How China Tricked Apple

shipping delays worker protests andmassive political pressure to pull outof China this is the frustrating realityfor Apple which has had so many problemswith its manufacturing that their CEOTim Cook is now getting publiclyaccosted by reporters do you think it'sproblematic to do business with theCommunist Chinese party when theysuppress human rights China'smanufacturing capabilities have beenhave the largest companies but that samemanufacturing strength has now turnedinto a cancerous dependency and it's putApple into an impossible situation tounderstand why Apple has becomecompletely dependent on Chinesemanufacturing we have to ask thefollowing question what made China soappealing to Apple Executives in thefirst placein the 1990s Apple manufactured most oftheir products in the United States thatchanged when Tim Cook joined the companycook started at Apple in March of 1998as a senior vice president for worldwideoperations right off the bat Steve Jobsneeded him to solve an important problemApple was just about to launch the firstiMac it was the first big release forApple since Steve Jobs had returned tothe company after 11 years away he wasconfident it would be a hit so he neededassurance that Apple could fulfillhundreds of thousands of holiday ordersTim Cook's solution was to call up AirFreight suppliers and pre-purchase ahundred million dollars worth ofshipments in advance this was a hugegamble if the iMac launch went poorlyApple would lose tons of money on theseprepaid shipping fees Tim Cook certainlywouldn't be the CEO today Steve Jobsprobably would have fired him and Cook'sbet paid off in a big way the iMac was ahuge success and apple was one of theonly computer manufacturers that couldfulfill every order of that holidayseason this early move made Tim Cook ahero in the eyes of Steve Jobs afteryears of struggling to scale Supplychains Apple finally had someone withthe competence and risk appetite toreally grow the business cook developeda reputation for ruthlessness callinginventory fundamentally evil and workingtirelessly to squeeze more and moreefficiency out of Apple's supply chainfor years cook optimized Apple'sdomestic operations but over time thingschanged for one thing products gotsmaller and required more specializedmanufacturing the other thing which cookquickly realized is that Apple wasstarting to pull away from its Rivalswhen he joined the company only aboutthree percent of people used Appleproducts but the iPod was a runawaysuccess selling tens of millions ofunits every year Apple needed to presshome this Advantage it had built up butto do that it needed to massively scaleup its Supply chains that's when Chinacame into the picture[Music]thank you for coming we're going to makesome history together today is the 2007Australian Open championwhatwe are calling it iPhone the first womanspeaker in our history Nancy PelosiI ingested my ancestor yesthe iPhone was just about to be releasedin stores and Steve Jobs noticed a bigproblem he had been carrying a prototypeiPhone in his pocket and the screen wasgetting scratched so we called a meetinghe took his phone out of his pocket andthen he pulled out his keys this wasgoing to be a normal user experience hepointed out everyone was going to becarrying their phone with their keys sothe screen couldn't be made of plasticjobs told his Executives that hewouldn't sell a product that got easilyscratched he wanted a glass screen andhe wanted it perfect in six weeks Ican't it was a Herculean task one whichmost supply chain experts thought wouldbe impossible but companies like applethrive on achieving the impossible so anapple executive booked a flight toShenzhen and told the plant to startworking the factory immediately directed8 000 workers to replace the screensthey worked 12 hour shifts to get itdone but within a few days the plant wasproducing over 10 000 iPhones with glassscreens per day that hard work was worthit helped by China's manufacturingcapacity the iPhone went on to becomebecome the best selling product inhistory this ability to mobilize massiveamounts of human labor is what makesChina so important to Apple andthousands of other companies wages inChina are much lower than in America butthe equation that companies like applemust solve when considering where tomanufacture their products is much morecomplicatedManufacturing in China isn't always agood decision for American companieslots of inexperienced entrepreneurs havebeen burned by shoddy Chinesemanufacturers who over promise and thenunder deliver people often joke aboutChinese manufacturers offering what'scalled a 50 50 partnership where theAmerican company loses half their moneyin the first year and then the otherhalf in the second year how does thiskeep happening time and time again theanswer is that Chinese manufacturershave a playbook for tricking Americancompanies into over committing it goessomething like this let's say you'rerunning a company that makes coffee cupsyou've been manufacturing them inAmerica but you simply can't keep upwith the competition anymore it seemslike every other brand is able to slashtheir prices and still make a decentprofit margin so you start looking atcheaper manufacturing options China isan obvious choice since so manycompanies make products there so youvisit a manufacturer and the productsample looks amazing they've