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Apple in China
Apple in China1920×2560 288 KB

Apple in China, Patrick McGee, 2025 - Though the book is about Apple’s involvement in China, it covers a lot of Apple’s history as well to set the context of its evolution. It is a fairly balanced take based on facts. Whatever you may think of Foxconn, you can’t help but be impressed by the passion, drive and capability they have displayed (Terry Gou esp) that we can only dream of. Nobody pulled Apple into China - it just evolved step by step over a decade with Foxconn taking its manufacturing to mainland China and later on being displaced by the Red Supply Chain (mainland Chinese companies) due to politics

My Notes -

  • Shortly before Jobs returned back to the helm in 1997, Apple had factories in California, Colorado, Ireland and Singapore. Production moved to South Korea, Taiwan and then to Mexico, Wales, Czech Republic and China (Jobs always wanted manufacturing in the US)

  • Apple opened its first store in Beijing in 2008 (for the Olympics) and did sales of $1b, by 2012 it went up to $23b (massively underestimated demand). Apple equipment in the country was $7b by 2012 (its capital investments)

  • Since 2008, Apple has trained 28 million workers in China - more than entire labor force of California. China brilliantly played its long-term interests with Apple’s short-term needs. In ‘99 none of Apple’s products were made in mainland China. By 2009, almost all of them were

  • By 2015, Apple’s investments in China reached $55b per year! To put it in perspective, the CHIPS act envisions $52b investment in the US over 4 years.

  • China demand indirectly supports between 1-2.6 million jobs in the US across all industries. Apple alone supports 5 million jobs in China

  • Apple expected to do $414b in revenues in ‘25 (~$100b in profits). Since ‘07, iPhone alone has done $2T in sales. Google pays $20b/yr just to be default search engine on the iPhone

  • Total Apple devices in active use surpassed 2.35b (1.4b iPhones). These are richest quintile of people in the world that Apple has direct access to for promotions

  • Apple’s move to change how third parties track users killed business of advertisers like Google/Meta but Apple’s own privacy-first ad business went up from $1b in ‘20 to $30b in ‘26E

  • Foxconn’s revenues today are greater than META and NVDA combined (as of ‘24)

  • iPhone operations - 200 lines each averaging 3330 units/day (~$250m/yr)

  • Until 2019, iPhones were manufactured by Taiwanese groups working in China - but this has changed considerably since with mainland groups with political backing taking over

  • Only a dozen MNCs earn > $10b in China. Apple tops the list with $70b (almost 17% of revenue)

  • In 1981, Jobs was critical of IBM’s PC because it looked like crap but it was built in under a year with pre-existing parts with software by Microsoft (DOS). Jobs missed how brilliant the idea was (of a open platform). IBM had zero revenues in 1980 from PC but by 1982, had 16% market share outselling Apple two to one. By 1984, it was 3x Apple (open platform and giving control of software to Microsoft meant IBM’s brilliant strategy was still a dud for it as others competed it away on price)

  • IBM achieved market dominance through innovation in circuit board production (outsourced to SCI). SCI pioneered automated circuit board manufacturing and EMS (electronics manufacturing services). SCI sales was $45m in ‘81 and $500m in ‘85. Later came Solectron, Flextronics, Celestica and Jabil

  • In 1985 Jobs expected Mac to do sales of 80000/month. It did just 5000/mo. Demand was so poor that Jobs and Sculley didn’t give product-wise breakup to Wall st.

  • Mac was too expensive in ‘85 and needed a killer app to justify price. Apple designed a Laser printer (LaserWriter) and manufactured in Japan by Canon (Adobe PageMaker as the killer app). This was the first Apple product manufactured by third-party. Laser printers used to cost $30k then. Apple bundled Mac + LaserWriter at $10k as a bargain. It was however too late to save Jobs (quit in ‘85 due to underperformance)

  • Apple collaborated with Sony in early 90s for PowerBook. Sony crammed innards of a Mac into a portable form-factor of a 5lb laptop priced at $2300. Apple was astounded by Japanese precision and quality

  • Japan lost its edge as an affordable manufacturing base in ‘94 when dollar lost half its value against yen in 15 yrs. Apple Newton manufactured by Sharp was a disaster due to labor shortages and soaring currency. Sharp had a condescending view of Apple engineering as well (likely how Huawei sees Apple today) and came up with its own rival PDA.

