How Apple’s iPhone Supply Chain Built China into a Manufacturing Superpower with Patrick McGee

Show Notes

Supply chains are essential infrastructure—and the iPhone’s supply chain sits at the center of U.S.–China competition. As Washington reassesses economic security, this episode explores what it looks like when market incentives collide with geopolitical reality. Frank Cilluffo speaks with Patrick McGee, author of Apple in China, about his reporting on Apple‘s deep manufacturing reliance on China—and what that reveals about leverage, resilience, and risk. They explore how industrial capacity is built through repetition, why diversification is harder than headlines suggest, and how concentrated production creates choke points that can ripple far beyond consumer tech. The result is a clear, practical case study in why supply chains matter for critical infrastructure, national security, and long-term competition.

Main Topics Covered

• How “learning by doing” powered China’s rise in high-end electronics manufacturing
• The “epic transfer of technology” behind Apple’s scale and China’s supply-chain competence
• Xi Jinping’s post-2013 pressure campaign and Apple’s strategic recalibration in China
• Why supply-chain diversification is slower than headlines suggest, especially in India
• The “red supply chain” and how Apple suppliers became capability multipliers
• Taiwan/TSMC as a single-point-of-failure risk—and the AI chip-export debate it echoes

Key Quotes

“China isn’t dependent on Apple in the way that Apple is inarguably dependent on China. My big worry in a certain sense is that the student has become the master.” — Patrick McGee

“If you just take the $55 billion that they invested in 2015 alone, which was 22% of revenue … and just go from let’s say the birth of the iPhone 2007–2025, you’re talking about a trillion dollars that Apple’s invested in China.” — Patrick McGee

“None of those phones are really being made in India, they’re just being assembled there. The joke that one manufacturing design engineer told me was that the phones are assembled in China, disassembled in China and sent to India for reassembly.” — Patrick McGee

“Our narrative is essentially that Apple exploits Chinese workers. In a certain sense, that’s the only narrative about Apple in China we’ve had in the past two decades. And I flip that on its head…[China is] getting more out of the relationship. It’s a story about China exploiting Apple. — Patrick McGee

“I think there still is a mindset that China is an imitator, not an innovator. I think we should recognize that… is not the case.” — Frank Cilluffo

Relevant Links and Resources

Apple in China (Patrick McGee’s book)

McCrary Institute’ Code Red report on “Typhoon” threat actors (Vault/Salt/Flax)

Anthropic’s Dario Amodei’s essay: “The Adolescence of Technology”

Guest Bio
Patrick McGee is a Financial Times journalist and the author of Apple in China, covering geopolitics, technology, and global supply chains.

Transcript

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Patrick McGee [00:00:00]: My big worry in a certain sense is that the student has become the master. What Western economics has totally sort of ignored over the last two or three decades is the value of learning by doing. And that’s what China has embraced. And the result is so much asset knowledge or shop floor innovation. And it just strikes me that if you’re 25 years old, coming out of grad school, going to China on behalf of Apple on your first day, what are you teaching them at this point?

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Frank Cilluffo [00:00:24]: Welcome to Cyber Focus from the McCrary Institute, where we explore the people and ideas shaping and defending our digital world. I’m your host, Frank Cilluffo and this week have the privilege to sit down with Patrick McGee, an award winning journalist and author and author of Apple in China. A must read, I might say. He was with the Financial Times and is currently still writing with the Financial Times, was a reporter in Hong Kong, Germany and then in the Bay Area covering Apple, among many other things. Prior to that, he was with the Wall Street Journal and is a graduate of SOAS at University of London as well as University of Toronto. So, Patrick, thank you so much for joining us today.

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Patrick McGee [00:01:13]: My pleasure, Frank.

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Frank Cilluffo [00:01:15]: You know, again, a must read. I’m going to share it with our viewers and listeners. But Apple in China, and it’s much more than a business story, it really is a sobering tale that continues to have major geopolitical and economic implications. And I think you call it the epic transfer of knowledge in terms of what the impact was. But before me putting words in your mouth and jumping ahead to later chapters, I think it is helpful to start at the beginning. So not only why did you write the book, but what are some of the key findings right out of the gate? And what’s the biggest thing most people misunderstand about Apple, Apple’s China story?

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Patrick McGee [00:02:05]: One strange thing is that there’s this sense that there are a lot of books written about Apple and I just don’t think it’s true. We’re talking about a $4 trillion company. There should probably be like one or two histories of this company per year. And it’s nothing like that. In fact, I would argue and maybe just demonstrate that, I mean, there has not been a history of Apple from near bankruptcy in 1996 to 1 trillion or 2 or 3 or 4 trillion dollars in the 21st century. There are of course been biographies of various people, Jony Ive, Steve Jobs, Tim Cook, et cetera. And I ask myself all the time, especially when I was pitching the book, like why isn’t there just a straight up corporate history of Apple. And I think the answer is sort of goes back to my favorite saying about journalism.