been ableto perfectly match what you've beenmaking in America plus they're willingto do it at a fraction of the cost itsounds perfect so you sign up place apurchase order and start shipping theproducts to your customers no one cantell the difference and you're startingto make a healthy profit margin againbut this is where things take a turn forthe worse see your Chinese manufacturerneeds to make a profit for themselvesand the price they originally quoted youwas too good to be true they can't raisetheir prices because you might take yourbusiness somewhere else so they startlooking for other ways to squeeze out aprofit they might switch to usingcheaper materials the plastic in thatcoffee cup might now contain toxicchemicals and in some cases they willactually make subtle changes in theproduct design you might have specifiedthat the walls of the coffee cup lidneed to be at least one millimeter thickbut over time the manufacturer will sendyou thinner and thinner coffee cups tosave money on raw materials this processis called quality fade it allows themanufacturer to increase their marginsall without raising prices or eventelling the customer what's happeningit's a huge problem because companiesusually don't have quality controlsystems in place to prevent this fromhappening if you aren't already testingyour products for toxic chemicals andthe manufacturer starts secretlyswitching materials on you you might notfind out for years this quality fadestrategy works well for Chinesemanufacturers who work with smallerbusinesses the products slowly get worseover time and as long as no one noticesthe manufacturers can book the profitsbut the quality fade strategy couldnever work with Applethe iPhone is simply too complex tosecretly start switching out componentsand apple Engineers have a rigorous setof quality assurance practices in placeif Apple's manufacturers wanted tomaximize their profits they'd have tocome up with a more subtle workaroundthe solution they found is one I callmorality fade and it's nearly impossiblefor Apple to detect see while Apple caneasily test their iPhones to make surethat they were made with the rightmaterials and to the rightspecifications it's much harder toverify that they've been made to thesame human rights standards if amanufacturer has a fixed price contractwith Apple and they want to increasetheir profit margins the only option isto reduce their labor costs and theeasiest way to reduce labor costs is touse workers you can exploit seven Applesupplies in China are using forced laborfrom Shenzhen they participate instate-run programs the same ones thatare allegedly part of China's campaignof genocide against the uyghursuyghurs are the dominant ethnic group inxinjiang unlike every other region ofChina where most inhabitants are HanChinese uyghurs have their own distinctculture most practice Islam and they hada historically strong IndependenceMovement for years under the banner offighting terrorism the Chinese Communistparty has been forcing uyghurs to workin factories we see workers every 50 ofthem are watched by one minder they'resurveilled online and in person theyhave to attend these Mandarin studiesafter work and political indoctrinationsessions and these factories have Butlerfences one of those factories was aFoxconn facility which manufactures upto half of all the world's iPhones somecompanies are directly using uighurlaborer to manufacture their productsand other companies you know in the longcomplicated supply chain and they mightnot know it's one of the clearestexamples of the morality fade strategythere are undoubtedly others which justhaven't seen the light of day and it's ahuge problem for apple and Tim Cookapple has a playbook for addressingnegative stories about the conditionsinside the factories that manufactureiPhones Apple's CEOsis very troubled by the string ofsukon Apple has been championing itselfas a perfect Enterprise but it is all afacade they categorically denounce thesituation and make plans to audit theirsupply chain to prevent this in thefuture Apple does one of the best jobsof any companies in our industry ofunderstanding the working conditions inour supply chain we go into thesesuppliers and we go into their secondaryand tertiary suppliersplaces where nobody's ever gone beforeand audited them before and we're prettyrigorous about it it's crisisCommunications 101 and that strategy hasworked for the most part Apple reallydoes want to avoid major publicrelations backlash so they constantlypush their suppliers to follow Chineselabor laws and avoid taking shortcuts tosave money faced with the morality fadescenario I just described the obvioussolution for Apple would be to pull outof China but it's easier said than doneApple hasn't really outsourcedproduction to China in the traditionalsense instead they've built one of thedeepest cross-border relationships inbusiness history throughout the iPhoneera Apple has embedded top productdesigners and Manufacturing Engineersdirectly into their suppliers facilitiesthese are Apple employees but they willoften live in China for months at a timeto make sure that new productionprocesses get designed properly in atypical manufacturing relationship thedesigner will often hand off a productto a manufacturer and let them figureout how to actually produce it at scaleApple takes a completely differentapproach working