Initiative for U.S.-China Dialogue on Global Issues

Eleanor M. Albert: Today our guest is Patrick McGee. Patrick is a business journalist who has written for the Financial Times since 2013, reporting from Hong Kong, Germany, and California. Patrick's focus over the past decade has been on Apple, digital advertising, robotaxis, electric vehicles, the Volkswagen diesel scandal, and connected fitness. His debut book, Apple in China, draws on 200+ interviews with current and former Apple executives and engineers to reveal how Cupertino’s choice to anchor its supply chain in China has increasingly made it vulnerable to the regime’s whims. Patrick, welcome to the show!

Patrick McGee: Thanks, Eleanor.

Eleanor M. Albert: I start most of my conversations trying to get a little bit of the personal backstory. So before we dig into our conversation, I wanted to ask you how you came to be a journalist and then how you came to zero in on Apple in China, which is the subject of your debut book.

Patrick McGee: I came to be a journalist because I graduated without any pragmatic skills other than reading, writing, arguably thinking. I studied religion at school: the anthropology, psychology, and sociology of religion. It's worked wonders for cocktail conversations in the last 20 years, but it's not great for looking in the classifieds and finding a job. In true Canadian fashion, I didn't really do any internships in the summers. I was a waiter at a restaurant for many, many years.

Eleanor M. Albert: I bet those social skills came in handy for journalism though, because you end up having to be able to finagle conversations in ways that you might not otherwise.

Patrick McGee: You're probably right. Obviously it's hard to measure that. You just have to walk up to all these people and just start speaking. There is an element of journalism that can be like that. I just want to say that if any of my Apple sources are listening, it wasn't fake Patrick. That really was me because I'm fascinated by Apple and its history.

So, I graduated university in 2006 and I just fell into journalism. I got a job at a Canadian magazine because I didn't know what I was going to do. I thought I was going to do a master's degree, but I had taken a gap year between high school and my bachelor's. Then the master's thing never really panned out. It did years later; I did a degree in diplomacy at the University of London SOAS (the School of Oriental and African Studies).

I just fell into journalism, but this was 2006. The financial crisis began brewing, and I found myself at a financial publication in DC. By the time Lehman Brothers collapsed and you had more veteran journalists really just getting up to speed on what a credit crunch is and what the implications were, I almost felt ahead of the game a little bit because I was at a small publication and I'd already been reporting in and out of the Treasury.

I became a bond reporter at the Wall Street Journal, and then eventually the Financial Times hired me and sent me out to Hong Kong. Hong Kong became a beat in Frankfurt, Germany, covering German industry. Then I covered Apple out of California for four years. So you couple those three beats together for the Financial Times. It was basically covering China supply chains and Apple, and that's basically the origins of the book.

Eleanor M. Albert: This is a great segue. I wanted to talk a little bit about where you did some of your reporting from. You mentioned just now you worked out of Hong Kong covering China. What was the reporting environment like then? How would you say it may have changed since?

Patrick McGee: It's changed drastically, and it probably changed most in Xi Jinping's first term, and that's when I was living in Hong Kong. Of course, Hong Kong was an international city, really not a part of China. Of course, now it is. I was living in Hong Kong when you had what at the time was called the Umbrella Revolution. I actually don't know if that's the term we still use.

This is when I was in my young 30s and I was looking up to students 10, 15 years younger than me because they were peacefully demonstrating in the streets and doing so in the most noble way. You couldn't not but look up to them. Yet you felt the tragedy the whole time because you just didn't think there was any real chance that they were going to take on Beijing.

I'm more comfortable speaking [to] Hong Kong because that's where I lived versus all of mainland China. I would say Hong Kong went from being my favorite city in the world to being a city that, post-publication of this book, frankly, I couldn't go to. The laws on national security are basically arbitrary.

I don't think the book paints China in a really negative light, but it does take as a fact that it's a ruthless authoritarian state. I don't think Xi Jinping would appreciate that there's a chapter called “The Despot.” It is sold in Hong Kong in English. There's no translation to Mandarin yet other than for Taiwan. If it were translated in Mandarin and sold on the mainland, I would probably feel comfortable then going there, but that seems like a distant shot. China's really changed under Xi.

