Patrick McGee: Huawei is coming out with like the 21st century equivalent of the translucent iMac, right? Yes. So Huawei has the phone that I think is the only phone in the world right now that would cause you to ooh and ahh and want to touch and feel it, which is the Trifold Mate XT. Yes. Right. Apple doesn't have a phone that folds once.

Right. Huawei has one that unfolds twice. Right. And when it unfolds, it's the same dimensions as a 10.2 inch iPad. Yep. But it's thinner than the iPad Pro, which Apple builds as its thinnest product ever. Yeah, I mean, it's kind of embarrassing to Apple, I would say.

Steve Hsu: Welcome to Manifold. My guest today is Patrick McGee. He's the author of a new book called Apple in China, which is getting a lot of attention. I'm really happy to be here with Patrick. Uh, we are in a beautiful location in the ferry building in San Francisco. I wish I was shooting video, but, uh, I'm on the road right now and, uh, just, you're just gonna get audio for this episode.

Uh, Patrick, welcome to the podcast.

Patrick McGee: Thanks so much. I'm scared by the questions I've seen on your resume. Theoretical physics. I mean, I hope we're not gonna get too deep into engineering.

Steve Hsu: Um, no, but you know, I've been following Glo like you, I can tell from your work at the FT for many years you've been following globalization.

And, you know, uh, lots of people made predictions about how it was gonna hollow out the American middle class or the manufacturing capability, how it was gonna build up China, what is the end state of all this stuff that was going on. Everyone just followed their local incentives for 30 years. And now, with the tariff war and Trump in power and your book, we can explore what really happened and what the consequences are.

Patrick McGee: Yeah, I mean, just very briefly, my book is basically an exploration of all of those trends, but through the lens of a sexy, iconic company, right? Because I think that's how you get the layperson to really grapple with these issues, understand these issues, be conversant on these issues.

Steve Hsu: Yes. Uh, and I think Apple is. You know, maybe the best microcosm or best example to use to illustrate all this activity. I, I find, you know, most people can't follow, you know, even one technology vertical, let alone 10 simultaneously. But if you can follow multiple ones, you see this happening across multiple verticals, whether it's military technology or AI or computers, mobile phones, 5G networking, you know.

It's happening in every sector, and I think people didn't anticipate that it was gonna be so dramatic. I think honestly, mainly because I think people underestimated, uh, Chinese capabilities for a long time.

Yeah, no, absolutely. Yeah.

So, um, my audience is pretty sophisticated, so I, I'm guessing they actually know a lot of the details of the story, not the details, but they know the story in outline.

Yeah. Um, let's just, let me maybe state, uh, my impression from your book and then you can elaborate on what I say.

Sure.

So one point you make is that there was a unique partnership between Foxconn and Apple to get production of, you know, really beautifully designed products, but at a, at a price point and at a scale where they could be sold to the entire world.

And so there was a very unique partnership. It depended on things like poor Chinese coming off the farms, being able to do extremely repetitive grueling work in factories. Incredible scale in that labor supply. But also transmission of technical capability from the Apple side to Foxconn and then to the workers and local subcontractors in China.

And now I think you said, similar to the game of Go, Apple is kind of trapped in the sense that it really can't get out of China, but of course, Tim Cook understands that Trump and the US would like him to get out of China. And so, uh, there's no easy way out of this for Apple and maybe not for many other US companies that make things.

Uh, so maybe just, uh, riff on what I just said.

Patrick McGee: There's, there's a lot to unpack there. Yeah. Let's start with Foxconnn. So the partnership with Foxconn and Apple goes back to the early nineties. But your sophisticated audience probably knows Foxconn is Taiwanese and the Taiwanese play this instrumental role, I mean the subject of at least three major books, uh, building the advanced electronics sector in China. And Terry Gou of Foxconn is foremost among them.

Right? I mean, uh, James Fallows in the late two thousands sort of said he was second to Deng Xiaoping in terms of transforming Shenzhen from a series of fishing villages population 70,000 in 1980, uh, to the Megalopolis it is today. I think when Fallows was writing it was. 7 million. So the population had grown 100 fold, yeah, in just over 25 years.

Now the population is 18 million. Right? So considerably larger than New York. That's probably larger than greater London. Um, I mean, just a crazy transformation.

Terry is the first person to really understand that the value of working with Apple is not the profits. In fact, Foxconn made more money than Apple in the first four years of the 21st century. But as it works with Apple more closely, its margins really collapse. That was the subject of multiple fights. I mean, Terry would come to Cupertino and argue with Tim Cook, I know this from a bunch of sources that had, you know, dinner with him the following night sort of thing while he was upset about it.

But nevertheless, he was getting something more, than profits out of the relationship. And that was like tacit knowledge. So Terry understood that the way Apple worked was different from Dell or Compact, which at the time in the early two thousands were absolutely larger clients than Apple. But Apple would fly in their best engineers and they would train, audit, supervise, and work hand in glove with all of, uh, his, his, his factories.

And people think Foxconn's just the final assembly, and that's sort of what they're famous for. But they do metal stamping and plastic injection molding and a whole host of issues. And so Terry makes major investments into Apple, and even when they're not doing something like final assembly, they are doing things like the aluminum, uh, for the, um, cinema displays for Apple in the early two thousands.

And it's that expertise that actually helps 'em win the iPod Mini order, which becomes the first major product that they worked together, in late 2003.

So Terry figures out something that I think the mainland Chinese writ large actually don't figure out until 2016 that Apple has this bad reputation if you're a supplier that they're, they're rigorous, they're grueling, and they don't pay you much. But, I'm jumping ahead of my story a little bit, but after Apple makes this more explicit to government officials in May 2016, Chinese suppliers perk up and you would get this sort of acceleration of the red supply chain. These companies like Lux Share, BYD, go Tech, wing Tech who've really been squeezing out Foxconn over the last 10 years, and this is only the final assembly.

I could say the same thing with, you know, Corning, the maker of glass, uh, out of America. They're being squeezed out by local competitors. And it's because there's this understanding, this great irony that to, um, respond to Xi Jinping's directive of indigenous innovation of made in China 2025. China's gonna be self-sufficient in all these technologies.

Irony of ironies. The best way to get there is to work intimately with Apple because they have America's best engineers teaching you how to do this, that, and the other thing. And so it's sort of, instead of it being low margin, Apple would portray it as tuition free training on the ground from America's best.

And so once you start understanding that narrative. Or at least once I started understanding that narrative, I realized there was a book here because we've sort of ignored that entire topography of how Apple functions.

Steve Hsu: Right. So one, one thing I want to say to my audience is, uh, you know, I only have a limited amount of time with Patrick, but he's been interviewed on, uh, an incredible number of platforms already.

And so you can get more details about the story from his other interviews or just by his book. That's what I was gonna say in the book. And so, um, one thing I do wanna clarify from the interviews, this is not Patrick's fault, but I think the audience could easily get confused when Patrick makes a statement about what happened, the history of Apple in China.

The audience might not be able to tell he's talking about 2005, or he is talking about 2010. Yes, because the position, the situation in 2025 is radically different than it was at the beginning. Yes. When really there was a huge amount of just direct knowledge transfer, tacit knowledge from the Apple side to Foxconn and then to other suppliers.

I just wanna mention that my uncle in law went to college with Terry Gou. Oh my gosh. Um, I think both at tda, they were both engineers and so he was Terry's right hand man. Through most of this period. And so I've been to many family functions where I, and I'm, I'm sort of interested in this subject. Maybe some of the other relatives are not that interested. They just know, oh, Terry Gou, our, our, our uncle is, is, is like super high up in Foxconn. That's all my rest of the family, but I'm interested in the nitty gritty of this. So I've had many hours talking to him about this process.

