Apple helped China become America's biggest tech rival

He came. He threatened. He capitulated. It took just a week for President Trump to go from frightening every trading partner on the planet with steep tariffs to offering them all a 90-day “pause”. The big exception was China, which was slapped with even higher tariffs.

Within days, however, some electronic devices — including smartphones and computers, two of the largest US imports from the Middle Kingdom — were offered an exemption. This spared American tech companies that rely on Chinese manufacturing from a painful blow.

The best explanation for Trump’s volte- face lies in the fact that Apple — the world’s biggest company, valued at more than $3 trillion — had in a matter of days lost nearly $800 billion of market value. True, other businesses suffered, but no American company is as valuable or iconic as Apple. And none is so exposed to China, home to 90 per cent of the tech giant’s global production and a $70 billion retail business.

Tim Cook, Apple’s chief executive since 2011, reportedly called the White House and lobbied for the tariff exemptions. Yet Trump’s about-turn doesn’t reflect the diplomacy of Cook so much as Beijing’s stranglehold over Apple’s operations.

Before Trump’s climbdown, his top deputies had spoken confidently of bringing iPhone production to America’s shores. But America lacks the experiential know-how, the dense population, the low wages or even the infrastructure to be competitive in manufacturing smartphones as complex as Apple’s. Little surprise, then, that two weeks later Apple reportedly made plans for every iPhone sold in the US to be assembled in India by 2026. However, there is zero chance that Apple will ever leave China.

The truth is Apple wouldn’t be Apple without China. No other place on Earth comes remotely close to offering the right combination of quality, scale and flexibility needed to ship close to half a billion luxury products each year.

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And yet the prevailing narrative about Apple in China is remarkably narrow. Much of the coverage over the past two decades has focused on the tedium of assembling Apple products — a tale of low wages, underage employees, 16-hour working days, a spate of suicides at an assembly plant in 2010 and accusations of using forced Uighur labour. This narrative wasn’t entirely wrong — Apple set up a supplier responsibility programme in response, vowing to improve conditions — but it missed the biggest piece of the puzzle: that Beijing allowed Apple’s activities so that China could exploit Apple and become a tech powerhouse in its own right.

Indeed, China wouldn’t be China today without Apple. The California tech giant’s investments in the country have been spectacular, exceeding even that of the Marshall Plan — America’s four-year effort to revive Europe after the Second World War — in cost, man-hours and impact. Apple estimates that since 2008 it has trained at least 28 million workers, the vast bulk of whom were in China — that’s more than the entire labour force of California.

This is the other story — of how Apple, in feeding its own global ambition, helped fuel China’s technological and economic rise.

The long march to China

Apple was famously founded in a garage by two college dropouts named Steve, in Los Altos, California, in 1976. A few months after Steve Wozniak left in 1985, Steve Jobs was ousted in a boardroom battle — only to return to rescue the company in 1997. He died of pancreatic cancer in 2011. Their stories are well told. How Apple tied its fortunes to China, however, has been ignored and overlooked.

Long queues form outside the flagship Apple Store in Beijing as the new iPhone 15 goes on sale, September 2023

GETTY IMAGES

The common narrative is that Tim Cook — an operations expert hired by Jobs as a 37-year-old from Compaq in 1998 — helped save Apple by closing down its manufacturing facilities on three continents and moving production to China. In fact, Apple had already begun working with third-party manufacturers in 1996, before Jobs had returned from his 12-year exile. For the following seven years, Apple worked intimately with a variety of contract manufacturers in America, Europe and Asia.

The computer credited with reviving Apple’s fortunes — the candy-coloured iMac, created by the company’s British head designer, Jony Ive, in 1998 — was first built in South Korea by LG, which then expanded production to Wales and Mexico. Later versions were made by the Taiwanese assembly giant Foxconn in China, but also in California and the Czech Republic. The first iPods, launched in 2001, were made by Inventec in Taiwan, the island nation that also made the iBook and PowerBook laptops.

