Auren Hoffman (00:00.443) Hello, fellow data nerds. My guest today is Patrick McGee. Patrick McGee is a Financial Times correspondent and the paper's former lead Apple reporter. He's also the author of the book Apple in China, which is a deeply reported look on how Apple and China kind of built each other. I read the book recently and I think it's the most important book I read in the last year. Patrick, welcome to World of DaaS.

Patrick McGee (00:22.366) Amazing. Love that introduction. You know, we still haven't done the paperback version, so there's still room for a good blurb like that.

Auren Hoffman (00:27.953) Oh, okay. Oh, I love that. Okay, great. I did the audio book and it was like, it absolutely blew my mind. I thought it was great. That's why I reached out to you. like we've never talked before. I reached out to you just kind of cold because I read the book and I'm like, okay, this is amazing. Our listeners need to know about this. What love to just chat with like, what did Chinese manufacturing capability look like when Apple started investing in China?

Patrick McGee (00:52.802) mean, 25 years ago, made in China was synonymous with poorly made. Obviously, a lot of stuff was being built there. It's not as though they were new to manufacturing. They really got in in the early 1980s. in a sense, what Western corporations or even Japanese corporations were taking advantage of was just abundant labor and scale. But they were doing that to make things cheaply. So think plastic dolls and things like that.

But you weren't getting sophisticated electronics. That's not where Sony was building their products in the early 2000s.

Auren Hoffman (01:28.227) Is it just like they're following, is it the same arc that was followed by Japan and South Korea? Is it just kind of like an Asian tiger arc?

Patrick McGee (01:35.938) Yeah, I think in terms of policies, the policies can be a little bit different and nuanced in China. But in terms of like, yeah, the sort of like trajectory of learning, I think you could say it's comparable. Absolutely.

Auren Hoffman (01:46.897) And there were other companies beside Apple that really messes HP. There's all these other companies like what specifically was Apple doing that was different in China?

Patrick McGee (01:56.578) Yeah, it's really worth knowing that Apple didn't sort of discover China in a way that others hadn't. Apple was late to the party, if you will. They were late both to outsourcing and they were late to offshoring.

Auren Hoffman (02:08.379) They were like building in America, right? Like for a long time.

Patrick McGee (02:10.87) Yeah, I mean, Apple very famously, you know, two Steve's in a garage were tinkering with circuit boards and stuff. And the first Apple computer was nothing but a fully assembled circuit board, in a sense, designed by Steve Wozniak, and to a large extent actually built by Apple's first employee, which was Steve Jobs' pregnant sister, who was just building the circuit board sort of, you know, as I described in the book, while on the phone with her friends.

Auren Hoffman (02:16.795) Yeah.

Patrick McGee (02:34.222) There's no automation back then and there was really no electronic supply chain for the PC because the PC barely existed if it existed at all. In a sense, if I'm skipping forward 15 years to, or 20 years, I guess, to about 1996, for me, the reason why Apple is nearly bankrupt is not that Windows created a better graphical user interface. I think arguably the Mac was still a better product, sort of computer versus computer. The trouble was is that Apple couldn't keep up with the mundane things that Steve Jobs didn't care about.

To be fair, he's in exile during this period. manufacturing, logistics, distribution, that is where the PC industry really had a revolution causing prices to come down quite literally on a monthly basis. If you're my age and you remember the inserts within a newspaper that would come, you would notice the specs were getting better by the month and the prices were often falling by the month. And Apple just couldn't keep up with that.

Auren Hoffman (03:27.183) And what did they do differently? What was the key thing that they were doing in China that maybe other companies weren't when they really started investing there?

Patrick McGee (03:36.748) Yeah, so to give just a tiny bit more history. So the likes of Dell and HP had really outsourced their operations. Maybe not all of the operations. Dell was pretty keen to sort of have some of their own factories, but even their own factories were in places like Malaysia and places like China. And they weren't, they didn't have the imagination. In a sense, Apple's success is one of imagination.

because in the late 1990s, Steve Jobs comes back, we'll sort of gloss over the reasons as to why he's gone and why he comes back, but he comes back in 1997 and he basically realizes that the CEO before him, who last 500 days, a guy named Gil Amelio, he really had the strategy backwards. What Gil wanted to do was catch up to the PC industry by using standardized interchangeable parts. And what Steve knew was we've got 3 % of the global computer market. If we try to play that game,

We're just going to accelerate our own demise even faster than it's already happening. What we need is product differentiation, right? And this is where imagination comes in. So you have the meeting of the minds between Steve Jobs and Johnny Ive. And they have this idea of, you the computer, I mean, you have to remember, this is just when like high speed internet is just beginning to pick up, right? know, people are, blogs don't even really exist at this stage. And so the computer is just at this like changing trajectory point, inflection point.

where the computer is no longer sort of in the basement, maybe it's beside the kitchen. And so they want the computer to look more like, you know, they got inspired by like BMW headlands. They got inspired by Swatch, the sort of multicolored Swiss watch company, you know, kitchen appliances. And they really wanted to just make the computer look really different. And so the results of this, of course, is the Bondi blue colored iMac. And I think usually the narrative for Apple just sort of stops there. And then you say how many they sold and you moved on to the next product.

And where my book just takes a really different stance is to say, look, if it took a wildly different imagination to come up with this computer, it obviously also took, if you just sort of think about it for a few minutes, a wildly different way to manufacture it. And so.

Auren Hoffman (05:45.699) Even just like the plastic was really hard to do, right? On that particular computer. That was like a revolution just on that one.

Patrick McGee (05:50.861) Yeah, I mean, the chapter for the candy colored iMac is called, it's called unmanufacturable. And the reason is that the first thing that Johnny Ive and the industrial team come up with literally can't be built. It's not that they can't mass manufacture them, they can't build one in the lab. And so it's this really interesting story where basically, know, Steve Jobs comes to realize that if they don't change the product design, the computer is not going to be made and Apple is literally going to go bankrupt.

And so Johnny Ive sort of tailed between his legs, has to go back and redesign the computer. There's several things that just couldn't be done. And then the product design team and the manufacturing design team is able to actually build that. And then they start working with LG in Korea to get it all done. And that is the first time that Apple is building a desktop computer outside of an Apple factory. And that's just like a change of monumental proportion for a company that always wanted the control of manufacturing. That's why it built things itself. So I mean, to be fair, from 1981 onwards,

there were computer factories owned by Apple outside of America, right? So they did have them in California and Colorado, but they also had them in Singapore and Ireland. But with that candy colored iMac, with it becoming wildly successful, Apple sort of obviates itself from the equation and has LG, which to be fair, which is kind of funny. LG is not even a contract manufacturer, but Apple just has this swagger and sort of turns their analog monitor supplier into a contract manufacturer. And then,

because it's so successful, has them replicate that triple continent strategy I just mentioned. And LG sets up operations in Wales and in Mexicali. And it's that strategy that is poorly executed that gives way for Foxconn's Terry Guo, this Taiwanese giant, or emerging giant, maybe I should say, to swoop in and say, we can do the strategy for you. Let us take over. Teach us how to build this computer.

and we'll sort of save you $40 per computer.

Auren Hoffman (07:48.697) And he's basically like Terry Joe at Foxconn, he's basically willing to bet it all and lose everything just because he thinks he's going to learn so much from Apple, right?

Patrick McGee (07:57.395) Yeah. Terry Goh is wildly important in the narrative. And it's really interesting that he's Taiwanese and that there's lots of Taiwanese entrepreneurs who are taking advantage of the size of China. And I think he and I'm really quoting or paraphrasing some Apple people here. Terry just understood Apple's uniqueness better than Apple did. He sort of understood that what Apple was

Auren Hoffman (08:20.837) Especially at the time, like Apple was like, it just, this is pre iPod. this is like, Apple's like, I don't know. I mean, when Steve Jobs comes in, it's like a $3 billion market cap company or less or something.

Patrick McGee (08:26.083) Yeah.

Patrick McGee (08:29.582) Yeah.

