a16z Podcast - How Apple Became So Reliant on China & What it Means For Their Future

Episode Date: June 18, 2025

What if the rise of Apple also built modern China?a16z’s Erik Torenberg is joined by board partner and former Microsoft Windows chief Steven Sinofsky to unpack how Apple’s pursuit of design excellence and supply chain scale catalyzed China’s manufacturing superpower status - and why that partnership is now under intense scrutiny.Inspired by the book Apple in China (but not a book review), the episode dives deep into:The early days of Apple’s shift to Chinese manufacturing What experts got wrong in 1999 about trade, globalization, and China’s trajectoryHow Tim Cook’s operational playbook reshaped the global tech industryBehind-the-scenes stories from Microsoft’s own hardware battles and Surface launchWhy Apple’s entanglement with China may now be a strategic liabilityWhat COVID revealed about fragile global dependencies — and where innovation goes nextHow national policy, intellectual property, and AI intersect in the new industrial eraThe episode opens with a few reactions to WWDC: Apple’s new UI, the iPad’s evolving role, and why Apple’s AI story still feels unfinished - before zooming out into one of the most consequential tech and geopolitical stories of our time.TImecodes:00:00 Introduction00:37 Guest Introduction: Steven Sinofsky00:49 WWDC Reactions and Apple's AI Story02:27 WWDC Highlights: Liquid Glass and iPad Updates05:16 Apple's AI Strategy and Market Dynamics06:34 Meta's AI Moves and Market Implications13:30 Apple's Manufacturing Evolution: From Garage to Global20:50 The Rise of ODMs and Global Manufacturing26:32 Microsoft's Struggle with Piracy in China27:19 Apple's Revolutionary MacBook Air29:30 Challenges in PC Manufacturing31:05 The Rise of Chinese Manufacturing Skills32:07 The Point of No Return for Apple and China32:59 Global Trade and Intellectual Property Issues37:04 COVID-19's Impact on Global Manufacturing41:19 Future of Innovation and Manufacturing47:10 Navigating Intellectual Property in the AI Era48:55 Conclusion and Final ThoughtsResources:Find Steven on X: https://x.com/stevesiFind Erik on X: https://x.com/eriktorenbergStay Updated: Let us know what you think: https://ratethispodcast.com/a16zFind a16z on Twitter: https://twitter.com/a16zFind a16z on LinkedIn: https://www.linkedin.com/company/a16zSubscribe on your favorite podcast app: https://a16z.simplecast.com/Follow our host: https://x.com/eriktorenbergPlease note that the content here is for informational purposes only; should NOT be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security; and is not directed at any investors or potential investors in any a16z fund. a16z and its affiliates may maintain investments in the companies discussed. For more details please see a16z.com/disclosures.

If you look back in 1990, it's like completely upside down from today. As Tim Cook says, people think that China is about cheap manufacturing, but it's the skills they have. For the global view of trade, it was working exactly as planned for everybody. All the experts in 1999 were like two things. Yay for global trade. This is what we all want. And also, don't worry.

China, they're going to stay a third world dictatorship for, forever. They couldn't have been more wrong. What if the Brise of Apple also built modern China? Today's guest is Steven Sinovsky, board partner at A16Z and former president of Microsoft's Windows Division. He led major efforts behind Office, Windows, and the introduction of Surface, and he's one of the sharpest minds in tech.

We kick off with reactions to WWDC, Apple's new UI, the iPad's big software shift, and why Apple's AI story still feels unfinished. we dive into the heart of the conversation, Apple's entanglement with China, how it started, what it enabled, and whether it's now a strategic liability. Let's get into it. As a reminder, the content here is for informational purposes only. Should not be taken as legal business, tax, or investment advice, or be used to evaluate any investment or security and is not directed at any investors or potential investors in any A16Z fund. Please note that A16Z and its affiliates may also maintain investments in the companies discussed in this podcast.

For more details, including a link to our investments, please see A16Z.com forward slash disclosures. Stephen, I've been looking forward to this episode because this is a full circle moment for me. You were how I got introduced to A16Z. You were on the board of Product Hunt over 11 years ago, which is how I was introduced to you in the firm. And I'm glad to be back in business together. I couldn't be more excited for us to be working together on this one. more in the future, I hope. Exactly. And yeah, definitely a reunion of sorts. Absolutely. So for those who haven't been longtime fans of the podcast of the firm, you've been Ais and Z for over

a decade as a board partner, et cetera. And before that, you spent many years at Microsoft helping lead both office and Windows. And you helped to choose the service PCs, which is relevant to the conversation we're about to have. So we're here to talk about Apple. We're inspired by the book, Apple and China. But first, let's briefly cover WWDC. What reactions or how it takes do we have from it? One of the exciting things about this book is that, you know, lots of interesting things to talk about with Apple. But WWC is, you know, they're a big yearly developer event. Of course, it's always disappointing. You know, we're here to talk about supply chains and China and gadgets, but there's never any gadgets at WBC, really.

But lots of big things to talk about. I mean, it's in a remarkable event. It's a remarkable platform that's been doing yearly releases for 26 years. Yeah. It blows my mind what they've done and the scale that they operate at. But I think there are three big things that came out of it. The first was, you know, obviously the big push. It was also the big reaction, which was called Liquid Glass, and it's the new user interface design.

So having gone through multiple big user interface redesigns of widely used products, although to be humble about it, not one used by a billion people, the reaction is extremely predictable, which is a bunch of people that has just explode, And they don't want it, they don't like it. You can always tell they dive in immediately to what problem does it solve? So if there's change, it must solve a problem. But there are lots of reasons that designs change. And then there's the reality, this was the developer conference.