much more closely withits manufacturing Partners they've spentbillions of dollars on custom machineryand developed Cutting Edge expertisethat sets them apart from thecompetition and why have they gone toall this trouble because of the iPhoneitself this is a deconstructed iPhone 4Sto show you how intricate the internalcomponents are the iPhone 4 wasassembled by Foxconn and pegatronanother Taiwanese electronics company itsold 4 million units in its first threedays on the market and more than 60million over its lifetime remember theiPhone 4 was released in October of2011. at this point it's almost 12 yearsold and it's only gotten more complexthe point is that assembling the iPhonehas never been easy every generation hasbeen made with the latest technology inboth software and Hardware China didn'thave the capabilities to scale up iPhoneproduction before Apple showed up TimCook and the Apple team brought thoseskills and helped build up thecompetency over many years as a resultthey turned the iPhone into the mostprofitable and best-selling product inhistory the best-selling car of all timeis the Toyota Corolla with 50 millionVehicles delivered the best-selling toyof all time is the Rubik's Cube at 400million units sold the best-selling bookseries is Harry Potter with 500 millioncopies sold the iPhone has sold morethan 2 billion units it's not just thebest-selling mobile phone it's also thebest-selling music player thebest-selling camera and the best-sellingcomputer of all time the iPhone was onlypossible because of China but eventhough China made Apple the biggestcompany in the world it now poses amassive risk apple is completely relianton China more than 95 percent of iPhonesairpods Macs and iPods are made thereand China makes up nearly one-fifth ofthe company's revenues this dependencymeans that as tensions escalate betweenBeijing and Washington Apple is caughtin a tough Place Apple wasn't the firstcomputer company to embrace the Chinesemanufacturing opportunity bothHewlett-Packard and compact made PCSthere throughout the 1990s but Appletook a very different approach fromthese earlier companies if you look atthe parts of an iPhone you'll noticethat nearly everything is custom madethis allows Apple to regularly delivernew features at every major keynote butthe trade-off is that it requires a muchdeeper integration with the Chinesesupply chain instead of handing overspecifications to suppliers and lettingthem decide how to build devices Applewould buy the relevant equipment andinstall it in the factory themselvesthey were so dedicated to scaling theproduction of the iPhone that by 2012they had over 7 billion dollars ofAssets in China to put that intoperspective Apple's Machinery in Chinabecame more valuable than all of Apple'sbuildings and retail stores combined noother tech company was pursuing thisstrategy but Tim Cook realized thatthese huge investments in physicalequipment could unlock new opportunitiesnow what's interesting about cook thoughisn't just that he had the confidence tothrow money at a problem when the timewas right it's also that he hadinstituted an extremely rigorous processfor vetting suppliers Apple Engineerswere constantly dispatched to meet withChinese suppliers in person and whilethey were on site they would drill theCEO with technical questions until theycould no longer get answers then theywould move deeper and deeper into theorganization until they were talking tothe most technical people at thesupplier to understand their fullcapabilities Apple would only moveforward with a contract if the company'sengineer signed off on the suppliersorganization it was an exhaustingprocess for anyone bidding for Apple'sbusiness but landing a contract could becompletely trained transformative Notonly would the supplier's revenuesimmediately start tracking with Apple'sgrowth trajectory but Apple Engineerswould effectively take over the researchand development roadmap to make surethat the supplier was hitting keyMilestones just look at how Applecompletely transformed Foxconn in theyear 2000 Foxconn started making IMAXfor Apple they did a total of threebillion dollars in Revenue that year TenYears Later Foxconn had grown to nearly100 billion dollars in Revenue more thanits five biggest competitors combinedthe Chinese government was quick torealize how important the Applerelationship would be for economicdevelopment after the 2008 Globalfinancial crisis Beijing issued over onetrillion dollars in loans and over halfof that money went toward infrastructurespending this meant bigger apartmentbuildings to house millions of Migrantlaborers as well as more reliablehighways airports and warehouses Chinawas betting that Apple would continue todominate the global Electronics Marketin 2010 they released both the iPhone 4and the first iPad great reviews andjust as Tim Cook had bet big on thesuccess of the iMac in 1998 the founderof Foxconn a guy named Terry guo wasready to double down on Apple he metwith Tim Cook to plan the launch of thatYear's products and argued that Applewas massively underestimating demand hecould tell that the combination of theiPhone 4 and the iPad were going to markan inflection point for apple and theyneeded to scale up it was an easy pitchto cook since Foxconn was going to footthe bill for the new facilities thatsounds like great news for Apple butit's also a huge headache