Patrick McGee (08:33.934) Yes, there's nothing intuitive about betting on Apple at this time. That's why history is important, right? Because if you sort of don't go through the slow detail, then you think, well, of course you'd bet on Apple. Like their products are so different. And it's like, no, like nobody wanted to work with them because they absolutely thought, I mean, you one of my favorite characters in the book, Tony Blevins, sort of the chief negotiator for Apple procurement from 2000 to 2020.

Auren Hoffman (08:48.677) Yeah. A lot of people thought they were going to go bankrupt at that point. Yeah.

Patrick McGee (09:00.206) He comes in and he leaves IBM after some decade plus and he tells his IBM manager and the guy says, undoubtedly, this will be the worst decision you make in your life. I mean, you have to remember that is the meat cute moment for Apple and China. China's not a major economy and Apple's tiny.

Auren Hoffman (09:13.987) Yeah. And by the way, when 2011 comes over, Tim Cook's already, he's already in Apple and there's a bunch of other IBMers there already at that point, right?

Patrick McGee (09:20.077) Yes.

Yes, mean, so IBM has, you know, there's a chapter called IBM West. And the reason is, is that people in IBM used to refer to Apple in these days as IBM West because the mature Steve Jobs, right? Remember the young Steve Jobs hated IBM and everything it stood for, right? The most famous ad of the computer industry ever is 1984. And that's Apple's big dig at IBM as big brother. By the late 1990s, when he's come back after 12 years,

Auren Hoffman (09:40.698) Yeah.

Yeah.

Patrick McGee (09:51.963) And you know, there's some success in those 12 years. mean, this is when Pixar comes out and he is the, or sorry, when Toy Story comes out through Pixar and Steve Jobs, as people may or may not remember, was the CEO of Pixar. So there is some success, but he also was a wild failure.

Auren Hoffman (09:58.736) Yeah.

Auren Hoffman (10:03.505) By the way, like the next, I I learned to code on a next computer. I'm that old. And it was like unbelievable. It was like one of the most beautiful at the time. was the most beautiful machine you could think of.

Patrick McGee (10:06.894) Amazing.

Patrick McGee (10:15.416) Well, you and Tim Berners-Lee, right? The World Wide Web was invented on a next computer. Yeah. So next is the computer company that Steve Jobs founds after Apple. But it's like a failure sort of three times over. And then it ends up being acquired by Apple, which is its own interesting thing. mean, that probably could be a book just on its own. For me, it's a few pages. But that's what brings Steve Jobs back to the company. And so.

Auren Hoffman (10:19.165) I didn't realize that. Okay.

Patrick McGee (10:40.652) When he is really trying to save Apple and it's not clear that it can happen, he hires all kinds of people from IBM. In other words, the mature older Steve Jobs understands that the things that he's not good at really matter. So distribution, logistics, procurement, just-in-time production, he needs those skillsets. So that's why he hires Tim Cook. And at the same time, Tim Cook brings along Jeff Williams, who just retired as chief operating officer, and Tony Blevins.

And this is the tip of the iceberg. There are loads of people coming from IBM to help Apple during this stage.

Auren Hoffman (11:13.187) And what, so what do you think Foxconn saw or were they making, is it, is it just a weird history? Like were they making other bets at the time they're making Apple, but they're making like six other bets and those companies went under or some random MP3 player that we never heard of. Or was it like, or they're really going all in on Apple at the time.

Patrick McGee (11:30.072) Yeah

Patrick McGee (11:33.965) So there are a number of major Taiwanese companies at the time. So Inventek is another, Quanta is a third, and all of them are making products for all sorts of Western electronics companies, right? I there's a lot of PC makers alone, but there's also stereo makers and all sorts. And Apple has this swagger, I suppose would be maybe a positive way of putting it, but maybe a perceived arrogance in its own products and how they're going to be built as well. And so these other companies really shun Apple. They don't want.

engineers overbearing, overbearing engineers breathing down their necks on the production line, asking for this, asking for that being so detail oriented. And so.

Auren Hoffman (12:08.496) Yep.

pushing them to get to higher levels of excellence.

Patrick McGee (12:15.104) Absolutely. so, well, in a sense, what you're doing is you're giving me the Terry Guo gloss there, which is that he understands, and I'm sorry to make it sound like a high school poster, the challenge is the opportunity. That instead of seeing Apple as overbearing, it's like, wait a minute, they're asking us to do things nobody else is asking. And they're doing so at a level of margin that is risible. Like we might even actually be losing money to work with Apple. But wait a minute, if we can please Apple.

Auren Hoffman (12:26.063) Yeah.

Patrick McGee (12:42.862) will be able to please any other client. So Terry Guo is just the first person to really get in the supply chain that the learning is the opportunity. And it doesn't matter if you're not making really any money from Apple. And by the way, one thing people get wrong about this is they always think, right, but you make it up in the volume. Well, today, maybe, but not in the late 90s. Apple's a tiny player in the late 1990s. So the vision, if you will, of Terry Guo really is quite extraordinary.

Auren Hoffman (13:02.298) Yeah.

Patrick McGee (13:11.392) in him recognizing the uniqueness of Apple and therefore the unique opportunity of working so closely with

Auren Hoffman (13:16.421) Give us a sense of the scale Foxconn back then and the scale Foxconn today.

Patrick McGee (13:20.788) mean, Foxone wasn't major. So you have to remember that when Apple sort of first enters quote unquote China, it's not really China in the sense of, you know, having to negotiate with Beijing. It's all happening in Shenzhen, right, or at least in Guangdong province. so this is like the capitalist experimentation zone that was sort of set up at the behest of Deng Xiaoping in the early 1980s. And so it's sort of it's it's obviously it's part of China. I'm not saying it's not.

Auren Hoffman (13:34.225) Mm-hmm.

Patrick McGee (13:48.813) But it's so different in terms of the laws and regulation and what's going on. You've got local cadres really turning a blind eye, but with federal approval of turning a blind eye to any number of things that are happening. And so that's really where the Taiwanese are setting up operations. And the reason, and I think people are familiar with this, that Terry Guo ends up building all these dormitories and such, is that the people that are populated in the factories, they're not Shenzhen residents.

by large, they are migrants from the hijalands, right? And you've got tens of millions of migrants going over to places like Suzhou and Shenzhen and Dongguan and so forth throughout the 80s and the 1990s. so Foxconn within the perspective of how quickly Shenzhen is growing, it's not extraordinary in that respect. It's well known, but its reputation is that of a third rate supplier, someone that will reverse engineer your designs.

and undercut you on cost. It's not intuitive that Apple should be working with Foxconn, but the deal is made between Terry Guo and a young Tim Cook. And it's actually a secret project within Apple, wherein only certain divisions are familiar with what's going on. But essentially, LG has failed to diversify into three continents, the manufacturing of the iMac, the candy colored iMac that we were talking about. And there's a secret project to basically help Foxconn

learn the ropes to figure out everything that LG is doing so that they can sort of undercut them on cost. But they do an extraordinary job. mean, the Apple engineers are blown away by what later gets called Shenzhen speed. And so it really is like Foxconn's engineering chops that are maybe the first and most important thing. But the other thing I'd love to emphasize is that Terry Goh understands the politics of China in ways that

are so favorable to how Apple operates that Apple doesn't think to sort of learn it itself. It really relies on Foxconn to understand how the system works. And maybe just to go off on a slight tangent, the biggest difference between Soviet communism and Beijing communism is the degree of federalism. And I describe in the book China as federalism on steroids, particularly during this period.

Auren Hoffman (16:00.145) It's like every little city is competing with every other city in a way.

Patrick McGee (16:04.65) Absolutely. And so like, if you can work with the local cadres, they are incentivized to really have growth in their area, which means they will give you, know, the migrant labor, free machinery, the land to build your factories and so forth. So you think of like Soviet jokes, they just don't work in the Chinese context, right? Certainly in the Shenzhen context. My favorite Soviet joke is, you a laborer saying, we pretend to work and they pretend to pay us like that wouldn't compute in Shenzhen. Everyone's working really, really hard. So it's very different from

Auren Hoffman (16:32.581) Yeah, I mean China is the in some ways the most capitalist place on earth like it's so cut road. It's so competitive there

Patrick McGee (16:34.03) That would be communism.