So it's not done. And Apple is very, very good at finishing these things. And all the bugs and all the issues, I can't read it, it's blurry, it's noisy, those will all get fixed. You know, and what's left is, is it great? and is it unique enough? And time will tell. I basically am reserving judgment and not joining in the hysteria on either side.

I have no need to defend it and no need to say it's the worst thing to happen to computing, you know, since ternary processors or something. The second thing that I thought was huge, personally, was just that the iPad gets Windows with a lowercase W. And I think that's just fascinating,

like 12 different ways. You know, it goes back to the original toaster refrigerators. comment or the iPad is different or Steve holding the iPad only like this because it was a book. And it's just a recognition of who uses it and what they use it for. I worry it's a little late. Like I think a lot of people have made up their minds about what to use where. Now the iPad sells an enormous number of units and people who don't use them don't understand that. They sell more iPads, you know, than the laptop run rate in the U.S. It's a big number. And there are

enormously popular with different segments. It'll be interesting to see how this plays out. The weirdest thing about it is, you know, the iPad is a Mac. The Mac is an iPad in terms of the hardware. And so you're really talking about a difference in software and how they deal with that over time and what apps run where and where is the experience is going to be super interesting. The third thing was more an act of omission than co-mission and which was AI. Right.

And the whole event sort of started with Craig, like apologizing, not really apologizing, but in an Apple way, which was like it took more time than we planned, so we're not going to talk about it anymore. And I personally think that, you know, months ago when they, with a great fanfare, launched all these AI features, that was out of character for them. They announced a bunch of stuff that they weren't done with yet, that hadn't baked. It was the right stuff, but they didn't capitalize on it to be polite. And I think what they're probably doing is saying, we're not really good at this pre-announce catch up to our own announcements thing, which, of course, I grew up doing. So I'm like completely comfortable in that world of just make stuff up and hope you catch up or people forget. And so I think that they're back to like, we're not the first mover company. We're the first integrator company. And they're going to just sit back and watch the technology mature a little bit more. But they do have a whole in a perception sense, which is Siri. and what they're going to do about that. And to not talk about it very much is interesting. A lot of people have commented on the sort of the failures of Apple intelligence

or just Apple's sort of inability to capitalize on this innovation. We just saw meta, you know, purchased 49% of scale. So they're making some big moves. How do you make sense of meta's move? And could we see Apple do a similar type of play where they sort of buy the talent in-house? How do you think about that? I think what meta is doing, at the very least, it's great for AI. Yeah.

You know, I'll let meta decide how great it is for meta or whatever. But it's great for AI. And the reason is, is that if you go back, the way platforms have been evolving, you know, in mainframes, IBM had 100%. In PCs, Microsoft had 95%. Then you start getting out there. And then in servers actually ended up being like, at best case, 50-50, and it's been downhill and it's all Linux now.

In phones, you have this split, you know, 80-20 globally, but you have to be. to really dig down by country where it's 80, 20, the other way. Yeah. And in cloud, it's very likely we're going to end up, you know, in a sort of a 40, 40, 20 kind of world. Yeah. And so AI, it's almost inconceivable that there'll be one winner. Right.

And the overlay is China and how that plays out. And the mobile industry is a really good example of how difficult it is. You know, the smartphones, so to speak, Japan had this huge lead in this thing called I-mode. but it only existed in Japan. And so they were leaders in technology and experience. They had all these micro payments, all this stuff. But it didn't go anywhere outside of the country. And so the biggest risk to AI is that either someone tries to think it's only one player,

which at times the federal government has acted like that, or one player says it should only be us, which there is a player sort of claiming that, or it gets geographically constrained. it doesn't matter which one of those might happen to prevent any one of them you just need a lot of players operating at huge scale and so in the startup world you have Anthropic and you have OpenAI

and you have pure open source you have meta then you have Microsoft and Google so we have like innovation happening on all cylinders and all fronts which is great because the competition you know is basically making the call that it's going to be one

and it's sort of going to be this government-driven approach. It might not be one company, but it will be one approach that's sort of sanctioned in some way. And it'll be interesting to see how that plays out. There's nothing better than more and open for AI right now. It's worth just commenting on the market structure point, because when we look back at the last few years of our sort of growth investing in this category, we've been very aggressive, but we regret not being even more aggressive. And because one of those principles was, hey, we want to back the market leader.

And so when you see a second place company, we're like, hey, it's not the market leader. But in this market, as you mentioned, it's not winner take all or just the market is so big that even the second place or third place can be, you know, generational companies. And we're not even at the point yet where I believe we'll get, which is the initial go-to-market has all been this cloud-based thing. But there's all these challenges with that, like privacy and security and cost. And so the idea that we would foist variable cost on the entire world of software, very tough

for me, as a fixed cost, low price volume mindset, to think will sustain. So I think there's a whole wave of AI on the edge that's going to happen, which only benefits from open. Right. There's nothing but positive to say. Yeah. Does it make sense to look at this Alexander Wang or this sort of scale as something of like a $15 billion aqua hire of Alex plus the top talent at scale?