For all intents and purposes, it went from, at least in Hong Kong, a city where you felt you were in any other European or North American city, liberal press. I would tweet whatever I wanted to. I took a real humorous tone to a lot of my writings for the FT during those years and never experienced any problem at all. I would not feel that comfort at all. Certainly not on the mainland, but definitely, not even in Hong Kong.

Eleanor M. Albert: There's definitely a shift under foot. I've spent many years in China, in the mainland, and visiting, you can sense that it's a different energy.

Patrick McGee: Well, a stat[istic] that I'm getting from Jane Perlez, who used to be the Beijing bureau chief of the New York Times, is that there are only 20 American journalists living and writing in China, a country of 1.4 billion people. That is just wild. There are, of course, some British and Canadian journalists, but 20, my God.

Maybe this isn't obvious, but I don't desire any sort of conflict between these two superpowers whatsoever. There's nobody that wins that battle. The way we're going to avoid it is by understanding each other. If we've got 20 American journalists even covering China,

You just think of how little we know, and I'm including myself here, of a city of Chongqing, 32 million people living there. What's going on, on a daily basis? What are the main companies there? We're talking about a city that's double, triple the population of greater New York, probably even more than that. Our ignorance is vast.

Eleanor M. Albert: It is, it is. I'll never forget when I went and I lived in Nanjing for a year and everyone was [said], "Oh yeah, it's not a big city, not a small city." There are nine million people . Scope wise, definitely just very different.

I want to turn to your book. In describing it, you've said in many ways China built Apple and in turn, Apple built China. How can we understand and unpack that relationship? Again, how has it evolved?

Patrick McGee: It's funny. It's difficult to simplify such a complex relationship and a 400-page book into a 90-second sound bite.  

I think the thing that people need to remember is that when Apple and China first get together, I joke about it being a “meet cute” moment before the marriage because Apple is a huge company today, worth more than $3 trillion, a $100 billion of net profit every year. Just wildly large.

China also, clearly the world's second-largest economy, and by some measures even greater than the United States already, but they were pretty small. I mean, not small, but at the time of the WTO 2001, America was eight times larger than the Chinese economy.

We have to remember that when the relationship was formed, it wasn't these two titans coming together. In fact, I would say it wasn't really even Apple and China. In a sense what happened is that Apple set up operations in Shenzhen, which as probably all of your listeners know, was a special economic zone.

Apple wasn't really partnering with China per se, and it wasn't really partnering with Shenzhen per se. It was partnering with certain suppliers that set up operations in China. Interestingly, those suppliers on the whole were not even Chinese. They were Taiwanese. I go through some of the history of these Taiwanese entrepreneurs called the Taisheng, setting up operations in the mainland. If you think of where China was when Deng Xiaoping takes power in the late '70s... they've just gone through just years of absolute upheaval. The country is poorer than Sub-Saharan Africa. In a sense, what “reform and opening up” is, is “how do we draw in investment from the likes of Hong Kong, Taiwan, Japan—the West in a sense comes later—to build factories so our people have something to do.”

I don't like the idea that it's top-down. Shenzhen's this experiment, but it's an experiment that works because of all this grassroots stuff that's going on with politicians in a certain sense, either even unaware of what's going on or turning a blind eye. It's not just like they carved out this series of fishing villages and says, "Have at it."

My point is that it's really not Apple and China or Apple and Shenzhen in the earliest years. It's really Apple and Foxconn. Foxconn is the company that's largely playing the role of political power player. How do you negotiate with the local cadres, and how do you get factories built and where's the real estate going to be, and how do you get the labor?

It's not just local Shenzheners whose parents were fishing villagers—it's people coming from the hinterlands of China desperate for maybe three, four years of work in a factory somewhere. So Apple is pretty ignorant of what China is as a country, but you can forgive them because they're not really operating at that level.

When they get extremely big in the mid-2000s with the iPod and then of course later with the iPhone, it really leads to all this friction because Beijing begins to see Apple as this overbearing, arrogant company. Of course, what they're selling to Chinese consumers as the iPod and iPhone go wild is a symbol of the younger generation's affinity for the West, for individualism, for consumerism. Things that Mao frankly would've hated and therefore a lot of hardliners in Beijing would've hated.