Patrick McGee: And where were you last year when I needed you?

Steve Hsu: Uh, you should have called me, but, or should have called my, my uncle in-law. But even words like injection molding and shaping aluminum and stuff like that were the things that we talked about. Yeah. And so I don't wanna call this a counter narrative because I think you're very fair in your book and in your perspective on this, but from the Chinese or the Foxconn side, yeah, one of the things my uncle used to tell me. So I'm a university professor and I've followed the advancement of stem in China and the quality of the universities there for 30 years now, more than 30 years. And I would always ask him when I saw him, well how good are the Chinese? So people accept that the Taiwanese engineers are good, right, right. TSMC and all this stuff. So people are, uh, people accept that the Taiwanese engineers are at a Western standard or US standard. But for a long time people weren't sure, like, how good are these kids from engineering schools in China?

Patrick McGee: Yeah.

Steve Hsu: And I remember my uncle's interesting response. He would say like, you know what, I went to National Taiwan University, which is a top university in Taiwan, but book learning is only so important in the factory when you're trying to do stuff and it's this tacit knowledge of how to like, make a slight adjustment to the injection molding machine or how to, you know, install some extra switches, you know, or something. So he used to tell me like, uh, yeah, I mean these smart guys, you keep mentioning these smart guys who, uh, come from Apple.

Maybe they went to Caltech like I did. And they're teaching these guys on the ground how to do stuff. But you know, from my uncle's perspective, it's more like the Chinese and Foxconn side had to actually figure out how to do stuff. Yeah. It wasn't true that the guy coming from Cupertino actually knew how to scale this thing to a, you know, a factory with a footprint of a football field and really get it working and they often had to figure it out in partnership.

Of course, yes. With Apple co invention is the word I use. So co-invention is the right term. And so this is true. I am discussing this question of globalization, 'cause now we're kind of at a kind of end point or, or, you know, acidotic limit of it. Um, you know, people want to have a kind of moral stance, like, oh, you guys stole stuff from us, so you owe things to us.

And the other side is like, we were poor and you guys tried to exploit us as hard as you could, but inevitably we learned some stuff from you. Right, right. So there's two, two narratives and there's, there's, I think there's truth in both of these. Uh, narratives. The Chinese side is more like, yeah, we were poor. These poor peasants came off the countryside and you guys worked them to the bone. But our engineers learned a lot of stuff along the way and now we can make better phones than you can.

Patrick McGee: Yes.

Steve Hsu: And so I think both sides are true. And, um, just curious. Um, you know. When, when you talk to an American audience, it feels to me like they're hungry for the first narrative.

Right. And they're not really particularly interested in the second narrative. Like, what, what does it look like from the Chinese side?

Patrick McGee: So I agree. I think this is clearer in the book. Yeah. In my, you know, careful, deliberate, you know, at multi hours rating Yes. Then it is in 92nd sound bites, right? Yeah. Yeah.

And so, yeah, so the narrative is sort of the Apple built China, which is a caricature of the argument, right? I'm saying they were the biggest contributors. Right to be made in China 2025. Right. Which is itself a big enough claim. You don't need to go further. Right? No, but in the book I give, um, uh, credit to, for instance, okay, so you know, the Steve Jobs narrative that you'd get out of Apple Books like Walter Isaacson is that Apple, and if not Steve Jobs directly, invented multi-touch.

Right. And you know, look, they acquired a company called Finger Works and they did, you know, pinch to zoom and things that you're familiar with. But, and actually to, to actually make that for a phone. Right. They worked with a Taiwanese company called TPK. Right? Right. And TPK was already working on electrical circuits that are, you know, invisible to the human eye within the glass to make your finger, yeah, like a conductor, as it were. Yeah. For the, for the, for the glass.

They worked with a company called Lens Technology, which is a massive company. That, you know, takes like, like the glass in your phone is made by Corning, right? If you open up the phone and break down all the components, there's nothing that says lens on it.

Um, but Corning makes glass by the meter, right? Meter, like in, in both dimensions. Um, and so someone has to cut, yeah, temper and shape that glass. And lens has become, I think, maybe worth $18 billion or some such thing by doing that sort of thing. So, no, my argument is actually that, um, the Apple engineers aren't going to sort of like empty factories with just like right, you know, blank slate.

People that sort of haven't already been thinking about this. They're working with companies that already have a certain expertise. So Lens had been around, I think, more than a decade before Apple started working with them, but they really do take them to the next level. So someone like Steve Eski, high up guy on all sorts of patents for, for, um, for, for iPod and so forth.

I mean, he was sleeping on the factory floor, um, to get this done directly with Joe Conde. Yeah. Um, you know, one of China's richest women. And so she's rich, not just because she accepted Apple learnings, um, that would be the caricature, but because she was very, um. You know, nimble, open to learning. Um, and also had all sorts of great government connections.

I mean, there's a fun part in the book where, um, I forget the name of the district where her factory was, but the whole place runs out of power. And she's able through factories or through political connections to get the fire department to show up with a bunch of generators so that her factory remains up and running in a district where everything else has no power.

Right. Apple couldn't do that sort of thing alone. Right. And so I make it really clear early in the book that. China was a once in a century partner for Apple. You know, I'm not just saying they had a bunch of poor people and they were allowed to exploit that. If that was your view, then of course you could go set up shop in India.

I'm pessimistic about India's prospects because Chinese industrial policy was world leading the way that they could have capital come into the country. The speed. And you know, to some extent the quality, I mean the quality was sort of shoddy, but nevertheless, like. Like the ability, let's say the capacity that they could build out was amazing.

And I, I think I have an, uh, maybe not an entire chapter, but a big section on China speed. Right. So there were, um, instances where, for instance, you know, some engineers at Apple are looking at this factory, uh, the size of a football field, and it's just full of machinery. It needs to be retooled by Apple.

Yep. And they estimate it'll be two to three weeks. They go home, you know, have breakfast, and come back to the factory. And it's done. It's all done. Yeah. Right. And just inexplicable speed. You don't get that in India. Right. I don't know why you don't get that in India, and I don't want to talk about, you know Right. The cultural differences between two cultures that I'm not the right participant of. But no, China offered all sorts of things from, from Beijing to the local cadres to the hardworking Chinese coming from the hinterlands. And I, I hope that's quite clear, um, in the book, because what they offered was.

Insurmountably Superior.

Steve Hsu: I, I can tell from the way you speak about it that it's very clear in your mind. I just think like when an American audience listens to it, they take away one part of it.

Patrick McGee: You're not wrong at all because I read the social media every day. Yeah. And, and that's been part of the criticism, but that's, but that, that's not been the criticism of anyone who's reviewed the book. Right. It's the criticism of, you know, a 90-second soundbite. Exactly. And so I understand that exactly.

Steve Hsu: Good. Um, so you mentioned their contribution to China 20, 2025. Yeah. And I believe, um. I think there's a, there's an anecdote in, in the book in which you talk about Cook going to its own high and basically offering, I believe it's $55 billion a year of investment and, uh, education for, uh, you know, Chinese workers and engineers that Apple will provide over, was it five years?