And if you're advising Apple, do they or even some of the other big incumbents need to do something similar? Obviously, Microsoft is will suit with opening out to begin with. But if you're Apple, how do you think about how to do you think about how to to play here. Well, I think, you know, the two plays are, or three, one is going to be the sort of the weird partnership dance play that Microsoft's an opening I have. It seems obvious that at some point, you know, Microsoft will have much more first-party software. There's the, we have always made our play by just having everything, which is Amazon. And so anything that comes out, they're going to

end up supporting, which is just how retail works. Like, you get all the cereals, not just fruit loops. And then I think there's just where we're going to go at our own way, in a sense, which is Gemini taking their approach or Open AI itself or Anthropic itself. And I think that Apple needs to pick one. You know, they did announce like, hey, you can call any model through our API. But the real thing that Apple needs to do is figure out what model is going to be tuned to run on their unique hardware on the edge. And their unique offering or constraint, depending on privacy. and how that plays out. And just to evaluate one of those paths,

if Satya could go back in time knowing what he knows now, do you think he might have done something, or would you have considered doing something different? How should we think about how this has worked out for Microsoft? Oh, these are tricky things. You can't ask me questions about my friends. But I wouldn't, putting it aside as advice,

I would say, I genuinely, to those listening, I do not know anything that's going on. But Microsoft has been involved in AI research since 1993. they were the first hires into Microsoft research when the labs were formed that I was working for Bill way back then. And, you know, Sotcha worked closely with those researchers

when he was the manager of the Bing team for a while because that was the cornerstone of what Bing was doing because that's what Google was doing in, say, 2006, 7, and something like that. And I think that I would not be at all surprised. I don't know anything, I swear people, you know, that there's some first-party thing that they're just trying to figure out when

and how good does it have to be. Because if you are Microsoft, it turns out that, like, the strength of Microsoft is that you never have to be best. You just have to be included. Yeah. And so it's likely that that will be their play. That's generally how enterprise software works. It's the inclusion and the bundle that customers value and pay lots of money for. Yeah.

Not being the very, very best at any given moment. Right. It's fascinating how all the big players have kind of crystallized their approach and response to each other. Oh, yeah. meta's approach, Google's approach. Anyway, I want to segue to the main focus of our conversation today, which is not a book review of Apple and China, though it's a great book, but inspired by the book. There's a few things I just want to say. First, just the notion that I believe they said Apple invests $55 billion a year in China. And I think the author said that's equivalent

or maybe even bigger than the entirety of the Marshall Plan. This is just astronomical. And this book talks about how Apple not only built its company in China, but also helped build China itself. China's sort of manufacturing economy and introduced the, level of talent and knowledge or sort of taught China, not just how to build phones, but that same sort of knowledge then led to help build Tesla, which are phones on wheels, and then led to other technologies used for the military, which we'll get to. But first, I just want to ask, was this inevitable? Did this make sense at the time? How do we make sense of this 20 years later? How did this all happen? It is crazy how it all happened. I mean, I think you go back. Of course,

Apple, we all know, it was in the garage in Palo Alto. They famously built the computers there. But the thing was, from the very beginning, Apple itself, was all about super tight control. I mean, first you had was basically creating works of art on the motherboard. And then they built a factory. There was the factory right here. And that's where they built computers. And they just kept doing more of that, tight control, build the whole computer. Then Steve left Apple.

Macintosh, of course, was famously the same thing. And Steve pushed and pushed on costs and the shape of it, made the famous toaster that you carry around and things like that. But after Steve left, the company had an enormous difficulty competing with the IBM PC. One of the things that it did later in the late 1990s was a super innovative laptop. Now, everybody's like, what is the innovative laptop mean? Well, it turns out in the late 1990s, laptops, nobody bought them. They were slow, expensive, bad computers.

They were just portable. That was their big thing. And if you had to have one, you did. But they built this thing that was the original portable for Mac called PowerBook. And they tried to cram a lot. They tried to make the best laptop possible. And in order to do that, they ultimately were hitting the limits of manufacturing in the U.S. And so Jean-Louis Gasset, who was running the Macintosh business at the time,

he was very famous French executive for Apple that Steve hired to run Apple, France, working for Scully. he actually pushed to do an experiment of partnering with Sony in Japan to build a power book. And so the original Powerbook line had sort of three computers of different sizes, power, and whatever. And the one model was done as a joint design effort, which was just incredibly brazen for Apple culture to, like, break out like that. And they did. And like it came back and the people Apple were like, wow, man, this is not so bad. You know, and it wasn't the best selling model, a lot of complexity.

and you could read all about it in this book or other places. But a light bulb went off. Maybe this helps us solve some of our constraints. Now, they had other constraints. Like the chips were wrong for the Mac. The PC was like half the price, like a lot of problems they had. But it was like a wow moment. And that was really interesting.

But they were failing at computers. Tim Cook joins Apple in like 1997. And he comes from IBM. And at IBM, he was about making PCs. And he should. shows up and he's already working this whole kind of world of supply chain and all this other stuff. He then later goes to Compaq, which is a famous Texas-based computer maker, and really helps them drive that whole motion of building in China.

And I'll talk about that maybe in a minute. But the thing that gets built by Apple then in 1999 is this iMac G3. Now, most people aren't old enough to remember it, but it was this sort of gumdrop shape. translucent Johnny Ive creation. And you look at that and you're like, wow, that's neat. And you're like, no, no, you don't understand. It was impossible. Like every element of that computer couldn't be built.

Right. Not just the stuff that they left off. Like it didn't have serial ports and parallel ports and all this other stuff. But it was like clear plastic. Computers came in gray stamped aluminum metal boxes with screws. And this was like a toolless, fanless, like amazing thing. And it was all done through. this kind of China-based manufacturing stuff.