Patrick McGee (16:39.83) Yeah, and it's all being built out in Shenzhen in particular during this timeframe. And so to sort of leap forward in the narrative a little bit, it's just that like, think Apple really understands what's possible given the migrant labor, the ubiquity of the labor, the cost of the labor. But more than that, how can we design computers that take advantage of this? So they really begin to reconceive not just operations.

Auren Hoffman (16:44.581) Yeah, Shenzhen, yes, yeah.

Patrick McGee (17:05.506) but the sort of tip of the pyramid in the product development cycle, which is design, right? In other words, the things that industrial design, i.e. Johnny Ive wants to create, are only made possible by the degree of like, know, conveyor belt logic in stadiums the size of football, sorry, in factories the size of football stadiums, right? So instead of the likes of Dell going there just for abundant labor and cost,

Apple understands that they can design products in a totally novel way to really take advantage of what's possible there.

Auren Hoffman (17:37.553) And Foxconn, give us a sense just like what is the scale of Foxconn today? Because I think most of everyone listening to this understands the scale of Apple, but I don't know if everyone appreciates how big Foxconn is.

Patrick McGee (17:50.425) So Foxconn's enormous, but not in terms of market cap or margins, because they actually don't make a lot of profit. I mean, they do with the volumes that it's building at. But in terms of revenue, gosh, I haven't thought about this. it's in the book, right? But I believe Foxconn makes more revenue. And this must be a 2024 figure, more revenue than Microsoft. It might even be that Microsoft and Nvidia combined during the year I was looking. You're a fresher reader to the book. that the statistic I use?

Auren Hoffman (18:19.313) I mean, I know it's enormous, right? It's enormous. And also the number of employees is enormous. Of course, their margins are tiny. So that's why their market cap isn't so big because they're just passing on most of these savings to the customer, which is why they grow so fast.

Patrick McGee (18:20.796) Yeah, it's, it's bad.

Patrick McGee (18:34.53) Yes, and I believe it's 2001. So going back some time. they do become really big, really, really quickly, where they become the largest exporter of China, right? No, small feat. And maybe it's a few years later, but they become, the most, what am I trying to say? They have more employees than any other place in China, right? So for America, I think that's either Walmart or Amazon, depending on the time of the year. For China, that's Foxconn.

Auren Hoffman (19:02.063) Yep. Yeah. Yeah. Wow. That's, that's, now, okay. Fast forward Apple, obviously they make the, the, the iPod, they make the iPhone. You have this amazing anecdote of Apple's first store in China and essentially having a partner with like essentially organized crime buyers. Like give us, walk us through that story. Cause I love that story.

Patrick McGee (19:27.182) Yeah, this is a wild narrative. It's my favorite part of the book. And just to give you like the behind the scenes thing, when I pitched the book, it was 70 pages, it was pretty detailed, but I had nothing interesting to say about 2007, which of course is the birth of the iPhone, and until 2013, which I already knew was Apple's political awakening. that's sort of the origins of, I'm sorry, that's the prologue of the book. But I didn't know, I didn't have anything interesting to say. I mean, it's not that I couldn't say anything about the birth of the iPhone, but you need four or five chapters.

And then, so I finally come across this narrative of how when the iPhone first comes out, first of all, it's not an international product. It's only made for the U.S., right? And you can only use it as an AT &T subscriber. The following year, 2008, Apple has deemed China a third tier market. Second tier markets include places like Uruguay. So they do not see China as this big market. It's so funny.

Auren Hoffman (20:20.017) hilarious.

Patrick McGee (20:22.698) And yet the Beijing Olympics is, is, is summer of 2008. and if you remember, this was just an extraordinary, massive event. mean, this was China's coming out party, if you will, they're on the world stage and they were going to nail everything. And so Apple sort of is, approached unbidden. Hey, why don't you build the first Apple store for China, ahead of the Olympics? And if you start now, basically, you know, we can sort of have it all built for you by then. And, and so they decided to do that and.

It's it maybe is worth knowing. mean, we're sort of laughing right a minute ago because how could you not see that China was a big market? But you have to remember, this is when Steve Ballmer of Microsoft was laughing at the five or six hundred dollar price of the iPhone for American consumers. And the Apple Store was basically a U.S. phenomenon. mean, at this time, they did have some in Japan, but that's because Steve Jobs loved Japan and Australia. But there was no Apple Store in Paris or Berlin or Hong Kong, like these upper tier markets. So the idea of having one anywhere in China.

It's understandable that they didn't think that was going to be a big market. Anyway, the story is that this Taiwanese missionary, maybe I should say former Taiwanese missionary, but a Mandarin speaking guy who had ended up owning his own supply audit business and traveled all around China for many years. By this point, he'd become a store leader in Denver for Apple. So he's an Apple employee, at this store manager meeting. And someone says, we're going to build this Apple store in China. And he sort of raises his hands. Nobody knows that he speaks Mandarin. And he mentions that.

Auren Hoffman (21:21.797) Yeah, yeah.

Patrick McGee (21:47.853) And his idea is that maybe he can go out for the Summer Olympics and just say ni hao as people walk into the store. He literally thinks he's going to be a Walmart greeter. And I need to fast forward through the story, basically. But basically, he becomes the de facto head of the Apple store, the Apple retail, for five years. And during this stage, the iPhone just becomes the most sought after, conspicuous product that anyone in China wants to have as a way of demonstrating, I've made it.

Right. I'm sort of part of this younger generation that thinks themselves and da da da da. And so, you know, this is also a time when Louis Vuitton and BMW are doing really well in China, but that's like for the top 0.1 percent for everybody else. If they've got any money, they want to buy an iPhone. And the stories out of this are wild. Right. I mean, there's someone this is a tragic episode. I think he's 17 years old on the on the black market. He undergoes surgery to sell a kidney in exchange for enough money to buy an iPad and an iPhone.

You've got people taking out 45%, 50 % loans just to purchase Apple products. mean, you can't really overemphasize how important or under emphasize how sought after the iPhone was. So what happens is these gangsters, these yellow cows, so they're just scalpers, I should say, but sometimes they're backed by the triads, right? So the Asian mafia, if you will, they recognize this massive supply imbalance where the whole country wants to have iPhones. And by 2010, there are only four Apple stores, right? So it's like,

You know, it's one store per 350 million people.

Auren Hoffman (23:13.809) And you can just like order it online and they'll ship it to you like you kind of have to get in the store, right?

Patrick McGee (23:16.568) There's no online store at this stage. Yeah. So this would be like if there was one Apple store for all of America, right? And then if you wanted to buy an Apple, yeah, well, Taylor Swift wishes or concerts where in this kind of demand, I mean, it's a whole different magnitude, isn't it? So, so yeah, so they're, saying, look, can we buy 10,000 phones and Apple's like, you know, absolutely not. mean, they're, they're using the sort of Steve Jobsian idea of like the store is an experience, you know, that's what they want. and so the idea of just like selling them out the back door isn't going to fly.

Auren Hoffman (23:21.541) Yeah, I mean, this is like Taylor Swift concerts. Like it's a limited supply, right? Yeah. Yeah.

Patrick McGee (23:44.751) And so these yellow cows respond by just hiring tens of thousands of people to come to the store on a daily basis from outside of places like Beijing and Shanghai. And they snake around the store, you five, six, 7,000 people at a time. And everyone's allowed to buy two iPhones. And then these gangsters are just waiting for them, right? They're paying each person some nominal fee, maybe a hundred yuan, $15 or so. And then they're just like driving like, you know, a bus, right? Or a truck to a city like Chongqing population 30 million.

And they just become the monopolist distributor of China's most iconic product. Sell them for twice the price. And then in a certain sense, Apple was in favor of this. I mean, it wasn't a formal relationship to be clear.