  • US was bureaucratic (this is mid 90s) and falling behind Asia on cost and quality. Turnaround time of 1-2 days in Asia would be 2 weeks in US (the idiocy of Trump trying to make iPhones in the US)

  • Taiwan rose as a industrial base with Japanese investments of skill and capital to combat rising wages at home. Taiwan used to be a Japanese colony for 60 yrs until WW-II so culturally it was a good fit.

  • Apple made $11.1b in Sept ‘95 (TTM) up from $7.1b 3 yrs prior. But Windows ‘95 launch and subsequent panic and price cuts led to halving of revenue to $5.9b in ‘98. They didn’t have a hit product, was saddled with debt and company was sinking fast. (Amelio was CEO)

  • Jobs started NeXT after leaving Apple and in 8 yrs (by ‘93), having learnt nothing from Apple mistakes - had a expensive product (NeXTcube), expensive manufacturing and a even more closed ecosystem than Mac making it a complete flop

  • In ‘86 Jobs acquired Star Wars maker George Lucas’s graphics group for $5m and renamed it as Pixar. Pixar had a high-end image computer ($135k). By ‘93 Jobs sold off the hardware business and cut staff by 70% and narrowed efforts to story-telling. Toy Story was a smash hit (first full length computer animation). Jobs took Pixar public and became a billionaire

  • Jobs made a similar decision at NeXT computer of focusing on software - OS and WebObjects. Apple paid $400m for NeXT for the OS which was 5-7 yrs ahead of everyone else (only way to fight Win ‘95 onslaught). Jobs came back as well to lead Apple.

  • Apple chose LG to manufacture iMac (Jobs’ first product upon return) since it was already making its CRT monitors and iMac was a CRT monitor with a computer stuffed inside (Jobs wanted Japanese but they were expensive). Japan had invested significantly in South Korea since the 70s like it did in Taiwan (again, a former colony and similar culture). LG bid that it would pay for tooling and bear the cost to make the prototypes (something most EMS guys working with Apple will do in the future)

  • iMac was a big hit. It sold 278k units in 6 weeks (Aug-Sept ‘98) and 800k units by Christmas leading to 5th consecutive quarter of profit since Jobs’ return.

  • Apple cut 450 positions in Ireland and 350 positions in California (even Jobs came around eventually to give up his fancy for US manufacturing). LG setup factories in Singapore, Sacramento and Ireland and later in Wales and Mexico. iMac demand was overwhelming

  • Inventory would be on LG’s books until it crossed the yellow line in the factory and became a finished good (Another recurring theme in all Apple manufacturing is vendor-managed inventory - combined with just-in-time manufacturing)

  • Apple tried to get prices lowered as iMac volumes ramped up (another recurring theme) but LG stood firm. It thought itself indispensable having worked with Apple on the design and owning complete manufacturing. It made the cardinal error - In contract manufacturing client comes first. A little known Taiwanese company Hon Hai precision (Foxconn) was reverse engineering the iMac and Terry Gou managed to get the contract from Apple (by dialling Tim Cook)

  • Taiwan faced same issues Japan did (rising labor cost) and did same things Japan did - build factory in mainland China like how Japan built in Taiwan and Korea. Just like Japan, Taiwan had a cultural fit with mainland China. Taishang (as these Taiwanese were called) brought export-driven low-cost manufacturing

  • Michael Dell visited Terry Gou (Foxconn) in Longhua campus and was blown away by the austerity of Terry’s office (just a shed with a plastic table) - it was clear that every dollar Foxconn earned was going to the production line and not to marble floors in the reception - it had world class machinery in the factory (subsidised by local govt)