But it was done in a very unique way at the time, which was the Apple people just went there and smothered the manufacturing line every step and samples back and forth and this whole deal. And I'm glossing over a very complex timeline of events. It sounds a little bit more all or nothing in sudden, but it's a very gradual transition.

But this product was huge. And then the next one was the iPod. Right. And so now they're already comfortable with this model a little bit, But the iPod, all of a sudden, the assembly of it starts to look like almost a war games screen of all these incoming things. Because it's like a disc drive invented in Japan, manufactured in Thailand, and all the stuff is coming together. And all the parts, the click wheel and everything are in China. And it's all of a sudden being made in one place in this incredible form factor.

If you were to look at the other media players at the time, they were these big honking, they look like game console things. Like not this solid deck of cards glued together with no tolerances. I mean, it's incredible. And so that was really the start of designed in Cupertino manufactured in China. Right. And that whole process. And that was celebrated at the time, right? Because we were excited about sort of more integration with China.

And so that wasn't seen as such a problematic thing at the time, right? Absolutely. It's even more than that. This was like hailed as like, this is the modern way to. do business. An example of this that's just super close to home about how things have changed was that in 1999, the World Trade Organization gathered in Seattle to ratify China as a member of the World Trade Organization. And this is the organization that sort of navigates tariffs and trade rules between countries. All the cool countries were in it, but not like communist, socialist,

China with, you know, a totalitarian government. And so the Clinton administration had really pushed for China to come. And it actually split the Democratic Party. People today, their heads would explode if you try to sell it. And it turns out the Republicans were split too. Yeah. Because half the Republicans were like,

free trade, free trade, free trade. And the other half were like, we hate communism. Yeah. So the whole world, if you look back in 1990, it's like completely upside down from today. And there were huge riots in Seattle.

Like the city was like a mess over this moment because it was viewed as this pro business anti-labour kind of thing because it just meant cheap outsourcing in China. Now, the reason for that was because that was the whole direction of American business. There's a very famous book in the 80s called In Search of Excellence.

And In Search of Excellence is sort of this Jack Welchian GE management mantra of like, what you do, you stick to your knitting. Like, you do the stuff that you're good at and you outsource everything else. And you figure out that core part of your company. And that was what you just did. Like, you don't

have full-time people to water the plants. You don't have full-time people cook in the kitchen. You don't have full-time people manufacturing. You just do that elsewhere. And that was the state of American business. It was like, let's get into China. We got the support of the president. It's the whole global market. Let's reduce trade barriers between countries. And so it was celebrated as the start of the whole new industrial era. So at what point did that change both for Apple as a company that they realize, hey, maybe we have some risks here, but also from a geopolitical standpoint. Was it when she came to power? Was it when Trump was elected? How did things start to change? It helps on this one to go a little bit backwards, I think, because before we get to,

like, when did Apple recognize? We should say there are other examples of everybody doing this. And the reason it's important is because it contrasts with Apple, which is the PC industry created what enabled Apple to do what Apple did. So Apple was on this path of let's manufacture in China, and let's keep very tight control. But the PC industry had a whole different approach, which was this much more classical in search of excellence outsourcing methods. So Dell and Compact,

which were the two big makers with IBM, were in Texas. And, you know, Michael was building PCs in his dorm room, and then they had a factory in Texas. Compact were some business guys who, like, built a whole factory in Texas, and the parts were being flown in from wherever they came from, disk drives from this country,

CPUs from Intel in the U.S., whatever, cables from China and stuff. like that, and assembling them in the U.S. But the problem was they were all standard parts. When you bought a computer from Dell and from Compact, if you open them up, Intel processor, Seagate disk drive, also from U.S., and so they were really not competing

on who could buy those parts and put them into a gray or beige box more quickly. They were competing on the other three P's of the marketing mix, which is price, place, and promotion, not just product. And so if you go back to in search of excellence, Well, the idea is, well, since we can't compete on manufacturing, let's just make it as cheap as possible. And so compact led, they were making the cases for compacts, which were these like 15-pound aluminum. Like you could, they were like shipping containers, basically, that held the PC.

They were making those in China. So it was the biggest, heaviest part. So it sort of made sense to see, like, how many parts could we get in the box before we shipped the box to the U.S., which was two-thirds of the market? And so they just started going to these assembly plants. And they went to one and said, we want you to build our PC. And they said, you got it because they are hungry. And they were just having the ability, because of WTO and all this other stuff, to open up and just do business. And so they were like the capitalists in South China.

And so they were like, whatever you want us to do, we're going to do it. And so Compaq, they want secrecy and intellectual party. So they were like, we'll build you a building. And so all of a sudden, Compaq had a building that was theirs. And then they went to a Dell. And we'll build you a building too. And also there's this other company that makes music players,

they have a building over here. And all these makers were starting to serve multiple PC companies. And then the PC companies were like, hey, this is kind of working for us because we're crushing Apple in the marketplace. And our PCs are getting cheaper

and people are buying more and the Windows 95 thing is taking off. Everything is just dandy. And so they started just like saying, hey, we don't even need engineers. Whereas Apple was like flying more and more people to do more and more advanced stuff. They were like, more gray boxes, more interchangeable parts, more lower cost.

We'll just keep selling more and making it up in volume. And that's exactly what was happening. And so these people, which were called ODMs, original design and manufacturers, were saying, you just tell us roughly what you want. We'll make it. And so you'd go to meetings with them, and they would just show prototypes of all the computers they could build. And you pick.