Auren Hoffman (24:17.105) and sell them for twice the price or whatever, right?

Auren Hoffman (24:24.625) It's a conspiracy in a way, right? Between Apple and these guys.

Patrick McGee (24:28.494) He's a conspiracy. I don't know. I mean, you can see why this works out for them, right? Because it costs a lot of money and takes a lot of time to set up Apple stores around the country.

Auren Hoffman (24:35.023) What I love in your book is like literally people are coming with like the exact change in cash for they knew exactly the price with all the things like literally to make it easy for the Apple employees so they didn't have to like make change and everything, you know.

Patrick McGee (24:45.26) Yes.

Patrick McGee (24:49.442) Well, and the analogy would be like, imagine if you saw like 2000 people and they looked sort of homeless outside the Tiffany store and you'd be like, what the hell is going on here? And that's what was happening every day in front of the Sanlitun Beijing store. Yeah. So it's this wild narrative. And what I was saying is that Apple is kind of supportive of this because the numbers, like if you're looking at Apple sort of success on a spreadsheet in China, I mean, it's off the charts. It's mind boggling to quote Tim Cook.

Auren Hoffman (25:01.905) Crazy, right?

Patrick McGee (25:17.006) But on the ground, it's a lot more complex or difficult. So essentially what happens is these yellow cows get greedy and they begin hollowing out the components and they're replacing components within the iPhone with non-Apple parts and then they're non-approved parts. And then they're selling those components like the memory in markets in Shenzhen. Yeah, so then people aren't loving the phones, they're going back to the stores. And then to complicate things further,

Auren Hoffman (25:38.193) people are just having a bad experience with the phones.

Patrick McGee (25:46.159) There are hundreds and possibly according to one estimate thousands of fake Apple stores in the country And so this is just a grift right? This is just the way to make money I know yeah, totally people that have lived in China have loved this narrative because they're like I saw bits of this But I never connected it all together But what that meant just think about it if you had a broken phone like you weren't involved with the the gangsters or anything But you could bought a phone and it stopped working. Maybe you broke the glass or whatever You know Apple has a certain warranty policy and you go back to the store

Auren Hoffman (25:54.299) This is so China.

Patrick McGee (26:14.232) But unknown to you and unknown even to the employee, it's a fake Apple Store. So of course, they're not living up to the warranty policy of Apple. so Apple, basically what happens is the day Xi Jinping comes into power, or maybe I should say the following day, Apple gets attacked for ostensibly having different warranty policies and for treating the Chinese in an inferior manner to the rest of the world. And CCTV just blasts this to millions of people and they've got secret footage of how Chinese people are being treated and everything.

Auren Hoffman (26:18.779) Yeah.

Patrick McGee (26:42.55) And Apple is absolutely flummox. They just haven't really understood the problem and they don't have a single senior person living in the country at the time. So John Ford is the guy who's dealing with this. This is the former Mormon missionary. And he's great at dealing with it. He's got real street smarts, right? He's not an academic, but he knows people. He's really good with it, right? You convert people to the Mormon faith through words, right? Not through academic, you know, treatises. But he's not necessarily great at communicating what he's seeing on the ground to Cupertino, who just doesn't have an understanding of China at the time.

And so it's this wild narrative where basically it takes Apple some eight years and using really sophisticated machines to basically be able to look at returned iPhones and determine at a near atomic level, this one's been tampered with, this one's legit. And it actually ties into why today all components within an iPhone are serialized to the motherboard. And it's because they were dealing with this blatant fraud in China. But anyway, this narrative leads to their political awakening.

Auren Hoffman (27:40.465) My favorite, there's another anecdote where these guys like, they like go to like the T-Mobile store in the US and they buy a ton of these because T-Mobile was like, could, you know, as long as you sign up for the plan, they're basically giving you away the phone for very low cost or almost no cost. And then they would just like steal them and then they would bring them, you know, of course, to note with no, uh, belief that they were ever going to pay for this plan, bring them to China.

Patrick McGee (28:05.379) Yes.

Auren Hoffman (28:05.393) So that basically, instead of like buying the phone for 500 bucks, they're getting the phone for less than 50 bucks in the U S bring it to China, then like jailbreak it and then bring it to the Apple store to get it fixed or something. Right.

Patrick McGee (28:10.626) Yes.

Patrick McGee (28:16.418) Yeah. You can be wildly sympathetic to Apple because my God, how are they supposed to understand this stuff? I mean, it was just crazy. And a perceptive listener might say, well, wait a minute, you can't just buy a phone for T-Mobile. It won't work in China. And that's true. But they have these factory connections where they're literally zapping out the processor. And while they're rendering the phone inoperable by doing that, they're also masking the retail origins of where it was purchased. And so the lines that used to snake around the sort of entry to the Apple store,

Auren Hoffman (28:21.317) Totally, yeah.

Patrick McGee (28:45.07) sort of go to the other side of the store where the snake lines begin being at the Genius Bar. And what you have is, know, these migrants are coming out with like entire backpacks full of broken iPhones and saying, you know, I bought these for everyone in my village and I don't know why they don't work. You obviously have a supply chain issue and the Genius Bar is just totally confused as to why these phones don't work. Cause they can, they can see these are, these are new phones. What's wrong with the processor? Here's a brand new iPhone. I'm so sorry. Um, and so I described someone involved in this as saying like, this was like cocaine to the yellow cows. I mean, they were just making.

Auren Hoffman (28:55.707) Heh.

Auren Hoffman (29:08.485) Right, right, right. And they just swap it out for them. Yeah.

Patrick McGee (29:14.402) You know, it's a good line that I've come up with since the publication of the book and I'm annoyed that it's not in there, but the yellow cows found ways, illegal and legal, to make more money per iPhone than Apple.

Auren Hoffman (29:24.089) Yeah, they were they were making I mean this was like it was like a boon for organized crime

Patrick McGee (29:29.442) Yeah, was amazing. And so these yellow cows are often connected to the political channels, right? The Communist Party in any number of cities. So Apple is sort of like becoming this problematic company in a political way, because in the way that it's retaliating against the yellow cows and sort of denying them new phones and stuff, as they sort of come up to speed, what happens is they start giving like a month wait, and then they're giving back refurbished phones rather than brand new units.

And that's the origins of the claim that I guess is true, but it's true for reasons that are quite complicated that the Chinese are indeed being treated in an inferior way because it's not what would happen in New York. And by the way, this still reverberates to today. So even in India, for instance, there are no refunds for phones purchased at the Apple store in New Delhi. And the reason why is because they don't want to deal with the same problems that they had in China. Yeah.

Auren Hoffman (30:23.441) so much fraud. Now, the contention of your book is really like Apple helped build China. And China today, the reason why China is so successful, partially, is because of that Apple relationship. Can you walk us through, like, when you think of like, the new great electronics companies that in Apple, BYD, Huawei, etc. Walk us through kind of like their arc and how they were kind of built through this process too.

Patrick McGee (30:51.626) Can I just say I'm delighted that we're at like 30, 40 minutes into the podcast and we're just getting to this. And what I hope the listener takes away is that there is just so much detail and narrative and character in this book. So even if you're familiar with the basic thesis, I still think there's so much to read and gain from the book, aside from the things essentially that we're about to speak about. yeah, so if you remember what we were saying maybe 20 minutes ago about Foxconn really learning from Apple.

Auren Hoffman (30:56.336) Yeah.

Patrick McGee (31:19.062) then they would take those lessons and they would supply them to other companies, right? Now, some of those companies in the early days would have been Dell and HP and so forth. But when it comes to like the iPhone era, Apple is training up hundreds of companies how to do any number of things to make multi-touch glass possible and to make things more and more compact and all that. And they're doing so not just at the insane quality that Apple has always demanded, but with the success of the iPhone in enormous quantity. And so Apple doesn't want to just be training one supplier for each thing.