  • Gou’s ten levels of breaking down a product - Level 1 might be a knob on a TV. Level 2 might be a stamped part that goes into the knob (only mechanical interfaces, no complexity). Level 3 might be some wires and connectors going into the knob. Level 4 and 5 complex subassemblies. Level 6 - PCBAs. Level 7 and 8 - putting together a PC or laptop and Level 10 would be finished good ready for shipment (He would always aim to capture complete value chain)

  • In 1980 Shenzhen was a fishing village with population of 70k. By 1990 it was 1.7m. By early 2000 it was 7m (100x in 20 yrs). Terry Gou ranks second only to Deng Xiaoping in transforming China

  • Soon firms assembling electronics hired expensive designers, invested in R&D to design PCs as white label products that brands like Compaq or Dell could pick and rebadge it (ODMs like Asus, Acer, Inventec etc)

  • Gou shunned ODMs because he did not want to hire expensive talent. Instead he wanted to be vertically integrated and control BoM (bill of materials) as much as possible (OEM instead of ODM)

  • Gou wanted to take supply chain off the client’s hands and make money in sourcing components (more parts he controls, more opportunity to manufacture or trade). So he would give tooling away for free (bear all upfront cost for molds, dies, fixtures) and do final assembly for very cheap

  • Cook’s ruthless efficiency in materials management in the 12 yrs at IBM almost sent Apple to bankruptcy. Jobs hired Cook because he wanted someone good at all the things he was bad at.

  • When Cook negotiates with a supplier - he wouldn’t try to figure out “Whats a reasonable thing to ask them?” instead he would ask for everything until the vendor says no (and Terry wouldn’t say no).

  • Gou figured out earlier than anyone that the value of working for Apple wasn’t the profits, it was the learning. Gou offered to build iMacs for Apple at $40 less per unit than LG. Foxconn was merely a connector company at this point. Foxconn built iMac tooling in 25 days as per commitment impressing Apple. The standard was 12 weeks for tooling

  • Foxconn opened a Czech unit where workers put in fewer workers and were repsented by a trade union. They threatened with a strike before Christmas - Foxconn deposited bonus within a week and then closed division within half a year closing Europe for Apple. Within a decade in the same way, all production would move to China - with all final assembly done by one vendor - Foxconn

  • Apple’s engineers found precision machining capabilities at hard-drive makers in Thailand, turbine blade factory run by Singapore Airlines, watch makers in Switzerland and applied those technologies to their products (started with flat screen iMac G4)

  • The iMac stand was forged, machined, heat treated, polished and chrome plated with hardened 17-4 stainless steel - soon Apple cornered the entire world market for the material

  • The amount of time in trail-and-error work it took to design the iMac across China, Japan and Singapore forced Apple to urge partners to set up operations in China. This allowed Apple execs to go from injection molding, sheet metal stamping or machining facility to assembly site in hours/minutes instead of summoning someone from another country (Apple follows this to this day, now insisting all Indian iPhone vendors to setup shop in South India)

  • When iPod (2nd product under Jobs after iMac) was launched it sold 125k devices in first month but sales petered out to 20k a month within few months. The 2nd gen iPod launched within 9 months didn’t sell much either. Problem was that iPods required iTunes/Mac to function. Jobs was hoping iPods will sell more Macs but it backfired :-) iTunes for windows catapulted the 3rd gen iPod into a blockbuster (manufactured by Inventec in Taiwan). The iPod 3rd gen demand boom caused Inventec to open second factory in China (Apple was squeezing Inventec on margins with inc. in volumes - another recurring theme)

  • Foxconn reverse engineered iPod without specs and unveiled it to Apple to show capability (you have to be floored by this level of ingenuity and drive). Apple was pissed with Inventec by then (on slow ramp up and margins) and Terry was willing to work for pennies on the dollar. Gou was again going for capability and not profits - he would rotate workers on Apple projects to maximise the learning