Five. Five years, yeah. So it was like $275 billion in all. Yes. And so, so talk about that and, and so what, what were the incentives for the different parties? So the Chinese government, you know, obviously they understand like we're allowing our workers in a sense to be exploited, but we want to, we want to gain from this, we want their children to live in a more advanced country with better infrastructure and all this tacit knowledge transfer to them. So, they wanted that from the foreign companies that were working there. Yeah. What is Tim Cook thinking?

Patrick McGee: So, so let me give you a, like a wonky answer. Yeah. 'cause you said this is more sort of, you know, the, your theoretical physicist.

Steve Hsu: Everyone listening is a college professor, tech, tech founder, engineer, you know.

Yeah.

Patrick McGee: So, I'm gonna come back to registered capital in a second and I'll explain the 55 billion. Yeah. But just to give some context. When Xi Jinping comes into power, it is pretty clear he sees Apple as this exploitative force. Yeah. That is not a quote in China, yeah, for China. Yeah. And if you just looked at public filings, something like Foxconn margins, you know, basically collapsing.

Yeah. In the 10 years that they've been partnering with Apple, Apple's margins literally go up by 25%. I mean, just to give a crazy statistic, Apple profits between 2003 and 2012 globally, literally go up by 60000%. Yeah. I think the number is 69 million to 40.

Steve Hsu: I can tell you that. Those illustrations that were popular like 10 years ago where they show a picture of the inside of an iPhone.

Yes. And then they'd say like, who's making how much money from all this? And Apple's like the biggest. Yes. But then like the Chinese guys who are doing all the dirty work, they are getting almost nothing. Yes. From the phone. So that enraged the Chinese side for they want to fix, rectify that.

Patrick McGee: Yes. And I think there's all sorts of misleading things about those pictures, but nevertheless, let's just say that's the image that the hardliners in Beijing had. Yeah. Coupled with the fact that the iPhone goes gangbusters in terms of retail demand. Yeah. But what is the iPhone more than a pocket sized emblem of capitalism? Of westernism, yeah, of individualism. It's all the things that hardliners in Beijing do not like. Yeah. And so I quote an editorial saying, if you see someone with the iPhone 6, cast your eyes with dispersion or something like that. I forget the exact word. Cast your eyes with contempt, I think looking upon them contemptuously is interesting. Um, that's what it's.

And so Apple's really in this mode where, uh, they are attacked within 36 hours of Xi Jinping becoming president. Um, CCTV, which we can call state sponsored, CNN of China really goes after them. They've got secret footage of how the Chinese customers are treated. And the narrative leading up to this is my favorite in the book. It's absolutely wild. And it involves scalpers that in China are known as yellow cows. They have recognized this massive supply chain, I'm sorry, supply demand imbalance because there's only four stores in 2010 and there's 1.4 billion people in China and the iPhone became the most conspicuous product that anyone with a bit of money, and I really do mean a bit, wants to buy. So there's an anecdote, for instance, when Apple is so flummoxed by this, they interview people as they come out of the store and one is a mailman and he says, I spent 30% of my annual salary buying an iPhone.

And they're like, you know why? Yeah, why? And, and, and he says, 'cause when people see me with the iPhone, I'm not just a mail man. Yeah. Um, and this was just happening in a crazy, crazy way.

Steve Hsu: It was a huge status symbol, especially for female Chinese for a long time, that they had to have an iPhone. Oh, really?

I actually don't get

Patrick McGee: into that.

Steve Hsu: Yeah. Yeah. That at least that was a story that I was told.

Patrick McGee: Okay. Fascinating. Yeah. So anyway, so I, I'm not gonna go into that narrative right now other than to say there's this fascinating thing involving Yeah. Um, triad backed organizations and stuff, and it's, it's, it is a wild narrative.

Um, so there's, what I mean by that though is there's certain misinformation that gets up to the highest echelons of the Communist Party about how Apple is treating customers. I see. And part of it when I say misinformation is that there are fake Apple stores. Um, I mean, dozens of really good ones. Yes.

And thousands if the estimates are correct. Yes. Of pretty shoddy ones. Yeah, I've seen those. Yes. But if so, you can buy real products. You can also buy fake products. But, let's say you brought back an iPhone that was broken to one of these stores. Where it's so good, the employees literally think they're working for Apple, but they're not.

Right? Well, they're not giving courteous customer service. I see. And, uh, you know, screen replacement on the cheap or something like that, because you know, or for free to deal with the warranties and stuff. So there's all sorts of problems that Apple's experiencing. Anyway, the point of the narrative over the next few years from 2013 to 2016 is Apple flips it on its head. They are worried that they're gonna be forced to make a joint venture or multiple joint ventures in the country so that they can give back to Beijing and demonstrate all the ways that Beijing wants you as a Western corporation to do. They flip the narrative on its head by explaining what I was going on about earlier.

I, I, I'm trying to coin it as the Apple squeeze. So it's how they work with their suppliers and they basically say, look. You might lose money on this transaction, you might only get 1% or 2% margins. But a, if you do it in the right quality and quantity, the scale will pay off for you and the learning will pay off for you.

Mm-hmm. Because we are going to send in, you know, our finance engineers right to handhold you through every step of the process and actually install, you know, in the aggregate, billions of dollars worth of machinery onto your factory floor to get this all done. This is, I think, a big narrative that's misunderstood.

So when Apple is doing their own supply chain study in 2015 to figure out how we're contributing to the country, that's when they realize we're investing $55 billion a year. Right? And this is what leads to Tim Cook going to HAI and saying, we'll pledge to invest that over the next five years. To be clear, this is a low ball investment because they're just taking what they'd already been investing, multiplying it by five years, which means that they're assuming no growth.

Yeah, they're, the actual figures are probably much higher. Right. But I don't go there because the numbers are big enough and I don't need to speculate and I don't have the documents. Whereas I do have the documents for the 55 billion.

Steve Hsu: Okay, so what is the 55 billion is something I think we should talk about.

Patrick McGee: Yeah, absolutely. Okay. So there's a concept in China called registered capital. So if you were Walmart, which earns more money than Apple. And you know, according to some estimates I'm not a Walmart expert, they sometimes get 60, 70% of the products from China. Mm-hmm. And, and at a low margin. Right. So it means like the wholesale price that they're buying is probably much more than what Apple is buying in any given year.

Yeah. I don't know that for a fact, but it makes some sort of intuitive sense. Yeah. Let's just say they're equal. Yeah. Walmart is not going into the factories training the Chinese how to build kitchenware or toilet paper or whatever else you can buy in Walmart that might come from China. So none of that counts as investment that is merely spent.

Mm-hmm. Okay. But a Volkswagen or a GM who do have joint ventures in the country, yes. They, uh, will train up a whole range of workers to build up a production line. So for 18 to 24 months, the wages of the laborers count as registered capital. Mm-hmm. Meaning it counts as investment, not spend. I see.

Because it's a training cost. So it's basically like a fixed asset cost. So yes, this is wages, but we're doing something where this, this skillset, this tacit knowledge is staying in the country and so it doesn't just get counted as wages. Okay. Apple has this novel argument, well wait a minute. Our spending is a lot closer to GM or Volkswagen than it is to Walmart.

Mm-hmm. We're not just sitting in Pudong ordering Lens glass. Yeah. We have our engineers in the Lens Factory. Yep. Teaching them how to do this. But more to the point, we never get to that 18 month or 24 month point where the production line is up and running, and then Toyota, whoever just builds a Rav-4 for seven years.

We are constantly redoing the batteries, the circuit boards, uh, the, the, the glass, the shape, the material, you know, the newest iPhones made of titanium. And so they're able to argue to the Beijing government or basically present to the Beijing government. Um, we never reached that stage. So the investments in wages really are registered capital.

