 77
You take that excerpt and simply magnify it by a very large factor, and that is what happened in China. As Apple had success, that success required a significant increase in manufacturing capacity, which required more manpower. In China, at the time, there was no limit to manpower, or any concern about working conditions. The inexorable move to contract manufacturing, and of contract manufacturing to China, began. Andy Grove, of Intel, had a prescient observation:
“The cofounder of Intel, Andy Grove, would later diagnose the problem as ‘a general undervaluing of manufacturing-the idea that as long as ‘knowledge work’ stays in the US, it doesn’t matter what happens to factory jobs.’ But as Grove warned: ‘our pursuit of our individual businesses, which often involves transferring manufacturing and a great deal of engineering out of the country, has hindered our ability to bring innovations to scale at home. Without scaling, we don’t just lose jobs-we lose our hold on new technologies. Losing our ability to scale will ultimately damage our capacity to innovate.’”
Apple in China: The Capture of the World’s Greatest Company McGee, Patrick pg. 112
Grove, in my view, had it exactly right. As the move to China accelerated for Apple, and the company began to grow by leaps and bounds, nobody in Washington was giving much thought to what was happening. As more manufacturing moved to China the satellite operations for manufacturing, especially Apple style manufacturing, moved right with the contract manufacturers. Industrial clusters sprang up, with major investments made by the Chinese government at all levels to make such clusters economically attractive to the arriving companies.
“Twenty six years later, the closed architecture of the iPhone was driving a different trend: the Chinafication of the electronics industry. The more Apple scaled, the more economic sense it made for all the components inside its products to be made within the country. …’It’s not really a global supply chain. In principle it is; but in practice it’s this totally engineered stack of process and product, engineering and production, and its all synced up in one place.’”
Apple in China: The Capture of the World’s Greatest Company McGee, Patrick pg. 176
Some of the biggest contract manufacturers in the world are now based in China, with Apple, as shown above, bringing in vast engineering resources to show these firms how to do complex manufacturing. But it was not just engineering talent that Apple brought. When Apple appeared to finally have some real difficulties with the Chinese government as a consequence of the new priorities brought by President Xi upon his assumption of power in China, after a period of not quite understanding, brought to the table a commitment of a $275 billion investment in China.
“Cook’s goal was to convey a similar message, to demonstrate to Chinese officials that Apple’s success in China had ripple effects across the advanced electronics industry. By investing in and teaching local suppliers, Apple was inculcating a corpus of hands-on-knowledge, both in tangible skills and abstract concepts, which applied well beyond serving its own needs. True, this was unintentional; Apple hadn’t designed its supply chain to spur innovation at its suppliers. Yet that is exactly what its had accomplished. And Apple’s investments weren’t just large, they were ruthlessly efficient and narrowly targeted in the advanced electronics sector-‘by far the most important’ thing desired by Xi, according to China Scholar Barry Naughton. Conveyed in the right language, this impact was wildly supportive of Beijing’s goals to learn from the West and move up the value chain.”
Apple in China: The Capture of the World’s Greatest Company McGee, Patrick pg. 281-282
The author compares the $275 billion to the joint private investment in Mexico by the U.S. and Canada after NAFTA, which the Apple investment in China exceeded. Key knowledge transfer, massive financial investment in manufacturing, and political pliancy have placed Apple in a prime position in China, but with the potential for some level of decoupling between China and the United States is that positioning going to be good for Apple? Is there anyway for them to shift manufacturing out of China?
This book brings us some real insight into how China became such a manufacturing behemoth, and how deep the connection is now between the Apple business model and China. It should dissuade those who may believe that manufacturing can simply be “moved” from China to the U.S. by building a few factories in the U.S. Past American policymakers have not fully grasped the full implications of the offshoring to China. Andy Grove understood the implication and now we must figure out the best way forward as the U.S. looks to reestablish domestic manufacturing. This book is highly recommended.
Wall Street Journal Article on the domestically sourced “Liberty Phone” A lot less phone for a lot more money.
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