Patrick McGee | Apple in China

0:00 You. a meteor strike on Apple's business if China annexes Taiwan, because not only are all the issues that my book is about, which is that all the manufacturing is in China and what a problem it is, but even more so is actually that all the CPU development is in Taiwan. And so if there's a war for Taiwan, I mean, this isn't going to happen peacefully. The, the fabs, the foundries, the manufacturing capabilities in Taiwan would go out of business in the first hour, and that means there's no AirPods, there's no iPhone, there's no MacBook for probably several years.

0:38 Nobody is exposed as exposed to that risk as Apple. And Apple has been TSMC's biggest client for more than ten years. I'm so excited about this event. So, John here is not just, moderator of the event. He is one of the key characters in the actual book. He was the character that I discovered, sort of 150 interviews in, and I started writing the chapters for the first time. I'm saying this it was really this, because I found I found his story so exciting.

1:07 So I want to give you a quick 5 to 10 minute overview of what the book is. Apologies if someone has read the book. And then I'll, I'll give it the sort of introduction as to why John was, such a sort of foundational character in the book. And then what we can kind of have a conversation and whatnot. Do you want is there anything you want to read before I. Get a little bit of, housekeeping. Before? Sure. Housekeeping.

1:28 Good. So welcome to the Commonwealth Club tonight. This is, hopefully a great event for everybody. My name is John Ford. So as Patrick talked about, I'm a character in the book. It, came as a surprise to me. I was, quite thrilled to be a part of it. So I'll we'll talk more about that later. I'll be the moderator for tonight. Sort of. We're going to do a little different format maybe, than some people might be used to.

1:49 We hope it'll be enjoyable for everybody. And so now we'll do a quick introduction of Patrick, who you may be aware of, but he's award winning business journalist and author of the new book Apple in China Capture of the World's Greatest Company Since 2002. Since 2013, he's written for the Financial Times, reporting from Hong Kong, Germany and the US. In addition to his Apple coverage, Patrick has written extensively about robotaxis, electric vehicles, connected fitness. But Patrick welcome to takeover.

2:18 Thank you so much. And thank you so much for for being here. And I really can't see because of the light. So if I'm not making eye contact, I apologize. Maybe I'm looking at people's shoulders or something. It's not all that clear. I want to explain the origins of the book. Was really understanding a sort of topography of Apple that hadn't really been written about, and that's called the manufacturing design engineer. So in a sort of Apple product cycle, we all know about the tip of the pyramid, and that's called industrial design, and that's run by Jony Ive, Jonny Ive and his 12 or 24 people would really come up with like the substance, the look and feel of something.

2:54 So if you've ever wondered why the iPod is sort of sleek, white on the front and a chrome back, that's Jonny and his team. They're the ones who come up with translucent plastics to introduce the iMac in 1998. They're also the ones that sort of determine, with Steve Jobs that the the iPhone is going to be pure glass, no keyboard, someone else's job. And it's a painful job to figure out how to actually execute that and fit in all the electronics.

3:16 And it takes a certain different kind of genius. So you've got hired at the top, and then they throw it over the fence to product design, which is PD. So ID and then PD, we'd write about those as well. The third category is the group that I think has been ignored over the last 30 years. And they play an instrumental role in Apple operations. It's called manufacturing design or MD. These are the groups of people that would fly over to Asia in general and China in particular, to train, train, train, audit, supervise and install hundreds of millions of dollars worth of machinery and later, billions of dollars worth of machinery in other people's factories.

3:54 So the line I use is that in the same way that Uber is the largest taxi provider in the world without owning any cars, Apple, using MBD, figures out how to manage factories at maniacally obsessive levels as if they own it, but they don't own it. So they put this machinery in other people's factories, and what that allows them to do is tag the Apple machines and take unprecedented control. But without actually owning any of the, of the, the factories in question, which means that they don't have to pay for the workers when the workers are not building Apple products and so forth.

4:27 Now, this, is a is a strategy that allows Apple to really be who it is today, a $3 trillion company. But what I got interested in is there's a geopolitical element here, which is that by having this obsessiveness over quality and then having so much success with the iPod in particular, and then the iPhone, remember, the iPhone goes from about 5 million units in 2007 to about a quarter billion in 2015. Engendered in this effect of having these engineers go across dozens and later hundreds of factories in China to train, was just technology transfer on an epic scale.

5:04 So by not investing in the United States, Apple sort of accidentally contributed to the hollowing out of American industry. And at the same time, they began up arming, in a sense, our biggest adversary. Now, that wasn't the case in the 2000. We had a, make up, an American consensus that we were inculcating the next great democracy in China. And so the trade made all sorts of sense. But once XI Jinping comes into office in 2013 and really takes China in a belligerent direction, the geopolitics really shift, to some degree.

5:38 And then we find ourselves in a really strange position where, wait a minute, why is America's greatest company sending over America's best engineers to train in advanced electronics? Hundreds of factories that can use these skills not just to dominate electric vehicles and smartphones, but potentially build military weaponry with these sorts of skills. And insofar as there's been some criticism of this, online, people have said, well, Patrick seems to want to just like, you know, keep China in its place and not not allow them to flourish or something.