Cook didn’t mastermind the move to China — nobody did. As global electronics suppliers competed to win orders based on price, they were increasingly attracted to the world’s most populous nation by the promise of cheap and abundant labour, aided by Chinese government policies meant to lure in multinational corporations with depressed salaries, a suppressed currency and relaxed labour laws.

By 2003 all kinds of western companies were outsourcing operations to China. But whereas Apple’s rivals manufactured there because of what was available, Apple shifted to China because of what was possible.

A place where dreams became reality

Before the return of Jobs in 1997, Apple made its own computers in a fashion called poka-yoke, a Japanese term meaning “mistake-proofing”. The idea was that products should be designed for what one engineer described to me as “idiot-proof” assembly. What Apple realised better than anyone was that thousands of labourers cheaply handcrafting hardware on a conveyor-belt production line allowed its designs to be increasingly intricate. Rivals looked at China and saw low cost; Apple saw unconstrained design.

The northeast London-born Ive, son of a silversmith, and his team could conceive of anything and an army of determined workers would see to its creation. The trouble was, migrant labourers within China didn’t have the required skills or expertise, particularly as quarterly demand for iPods climbed from tens of thousands to millions. The difficulty in building at these quantities was amplified by Apple’s perfectionist culture and Ive’s desire to miniaturise each unit’s dimensions while coating them in a dazzling array of colours.

The company’s solution to this had world-changing consequences. Apple flew in American engineers by the planeload so they could mentor, finance, train, supervise and supply Chinese workers, enabling them to vastly exceed their previous capabilities.

It wasn’t “outsourcing” in the normal sense — that would imply Apple was sending blueprints to companies capable of taking the orders and executing them. In dozens and then hundreds of factories across the country, Americans worked side by side with Chinese labourers promoting an obsessive attention to detail and teaching problem-solving techniques. If the factories didn’t have the right equipment, Apple would spend hundreds of millions of dollars to buy it and install it for them.

One former manufacturing design engineer likens Apple’s tireless training to attending an Ivy League university for hardware. Indeed, these (mostly male) Apple engineers began flying to China so often that some of their wives took to calling themselves “Apple widows”. So many marriages failed that the company had to hand out bonuses and allow some employees extra days off — policies that engineers nicknamed the DAP, or divorce avoidance programme.

The company’s strategy was wildly successful. In 2003 Apple’s global profits were just $69 million. By 2012 they had ballooned to $41.7 billion — a rise of more than 60,000 per cent.

The dream turns sour

As Xi Jinping ascended to lead China’s Communist Party in late 2012, Apple’s success was looking conspicuous, even unfair. The company’s meteoric rise wouldn’t have been possible without China, but the tech giant didn’t appear to be sharing the wealth.

Foxconn had been making more money than Apple when their partnership was forged in the early 2000s. But as iPod and then iPhone volumes took off, and Apple’s margins soared by 25 times, Foxconn’s collapsed by two thirds.

Workers at Foxconn, a manufacturer of Apple products, at a factory in China; 14 employees at the Shenzhen plant died by suicide in 2010

AFP

Xi made a point of going after Apple within 24 hours of completing his transition to power in mid-March 2013. The morning after he was formally appointed as China’s president, Apple Store employees in Shanghai were confronted by a cohort of local and international media. The journalists, briefed by Chinese officials, blindsided employees with allegations that Apple product warranties in China were inferior to those in the rest of the world.

The employees couldn’t respond without first informing Apple HQ in Cupertino, California, but it was late there and senior executives couldn’t be reached. After an emergency conference call was arranged with half a dozen senior Apple executives, Tim Cook coolly rejected the allegations and confidently told subordinates that he ran the world’s most valuable company and wouldn’t apologise to anyone.

That night, China Central Television aired a widely watched segment scolding Apple. Cupertino chalked the segment up to a misunderstanding. The company matter-of-factly denied the warranty allegations and boasted that Apple provided an “incomparable user experience”.

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Wrong answer! Apple was soon victim to a digital blitzkrieg by state-backed Chinese media that lasted weeks. Chinese newspapers called Apple “dishonest”. The country’s quality inspection bureau warned of “severe repercussions”. “Strike Down Apple’s Incomparable Arrogance”, blared The People’s Daily in a front-page headline.

