3 Takeaways - Did Apple Accidentally Help Build China’s Manufacturing Empire? (#299)

Episode Date: April 28, 2026

“We trained a whole country.”It sounds like an exaggeration.It’s not - according to Patrick McGee, author of Apple in China.So what actually happened in China?

Apple went to China to make its products, but it may have helped build something much bigger. China as a manufacturing superpower. So what did Apple actually help create in China and who holds the leverage now? Hi, everyone. I'm Lynn Toman and this is three takeaways. On three takeaways, I talk with some of the world's best thinkers, business leaders, writers, writers, politicians, newsmakers, and science. Each episode ends with three key takeaways to help us understand the world and maybe even ourselves a little better. Today I'm thrilled to be with Patrick McGee, journalist, author of Apple in China and one of the most clear-eyed observers of the Apple China relationship. Patrick, welcome to the show.

Thanks, Lynn. Thrill to be here. It's my pleasure. Most people assume that Apple went to China for one simple reason, cheap labor. You say that's not really the full story. What were they actually after? Yeah, cheap labor is certainly a part of it. I would say it's baked into the cake. It was far more that there was like a certain dynamism.

You had this forceful state that was deploying what was at the time the world's largest population. And yes, they had low wages, but it was more that they could move around. So within China, you have something called the floating population, which is essentially these rural migrants who go to places like Shenzhen, right, the special economic zone. They just grows like wildfire. And it grows so quickly because China has a specific industrial policy to lure in foreign expertise, foreign capital. People forget how poor China was when Mao had died in 1976. And so there's this will to power that China wants to achieve. And they're going to do it through manufacturing, but they don't have their own capital.

They need to rely on at first the Chinese diaspora, Hong Kong, later Taiwan, and then later the Japanese through Panasonic and then the Americans. And so Apple sort of fits into this role where they realize that as their suppliers move, they can move more and more of their operations there. And yes, it's cheap, but it's more that things will be built really quickly. The local governments are working hand in hand with the entrepreneurs, right? I compare government bureaucrats in China to like a venture capitalist who sits on your board and drives growth, but actually direct. policy for you. And then Western corporations like Apple are able to take advantage of that. Apple got attacked on Chinese state television and they responded with a calm, factual rebuttal. Completely reasonable, right? Except that it backfired spectacularly. What did Apple fundamentally

misread? So this happens in March 2013 and it's within 36 hours of Xi Jinping fully taking the presidency in China. Apple, at that time had a business worth more than $20 billion of revenue a year, which is far bigger than anybody else. And that was the least significant thing. They're also the world's most sophisticated operator in China. You know, the iPhone is growing exponentially at that stage to something like 160 countries around the world. So in a certain sense, they had cracked China in two ways, both as an operator and as a retail giant. And you would assume, wrongly, but you would assume that Apple had really understood the local political scene and the cultural scene and knew what they were doing,

et cetera. And what this episode exposed is that they really didn't. There had actually been a cover story at Thai Magazine around this time that basically said, you know, Apple had sort of accidentally become a giant in China. In other words, the local population just loved the iPhone, but it wasn't that there were particular advertisements directed to them or something. So, yeah, the assumption would be that Apple really knew what they were doing in China. And in fact, they sort of didn't. And one reason they didn't is that Foxcon, the Taiwanese company, that they rely on for much of their assembly, they hadn't just outsourced the manufacturing to Foxcon. They'd outsource their like political relationship building to Foxcon.

So one thing that Foxcon founder Terry Guo was just brilliant at was building these local connections and getting subsidized machinery into his factories and so forth. And the quid pro quo was that he was going to build these enormous campuses where he was literally employing hundreds of thousands of local Chinese people. So Apple wasn't necessarily involved in really any of those negotiations and didn't have all the political and cultural wherewithal to drive those negotiations, but Foxcon had done it for them. And in 2013, when Apple has this like wake-up moment where they're basically attacked on a major television show seen by millions, if not tens of millions of people, it's when they realize they need to take ownership of those relationships. Otherwise, they fear