You want this one. And they're like, go out a little taller, smaller, thicker. thinner. We want to be able to swap out graphics cards. Yes, yes, yes, and yes. And here's the Dell logo on it. And then they got very, very good. So they were effectively moving up the stack and becoming product makers and designers. And the reason is very simple. They also couldn't compete on labor. Like the way that the government was working, the socialist part of this experiment was you can't live anywhere you want in China. You live where you're born. And if you want to move, it's a whole thing. You're not allowed to just move. But what China was doing was taking all

the hundreds of millions of poor people and letting them live temporarily in all the factories of all kinds, clothes and cars and computers, whatever, and live for part of the year and then bring massive amounts of cash back to the rural. And that's how China lifted a billion people out of poverty. Yeah. Well, those are all the same workers. So you can't get a better deal on labor. Right. And then you're all going to the same ODMs who are building the same factory, so it's hard to get a better deal on that. So the ODMs, in order to compete, they were moving up the food chain and the American electronics world, whether it was TVs or whatever, we're like, yeah, or Japan with doing it with Sony. We're like, we love this. Just keep showing us more stuff

we could put our name on and we'll just focus on sales and marketing, distribution, and branding. We're awesome. And by the way, like little things, like there were all of a sudden 50 different music players. Yeah. Because all that knowledge was distributed throughout all these makers. And so it was very, very interesting. Now, what's it like to visit one of these ODMs? These guys are crazy. So you think, like, when I first went, you've been there a few times? A bunch. Oh, I lived in China, like in 2004 even. And that's all I did was visit all these people all the time and the government and we go on for everybody. But the thing about these was, you know, you'd think you'd go and it's like a factory. Like how exciting. And I've been to like car factories and

washing machine factories because they're all Microsoft customers. So you go and you visit them and they all show you plants and stuff. And you go and all of a sudden, you're like, oh my God, this is like a hospital. And I'd been to Intel, which is an operating room. Like it's all bunny suits and all the other. But they're just joining parts. It's the same thing I do in my living room when I buy a PC. Like I'm just putting all the parts here. But these things are football field size. And I should say just for a baseline, I did summer jobs at the factory that built intercontinental ballistic missiles and surface to air missiles in Orlando. So I've seen big giant factory floors before there are like thousands of people on hundreds of acres of assembly. And you

just watch like computers flying off. And so the owners of these are very proud. You go and you meet the CEO, founder of these ODMs, and they take you on the tour, they show you everything, show you every step in the line, but, you know, they show you the one you're allowed to see. Yeah. So, like, I was at Microsoft. I couldn't see any of them. But I could see he was very proud to always show me, like, one step in the process. And that was the step when they attached the Windows logo to the PC, something Steve Jobs would never have allowed. But the Windows logo meant it was a legal copy of Windows. The whole reason I moved to China was because they were stealing windows in office left and right, and my job was to sort of somehow help to see if we

could stop that. But they were very proud and very legal about that step. And so I have lots of photos of stickers being put on computers. And then you go and you just go outside. He goes, that's where we make HP laptops. And this is where we make those other laptops that we're not allowed to tell you about. And that's the difference. And what was going on in the Apple building was just super important. And that's where he gets the answer of your question. The Apple building, fast-word a little bit, and they're building what became the MacBook Air. And so, like, the MacBook Air goes back to the original PowerBook 100 experiment, which was, how can we take what basically suck, which are laptops that Windows people use?

Like, give you an idea. Like, when the MacBook Air came out, the typical knowledge worker in a company was traveling with about six pounds of computer gear, which was a laptop. It was probably an inch and a half thick, nine by 12. It had one of these padded laptop cases that you sometimes see. It was awful. I actually wouldn't even travel.

I only used, like, Japanese laptops that were fit in envelopes and stuff. So Apple was building the MacBook Air, and so now we know it was this machine-milled aluminum chassis in that building that they showed us. And it was, like, remarkable. Yeah. Now, you know, Steve held it up and put it in an envelope

and everybody, ooh, it fits in. And I'm like, my Sony fits in an envelope, but my Sony was $3,500 made by hand in Japan. Yeah. And this was kind of a miracle. And the problem was that the ODM, who was on tour with me, so this is what happens. You go on the tour, they take you up a secret elevator. And then it's like you're literally above the factory and all of a sudden I'm like in a Bond movie. The elevator door opens and you're in this football fieldside office with a tea ceremony room and like weird ancient suits of armor for art. Were you ever terrified? I was completely terrified.

And, of course, no one ever gets hurt. But what the hell? Like, I'm, like, looking, is there a stairway that's going to turn to a slide and I'm going to end up being eaten by Chinese sharks or something? But there's, like, ancient scrolls, and we have to go through in every single piece of art.

I'm getting the story. And I'm like, I'm jet lag, and I have to pee. And, like, I'm here to just make sure the stickers are going on the laptops. But I'm getting the full deal. And then we sit down, and he's like, the windows people are losing. That's me.