They want to train multiple suppliers for each thing. So they're building up intense rivalry between these companies. So they end up just having this enormous influence across hundreds of companies, all sort of following the model of what Steve Jobs used to call giving a shit. In other words, standard manufacturers and contract manufacturers, they're usually just trying to do like something that's good enough. And for most Western companies that are in China, good enough is basically what they want because they're there because of

cost, right? And the fact that China can produce stuff cheaply is great for them. Apple is totally different in this respect. They are unique. They don't chase cost. They chase quality. I mean, they are just maddeningly different than the likes of Nokia, who also relied on Foxconn to make their products when it came to like testing every device as it came off the production line. In fact, if people have an idea that sometimes you have a production line that's maybe like 100 yards in length, two thirds of it would be the testing and validation of the units rather than the assembly of them.

Right. And I quote someone from Nokia at a time when Nokia was making way more phones than Apple was, and they were stunned at the level of test and quality and validation that was going on versus Nokia. So the line I think is that he saw 50 test stations within Apple and Nokia at the time building, you know, an order of magnitude more phones had won. And so my point, my point there is just that like, although that sounds a little bit wonky.

Auren Hoffman (33:05.617) Crazy.

Patrick McGee (33:08.898) The level of detail and quality validation that's going into Apple products is just like, it's incomparable to anything else that anyone has experienced. And the way that they're doing this is Apple is sending over literal plane loads of engineers, 200s of factories where they're just descending on these factories and they're just training the hell out of them. And especially when we're talking the early 2000s.

Auren Hoffman (33:28.529) In fact, some of the direct flights between SFO and different cities of China were because Apple guaranteed a certain number of seats in business class,

Patrick McGee (33:37.037) Yeah, so for both Chengdu, which is now known as iPad City, or at least the factory within Chengdu, and Hangzhou, which is just outside of Shanghai, United began flying there three times a week, nonstop, the longest flights in United's entire global portfolio, specifically because Apple said, it doesn't matter if nobody else flies on those planes, we will buy enough first class seats to make it profitable for you.

So yeah, they're just sending an enormous amount of engineers. sometimes it's really funny. I mean, if you talk to Ben Thompson of Shrekery, but also a Motorola engineer from the time or Pixel engineer, they would say once in a blue moon, they would fly to China from SFO. And everybody else in first class was for Apple. So they're just exerting this enormous influence. And sometimes in soundbites, people think what I'm saying is that China was treated as sort of like carte blanche or whatever, and that I'm giving all the credit to Apple. And so just to clarify,

This is co-creation, but Apple is the one with the leverage. so Apple takes the IP. And so Apple is able to sort of learn what it can with one group of engineers, but then it'll supply another set of engineers at a different company, you know, their direct rival, the same lessons and really help them. So they're really moving them up the value chain. And the crazy thing about this, of course, is that the result of doing this is that intentionally or not, and I'm not entirely sure it was intentional, this is all happening under the radar.

Right? There is no Apple factory or any place that's building stuff that has a bit and fruit outside. so Apple is very much operating under the radar. So maybe it's the suppliers understand what's going on and they're teaching, they're getting the lessons and everything. But Beijing doesn't know. And Apple doesn't have anyone senior living in the country explaining this. And so after this yellow cow incident where the CCTV sort of the state sponsored CNN of China attacks Apple, Apple's really put on the back foot.

and they worry as their product sales absolutely freeze and then decline over the course of a few weeks, they worry about being blacklisted in the country. And that's not an idle thread or some hyperbole. Facebook is blacklisted. Google is blacklisted. That's par for the course in China. And so they sort of have this multi-year wake up where they realize, hey, wait a minute, the way that we're training up all these factories, that is like political leverage, right? That is capital, as it were, that we can spend to sort of build up our narrative.

Patrick McGee (35:55.151) So in 2013, Apple has nobody seen you're living in the country and they realize we need to start saying why we're in China and what we're doing for China because Xi Jinping is really taking control. He's really taking the country in a different direction. And his policy is frankly the equivalent of Donald Trump's America first. He calls it in China for China and he's really prioritizing quote unquote indigenous innovation. And so what Apple begins to realize is, wait a minute, we are the biggest supporter of indigenous innovation in the country.

Because the thing that Xi Jinping cares about most is the high end electronics industry. And we're Apple. We're literally the world's most valuable company. 90 % of our operations are in China. At the time, in 2012, they have a $25, $22 billion business just in China for the retail market. So they sort of are beginning to realize that we're enormous and we're having this extraordinary influence. And yet Beijing is upset with us because we don't have any joint ventures. And at the time, Samsung has 35 joint ventures in the country. So Samsung looks great and Apple doesn't.

And so Apple flips the script. It hires eight people that jokingly call themselves the Gang of Eight. These are the first senior people living in China. It's just significant because the first business that Apple has in China is in 1993. So for more than two decades, nobody senior is living in the country. And the Gang of Eight basically does their own supply chain study to recognize what Apple's importance is. And they recognize that Apple is investing $55 billion a year into Chinese factories and that this is such an extraordinary sum.

I couldn't find any corporate equivalent. And so I looked at nation building efforts. frankly, I only got there because when I looked at something like Japanese investment, which the biographer of Deng Xiaoping had said was instrumental to building up the factories in the 80s and 90s, you convert to $2,015 and you're nothing close to what Apple was pledging to invest. And so this message basically gets to Tim Cook. And Tim Cook goes to Zhongnanhai, the citadel of communist power, in May 2016. This is just as Donald Trump is

is campaigning on an America first platform. In fact, he's actually advocating the boycott of Apple products for reasons we don't need to get into. And so it would have been corporate suicide for Tim Cook to hold a press conference from Jungling High. But in this meeting, they pledged to quintuple the $55 billion a year. So $275 billion a year. And they say we'll invest that much into Chinese factories over the next five years. I mean, just a mind boggling number like it.

Auren Hoffman (38:16.689) Which is an insane number. I just want to talk a little bit about Huawei because it's such an important company and their products are like now their products are kind of amazing and it really took Apple by surprise that a company like that could build these incredible products. Walk us through Huawei as kind of essentially an Apple competitor.

Patrick McGee (38:37.912) Yeah, so, Apple.

Patrick McGee (38:42.766) So Huawei is sort of late on the scene versus the likes of Xiaomi. And people might remember Johnny Ive in particular dismissing Xiaomi phones as lookalikes that had really stolen Apple's designs, even worked with the same suppliers, and basically just built an iPhone with an Android operating system and called it a novel phone. The reason I'm bringing that up is that they were dismissive of the quality, probably rightfully so in 2014, let's say.

By 2018, 2019, all of a sudden these Chinese companies are really doing well. And I'll come back to the 2019 period in a second. But the reason of course they're doing well is that Apple is training up all these suppliers, but the suppliers need to sort of feed the beast beyond Apple. Right.

Auren Hoffman (39:31.185) Right. They're not making money on Apple. So they have to then use that knowledge to make money off other things. Right. Cause Apple's also beating them down on price. Right.

Patrick McGee (39:36.684) And then what

Absolutely. And then one of the most fascinating things I learned is that Apple facilitated this through a sort of selfish way wherein if you remember how much the iPhone was changing year in year out in the first, let's say six versions of the iPhone, they would just remove some components, right? or, or, or what I'm saying is when you remove a component, you're there for removing the supplier, right? And so what would happen was that if you went from 5 million iPhones in 2007 to 230 iPhones by 2015,

But along the way, you know, suppliers were sort of following up on that trajectory, but then you were obviating the need for their presence. Those suppliers were just sort of going bankrupt. I mean, they'd invested in all this capacity to feed Apple and then Apple didn't need you anymore. And so they would just fall away and there would be all sorts of problems as a result of that, Whether it's bad PR or just, you know, people saying bad things about Apple within whatever city they're operating in, et cetera. And so Apple begins to have this 50 % rule where they basically say to them directly,

However fast you are growing with us, you need to find someplace else and grow that fast without us, right? So that you're no more than 50 % dependent on Apple. And the result of that is what I mean, just put this in concrete terms. If I'm lens, a Shenzhen based company that does the glass for the iPhone, they will take the Corning glass that may or may not be built in America, but that glass is made by like the meter, meter high, meter wide.

