Episode Transcript
[00:00:00] Speaker A: Apple's shipping more than 2 million products a day. I mean, a million iPhones a day made up or comprised of a thousand components a day means you're operating with a billion components a day. You're doing the logistics, the just in time manufacturing and the shipping. I don't know that there's any American companies that can keep up with that pace for any of the components, let alone the whole enchilada.
[00:00:28] Speaker B: So I want to welcome you to this week's episode of Movers and Maker, brought to you by Diagon. I'm Greg Smythe, one of the co founders, and I'm here with Will Drury, my co founder and CEO. With us today is Patrick McGee, who's the author of Apple in China. That talks a lot about the dynamics of Apple and its relationship with China, how it built its manufacturing base there, and we'll get into the details there as well. He's also a Financial Times reporter and really excited to have him on the podcast to talk about the both that Apple relationship in China, but also kind of the broader reshoring themes that are happening here in the U.S. so welcome. Patrick, thank you for taking some time to talk with us.
[00:01:07] Speaker A: My pleasure. Thanks, Greg. Thanks, Will.
[00:01:09] Speaker B: All right, I thought we could get started. I mean, I think the last two or three months has really been shaped by this broader, the geopolitical, the restart of the trade war with the current administration.
Maybe in this Apple context, you know, you kind of hear about Apple kind of maybe de risking China.
You know, the question, the way I have it framed here is maybe is it symbolic desourcing or dual sourcing away from China, or do you think there's like a material move from American companies? You know, maybe Apple is the tip of the spear of that. But how do you think the most recent trade war and maybe how it even ties to the original one with the previous administration as well?
[00:01:46] Speaker A: Yeah, there's a couple of things to unpack there. I mean, so the first iPhones started being produced in India back in 2017, and that was exclusively about tariffs, but it wasn't about Trump's tariffs tariffs. It was about Narendra Modi's tariffs. So Apple recognized that India is in a sense the next big middle class. Right? You could probably say the next China. And they think they had 1% market share in terms of iPhone. So obviously like a big market, man. I got some internal documents that called India a vast opportunity to exploit or a vast market to exploit. And so I think there was something like a 20, maybe 22% tariff on importing phones from China. And so Apple wanted to assemble the phones in India just to get escape from tariffs. I'm pointing that out because it's not a de risking story. It's not that Apple recognized oh, there's an authoritarian turn in China, we need to have a backup plan. It was solely to get over Narendra Modi's tariffs and the acceleration we've seen in the last couple years is mostly to get around Donald Trump's tariffs. I don't think you can really call that a de risking strategy that you're seeing more talk about Apple diversifying to other places. It's more just that India's got 1.5 billion people and importing the phones at a 20% rate isn't going to do anything good. So you want to assemble the phones in India. There's one caveat which is that Covid wasn't the major risk to Apple supply chain that people thought it was. If anything, I think Apple actually largely demonstrated the resilience of its China centric supply chain by doing so well. I mean yes there was problems and I think they had $30 billion of supply chain challenges over a four year period, but that's actually about 3% of revenue. So it wasn't some major hit. And in fact I think it's in 2021 that Apple re go up by something like 33%. So Covid helped Apple's stock price, let's say helped Apple's revenues more than it hurt it. However, in 2022, Shanghai goes into lockdown. Shanghai is the biggest place where Apple has labor demand in China. Some internal documents where the peak season each year they need more than 800,000 employees in Greater Shanghai for assembling their products.
And that was the first time that provincial officials, not Beijing per se, but had really implemented policies that demonstra hurted Apple's position. And that's when plan B we need to do more in India really got an acceleration. So you could say that's de risking from China, but I think it's more like a realization that maybe packing all our eggs in one basket is a bad idea. Again, slightly different from the narrative that we usually hear about which is that we need a backup plan because China is going in a belligerent direction.
So there's a couple things going on there, but I think so far is still mostly about assembly. And insofar as what Apple needs to do is build up the the depth and breadth of the entire supply chain in India, you know, all the way down to raw minerals, all the way down to circuit boards, et cetera, we're seeing that, but it's more hype than substance. It's not happening at a fast clip. Arguably, and you guys probably know this better than me, it can't happen at a fast clip. I mean, replicating China's industrial strength is a 10, 15, 20 year effort if it can be done at all. And then just to add one more complicating factor, if Apple becomes the poster child for Western corporate de risking from China, that is terrible for their image in China where they have a $70 billion business. And it's worth just slowing down and thinking about what a $70 billion business means. I mean, there are only about 12 businesses in China that have more than $10 billion of revenue. Apple is far and away the biggest and they're making 35, 40% margin. So in terms of profit, when I did the calculations a few years ago, Apple was more profitable than any of the China tech giants. So their business in China is absolutely enormous. It's not something that they can sort of like, you know, play fast and loose with. So if they make a radical acceleration to India, which is something like I would advocate, that actually hurts their retail business in China at the consumer level, let alone all the things that Beijing would be pissed off about as well. Sorry for the long answer, but hopefully that sort of sets the scene.
[00:05:43] Speaker C: No, it's a great answer actually. I would like to run with that thread for a little bit. I think that when people think about supply chains, they really tend to think about just the place where the production is being done, if they're, if they think about them at all.
You bring up a really interesting point in talking about the consumer market and the market of people who are actually going to be buying these things. I would argue that at the time when Apple decided to enter the Chinese market, there wasn't a massive consumer base that was ready and primed to spend 1500-2000 for a consumer electronics device. But because of, as a result of that influx of manufacturing, there was jobs, there was income, there were business opportunities for local mid size and large shops that created and kind of built this middle class that now is able to afford these products. Do you think that. I guess there are two parts to this question. The first part is how much should companies be thinking about the consumer base in the place where they, they are deciding to build their products?
And do you think that all of those things have to be true in order for them to enter a market to do the manufacturing in the first place.