Yeah. And because I am building these great things. And then he shows me prototypes for all these. these Windows computers. So these are the ones that he built without any help from the Apple people. Wow. And he's like, we could build these, but we can't convince Michael or De or Compaq or anybody to build them. They're too expensive or whatever. I can make them cheaper. Also, and this is where they get candy, it's like, it's very difficult to work with those people. They don't give them any

degrees of freedom. He can't be creative, but he also can't move up the stack. And the PC people just wouldn't do it. And so two lessons from that. One is that Apple taught them how to do this. Now, they didn't plan on doing that. Right. But osmosis happens. And they got all these skills. And then the other was Apple was still going to uniquely do it. And no one else was going to come and invest that money. Now, we were there also at one point to help get surface built. We were actually doing it to solve the problem. The reason surface exists is because the PC makers wouldn't build like an aluminum computer, basically, or an all-in-one for that matter. And so we did a whole different approach to metal. We actually built a whole metallurgy plant to do injective magnesium alloy for the original

surface computer that ran Nvidia chips and all this other stuff. And we were willing to make cases of any size or shape for the OEMs, but they just saw it as a niche. And so the PC makers just continued to stamp out routine things for at least three more years until Intel finally invested a bunch of money in the OEMs via pricing to get them to build what today look like laptops for Windows called ultra books. Yeah. But Apple just continued to do that and they were building that expertise just inadvertently. And then Intel came in and piled on more.

And so more people knew, except in the slightly more open part of China. And so it was like this slow-moving osmosis that gets us to the point where, as Tim Cook says, people think that China is about cheap manufacturing, but it's the skills they have. Nobody else in the world could run 500 prototyping aluminum milling machines at one time and produce the right defect rate and save all the waste and develop all the stuff. When we're making surface, you know, you have to use all this pressure-sensitive adhesive and keep all the things together to make it USB thickness. And, like, nobody's hearing us how to do that.

They were telling us what they were doing. Yeah. And that is what happened. And it was not a design. And that's one of the differences I have with the book. The book is clear it wasn't on purpose. But it still makes it seem like we could have stopped it at any point. Not only do I not see that we could have, there was no interest in stopping it.

For the global view of trade, it was working exactly as planned for everybody. Yeah. Let's now get back to when did that? that start to change? I don't know if it's going to the book or someone said, hey, China has Apple by the balls or has us by the balls. Let's talk about that. And when did we realize that happen? At one point, it's the point of no return. So the point of a return was basically, I would say, two years into the iPhone, the scale was such. There was nowhere else. I'm sure Apple would just argue, oh, there was no way we could even have started the iPhone anywhere else. And I could tell you,

like, Surface, there was no chance. And that's a low volume product. There was no chance. And most things are very low volume, which makes the non-recurricular. engineering costs much higher, so even more impossible to build all the startups, you can't even consider doing that. So the point of no return happened so long ago that it's sort of a weird thing to think about $50 billion a year in investment because that's not what did it. What did it was this weird, no, that's definitely the wrong word, this unique blend of socialism or totalitarianism and entrepreneurship. And that's the thing that all the experts got wrong. All the experts in 1999 were like two things.

Yay for global trade. This is what we all want. And also, don't worry. China, they're going to stay a third world dictatorship forever. They couldn't have been more wrong. Frankly, that's how I felt living there. Right. You know, like, yes, obviously it fuels the authoritarian.

Like you turn on CNN and you're watching and then it vanishes and you're like, well, that was weird. You try to connect to a website randomly from the link and you can't see it anymore. And there are all these people that. worked for the government in our office, and I can't talk to them, and I don't know why they're there, and I'm their boss. It's super weird. Like, there's a lot of stuff that is an American, you're like, this is just kind of strange. But you go to the ODM, I could have been visiting Kimberly Clark in a plant or Kellogg's. It looked like a factory with a person who was like, just tell me what I can make and sell. I'm there for you. And so you're in this weird hybrid

world that was completely predicted wrong. Right. And so you wake. And so you wake. up and you're like, oh, well, they were really working. And a great way to think of it is like the car industry. So the car industry, there was no auto industry when I was living in China. All the cars were Volkswagen or Mercedes. And that's what everybody drove around. If you owned a car, you owned a Volkswagen. If you got driven around, you got driven around or Mercedes. And that's just how it was. The way they got there was by doing these joint ventures with the China. And that was the mandated way. And the joint venture came with these terms that were onerous. Like you had to give them all your IP. And for us, like even to get a license to sell software,

not that anyone was buying it legally, but to sell software, we had to sort of allow these inspectors to come in and see stuff. And like, we had to shut down hotmail for forever because, like, we wouldn't let them see the data center servers, which weren't even in China and all sorts of complexities.

But if you wanted to sell into the world's largest population market, that was your choice. Compli or not. In the meantime, the entrepreneurs in southern China, they're not looking at Beijing for government direction. They're actually going, well, we have to beat, Korea. We have to beat Japan. We have to beat Singapore. We have to beat Vietnam or Indonesia. And those are all their neighbors, and they see them all. And so the car companies, if you just

fast forward, they all are out of China now. These joint ventures, they could never get their money out. They lost all their IP. They're manufactured. It's just horrible. Volkswagen, Ford, Mercedes, just has been a nightmare. Tesla didn't have to do a joint venture, which is sort of the modern thing, just like Apple, where they were allowed to operate. But it turns out there are all these soft ways that the company could be miserable. That's where it goes from entrepreneurship to the socialist totalitarian, where the Communist Party could just say,

we all need to have phones and we like this model from Huawei. Or we're picking a new 5G standard and it's going to step all over the Qualcomm patents, but it's only in China where we enforce the laws. And you're like, but the WTO says the what, says what? And you get really stuck on this kind of stuff. And I think what everybody learned was

in, say, 2000 to 2010 was very easy to pour money into China. Yeah. But it doesn't come out. The returns just aren't there. And then it's also easy if you're one of the blessed sort of companies to sort of grow, but then all these soft things happen. Now, a lot of people love to say how that's just totalitarian governance. But they forget, like, the history of trade in America.