It needs to be cut, tempered, placed. It needs to be etched with electrical circuits so that multi-touch makes sense or whatever. That's all happening in China. But if I'm not going to be so dependent on Apple, well, what else am going to do with that skill set? Of course. Yeah. so the birth of all these Chinese companies is the suppliers basically calling them up and saying, hey, we know how to do this. We know how to do that. Can we help you? And so by 2018, Huawei is making ridiculously impressive phones.

Auren Hoffman (41:15.419) Yeah. You got to find another. Yeah. You to find another phone. Yeah.

Patrick McGee (41:31.182) And this is all laid out in the chapter 36, so we're sort of deep into the book here, called Five Alarm Fire. And that's in quotes. And it's in quotes because essentially what happens is Apple realizes a few weeks before an earnings call that the Christmas season of 2018 is going to be a disaster. And indeed, it does become a disaster. It becomes the first revenue warning in 16 years, so the first of Tim Cook's tenure and, of course, the first since Steve Jobs had passed away in 2011.

And it's all because Huawei had come out with phones that were better in terms of the specs. And I have internal documents that confirm this from the perspective of Apple. And they were at a lower product price point. So within just a few years, Apple is shocked at how efficient and how quality made the Chinese phones are. And the Chinese consumers have picked up on this as well. So instead of buying the iPhone XR, XR,

They're buying Huawei and they get suit for, sorry, go ahead.

Auren Hoffman (42:28.965) And just to take a step back, essentially what you're saying, mean, kind of like what you're saying in the book is like, basically, Apple's essentially investing in training all of these people in China how to build the Apple devices. But of course, then they take that training and then they basically build a competitor to Apple and all these other types of things.

Patrick McGee (42:49.058) Yeah, it's of wildly intuitive once you've put the pieces together, right? Like, yeah. Absolutely.

Auren Hoffman (42:52.463) Right. Now, in some ways, we see something similar with Tesla, like Tesla is training all these incredible engineers and now BYD is building out like the BYD cars are like absolutely fantastic. And they're basically just taking that engineering know-how and building essentially a Tesla at half the price.

Patrick McGee (43:10.882) And a major difference is Tesla doesn't have the same moat that Apple has, which is to say, however great the software in a Tesla is, it's not comparable to how iOS is just different. In other words, if you and I text each other, right, we get the blue bubbles, right, we're sort of able to do high resolution stuff, I can FaceTime you.

Auren Hoffman (43:20.721) Correct.

Auren Hoffman (43:25.551) Yeah. Also just like market share. Apple has 50 % market share in the US. I don't know. Tesla has a couple percent market share in the US, right? Yeah. Well, that's true for any car. No car has 10 % market share, right? I mean, I don't think there's any car. Yeah.

Patrick McGee (43:31.714) Yeah, but what I mean is that if you and I each own a Tesla, it doesn't do anything. Like if I have a Ford and you have a Tesla, no, exactly. But it does matter if I have the same smartphone as you do, right? Because of the way that the product works, it makes sharing easier. So if you have an Android, you come over to my house and I would share you something, well, I'm not using AirDrop, right? So Tesla doesn't have the same moat that Apple has, and that's just worth knowing because Apple has continued to be successful.

Auren Hoffman (43:44.817) Correct, yep.

Patrick McGee (43:59.011) whereas Tesla in China is beginning to really struggle.

Auren Hoffman (44:04.325) Yep. Yep. And then, and then so there's a point where like, so now we're now we're less fast forward to today, like Apple, mean, we have China, you know, kind of in some ways incredible now Apple has to in some try to figure out a way to get off of China, like they're too reliant on China today. Right. And so so many other American companies and so much of the American economy is too reliant.

We're trying to offload things. We're trying to move either the manufacturing to the U S or find alternatives like India or Vietnam or Mexico, et cetera. Like where are we moving today?

Patrick McGee (44:46.082) think the first thing to note is that I would argue that they're way too dependent on China, right? So my subtitle is capture of the world's greatest company. And what I mean is that they really can't produce the iPhone outside of China.

Auren Hoffman (45:03.625) Essentially like even in India today where it says like when I see a phone that says made in India, it's basically like mostly made in China and then it's like the last few screws are in India or something, right?

Patrick McGee (45:13.538) Yeah, absolutely. India has not in any sense of respect and nobody is claiming this, you know, built up the depth and breadth of the supply chain. so my point would be that if you buy an iPhone today and it says made in India, it's unlikely to say that but next year it might. Nevertheless, that phone will not be any less dependent on the China Central supply chain.

Auren Hoffman (45:31.395) In India, if you buy a phone, does say made in India and there are some places in Europe where it will say made in India today. Right. Yeah.

Patrick McGee (45:36.803) Yes, I think but if you go by the iPhone Air, it's not going to say that is the point I'm making. But next year it might. But even so, that will not be any less dependent on the China Centric supply chain than any other place. So it's not as though Apple has a bifurcated supply chain these days. And I'm just making that point because a lot of people think that they do. And it's it's not true. Now, that might be true in five or 10 years. But what I want to be clear about is this is my argument. I don't know that Apple agrees with that. In other words,

Auren Hoffman (45:40.175) Yeah, that's right. Yeah.

Patrick McGee (46:04.884) Apple, the engineers that I've spoken to, the senior people that I've spoken to, they feel pretty safe in China because as we've just laid out, Apple is training up hundreds of suppliers across the country. It would be pretty foolish, if not just downright stupid, for Beijing to take a major action against Apple and kick them out of the country. And so Apple realizing them.

Auren Hoffman (46:23.601) There are a lot of people in the U S especially in conservative circles in the U S who are basically, kind of saying China. mean, Apple is the enemy. Like Apple is, is arming the enemy. They're doing all these things. They're there. Like what's your response to that? Like, where do you, do you think, where do you think that their criticisms have merit? Where do think the Chris's don't have merit?

Patrick McGee (46:45.656) So it's really complicated. I disagree entirely with the idea that Apple is some traitorous company, you know, and because people have really made that point. And to be fair, I mean, they're probably getting a lot of the ammunition, as it were, in my book. And that's true. But the other thing you would get from my book is a sense of, wait a minute, when Apple was moving to China in the early 2000s, this was sort of the American consensus, at least politically, that we wanted that.

that we had played a starring role of helping West Germany, Taiwan, Korea and Japan going from authoritarian countries to middle class thriving democracies. And we were going to do the same thing with China. And so now are we really going to blame Apple for just playing the game better than anybody else? And so I'm very sympathetic to the idea that look, Apple didn't sort of mean to up arm America's greatest adversary in the world of high-end electronics, skill sets that can now be used to build drones and are being used to make drones.

skillsets that are being used to build a smartphone on wheels, right? The EV sector that is now world dominating and skill sets that can now be up arming the military. I think that's all true. But I'm stuck on how culpable Apple should be for that. The political message is less historical and more do we do we want them to continuing to do that over the next five, 10, 15 years? And of course, I think that's madness.

So once you've digested the narrative in a really simplistic way, I think in a way that's really unfair, you can just sort of hold Apple's feet to the fire and say, how could you do this or something? I think that's the wrong message. And just as a journalist who's just trying to sort of diagnose the problem and not really solve it per se, I think it's a lazy reading. It's a lazy reading because it doesn't factor into just how

much China offered. In other words, the lazy reading that I'm referring to is when people say, wow, imagine if Apple was putting $55 billion into Pittsburgh and building up the manufacturing center there. And it's like, yeah, you're just not taking into account what was possible in China that just isn't possible somewhere in Pennsylvania.

Auren Hoffman (48:55.267) And also like Shenzhen itself is is an interesting place. it's like kind of like the old school Detroit where everything was around there. And so you had all the factories all the way like within a few miles of each other. It's a concentrate. It's not like China. It's actually this like tiny little place in China where all this stuff is happening. Like geographically, you can just drive from one to the other. Right. All these different factories are right next to each other.