6:12 And that's really not the case at all. It's the consolidation, right? It's the quarter century investment in a single country that is problematic. And it's not doing it in America. That is problematic. So I sort of had the contours of this story. I saw it two years ago because I knew that XI Jinping, when he came into office in 2013, really, goes after Apple within 36 hours of becoming president, and he goes after them by having state sponsored media attack Apple for warranty differences.

6:41 And that's sounding, not very significant. It's going to become very significant once once we get John entering the picture here. But basically Apple is confused as to why they're being attacked. And this leads to their political awakening where, you know, we know that they outsource their manufacturing to a company like Foxconn. What we probably don't know is that they really outsource their government relationships to Foxconn as well. So Foxconn was really playing a role of, deriving the orders from Apple and sort of parlaying that into free machinery, free land, necessary, labor coming from the hinterlands of China to work in these factories.

7:16 And Apple really didn't have any political savvy by the time XI Jinping enters office. That really changes, quickly. Actually does take about two years, but they they begin to come up with a counter narrative in this, in the sense the biggest thesis of the book is this part five in the book, where Apple hires or names these people, they call themselves the Gang of Eight, and their role is basically to come up with a narrative to placate local officials, placate federal officials, and put Apple's operations into a language that China can understand.

7:48 And in a sense, what they come up with is a narrative of you have no idea how much we're contributing to your own companies, to what Beijing calls Made in China 2025, a directive to support indigenous innovation. And so, irony of ironies, irony of all ironies, what Chinese companies realize around 2016, 2017 is the best way to support indigenous innovation is to work with the mother of all capitalist companies, Apple. And then the narrative goes on from there, and we get to a point where the Chinese begin to be able to make better smartphones than than Apple.

8:21 I think the best smartphone in the world today is the the Huawei Mate XT. It costs $2,800. It unfolds twice. And so it's effectively an iPad and a smartphone in one, at a time when Apple doesn't have a phone that unfolds once. And not only is it a better phone, but they do the industrial design, the product design, they've got the same pyramid structure and they do it all in China, whereas we really have no plan B, Apple has no plan B.

8:45 If China decided to export, it's, canceled its export license. I mean, there is no way that they're building phones in India, despite what you might have read in the headlines. So, what was so exciting about meeting John Ford is that John tells a totally different part of the story, and it was something missing in my 70 page book, pitch, which is the sort of birth of the smartphone market or the iPhone market, really in China. And so if you remember when the iPhone came out, it costs 499, maybe 599.

9:17 It was enough for Steve Ballmer, Microsoft CEO at the time, to openly mock, really infamously, the price of the iPhone. And he basically said, no one's going to buy this thing, and that's for an American audience. So just try to remember that it wasn't an intuitive thing, that we were all going to pay large amounts of money for, for this, this smartphone. And so Apple really didn't think, the phone was going to do really well in China after all, the reason they're in China is it's a big country of depressed wages.

9:44 It's not a country where people are buying, you know, a ubiquitous, expensive phone. And the smartphone in China instead goes absolutely wild in 2010. And John is sort of got the front row of all front row seats to this whole narrative. And I'll hand it over to you to sort of tell us how you get involved in Apple. Yeah. And we'll tell the story of them opening the first store in the country, which you lead. Yeah.

10:13 So I'll backtrack a little bit in kind of my history and kind of how I wound up in that China market position. So my early years, I was a missionary in Taiwan. I learned to speak Chinese. So I'm fairly fluent in Mandarin. Most of my career because of that's been tied to China one way or the other. About a quarter of my life I've lived in Asia, lived in Beijing for five years, Shanghai for four years, to Taipei for a couple of years, Sydney for a few years.

10:34 So very international and global in my in my scope and my 20s. Taking my language, I started a small company doing audit compliance work, looking for a child labor issues, and took me a lot to Southeast Asia and then to mainland China. Learned a lot about manufacturing in terms of how the industrial manufacturing was going, what was happening in and in China in the in the mid 90s to late 90s, very low, low end industrial production, low quality clothing.

10:59 Most of your high end brand stuff was done somewhere else, but you'd see a lot of that kind of entry level manufacturing work being done in China traveled before there were roads and bridges and crossing through, you know, dirt roads. And it was it was a different world in China in 95 to about 2000. Ended up, selling that company and joining Apple, oddly enough. And, I, I didn't quite know the journey that was going to be going down.

11:23 But love to Apple a group. As an Apple enthusiast, I had my first Apple to when I was a very young teenager. And so my father kind of helped curb, help, help fund my Apple passion as a, as a young child. So coming to work at Apple was like coming home my first day at Isle one, infinite loop one, the corporate office was just like walking into home. And so it was this really nice transition into this new job.

11:44 I knew when I started with Apple in 2003, my number one goal that I set goals myself every five years was to find a way to get back to China with Apple. Didn't know what that meant and didn't know what it was, but that was one of my goals. And so then it was, you know, I started a job with Apple. It was three years later that I was in a retail job. And my father, Patrick, kind of highlights this in the book.

12:04 My dad kind of kind of looked at me funny when I sold my company and, and started working for working for Apple, and suddenly I'm in New Mexico, and then I go to work in a retail store. It's like, okay, yeah, you were a CEO traveling the world. You were kind of living the high life, and now you work in the mall and you're. Making $13 an hour. $13. As the only Apple employee in New Mexico.

