This is Part 4 in our Planet Money newsletter series on manufacturing and America. Part 1 asked why Americans aren't filling the manufacturing jobs that are already here. Part 2 dived deep into economic research that finds that manufacturing jobs pay a higher premium than many other industries. Part 3 asked whether manufacturing-based economic development could help America's heartland catch up with its major cities. Subscribe here for the next installment. As always, our podcast is here.
Planeloads of some of America's best engineers flying to China to train its workforce in how to do advanced manufacturing. A jaw-dropping level of investment in China's development, which puts the Marshall Plan to shame. When Apple came to China, the company proved instrumental in helping the country become a manufacturing juggernaut. And now one of America's most valuable companies is awkwardly dependent on the production capabilities of a country that has become one of America's biggest adversaries.
A new book from Financial Times journalist Patrick McGee, titled Apple in China: The Capture of the World's Greatest Company, offers the wild story of how Apple became so deeply entangled with China. Depending on your point of view, it could be the story of the wonders of capitalism in lifting a nation out of poverty while delivering the world cheaper, more advanced electronics. Or, if you're wary of China's geopolitical rise, it could be the story of how an icon of American ingenuity may have unwittingly threatened our country's national security and its lead in technological innovation.
An origin story for Apple's entanglement in China
In 1999, Terry Gou, the head of a then little-known Taiwanese company named Foxconn, made a fateful phone call to a young operations executive who'd just joined Apple: Tim Cook (yeah, the future CEO of Apple).
Apple was on the verge of what the company hoped would be a big comeback. Two years before, it had almost declared bankruptcy. Under pressure, Apple rehired (and acquired a startup of) their visionary co-founder Steve Jobs, whom they had unceremoniously pushed out a decade before. Everything was now riding on the success of a new personal computer Jobs and his team had developed: the iMac.
The iMac was not a typical computer. It wasn't rectangular or beige, gray, or white. It had a more round-ish, teardrop shape with a translucent plastic casing that came in a variety of bright candy colors. Like many other Apple products in the years to come, the iMac had a cutting-edge design that required meticulous manufacturing.
For much of its early history, Apple had manufactured its products in America. After the company was founded in 1976, McGee writes, it employed Steve Jobs' sister Patty to hand assemble its first computer's circuit boards. When it released the much more popular Apple II computer in 1977, the company reportedly turned to a woman in Los Altos, California, who enlisted a ragtag network of immigrants, including undocumented ones, to assemble circuit boards and power supplies in crowded apartments and houses around the Bay Area.
"No one ever mentioned minimum wage, or Social Security, or workplace safety laws," writes Michael Malone in Infinite Loop, a 1999 book about Apple. "And thus, for more than a year, the Apple II, promoted as the machine to liberate people from the slavery of bureaucracies and office work, was in fact being partially assembled in sweatshops."
When the money started pouring in, Apple set up a more legitimate factory in the Bay Area. While it did work with overseas suppliers on certain parts and products, the company was much slower and less willing than other computer companies to completely outsource and offshore production. Apple had more creative designs than other computer brands (sometimes called "PC clones") and was obsessed with a level of quality that, for a long time, they believed only they could deliver in their own factories.
But, after its financial troubles in the mid-1990s, Apple began increasingly contracting out manufacturing work in an effort to slash costs, increase efficiency, and boost its stock price. Its competitors — who were winning at the time — already had.
In 1999, when this call between Cook and Gou happened, Apple was making products in a mix of its own factories and other companies' factories across three continents, from California to Ireland to Japan.
The iMac's monitor, which made up most of the computer, was initially manufactured by the South Korean conglomerate LG. As demand for the iMac exploded, LG struggled to keep up. Apple wanted the company to replicate their three-continent production strategy, McGee writes, and LG agreed by setting up new factories in Wales and Mexico. Each factory proved to be a disaster, leading LG to drop the ball on production at a critical time for Apple's business. Meanwhile, LG was proving to be stubborn when it came to contract negotiations.
Somehow word of these troubles got to Foxconn's Terry Gou. Foxconn had for years been a small-time supplier of cheap component parts for Apple, but it had recently proven itself in making the external housing for Apple's Power Mac G4 desktop. Gou dreamed of a much grander relationship with the American company. And, with LG struggling, he saw an opening.
That's when he called Tim Cook, whom he had previously worked with when Cook was at Compaq, an American computer company that was a big Foxconn client.
"I can fix this," Gou reportedly said.
McGee writes that it was the start of a much closer business relationship that would revolutionize not just both companies, but also the economic fate of China and potentially the geopolitical balance of power.