[00:06:57] Speaker A: Let me answer the first question, which is just that I like that you're pointing to sort of rational things like a rising middle class in China, et cetera. But actually, it was irrational things that drove the original demand for the iPhone. So my favorite section of the book, I don't know that it's. Every reader's favorite section, is part four, and this is called Insatiable Demands. And it's about the birth of the iPhone. And as a product within China, totally unforeseen by Apple, nobody in Cupertino thought that they were going to sell lots of 5, $600 iPhones in China. I mean, the iPhone wasn't even available outside of America for the first year, and they only opened a store, as readers of the book will know, because of the Beijing Olympics in 2008, by 2010, it's going absolutely gangbusters. And the story is nuts because it involves, like, organized crime networks that are actually acting as the de facto distribution arm for the whole country. But what's happening is that people are like, you know, you've got people selling their kidneys to undergo, like, undergoing black market surgery to buy an iPhone. You got a postman, for instance, that Apple interviews where he spends 30% of his annual salary just to buy an iPhone. And he says, when people see me with the iPhone, I'm not just a mailman. I'm just pointing to the irrational thing, irrational exuberance that drove the demand. So for starters, I would just push back against the fact that I don't think Apple planned for it. It was success without really trying to quote a Time cover story From, I think, 2013 by Hannah beach of the New York Times.
So I don't know what lessons there are there because Apple itself didn't sort of have a great strategy and then implement it. The other thing is that it's actually Apple's success in China, going back to my previous answer, that makes moving so difficult. I mean, it is not so difficult for Dell a few years ago or Samsung a few years ago to have basically left their factories in China and manufacture somewhere else. Why? Because Dell never really had a big market in China. It's just never a market they cracked. Same thing with Microsoft. Microsoft was used all over China, but never in a pirated sense.
As far as I know, Microsoft revenue was never more than 2 or 3%. China and Samsung is a fascinating example where they did everything Beijing wanted them to do. They built dozens of joint ventures, they played the game just as Beijing saw fit, and in 2013, one out of every five phones sold in China was a Samsung device. By 2019, fewer than 1% of the phone sold in China was a Samsung device. So in a sense they played by the rules and suffered for it.
But what that meant is that when Samsung wanted to diversify, when they wanted to de risk, they did so without any big headwinds because there was no consumer base to upset. Right. So it's Apple's success in China that has created such a vulnerability. Right. So I feel like that's a counterintuitive answer than what you were going for. Right. Because in a certain sense the logic there might be, if you want to manufacture in China, maybe don't sell to the local base because that in a sense captures you. Hence the subtitle of my book.
[00:09:50] Speaker C: Yeah, that makes sense. That's the thing that locks you in.
So I spent several years working at Tesla. I was in the procurement team, so part of the supply chain, global supply chain group. And one of the things that was very much premeditated by Tesla was the size and scale of the Chinese market.
So before Tesla decided to open up a manufacturing facility in China, I think they were looking at the success that Apple had in not only building out their fact building out factories there, but also in selling to the Chinese market base and as an American product.
Similar. Exactly what you just mentioned. There's this irrationality of the economics where because it's a foreign brand, you're able to sell it at a premium and people will do anything to have it. And I think Tesla experienced that same thing when they first entered the Chinese market. Now fast forward several years later and they've got major problems with all of the competition that's popped up around them. But I will say that maybe it wasn't premeditated by Apple, but I think there are other brands that, that have thought about that as one of their factors, deciding factors for getting into a market like China.
[00:11:00] Speaker A: I have a small section on Tesla in the book and I think it's one of the most consequential sections. I mean, it is only maybe five pages, but it packs quite a bit. It might even be three pages, but it packs quite a bit in. And it's really that Tesla recognizes the opportunity to go into China, but it's all because Apple has just paved the way by essentially teaching the federal officials, you have no idea what our impact in the country is. We are up arming your entire supply chain through hundreds of factories by training them, by teaching them, by installing machinery and making them better. And the net result is that after they are done supplying us, once iPhone demand is sort of like, you know, gone through its season, they begin supplying Oppo, Vivo, Xiaomi, Huawei, et cetera. And an iPhone is, or I'm sorry, an EV is an iPhone on wheels. And so the idea was, why don't we have Tesla do the same thing for the EV sector? And so when Elon Musk comes calling and asks the mayor of Shanghai, I want to build a factory, I think we can do it in 24 months. You know, the mayor basically says, make it 12. Right. And they give them these land subsidies and all these reasons, incentives to make it happen, you know, on an even quicker timeline. And I think Tesla ends up playing this absolutely instrumental role. You know, in China this is sometimes called the catfish effect. Throwing a catfish into a pool of withering sardines. They will fight for their survival. And I disagree with this idea just because it makes it sound like it's indirect, as if Tesla played this inspirational role when in fact they adopted the Apple model, the Cook model, you could even say of training the suppliers, companies like Catl, companies like byd. And that has created a massive problem for Tesla. I actually think it's too early to know whether Tesla has of shot itself in the foot here or not. I mean, basically a criticism that I hear after people have read the book is it sounds like Apple had this hubristic sense that we will always stay multiple steps ahead of our Chinese competitors. And once jony I've leaves the company in 2019, Apple design doesn't really hold water. I mean, the iPhone 11 versus the iPhone 16 is pretty much the same phone. Like, yes, you've now got 5G technology, better cameras and better batteries, but that's true of any smartphone going over six generations. I don't think Apple's doing anything fancy or particularly special in design. And the Chinese are frankly, and they're taking advantage of that and they're looking better. And I think that's probably the same thing that Tesla's experiencing. When was the Model y out in 2016.
Great car. And yes, it's been tweaked in terms of the design, but if you're Chinese living in China, the world of opportunity, of design, you know, the latest Xiaomi SUVs and so forth, they're so new and appealing. I can completely understand anyone who thinks the Model Y. Certainly the Model 3 looks a little stale by comparison. So whether Tesla can keep up and has the brand image and maybe can get full self driving Release or whatever, maybe it ends up being a massive success story. I mean, to draw one parallel, maybe this is a little bit wonky, but Apple was panicking a little bit in 2010 because this is like when Steve Jobs declared thermonuclear war on Google for releasing Androids and sued Samsung and so forth. And it's because Apple market share of the iPhone, I think globally, was around 10% and Android was double. And within a few years, of course, Android ends up becoming 80% of the market. And so Apple's in this period where they haven't quite realized it's okay that we're not winning on volume because we are winning the richest quintile of people on the planet. And they end up having this crazy scenario where Apple 20% market share is the most that Apple ever reaches globally, but 80% share of the industry profits. Right. Find me another industry that's remotely comparable to that. It is possible.