12:22 Mexico. Yeah. So it was a rough transition, sort of. But I knew I loved it. Love the energy of it, love the pace of retail. I loved helping customers. Was a horrible manager, didn't know a lot about leading people in talent. And so I kind of developed skills that I knew really well how to sell, how to sell, how to work with customers, how to leverage a relationship to build trust with people that I learned as a missionary in previous years and built into a pretty good, reputation of someone who could build culture and manage teams and, leverage that into a store management job.

12:52 And it was a few years later, a couple of years later, in 2007, late 2007, I was in a meeting and they brought up this, hey, we're going to open stores in China. They were highlighting new markets that Apple was going to move into, and I happened to be in the room and I just said to a recruiter nearby said, I'd love to help. I speak Mandarin. And that suddenly turned into, oh my goodness, you speak Mandarin here.

13:11 Come meet Steve Cano, who's the head of Apple Retail. So that okay introduced me to Steve and I thought there was this giant master plan. Apple is a big company. There's got to be a master plan. There's got to be a thousand people already there figuring everything out. I found it very quickly. There was no plan. We found out a few years ago. I was the plan quickly, but initially we found out. We knew we were going to build where we were going to build.

13:35 The government said, we have this with the Olympics, a retail location. Can you come in and open a store? Apple said yes. And then suddenly, two weeks after that conversation, I was on a plane to China and to go figure it out. Yeah. So I described John as this humble figure who really thought he was going to be the equivalent of a Walmart greeter, but it. Really did. Beijing saying, anyhow, when people walked in to the store and then it quickly dawns on you that they don't want you there for a temporary wall.

14:00 And you have three children at the time, right? Three children and school age kids. And suddenly we're thinking about moving our family to Beijing. And, it was a daunting thought because I had been in China years before. I remember telling my my wife at the time, I told her, I said I was in Hong Kong on a phone call with her in mid 90s. I said, we may live in Hong Kong, we might live in Taiwan, but I'll never ask you to live in mainland China because in the early 90s it was kind of depressing.

14:23 It was a different place. It was emerging, but it was still not the not the place you think of today. So my opening for you in the book, right in the chapter is called The Missionary, is that this 275 pound guy who went to, you know, Portland State on a football scholarship is arriving in China with nobody there even to greet him. I mean, Apple is so, small at the time that one of the first operational employees, is once going into a factory.

14:47 She says she works for Apple, and this is in Chinese. And the security guard says, can I see your trunk? And she opens the trunk for him and then says, like, why am I opening the trunk for you? And he says, I wanted to know what kind of apples you were bringing into the factory. And John actually plays this really instrumental role. So Apple, I mean, technically Apple goes back to 1993. That's when they opened their channels business.

15:09 This is third party sales. They really never have a market share. The iPod doesn't take off the way it does. In America. And at the time it's always known as ping. Well, so Apple in Mandarin and John's the guy who says no. Yeah, I spent time with Ian Duffey, who was the head of Ikea in Southeast Asia, and Ian told me so the number one mistake I made in China when we opened the China market was we called Ikea, Eeyore, and everyone in China knows that his idea and I can't get it back to Ikea.

15:38 And he said, the rest of the world, we just use the non-English word Ikea. Even in America, he said. I don't really remember why we did it, but we should have just kept it. Ikea. We don't translate it for the Americans, we don't translate it anywhere else. And he said, if I were you, I would try to keep it apple. And I thought deep about that, not only about the word Apple, but iPod, Mac, iPhone, things that were market things.

16:00 And so we made an agreement with Ron Johnson and Steve and myself on this. Steve on a phone call, and they asked me the question, what do you think? And I said, we should stick with Apple. We want to respect our local cultures that we're moving into, but we have to realize if they wanted a Chinese company, they'd be buying from a Chinese company. And I wouldn't even call us an American company. We're Apple, let's be Apple.

16:19 And Apple has these marketing terms that we created. Why wouldn't we stick with them? And so we made a really concerted effort not only to make that choice, but then in all of our training with all of our employees, we always use the word apple. We speak Chinese and you'll hear the word apple come in and here it is. You know, some some a lot of years later. And if you walk into an Apple store in China today, you will still hear people speak in Chinese and use the word apple.

16:41 And I think the quote you get that I told you a long time ago was really proud to say you have an influence on how a billion people think about a product. And I love that. This is just like sort of you just coming up with this and then just sort of convincing people. But there really isn't just this massive team. John is the team. Can you tell me about okay, so what among the first things that happens when John arrives in the country as he realizes, there's a catch 22, you can't get a retail license unless you have a store, and you can't build a store unless you have a retail license.

17:10 And so you surmise, okay, this is probably about finding an official, giving them a red envelope stuffed with cash, and you solve the problem that way. But from day one, you don't want to be involved with any sort of corruption. Yeah, certainly as an American, you have very strict laws against against political corruption. So you gotta be very, very careful about that. And we take anytime you're on and kind of a leadership role in a company like Apple, they walk you through the course on things you kind of can't do.

17:32 And so you're aware of it. I was already aware of it, but going into it, I spent time with a lawyer who worked in the Apple market office who was there. There's a handful of Apple employees who did marketing support. And, his advice was, we need to find something that would be a license that's similar to electronics, something that would that would preclude sales. And then we can transfer that license over legally. And that could be your, your, your chicken and egg.