Yeah. Or we talk about the EU a lot. But, you know, we have a lot of these soft things, too. Like when San Francisco County wants to buy. fleet vehicles. They just say, well, they have to be American cars. They don't even think about it. They're like, step one has to be an American car. And when the Defense Department buys stuff, like there's a massively 1,000-page list of all the things that you have to check off in order to be sold to Defense Department. To the outside world, that looks like

safety and security, but it also could be viewed just as much as protectionism. It's just two sides of a coin. Yeah. When we look at Apple's dependency on China, when does Does this go from this is great to, okay, this is actually an existential risk for the company? Or would you say we are there yet? Or how is this developed into the current era? The easiest way to view the wake up call is through the lens of COVID, I think, which is all of a sudden the entire world learned that this global system, while great for prices, great for in search of excellence, focus on what you're knitting and what you do well, it turns out it's actually pretty fragile. Yeah. And it's fragile because there's single points.

of failure all over the place. And in this case, the single point of failure turned out to be like, if this city is closed, no one can go into the factory. And then if transit is closed, then the stuff can't make it. And so I just think COVID was the wake-up call for the whole system. And of course, at a national security level, it's massively important now because you can't afford to have a nation shut down because of these things. And if all the technologies are based on chips,

which are assembled in one place and packaged by these people who have all the skills to package them, you go, well, that's sort of a problem. Now, the defense weren't long ago figured this out for, like, guns and rockets. Like, those are all made in the U.S. The military sidearm is a Beretta pistol, which is the oldest company in the world in Italy. And the first thing Italy did to win the bid was set up a factory in the U.S. And so good news, we have plenty of sidearms that we could throw at the drones or something. But drones is the opposite end of the spectrum.

All of a sudden, drones are the most important thing. And all of a sudden, we were like, not just we don't make the drone. We don't make any of the parts for the drone. And the only person who makes them is our enemy, so to speak. So this seems to be a problem. And so let's say Trump brings you in and says, hey, I've noticed that nearly all of computing, you know, every labor stack is done in China and Asia more broadly. And I'm trying to sort of decrease our dependencies.

Microsoft, man, what should I do? Well, obviously, there are much smarter people who know more and have much more at stake than I do. dude trying to solve this. I mean, you have to do it. Yeah. The thing is, it goes against all these academics that were experts in 2000 that said it was good. Yeah. But they didn't think about all of these. Like, nobody thought that the dependency would be on sort of the replacement for the Soviet Union in terms of longtime enemy. No more would we be dependent on the Soviet Union for something than we would be on China. There's no choice in that matter. Now, hopefully, our detent with China, is already vastly more open than anything that up until 1990 that the Soviet Union was.

So we're in a very good sort of peaceful situation there, but that doesn't change the posture. And so Apple is like doing this experiment. It's obviously more than an experiment to build in India, which solves their problem. It doesn't necessarily solve the current administration's view of the solution. Right. I mean, because if you think of it, like the other part of free trade that inverted, twisted, and split the political parties in half of the U.S. was NAFTA in the early 1990s, which was like free trade with Canada and Mexico. What could be more of a no-brainer?

Well, it turns out it was also the global view of things. Like, in fact, NAFTA, half the Democrats voted against it, half the Republicans voted against it, the same as WTO kind of stuff. And here we are, like, well, that meant that all the jobs just moved to Canada and Mexico. Yeah. And, you know, long term, also not having employed. people is a bad thing. It doesn't matter if it's manufactured or anything. It's just like, weird that just being across a border

would so substantially change the economics of what's made. I mean, especially when you literally just drive the parts back and forth through Texas. It's kind of weird. Or Minnesota or whatever. And so I think this reset is happening broadly. I don't like the idea that

the people who are very much in favor of this global world sort of ignore inherent risks of the polarized world, but also just immediately jump to no one's going to pay $5,000 for an iPhone. What an incredibly silly argument. Because if you were to look at an iPhone and think about making it by hand,

you would go, well, it's going to cost $100,000 each one. It's like a fancy watch. And so the reason that it's $1,000 or $1,500 or whatever is because of the innovation in manufacturing. So all that needs to happen is like another step function change in manufacturing. And of course, for decades, that's all Apple woke up and thought about.

So they remained that whole operating mode of apples of sending zillions of people being on the factory floor, that's what they do. They rely on skills, but they are there inventing these things. And so if you look at the Applevision Pro, like it has all these lenses and all, they made all of that stuff.

And so what they're going to do is they're going to focus on, okay, if we have to do this, we're going to also end up with giant factories of robots or better automation or, new packaging technologies that don't require as many stuff, all this stuff that they've already the world leaders in. So you're sort of optimistic that this is a solvable problem that Apple can decrease its dependency

and figure out whether it's Frenchoring or something. I think, you know, it's easy because of the book to focus on Apple. Right, but like everybody faces this problem. Yeah. Like even if you make cars in Detroit that are really manufactured and assembled in Canada, like where do all the in-dash electronics

and all the car computers come from? Right. They're just flown in on a plane. to be glued in. And so I'm not just optimistic. I mean, this is literally how innovation happens. Yeah. Like, innovation isn't invention.

Invention is like, was just sitting around thinking what would be really cool to make. But innovation is this is the constraints that I have to work in. Like, I'm going to solve this problem. And nobody loves to do that more than engineers. Yeah. And so if you're a packaging engineer, like in the software, hardware motherboard, like this is like you live for this. How do we reduce the steps? How do we reduce the components?