Possible. I'm not optimistic about this, that Tesla is going through something similar where they're being overtaken by the likes of byd, but they're able to retain their profit margins and look good. I don't really foresee that happening, but I think that's the unwritten thing. We don't know yet. And maybe we'll look back in five years and say that, oh, Tesla actually out innovated, had a particular brand image and did really well. I wouldn't hold out much hope for that, but I think it's at least possible. And it's the same story with the humanoid robots, that maybe that's where they're able to sort of elevate their game and stay ahead of everybody else. But if they don't, then I think you would say hubris was probably the reason. Right. They think we can always outpace the Chinese competitors, but actually the innovation in design, let alone manufacturing on the China side is world leading at this point.
[00:15:34] Speaker B: Maybe just a tie in with some of my personal experience.
I was one of the first supply chain people in country when we built the factory in Shanghai. And I remember when that Elon said, I want cars rolling out of the factory before next Christmas, which was, I guess the Christmas of 2018, I think, if I remember right. I think I was there in the summer or maybe the Christmas or just in the December of 2017 and most of those things never come true. And it did. And there was cars rolling out of the factory before Christmas of the next year.
[00:16:06] Speaker A: Yeah. Wasn't it 10 months from like inception to.
[00:16:09] Speaker B: Yeah, like when I was There in December, they were like clearing dirt in December. There was bulldozers on site. I have a selfie in front of it. And then, you know. But in less than 12 months there was cars rolling out of the factory that were probably quantifiably better than the cars we were building in the US at the time. You talk about this transient workforce that was a big differentiator for Apple, but it feels like there's more to it than that, especially as like in maybe the 20s, 2000 and 20s or in current day. Why is that possible?
Is it lack of regulation? But it feels more than that. But what's your sense of why is it possible to do things like that where in honesty it feels sort of impossible or impractical to achieve those kind of things in the US or in the western world more broadly?
[00:16:56] Speaker A: So I'll answer. But first of all, I just want to hear more about your Tesla experience and what happened in those months, because that sort of sounds like it's Tesla's introduction to what Apple calls China speed.
I mean, I have these funny stories that didn't make the books. Maybe some of them did, but one of them was just like, you know, this is way back maybe in 2004, 2005, where Apple was sort of taking over this like football sized factory. It was full of equipment that they didn't need and they needed it all retooled and all set up for their own production lines. And so the Apple manufacturing design engineers estimated, okay, it'll take two to three weeks for all of this stuff to get moved out or whatever and then we can begin our work.
They show up the next morning and it's all done and it's just totally inexplicable to them. They don't understand how it's been done and yet there they are. I mean, it's like a magic trick has been pulled off. And that was just the sort of thing that was happening all the time. I mean, Apple engineers would call these OIC events things that happened only in China. And I think you're sort of pointing to a similar example where the entire factory is developed in a time speed that is just mind boggling because it's.
[00:17:58] Speaker B: Not like, because you kind of hear these, like these are these sort of ethical things why it doesn't happen. But I think it was much more like they weren't building worse car. Like the factory was, it was like a world class automated factory. And then I was actually more exposed to the supply chain. We were domesticating a lot of the Supply and like just the supplier at the time anyways, the Chinese EV market was like quite slow. So the supply base was very eager for more business, but also very eager. Tesla had a similar like brand appeal as Apple and so they were very eager to do business with those companies.
But also I worked on tool and die, so it's kind of this old school industry in the US that's largely been hollowed out. And actually one of the guys that works in our team talked about this meeting with the tool and die companies. They were phenomenal, but they had people with PhDs in tool and die and that they were just literally the best tool and die people. I've heard this Tim Cook analogy where he's like one of the reasons we work there is there's football field or football stadiums of industrial engineers there where there's like 50 in the US there's like 50,000 or 500,000 of these expertise. And like I think we experienced that directly where like they have these PhD level engineers that can turn out dyes. They have huge facilities that can do it and they really can do it in a very high quality, very fast way. It was incredible to see it unfold. And maybe the last thing I'll say is like it did feel like there was this invisible hand, you know, where you kind of tend to run into all these like roadblocks and building factories and doing these things. It was hard to see it like, but there was this, there was like an invisible hand of maybe the government or other things kind of influencing or pushing things to happen. And very. And it's because it wasn't just the factory, it's like the secondary supply chains that were feeding the factory that those dominoes were falling so quickly.
[00:19:43] Speaker A: Yeah. It's funny, I think it might be the visible hand, in other words, Beijing's industrial policy in the widest sense. So I mean in the narrow sense they would select certain industries and EVs was one of them, smartphones was another. But you know, made in China 2025 is nothing but, you know, a selection of particular industries the state wants to support through subsidies, through incentives, through allocating labor, etc. So that China can become world leading. But in the wider sense of industrial policy, you just had, you know, China wanting to attract foreign capital and you know, build baby, build. Right. So you know, I don't know exactly how this works out, but they don't have the same environmental standards, the same eminent domain standards and so forth. Right. If things need to be built, populations will be moved. I mean There are examples where hundreds of thousands of people are moved because a new industrial cluster needs to be set up. What's so difficult about that is we're not going to replicate that. Right. There are many things that China does well in terms of industrial policy that we should replicate. And for instance, I'm in favor of having a BYD factory in Ohio or in Pittsburgh or whatever and having the cars built here. I think that's actually faux pas in sort of current administration talk and so forth. And yet I think why wouldn't we want to sort of replicate some of the best things in Chinese industrial strategy and have it more symmetric? Right. It doesn't make sense that we've got all these companies manufacturing in China and China doesn't really have companies manufacturing here. I think more symmetry there would be fantastic. But there's other things that just we're not going to replicate. So getting back to your question about migrant labor, I mean, the number of people that have a rural registration, household registration called Hoku in China that go work in places like Suzhou or Shenzhen for temporary periods. And these temporary periods, to be clear, it can be like a university term, right? Like a four year thing before they go back. I mean, that's 350 million people. That is larger than the population of the United States. How are we going to compete with that? I mean, just to give one particular example, at a Pudong factory run by Pegatron, and this is 10 years ago, but I got the internal documents. So it's nice to have the standing state of people working on Apple products was 100,000 people, which is itself difficult to replicate. 25,000 people were leaving per month. Right. Their weekly attrition rate was nearly 6%. And the average duration of the workers there was about two months, 65 days. So they were having to hire 25,000 people a month just for the standing state. This is before a sort of September cycle when the iPhone goes on sale. We're just never going to do anything like that. Now I'm pretty pessimistic, therefore, about America's prospects to build iPhones sort of anytime soon or ever.