17:56 And the way around the. Fire is store rather than start fresh. And what's the store that you find. So we found a of walking down the street, and I just happened to see this little sewing machine repair shop. It was not much bigger than the stage by a little bit smaller, dirty, filthy sewing machines all crammed inside of it. And, struck up a conversation with the shop owner, and I think he. I couldn't tell if you thought it was crazy or if he thought I couldn't quite understand my Chinese.

18:20 I didn't know quite what the issue was, but I could tell I wasn't getting through to him. So I went back and met with the lawyer and said, what do you think about a small sewing machine sewing machine repair shop? And he thought about it and said, well, they sell sewing machines. They repair them, they have computer chips inside. So this might work. And so we went in and negotiated a fee that was probably, you know, 20 or 30 times his, his, his, his annual income.

18:44 And, he was extremely ecstatic about it. But that was the foundation for what is today Apple's giant retail, online and retail. Yeah. I mean, just to be clear about how nuts this is, there's 12 companies in the world, non-Chinese, that sell more than $10 billion worth of goods in China. Apple is far and away the largest with $70 billion. And the retail license for this was John finding a sewing machine repair shop. Yeah, this is a fun story. Yeah.

19:09 So you sort of convince or rather demonstrate that you are the sort of savvy self-starter who had been a CEO. I think when they first talked to me, it was the entrepreneurial side of starting a business in my 20s. They liked sort of the person who could overcome challenges and go figure out how to do things. Yeah, my very first client as a small company was the National Basketball Association. And that was, you know, going from a 23 year old kid to getting that client.

19:31 I think they like that journey that I went on. Yeah, totally. And so I think I have all these moments of overcoming challenging obstacles. And that led me in this pathway of you know, trying to figure out and trust me, your your first section of the book that talks about me, it's highlights me flying into Beijing and gloomy skies going through the imposter syndrome in my heart. I was completely thinking, how in the world am I going to do this?

19:52 The quote that I use is from Steve Jobs and some of you may know it. It often goes viral on LinkedIn where Steve Jobs says, we don't hire smart people and tell them what to do. We hire smart, smart people so they can tell us what to do. And I thought you're the quintessential example of that. So okay, so maybe we haven't quite explained. So what happens is Apple gets this opportunity unbidden to build a store in the Sanlitun district of Beijing.

20:15 And so a mall is basically being developed. The neighbors end up being Nike, Nike. It's a it's probably the first mid income mall in in all of China. Most of them. And before that had been focused mostly on Cartier and Prada and all the really high end. Ultra luxury or bargain collection. This is this was. Much more in the middle toward a middle class customer. With the Olympics coming in, it was a prime location for us to be.

20:36 We had the center spot right in the middle of the assembly two courtyard. It was a beautiful spot, very small. And so that modest small size meant our rent wasn't quite as bad. Yeah, the small was actually a good factor because Cupertino is not convinced this is going to make money. Cupertino had thought, and live in Cupertino. The Apple retail team really thought China was more of a 5 to 10 year window problem, not something you were worried about today.

20:58 They had a lot of countries on the market on the list are well ahead of China that you wouldn't even think would be on the list in today's terms. Yeah, I mean, there's no Apple Store in Hong Kong, which is like, you know, the upscale city of Greater China. There's still no store in Paris. There's no store in Berlin. The Apple Store is largely an American phenomenon. There's 70 stores in America at the time, but it's really not not much international.

21:17 And they had stores in and in Japan that weren't super successful. They were they were moderately successful. But really, Japan at the time was the second largest market for Apple. And the stores did okay. But compared to the U.S. stores, the volume was really quite negligent. So I think they were extrapolating the work in Japan to what might have happened in China. And the belief was we wouldn't do a lot. You alluded to a story the day before we opened.

21:39 I'm sitting with some other executives, and they were asking me and kind of in a joking way, what are you going to sell? 12,000,010, 12 million in revenue in an Apple store was nearly nothing because most U.S. stores were doing three or 4 or 5, six times that much. And so I'm going to fast forward a little bit here, which is just that it ends up being moderately successful in the first few years. But that figure that John and his team are guessing for the first year, 15 million or so, ends up being what Apple is clearing in a single week within about three years.

22:06 And we were hitting 3 or $4 million days sometimes. Yeah. I mean, so nobody in Cupertino was was seeing this again. They saw it as a big country of depressed wages. And instead growth is absolutely wild. But this is where the story just becomes a little bit nuts, because in America, when people are going wild, it's the early adopters that are standing outside the store. They're the ones who want to show that they have the biggest, story, the best phone.

22:28 And they'll they'll camp outside, you know, Cupertino or wherever, Palo Alto for for three days. It's a totally different buyer that emerges in late 2010. Am I right about that? Right. And so just tell me the disconnect. I would love to know the first time you noticed, because basically you're seeing fairly impoverished people not city dwellers, and they're in line to buy what is, in effect, a luxury item. So maybe, maybe just for perception purposes purposes, it would be like seeing a line of 5000 people outside the Tiffany's store, and none of the people look like they can afford the jewelry.

22:59 And you must be going, who are these people? So could you do that? So we had a mixture of, people trying to resell work that was that was confusing to people would buy and try to sell somewhere else because we only had a few stores in market. But as you saw consumers buying the iPhone, we we did some internal surveys. And one of the survey pieces that came out, you alluded to there was several customers we talked to.