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Patrick McGee [00:02:46]: We cover all of the plane crashes and none of the landings. And when Apple is just like this massive success story in a certain sense, as a journalist, you’re like, why would I write a book about that? And this is all hindsight, by the way. This isn’t sort of the origin story of how I got to the book, but the China angle sort of solves that quote, unquote problem for the journalists because it introduces all the tension. And so what previous histories or movies or biographies of people have missed is just the absolutely salient role that China plays in the creation of all of Apple’s products. So we in the West, I think we just habitually do this. We think about design conception and product design. Right?

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Patrick McGee [00:03:27]: So people know some semblance of story about Jony Ive coming up with the, you know, the all white chrome back of the, of the original iPod, or maybe there’s something about how the glass was made for the iPhone or something like that, but it’s usually about how did they come up with it? Not how did they build a million a day. Right? And the whole role of Tim Cook, who is the CEO, is that he’s the guy in operations who’s managing all of that. So when the visionary of the last, the greatest visionary of the last century passes away, who becomes the CEO? I mean, it’s uncontested. It is the ops guy. And so I think given that that was 14 and a half years ago, I think we in the media, and therefore and academia and so forth that relies on media have just been getting the story wrong. We’ve just been telling the story of Apple in the Steve Jobsian sense and not in the Tim Cookian sense of how do you actually build all this stuff? And so me covering Apple for the Financial Times for three or four years, I sometimes joke this book came out of the failure to cover Apple well rather than the success of covering Apple. And it’s because late in the beat, I really discovered that I didn’t know how the products were made.

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Patrick McGee [00:04:32]: The products are of course, made in China. They say so on the back or at least on the box. And yet I didn’t know anything really about Foxconn or how they operated. And I could go on and on about this and obviously it’s all in the book. But the shortest answer I could say is I discovered the position called MD or manufacturing design engineer. And this was a critical role where it was someone who would take the idea that Jony Ive had come up with and literally start touring dozens and later hundreds of factories in China to find the right facilities, to find the right tech competence, and then sort of bring over a whole team of engineers from Apple. Right? So California engineers to train the factories, install the machinery, get the processes up and running.

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Patrick McGee [00:05:14]: And this is where the epic transfer of technology comes in that you mentioned.

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Frank Cilluffo [00:05:19]: Well, fascinating. And I think many are not aware of, parts is parts, as some would say. And at the end of the day, it really does matter where something is manufactured, designed, and the like. And one of the things that, I think you used a very powerful analogy. And it’s sort of our CHIPS Act in the United states and the 52 billion that was devoted towards that. Right now, Apple is investing, what, up to $55 billion a year in China. And I’d be curious, and I think you called it sort of a corporate Marshall Plan, which is a very apt analogy. And I’d be curious in terms of did we in essence, and Apple specifically, did they ultimately fund and invest in what ends up being their greatest challenge and concern going into the future, into their competition? And how did that happen? If you can maybe paint a little bit of color as to how that happened.

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Patrick McGee [00:06:28]: So it’s always difficult to distill six chapters, let’s say that deal with this into 90 seconds or so. But in a sense, what happens is Xi Jinping comes into power in March 2013, and he’s pretty upset with Apple. If you were Xi Jinping’s lawyer, you would have a great case that Apple was just there to exploit the country. They weren’t doing anything public in China for China, which is the policy that Xi Jinping began to implement. So, for instance, Foxconn and Apple sort of first form a real partnership of assembly in year 2000. At the time, Apple’s a pretty small company, and Foxconn literally makes higher profit margins and more money in absolute dollars. Right? So in other words, when they have their meet cute moment, Foxconn’s wearing the pants, shall we say. With the introduction of the iPod Mini, followed by the Nano, followed by the iPhone, Apple revenues, this sounds wrong, as I say it.

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Patrick McGee [00:07:21]: And I’m pretty sure I’m getting it right. Apple revenue, maybe it’s profit that goes, goes up by something like 35,000%. I mean, it just sounds wild, but we’re talking about a time when Apple, you know, just becomes a big hit around 2004, and then by 2013. They’re absolutely enormous. And the thing is, is that Apple goes from profit margins of about 1% to about 26%. So they basically have their profits go up by, by, by over 25 times. FoxConn’s actually fall by about two thirds during the same time. So in other words, the partnership that makes those devices possible is very much sort of rewarding Apple and not Foxconn. And you could see this across the supply chain, right? So it very much looks like this big American company with swagger is treating companies local to China as, as, I don’t know, what would the analogy be? Just like, you know, not very well. Now, to be clear, Foxconn is Taiwanese, not Chinese. And that’s actually really important for the narrative.

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Patrick McGee [00:08:19]: But I’ll skip over it for this question. But Apple is basically put on the back foot. And this is a time when Steve Jobs has only recently passed away. Facebook and Google are basically blacklisted from the country. And Apple begins to fear that it might be blacklisted from China as well. And its revenues have gone from about a billion dollars in 2008 in China alone to more than 22 billion dollars four years later. And all of their operations are essentially there at that point. So they’re really fearful.