The possible solution is that, well, you just have to rebuild it in such a way, you have to redesign it in such a way that it doesn't require 400,000 people assembling the thing in what Apple calls iPhone City in Zhengzhou. So maybe there is a sort of like artificial intelligence, you know, smarter way of doing this that doesn't involve so much manual labor. But I think people are a little too sanguine about that prospect because for starters, redesigning the product so that it's quote unquote, designed for manufacturing is like totally antithetical to how Apple operates.
And secondly, even if you have this imaginary machine where you literally just put the inputs in and iPhones come out the other end of the factory, all those inputs are still being refined in China. Maybe the minerals are being mined in Africa, but they're doing so at the behest of Chinese companies.
So we still have enormous disadvantages in those respects. So in other words, even if you're thinking of a hypothetical of why not just automate this, fine, but, but the minerals, the machinery, the robotics, so much of that is still in China and it still involves some labor and the labor is probably a tenth of that of the rate in the U.S. so there's just enormous problems for doing any of this. I think that what I'm saying is interesting, but I don't know that I'm fully answering the question, so sort of take it back.
[00:23:31] Speaker C: I can take another crack at this question and then I've got another thread that I'd like to pull on. So in Greg's question or in his experience in building out and industrializing this supplier base in China, we got to experience what you described as China speed, where overnight you can bring in a labor force to build a highway or you know, clear out an entire industrial zone. And one of the things that always strikes me when, when I visit China is the amount of, of of surveillance, the amount of just kind of like government and corporate oversight on everything, keeping tabs on all the employees and citize where they're going, what they're doing, even to the extent that they've got like a citizenship score to some degree for citizens. And I've always been struck by the amount of trust that people have in both their government.
Maybe I'm speaking in generalities, I would love to get your perspective on this, but people that have the trust that the government is going to do the things that it says it's going to do, and people seem to trust that the government is going to do things that are in their long term best interest, you know, by clearing this field out over the course of the next 48 hours, we're going to build a factory that's going to employ like everyone for the next generation. So, you know, get there, do the thing and don't worry, we'll take care of you. I've always just been struck by that in China and juxtapositioning it that with the US and generally the amount of distrust that people tend to have for the government and for big corporations.
I'm curious how much you think that that factor plays into China. Speed and the willingness for people to seemingly just go along with things.
[00:25:17] Speaker A: That's fascinating. I think you have to give a nuanced answer which is that I mean certain policies where a village is basically moved in order to make way for something industrial. I mean that I want to be really clear that has all sorts of psychological damage and people fighting against it and they don't have the same rights that we have to fight back against it. So I don't think you can sort of ignore the individual, I don't know, suffering or what have you that takes place there. So I just want to be upfront about that. Yes, I think you're right in general in broad strokes about the Chinese trusting the government and seeing it as it's on their side. But this is also the same government that instituted the one child policy. And the more you learn about that, the more you recognize that it was probably the biggest state backed assault on women's rights in world history. And I'm sort of getting this from I was reading a book that hasn't come out yet, I believe it comes out next month called Breakneck by Dan Wang. And it's a really interesting book because it's not just a sort of history or viewpoint about China, it's in juxtaposition to America. It's sort of a way to draw in American readers, I think. But he contrasts America as the lawyerly society where a guy government bureaucrat essentially exists to put up roadblocks, to stop growth, to protect the environment. A bunch of initiatives that can all be positive, but the net impact is that we find it difficult to build stuff on any sort of good timescale. The other great book about this is Abundance by Ezra Klein and Derek Thompson. And he contrasts that with the engineering state where I forget the particular year, but in the early 21st century, all nine members, I believe, of the Politburo, the highest echelon of Chinese communist power. Power. We're all engineers by background. And so you have this engineering state where human rights and individual needs aren't really taken account of because the wider view is what gets prioritized. And there's obvious benefits to that. I mean there are clearly problems with it as well. But I think Dan's overall point is that America swung too much in the direction of the individual rights such that we can't even get stuff built Right. Or like I'm in San Francisco where I think a single public bathroom costs $1.7 million to make. I mean, it's just absolutely ridiculous. And then you've got the engineering state. And what I like about the book is it sounds very attractive if you're just looking at the industrial growth. And so the reason why I think, I'm guessing he introduces things like the one child policy is he wants to show you all the problems of the engineering state. Right. In other words, you wouldn't want to trade certain things to have engineers running the country because they don't prioritize certain things to do with human rights. So they would prioritize the net impact. You know, if everything's running on an Excel sheet, how do you put human rights on your Excel sheet? If you're just looking at numbers and margins, then it would just be grow, grow, grow.
[00:28:09] Speaker C: No, that's a good, that's a great, a great answer. I think that the thing that I'm getting from this is first, there's nuance in this idea that people just seem to go along with things. In China, while people might go along with it, that doesn't negate the human suffering. That is still a factor in the people that get impacted. And also, just the value systems are different. So you can value the rights of the individual in places like the US and most of Western Europe, or value the rights of the companies.
Both have their benefits. But there are also clear drawbacks, and those are really evident in looking at the way things operate.
[00:28:48] Speaker A: Yeah. Let me just add one other thing, which is that sometimes I associate this more with Republicans. That might be unfair, but someone like Senator Tom Cox Cotton will write a really nasty book about China. And basically what he's doing is he's taking like, American values and seeing how they work and live out in China and then just declaring the whole society corrupt and awful. And it's just like that's just a really poor way of looking at the society. China has different values. They're not therefore necessarily inferior or bad, but they're just different. And it's worth an honest assessment of how they work. And, you know, I don't know that you can have a fully trusted Gallup survey that takes place in China, for instance. Right. You got a state censored media landscape and so forth. But insofar as we have anecdotes and statistics coming out of China, I think trust levels are almost certainly higher. I mean, probably much, much higher than in America. And you have to understand why in this Sort of local deal, this is sort of cliche, is that we will give you growth. Right. This is sort of Beijing to its people and you won't complain about needing democracy and so forth. Right. And that has largely played out for four decades.