How Chinese manufacturing got much more advanced
Although Foxconn is headquartered in Taiwan, the company's success has long been dependent on its factories in mainland China, which it began to shift to in the 1980s as Taiwanese labor costs began to rise.
Starting in the 1980s, Foxconn's Terry Gou and other Taiwanese entrepreneurs — known as the "Taishang" in China — helped develop what became known as "the Guangdong Model" on the east coast of southern China (Guangdong is a province there). In this area, Beijing set up special, export-oriented economic zones, where industrial capitalism was encouraged to flourish.
"Local officials, earning fees from factory growth, were incentivized to work hand in glove with the Taiwanese entrepreneurs," McGee writes. "They were empowered to subsidize land and machinery, to build infrastructure to aid logistics, and to facilitate the flow of migrant workers from China's rural areas."
China had a very restrictive internal migration system that prevented their people from moving to new places without government authorization. It opened up that system to encourage migration into these special economic zones, allowing millions of desperately poor, rural residents to come and work. Foxconn built massive factory complexes that served as basically self-contained communities for these workers. It was a population willing to — or, given their political and economic circumstances, you might argue, forced to — toil on assembly lines for obscene hours and meager pay in a way that few Americans would probably accept. In fact, many Chinese workers couldn't tolerate these working conditions. Over the years, Foxconn factories saw suicides and other horrors. At one point, Foxconn installed nets around their factories to prevent people from killing themselves.
But McGee stresses that the attractiveness of China was about more than just cheap or exploited labor. It was also the sheer number of workers and the willingness of government officials and private contract manufacturers like Foxconn to basically bend over backwards in an effort to make Chinese factories succeed and keep their foreign clients happy. Apple, with its cutting-edge designs and perfectionism, was a pretty fussy and demanding client.
In 2000, when Apple's relationship with Foxconn intensified, Steve Jobs actually still harbored ambitions to keep a lot of manufacturing in-house at Apple and in America, McGee writes. But Jobs' perspective began changing around the turn of the millennium. First, came the dotcom bust and a financial squeeze for tech companies. And, in 2001, China joined the World Trade Organization, which, through various measures, helped make China an even more attractive place to do business.
Foxconn — and China — proved to be an incredible partner for Apple. "Once Foxconn started to work on building the iMac at scale, Apple engineers were astonished at what became known as 'China speed' — an ability to get things done at a rapid pace beyond the comprehension of Western visitors," writes McGee.
Foxconn's strategy, McGee argues, was to offer the Cupertino-headquartered company dirt-cheap, high-quality factory work in exchange for learning from the best in the business. "Foxconn might not win much profit from Apple — it might even lose money at times — but the work itself, as well as the lessons Cupertino offered by having its engineers work side by side with locals in the factories, gave his team a deep education," McGee writes. "Foxconn's goal was to absorb these lessons and apply the skills to its other, more lucrative clients."
In the years to come, Foxconn proved indispensable in making Apple products. When Apple released the iPod mini, one of its most successful products ever, Foxconn — and an army of Chinese workers — went above and beyond in proving their capabilities to deliver huge volumes of high-quality gadgets at low cost. "The experience fundamentally reshaped Steve Jobs's perception of what was possible from a manufacturing perspective," McGee writes. "In 2000, he'd clamored for Apple's own factories to take on more production. But by 2005, Jobs grasped that there was no going back."
Within a decade of the call between Tim Cook and Terry Gou, there was a dramatic transformation in how and where Apple made things. "In 1999, none of Apple's products were made in mainland China; by 2009, virtually all were," McGee writes. He argues it was less globalization, and more "Chinafication."
The Legacy of Apple In China
Reading Apple in China, it's hard not to wonder whether Apple, in its pursuit of profit, may have inadvertently helped usher in a new world order helmed by one of America's biggest adversaries.
McGee offers some stunning facts and figures in his book about the role that Apple played in developing China's industrial base.
"Not a single manufacturing site bore the Apple name or displayed a bitten fruit outside, yet by 2012 the value of Apple-owned machinery in the country had soared to $7.3 billion — more than Apple's US buildings and retail stores put together," McGee writes.
"Internal documents obtained for this book reveal that Apple's investments in China reached $55 billion per year by 2015, an astronomical figure that doesn't include the costs of components in Apple hardware."
But money may not have even been Apple's most valuable investment in China. It may have been teaching a massive workforce how to do advanced manufacturing. "Apple itself estimates that since 2008 it has trained at least 28 million workers — more people than the entire labor force of California," McGee writes.