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Patrick McGee [00:08:45]: And essentially they hire or name a bunch of people. They call themselves the Gang of Eight, who are the first senior people to ever live in China on behalf of Apple. So they’re not just flying into the country and working on a project, going home. They’re living there. And they essentially are able to do their own supply chain study and realize, okay, the problem here is that we don’t have any joint ventures, which is what Beijing has wanted since the 1980s. But Beijing doesn’t understand we are sending America’s top engineers to literally sleep on the factory floor of hundreds of factories to get everything up and running. And this is my words, not theirs. We are the biggest supporter of Made in China 2025, which is Xi Jinping’s plan 11 years ago to rise up indigenous innovation, to move up the value chain.

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Patrick McGee [00:09:30]: And so Apple realizes that its contributions are enormous. But as everybody knows, Apple’s a deeply secretive company. And so Xi Jinping and others basically don’t understand what Apple’s contributions are. And the net result of this is that in May 2016, Tim Cook goes to Zhongnanhai. You could think of that as a citadel of communist power or something like the White House. And basically pledges that they’ll spend $275 billion over five years. I compare that to The Marshall Plan, if you convert to 2015 dollars, the Marshall Plan is actually half of what Apple was investing. And what readers haven’t quite extrapolated because it’s such a crazy analogy already, that I didn’t want to go further with it in a certain sense. But of course I’m only talking about those five years.

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Patrick McGee [00:10:09]: But Apple’s been investing in China since 2000, right? And consolidated basically all of their production in 2003. So, so if you were to just to take the $55 billion that they invested in 2015 alone, which was 22% of revenue. If you just take 22% of their revenue in an Excel document and just go from let’s say the birth of the iPhone 2007-2025, you’re talking about a trillion dollars that Apple’s invested in China, right? It’s absolutely enormous. And these numbers sound insane, but then you just have to think about, look, this is a company that makes $415 billion of revenue a year. Their products are basically like nobody else’s, right? They absolutely lead in terms of the design. You know, they lead in terms of quantities. They built more iPhones than anyone built phones last year. They have product lines, you know, like, you know, from, from headphones and air tags and computers and laptops.

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Patrick McGee [00:10:59]: Right? I mean, Apple is a unique company. There’s a reason why they’re worth $4 trillion. But all of their operations being in China has just meant that they have need to train the tech competence rather than find the tech competence in China. And I think that’s the narrative that is the most original, you know, reportish, that’s, that’s in the book.

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Frank Cilluffo [00:11:20]: And it is thoroughly researched. And those are staggering when you think about it, the figures and the long term implications. Because I think most people are just thinking about the iPhone that we’re all having in our pockets. But at the end of the day, could they be diversified from China if things were to go south, what would that look like? What’s realistic? What’s pragmatic? Or is that wishful thinking? Because I think you, you, you nailed it. The book starts 2013 in the public shaming of Apple. Some pivotal decisions were made at that point, but where do we stand today in that respect?

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Patrick McGee [00:11:59]: So in a certain sense, it depends if your thought experiment is okay, what’s the scenario? Does China expel Apple, you know, cancel its export license and all of a sudden Apple has to move heaven and earth to get things up and running in Mexico or India? You know, in that scenario, I don’t know, maybe we’re only talking about three years or something. I mean, I think you would go quite a while without there being 230 million iPhones per year, let alone all of their other products. But if Apple was in an existential position like that, it would happen like nothing has ever happened in the supply chain ever in terms of the speed and the dexterity. The problem is, or maybe not problem, that’s just unlikely to happen. And so Apple is not going to say no to selling their products in China. They literally earn $70 billion a year in that country.

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Patrick McGee [00:12:43]: Right? Or in greater China, includes Taiwan, Hong Kong. And so they’re in this fairly precarious position where, yes, they understand the issue, the geopolitical issue, and yes, they need to diversify. But if they move quickly, they are in trouble with Beijing, and if they move too slowly, then they are stuck. So somehow they have to find this perfect pace where they’re making investments in places like India, but they’re not sort of causing Beijing to become too upset with them. But that’s a pretty slow pace because if they make some big hoopla announcement about, you know, investing in New Delhi or Bangalore or Karnataka to build iPhones, it is just not difficult for Beijing to just have factory power go out for four hours at a certain supplier. That’s crucial for building the iPhone. There are a thousand parts in the iPhone.

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Patrick McGee [00:13:36]: They build up to a million a day. That means they’re doing a billion components on a daily basis at peak season in a just in time manufacturing method. It is incredibly intricate. I think it’s probably the world’s most sophisticated supply chain. China has dozens, if not hundreds of choke points should they feel the need to exercise them. If that’s the case, you’re just not going to piss off Beijing.

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Frank Cilluffo [00:13:59]: Yeah, very, very well said. And I want to ask it maybe in a too simplistic way, but Apple needs China more than China needs Apple? Yes, no?

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Patrick McGee [00:14:07]: No, absolutely. Because China isn’t dependent on Apple in the way that Apple is inarguably dependent on China. My big worry in a certain sense is that the student has become the master. I mean, I think the rise of Oppo, Huawei, Xiaomi, Vivo is ultimately dependent on the investments Apple has made. Now, to be clear, because sometimes people confuse this, I’m not directly saying that Apple invested in Huawei. That’s not the case. Apple invested in their suppliers, right, to build up their own products.