Patrick McGee (49:09.475) Yeah.

Patrick McGee (49:14.412) Right.

Auren Hoffman (49:24.027) Like there's no equivalency anymore in the US or even in most other countries.

Patrick McGee (49:29.112) There's not, and it's not just that Apple didn't invest somewhere in America to make that happen. It's that the things that happened in Shenzhen were just never gonna happen any place in America. So you sort of have to give China its due. When I say Apple taught China everything, I mean, that's not to discount China's contributions. China's contributions are absolutely monumental. So I'm actually trying to give loads of credit to China to such a degree that I think the copy and paste strategy of Apple's gonna replicate this operation in India is fanciful.

That's the most superficial reading of India versus China. Hey, it's, they're both.

Auren Hoffman (49:59.825) Because there's no other, it's not like there's no Shenzhen there. There's no other factories. There's no other things. There's no other suppliers. So you still have to like, it's like you have to like get all the things. It becomes more difficult to go do.

Patrick McGee (50:02.817) No.

Patrick McGee (50:10.828) I mean, you know, the engineers I speak to talk about there's no India speed. When someone says India speed, they don't mean things are happening in a quick way, whereas everyone knows what China speed is.

Auren Hoffman (50:18.491) Yeah, actually, you think of the opposite like in India, right? It's just like the red tape and the bureaucracy and somebody coming with triplicate, right? It's like the old British kind of bureaucracy coming in and slowing you down.

Patrick McGee (50:23.148) Yes, corruption.

Patrick McGee (50:32.46) Yeah, no, exactly. So India would really have to sort of upend its entire political system to be able to accommodate Apple. And I know that sounds crazy, but Apple has up to three million people working on its products in any given year within China. That's a complicated, asterisk worthy statement that I won't get into, but it's more in the book. So yeah, I'm not really optimistic that you can do this sort of anyplace else. But I think to more directly answer your question. Yeah, I push back against the idea that that Apple's

traitorous in some way. can't remember if you brought up that term or I did, but

Auren Hoffman (51:05.541) Well, Trader is in the past, but now there's a go-forward thing. Now we know what we know, right?

Patrick McGee (51:10.742) Yes. And so look, on the one hand, the current White House seems to sort of understand. On the other hand, they totally get it wrong, which is to say, I think the White House should say everything that's happening in China in terms of manufacturing of specific sectors, be it semiconductors or high end electronics, we need that replicated outside of China. Their mistake is that they think we need to replicate it inside the United States. That's fanciful. That's just not going to happen. We don't have the same population.

We don't have so many things. We don't have a Nietzschean will to power based just on manufacturing. But if the goal is that it's outside of China, in other words, the goal is decoupling, de-risking from China, you can still maintain links to China, but we just can't, we need to reduce our dependency. Then you would be wildly in favor of NAFTA, right? Like a NAFTA on steroids or USMCA. You'd be wildly in favor of free trade with Mexico. What I mean? Free trade with India, et cetera. But Trump is explicit that he doesn't want factories.

in Mexico. certainly doesn't want Chinese investment in Mexico, which I would be in favor of. He doesn't want iPhone production in India. I would be in favor of that.

Auren Hoffman (52:13.777) And also if you're going to do this in the US, you almost need to create a new Shenzhen, right? You need to create like a cluster. It can't just be like one in Nevada, one in Michigan, one in Ohio, which is what like senators would probably want, right? These factories, although kind of like, mean, you know, when you bring like BMW to Tennessee or something, you you have that, you kind of need this cluster and then you'd probably want the cluster near a low.

Patrick McGee (52:24.398) Yeah.

Auren Hoffman (52:39.953) a cheaper labor source, so you'd want it probably on the southern border. So you could be like, you could jump across and have some lower wage folks if you need them. You know, maybe the higher wage stuff in the US and the lower wage stuff. you'd probably want like somewhere in Texas or something.

Patrick McGee (52:55.022) This is why think Mexico is crucial. So we think of Mexico as like a job stealing country. And I think we need to see it as an asset. That if we regionalize the fact that we have a country that literally has lower wages than China these days, because China's wages have really gone up a lot over the last 25 years, then Mexico is a major asset. And when you have things being made in Mexico, I think the statistic is that 40 % is typically made in the US. Like in other words, our parts made in the US comprised in the bigger product. That's not remotely true if you make things in China. Everything's being made.

in Asia, if not just in a single industrial cluster in China. So the more that we can have made in Mexico, I know it sounds counterintuitive, but the more it can be made in America. And the reason people don't get that is because they're thinking of America versus Mexico, rather than thinking of the entire region versus China.

Auren Hoffman (53:25.083) Yeah.

Auren Hoffman (53:39.535) Yeah. And it's easier. mean, there are places in El Paso, where, like, if you just, if you're, if you're driving and you just don't, if you're not paying attention, you literally will end up in Mexico. Like you literally like, Whoa. just, I mean, back to like, it's that, like, it's that close. Is that kind of crazy? What? Okay. Now, now, okay. You talk so much about obviously your books, Apple and China now.

Patrick McGee (53:49.262) Yeah.

Patrick McGee (53:57.413) Yeah, yeah, so I, so yeah, sorry, go ahead.

Auren Hoffman (54:05.649) There's this other company that all of us are talking about today, which is Nvidia. They have their own China issue that both selling products there that people might not want them to sell there. There's lot of then potentially copycats that could be coming. What would your advice be now that Nvidia has, assuming that Jensen Wong has read your book, Apple and China, how should they be thinking about

Patrick McGee (54:35.668) Based on his recent comments, I don't think he has read the book and I would love to brief Nvidia. You had sort of highlighted an email that you'd asked me about Nvidia. So I wrote out an answer here and it's got some statistics. So I'm going to actually just read it to you a little bit. So I said, I know far less about Nvidia, but I can point to a few things. First, even though Nvidia is worth more than Apple, about a trillion dollars more these days, Apple is much larger in revenue. We're talking $400 billion versus about $130 billion at Nvidia. In fact, at least by a few measures, Apple's chips business alone.

Auren Hoffman (54:47.505) Okay.

Patrick McGee (55:04.502) is larger than Nvidia. What I mean by that is that

Auren Hoffman (55:06.639) growing much, much, and videos growing like insanely fast.

Patrick McGee (55:09.388) Way faster. look, if someone's listening to this in 2027, these statistics will all be funny, because they'll all be so wrong, right? But both Apple and Nvidia design their own chips. Both rely on TSMC in Taiwan to fabricate them. Apple has been TSMC's largest client for some 14 years. Estimates are that Apple accounts for 25 % of TSMC's orders. Nvidia is somewhere between 10 and 15%, so a very distant number two. But as you say, Nvidia's catching up quickly. Its revenues more than doubled last year.

whereas apples are typically growing in single digits. So, you know, insofar as Apple and Nvidia are both wildly dependent on Taiwan, they face the same geopolitical risk, which is to say if China were to annex Taiwan or even just to block blockade the island, and I'm sure your listeners are familiar with this, know, Xi Jinping in particular thinks of Taiwan as a rogue province that needs to be reincorporated, of not dissimilar from how Hong Kong was reabsorbed into the mainland, as it were.

a few years ago. Well, then they are exposed to the same risk. So I write in the book that those things happening, a blockade of Taiwan would be like a meteor strike on Apple's business. And the exact same thing is true of Nvidia. However, Nvidia doesn't have the same exposure to the mainland directly, which is to say virtually all products are being made outside of chips are being made in China for Apple. That is not true of Nvidia. Their supply chain is very much Taiwanese.

with some Korean and Japanese, but they don't have big facilities, at least that I'm familiar with, building things in China. So it sort of depends how the geopolitical exposure were to be made. So if you slap 200 % tariffs or whatever Trump was threatening a few months ago on China, that's really harmful to Apple, although they can get around it through doing things like that we talked about in India, it's not so harmful to Nvidia. So it sort of depends on how the geopolitical risk of China manifests, but they have some big differences.