[00:29:54] Speaker B: My intuition is economic growth is worth a lot to people individually and when it's so visible, I mean from the outside it's visible and obvious or having visited there a handful of times. But that's my sense where it probably is worth the trade off as a society more wholly just seeing what's happened. I think you described it in the book and in the podcast about what Shenzhen was in the 80s was just like a bunch of fishing villages and then now it's a city bigger than New York City. It's just incredible. And I think experiencing that like there it probably is worth a lot of these trade offs where it's like those irrational decisions by society to say like, well it's working, it's working for my.
In one generation this has happened or in two generations you've seen this material economic boom that is probably in some ways, you know, is rationally worth some of these sacrifices.
[00:30:45] Speaker A: Yeah. I quote this Federal Reserve scholar Yi Wen, China Born wrote an amazing book about China and in a sense his big point is that what China has done in a matter of 30 to 40 years, you could call that a single Generation is compressed 200 years of industrial revolution. And it's the good and the bad. So if you just look at the bad stuff like the environmental impact and the carbon emissions and of course that looks awful. But if you're looking in the wider sense of industrial growth, then it just looks totally amazing. And the role of a journalist is to really look at, at all aspects. So I mean, sure, China has been, you know, the world leader in, in carbon emissions and so forth, but they're also becoming the world leader in solar panels and wind energy. I mean someone told me this the other day, I haven't rise out of.
[00:31:30] Speaker B: The, just the rise out of poverty, like the number. I think Bill Gates has this thing where it's like 100 million, 100 million people per month or something like that out of poverty for, for like you know, 20 years. It's, it's incredible.
[00:31:42] Speaker A: That wouldn't check out, but something close to that. Right.
[00:31:45] Speaker B: But it's some astonishing number. Yeah, yeah, yeah, yeah, yeah.
[00:31:48] Speaker A: It's a mind boggling number.
Sorry, I forget where I was going with that. But I think a proper journalist or anyone really looking at China has to look at the net Impact. So, so what I was comparing was carbon emissions. But China is also becoming a world leader in solar panels. I mean, they're already the world leader in solar panels. Someone told me they're creating 150 nuclear reactors right now, which again, can have all sorts of negative impacts. But if you want a zero carbon energy, they're doing amazing.
[00:32:15] Speaker B: They're like electron batteries as well.
[00:32:17] Speaker A: So China's a really nuanced country and a much, much bigger country than America. So insofar as you can just have a broad brushed but useless stroke opinion about America writ large, and any American would just say, well, that's simplistic and stupid. I think we're too liable of making the same sort of statements about China, which is even more nuanced in a larger country. And so you really have to do both. And I'm only doing it for the very limited world of industrial manufacturing. I mean, I mean, sometimes I'm then asked, like, to make predictions about China five years from now. It's like I know, like one tiny little thing and then there's like entire economies that I don't know anything about, like the construction sector, which is even larger than the manufacturing sector in China. And so it's difficult for me or really anyone to make big guesses about what's going to happen in five or 10 years.
[00:33:01] Speaker C: Yeah, that totally makes sense to me. You know, this topic has come up a lot throughout the course of the conversation, but I think manufacturing workforce and labor force comes up a lot when we think about what an economy is capable of. With China, there's just such a large population of people that can do the operator jobs, and now many of them have worked their way into these highly skilled kind of management positions. At one point you were comparing the workforce to the size of the entire labor force of the state of California, and it's just eclipses the entire number.
I think it was like 28 million people working within the supply chain of the iPhone or something like that. We've talked a little bit offline about humanoid robots and the role that people think they might play in the future of production and whether or not they're going to be a potential saving grace for the American manufacturing industrial base. I tend to be very cynical about humanoid robots and their ability to kind of take on these types of roles. But I'd be curious to get your perspective on humanoids. Do you see them as a potential solve? The Chinese manufacturers seem to be investing a lot in humanoids as well. And so I think anytime you see a High concentration of companies building in one particular space or product category. There's probably something to it that maybe I just don't get. I would love to understand kind of where you think humanoids fit in into this economy.
[00:34:35] Speaker A: So let me just add to your cynical take. So for starters, I'll just say I'm agnostic as to whether or not there will be a factory line of humanoid robots on any production line in five or 10 years. I've seen some of the robots. I'm trying to think of what the company is up in Oregon that does this and has some former Apple people building it for them. You know what I'm talking about, Digit.
[00:34:53] Speaker B: Maybe, I don't know. That company figure was the one that came to mind, but I'm not familiar with the one.
[00:34:58] Speaker A: I'm thinking of Digit. But it's possible the name of the robot is Digit rather than the company. If you find it, it's up Oregon. I think it's near Nike. But let's just say that that comes to fruition and that they can work factory jobs in 10 years, these humanoid robots. I don't know what the logical leap there is that that's going to somehow save American industrialization because the country that's a probably going to make them in more sort of quality and quantity than anybody else will be China. I mean, that sounds almost, I don't know what the counterargument to that would be.
Right. I mean, they've just got the supply chain, industrial clusters to do it at a far better rate than we can. And the company with the sort of like almost moral imperative to do it at scale is again China because they're facing this demographic time bomb related to the one child policy, right? So like I'm sure you're both familiar with the, with the cliched phrase China's going to grow old before it grows rich. Right. And it's because there's this understanding that I believe China's, you know, what's the figure called?
The rate of procreation. The thing that gets like 2.1 is your rate is sustainable. Replacement rate, Replacement rate. I believe China's is actually lower than Japan's right now. Japan's has been sort of very low for years, if not decades. So in other words, insofar as Apple, or sorry, insofar as China is going to continue leading quality manufacturing around, you know, for global distribution, if they don't have workers because of the one child policy in effect, they're going to need robots in a way that American society Because it's not much of a manufacturer actually doesn't like it's cool if we can build it and they could be used at select places, but we don't have 15% or what have you of our GDP based in manufacturing the way that China does. So in other words, for technology reasons and for sort of like moral imperative reasons, I would give both sort of like points or whatever to China in terms of who's going to lead in that field. So I would love the counterargument if one of you wants to tell me what I'm missing as to why robots are the answer for American re industrialization. But I don't see it.