being blacklisted in the country. What were they slammed for on Chinese state television? They were accused of treating the Chinese people in an inferior way by not having the same warranty policy. There had actually been, as part of the TV show, footage of someone returning an iPhone in Paris and then someone returning an iPhone in China, and the customers just being treated differently. And there's complicated reasons why that was actually true. But that was the allegation. And was that the moment that Apple finally realized, oh, this isn't business anymore, this is politics? Apple basically just said, what are you talking about? Our policies are the same everywhere, and they sort of wrote this benign statement, and then they signed it off by saying

in an offhanded way, Apple makes incomparable products, something like that. And the big editorial in the People's Daily, you can think of that as like state-sponsored New York Times for the country, sort of rift off of that statement and deride at Apple for its incomparable arrogance instead. And that, I think, is the moment when Apple realizes, oh, our statement didn't do very well, this isn't going to go over the way we think it is. And in fact, the iPhone had really stalled. People stopped going to the stores during this time. And that's when Tim Cook issues an apology in Mandarin on the Apple China website. And that would be the first real reportable concession on the part of Apple of there's a political awakening taking place. And I think it takes them several

years to really get to grips with what it means to be operating in China. You argue that China wouldn't look the way it does today without Apple. That's such a wild idea. What did Apple actually help build in China? It is a wild idea. And I have to say manufacturing is the thing that Xi Jinping cares most about. That is the way that China creates its power and that creates choke points in the world economy where other nations are dependent on China. And the electronics industry in particular is the most important industry.

Inherently, almost everything in electronics has a dual use, meaning that it's helpful for consumers. It's also helpful for the military. You think of what a drone is. It's a smartphone with propellers. You think of what an EV is. right, a very important industry for China. It's a smartphone on wheels. If you can understand to do the logistics of high volume production of iPhones, you absolutely can transfer that technology to building anything involving chips, cameras, GPS, etc., which of course means military technology. Apple just played an instrumental role in what Xi Jinping called made in China, 2005. This was a program from 11 or 12 years ago, which is, in a sense, to sever China's dependence on the West, to sort of be a vertically integrated country that could do all of the things necessary for 20. 21st century technologies on its own. And Apple basically realizes around 2015, not only that they could help China in that way, that they already were doing so. They just hadn't sort of put it

in that language. But the result of this is that Apple, as I said, had no vice presidents in the country around 2013. Within a few years, they have several. The key eight people call themselves the gang of eight. And they're able to basically come up with their own study to realize that Apple's contributions to Chinese factories is in the realm of $55 billion a year. And Apple realizes they're sitting on political capital that they hadn't executed before. It does not make sense to us for Be Secret. Maybe we shouldn't be singing this from the helltops, but we need to get the most senior people in the Chinese government understanding

that we are sending America's top engineers. And actually, I would go further than that. There are not only just sending America's top engineers. They're sending the best engineers from Korea, from Japan, people that they hire in their display units and their chips units and so forth. They would send them to the Chinese factories and train up these people. So it's not even a story of transfer of technology from America. to China? It's actually transfer of technology from around the world to China.

Apple trained tens of millions of workers, not just in assembly, but in precision manufacturing, logistics and quality control. At some point, does China just not need Apple the way it used to? There's certainly a sense that the student has become the master. One has to assume there are diminishing returns in what Apple can teach China. And China is just very much. very hungry. And so it's hard to know. The question is, if you get to that moment, it's not clear to me that Beijing or local governments just kicked Apple out of the country, because their economy really is dependent on exports to the rest of the world. If, for whatever reason, Apple all of a sudden had its license to build and export in China canceled, that would just

be a real own goal on the part of China, because every board room around the world that does anything to do with hardware, would say, oh, we need a contingency plant ASAP because if Apple's not safe in China, nobody is. So China doesn't really get a whole lot from kicking Apple out of the country. China knows better than anyone how instrumental Apple has been to its own industrial prowess and that they wouldn't go after them because they get too much out of it. Apple always insisted that it doesn't manufacture, that it just designs. But in practice, they were embedding engineers on factory floors, helping build manufacturing facilities, shaping production processes. Did they convince themselves they weren't creating something when they actually were?