I'm just trying to say read the book because it's such a complex answer. China as an entity doesn't really enter the picture until 2013. That's staggering because Apple's first entity in China is in 1993. So it's two decades into the relationship where all of a sudden there's this wake up moment where Apple has to understand who they're working with and understand, “We don't understand China, its culture, its politics, its people. We need to change that immediately.” That's how the book opens.

Eleanor M. Albert: That's fantastic. I am a sucker for unpacking the complexities, especially when it comes to understanding anything in China.

I want to turn to this 2013 moment, and if China becomes a player in that moment, how does a company like Apple come to then navigate China's authoritarian system? What type of political or cultural understanding did it need to develop, and where were its deficiencies?

Patrick McGee: The quick and dirty history is that from 1996 to 2003, I have this section called “Apple's Long March to China.” So 1996, if people can remember, Apple is flailing. They're literally days away from [not] being able to make payroll. They thought they were going to be acquired by another company. It didn't happen. At that point, they literally hire a chapter 11 lawyer. The Apple we come to know and love really almost didn't make it.

This is actually before Steve Jobs came back, that they adopt a global outsourcing strategy. It's not, “Okay, close the factories. Let's move to China.” China's not really in the picture just yet. Yes, they're doing a little bit of marketing there. In 1999, zero products are built in China. At least in the first months.

Everything begins to change once they come up with the candy-colored iMac. First, that's built by LG in Korea. Then it's so successful—it becomes America's best-selling computer—that LG is asked to replicate what Apple had long had, which is a triple continent strategy. They had their own factories in Singapore and Ireland in addition to America. So LG does the same thing by setting up shops in Wales and Mexico. This is a history largely people were not familiar with.

Then Foxconn comes on board when LG has this great strategy, but they don't execute well and things are not going well. Literally a factory in Mexico is on fire. Terry Gou calls up Tim Cook, who's just been hired as the operations chief, 1998, and says, "Let me fix this." Terry Gou follows the triple continent strategy.

Again, Taiwanese entrepreneur, but he sets up this operation in Shenzhen, China, of course, and then also in the Czech Republic, that's for the European market, and in Fullerton, California. That relationship obviously has massive influence for both companies and frankly, all of China for the next 20 years. It's not a fluke relationship, but it really matters who is calling the shots there. It matters that he calls up Tim Cook. He doesn't call up Steve Jobs.

One of the best lines in the book, and I can say it because my wife wrote it, is, "The meeting of the minds between Jony Ive and Steve Jobs is what made Apple products unique, but the meeting of the minds between Terry Gou and Tim Cook is what made them, or what would ensure they were ubiquitous." That's really important.

Manufacturing doesn't really consolidate into China until 2003. By consolidate, I mean what's going on in the different nations I just mentioned, plus Taiwan, that all goes away. I have this narrative where the iPod, the iMac G4, those products are being built in Taiwan, but there’s constant labor shortages. The island is just too small. So as a result, you end up working with Singapore, Thailand, Japan, all these different places for your plastic ejection molding, your metal stamping. So many things.

Apple products are just maddeningly complex in a way that no other computer maker is even trying to do. People remember beige box computers, where if you put a panel on backwards or upside down, it wouldn't even matter. That would obviously matter for Jony Ive. He had a zero tolerance for defects mindset.

Apple begins to build that up in these other nations where they're operating. I have the man who hired Jony Ive say the reason why Southeast Asia writ large is so good at building quality computers today is all the lessons Apple gave them in the '90s. That's a wild statement, and you could disagree with it, but that's the sort of sentiment you get out of Apple.

What’s so wild about that is Apple’s a small player back then, but the person, what they’re saying, is that's how good the training was that—Apple would send, in the sense, America’s best engineers and they would train, train, train. They would audit, they would supervise, they would install machinery on the factory floor, and obviously in factories that weren't theirs, and they would get people up to Apple quality.

What happens in China is that you do that even greater scale because once the iPod takes off, you're doing it in massive quantity as well. So the investments that Apple ends up making in China are just absolutely extraordinary. Fast forwarding a little bit, iPhone volumes go from what, 5 million in 2007 to above 230 million by 2014, 2015. Xi Jinping comes into the fore in late 2012, early 2013. Let's say you were Xi Jinping's lawyer and you had to look at the question “Is Apple exploiting the country?” It would absolutely look like that.