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Patrick McGee [00:14:37]: And then it told those suppliers it literally had something called the 50% rule. Don’t be so dependent on us that, or if we are to make a design decision that obviates you from the equation that you go bankrupt. So however fast you are growing with Apple, grow that fast with somebody else, right? But if I’ve been teaching you how to take Corning glass and to etch it with electrical circuits, right, to cut it, to shape it, to temper it, to put it on the iPhone, what are you going to go do with that skill set? If I’m telling you not to be so dependent on me, you’re going to call up Huawei, Oppo, Xiaomi, Vivo and say, guess what I can do? And that’s what happened across hundreds of suppliers in every facet of making high end electronics, right? And at the savviest way. And because Apple is so difficult to deal with, you know, for very little margin, sometimes companies are losing money just to be involved in the Apple supply chain. Because in a sense what they’re actually getting is, is the equivalent of an Ivy League hardware engineering education.

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Frank Cilluffo [00:15:32]: And you know, Patrick, there’s a saying sort of in D.C. circles, we’ve got a lot of tactics masquerading as strategy. And when you look at this issue tactically, when you look at it through short term lenses, we probably have hundreds of similar examples unfolding right now. When you look at it sort of strategically and you look at it as the net net impact a few years out though, the implications are huge. I’d be curious, did you see any examples of how China specifically used Apple to advance its own tech priorities? Whether it’s made in China 2025 or whether it’s building off of the Belt and Road initiative or any of the other sorts of strategies, whether in space defense, they have lots of long term strategies. I’d be curious if you’ve seen any that have had direct impact.

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Patrick McGee [00:16:24]: So not to give too long winded an answer, but the reason that Foxconn and its founder, Terry Guo are so significant is that in the late 1990s, they are the ones who understand Apple is doing something in a design sense and therefore in a manufacturing sense that is different from anybody else. So Foxconn basically understands we need to embed ourselves and win these Apple orders because they will train up our workforces and understand how to do it. So they are in a sense just as critical for Apple in rolling out the red carpet and bending over backwards to take the Apple orders. Right? And I have this funny anecdote from Tony Fadell, sometimes called the pod father, who would talk about, you know, working with all these Foxconn engineers and then coming in one day and realizing they don’t know anybody on the factory floor. And it’s because Foxconn very cleverly had just rotated everybody who was working on the Apple stuff. So it’s like a new semester had started and Apple had to train all of those people as well. Now that’s in the late 1990s.

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Patrick McGee [00:17:17]: And in a sense, the reason why Foxconn becomes the, easily by far the world’s biggest contract manufacturer by 2010 is their close relationship with Apple. As I said, China didn’t really understand what was going on. And a lot of this stuff with Terry Guo was happening in Shenzhen, which is like a capitalist experimentation zone. It wasn’t really China proper. And so when Xi Jinping gets wind of this and Apple sort of makes it concrete by having this meeting in May 2016, that’s when you see the red supply chain. This is the Taiwanese term for the local home grown giants that are taking on the likes of Foxconn. So companies like Luxshare, BYD, which is a big supplier for Apple, but we mostly know it as a maker of electric cars, Gore Tech and Wingtech, these are the big four assembly giants. But it’s been happening at the component level, not just the assembly level as well.

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Patrick McGee [00:18:03]: This is when these companies essentially pick up on the message that Apple is the biggest supporter of Made in China 2025. The essence of Made in China 2025 is that China needs to cut its severance on the west and be self sufficient in a number of key areas. Some of them are irrelevant to this narrative, like biotech and pharmaceuticals, but the others are, you know, semiconductors, high end electronics, production and so forth. And so, irony of ironies, right, the way that you learn up, go up the value chain and become an indigenous leader is to work with the mother of all capitalist companies. So in a sense, Beijing understands, 15 years after Terry Guo already got it, that Apple is a unique client to work with and that they should operate with them more closely. In terms of, let’s say, a Wall Street version of events, this happens at a perfect time for Apple. Because 2015 is literally the peak year of iPhone shipments. Even by today’s standards. iPhones peaked in 2015. There’s been no growth for them in 10 years.

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Patrick McGee [00:19:06]: So where do they get the growth? They get the growth in higher prices and they get the growth in higher margins. So when you have legions of Chinese companies that are willing to undercut international competition and work more closely with Apple, Apple is making higher margin. The downside, right, this is not the Wall street narrative, is that they are getting more and more captured by Chinese companies because they’re only teaching a select number of companies how to do this, that and the other thing for all of their products. And if only Chinese companies are able to do that stuff and crucially only in China, then where else are they going to go? So it’s a mind bogglingly complex supply chain and China unfortunately is the only place on the planet with the same capabilities of cost, certainly quantity and quality.