  • Foxconn had a stronghold in metals in 2002. It was the go-to source for all things Aluminum starting with the iMac cinema display. Jony Ive was impressed by the stainless steel back of the original iPod but it would attract fingerprints (it forced the user to polish the unit, developing an unconscious nurturing connection) so when Jony wanted to shift to anodized aluminum for iPod Mini, Foxconn was the natural choice in 2004 (Apple’s bestselling product at that point)

  • Gou put up greenfield capacity for iPod in just 6-9 months - installed new machinery, hired tens of thousands of people and got production line up and running (9 months, even permit for site cant be acquired in America). iPod sold 937k units in 2003 to 4.4m in 2004 and 22.5m in 2005 (market share from 33% to 82% between ‘02 to ‘04)

  • Jobs attributed his cancer to the volume of work he took up in ‘97 running both Apple and Pixar

  • Apple abandoned sampling (testing random samples) in QA process and instead tested every iPod through costly tests - two-thirds of line was dedicated to testing and validation. Nobody would do that because of the cost (A habit they will carry on to iPhone)

  • Foxconn intended to squeeze Apple on profits (by controlling supply chain) but Apple instead squeezed Foxconn. In 2000, Foxconn PAT margin was 10.6% and dropped to 4.6% in 2007 and then to 2.4% in 2011. Between 2007 and 2011, revenues went up from $53b to $107b but prfits only went up from $2.41b to $2.53b (and Foxconn was fully responsible for warranty on iPhone!). Same time Apple margins jumped from 1.1% in 2003 to 26.7% in 2012

  • I would prefer to talk inventory in hours and not days - Tim Cook

  • For the unibody Macbook pro machines out of a single block of Aluminum - Apple bought 10000 CNC machines in a single year - costing between $100k to $500k each (deal with FANUC to buy entire pipeline for years, shutting down competitors)

  • When Apple co-created a process with a supplier, Apple owned the IP for it

  • It doesn’t make sense to hire smart people and tell them what to do; We hire smart people so they can tell us what to do - Jobs

  • “Fool me once, shame on you. Fool me twice shame on me” - American version. “If I cheat you and you don’t catch me, its your fault” - Chinese version

  • Since products made in China were for export only, Apple had to route them to Singapore and import it back to sell in China

  • Throughout the 2000s, manufacturing labor costs rose by 15.6% a year. Attrition was 300-400%, sometimes 25% a month and avg tenure only 68 days (competition for labor from Xiaomi, Vivo, Oppo and Samsung was very high). Churn around Chinese New Year was the highest at 50% (workers won’t return back from home to the city)

  • Samsung was making chips, flash memory, displays batteries for Apple until they copied the iPhone which pissed off Apple. This led Apple to work with TSMC. TSMC couldn’t commit to whole order and took only 50% (rest still with Samsung) and borrowed $7b to invest $9b to bring up a new chips fab in 11 months. Later shifted whole chip supply to TSMC (and risking itself with Taiwan situation)

  • Plenty of vendors went bankrupt when the technology they supplied was obsolete in the next generation of product (later they would insist vendors not make more than 50% from Apple to prevent negative headlines)

  • ToT (Transfer of Tech) as explicit condition for market access was illegal as per WTO. But when Siemens, Bombardier and Kawasaki entered China for high-speed rail, thats precisely what they did for local market access and soon Chinese companies caught up fast and were competing with them in the US on copied tech

  • China is a regionally decentralised authoritarian regime. While Beijing set the goals, how it was achieved was left to the provinces, municipalities and countries. This led to massive cauldron of independent experimentation. What worked in Guangdong would then be replicated in Shanghai and so on.