Apple was made to understand that the stakes were enormous. Its revenue in China had been soaring — from less than $1 billion in 2008 to almost $23 billion in 2012. In the recent December quarter, sales rose 67 per cent year over year. But as Beijing targeted Apple, growth stalled over the next two quarters — sales in China slowed to 8 per cent growth, then went into reverse, sinking 14 per cent. Apple, in a matter of weeks, went from feeling untouchable to fearing its products would be blacklisted in the country.

Apple’s “gang of eight” kowtows

The co-ordinated attack by Chinese media exposed that Apple’s supply chain — the envy of the tech world — had an Achilles’ heel. In the prior years, other tech giants including Google and Facebook had faced challenges trying to get their products accepted by Beijing. Apple’s dilemma was far greater. “For [the others] it was, ‘Can we grow without China?’ ” says an executive at one of Apple’s contract manufacturing partners. “But for Apple, it was different. They knew they wouldn’t exist without China. They’d have no production. China had all the leverage, and Apple had to bow.”

Within two years the company assembled a team of senior executives to be Apple HQ’s eyes and ears in China. Referring to themselves as “the gang of eight”, the team was led by Rory Sexton, a vice-president (VP) of operations who had joined Apple in 2001, and Jun Ge, who was poached from Intel to lead government affairs at Apple in 2014. Their first significant task was working out what the company’s story was. Why was Apple in China? How was it contributing? What could Apple do to demonstrate its commitment to China?

Their task became more urgent as Xi aggressively emphasised “in China, for China” policies, advocating that foreign companies launch “joint ventures”, so Chinese companies could learn and recreate the best technologies. Within months of Xi’s ascent, a senior Chinese official threatened 30 foreign companies with antitrust fines and recommended they write “self-criticisms” about their behaviour. As one participant told Reuters: “The message was: if you put up a fight, I could double or triple your fines.”

As the gang strategised, Apple faced new political challenges. Ahead of the launch of every new iteration of the iPhone, Apple suppliers would ramp up production, often relying on temporary workers for 50 per cent or even 80 per cent of their workforce. But in 2014 a new law limited the share of these workers to 10 per cent. Meanwhile, once-rare problems in the supply chain were becoming frequent. In 2015 Beijing even accused Apple of under-reporting sales and penalised it more than $80 million in unpaid taxes and fines.

The “Apple Squeeze”

One member of the gang of eight, Doug Guthrie, a China scholar in his early forties, was especially tuned into political changes on the ground. He was a Mandarin-speaking academic who’d lived in Shanghai in his twenties and was dean of the George Washington University School of Business before Apple hired him to better understand its China predicament.

As Guthrie studied Apple’s operations, a common theme emerged in talks with dozens of suppliers. “Working with Apple is really f***ing hard,” they’d tell him. “So don’t,” he’d respond. And they would demur: “We can’t. We learn so much.”

By 2014 Apple was so frequently sending America’s best engineers to China — what one Apple veteran calls “an influx of the smartest of the smart people” — that the company convinced United Airlines to fly 6,857 miles from San Francisco to Chengdu three times a week, pledging to buy enough first-class seats to make it profitable.

Guthrie quickly realised this wasn’t the industry norm. Although suppliers resented the intense pressure and the soul-crushingly low margins offered by Apple, they put up with it because they derived something far more valuable than profits. The deal — let’s call it the Apple Squeeze — was that Apple would exert enormous power over its suppliers multiple hours a day, for weeks and months leading up to a product launch, and in return, the suppliers would absorb cutting-edge techniques.

Guthrie began to realise that Apple, however inadvertently, was operating in ways that were immensely supportive of Beijing’s “indigenous innovation” directive. Chinese officials just didn’t know it because the company was so secretive about how it developed its products.

As one former industrial designer put it: “I don’t remember, ever, a strategic withholding of information. All we cared about was making the most immaculate thing Every day you’d invent your way through a problem. It was absolutely wonderful as an experience. But I guess we were unwittingly tooling them up with incredible knowledge — incredible know-how and experience.”