What Apple really figured out 25 years ago is that it's more important to own the process than it is to own the factory. The narrative is really of a company figuring out how to separate knowing how from actually doing it. In the 19, let's say, 50s, 60, 70s and 80s, there's competition between Japanese and American companies at a firm level of who can build more quality products. And Apple basically out competes the Japanese by coming at them at a sideways way, by, in a way, using the supplier's own skill sets against them. I'll give you an analogy. The original iPod, that product is like 70% Japanese componentry, but wrapped in an American design.

It's this American company that figured out how to sort of like give the logistics together, design it really well with Johnny Ive, and have brilliant software that the Japanese couldn't compete with. But they're using Japanese companies to do the hardware. They're not building anything, but they're designing things and they're specifying things. And then really importantly, then they structure deals where when they co-create something with, let's say, a Sony or a Samsung, they will use their leverage to own the IP behind a co-creation. So once Apple owns the intellectual property, they can share that process with another company. So if Lynn creates this brilliant thing for me, but I own our joint creation, I can tell your colleagues how to do it, which basically is an abuse of power to some extent, although it's legal, because you're losing your secret sauce.

I'm extracting the manufacturing DNA from you, and I'm sharing it with your direct rivals, which diminishes the leverage that you have against me. Now, the good thing is we are working together. I am teaching you. But I'm also learning from your rivals and then teaching that back to you so that there's no differences between the various parts that I'm getting from three strategic partners. So Apple was brilliant in a way because they didn't outcompete others by building quality products. They just owned the processes, the specifications, and the equipment behind all of it. There's a line that haunts me from your book.

We trained a whole country and now that training is being used against us. Is that hyperbole or is it basically the honest side? of what you believe happened? I think that's a totally fair statement. And when Trump tried to raise tariffs to 145% I think was the peak last year against China, Xi Jinping was able to get Trump to capitulate essentially within day by saying, OK, well, we're going to license all rare earth metals coming out of China and essentially stop any military from using them.

An F-35 fighter has 900 kilograms of rare earths within the fighter jet. It's even higher figure for submarines used by the U.S. military. If we are cut off from rare earth metals that are not only mined, but refined in China, certain parts of the economy comes to a standstill. So the way that Westerners trains them up to be absolutely world class, and now they are using those skill sets against them. I mean, to be fair, I don't even think you can begrudge China for this. This was actually a brilliantly executed plan, and they did well with it.

You've talked about how the dynamic between Apple and sophisticated companies and China has inverted. has China started issuing demands as opposed to just fulfilling orders? And what does that look like? Yeah, absolutely. So if you think of the first iPhone in 2007, that was undoubtedly a product of globalization. In other words, the components came from all over the planet. And China's contributions were fairly minimal in that there wasn't a whole lot of Chinese parts. And final assembly was probably the most instrumental thing they did to it.

But in a sense, two different things happened since two. 2007. One is that more and more of the work, even if it was German, Japanese, Korean, et cetera, all move towards China. If you're going to be Apple and rely on 50 different countries for your supply chain, which is, this is what Apple sort of publicly says, it's going to make no sense that as you're going from 5 million units in 2007 to 230 million by 2015, that you're just relying on an ultra-sophisticated supply chain that's operating, again, with 50 countries, importing the products for a just in time production method, just fingers crossed that it's going to get through customs on time and everything. That's ludicrous. So obviously, Apple leaned on all of its

suppliers and said, you need to be building in these industrial clusters. So all these German, Korean, Japanese companies began building facilities in China. I would say this is what people miss all the time. There's literally a tear down of every iPhone unit that gets built. And what people will find is that there is a lot of Korean and Japanese and so forth parts. But of course, what we don't know and what Apple essentially hides from us is how much of that work is actually being done in China. So that's one thing that's going on. The other thing is that the contributions of China have really gone from final assembly to more and more of the real estate, if you will, within the iPhone, is Chinese. So even companies like Foxcon, which again, is Taiwanese, very important, they're being squeezed