  • China might be mimicking the West but it wasn’t actually becoming Western. The assumption they would gain Western values leading to collapse of CCP was intellectual laziness (back in 2000s)

  • In 2016 China created a limit for companies temporary workers to just 10% - almost all of Apple’s vendor were in violation. Beijing creates policies like this when it wants to arm twist companies towards a wink-wink nod-nod arrangement and compel companies towards favors. Starting 2013, China started tightening the screws on Apple

  • Qualcomm which was collecting license fee on every smartphone sold using their chips was arm-twisted into paying a $1b fine, reducing license cost and losing IP.

  • iPhone accounts for < 20% of smartphones sold around the world but accounts for 80% of the industry’s profits

  • Apple would constantly send and train Lens Technology’s (company which cut corning gorilla glass) competition to keep them on their toes

  • Apple Squeeze - rigorously train local partners and give away manufacturing knowledge and help them scale and maintain quality but squeeze them for soul crushingly low or nil margins. iPhone margins was 33% for Apple while Oppo/Vivo/Xiaomi were earning 7%/6%/2% (with tech they learnt from Apple)

  • Apple demanded to access every detail of its vendor’s operating costs, from wages, cost of dorms, bill of materials and expenses of its machinery. Apple most times had better sense of its suppliers’ op. costs than the suppliers themselves. It would disintermediate vendors by procuring supplies for them and obscuring costs (like they did with Foxconn)

  • Because Apple didn’t want its vendors to be solely dependent on them (50% sales from others), they would strangely end up driving up Android sales - even encouraging their vendors to do so (because of negative news headlines when vendors went kaput losing Apple business). This is how Huawei, Xiaomi, Vivo and Oppo thrived. This ended up being even better than a JV based tech transfer

  • To CCP, Apple pledged to invest $279b in China over next 5 years in 2016 (they anyway invested $55b in 2016 - so they were just marketing) - to campaign for Chinese govt. to go easy on them (To put it in perspective the Marshall plan to spur development of 16 European countries post WW-II was $13.3b or $131b in 2016 dollars)

  • Catfish effect - put a catfish among sardines and they survive better and taste good (Norwegian fishermen would do this while transporting them). China saw Tesla as the catfish for its fledgling EV industry in 2016 (and we know how this went). We should probably let Chinese companies into our country and nudge our high RoE sardines to survive

  • Luxshare Precision won the order to assemble Airpods in 2017 - at cost with no margin at all on one condition - that Tim Cook visit her factory and be photographed on the assembly line. Two reasons 1. Owners stood to make more from stock market - predictably stock was valued at $38b even surpassing Foxconn, though Foxconn was 13x more on revenues 2. Luxshare wanted govt attention - to get factory land and other incentives for cheap.

  • Luxshare went on to make Apple Watches in 2019 and 2021 and even iPhone (first mainland business to do so). Between 2016 to 2023, its revenues soared 1455% to more than $32b (3/4th revenue from Apple). The faucet was turned off for Taiwanese as the mainland Chinese (the Red Supply Chain) would work for even cheaper and politics was forcing Apple’s hand

  • In top 200 vendors for Apple, there were 16 Chinese companies in 2012. 41 in 2019 (surpassing US) and 51 in 2021 (surpassing Taiwan!). Even this is misleading as the Chinese companies were many times bigger than the others. Apple’s whole labor demand in Vietnam was 45k (across 14 vendors) vs 72k at a single Chinese supplier Biel Crystal (glass). Even the non Chinese companies had presence in China (151/200 top had)

  • Other mainland Chinese suppliers than Luxshare - BYD Electronic (hardware enclosures), Goertek (Airpods and Airpods pro) and Wingtech (Mac mini and Macbooks) - collectively $6b revenue in 2015. $25b in 2020 and expected to do $52b in 2025 (Apple shifted from Taiwanese leaders like Foxconn, Wistron, Pegatron and Quanta and the workers shifted as well from these companies to the red supply chain)