How do we cram more? This is like your whole focus in life. It's your mission. Yes, and they've been working on it. And so the way innovation happens is the people have been working on stuff go, I have a totally better idea. And then you try it. And oh, this one worked. The other thousand didn't work.

I mean, that translucent case, like, it's not like people haven't thought of making plastic cases before. And translucent plastic was like a thing. And then they sat down and they just made it because you can build things. Like, that's a thing that happens. And factories are things that can be built. Yeah. And so, like, I don't see any reason why. I think that the mistake is either thinking that China is about cheap labor

or the mistake is thinking that for things that be made in the U.S., it has to recreate 300 million migrant workers on buses working temporarily and going back home. That was their constraint. Yeah. Like, their constraint was we have to employ all these people, but not let them move. Yeah. That was their constraint. Like, we have an idea.

Let's build the factories in Shenzhen and get a bunch of buses and dorms. Yeah. Problem solved. Right. We have a different one. We don't have 100 extra million people. Yeah. We have a lot of money and a lot of intellectual power

and a big desire to bring low-cost, high-tech products to people. Yeah. Let's build things. Gearing towards closing here, you know, it felt inevitable to me sort of that Apple would become this even much bigger than it is today in the sense of, I remember reading the stat of like... Wait, I'm sorry, much bigger than like the hugest company in the world, much bigger? Because nine out of ten, I think high schoolers prefer Apple products.

So when they get to college, when they grow, graduate, like, why isn't sort of iPhone market share much bigger? Why wouldn't it just keep getting significantly bigger, not just a phone, but also in sort of laptop, just up as well. But when you look at the risks, maybe the China situation just drastically increases prices if something were to material happen in the short term, or maybe there's a new form factor that Johnny I at Open AI or someone else figures out that overplays the phone. That doesn't seem super likely in the short term. But how do you sort of react to that? People always think that you're either in the school that things are just going to keep going like they're going to go forever.

Or, like, idiot, this thing is over. There's already a new thing, but you can't buy or touch the new thing. And we are in that in between space right now. And I do think that it's highly likely that new ways to make things will get figured out. It's highly likely that it's going to get much more competitive in phones only because the target is a little bit more stable. And the best way to think of it is, like, Macs are half the laptop market in the U.S. at this point, you know, not going to be. quite, but with segments. And so nobody thought that would ever happen. Yeah. But that's partially because the reason that could happen is because the use case for laptops stagnated at about 2,000.

And so all of a sudden, I'm basically running a browser and Microsoft Office. Yeah. And if you're doing that, a Mac module of the differences in Office is roughly the same. And so then if the price is the same at $1,000, why not? Half the market is always going to view it as a price point. And $1,000 is $200 more than $700. And so a certain amount of the market is going to buy the phone that's free with the plan. And that's just going to happen. But more and more of the market

will see the phone as like a positive part of life and be willing to invest in it, like any branded item. I think that's going to happen. But I don't know what's going to happen on the device side. I think generally speaking, the form factor is going to last much longer than even the most optimistic people think. I mean, there's like a lot of people running PCs still,

even though nobody in Silicon Valley knows that. But I think, like, it's just going to be up for grabs. There's nothing written anywhere. Bill Gates used to always, always, always have to remind people that Microsoft any day somebody could just show up and do a better version of everything Microsoft does because it's software. And the economy of scale, all that stuff,

isn't the barrier that people used to think. Manufacturing devices specifically has a bit of, barrier, but also because of the automation, because of all this work that's going on, that barrier is just going to drop. In fact, it has dropped. The only reason that there are so many amazing Samsung phones is because they've all seen the movie. Yeah.

Like, they know what to do. Is there anything else you want people to take either from this book or from this conversation in summary? I would sort of just drill out on one issue that I just think is super important for people to really consider in the competition between the U.S. and China and also how it relates to AI, which is the difficulty we're all going to have collectively to navigating the world. of intellectual property. Yeah.

I think it's very, very easy to say China doesn't respect intellectual property so they can't be part of the world stage flat out. I mean, they've crushed the pharmaceutical industry that way, what they've done with BID and Tesla arguably pretty rude and stuff like that. But on the other hand, it's just as easy to say, well, because of AI, all knowledge, all content, all information just needs to be free to train and to reuse. Neither of those are realistic positions. And I think that this issue is far more subtle and far more important than I think either China thinks or the sort of the didgerati in the U.S. think.

And I believe that that's one that's going to need a lot. And I worry about wild cards. Like I worry about the European Union going crazy in one direction or another and passing some rule. Then all of a sudden that market is weird. Or Japan, which was like went the other way because they have a language challenge, which is Japanese. like they could just they're in control of Japanese so they just said yeah we could train anything here but it's like yeah but that's just Japanese

or is it a loophole for English we're not really sure yeah so I think that that issue is the one where policymakers need to spend the most time but it's also structured in the U.S. that it's just it's a litigation issue and there's no way around it so we're in for years of kind of market uncertainty over how this plays out and that's been a core part of Apple's advantage has been their ability to maintain

the intellectual property of components and manufacturing and assembly, and now that's dispersed. Yeah, that's a good place to end. Stephen has been a fantastic conversation. Thank you so much for coming on. Thank you. It was great to be back together. Thanks for listening to the A16Z podcast.

If you enjoyed the episode, let us know by leaving a review at rate thispodcast.com slash A16Z. We've got more great conversations coming your way. See you next time. Thank you.