[00:37:06] Speaker B: Maybe I'm more, maybe less about the US I think I'm more bullish that the technology like the generalized. I think I've seen I give it to maybe a couple of opinions. One is that I think we're starting to see the diminishing returns of, of current automation. That it's still like, it's still a big issue. Automating, building automated systems to build cars and other things. It's still very hard and complicated. And I think there is a huge space. I was still shocked when I would go to the Fremont factory every day and there was 10,000 people or something like that that worked there, you know, across various shifts and things like that. It just blew my mind. People like just taking a part out of a box and putting it into a line or you know, driving a forklift and these kind of things that there's still, you know, you don't need to have. They call these lights off factories but there's still huge amounts of optimization that could go into this and places for generalized human experiences that I think could be a huge opportunity. And I think the other nuance to it is like the, I've heard some anecdotal numbers that the Tesla engineering team on Optimus, that the biggest team is the hands. They have like hundreds of engineers working on the hand design. And so like a big part of like I think what you describe in the, the automation portion is really just people taking small parts and putting them on a circuit board and like maybe you need to redesign the whole phone or maybe you can build in 5 or 10 years with like amazing AI and advances in robotics, like very dexterous hands that can do that kind of work without having to change the existing system. And I think you see Elon's approach to full self driving and Optimus is like the whole world is built for humans and you can rebuild the whole world or you can build a robot that can do the thing like humans could do it. And I think I'm optimistic with the trajectory of the way things are heading, that technology will start to converge. Maybe not in the next two or three years, but maybe in the next five or ten.
[00:39:03] Speaker A: So I agree with all that and I want to see that. But what Will and I were talking about offline is I sent him this story from the Wall Street Journal just the other day and I'll just read a little bit from it. Engineers from Chinese suppliers have worked overtime with optimus engineers to complete designs. The suppliers efficiency have enabled Tesla to cut costs for some components so dramatically that the company didn't bother bother suspending shipments, even after Washington imposed hefty tariffs on Chinese imports. The people said. Now the reason why I'm quoting that is that it sounds to me like Tesla in China, right? To sort of paraphrase my own title, in other words, the trajectory of my book is that for a number of reasons, really the second and third order impact of Jony I've and Steve Jobs having this like aesthetic redesign of the personal computer and then wanted to make the ipod and then wanted to make the iPhone. China just becomes the answer, the place to do all of this stuff. But the sort of unforeseen consequence, the thing you can't put in an Excel sheet is sort of accidentally up arming America's biggest rival in how to actually do this stuff at scale.
Right? So so many books about Apple are all about the design, the product conception and we're just missing that the thing that we know about Steve Jobs sort of yelling and belittling and bullying people, but having an impact such that everyone's sort of, you know, competency is raised. Right? We're familiar with that. And somehow we've missed the narrative that that happened across an entire country where you were actually building this, that they raised the competency of hundreds of factories and the numbers are staggering in terms of how many people they trained and how much they invested in the people to get this all done. And so what I'm pointing to is the article here is it sounds like a hell of a lot of optimist production and design work is being done in China.
So maybe this works out really well for Tesla. I don't know that it works out well for the United States industrial production because the more that Tesla is probably comparing what's going on in the US versus China, the better China is going to look. So the more they're going to move there. But the more they do that, the more the suppliers then use that knowledge to supply the Chinese equivalents of Optimus. And then the question is, to what extent can Tesla remain ahead?
So it just sounds like a microcosm of my whole argument, but instead of 30 years, maybe it's going to happen in five or 10 years and it's looking ahead. So it looks myopic on the part of Elon Musk. From my narrow perspective.
[00:41:25] Speaker C: Yeah, I tend to agree with you. My criticisms of humanoid robots, I think also have more to do with the functionality of the robots and the form factor of. Of the robots. I think all of those things are really the minutiae. When you start to think about, like, are they even going to be, Are they going to be required? If so, where are we going to make them? And if we end up in a world where all we're doing is importing tens of thousands of robots per year from China to do manufacturing in the US that to me also still feels like a losing game and not one that I think will be tenable to the American people, public sentiment and politicians who very much want to invest in manufacturing jobs so that they can bring jobs and economic stimulus to their constituents.
[00:42:16] Speaker A: The other thing I don't know about humanoid robots is I think it was Greg's point, or maybe it was Will's point, I don't remember. But one of you said that so many engineers were working on the hands. Right, because you brought the dexterity of those trivial tasks or those, maybe I shouldn't say trivial, the minutiae or whatever of circuit boards and stuff. It's not clear to me that those hands need to be attached to a biped that wanders around.
Why is the human somehow the ideal form factor of a factory worker? That strikes me as a weird failure of imagination.
[00:42:48] Speaker B: Yeah, I think there's something to that as well.
I want to be mindful of time, and this is probably a very long topic, but I've kind of used this term that re industrialization of the US Needs a rebrand. I kind of have this image of like the 1940s factory or where the Model T was made, that we want to bring those factories back. But I wonder, can you paint the picture? What do you imagine when you picture the US re industrializing, reshoring, manufacturing? What does that look like for you?
[00:43:18] Speaker A: That's a great question. To some extent, I like that we've talked about Elon Musk's companies a couple times, because if I have reason for optimism, it's that Tesla has Been this wild success story. I mean it was as recently, I think as 2016, that there was a certain story on Bloomberg about Tesla. And when you went to the top of the screen, you guys were probably both there at the time. You might remember this. It showed the level of cash that Tesla was burning as you read the article. So depending on the speed of your article, Tesla had burnt through $16 million or whatever. Right. And there used to be, it would.
[00:43:52] Speaker C: Have been a lot of cash.
[00:43:53] Speaker A: Do you remember that? Yeah, exactly. I mean I'm making up the number. I have no idea how much it was.
Maybe 16 million indicates that I'm a fast reader or a slow reader, I'm not sure. And there used to be Tesla Death Watch. I mean Tesla, correct me if I'm wrong, was the first automotive IPO since the 1930s, I think. I mean nobody expected it to be successful.
[00:44:12] Speaker B: We lived that. We were there. Elon's talked Openly about in 17 and 18 about Tesla being very near bankruptcy and what the experience was like inside the company.