Yes. These training costs and we're upending how these things work day in, day out. Now, on an accounting basis, someone could say, I find that, you know, quack quacky or something that is acceptable or not acceptable. But first of all, you're not arguing with me, right? It's Apple's argument, right? And more importantly, Beijing accepts the argument, right?

So take it up with them, but not me. But that's the argument as to how they're able to spend, or, or, or, or how they classify, um, much of their spending as investment.

Steve Hsu: Right. Well, I think, I think now, now that people have awoken to the idea that, uh, okay, maybe China's not gonna turn into a democracy overnight, and maybe they can innovate once they get, you know, close to parity to the United States.

Um, and so now we're suddenly worried about this. People forget that the deal, the explicit deal when you, when you signed a joint venture agreement is that you put a bunch of your IP and expertise into that jv. In this case, it wasn't a joint venture, but Apple was agreeing to, right, train up, uh, and, and invest, uh, in China.

So that was, it was all explicit. And it wasn't like this was stolen. You know, they said they weren't gonna take this from us, and they took it. It was more like, no, everybody signed an explicit agreement that this was going to happen. Yes. Right Now you might look back at it and say, this was very foolish for American business to do this, but it was explicit at the time.

Right?

Patrick McGee: Yes. So it, although Apple never actually ends up doing a joint venture right, they didn't do the impact of their agreement Right. Isn't so dissimilar. Right. But they do. So for reasons that are, I wanna say selfish, but I mean that in a neutral way. I just mean they're working for their own interests.

Right. Uh, I'm not sort of, you know, sort, sort of using in a nefarious sense. So basically what would happen is. If Apple likes it, okay, let's remember that iPhone volumes went from fewer than 5 million in 2007 to 230 million, yeah, by 2015. They've got loads of suppliers because there's a thousand components roughly in, in an iPhone.

Because Johnny Ive is upending the design of that phone every year using different components and therefore different suppliers. Um. What would happen if he made a certain decision is that, you know, let's just say for the sake of argument, a dozen suppliers that were building some, some various components would no longer be needed.

Yeah. And if they had followed Apple for two or three years of exponential growth and they no longer needed mm-hmm. They would go bankrupt. Yeah. I mean, they would have these massive labor forces and factories and machinery and stuff. Right. And they would no longer have anyone to give it to. Yes. So Apple institutes this policy that we don't want any supplier to be 50% dependent on Apple.

Right. So effectively they tell their suppliers, however fast you are growing with us. Right? Make sure you grow that fast with somebody else. Yeah. And that's where you get the sort of impact of the technology transfer, because however, unwittingly, right? Apple is basically saying to them, go supply. Right?

Huawei omi,

Steve Hsu: That was quite an enlightened position because I wouldn't necessarily care that much about my suppliers. You know, I might say like, look, you're taking a gamble. If we keep using your stuff, we keep using your stuff. But this is very, being very nice to them, saying like, we want you to have a fallback position.

If, if, if we stop using your stuff. And, and as you say, it has this, is this maybe witting or unwitting, uh, effect of transferring lots of capability. Right.

Patrick McGee: Nice is probably too generous a term. And, and, and, and, and what I mean by that is in their first term of Xi Jinping. I mean, you know, there's a meeting where 30 Western companies are taken to task.

Yes. Okay. So, they're threatened with antitrust lawsuits. I see. Forced to be nice. And they, and the quote that I get from Reuters is, if you put up a fight, we will double or triple. You're fine. Yeah. And the sort of poster trial example of this is Qualcomm. Which is, you know, basically it gets paid licensing fees that are, that are static.

So no matter what the phone is, they get paid a certain, uh, percentage of the retail price, I believe it is. And because China becomes the dominant, uh, maker of smartphones, they're paying, they're paying these outside fees Yes. To, to Qualcomm. Yes. You know, again, not even necessarily because the chips are in the phone, but because of the engineering.

You know, the program works where your Qualcomm gets license fees for having invented 3G, 4G, 5G technologies and so forth. So Qualcomm doesn't have much of a counter argument when Beijing sues them or maybe not sues them, but goes after them for antitrust purposes. Right. And so Qualcomm basically fights for three years and eventually capitulates by paying a billion dollar fine.

So the biggest in China's history at the time, and agreed to set up a joint venture. And I quote a Qualcomm executive saying that we had gotten so frightened. We refused to send more of our executives to the country because we worried that they'd be kidnapped. Right. And the one negotiator that did keep going, literally slept on the plane rather than in a hotel because, uh, he was so worried.

So this is the context. So Apple wasn't being nice. Apple recognized the authoritarian turn taking place in the country and realized that they had to play ball, but they had to play ball in a way that wasn't just window dressing. It would work for them as well. Yes. Got it.

Steve Hsu: Yeah. So at this stage, you would say, Apple really doesn't have any good options for getting out of China?

Patrick McGee: No, I mean, you know, just present me with the options and I'll tell you why they don't work, kind of thing.

Steve Hsu: Right. So, so our, our favorite Commerce Secretary, Lutnick, somehow thinks Americans are gonna be turning screwdrivers to make iPhones pretty soon, or, and then he corrected himself the next day and said, no, well actually, we'll be making the beautiful robots that'll turn the screw or something like this, but yeah.

Yeah. But does anyone at Apple believe that they could reshore their supply chain or their manufacturing.

Patrick McGee: I mean, just put it this way, Apple knows the political pressure they've been under really since the Obama Romney debates in 2012. I see. Yeah. If they could build in America, they would win so many political points by doing so that they would've done so.

Right. Um, so people think, well, wait a minute, why do just automate everything and therefore you don't need 400,000 people in Jang Joe doing this. Right. Because there's a recognition that Pittsburgh's never gonna be able to compete. Right. Or something like that. Not enough people. Yeah. And look, I'm not gonna say I know where automation is going.

I mean, open AI and everything going on with general, um, artificial intelligence is mind blowing. Yeah. And so maybe we do get there. And so I'm open to that possibility. But as to, to quote an Apple person that is familiar with all this stuff, everything that can be automated in the Apple supply chain is automated.

In other words, yes, the phones are handcrafted to some degree that you have lots of people doing these nine to 11 tasks, nine, nine to 11 second tasks on a conveyor belt. But there is mind blowing automation leading up to those stages, right? And so, um, maybe we get to a stage where you don't need so many people.

But that's a big if. And even if you get to that stage, where are the rare earths? Where is the lithium, where are the batteries all being made refined, uh, you know, slice and dice, whatever, whatever the materials are. China has an enormous advantage in that respect as well. So. It's not as though we automate, we just like, like my, I guess my point is the labor population and the labor density advantage that China has is just one of like 20 advantages.

Yeah. Yes. So if you're, you're almost playing whack-a-mole, like maybe that's solvable through automation. Right. But you're forgetting the other 19 things.

Steve Hsu: And if you don't solve all of 'em at once, you can't really move it, right?

Patrick McGee: Absolutely. This is like, what's the line about, you know, fixing the airplane while it's, uh, flying. Flying, yeah. Um, it's that sort of thing because Apple's enormous. So, you know, like one thing that would be really interesting is this new Sam Altman, Johnny Ive hardware venture. Yes. Where are they gonna build?

Steve Hsu: Yeah. Well they're probably gonna build the device in China.

Patrick McGee: I mean, they probably are. Yeah.