For starters, there are everything from Daily Mail articles talking about Foxconn work conditions and how Apple doesn't pay people correctly, and a hundred people to a room sort of thing with cold water for showers, that kind of stuff. There’d be a human rights issue that you could say Apple was responsible for through its suppliers.

Then there was also the fact that Apple margins were going so high. They literally go from 1% in the early 2000s to above 25% by the time Xi Jinping is coming to power. Whereas a partner like Foxconn sees their margins go from above 10%, double digits, to about 2% in that same decade. It looks like Apple is exerting leverage and reaping all the benefit.

Xi Jinping comes into power regardless of what he thinks of Apple, as in China for China. In other words, if you're a Western corporation that wants access to all of our factories and our 1.4 billion people, if you're selling to us, great, but you better be helping us move up the value chain, not just exploiting our labor.

So to answer your question, Apple gets put in this position where they realize, “We're going to be blacklisted if we don't get a better relationship with not just Beijing, but provincial officials and all the way down to local cadres in the places where we’re operating.” They recognize that they need to turn the tables a little bit up into the narrative and demonstrate to Beijing all the ways in which Apple’s presence, their operational presence, probably their retail presence as well, but mainly their operations, are benefiting the country.

That’s the first time they start doing internal statistics. How many people are they hiring? What kind of investments are they making, et cetera. The numbers that they come up with are just extraordinary. Which is to say that in 2015, they run their own supply chain study and recognize that they're investing $55 billion a year into Chinese factories. An absolutely staggering sum.

They've got three million people in China each year building their products. It's a massive jobs program. Once they're able to demonstrate this to Beijing, yes, they've continued to have problems, but essentially all obstacles to their production are removed because Beijing begins to understand, “We do not want to get rid of this company. They're doing wonders for us.”

Eleanor M. Albert: Especially given Xi Jinping's pivot to wanting to be focused really on the tech space, which is at the forefront of the economic vision that he has for where China is hopefully going.

Patrick McGee: Just as Apple’s doing the supply chain study, Beijing is coming up with “Made in China 2025,” an ambitious plan to sever dependence on the West. Apple’s message basically fits like a puzzle piece into this big picture that Beijing is drawing up and it’s just perfect. This is the marriage.

Eleanor M. Albert: Apple is, of course, not alone in trying to maximize the benefits of operating in China and selling to China. It’s a huge retail market. What are some lessons learned from the Apple experience that another tech company, or even just a manufacturing company… what are some lessons that should be learned? Is a project like this or an endeavor or a marriage, as you call it, possible moving forward?

Patrick McGee: The answer is wildly different depending on if what you mean by what can we learn is are you a business that wants to thrive in China and make sure you don't have problems with the political players? Or that you don't want to be overexposed? In other words, are you wanting to replicate what Apple has done or avoid what they've done?

Very briefly, if you want to replicate what Apple has done, then of course you would consolidate all of your operations into China. You make sure that instead of just being under the radar, you work hand-in-glove with all sorts of local officials. The first thing to understand about Chinese communism is that it’s very different from Soviet communism, it's not Moscow says this and everybody falls in line. It’s more of a grassroots thing where the local cadres of Hangzhou are really trying to compete with the local cadres of Suzhou.

Foxconn was brilliant at this, and Apple is today, but they weren’t in 2013 when they began learning that you’re going to have to play one set of municipality bureaucrats off of another in order to extract the best incentives. Then you damn well better actually achieve those metrics in order to make them look good. Learning to play the political game is really important.

In 2013, Apple’s mentality was, “We’re fine. We send people to Beijing and we have these dinners.” Then, it didn’t seem to have any sense of what it meant to be in the local places. My analogy would be, if Elon Musk, because he’s South African, didn’t totally understand America, was negotiating with Washington, instead of California when they were setting up the Fremont factory 20 years ago. Obviously that would be absurd, and that's why it’s absurd in China as well. In China for China—you would have to learn how to play that game and really understand the local stuff.