Auren Hoffman (57:00.305) Okay, interesting. Where do you think we go in this kind of like China relations over time? Like how should the policymakers in the US, how should we be thinking about China vis-a-vis? I mean, this is obviously very, very smart country, like doing everything possible to take advantage of all the different things here. How should we be thinking about it as a, if you're a US nationalist, how should you be thinking about all these things?

Patrick McGee (57:29.954) Yeah, it's really tricky. And it depends on what issue you're speaking about. I guess we just have to have some realism. So the idea that we're just going to stop trading with China or something like that is nonsense. I mean, that's just not going to happen. think Elon Musk. Yeah, whatever you think of Elon Musk, he had a great statement where he was once asked about this. And he said, you know, decoupling in its entirety would be like performing surgery on symbiotic twins. It's likely to kill both. I think he's right about that.

Auren Hoffman (57:40.047) Yeah, basically like everything is dependent on China. Yeah.

Patrick McGee (57:58.681) You know, the Soviet, like when people talk about Cold War 2.0, I don't like it as a metaphor or a paradigm because not at all.

Auren Hoffman (58:04.177) because we weren't trading with Soviets. Maybe we'd give them a little wheat and they'd give us a little oil or something, right?

Patrick McGee (58:09.89) I think I have this line in the book where Apple literally exports more from China per quarter than was exported from the Soviet Union to the U.S. during the entire four decade Cold War. Right. So just just to give a sense. And that's not that's actually not saying much about Apple. That's just saying how little trade there was between the two superpowers in Cold War 1.0. So it's a poor metaphor. So the problem isn't that Apple made some investments in China. In a sense, they had the political past to do so. The trouble is just the absolute overconsolidation into one country.

Auren Hoffman (58:19.729) Insane, yeah. Yeah.

Patrick McGee (58:39.658) So they're going to continue building things in China. That's fine. But they really need to develop resiliency. They need to invest in resiliency. And that's what I would want to see. And so look, my expertise is really confined to Apple. But I think you'd have to say the same thing about other companies, which is why the current administration and the past administration were really advocating, let's build chips in Arizona so that we're not so reliant on Taiwan. And Samsung is building chips in America as well for similar reasons. But all of these things are really contentious.

Auren Hoffman (59:09.169) You just go like all the magnets are coming from China. Like you just go like all to go down the list of all the little things, you know, exactly. Yeah.

Patrick McGee (59:09.208) or not sort.

Rare Earths, I mean.

And one thing I'm trying to push back against is you don't have to be a China hawk to understand that nevertheless, China is a massive adversary in a sense that look, whatever you think of their political system, it's a different value based system than we have. And if there's a war between the Koreas, we're on one side, they're on the other, just as they are on a different side when it comes to Iran, Israel, just as they're on a different side when it comes to Russia versus Ukraine, to be utterly dependent.

for rare earth metals that make up something like 900 pounds of an F-35 is wild. And nobody foresaw this and nobody would have planned this. It's a terrible idea. But I think we're just beginning to reckon with what it means to have that total dependence. And so I'm just, go ahead.

Auren Hoffman (59:50.033) crazy.

Auren Hoffman (59:57.905) met a guy last week that owns a bunch of copper mines in the US. He owns copper mines all over the world, but a lot of them in the US. Basically, he says 100 % of the copper that he takes out of the ground in the US, he ships to China. Then they process the copper and then ship back, essentially, mostly copper is made for wires, and they ship back the wires. He's like,

We have to ship out all the way, know, thousands of miles to China and containers, and then have to bring it all the way back because it's like there's no other place on earth where they can make the wires except for China.

Patrick McGee (01:00:31.734) Yeah, yeah. And so this actually gets to why, like, I think the US should be in favor of Chinese investment into Mexico, because I don't know that we're going to be doing the refining of those minerals en masse. I mean, we have so many environmental protections that would be against it and so forth. But to be against it, it doesn't mean it doesn't happen. And it's a big win for the environment. It just means it's happening someplace else. And so if we sort of have like a bigger, like Western hemisphere trading system, like the sort of Monroe doctrine, but reimagined,

Auren Hoffman (01:00:42.555) Yeah.

Patrick McGee (01:00:59.886) I think that could be great. And people don't like the idea of China investing in Mexico. But it's like, look, if you think it's unfair, if you're upset by the time you get to the final paragraphs in the book that Apple invested so much into China, why would you not want to reverse the scenario wherein we're welcoming Chinese investment either into our own states or into our neighbors to build up that capacity and have the technology transfer in reverse?

Auren Hoffman (01:01:27.333) This has been amazing, Patrick. Last question, we ask all of our guests, what conventional wisdom or advice do you think is generally bad advice?

Patrick McGee (01:01:34.585) You know the one I think about a lot, and I'll lose my younger audience here, is be yourself. I don't like be yourself. I would much rather have people emulate either great figures from history or whoever their heroes are, but something that you're living up to, that you're aspiring to, rather than just like, when I hear be yourself, I'm thinking of the TikTok generation watching videos four or five hours a day, whatever it is.

And then like that's their value system and they're just going to replicate that. Like that just strikes me as a terrible idea. I think you need to have role models. that's a good question. I wasn't prepared for that one. I mean, you know, I don't know. I have some influence.

Auren Hoffman (01:02:06.683) Who are you trying to live up to?

Auren Hoffman (01:02:13.615) Is it a great writer or is it a great reporter or great storyteller?

Patrick McGee (01:02:17.1) That's I'm glad you mentioned that because yeah, I mean, when I'm writing, you know, I'm trying to emulate. Gosh, I love this Chilean writer called Benjamin Lapidute. I love the writings of Michael Lewis and Malcolm Gladwell. And certainly you're trying to live up to that when you're a journalist, you know, as a father, obviously, it would be very different figures. You know, I don't think you have to have role models that are sort of like the answer to everything. But yeah, I don't know.

Auren Hoffman (01:02:43.921) In fact, you can't because like everyone's so flawed that, know, you know, great writer, you know, you don't want to like, you don't want to look up to Hemingway for all the things he did, right? You know, or something, right?

Patrick McGee (01:02:54.414) Yeah, I've never actually cared for his writing, but yeah, no, I get the joke. The other thing actually, though, that this makes me think about is I don't like how do I put this? If you're an expert in one thing, let's say, I don't know, fitness, then you write articles just about your perfect fitness routine and all that kind of stuff. And then it goes into fitness specific magazine. And that's what we learn and read. And yet I always find like that that advice is probably pretty inapplicable.

Auren Hoffman (01:02:57.84) Yeah.

Patrick McGee (01:03:23.438) to someone like me who has two children and a full-time job and is trying to live his life, right? Like, in other words, I don't like the sort of carving out of niche-ness. I would rather there be a magazine that's devoted to people who have like families and jobs and are biding their time between this, that, and the other thing. And then how do you have the sort of the perfect advice or whatever, right? So the specialization of everything, I think actually makes it difficult to follow the advice of one thing or the other. Cause maybe I don't have the time to do the meal prep that someone who's religiously obsessed with what goes into their body or whatever it is doing.

Auren Hoffman (01:03:49.093) Yeah. Yep. Yeah. Or the four hour meditation routine every day or something, whatever it is that these guys do.

Patrick McGee (01:03:53.678) Yeah, yeah, I want like the Everyman magazine or whatever where it just sort of gives you realistic advice.

Auren Hoffman (01:03:59.985) So let's start it. You and I can start that. That's a great idea. All right. This has been amazing. Thank you, Patrick McGee for joining us on the World of DaaS. I highly encourage our listeners to buy and read a Apple in China. I just thought it was such a important book. as I mentioned, the probably the most important book I read in the last 12 months. and I also follow you at Patrick McGee underscore, which is a terrible Twitter handle by the way, but, Patrick McKee underscore on X. I definitely encourage our listeners to engage with you there.

Patrick McGee (01:04:22.986) It really is, yeah.

Patrick McGee (01:04:28.975) Cheers, Auren, appreciate the conversation.