But they're not in the same dilemma that Apple is in. In other words, maybe they can do automation first. Right? Like from the design process on down. Right. Which is something that Johnny, I would not do at Apple, but maybe that's what he would do. Um, they're working with such volumes that you could build the capacity rather than be right.

Apple's different, they're already dependent.

Steve Hsu: Now, I, I seem to have seen claims not so long ago from some filmmakers, maybe Xiaomi that they have lights out factories, but I guess you're saying there's still some last bits that really require human, you know, nimble human fingers or something to like get a camera in or something in the right place, or,

Patrick McGee: Yeah. The distinction would either be that they're only referring to where some of the components are. Yeah, are coming from, I don't know if they're specifically referring to the final assembly test and packout. Yeah. That is the labor intent state. Okay. That is what Apple's trying to build or really actually building in India.

Yes. So, that's one thing. The other distinction might just be that the way Apple, um, innovates is that they're not just using components and parts made by their suppliers and hoping that those companies innovate on their own. They are in the factories building those components and parts, right?

So the more like off the shelf processes you're using, the more it would be easy to automate, right? So one thing that Tim Cook has done in the last 10 years, for instance, is that you can go buy the iPhone 16, and that's a more handcrafted device than the iPhone 15 or the iPhone SE. Mm-hmm. And the reason why.

Is that, um, those are older phones where because they've been in circulation for a longer time, they're able to automate those processes. Right, right. Because even if certain processes are automateable, it takes time to set up the production lines. Got it, got it. And so you have to get through that initial like six month burst.

Got it. Of iPhone demand where you really are shipping a million devices per day, a thousand components per day. Right. That's doing the logistics, the just in time manufacturing for a billion components per day at peak volume. Got it. So yes, some of that can be automated, but it can't be automated in week one.

So let's say after 50 weeks it can be automated and that's why Apple continues to sell older model iPhones using, you know, the chassis of an iPhone eight or something. Yes.

Because then you're similar to car production, where if you're building a Rev four in 2019 and the design is the same thing in 2025, you can automate a lot of those processes.

Yep. So Apple finds it difficult to introduce automation on an annual basis for the newest phone, but it absolutely is doing it for the older phones that stay in circulation.

Steve Hsu: So, you know, I, I, I was an Apple person for a while and I eventually migrated completely off their, out of their ecosystem. And um, you know, my impression is that there's more phone innovation actually in China by Chinese companies than from Apple.

So I guess you agree with that?

Patrick McGee: Um, yeah, I mean, uh, and just to give it some historical perspective, I quote someone. Sort of, um, you know, from a decade ago, and this is at the stage where Apple is beginning to understand that in a sense, the cost of doing business in China is that your suppliers do, yeah, take your skills and they supply them to somebody else, right? Right. And this is the reason why Apple was reticent about going there in the early two thousands. But in a sense, what they're able to get out of the country outweighs that concern. Um, but what the person said, I hope I'm getting this quote right, 'cause it's such a good quote, is what we realized is that people are copying us, they're copying what has shipped rather than what's about to ship. And so, especially in the years when Johnny Ive, the design studios redesigning the phones and coming out with something like the Infinity pool design. Yeah. Apple has this confidence in retrospect, I think we call it hubris, right? That they're gonna keep out innovating and so everybody's a step behind. Right.

I don't think we're in that stage anymore. No. I mean, whether it's the departure of Johnny Ive in 2019, whether it's the cumulative effect of having an operations guy instead of a product guy at the company. The iPhone 11 is not really much different from the iPhone 16. Right. Sure. We've now got 5G chips. The cameras are better. The bump is bigger, the battery is superior. TSMC has done a lot, but broadly speaking, if you have an iPhone 11 and I have a 16 pro, we are using the same apps. Right, right. It's not like I've got a purple bubble and you've got a blue one. Right?

Like we're using the same Spotify, the same audible, the same, whatever. Right. Um, the differences are pretty minimal at this stage.

Meanwhile, the Chinese, partly because Huawei in particular was sort of put a gun to the head by Trump Yeah. Is really innovating and they've got something to prove. Yeah. I mean, they're in the stage that Apple was in, in the first five years Steve Jobs has come back, you know?

Yeah. So Huawei is coming out with like the 21st century equivalent of the translucent iMac, right? Yes. So Huawei has the phone that I think is the only phone in the world right now that would cause you to Ooh and ahh and want to touch and feel it, which is the Trifold Mate XT. Yes. Right. Apple doesn't have a phone that folds once.

Right. Huawei has one that unfolds twice. Right. And when it unfolds, it's the same dimensions as a 10.2 inch iPad. Yep. But it's thinner than the iPad Pro, which Apple builds as its thinnest product ever. Yeah, I mean, it's kind of embarrassing to Apple, I would say.

Steve Hsu: I, I think if you follow tech in a more granular way, you realize Huawei is actually doing stuff that nobody else can do.

And so that the Trifold is an example of that. But, uh, they are a super impressive company across a lot of different, like they're, they're latest AI cluster, which competes directly with Blackwell, uh, actually has more compute power than the top Blackwell cluster than Nvidia cells. That just came out in the last couple months.

But they're, they're innovating in a number of different things, including in actually the, you know, semiconductor manufacturing, which Apple doesn't outsource to TSMC. Yes. But yeah, so Huawei's a very impressive company. It's insane.

And I think the thing that people here are sleeping on, uh, this doesn't affect Apple, but most Chinese phone makers are using Android. But now, um, Huawei has finally launched a mature Harmony os which you know, is both a laptop operating system, your, your TV's operating system and their phone's operating system. Yes. So, now there's a very slick ecosystem that doesn't even require one, uh, doesn't even rely on Western software to run on.

Patrick McGee: Yeah. I mean, so yeah. I mean, first of all, I think this is huge. Yeah. Secondly, I think it's only because Trump 1.0 went after them so hard. Yeah, exactly. They were just quite happy to use Android. It's open source. Why not? Yeah.

Steve Hsu: They would've been happy to use Android and Qualcomm chips. Yes. Which they weren't allowed to do.

Right.

Patrick McGee: Yeah. So it's sort of like it was a short-term gain. Yes. Long-term pain. Yes. Because, uh, necessity is the mother of invention. Yeah. And Huawei really had to burrow down to get all this done. Let me know what you think about this. This is my educated guess. Yeah. Harmony os is gonna become the operating system for Xiaomi and everybody else in China by 2030.

Steve Hsu: It could happen that way.

You know, it. I think those companies are themselves a little resistant to getting absorbed into the Huawei world. So, as you see them, some of those phone companies are experimenting with their own. Uh, you know, not very well known, but their own like tweaked Android, you know, uh, local localized operating system.

Patrick McGee: My suggestion is it's probably gonna be a political directive.

Steve Hsu: Yeah, exactly. That's what I was gonna say. They could be easily forced by the central government to say, Hey, everybody's gonna use Harmony OS now.

Patrick McGee: Yeah. Yeah. Yeah. I, that, that sounds to me like a near certainty fabric betting meant.

Steve Hsu: Which, which is not completely crazy because if the government sets it up in such a way that there is a standards body and inter interoperability rules, they can make Harmony os like a, a, a kind of more neutral platform Absolutely.

That everybody can play and not just Huawei's. Right. Uh, yeah. Under Huawei's. Yeah.

Patrick McGee: If we play that game of predict headlines for 2028, that is my, that is my, I agree

Steve Hsu: with you. Easy prediction. I, I

Patrick McGee: agree

Steve Hsu: with

Patrick McGee: you. Yeah.

Steve Hsu: Yeah.