That’s how Apple has created a bind for itself because it has no leverage. It doesn’t have a clear argument or counterweight when Beijing goes after it or it asks it to, let’s say ban the New York Times or ban WhatsApp or ban VPNs. They know that Apple’s not going to respond by saying, well, “We’re just going to move everything to Mexico.” Well, are you? Because you haven’t been investing in Mexico for the last 20 years and they can’t compete with us, and you demand huge quantities and the highest quality in the world; only our factories can do that. It’s not even a real threat.

If you want to avoid that, then, I think you have to not just look at what comes up on the Excel sheet in terms of margins and productivity and labor costs, where, I think on the whole, China is going to win out here and again, but you have to suck it up and pay for the [diversified] supply chain strategy. Take a hit on margins, but consider the adaptability of your supply chain. If you don't have that, then you’re going to be doing what Beijing needs you to do because you don’t have a counterweight against it.

Eleanor M. Albert: A really good way of seeing the two different options. I think a lot of businesses are still trying to thread the middle line of that. I don’t know that that is a tenable position to be in. At the very least, there needs to be understanding of the political and economic facets of their investments.

Patrick McGee: What’s the video game term? Is it an NPC [non-playable character] when you treat other people like they don't have their own values and consciousness and ideas? That’s how Apple treated China for the first 10 years of their manufacturing there, which is that they just cared about what they needed. They weren’t considering the political aims.

Of course, you can’t begrudge China for this. They have their own wants and ends and needs. They don’t want to just be doing the low value assembly. They want to go up the value chain. If you have no counterweight against it, you’re going to end up doing that because otherwise you’re not operating at all in the country.

China’s very savvy. They’re long-term. I think to some extent this narrative is a nation-state with a multi-decade vision pitting itself against a corporation that has at best a multi-year or multi-quarter strategy.

Eleanor M. Albert: Final question. This book has been a huge success. If you think that there’s maybe something that’s been misunderstood from the book that you want to dispel, what would the takeaway be?

Patrick McGee: I think it’s a slow burn argument. There’s a lot of handholding along the way, and I don’t think anyone could possibly finish the book and be like, oh, Foxconn's Taiwanese? You will get that in the narrative.

Generally speaking, there’s more people that have listened to interviews or podcasts than have read the book. There there’s a great misunderstanding because, I think, there you have people that think the book is a screed against Apple and it really isn’t. Or they think it’s just a polemic against China. Again, I do treat it as ruthless authoritarian state. If you read, say, Tom Cotton’s book and then you read mine, you would notice a huge difference in perspective on China.

Then the third thing would be that I’m never able to convey through podcasts just how character-driven the book is. I'm always giving you the 20,000-foot view.

What I would want to convey is my main characters are people like Jackie Haynes, Chris Novak, John Ford, Isabel Mahe. If you think you know too much about those people already, then yeah, don’t read the book, but they’ve never been profiled  in any book ever. So there’s a lot of new information.

It’s told through fun characters. The content of the book is more written in the style of a novel than I’m able to convey through my simplistic answers on podcasts. That’s what I would want to get up there.

Eleanor M. Albert: I also think that's so illuminating because so much of what takes place in China, and presumably also in big corporations, is a product of the personalities of the people who are sitting down and negotiating or who are shaping the future of companies.

Patrick McGee: Just to give one funny anecdote. Apple has a $70 billion retail business in China, and they have more than 55 stores, and these are often two-, three-level, all-glass stores. The license for that store is just one guy figuring out that there's a catch-22 when he's trying to build the first Apple Store in 2008. Which is that you can't get a license unless you have a store, but you can't get a store unless you have a license.

So instead, they just acquire a little company and just change the license name in a sense, from this tiny, little sewing machine repair shop, five meters by five meters, to Apple. I mean, the idea that the basis for the most successful foreign corporation operating in China is a little family-run sewing machine repair shop, I think is hilarious. The book is full of those kinds of details that certainly haven't been reported before.

The views and opinions expressed are those of the speakers and do not necessarily reflect the position of Georgetown University.

Outro

The U.S.-China Nexus is created, produced, and edited by me, Eleanor M. Albert. Our music is from Universal Production Music. Special thanks to Shimeng Tong, Tuoya Wulan, and Amy Vander Vliet. For more initiative programming, videos, and links to events, visit our website at uschinadialogue.georgetown.edu. And don’t forget to subscribe to our podcast on Apple podcasts, Spotify, or your preferred podcast platform.