As Apple came under political pressure to “give back” to China, Guthrie advocated that the company change tack. “China wants the constant learning,” he told colleagues. “The fact that Apple helps bring up 1,600 suppliers for China — it’s an incredible benefit.”

When staffers added up Apple’s investments in China — mainly the salaries and training costs of three million workers in the supply chain, as well as sophisticated equipment for hundreds of production lines — they realised the company was contributing $55 billion a year to China by 2015: a nation-building sum.

The mother of Chinese invention

The ripple effect from Apple’s investments across Chinese industry was accelerated by a rule imposed by Apple that its suppliers could be no more than 50 per cent reliant on the tech giant for their revenues. This was to ensure that a supplier wouldn’t go bust overnight if a new Apple design did away with components it manufactured. So as iPhone volumes soared from under ten million units on its launch in 2007 to more than 230 million in 2015, Apple would encourage its suppliers to grow their non-Apple business just as quickly. The upshot of this policy was that Apple gave birth to the Chinese smartphone industry.

In 2009 most smartphones sold in China were produced by Nokia, Samsung, HTC and BlackBerry. But as Apple taught China’s supply chain how to perfect multi-touch glass and make the thousand components within the iPhone, those suppliers took what they knew and offered it to Chinese companies led by Huawei, Xiaomi, Vivo and Oppo. Result: the local market share of such brands grew from 10 per cent in 2009 to 35 per cent by 2011, and then to 74 per cent by 2014, according to Counterpoint Research. It’s no exaggeration to say the iPhone didn’t kill Nokia; Chinese imitators of the iPhone did. And the imitations were so good because Apple trained all its suppliers.

To get this message to Beijing, Tim Cook and his deputies visited Zhongnanhai, the citadel of communist power near the Forbidden City, in May 2016. They explained that Apple wasn’t just creating millions of jobs; it supported entire industries by facilitating an epic transfer of “tacit knowledge”— hard-to-define but practical know-how “in the art of making things”, as defined by the China-born Federal Reserve economist Yi Wen, who believes that such knowledge was “the secret recipe” behind Britain’s Industrial Revolution.

A former Apple executive says this message was “music to the ears of China”. Beijing had spent decades trying to catch up with the West’s lead in advanced industry, scientific research and economic might. It often resorted to spying, outright theft or coercive tactics. But here was America’s most famous tech giant willingly playing the role of Prometheus, handing the Chinese the gift of fire.

Tim Cook, Apple’s CEO, with the Chinese vice-premier, He Lifeng, at a business forum in Beijing in March this year

EYEVINE

What will Tim Cook’s legacy be?

Fast forward to today, and Apple is utterly dependent on China for the vast bulk of its manufacturing. Even recent moves to India are mostly confined to assembly — a tariff-avoiding tactic distinct from the complex processes needed to tool, stamp, machine, cut, etch and shape all the components before final assembly. The grand irony, though, is that Apple isn’t dependent on the advantages it found in China; Apple is dependent on the capabilities it created there.

Over the course of a quarter-century of investment and training, Apple’s strategy in China has resulted in a transfer of technology and know-how so consequential as to constitute a geopolitical event, like the fall of the Berlin Wall — but it’s an event that played out over many years, hidden by strict nondisclosure agreements and in China’s censored media landscape.

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Washington has good reason to want to untie this knot, to convince Apple it should train workers in Ohio, not Zhengzhou. But the supply chain in question is the result of decades of Chinese investment, focus and tailor-made policies, supported by cutting-edge robotics, skills and experience.

The US now imposes prohibitively high “reciprocal tariffs” on China-made kitchenware, action figures and bedding, probably pushing inflation higher. But it exempts high-end electronics — precisely the sector where America’s dependence on China is most dangerous, and where civilian tech blurs into military hardware.

Never mind the “next big thing” to come after the iPhone. Apple’s China problem is the company’s biggest risk, the most consequential unknown for Tim Cook’s legacy and an urgent challenge for Washington.
Apple in China: The Capture of the World’s Greatest Company by Patrick McGee (Simon & Schuster £25) is out on Tuesday. Go to timesbookshop.co.uk. Discount for Times+ members