So the, so the, you know, it's kind of a disaster. I mean, the. I'm in a lot of debates over the current chip war and the AI competition, and my contention is the recent sort of more Biden era chip war actually, um, you know, catalyzed, uh, huge advancements in, uh, Chinese domestic semiconductor manufacturing capability.

But the earlier case, which you're aware of, is what happened to Huawei already after Trump won. Yeah. And that, that we're now seeing the full, the full fruits of that now.

Patrick McGee: Yeah. Yeah. So this is way above my pay grade. But the other question is like, you know, is it smart to deprive the Chinese of A SML technology?

Yeah. Yeah. For the, for the, you know, the best chip.

Steve Hsu: I think it's mistaken if you're a shareholder of, you know, lamb research or applied materials or cadence, I mean, synopsis. There are all these companies which are, you know, within a few miles of where you and I are sitting right now. Are gonna lose 30, 40, 50% of their market.

Yeah. Due to this. 'cause the Chinese are never gonna go, come back. Right. Even if they lift the sanctions, they're gonna be like. There's just this tail risk I can't deal with, and my government doesn't want me to deal with that, so we're gonna go with the local providers of all this stuff now. Yeah. So I think it's, I think it's a disaster.

Patrick McGee: Yeah. Whereas I don't think the chips act, you know, in other words, sort of incentivizing fabrication of chips in America, right. That doesn't have the same No, not at all. Yeah.

Steve Hsu: I think strengthening ourselves should be the main, yeah, goal. Yeah. And, you know, sanctions are not gonna work in the long run. When your competitor has graduated almost 10 x as many stem uh students a year as you are. Yeah. It just, you can't, and, and they have enough, um, financial and infrastructure support for those people that they can be productive. Yeah. We just can't win. We can't prevail. And so it's just better for us to make ourselves as strong as we can.

Patrick McGee: And so I would love your perspective here, which is that, you know, some people are saying that not, again, I don't think you get this from the book. But some people think, uh, in an interview that I sound too anti-China.

Steve Hsu: I am actually, so just to be fair, I, I don't think you are anti-China, but I'm not. Yeah, I, not at all.

I, I actually, 'cause I, I'm sensitized to this, so when I listen to you, I'm like, yeah, this guy gets it. This guy understands both sides. But of course your interviewer is pushing you in a particular direction. Sure. They want you to say. Oh, Apple's really screwed now, what, how shortsighted are their executives to allow themselves to become hostages of the communist party?

Right. So they want you to kind of, and you're like.

Patrick McGee: Well, okay, well look, I think putting your eggs in one basket is a problem. Yes. Regardless of, you know, whether that basket is, is a, is a, is an ally or, or not, like it is a problem, for instance, that all of our chip production is in Taiwan. Yeah. Right. I love Taiwan.

Right, right. Taiwan's a great partner. Right. That's nevertheless an issue. Right. But you have to recognize China as the great adversary, or at least the great rival. I mean, let's not get hung up on China 's competitors. Competitor. I mean, yeah. So what have you, so, you know, I, I, I guess I'm only saying that we at least need to respond to Made in China 2025.

Yes. In other words, if China literally has a plan to be self-sufficient, sort of vertical integration at the national level of all these technologies. Yes. Well then we can't have so much dependence on that country because they're doing so for reasons that are, you know, to do with industrial policy and such.

Right now, look, I think it's wrong of the Trump administration to effectively want to adopt the same thing within the borders of the 50 states, right? I'm more in favor of the integrationist model wherein Apple has, or I'm sorry, America, but Apple. Has all these allies in India, in Mexico, et cetera. So I would love to see NAFTA on steroids.

Right. Rather than, you know, 25%, tariffs on auto, automotive parts. Right. Well, you're, you're not, and I wanna see more Chinese investment into America. Well, you're not BYD who wants to build cars in Pittsburgh. Great. You're not welcome in the White House with those views. Right now. Well, and look, I understand that politically it sounds like, or it can sound like you're talking outta both sides of your mouth to say, on the one hand, Patrick's saying, China's this great adversary.

On the other hand, he wants more Chinese factories in America. Yeah. That is my view. Yeah. But if you caricature, it sounds absurd. Yeah, but I don't think it is at all.

Steve Hsu: No, I don't think it's absurd. I, I, so I have the same view that they are a very formidable competitor and we have to take them seriously, which was actually a problem. It still kind of is a problem that still some people don't think they can innovate and so then they're, they're just taking them lightly. Yes.

But in the same way that we had a lot of technology, and in order for them to get it, they forced our companies to form JVs in their country, and that's how they got the technology. We can do the same thing. So, so one of the hopeful things I heard from Trump during the campaign was he said, look, if BYD builds a factory in the United States, and he didn't say this explicitly, but I, I, I, uh, interpret him to say, transfer some know-how and capabilities so that we can develop our own domestic ev com competition, then he's okay with them selling the cars. So it's sort of a turnabout. Yes. Right.

And that is part of strengthening ourselves. Because if they got ahead of us in something, how are we gonna get it? Well, one of the ways they're gonna get it is if you want to sell their stuff here. They have to allow suppliers to be here and our suppliers to catch up.

Yes. And all that tacit knowledge gets transferred back. Yeah. And that, that's the only way I see it happening actually.

Patrick McGee: I also just like the idea that investment isn't so asymmetric where you have any number of hardware companies in China, but you don't have a lot of Chinese companies in America. Right.

Um, so the more symmetry there is there. Right. I think there is less reason. Yeah. For, you know, you know, like what you don't want is entrepreneurs in China supporting the idea of going to war with America. Something like that. Exactly. If they're like, whoa, whoa, whoa. Hold back to every political cadre they speak with. Yeah. I think that's a net positive.

Steve Hsu: It, it's very interesting because the older, so you, you remember the era pre Xi, so if you were in China then, which is very open and freewheeling and it was sort of the Shanghai group that was in power, not, you know, the Xi clique, everybody was pro western. So the, the more highly educated, the person you talk to in any of these tier one cities, uh, or the richer they were, the more pro western they, they were. They were trying to get their kid into Harvard or, you know what I mean? Yeah. And they were like, oh, the best thing isn't an American product like the iPhone. Right. Huawei is some junkie.

But now it's very different. Young, if you talk to young technologists and founders in China, they're very nationalistic. They're like, well, these guys tried to fuck us, basically. Right? Like, they, oh, what was it fair what happened to Huawei? Did they actually kidnap the daughter of the Huawei founder in Yeah, yeah. The Canadian help.

Patrick McGee: Yeah. Great point to point out that I'm Canadian. Yeah, let's get that on the record.

Steve Hsu: But no, but I mean, just from their view, right?

Sure, absolutely. From their view, it's like, well, those guys, we got to a certain level and then they, they just started doing everything they could to keep us from climbing any higher. Yes. And so now a lot of the younger people, they're very nationalistic. Yes. And that, that's another bad outcome of, of, I mean, but you're right.

Patrick McGee: So different from the late two thousand where, so John Ford was the head of Apple retail in China for five years. Yes. And his sort of section ends with him saying, I see such a divide between the post 80 generation. Exactly, exactly. And the older generation, I'm unable to teach the older generation the skills.

They just have this blinders on mentality of you don't speak up because you might get, you know, some, in some sort of profit 'cause they remembered Mao. And the younger generation was just so open to ideas, open to experimentation, open to the west. So he just thought, well, look, Apple doesn't understand China all that well, but they're in good hands, as it were because the next generation is like the pro America generation. Yeah. And then it's like within months of him leaving Xi Jinping comes on board. Yeah. And really takes the country in a different direction.