23:18 One was a young mailman, a young postman, and he was probably in his early early 20s to the kind of 21, 22, 25 year old he spent about a third of. Is there a third to a quarter of his entire annual salary to buy an iPhone? And the quote that he gave that I'll never forget, I watched it on video was was something to the effect of, you know, when people see me with the iPhone, you know, I'm not just a mailman.

23:39 I'm more than that. And the even more dramatic example, which made all sorts of headlines in China at the time, was, a young teenager went, underwent black market surgery to sell his kidney in exchange for enough money to buy an iPhone and an iPad. And now these might sound like anecdotal examples, but we're talking about a period in which sales in China go up around 3,000%. I think it's 2,200% in a matter of three years. So Tim Cook himself calls the growth in China mind boggling.

24:06 I mean, they are not expecting this to be a market and instead it becomes the market of all markets. Yeah. Okay. And even to the point of, you know, in a in a different time, you wrote in the book about a moment where an Apple executive who managed supply chain was talking to me and asked my opinion on how many phones we needed to satiate demand in China. And I gave them a number is quite large.

24:25 And he came back and he said, that's a quarter of the global supply. And I said, Welcome to China. Yeah, I literally said, just like that, a little nonchalant and arrogant. And I think his reaction was just like, is this guy joking? Okay, so I'll explain who is in the line, and then you come in with more color. So what happens is, these well, okay, so some background there, these quasi gangsters in China and they're known as the yellow cows in the 1990s in the history I give, they notice that, there's a middle class building in China, and they want to ride more on the trains.

24:59 But China, you know, this is a decade before high speed rail hasn't built the necessary railcar capacity. So what they do is they buy up all the tickets and then they stand outside the line, and then they just scalp them and they make money. I mean, not so different. If you were going to go to an NBA game tomorrow and you'd probably find some people scalping, but, but they do it to such a degree that they get mixed up with organized crime.

25:21 And instead of just selling the tickets, they're actually working with factories, buying proprietary cardboard, buying proprietary machines. And they're, they're creating the tickets. Right. So you go from just like scalping to make some money to outright forgeries. And this is essentially what happens with the iPhone. So you have a rule I don't know if if you created it or not. But basically if you wanted to buy an iPhone, you could only buy two. Maybe sometimes you could only buy five.

25:45 But they recognize this imbalance where if they can amass, let's say, 10,000 iPhones and go to a city like Chang Cheng, population 32 million, number of Apple stores zero. They can be the monopoly supplier of iPhones and sell them for such amount of money that, as I put it, they're making more money per iPhone than Apple is, correct? Yeah. And a lot of those rules came into place because when the iPhone search first became popular, yet, in particularly in the UK, we had, Russian resellers coming in buying in volume and taken out.

26:16 So we had to put rules in place to try to slow down the people that were turning the products around. We had Chinese resellers coming into the US to particularly low tax states and buying the product. Yes. Portland, China. Portland was Portland has no sales tax. So they were being smuggled in from Portland. And so it was very, very common practice to buy up and volume, bring back into China and then resell them in China. We started to sell in China, and then they started to figure, well, let's just buy them right here.

26:39 And they would bring busloads and not even joking busloads of people. So in the morning when I would open, I might have 4 or 5000 people waiting in line to buy iPhones. You know, just snaking around the store. And the first time we did it, we didn't quite know what to expect. We had 30 or 40 security people. By the six months into it, I would have 7 to 700 to 1000 people daily, just who were security people.

27:01 Yeah, I think I got this number from somebody else. But there was like for every. One for ten or. Every ten people in the line, Apple would have a security guard, but they didn't want to make it look like a customs stop. So it was a plain clothes guard who's just sort of subtly keeping keeping order, keeping people in line. And then there begins to be these news incidents. Right. So you've got ordinary people in line that are wanting to have the Steve Jobs experience of the sanctuary of the store, but the yellow cows are effectively like elbowing these people.

27:27 There's bloody noses and CNN is covering the story. So you're the guy sort of managing the chaos of the Sanlitun store. And if you could tell me just a little bit about what was it like to be able to have like record numbers of sales? So everybody's happy and yet, you know, images and news reports of just like utter chaos. Yeah, it was it was a tough balance because people would ask about volume. And I said, I don't like talking about volume because I can make volume.

27:49 Whatever you want it to be. You pick a number and I'll make that number happen. And it doesn't matter how big or small, you make the number. And so through the experience of working with these, we call the Huang Nio is the Chinese term for. But these these the these yellow cow scalpers, you know, they're a group of people that will target any inefficiency in the country and including they didn't mention this one about hospitals. They'll go to the hospitals in the morning and take all the tickets.

28:11 And if you have to see a specialist, you go pay a certain amount of money. If you want to see them today, you'll pay a fee. If you want to see them in next hour, you pay a big fee. So and the more important the specialist is, the more you pay. So these these practices are quite common around China. They're looking for this inefficiency in your distribution model. Some sort of pipeline they can clog up. And they identified pretty quickly.

28:31 We have four stores in the country. We have a massive supply of phones. We have distribution problems all across the country. They knew it. And so they would bring the busloads in and get them in line. And these it wasn't so much. We had riots come up. It wasn't what we think of in riots in Western terms. We think in riots, a Western in terms of maybe pitchforks and torches. This is more people that they know inside of that building is, you know, months worth of income for me.