  • Huawei Mate started nibbling away at iPhone market share in 2018 leading to a dud launch of the iPhone XR (first revenue warning in 16 years). Mate was awfully good, outshining Apple in features rather than just price. Within a year Huawei was outselling Apple not just in China but globally (Even in premium market of $600-800 phones, Huawei market share soared from 10% in 2018 to 48% a year later)

  • Trump sanctions on Huawei preventing Google services and cellular chips from being sold to Huawei collapsed its business and gave a huge lifeline to Apple (Huawei share of Chinese market collapsed to 7%)

  • Mac Pro assembly in Texas by Flextronics was a disaster. If screw is too short and you needed a longer one, you call someone and you will have 1000 at the factory tomorrow. In Texas it would take 2 months. Apple had to ship Chinese engineers to Texas to complete the project

  • Trump tariffs of 25% against Chinese products would have hammered Apple’s margins but it survived by gaining exemptions (this is in 2019)

  • By 2022, more than 70% of Airpods production, nearly a third of Apple Watch assembly and about a quarter of iPad manufacturing had moved out of China - mostly to Vietnam and Thailand. Apple has nudged the Taiwanese manufacturers to drive this shift who have driven the shift to India, Vietnam etc.

  • India ramped up iPhone production from zero to 15 million units between 2016 to 2023 (5.9 million in first half of ‘25). China between 2006 and 2013 went from zero to 153 million units! India mostly does FATP (Final Assembly Test and Pack out) mostly by Taiwanese companies Wistron and Foxconn.

  • Lower labor costs in India are offset by logistics cost of sending freight from China. Japan, Taiwan and China started out by making components, creating foundational technical expertise. By contrast India has been doing FATP for 7 years only now building up competency in parts

  • Industrial robots deployed in China - 290k. In India its 5400. Culturally too China suppliers and govt officials had a “Whatever it takes” approach to win iPhone orders, backed by docile hardworking labourers. In India its officials aren’t incentivised to boost growth and its labour has more of a voice. Tata Electronics however has shown intent and drive buying Pegatron and Wistron and scaling operations

  • Foxconn has limited interest in establishing operations in India given its investments in China and its knowhow of political and cultural landscape. Only thing driving it is Apple’s mandate. China has blocked equipment and workers from traveling to India but Foxconn has used its Taiwanese workers to compensate. China wants tech transfer to be a one-way gate

  • Today Apple Silicon in every iPhone, iPad, Macbook, desktop Mac, Airpods, Apple Watch are made on one small island by TSMC (Apple has doubled down on China risk moving away from Intel chips)

  • If Taiwan were prevented from exporting chips, global losses would be $600b-$1t on an annual basis for first several years

  • Samsung is likely to be the biggest winner if something were to happen to TSMC since it runs its own chip foundries in Korea and Texas

  • TSMC’s investment in Phoenix, Arizona would still be depended on Taiwan for advanced packaging so this fab would be a paperweight if something were to happen to Taiwan

  • Just 4 years after Trump sanctions, Huawei began shipping phones with its own chipsets and its own OS (HarmonyOS) and in early 2024, overtook iOS in Chinese market share. Huawei and Xiaomi outsold Apple in 2024

  • Apple market value has grown by $700m/day since Cook took over - but it might very well end being like Jack Welch at GE since the risks Apple faces of a blowup are now substantial

If it isn’t clear, China isn’t doing low value add work as is perceived by most of us. It appears as low value add only because they are foregoing margins. Most of the contributions aren’t inside the iPhone (as parts) but in the machinery and processes that made it. China doesn’t see itself as owing Apple anything - Apple created jobs but it also made a lot of money. It is also clear that Apple so far has been nimble and switches suppliers on a dime - be it Samsung or Inventec or Quanta when its not happy. However it might have sunk itself irretrievably in the Chinese Red supply chain and also traded short-term gains for long-term moats and stability (relentless margin expansion by squeezing suppliers in exchange for supplying know-how) both of which are at threat in the future. The book is very well researched and written well and is a very good read. 10/10

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