in favor of a company called Luxhare, which is sometimes known as mini Foxcon. Luxshare is a company that made less than $2 billion of revenue in 2017, the first year that they had an AirPods order. I believe the last 12 months, they made around $47 billion. So just skyrocketing growth, and Apple is estimated to be about 70 to 75% of their revenue. So Apple has really brought up this supplier to take on Foxcon, and it's just one of many Chinese companies that has become a giant. If not in terms of market cap and dividends to shareholders, then at least in terms of capabilities. B.D, you probably know as a company that outsells Tesla, they've been an Apple supplier since 2008. They're a major assembler of iPads. So there's this

sense in which getting in on the ground floor of the iPhone supply chain, not only equip you for just enormous growth within Apple's own manufacturing network, but supplies you the skill sets and capital to expand into other industries. And that's why Apple's played such an outsized role in Chinese industrial development. So yeah, there's absolutely leverage being exercised on the part of China. And these are the ones we know about. I'm sure there's a whole book to be written about the things we don't know. You mentioned BYD, a leading Chinese company, which was a manufacturer for Apple, which is now selling electric cars, which, as you say, are essentially phones on wheels and outselling Teslas. Did the manufacturing expertise that BYD learned by being

an Apple manufacturer helped in their ability to build that business and their battery business and other businesses? One thing I don't want to do is discount the ingenuity and the hardworking workforce of the Chinese. It's not that they're just sort of sitting at the beck and call of Apple and then learning from them. They're learning on their own. But Apple pushes suppliers beyond good enough all the time. Famous quotes about Steve Jobs caring more about the back of the computer than another company cares about the front of their computer. He cares about the insides of the computer, the color of the wiring and all sorts of things. So there was a certain mentality that was brought to all these relationships, these partnerships in China. And I spoke to

someone spent many years at Apple. And she said, you know, when we were working with a display manufacturer, it's not that we would know more than the display manufacturer, but we would have higher standards and we would push them to a degree that they wouldn't be able to do on their own. So there was almost a sense of like a cultural mindset of quality of perfection that Apple brought, not just an engineering mindset. So there was a lot of that. Interesting. So what started as a business decision for Apple to find cheaper manufacturing, Quietly became one of the biggest geopolitical stories of our time. Is that what you're saying?

Apple just is enormously powerful and pushes companies in a way that nobody else does. And why is this one of the biggest geopolitical stories of our time? Well, because the rise of China since 1980 is the biggest thing to have happened on the planet. I mean, nothing else comes close. It's the world's most populated country that's been growing around 10,000. percent for more than three decades with some 800 million people coming out of poverty. That is just the most consequential thing that has happened on the globe. And if things continue, China will be the world's most dominant country in the 21st century.

Like, that's just a fact. And the idea that one iconic corporation played an instrumental role helping China achieve that manufacturing dominance and being able to sever its dependence on the West, I think is an absolutely wild narrative. It really is. Patrick, what are the three takeaways you'd like to leave the audience with today? My first takeaway is there are limits to what you can put in a spreadsheet. Things that don't make a spreadsheet still matter.

A second major takeaway is that owning the process is more important than owning the technology. If you think of Airbnb and Uber as asset light tech companies, Apple did that 10 years before either of them existed and made asset like manufacturing by controlling the supply chain, by orchestrating the supply chain rather than building anything themselves. And the third is even the world's most sophisticated supply chain company can fall victim to the rookie and calamitous mistake of putting everything in one basket. It's the ultimate example of that. Patrick, this has been wonderful.

I really enjoyed your book, Apple in China. Thanks, Lynn. If you're enjoying the podcast, and I really hope you are, please review us on Apple Podcasts or Spotify or wherever you get your podcasts. It really helps get the word out. If you're interested, you can also sign up for the Three Takeaways newsletter at Three Takeaways.com, where you can also listen to previous episodes. You can also follow us on LinkedIn, X, Instagram, and Facebook. I'm Lynn Toman, and this is Three Takeaways.

takeaways. Thanks for listening.