McGee details how Apple, obsessed with maintaining their quality standards, would literally send planeloads of their engineers and others to China to teach Chinese workers and executives how to properly make cutting-edge computers and electronic devices. Apple sent "so many engineers to China on temporary trips," McGee writes, that the company "convinced United Airlines to begin direct flights from San Francisco to Chengdu, three times a week, arguing that Apple would regularly buy enough of the thirty-six first-class seats to make it profitable. The 6,857-mile flight became United's longest nonstop flight."
Apple in China is the story of a dramatic transformation — of Chinese industrialists and workers learning from the best in the business, helping them to jump from low-end manufacturing to making cutting-edge tech.
"This rapid consolidation reflects a transfer of technology and knowhow so consequential as to constitute a geopolitical event, like the fall of the Berlin Wall," McGee argues.
But, really, it's less like the fall of the Berlin Wall, which ushered in greater freedom and democracy. It's more like if Corporate America had supercharged the economy of the Soviet Union.
China learned to emulate the Apple model with other American companies. For example, China enticed Tesla into building cars there and then took the learnings and quickly applied them to their own homegrown EV industry, which is now outcompeting Tesla.
As we said at the top, how you see all of this is largely political. When it comes to raw economics, there's not really any question that Apple's arrangements in China created a lot of wealth, innovations, and cheaper, more abundant electronic devices that consumers around the world love.
When Apple first began pursuing this strategy, the American political world was much different. At the turn of the millennium, leaders in both political parties were all about opening up China with the hope it would produce a better world, a better economy, and a better, more democratic China.
Around 2013, that began changing. China, under Xi Jinping, took a more authoritarian and nationalist turn. Meanwhile, the evidence of the downsides of free trade for U.S. workers had become more apparent. The election of Donald Trump in 2016 was a major turning point. And Apple has been in an uncomfortable position ever since. McGee paints the company as basically hooked on Chinese production and that there's no easy way to get the monkey off its back, even when politicians are screaming they better soon.
There are many questions over the future of Apple in China. Can it drop China, or, at least, diversify away from China, and make iPhones in America, or, more realistically, a country like India or Mexico? McGee suggests that it is much harder than it may seem. And it's not just because China has over a billion people and an authoritarian government with dictatorial powers over industries and workers. The supply chains they've developed are astounding. They now have a massive, skilled manufacturing workforce as well as a massive, poor population that has proven willing to migrate to industrial clusters. Beijing has been able to turn on this flow of labor like a faucet when and where needed. China's machines, robots, factories, and knowhow make their workers incredibly productive. Meanwhile, China's homegrown companies — having learned from companies like Apple and Tesla — are increasingly competing with Western companies on things like design and the development of tech.
Postscript: What Apple In China may teach us about the importance of manufacturing
We've been doing a manufacturing series in the Planet Money newsletter, looking for evidence for why this sector may be special. It gets a lot of attention in our politics.
In the course of reporting this series, we've encountered many manufacturing boosters who stress that domestic manufacturing is important for America for at least two big reasons beyond the ones we've already covered: national security and innovation. Apple in China adds evidence on both points.
First, national security. Even diehard free-market economists tend to believe that nations need capabilities to physically make things in order to defend themselves in wars or national emergencies like a pandemic. That has historically meant preserving the nation's ability to make tanks, planes, guns, bombs, and so on. Even if it's cheaper and more efficient economically to make these things abroad, the importance of having these production capabilities in America makes a lot of sense for national security reasons.
Apple in China raises the specter that the dramatic offshoring of tech manufacturing, even if it's just smartphones, earbuds, and computers, may also threaten American security interests. As McGee makes pretty clear, the offshoring of manufacturing overseas helped China make leaps in economic development and become more innovative as a nation. It suggests that there are profound spillover effects from having a large manufacturing base.
Some argue, often quite convincingly, that the mass offshoring of manufacturing has atrophied America's ability to innovate in making physical stuff, as opposed to software and other services. We may now not have enough skilled manufacturing workers, or workers willing to work in manufacturing at the wages companies are paying. We may not have enough robots and advanced machines to make stuff efficiently. Our supply chains pale in comparison to China's. And some fear factors like these make America less competitive when it comes to developing the next wave of cutting-edge industries, in areas like robotics, clean-energy technologies, aerospace, and drones. These areas could be generators of lots of good jobs for Americans, and they could also be important for national security.
We'll likely be revisiting this manufacturing and innovation debate in a future newsletter. For now, stay tuned. You can subscribe here.
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