How Apple made China a global tech power?

Former Financial Times’ journalist, Patrick McGee, has lifted the secretive veil off the production of Apple products in his fascinating book, “Apple in China: The Capture of the World's Greatest Company”. It is based on interviews with more than 200 sources, more than 90% of whom worked for the tech giant at some point.

Traditional narratives of Apple in China

As is well-known, Apple iPhones bear a label – “Designed by Apple in China, Assembled in China”. And this narrative has long been reflected in the collective wisdom of academic and professional analysts.

According to this collective wisdom, iPhones are designed in California, but many of the components come from Japan, South Korea, Germany, the US and elsewhere. And while assembly operations take place in mainland China, they are conducted mainly by Foxconn, a Taiwanese contract manufacturer, rather than Chinese companies.

Further, Chinese value added would be less than ten percent of total. China’s input is based on cheap low-skilled labour, and generous investment incentives like free land, weak labour and environmental laws, and low taxes, together with the stability of China’s authoritarianism.

Apple is captured by China

But McGee recounts a richer story, whereby Apple became “captured” in China due to its dependence on the country’s skilled workforce, its complex and production and logistics systems, and above all its unrivalled capacity to produce the enormous quantities of Apple products. There is not another place on the planet, not even the US, where you could make 230 million perfect iPhones every year, each one of which has one thousand components.

Thanks to working closely with Apple, China’s engineers are now adept at producing all sorts of electronic products, including military equipment, which could be used against the US. One could validly ask which side is Apple now on in the great power struggle between the US and China – even if Apple basically sleepwalked into a geopolitical dilemma. In sum, the Apple success story is a Chinese success story, not an American one.

Apple is also increasingly under China’s thumb. For example, it had to remove the New York Times app from its online store in China. and keep Chinese user data in China rather than the United States. And as Apple moves into services provision, it is subject to Chinese censorship policies which restricts Apple’s freedom of expression. Apple also tries to placate the government by blocking virtual private networks (VPNs), restricting the use of AirDrop.

How Apple moved into China

Apple has come a long way since its near-death experience in the mid 1990s to become the world’s most valuable company. It followed the American outsourcing to Asia wave which began in the 1980s. And during the 2000s decade, Apple consolidated all of its supply chains in China. “This rapid consolidation reflects a transfer of technology and know-how so consequential,” McGee writes, “as to constitute a geopolitical event, like the fall of the Berlin Wall.” China wouldn’t be China today without Apple.

McGee insists that you cannot blame Apple for moving into China in the early 2000s. China was admitted into the World Trade Organization in 2001 and there was a broad American consensus that economic openness could lead to political openness in China.

Apple/Foxconn partnership

At the heart of the Apple in China story is the partnership between Apple CEO Steve Jobs and Foxconn CEO Terry Gou. Gou was able to convince Jobs of his willingness and capacity to assemble and produce Apple products more efficiently than elsewhere and at a massive scale, even if Foxconn’s dominance is now fading a little, with the rise of Chinese electronics enterprises.

Gou played a critical role in negotiating investment incentives from the Chinese authorities. Moreover, Foxconn had no ambition of creating its own branded electronic products, and could be trusted with intellectual property. Thus, Apple did not own any production facilities in China. These belonged to Foxconn and other contract manufacturers.

Apple trains Chinese workers

While China had cheap labour, it was not of high quality. In contrast to the general impression, China does not have great vocational training systems. So Apple became China’s vocational school.

Apple assumed maniacal control over Foxconn’s factories, to ensure its traditional perfectionist quality control. This included sending over plane loads of high-level American engineers to train Chinese workers, and investing machinery for production lines. Further, while components from foreign companies are still used in Apple products, these companies are now increasingly based in China, and using Chinese workers who are trained by Apple.

Over the past decade, Apple invested some $55 billion a year for staff training and machinery. Since 2008, 28 million Chinese have received training from Apple – a figure larger than the workforce of California. Today, Chinese workers are no longer just low-skilled labour, as China now undertakes more and more complex tasks for Apple products, including producing specialised components.