28:57 If I can get in there, the, the reseller has handed me a lot of cash. I'm a poor person who works in a maybe a farm in a rural area. I'm here if I can just get five of these phones, that's probably six months to a year salary for me. And so and these are people that are quite poor and need the money. And so they're very adamant they want to get in. And in China, when you want to get something, you have to push your way through it.

29:17 We drive that way in our cars. We sort of push our way into into spaces. If you really want something, you mentioned the train tickets during during Chinese New Year, and you go to the I don't do it, but of my, my some of my employees would have to do it every year and go to the train station and push their their money to the front of the counter. And everyone's just doing this. You can't just tell them to wait in a queue. Right.

29:38 And so those are some of the struggles we dealt with. And every time I reach out to Cupertino, the first response was call the police. Yeah. Which was if you live in China and you work in China enough, it's a it's a almost comical thing to say. Yeah. So I sort of portray John as like this person that speaks the language and has a real sense of street smarts and sort of trying to communicate this back to Cupertino, which just doesn't this doesn't have those skills.

29:58 And so there's there's always this disconnect between what you're seeing on the ground and what you're trying to communicate and sort of what they're hearing and what they're wanting. Tell me when you when you first started communicating with the street cows, I'm sorry, with the yellow cows. And then how that developed into, your visit to the cash room. Yeah. So the early on, it was trying to figure, okay, how do we placate them? How do we find a get them enough inventory to have them take their people and go somewhere else?

30:21 Because at the end of the day, we just wanted to sell to real customers daily. I had employees crying. I had employees frustrated. They weren't treated well by the people in line. It was a really frustrating experience. There were real customers who wanted to own the product experience, the product and the employees. We had really wanted to give them that experience, and so they weren't able to do that. They became essentially cashiers just processing orders through, and there's nothing to be inspired about in that process.

30:45 And so. So people probably have an image of like, making an iPhone in Shenzhen, where it's this conveyor belt system. I mean, I literally asked a very senior person at Apple, how do you make an iPhone? And he said, have you seen the I Love Lucy scene where they're making chocolate? I hadn't actually, so, I'm glad someone has. And so, you know, it's a scene where just these chocolates are going and what is she trying to do?

31:05 She's packaging them. And of course, it gets so difficult. This is a funny comedy that they start eating them as a way of getting rid of them. Well, the way that the conveyor belt system was made using an iPhone or, sorry, building an iPhone where essentially you have 9 to 11 seconds to put, you know, the camera in the left hand module, and then you move on and you do that for 12 hours a day. It sounded so much like that's how you were selling phones.

31:25 I mean, you got like clearing through so much inventory. Yeah, we were we were doing all sorts of crazy things, like we could use cash registers, which are pretty common in the retail space, but I surmise we could do faster throughput if we just took all the computers, turn them into cash registers, took cash, drop them in little bags, wrote a bag till number on the order that we just didn't throw it in a cash room.

31:44 And so we had teams of people checking people out, teams of people who just walked down the road grabbing plastic bags. And anyone who's ever worked in retail will know the heresy that I just brought up, because you got to manage cash very carefully. And we were very nonchalant because we were trying to push the volume as fast as we could. Well, and. So much was being sold. This is also from another source that armored trucks were having to show up at the store multiple times per day, filling the truck with cash.

32:08 Because the other thing that you have to know is that the highest denomination note in China, I think even today, is ¥100. That's about $15. Now, today it's not really a problem. It's they've really moved like the QR code based society. But this is before that. So before that everything is and. Wouldn't be uncommon to have $3 million of cash in the store. And I remember calling Cupertino and saying, this is the money people kill over.

32:29 You have to get this cash out of my store. Yeah. And so we worked with the banks to then work is the banks there typically don't work in the weekends, don't work on holidays. And we paid them enough money and they worked on holidays and weekends for us. Tell me the story of one of the yellow cows. Is able to convince you to sell them a whole lot of phones. So we were working with the idea of, okay, how many phones could we give them?

32:48 So they might take their cadre of people and leave and not come back to try to free up space. And so we worked with, one of the yellow cows that I'd gotten to know pretty well. And I knew them all by name. They all wore gold chains. They all had a Louis Vuitton bag with them. The bag would stuffed with money as much as as much as they could carry, because they ran into people, or than one other bag.

33:06 They take the phones and hand to someone else. And so one of them that I'd gotten to know pretty well and trust, I said, look, I'll sell you a bunch of phones, but I want you to take your people and leave. And so I worked with Cupertino, another another Apple exec there to make sure we had enough people aware of what we were doing. And we did an offload order, took them down to the garage, had them bring their car in the garage.

33:24 They paid a boatload of cash, and we loaded a few thousand iPhones into their truck, and they drove off. The very next day he's back there. And he said, I said, what are you doing? He said, things change. Yeah. So the whole part of the book is called Insatiable Demand because it's just Apple struggle to just make enough iPhones and get them to these people. But it just becomes this massive, conspicuous symbol, the cash room. Yeah.

33:47 So so that was the same the day or so later we were talking through what is the volume in Cupertino was like, what is the volume you would need to make and go away? And I was trying to talk to the different resellers and they said there's not any amount you can give us that will stop us from continuing to buy until the demand goes away. And so I said, I don't believe you. You have enough money for the one of the biggest companies in the world.