Steve Hsu: Well, it's still true that, that a lot of the, there, I mean, it's, if you conditional on the other person you're talking to, like speaking English and you know, being somebody an FT reporter can talk to, they're very, they're much more likely than the average Chinese person to be like, anti Xi, why can't we go back to this open era that we just had?

Yeah. And, and so like. I don't blame Western journalists for having the impression that, oh, lots of Chinese don't like Xi for these reasons. Right. But it's also a little bit of a selection effect of who they can actually get in contact with.

Patrick McGee: Yeah, that makes sense.

Steve Hsu: And so, but over time, 'cause she's been in power now for over 10 years now you're getting kids coming up who like, oh, I just graduated from a top university in China, but I'm all about building China and these Americans are trying to fuck us. Yeah. That, that's, that's like a, a much more common view now than it was 10, 15 years ago.

Patrick McGee: Yeah. No, I mean, they would be able to, I mean, I could give them the evidence Yeah. That for, for that world view. Yeah.

Steve Hsu: Well, it's even, it's even like spoken out loud, you know, like, like Marco Rubio or whatever.

It's just saying it out loud like. Yeah, we're gonna keep them down as much as we can.

Patrick McGee: Yeah. So that sort of goes back to my other point that actually if some of those people are graduating from top universities and then they're helping setting up the BYD planted in Pittsburgh Exactly. Presumably they're gonna have more.

Absolutely. That's a good point. Relationships and, and that's net good. Absolutely. I mean, just in the same way that you had, I mean this is diminishing, especially 'cause Trump is accelerating. Its diminishment. But you had so many students from China go to top universities in China. Yeah. I'm sorry. Top universities in America.

Here. Here, we don't have so many students in America going over to China. No, it's a real problem. And that's really unfortunate. They speak our language. We don't speak that way.

Steve Hsu: Yeah. It's a real problem. Of course, like there's a lot of effort, like a lot of angry Chinese students are like, I had to learn English starting in, you know, fifth grade and it was horrible.

And I never, for most Chinese, I never use it. Right. So, but of course that's the cost of it. The benefit is, yeah, you actually have people in China to come here for grad school and function. I. You know, pretty well. Whereas there aren't people like that in the US who can go there, so yeah. Yeah, yeah. I mean, there are some, but they're just, so far, it's so rare. And it's actually, it's actually decreasing.

So, so the, the amount of Mandarin learning is just going like this, but, you know, AI might solve it because you might just have a little earbud that lets you. You know, universal translator.

Patrick McGee: I just wanna push back because on the one hand, yes. On the other hand, anyone who's learned another language realizes that you're learning so much more.

Then another language. Oh, I think you're learning another worldview. It's good for your brain. Yeah. I wouldn't be surprised if it helped your musical ability. Yeah. I mean, you're just like, I. Working so many neurons in your brain, it's just a net good thing.

Steve Hsu: Oh, I'm all for it. I'm all for it. But I, but I think there are a lot of like, 'cause in Asia, everyone is forced to learn English.

Right. And the ones who actually are able to benefit from it, they go to NYU for grad school or something.

Patrick McGee: Yeah.

Steve Hsu: Great for them. But they're, for every one of those guys, they're like 50 guys who are just like, I never used this. Right. And uh, boy, I had to drill, I had to memorize so many English vocabulary words.

Patrick McGee: But even if they never went to America, it becomes in a sense, the lingua franca between a Japanese, a, Korean, and Chinese. They're all meeting somewhere. It's, it's, it's, yeah. Yeah. It's weird. It's not like a Pan-Asian language that everyone can agree to speak.

Steve Hsu: When I'm in, like say Beijing and I'm giving a, like a theoretical physics lecture, I'm often embarrassed because like if I weren't in the room, they would all be talking to each other in Mandarin.

'cause my Mandarin's not good enough to discuss physics. Right. And so. I've, like this one person causes them to suddenly default to liking a totally different mode of communication, which is actually not as good as what they would be doing. Right? So I often feel a little like, oh my God, I'm putting all you guys into this other mode, which, yeah.

So that's really funny. Yeah.

So the time has flown by and I, I wanted to, I know you have another call you have to get on, so I want to keep, uh, uh, under an hour. You mentioned, there's a lot in your book that interviews never ask you about. Yeah. And so I wanna give you an opportunity to like, what's a hidden gem that's in your book that, uh, you haven't spoken about in any interviews?

Patrick McGee: The thing that people don't get if they only listen to interviews Yeah. Is just how character driven this 30 year narrative is. Yes. And it's characters that are really important and I can convince you of their importance in a paragraph or two.

Steve Hsu: Yeah.

Patrick McGee: But you have never heard of it. Yeah. So one of them, for instance, is Jackie Haynes.

Um, and I'm sure no listener is like, oh yeah, Jackie Haynes, right? But she worked with Tim Cook at three different companies from the 1980s onwards. She was one of the people that was always at the top 100 meeting. Um, so, you know, this is like a, a, a. You know, I think, I think we go to Santa Clara, like the top executives of Apple go to this retreat each year to discuss the big ideas. And she was there.

She retires in the late two thousands, but she's asked to come back after Steve Jobs has died and Tim Cook has become CEO, to lead supplier responsibility. So she goes to live in China and her goal, let's say, is to treat Chinese workers as clients. Mm-hmm. And she really wants to advocate for their reform.

She wants to advocate for, for better, uh, conditions. And it's like this 3000 word chapter of how, in retrospect, this is sort of naive and idealistic because what she's trying to do coincides with the operational demands of Apple culture. Yes. Which really prioritized just getting shit done. Yeah. Rather than treating everybody really well. And the, um, the first term, the second term transition of Xi Jinping, which really cracks down on civil society groups, right? Mm-hmm. So people clamoring for better wages, better labor rights, et cetera. Right? And so it's really this tragedy where Apple tries to make this big push. I think Tim Cook, to some extent, bets his legacy on this push. Yeah. And it doesn't end well there.

Steve Hsu: There's, you know, one of the ironic things of the recent eras, like the Communist Party cracking down on labor unions, trying to help workers like.

Patrick McGee: What? Yes. No, I mean, one of them that I, I take from the New York Times is a student activist saying like, we are Marxists. Yeah. We are taking what we learned. We were the real Marxist Yeah. In the Beijing school. Yeah. And they can't touch us. Yes. 'cause that's what we're advocating for. Yeah. Well, long story short, they are touched.

Steve Hsu: Yeah. Until they get a phone call and it's like, hey.

Patrick McGee: Yeah, exactly. So they, I mean, these groups have to go into hiding. Yes. Um, and, and sort of Apple is, is, uh, has to be a participant to some extent of that, right? I mean, they're just not able to expend political capital, right? Right. So it's a really interesting chapter and, you know, it's all, all this novel stuff.

Jackie was a supportive character who, unfortunately , has passed.

The other one is Isabel Gamma. She has been the head of Greater China since 2017, and she's never been profiled. There's sort of one piece when she first comes in, written by Forbes. But it doesn't really say much. And she tells one anecdote about being, you know, beckons by Steve Jobs directly to run the wireless division in 2008, which she runs from 2008 to 2017 before she's sort of sent off to China, but she's kind of sent off to China in a way that you'd be sent off to Siberia.

