Apple in China
Apple in China: Til’ death do us part
The neo-liberal consensus of free trade and integrated supply chains is under heavy strain due to growing populism in the developed world (which has seen stagnant wage growth) and in response to national security concerns. COVID-19 laid bare the glaring problems of not having domestic production in items such as pharmaceuticals and semiconductors. Both the Biden and Trump administrations have been focused on decoupling from China, albeit in very different ways. President Biden used the carrot in the form of industrial investment and corporate subsidies (i.e., the CHIPS and Science Act and provisions of Build Back Better). The Trump Administration has used the stick in the form of tariffs.
Patrick McGee’s book, Apple in China: The Capture of the World’s Greatest Company, offers a compelling example of how the U.S. and Chinese economies became so intertwined. Apple began to expand into China in the mid-1990s. By 2015, Apple’s annual investments in China reached $55 billion. The recent CHIPS and Science Act, which was designed to counter Chinese dominance in semiconductors and artificial intelligence, was dubbed by President Biden’s Commerce Secretary, Gina Raimondo, as a “once-in-a-generation investment” and is designated to spend $52 billion over four years. More astounding is the fact that adjusted for inflation, Apple’s annual investment in China is 2x that of the Marshall Plan (The 1948 bill coined after Secretary of State George Marshall, which rebuilt a post WWII Europe, that was in ashes.)
How Apple and China got to where they are is complicated. In 1996, Apple was hemorrhaging cash, and Vice President Joe O’ Sullivan had no choice but to sell Apple’s factory located in Fountain, Colorado (a suburb of Colorado Springs) to Space Craft, Inc. (the Huntsville, Alabama-based firm designed to build spaceships in response to the Soviets successful Sputnik launch).
In the intervening years, Apple found a solution in China, specifically in the Taiwanese contract manufacturing firm Foxconn. Foxconn offered cheap and reliable labor in factories throughout China. More than cheap labor, Foxconn was an exceptionally efficient contract manufacturing firm, with unparalleled expertise in mass production. Additionally, the CCP under Hu Jintao was more than accommodating to Western firms and investment. The factories and supply chain improvements that came with Apple would lead to the development of Chinese tech giants such as Huawei, Vivo, and Oppo.
The emergence of organic Chinese firms, built in part by Apple, helped create an emerging middle class in China, which in turn became Apple consumers. At the time the 2008 Beijing Olympics rolled around, Apple’s revenue in China was less than $1 billion; by 2012, it would grow to roughly $23 billion.
Under President Xi Jinping, Chinese politics has been much more muscular in its demands on Western firms. Thousands of apps have been banned nationwide, low wages and suicides at FoxxConn have been a PR image nightmare for Apple, and the American desire for onshoring has put Apple in the spotlight.
However, a generation of investment has created a situation where Apple’s initial short-term needs have resulted in China’s long-term gain, and they have all the leverage. 90% of Apple's production occurs in China, and that which occurs in countries like India and Vietnam remains very dependent on China’s supply chain.
On June 2nd, Bloomberg journalist and host of the Odd Lots podcast, Joe Weisenthal, interviewed Patrick McGee. McGee, when asked about moving production elsewhere, stated:
“Put it this way, if there are 1,000 steps in making an iPhone, and the final one is now being done in India, that’s enough to have a quote-unquote substantive change to the product, and therefore the box can say made in India. Nothing about that phone is less dependent on the China-centric supply chain than any other phone you have ever purchased.”
The marriage between Apple and China, once blissful, is now contentious. But like any good traditional Catholic marriage, it is unlikely to end in divorce despite “irreconcilable differences”.
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