34:07 And he said, come with me. And he walked me into a room that was maybe a quarter the size of this room, a little smaller, but it was as full of red R&B, 100 R&B bills as I could ever imagine. A room being full. And as much as your mind can surmise how much cash would be in that room, it's exactly what it was. It was overwhelming to see it. And that's when I remember telling Cupertino, this isn't a problem with us paying them off to go away.

34:30 This is really us figuring out distribution. We've got to figure out how to supply the inner cities that they are supplying. And until that gets solved, this is going to be an ongoing problem. And this happened. This basically is every product launch for multiple years. Every product launch that we had that was they thought would sell. So all of the mobile devices and any, any of the iPads, iPads in particular, were were doing quite well at the at the time also.

34:51 Yeah. Okay. So it looks like we got what, eight minutes or so, seven minutes before, sort of opening up to a little bit of Q and A. 33 minutes in the back. So we got about 15 more minutes. Oh, okay. Okay, good. What I'm going to do is sort of wrap up this narrative where, okay, so for the longest time, including even when I submitted the first manuscript last September, the whole story of insatiable demand was sort of a detour from my narrative, which is largely based on producing the computers, right in different, countries across Asia, even in the Czech Republic, even in Wales, until sort of the armies of affordable, ubiquitous, hard working laborers in China really went out.

35:24 And you have this massive consolidation, into China. And because of the technology transfer engendered in that process, that's really where the narrative drive is. But the story begins that my story begins in 2013, where within 36 hours of XI Jinping coming into power, CCTV, you can think of it as like a state sponsored CNN really attacks Apple for these warranty differences. This was a big story covered in the Associated Press, covered in the Atlantic. And I don't think anyone ever really realized, what what why the warranty differences of all things were an issue.

35:58 And, after submitting the manuscript, I feel like I finally solved the riddle and it was already the prolog. But then I was able to make some additions to the narrative. And so what was crazy and so interesting for me, it was it was all about the yellow cows. So I had this detour of a narrative, and it's my favorite part of the book, but it turned out to sort of tie a ribbon around the whole thing.

36:17 So what had happened, if you remember where I said that, with the railcar capacity, they started forging, forging tickets. And in the sense what happened is the yellow cows got greedy with, with the iPhone. Now, some of this happened while you were there, right? Some of it happened after you left because you left in late 2012. Correct. And some of this narrative is in 2013. XI Jinping technically becomes, head of the Communist Party in late 2012.

36:38 He doesn't become president until March 2013. At that point, John has left. I'm pointing this out to some extent because it's a sensitive topic. And just to point out that John really wasn't the source for this. He wasn't even wasn't even there. But you you saw some of the lead up to this. Of course. And so okay, so what happens is the yellow cows get greedy. So among the things they do is they start using a legal ID.

37:00 Sorry, legal idea. What am I trying to say? False ID, fake IDs. Yeah. And they're going to stores in America, so they just want more and more iPhones. But it turns out that China is actually not a great place to buy iPhones. For starters, there's 5000 yellow cows in front of you in the lineup. Secondly, you can only buy two. And thirdly, there's a value added tax. So not only does Apple sort of like take the American price and then translate it to a foreign currency and add a bunch of percentage points and then round up to a nice price.

37:26 But there's also 22%, I think value added tax, 20% value added tax. So they they sort start finding ways to buy the phones in America and then smuggling them in some of the more nefarious yellow cows get even smarter, albeit more illegal, and they start using 24 month contracts with these fake IDs. So they're acquiring iPhones for one month, of the 24 month purchase plan. So in other words, they're acquiring iPhones from for less than $100, taking them to China and then still selling them for seven, $800.

37:58 Which is a little bit nuts, of course. And then to take things even further, they develop factory connections, just like they had done with the forgeries of train tickets, and they began finding a way to zap the processor and the rendering the phone in operable. But by doing so, they're also rendering it difficult to find out where the phone was coming from. So some of you, with the technical nature, might understand that a phone purchase in America can't just be used, on China Telecom phones in network in China.

38:25 We had we had also surmise a lot of these warranty issues. They were importing so many phones from the we call it the gray market from other countries into China. We surmise that if we change the warranty slightly, that might limit the value. So the warranty change we made, it used to be a global warranty for the iPhone, and we made it so that it became a regional warranty. So when they were bought in the US, they weren't under warranty in China, which would have meant had you brought a broken three month old iPhone to an Apple store, we couldn't have serviced it for you.

38:51 Hoping on our end to lower the value in the in the gray market on those phones that were imported from from from other countries. Right. Trying to offset the balance to make it so they could we were trying to figure out how do they make less money off of. Yes. So once they figure out how to zap the phone and mask that, it's basically a stolen phone from America. The line switch. So think of the lines that John was describing.

39:10 To get to the front of the store, they sort of moved to the other end of the store, and they're lining up at the Genius Bar. And I talked to other people who describe how people would literally show up with a backpack just full of iPhones and say, I bought all these phones and they're all broken, right? And Apple at first doesn't really understand what's going on. I mean, these are probably some of your genius bar employees.