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Frank Cilluffo [00:19:51]: You brought up supply chain and we’ve done a couple of studies here trying to illuminate the supply chain. And when you get to first second order effect, it’s pretty easy to get a sense of what your bill of sales and everything may look like. But when you go fourth, fifth, sixth, seventh order effect, it gets really, really, really, really difficult. And we’ve done a couple of reports here looking at the various so called Typhoon actors named after Microsoft. But Volt Typhoon, where it was pre positioning, the PLA is pre positioning in critical infrastructure in the United States, Salt Typhoon, telecommunications hacks, Flax Typhoon, much of which occurred in, in Taiwan and elsewhere. But IoT devices targeted in particular. Do you think that there is concern in the veracity and the efficacy of the supply chain? It’s hard enough when you can get your arms around it. When you really don’t know who’s your third order supplier, that poses some significant security considerations, doesn’t it?

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Patrick McGee [00:21:01]: I would suspect that Apple knows who its suppliers are, even going down multiple tiers, more so than the military contractors. Right? There’s a meme that goes around. I’ll just assume it’s true for the purposes of this conversation, right, that points out that the likes of Raytheon really don’t know where their suppliers are coming from even if you go down to the third tier of the supply chain. I have some Apple internal documents where it lists the people who are in charge of the fourth tier in a supply chain. Right?

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Patrick McGee [00:21:29]: So they have oversight that, that’s pretty great. And if you think about, you know, sort of why they would need enhanced oversight versus the likes of the military, the quantity of products that Apple is building is on a scale that nobody else is, is really having to quantify. I mean maybe TSMC with chips is or something. But sometimes people will think like, well if we can build SpaceX in America, why can’t we build the iPhone, right? Well, how many rockets you actually building each year? Right? It’s not millions obviously. And so, you know, it’s about a half billion products that are being made by Apple each year, right, if you encompass the whole portfolio.

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Patrick McGee [00:22:06]: And so the reason I’m pointing this out is that when it comes to 2013, 14, 15, Apple’s realizing that they are operating at such enormous scale that they cannot just rely on, let’s say a two tier, a tier two supplier to make sure that they have enough copper wire from the third or fourth tier. And so Apple actually did disintermediate the likes of Foxconn and it begins negotiating for the contracts for things like the mineral, I think that comes out of Mongolia or Russia, that was used for thumbprint, if you remember, thumb id. Like they had cornered the market essentially worldwide on the mineral that was used for that thumbprint sensor. And they couldn’t just rely on some third tier supplier to make sure that had enough of it. And so Apple would actually go negotiate. They also think they’re better negotiators. Right? They have the clout of Apple.

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Patrick McGee [00:22:52]: And so there’s like 1200 people in the procurement team that is negotiating these deals for any number of components and they just have resources that the likes of the military do not have. So, so if that, if that, if I understood your question correctly, the visibility of the supply chain and the integrity of the supply chain, I think Apple knows it like nobody else.

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Frank Cilluffo [00:23:11]: And they know their ecosystem and there’s a good business reason to do so is, is also what I’m hearing.

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Patrick McGee [00:23:16]: Well, the business reason is emphatically great, of course, Right? But like Ian Bremmer has used the term geopolitical recession to refer to like a 10 or 20 year period where we just didn’t factor in geopolitics into our decisions. You know, a great example outside of Apple would be Angela Merkel signing a deal to get energy from Russia. That was great until Russia invaded Ukraine. There’s a number of examples like that. And so I think it’s a, it’s a, it’s a good term. And I would say even when I was talking to so many people, right. I spoke to more than 200 Apple people alone, mostly former Apple, but some current Apple about these issues.

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Patrick McGee [00:23:49]: And their quote, unquote, wake up about this was often happening in real time, right, just with the questions I was asking. You can actually sometimes see that in the quotes that are used because someone will throw in like an, I guess, I guess we were tooling up millions of Chinese engineers. Right? You only say that if you’re sort of realizing in the conversation the implications of the design decisions and the quantity of skill set that Apple needed to get things built.

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Frank Cilluffo [00:24:17]: Patrick, and I’m not going to name names, but your book came to my attention from a number of senior Apple employees.

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Patrick McGee [00:24:25]: Oh, yeah, no, please, name names.

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Frank Cilluffo [00:24:27]: Yeah, that’s, that’s how I first found out about your book. And they’ve been at it a long time and they, they learned a lot too, I think in, in that process.

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Patrick McGee [00:24:35]: That’s funny. I mean, in a weird way, that of course sounds terribly arrogant, but when I was putting the final touches on the book, I was thinking, there’s not possibly another person on the planet who knows this entire narrative. Right? And it’s not to do with me, it’s just to do the fact that any journalist, if they just spend a year looking at all facets of the company, not even someone at Apple, is going to know all the narrative because it’s a very siloed organization. What you don’t find at Apple, for instance, and this is something they’re struggling with now as they try to think about replacing Tim Cook, is you don’t have someone who works in one part of the business, like the manufacturing side, and then they send you to run retail in China for 10 years and then they run you to look at chips for 10 years. They don’t do that. If you get really good at your job in China or, sorry, in Apple, they, they tell you to go further, you know, more deeply into that role. Right?