There was very many days or months that we didn't think we'd make it through the Model 3 launch and, and it was very perilous. Although it's successful kind of in hindsight, it was very close. You talked about Apple kind of almost coming not to existence when Steve Jobs returned and hiring a Chapter 11 lawyer.
I think Tesla went through it similar to Death Valley and came very close to that as well.
[00:44:45] Speaker A: And it's funny is on the one hand you would point to Tesla as a story of okay, America can innovate and not just do the designs, but build. And that's a real success story. And maybe we can come back to SpaceX because I think it's the same story on steroids. However, you couldn't really apply it to the EV sector. I mean, any number of companies following Tesla, you know, I'm thinking of Canoo. There's so many Rivian's, pretty successful, but not in the same league as Tesla. But there's so many companies where you'd think coming 10 years after Tesla, where you sort of already know what paths to take in terms of supercharger network rather than replacing batteries, building the mass appeal because Tesla's already there. I mean none of them have really been successful. There's just so many failures and it's affecting so many failures in China as well. So even though Tesla is an impressive example, the wider sector of EVs somehow kind of isn't all that impressive. Right? I mean, I covered the German OEMs from Frankfurt for three years. And frankly, I'm stunned by their inability to compete with Tesla and to build their own sort of world dominating EVs. I mean, 2025, when I was writing back in 2018, felt really far away. And I think Volkswagen back then was Talking about having 50 different EV models across their whole lineup, from Porsche and Audi to, to Volkswagen and all these other brands that they have. I mean, maybe some of a bunch of those do exist. I don't know that it's 50, but they're not doing them in impressive volumes. And Volkswagen's never come out with a product that I'm wanting to go buy. So it's sort of sad how slow this has been. And in the interim, Shanghai Auto show, you know, basically has been shocking the world since 2023 with everything that's coming out of China. So I'm not left with all that much optimism. But anyway, The Musk companies, SpaceX and Tesla give me a sense that a lot more is possible here than I would have maybe suspected. And you guys lived with this experience, so you know this better than me. So it's sort of silly for me to talk about it rather than you guys. The difference probably is scale. I mean, as impressive as Tesla is, I think they build about 2 million cars a year.
And let's just leave aside that a million of them are built in China. 2 million a year is. That's sort of nothing compared to Apple where you're building or shipping in a good day, Apple's shipping more than 2 million products a day. Now granted, I'm counting AirPods and AirTags and these aren't as complex as a Tesla. But just to give the listener a sense of just how large Apple is, I mean, a million iPhones a day made up or comprised of a thousand components a day means you're operating with a billion components a day. You're doing the logistics, the just in time manufacturing and the shipping. I don't know that there's any American companies that can keep up with that pace for any of the components, let alone the whole enchilada.
[00:47:31] Speaker B: Well, I think I share your optimism though, that like maybe consumer electronics is an exceptionally hard thing because of the supply chains and intricacies of it. But you know, I do think Tesla and SpaceX has proven that you can build like highly automated modern factories in current day and have them be at least economically viable or profitable.
You know, do that both in California and in Texas, I think is no small feat. Even starlink, I think, is Being built in a factory and you know, I think in Texas somewhere. And so it is great that it's proven that there's some ability to do it. Whether it's scalable across other industries is questionable or not but it's still great that he's proving that. I think Tesla's still in the US made car measurements, you know, compared to Ford and GM is still like the most American made cars although it doesn't have that public perception a lot of the time.
[00:48:20] Speaker A: Time.
[00:48:21] Speaker C: So Patrick, one of the things that I think was just an outstanding statistic in the book was this figure of Apple investing roughly $55 billion per year into the Chinese market covering things like manufacturing capex construction costs, the amount of money that's being paid in wages to these factory workers.
And when I think about that I just find that number staggering and awe inspiring in some ways because we've seen over the last few years lots of different types of stimulus packages. We had the Inflation Reduction act that was really aimed at putting stimulus money into the battery industry and other kind of clean renewable energy industries. We've seen the Chips and Science act that was really focused on building more semiconductor capacity in the US and the amount of money that we're looking at in investment from Apple, presumably backed by Apple investors and really the consumers of the product because Apple wasn't operating as just a venture backed company just waiting to raise its next round of capital. At the end of the day a lot of these dollars are just being funded by customers. I'm curious to hear your perspective on where do we find that next growth engine over the next decade. When we think about where are there going to be massive quantities of funding moving to build infrastructure for products that are going to power the next generation. It could be consumer electronics, it could be something entirely different. I would just love to hear from you. Where are some places that you think there are some reason to be optimistic about about what's being funded and how it's being built?
[00:50:09] Speaker A: I mean the shortest answer is I have no idea. Maybe the more compelling answer is that I like that Jony I've and Sam Altman are getting together to make like a AI first hardware device and the question that doesn't get asked is well who's going to make it and where is it going to be built? And that would be fascinating to figure out what the case is. I mean I'm not optimistic that they're going to build it in America but what makes building iPhones in America so difficult is, I mean the quality Absolutely. The cost. Absolutely. You know, at that margin. Absolutely. But it's the quantity. I mean, it's 230 million iPhones a year. How do you build that anywhere else when you've got all these industrial clusters that have been doing it in a sense since 2007, where it's not just that you have the competent suppliers, you have competition to all of those competent suppliers. Right. You have sort of like, you know, three suppliers for every component that are vying for the contract year in, year out. I mean, that's just so difficult to replicate. And the Trump administration seems to have just zero understanding of how difficult it would be to transplant that over.
So, you know, Jony, I've and Sam Altman, when they're building something, they're building it in prototype stage. Right. They don't have the same problem, obviously. They have the same problem in terms of a lot of the components aren't going to be made here and so forth. But it strikes me that given the sort of funding that they have and the brand name recognition that those two people have, you know, everything on my desk essentially is designed in some way, shape or form by jony. I've. And ChatGPT has continually surprised the hell out of me over the last two, three years. So I don't know what they're going to build and I don't know why it would sort of divert the need for me to have an iPhone in my pocket that I look at four hours a day if I'm the median person.