how many tooland die makers do you know in the US nowwe could have I could call a meetingaround the United States and say whatevery tool and die maker come to thisroom tonightwe wouldn't fill the road in China youwould need several cities China is nolonger the best option for Apple it'sbecome the only option[Applause]so what's the solution can appleactually pull out of China right now theanswer is no in 2019 Tim Cook stood nextto Donald Trump at a manufacturingfacility in Austin Texas the goal of thephoto op was to let the world know thatApple was committed to making productsin the United States again it was awin-win for both of them Trump could saythat he was bringing back manufacturingjobs while Tim Cook could say that hewas getting ahead of the China issue butthat event was mostly smoke and mirrorsthe facility had actually been inoperation since 2013. it didn'trepresent any real shift in Apple'smanufacturing strategy back in 2012Steve Jobs was very direct with BarackObama about Apple's manufacturing planshe told him Point Blank that those jobsaren't coming back that might have beena reasonable economic decision to makeback then further globalization lookedinevitable but things have gotten somuch more complicated since then covidlockdowns wreaked havoc at Foxconn andcreated a shortage of 6 million iPhonesthis last holiday period but shippingdelays are much more tall tolerable thanhuman rights abuses and when Factoryworkers started protesting therestrictions Apple's response wastelling in the past Apple had generallybeen supportive of improving workingconditions in Chinese factories but notthis time instead of supporting theprotesters or issuing a statement aboutthe importance of free speech anddemocracy Apple started restricting theuse of airdrop to share informationabout protests this led to harshcriticism from American politicians onboth sides of the aisle on the left youhad Senator Mark Warner saying thatApple was quote doing the bidding of theChinese Communist party and on the rightyou had Senator Josh Hawley saying quotewhen the Communists in Beijing tellApple to jump it asks how high it'salways dangerous to be in a positionwhere you have no allies in WashingtonDemocrats and Republicans don't agree onmuch but right now they both agree thatApple needs to pull out of China socould Apple actually do it where couldthey goIndia would certainly be a logicalChoice it's a democracy of more than abillion people and English is officiallythe second language there are far fewergeopolitical risks and Indians arestarting to buy more and more iPhoneseach year as incomes rise the country isaccelerating and Manufacturing as wellin 2014 Indio is responsible for justtwo percent of global smartphoneproduction but that grew to 16 in 2022.you have political situation especiallybetween China and U.S it is a greatopportunity for us Samsung has been ableto build 120 million phones annually inIndia and the government is dedicated toimproving infrastructure Apple hasactually been manufacturing iPhones inIndia since 2017 but that headline is alittle bit misleading the vast majorityof the Apple supply chain is still inChina and even though India is startingto produce smartphones in large volumesthey are still years behind The CuttingEdge of the 20 million phones made inIndia last year most were budget phonesthat sell for 250 or less the countryjust isn't ready to start manufacturingflagship iPhones yeah India does haveover a billion people but they don'thave the skilled technicians and migrantlaborers who are critical to iPhoneproduction the infrastructure is stillyears behind too which makesTransportation utilities andcommunication networks all moredifficult so not India well what aboutVietnam Vietnam has truly become one ofthe great miracles of the world afterall the average Vietnamese worker earnshalf as much as their counterparts inChina so there are significant laborcost savings Apple has been pushing hardto make Vietnam work it's planning tomake more than 50 percent of airpodsthere by 2025 but it's unlikely that thenumbers will ever really add up by somecounts China has more Factory workersthan Vietnam has people so much ofhitting the ruthless iPhone productionschedule revolves around hiring tons ofpeople and quickly ramping upmanufacturing China's migrant workersare critical to this effort and thereare nearly 300 million of them Vietnamby comparison has fewer than 100 millionresidents in total decoupling from Chinawill be a massive task for Apple they'veinvested so much into the country andit's impossible to just pick up andleave in 2016 Tim Cook personally signeda five-year agreement to spend more than275 billion dollars in China instead ofpreparing for an exit apple is doublingdown on China and moving even deeperinto the country the end result is thatApple isn't really looking at analternative manufacturing center at bestthey're pursuing a China plus onestrategy where they will add additionalcapacity elsewhere without pulling backin China whatsoever Apple will probablyjust wait until the media attention diesdown and then keep investing but thisstory is far from over in order tounderstand how the U.S Chinarelationship will evolve over the comingyears it's important to learn thehistory of China's leader Xi Jinping ifyou want to know everything about hisrise to power just watch this video nextthanks a lot