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Patrick McGee [00:25:22]: So you’re sort of going backwards through the supply chain, for instance, rather than covering a new, another facet of the company. Right? If you work for Nestle, there’s a good chance you’re going to work on coffee for a bit and then work on chocolate and you’ll be in different parts of the world. Apple’s just not like that. And so I think I’m connecting the thread here in a way that makes sense. Right? So if you’re the journalist who sort of tries to get an overall view, you inherently end up telling stories that people in logistics or procurement or retail are not going to know because it was never part of their job.

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Frank Cilluffo [00:25:50]: And I’d be curious, I mean, you mentioned earlier the, and I don’t want to say hubris, but they feel they’re better negotiators. There’s short term negotiation and then there’s long term negotiation. And I’d be curious what you think the implications are there. And granted they’re responsible to who? Shareholders and the like, and largely Wall Street. But how do we elevate some of these issues to where, because when I look at this issue net net, at the end of the day, it’s authoritarian regimes vis a vis democratic regimes in terms of where technology can really change everything. And, and we’ll get into AI in a second.

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Frank Cilluffo [00:26:35]: But, but I’d be curious, how should we be looking at this and, and, and where it’s not transactional alone, but also is, is, is strategic in nature? Because this has huge reverberations economically, geopolitically and the like, and militarily.

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Patrick McGee [00:26:55]: Yeah. The most honest answer I could give you would be to dodge the question and to say, look, I’m a journalist, I write about things as they happen. You need a consultant or someone that’s much higher paid. You know, McKinsey would have to tell you what you should do. Right? That’s the most honest answer. But I would say, you know, my thesis of course is that they’re captured. I mean, there just is not another place on the planet where you can build the kind of iPhone, quality, quantity, cost, somewhere else. A lot of people think wrongly that, you know, 25% of iPhones are made in India and so therefore they’re quote, unquote, halfway to their diversification strategy, right, their China plus one strategy.

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Patrick McGee [00:27:28]: None of those phones are really being made in India, they’re just being assembled there. The joke that one manufacturing design engineer told me was that the phones are assembled in China, disassembled in China and sent to India for reassembly.

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Patrick McGee [00:27:43]: Right? Now there is a bit of a joke there, but the truth is more valuable than the joke. So the point is that you might be able to buy a phone next year that says made in India, but it’ll be no less dependent on the China centric supply chain than any other iPhone you’ve ever seen. Now I do think Apple has a long term strategy to do more and more in India, but unfortunately, the sort of things you saw in the mid-2000s, in the 2010s in China, which is like the bend over backwards strategy of, you know, doing anything to win the orders, building the eight lane highways, building the world class ports, making sure there’s high speed rail across the country. You just don’t see that in India. Right? I talk to Apple engineers who currently work for Apple in India and they’ll just tell you you don’t see China speed when you’re in India. Right? There’s all sorts of stories that would be hilarious and profound in the mid 2000s where some engineers at Apple would find themselves in a factory and they had to remove all of the machinery that was in it and make it empty.

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Patrick McGee [00:28:40]: And then they were going to install some Apple machinery for their production line. And they would estimate, okay, this is going to take two or three weeks to get this all done. They go out for dinner, they go out for drinks, they go to sleep, they come back to the factory, all the machinery is gone. And they don’t even know how it was remotely possible for someone, a team of people, in 12 hours to get rid of all that machinery. China just sort of was this perfect place once in a century bet, you know they’re coming out of their century of humiliation and they just did everything to win those orders. You’re just not hearing those stories if you talk to people in India. Unfortunately, I wish you were, but you’re not.

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Frank Cilluffo [00:29:16]: And we often hear about computer network exploit or espionage, the theft of intellectual property. I’m shocked there’s gambling going on in the casino. But, but at the end of the day, those are illicit means. In this case, they’re also using licit means to be able to also have that transfer of knowledge, wealth and, and, and the like. And I’d be curious in a, in a simple way, did, you mentioned their negotiating pride, did the most innovative company, arguably in the world get outmaneuvered?

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Patrick McGee [00:29:53]: Yeah, I think that’s the whole narrative. There was a question you asked earlier that I didn’t quite answer and sort of in the earliest, maybe it’s like the page three or something, I say most histories of Apple, whether it’s in books or articles, whenever Apple, whenever China comes up, it’s to mention a problem, right? Because our narrative is essentially that Apple exploits Chinese workers. I mean, in a certain sense, that’s the only narrative about Apple in China we’ve had in the past two decades. And I flip that on its head and I say this is a story about why Beijing would allow its workers to be exploited by Apple. And the answer is that it’s getting more out of the relationship. It’s a story about China exploiting Apple.

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Patrick McGee [00:30:29]: The technology transfer is just at the absolute heart of it. And this was an explicit policy on the part of Beijing and frankly, quite a clever one. I mean, the country is as poor as sub Saharan Africa when, when Mao dies and Deng Xiaoping, famous, you know, leader, probably in his 80s at that stage, he was born in 1904. He, you know, famously took trips to Japan and Singapore and saw automated factories and thought, this is what we need. Right? And this is the origins of Shenzhen and other capitalist experimentation zones. And the realization was, we don’t know how to build this stuff. And so they relied initially on the Chinese diaspora. So people coming over from Hong Kong, the Taiwanese entrepreneurs called the Taishung, are in particular really important.