Yeah. Like people don't like working with her. She's difficult to work for. And at the same time, Apple needs someone that's Chinese and the fact that she's a woman doesn't hurt. Because they're doing this for optical reasons. Mm-hmm. They want to show China, look how important you are. Right. On our executive team website, we have one person, the only managing director in the entire company of 160,000 employees, and it's just for China. But my chapter about her is called the figurehead because 14,000 employees work for Apple in China, and virtually none of them actually report to her. Really? Okay. She doesn't have this strong role. I see.

And I'm able to back this up because I have a bunch of internal materials, including when Tim Cook is deposed and this lawsuit that's about Apple and China, and allegedly lying about Chinese sales, and he has asked, please name all your direct reports.

He doesn't name her.

Wow. Um, there are all these emails about slashing production, right. Revising Salesforce forecast. And a bunch of executives are on these emails and Isabel is not CC'd on them. I see.

And I don't get into the political dimension here. There's a very good chance that Apple knows China so well that it would be fearful of having, uh, the head of greater China on the executive team meeting every Monday.

I see. Right. That they would worry that she could be either not, I don't wanna say that she's an asset, but she's certainly a target. Yes. If you are in the CCP, yes, and you want a target. Yes. Um, she's very vulnerable to that position. Yes. Apple will be very wise to that. Right.

But I'm just, I guess my point is there is so much novel that's in this book, including thousands of pages I've discovered, I should say not thousands, though more than a thousand pages of material from a court case where the material was made public, but nobody ever discovered it. And I report on that. It includes internal assessments of Huawei as a competitive threat, you know, highly confidential, made by Apple, right. Um, and a whole host of other material. Tim Cook emails to the board, Tim Cook emails to his, his top deputies.

So there's a wealth of material, in addition to the 200 interviews I did. But there's characters like Isabel and Jackie who have never been profiled before, and they sort of fit right into my narrative in just like a sort of perfect place.

Steve Hsu: What was the most surprising thing you learned perhaps through these confidential documents?

Patrick McGee: Oh, uh, well that, so Apple is sued for allegedly lying about the state of Chinese demand, this was, they have an earnings call on November 1st, 2018, and they, in effect, they, Apple's very clever, they lead investors in the direction of China is fine. There's not particularly a quote that says that. It's just that when Tim Cook is asked, he does this subtle shift from the present tense, which is what he's asked about.

And he makes it about the past tense. Yes. But investors don't quite pick up on the distinction and it's this sort of, like, obfuscation that they're sued for. Right.

The documents make it very clear that for one to three weeks ahead of that earnings call, Apple knows full well that a phone called the iPhone 10R is not doing well in China.

Got it. Their internal forecast for the country is not that China is growing slowly, it's that it's shrinking. Mm-hmm. And they do not say that to investors. Mm-hmm. And the material, I think is damning because you have emails like Tim Cook telling his talk, deputies quote, this is a disaster. We need all hands on deck now.

Steve Hsu: Is that suit still ongoing?

Patrick McGee: No, it was settled last September. Apple paid $500 million and admitted no, uh, liability. Okay, got it. Uh, but that's just how the court system works. Yeah. I don't think that really tells you anything. Yeah. Um, in fact, the $500 million is what you should look at. Right.

Rather than the statement that they didn't, uh, do anything. Um, the other line is that, so this is Chapter 36 of the book, right? It's near the end and it's called Five Alarm Fire in quote marks. That's like fireman jargon for more than a hundred people that need it on the scene, right? And that is what a VP of sales refers to the entire situation as I see. Um, so again, before they speak to investors and make it seem like everything is fine.

So, I mean, I, I'm pointing to that because it's all novel, but it also points to a really, a real credibility problem at, at, at the top. And I think Apple's credibility has been shown to be wanting in the next, sorry, in the last 12 months in particular, where they've made promises about what sort of Apple intelligence would be their products for being sued for that, because it hasn't arrived. And that was a year ago, right? Yeah. WWDC is this week.

And the other one being that in court, you know, they were asked to, um, make a bunch of changes for how things can be paid for within the app store. And they did so, they followed the court order in such a way that the judge, um, has accused a VP at Apple of lying and is referring the case for, like, contempt of court.

Wow. Um, and, and, and said. Things like, quote unquote, Tim Cook chose poorly when she was able to look at the internal deliberations of how they should respond. So I think Apple has really taken a credibility hit, and I'm giving you those three trends. 'cause journalists like to have three, right? If you're gonna cause a pattern, right?

Yeah.

Steve Hsu: With your unparalleled depth of knowledge about Apple and Apple in China, do you wanna stay on this beat or do you wanna do something different now?

Patrick McGee: Great question. So if we were doing this interview five months ago, I would've said, everything I want to say about Apple is in the book. I'm gonna move on.

But there's always new stuff happening. Yeah. I mean, I didn't realize, well, A, I didn't realize that Trump was gonna become president and B, I didn't realize the degree to which he would attack Apple in particular. Yes. Right. I mean, it was in London a couple weeks ago when he literally tweets an iPhone specific tariff.

Yes. I mean, I've never heard of a company specific tariff, let alone a product specific tariff. Right. You of course try to expand it later and say that it's Samsung phones, et cetera as well. Uh, that just makes it, I mean, I guess I'm so wedded to the topic that I'm just ridiculously interested how this all goes.

Yeah. I really want to know if they can build, build, build in India and if they do, how Beijing responds. So how I'm going to cover it, I don't know. I'm sure the paperback is gonna have a new chapter and a nice new, uh, epilogue or something. Um, but yeah, I really went into the topic. It's totally fascinating

I think it's broadly speaking, not being covered well enough. I think too many Apple reporters are in what we used to call the reality distortion field, where what we're interested in is what Apple announcements are and what the next features are on its products. I'm much more interested in the sensitive underbelly of the company.

And like Apple as a political entity.

Steve Hsu: Yeah. Well, I mean, it's such a big entity and has such a big footprint on the world. It deserves a deep, his, like, I, I think your book is, it's like a PhD dissertation on Apple or Apple and China. And, uh, these, I think big, these big entities deserve that. It's, it, it, you know, like they're so important in the world that people should really dig in and try to understand what's going on.

Patrick McGee: The irony is that we've written for the last 10 years, all these stories about, oh, how, you know, the. GDP of Denmark doesn't equate to, you know, the market cap of apples. Yeah. And those are still silly, but what they reflect is the understanding that these entities really are huge. Yeah. And yet we haven't then done the next obvious thing.

Yes. Like if they are indeed as big as we think they are. Yeah. What are the political ramifications Yeah. Of a bunch of suppliers moving from one country to another. Yeah. And so it was sort of remarkable that the book hadn't already been written. Yeah. But I guess to sort of quickly get into my background before we end.

I covered, you know, Hong Kong, uh, for the FT for three years. And then I covered supply chains out of China, out of, sorry, Germany for the automotive industry. And then I covered Apple. And so that was really where the book came out of. Right, right. I'm connecting the dots backwards the way Steve Jobs used to talk about the China supply chain. Yeah. Apple. Yeah. And so that's where the book comes.

I guess, other reporters are probably just more devoted to the tech beat writ large rather than sort of wider ramifications. So, I guess that's how I got into it and, and maybe that's more unique than I had thought when I was, you know, pitching the book.

Steve Hsu: Right. Well, congratulations. I, I, you know, you're getting, your book is rightfully, I think getting a ton of attention right now. It was published at the right time. I think. Oh my god, the timing was extraordinary. The timing was great. And so I, I wish you all the best and uh, thanks for coming on the show.

Patrick McGee: Thanks, Stephen. I appreciate it.