But I'm hoping that they have some amazing vision and that they decide maybe not to build it in America because there's a whole reason why they can't do that, but maybe that they're de risking in some way. Maybe it's built with NAFTA or what used to be called nafta. Maybe it's built in India, maybe it's just built in Taiwan. But I would be pretty disheartened to hear that they decided to just use Foxconn, let's say, or worse, luxshare. I say worse just in the sense of the deep consolidation to China and the companies in particular that are called the red supply chain, that have this sort of political capital and whatnot with the local and federal officials in China. So you're asking for an optimistic answer, and I don't know that I'm giving you one, but it's way above my pay grade to sort of forecast what the next great consumer electronics are or whatever. I would say when I sort of sort of Think about the next generation of kids. If you're 4, 5, 6, 7 years old right now, are you going to have a smartphone when you go off to college? I mean, maybe it's just a failure of my imagination, but yeah, I think so. You might very well have some glasses that augment your phone or whatever. But the form factor of a little electronic device that has the next generation of TSMC chips within it and has a screen and is your communication device and every other thing that we all do for it. I don't need to give you a list that's a hard thing to beat. I don't know why going around your collar or whatever is somehow going to be some revolution. Even if there's a great hardware device that gives you access to, you know, next generation AI or whatever, the chips are always going to be faster in an iPhone. So whatever product you come out with, it's probably going to work better in the 6 inch glowing rectangle in your pocket or purse than anything else that can come out with. So I'm not all that optimistic about it.
I don't know. Sorry, did that answer the question?
I want to end this conversation with a call to arms and some great optimistic thing, but it's up to the decision makers. It's not up to journalists, it's up to what you guys are doing with Diagon and it's up to Jony, I've and Sam Altman to make a decision that we're going to be successful and we're going to do it in America.
[00:53:43] Speaker C: Yeah, I think that it's a great answer. To be honest.
We don't need an optimistic answer. I think we need realistic answers.
So really our mandate with within our company is to equip the factories of the future to build the products of the future. And I like this, the imaginative journey that you took us on just thinking about this next generation of kids, when they go off to college, what are they going to use? I know when I was growing up my parents thought like, oh, okay, every kid's going to need a PC. And then maybe as I got into high school they were thinking it's a laptop. And by the time we all got there, the iPhone was really just coming into the fold and it was a new way to experience the breadth and knowledge of the entire Internet on a glowing rectangle as you describe it. I think that going into this next generation of AI powered products, we're going to experience AI in new ways on physical products. And that's going to be something that I think will just be hard for us to imagine as it is today. I think, yes, it'll still be powered by, you know, high powered semiconductor chips that have to be manufactured somewhere. And it stands to reason that it's likely going to be companies that already have that expertise to be able to build them. But I also think there are going to be some really exciting things that happen at massive scale when it comes to data centers that are going to be powering all that compute on the cloud. Somewhere in your backyard, the cloud is a data center somewhere. At the end of the day, I think that there are going to be lots of things happening in the world of electricity generation. When we look at this next wave of nuclear power facilities coming into the fold, that's something that also gets me excited. I think there are reasons to be excited and optimistic, but I'm also really just thinking very realistically about where will the next wave of productive assets need to be funded? What are those things going to be and how do they get funded? I don't think that we can rely exclusively on venture capital without eventually thinking about what's the payoff going to be, who's the paying customer going to be. I think the American consumers to a large degree have funded the consumer electronics industry by going out and buying Apple products. I'm guilty myself as well, but I'm really just, I don't know, very curiously going to be observing and watching where this industry heads because I think there is room for, there is room for lots of surprises over the next decade. So I'm going to hand it over to you to get the final word.
[00:56:22] Speaker A: I thought that was a good conclusion. I don't know that I have anything sort of better to say other than, you know, like the conclusion of my book is just really cementing the idea that Apple does not have a plan B. That even if you think about them manufacturing in Vietnam or India, everything they're doing is still as dependent on the China centric supply chain than anybody else. It's up to the reader to decide whether or not that's actually a problem. I mean, if you look back at the last 25 years, it really has been the golden age where America focuses on design and China manufactures and ships it. I mean, that's, that's actually pretty brilliant for all parties involved. But for reasons that you can't begrudge the Chinese for, they don't want to be held in the low volume, in the lower value add part of the equation. The smiling curve of product development. If the listener is familiar and so the likes of Huawei and Xiaomi have really moved up. And so they're not just competing or they're not just doing the manufacturing, they're competing on industrial design. There is like the next Jony I've is Chinese. I mean, right, for sure. They're doing the product design, they're doing the manufacturing design, all in China. And so the risk is just that. Not that the golden age continues. That would be okay in numerous respects. The risk is that Chinese companies begin to just squeeze out American competitors. And that's obviously the risk for Tesla right now. Certainly the risk of Apple in China, I don't know about. Globally, it's not really the risk in the U.S. but you know, China already dominates markets in terms of smartphones for India, for Russia, for Indonesia, a whole host of nations. So I guess I'm just trying to bring that up because I think some people don't really realize, like, what the issue is that I'm focusing on. So Apple made a bunch of investments in China and my iPhone comes from China. Well, whatever works pretty well. That seems fine.
That's fair. But the question is, in 2030, 2035, 2040, I don't know that Apple still has those relationships. I mean, Apple's at a stage where the student has become the master. I don't know that they have a lot to teach the Chinese in terms of how to build the next product. I think Tesla's probably experiencing the same thing in China. And if that's the case, are we just losing out on those industries and we're just all going more and more into the service sector? That's worrying to me. And the prescient essay from 2010 by Andy Grove is really worth a read that he really talks about.
If we're not doing anything on the shop floor, we're missing out on whole facets of innovation because so much comes from doing stuff. And that's really been the value, I think, of Tesla and SpaceX over the last 20 years, right. That you've got a bunch of people with experience, like you guys, who know how to actually do stuff, build stuff, work with your hands, carry on with the logistics and so forth. And the idea that we just outsourced all of that because we've devalued it. We don't care about manufacturing at a sort of cultural level, maybe even an engineering level. That strikes me as a. As massively risky.
[00:59:08] Speaker B: All right, I think we could probably talk for another two hours, but.
[00:59:13] Speaker A: I.
[00:59:13] Speaker B: Think we've probably opened up more threads that we can close maybe at a later date, But I think this is a wonderful conversation and appreciate both your time and input and expertise. Patrick and so I want to say thank you and thanks from Will and I and we'll kind of close things out from here, but all the best. And check us out at our next Movers and Makers event or podcast that.