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Patrick McGee [00:31:14]: This is why you get the likes of Foxconn operating in Shenzhen. And then with time, it’s the Japanese who have war guilt over their sort of massacre in World War II. And so they’re wanting to contribute. And then Apple just comes in pretty late to the party, but sort of discovers, you know, exploits what’s possible in China in a way that just nobody else had done. So, you know, companies like HP and Dell had been in China for a while. In the case of hp, frankly, two and a half decades. But they had never, like, reevaluated how to build their products based on the ubiquity and abundance of cheap labor in China. Apple, for whatever reason, just understood like, holy shit, if we’ve got this number of people at this rate of labor and they will basically custom build a factory for us, we can reconceive how to build things from the very first time a pencil hits a piece of paper in Jony Ive’s office, right? And so they’re able to take full advantage of what China is, is capable of.

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Patrick McGee [00:32:07]: And so, you know, it’s not just a blank slate. China has what Kyle Chan calls absorption capacity, right? An, an ability to listen, learn, replicate, move up the value chain, et cetera, that I just don’t think you see in that sort of quantity, you know, 1.4 billion people anywhere else in the world.

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Frank Cilluffo [00:32:24]: Patrick, really well said. And I want to pivot to AI in a second, but one last question. What’s the next Apple? What’s your next book? Is there another example, or is this such the exemplar that there could never be another example? What lessons should other executives take away and or policymakers, whether foreign, diplomatic, economic, or national security oriented?

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Patrick McGee [00:32:51]: You know, it’s hard to know. So I was at Reindustrialized last year, this great conference in Detroit, and it was only in retrospect that I realized that so many of the entrepreneurs who spoke there or that I had private conversations with are always wanting to, like, invent their way out of the problem. And that’s so American, in a certain sense.

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Frank Cilluffo [00:33:06]: The American way. Exactly.

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Patrick McGee [00:33:06]: But we’re not scaling our way out of the problem. In other words, you talk to someone who does drones and they’ll talk about their AI capabilities and all that kind of stuff, but how are you going to build millions of drones? Because that’s what they need frankly in Ukraine and that’s what China is capable of building. We’re just not going to have that kind of scale. So the best sort of example is that Jony Ive and Sam Altman are working together on a hardware device and this is reporting, it’s not my own fact, but I believe they said they were going to use a Taiwanese contract manufacturer. What I don’t know is whether they’re going to build it in China. If they can build it in Taiwan, that can be all right.

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Patrick McGee [00:33:43]: The problem is of course Beijing considers it a rogue province that they’d like to reabsorb. If it’s a Taiwanese contractor operating somewhere in America and you have Jony Ive and Sam Altman really building up an ecosystem, that would be phenomenal. Because it’s like the whole thing about like how fast, you know, an oil tanker can turn. It’s sort of too much to ask that we’re going to have 240 million iPhones actually built, not just assembled in some other country in the foreseeable future. But it’s not a huge ask, it’s still a big deal, but it’s not a huge ask for them to go, sorry, OpenAI and Sam Altman together and Jony Ive, going from prototypes to what, you know, what are they hoping for in the first few years? Thousands of units, maybe tens of thousands. It’s not going to be millions. Right?

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Patrick McGee [00:34:25]: And so if they can scale up, you know, from the perspective of Apple today, slowly, that would be fascinating if they’re able to do it without a China connection, I just don’t think that’s possible.

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Frank Cilluffo [00:34:36]: True. And when you think about scale and advanced manufacturing, sometimes it’s not the what, but it’s the how. And, and, and obviously that has big implications. One, one more question. I’ve never had an unspoken thought, but what do you think an invasion of Taiwan would mean to Apple?

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Patrick McGee [00:34:54]: I mean I call it, it’d be a meteor strike on Apple’s business. I mean, for what it’s worth, Warren Buffett is the number one investor of Apple and he temporarily, like maybe for a matter of months invested around $5 billion into TSMC and then took it all out. He was asked about it. He basically said, look, I love the company, I wish it was in a different location. That was his only explanation. In the research and writing and publication of my book, like two year period he divested about two thirds of his Apple stake. It remains pretty enormous, but it used to be two times bigger, three times bigger. And my only explanation, he has not talked about it is that if he understands the risk of TSMC being in Taiwan, then he must understand that every single Apple device you can name relies on chips fabricated in Taiwan by TSMC.

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Patrick McGee [00:35:36]: So the logic applies 100%.

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Frank Cilluffo [00:35:40]: You know, I’m reminded of an old Far Side cartoon and it had a bunch of dinosaurs, a comet going over, and the caption was one, one really bad day. And that could be an existential day. Obviously it has broader implications than markets and everything else, lives, but, but economically it is a single point failure.

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Patrick McGee [00:36:01]: I mean, honestly, the silver lining of that question is that if there’s a blockade of Taiwan or even scarier, that China actually invades Taiwan, where you get your next iPhone is like your 30th concern.