In sum, Apple’s supply chain has become much less global and more “China-centric”. This is a story of both China making Apple and Apple making China. Apple simply could not have become the company it is today without China, nor could China have become the country it is today without Apple.

Apple’s nation-building project

Apple’s investment in China represents a veritable nation-building project in China. Indeed, McGee stresses the enormity of Apple’s $55 annual investment in China. In contrast, former US President Biden’s CHIPS Act, designed to induce many of the world's leading semiconductor companies to produce chips in the US, only offers $53 billion over four years. Further, spending on the Marshall Plan, from 1948 to 1952, was half that of Apple’s investment in China, when measured in real terms. In sum, Apple has become “the world’s biggest corporate investor” in the country.

In contrast to many other Western companies, Apple managed to escape China’s frequent requirement for establishing joint ventures with Chinese companies, which can facilitate technology transfer. But when Xi Jinping took over the leadership of China in late 2012, he saw Apple as an exploitative power that is not giving back to the country.

Apple then had to undertake a big campaign to convince Xi that Apple’s training activities provided immense benefits to China, and more than could be achieved through a joint venture. So Apple committed to continue its $55 billion a year investment in China. Indeed, Apple’s suppliers offered their know-how to homegrown companies led by Huawei, Xiaomi, Vivo and Oppo. China has thus become a smartphone superpower with its brands accounting for 55 percent of the global market.

Into the Chinese quagmire

Today, Apple finds itself stuck in China. McGee argues that Apple needs to de-risk itself from its excessive dependence on its China-centric supply chains. But this is not easy. It has around three decades of investment in China which cannot be easily unwound. Moreover, Apple’s Chinese system works like a song and China is still the market for about 20 percent of Apple's sales. .

Many commentators are suggesting India as an alternative production base, although Donald Trump is against this. Some assembly functions are indeed being shifted to India. But these are just the very final assembly phase of production, which are sufficient to justify attaching an “Assembled in India” label. All the pre-assembly activities remain in China. At this stage, nor is India not a viable alternative in terms of human capital, infrastructure and logistics system.

Over time, it could become so, but it would be a decade long process. It is however important to not overestimate India’s merits as an economic and political ally. It is staunchly attached to its “strategic autonomy”, while its democratic credentials are fragile. Moreover, autonomous India may have Apple’s interests less at heart than authoritarian China does.

US is not a realistic option for Apple’s production

Donald Trump’s desire to “reshore” Apple’s production to the US is not realistic, despite his insistence. It does not have the capacity to produce Apple’s products at scale and at low cost. It most certainly does not have the same low cost, well trained engineering workforce as China, which has some three million people working in Apple’s supply chain.

Under Trump 1.0, Apple made a commitment to build “three big, beautiful factories” (in Trump’s words) in the US. But none were built, it was just hot air. This time round Trump has threatened to impose a 25 percent tariff on iPhones if they are not made in the United States.

In response, Apple said that phones sold in the US would be labelled “Made in India”, and has pledged to invest $500 billion in the US. What this pledge means in reality is still unclear, and as I said Donald Trump is against the India option. Apple may ultimately need to build a token factory or two, with limited production functions, to pander to Donald Trump.

For its part, China would not like to see Apple depart from China. It has gained so much in terms of technology transfer and human capital development. Moreover, McGee argues that Apple has been the de facto largest supporter of the “Made in China 2025”, Xi Jinping's ambitious plan to make China self-sufficient in robotics, automation and advanced electronics. Apple has nurtured conditions for Chinese technology to outpace American innovation.

Thus, if Apple started shifting major parts of its supply chain out of China, the Chinese authorities could easily respond by sabotaging Apple’s supply chain such as by cutting electricity supplies and restricting access to key raw materials. While Apple has benefited from China’s authoritarianism, this system could just as easily turn on Apple.

Conclusion

In sum, Apple has helped create a monster, in the form of the Chinese global tech power, and left itself stuck in China, with little place else to go for the manufacture of its tech products. Apple is likely to come to an unhappy end in China as its chief domestic rival, Huawei, outstrips its market share, while Donald Trump’s trade wars may harm its bottom line in the near term.