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Frank Cilluffo [00:36:12]: I’m with you on that and I want to, my final question is just today, Anthropic CEO Dario Amadei had a really interesting, sobering, provoking essay that he put out 30 something pages, I can’t remember exactly. And it was called the Adolescence of Technology. And it really did put front and center, think of AI running alongside a teenager’s brain is what I’m looking at. My girls are all out of that stage. I have four, they’re in their 20s now. But that would have been a scary, scary moment in time.

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Frank Cilluffo [00:36:51]: And looking at frontier models and just the sheer power that AI and the impact it can have on civilization. He wrote in there, the idea of selling advanced chips to China is equivalent to selling nuclear weapons to North Korea. Pretty stark. What are your thoughts on that? And I think there are so many lessons that can be pulled. I feel like I’ve seen this movie talking with you. We just talked about this movie. Are we seeing it again? Is history, are we going to march into the future looking through rear view mirrors? And to use Mark Twain, I think it was Mark Twain who said, whereas history may not repeat itself, it tends to rhyme. In this case, the speed and the impact would be even greater than arguably Apple’s. And I’d be curious what some of your thoughts are there.

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Patrick McGee [00:37:43]: So I’m going to give you the journalist answer rather than the policymaker answer. I don’t know what the right policymaker response is. And this has been going on for months. And Nvidia’s Jensen Huang has been at the White House lobbying for his, his position. And I understand that position. What I would say is that in the book I go through how in 2019 Huawei had actually outsold Apple in smartphones, not just in China, but globally. And the Trump administration went after Apple.

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Patrick McGee [00:38:09]: Sorry, went after Huawei, by putting them on the entity list and very much depriving them of, of their ability to make 5G smartphones. Right? They basically deprive them of Google services and of Qualcomm chips. That looks like a good policy in a certain sense. I mean, I never was for the policy, but you could see how it looks like a good policy at the time because Huawei lost tens of billions dollars of revenue and was basically wiped off the map for a couple of years. But they also hunkered down and now can do their own 5G technology at the chip level and the base station level.

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Patrick McGee [00:38:43]: And they’ve built up their own competitor to iOS and Android called Harmony OS. I think within China in terms of monthly shipments, there’s actually more devices running Harmony OS than iOS these days. So my point is that by depriving China, you actually gave them like the necessity as a mother of invention type attitude where they hunkered down and they built something better. So it’s actually good in some respects for Eastern companies to be dependent on a Western tech stack. And that’s the argument that Jensen Huang has made. So the thing that I don’t like about what the White House is doing about this is they’re explicit in what they are trying to do. In other words, they’re saying, here are some Nvidia chips and so forth because we want your companies to be stuck on the tech stack. Now look, there’s a truth there, but it’s not one you should be mentioning because you’re trying to get the companies in China to, to, to follow what you want them to do.

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Patrick McGee [00:39:41]: Bu saying it, it’s sort of a bad idea. What it reminds me of is Bill Clinton had famously said in the late 1990s that with the Internet, China was basically going to be forced to democratize because, you know, controlling the Internet was going to be like pinning Jello to the wall. Well, again, correct on the merits, but how do you, think of how that is read or listened to in Beijing? I mean, it’s basically a challenge. And the result of that is essentially the great firewall. In other words, China basically understood the challenge and orchestrated events in their favor. So we need like, I don’t want to call for less public disclosure, but could we have some strategy at the highest levels of how we’re actually going to go about this?

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Frank Cilluffo [00:40:21]: Very well said. And I think there still is a mindset that China is an imitator, not an innovator. I think we should recognize that, A, is not the case.

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Patrick McGee [00:40:31]: True.

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Frank Cilluffo [00:40:31]: And B, I may be in the minority here, I worry about the day they stop stealing our secrets because that tells you they don’t need them anymore. So.

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Patrick McGee [00:40:40]: And yeah, I think I said earlier, the student has become the master. I mean, we are at a level where I don’t know how much hardware engineers coming out of MIT or wherever are able to train the Chinese engineers. I mean, what Western economics is totally sort of ignored over the last two or three decades is the value of learning by doing. And that’s what China has embraced. And the result is so much tacit knowledge or shop floor innovation. And it just strikes me that if you’re 25 years old, coming out of grad school, going to China on behalf of Apple on your first day, what are you teaching them at this point?

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Frank Cilluffo [00:41:10]: Well said. Patrick, what questions didn’t I ask, if any that I should have?

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Patrick McGee [00:41:15]: I don’t know. I just need readers to get through the whole book and then they could, you know, hit me up and ask whatever questions they like.

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Frank Cilluffo [00:41:22]: I highly recommend all our viewers and listeners to buy the book. Patrick, thank you for taking so much time with us today. More importantly, thank you for all your gumshoe hard work on such an important set of issues and, and thank you for joining us. So really appreciate it.

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Patrick McGee [00:41:39]: Thank you, Frank. Cheers.

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Frank Cilluffo [00:41:51]: Thank you for joining us for this episode of Cyber Focus. If you liked what you heard, please consider subscribing. Your ratings and reviews help us reach more listeners. Drop us a line if you have any ideas in terms of topics, themes, or individuals you’d like for us to host. Until next time, stay safe, stay informed, and stay curious.