39:30 The Genius Bar employees couldn't tell where the phones came from. We didn't quite know how they were zapped because you couldn't see the electrical connection anywhere. But they could. Confirm this is a new phone. We could. We could confirm the quality of phone, the age of the phone, and every and right and everything. We knew something was going on. We just didn't quite know. You didn't know what it was. And so Apple begins to do their courteous service thing, which is like, well, we'll sorry, like pop it out.

39:50 Here's a new phone, right. Sealed box, Apple receipts, brand new. And so if you're the yellow cow, I mean, someone described this to me as this was cocaine to the yellow cows. They were able to make an absolute killing. Apple sort of catches wind of what's going on. They developed these sophisticated techniques, and this narrative extends all the way out to 2018, where if some of you might know this now, and especially if you're a right to repair activist, someone who wants it easier to buy a phone, you'll know that in the last few years, every component in the phone is serialized to the motherboard.

40:22 And Apple has experienced considerable blowback for this. Because if you just want to go get your phone fixed, at the store, you know, get a new battery or whatever, it's actually quite difficult. More difficult with Apple products than anything else. The reason why is because the yellow cows were hollowing out the phone, so they were not just zapping the processor, but they would sell the components, the expensive memory and other components in the phone and then use replica parts that, to the untrained eye, looks genuine.

40:48 And then so. So not only are they sort of taking out all the expensive components, selling all of that, then they're then they're still going back to the Apple Store and getting a new unit. So eventually Apple catches wind of this and they begin doing something where there's like a 30 day pause. So in that pause, they're examining the phone. They're sending it to Singapore where they have a logistics hub and they're refurbishing the phone. And so this is the origin story of how the yellow cows begin to get upset because by Apple taking action and refurbishing the phone, they're in effect responding to a broken phone in a way that they're not doing so in every other country.

41:24 So this is the origin claim of of hey, the Chinese are being treated in inferior way because where someone else gets a refurbished or, I'm sorry, a new phone, we're getting a refurbished one, so who knows what the yellow cow said. As this escalated up, the political channels. But there was a grain of truth there that the Chinese were being treated differently. If you just ignored the whole fraud part right. And so. So when XI Jinping attacks Apple and really puts them on a back foot and really begins that whole next narrative of, of, of my book and that really the whole thesis of the book, it's really based on this yellow cow narrative that, you know, you play this instrumental role.

42:00 And so I'm hoping I'm describing that this sort of tied everything up into a pretty bow. And it really sort of emphasized that the, the prolog really should be when XI Jinping attacks Apple. Correct. What do you have to add just on that story? Because that was mind bogglingly complicated for me to put that all together from for. Me, it really surmised into the you can tell how much Apple didn't understand China. Well, yes, they're in way over their head.

42:21 And every step along the way we made mistakes as a company and sometimes our mistakes. I mean, I look back thinking I probably would have done things somewhat more similar. I had some things that were, I would say, misconceived on the on on how things would turn out in the long run. But ultimately, Apple misunderstood the country, misunderstood the culture, misunderstood the effects of the buying that they were seeing. They were looking at it from a very Western lens of what would happen in any other country in the world, and they couldn't put two and two together.

42:50 And it really took a full decade beyond where this problem started, before they started to get a real grasp on it. And even today, I'm not so sure they have a clear picture on what the next step needs to be. Tell me about the the Navy Seals, because you are in this position where you're trying to sort of have control over the stores. Things are doing really well, but they continue to have this, chaotic picture of how you're managing the store.

43:12 They don't quite appreciate it. So Apple tries a different tactic. 2 or 3 riots happened over a period of several months. Makes global news of, you know, if you were paying attention back in when this was going on, the pictures of the store were always there. The story was always quite wrong. It was always quite exaggerated, but it was had a grain of truth to it. And let me pause you for two seconds to tell the Navy Seal story.

43:30 But just don't let me forget. John gets arrested. I was like the local authorities, and we have I. Was going to jump. There first. This is how I found you. Someone had said, did you ever talk to the guy who got arrested? You know, after film footage arrive of what's going on? So let's tell that story just after. So we we, Apple at one point, I was on out of the country on a business trip, and I had just come back in and I was getting these, these messages on my phone like something's going on.

43:53 And and they had brought in, unbeknownst to me, for people that I call them Navy Seals, they were just security experts who former military guys, a lot of American guys who had a lot of experience managing crowds in real unruly crowds, etc. they brought them in and had them come and fix the issue with the line and manage the crowd. And within a few hours of being there, just I think it was within a within a day or so of them really taking control.

44:17 They had started some issues. Local police had gotten upset taking them off to the jail, taking their, passports from them, and we didn't quite know what was going to happen next. So I'm landing as this is happening and immediately trying to call the ambassador's aide, who was a who was a friend, trying to get Ambassador Huntsman to get involved. I had a couple other political people that we were trying to leverage to get involved, to make sure we get these guys taken care of.

44:40 And all of it was requested by the local police, was make them leave the country because they shouldn't be here. And it was another example of Apple, you know, taking a very Western approach to an unruly crowd, not understanding, you know, why they're unruly, why they're pushing. And even you highlighted the glass door. They broke a glass door one day, and we would all think they shattered the glass door of the store and came rushing inside.

45:03 They shattered the glass door, and they stand in shock because they didn't mean to shatter the glass door. They just wanted to raise awareness of their frustration. Yeah. So and so we'll get to the arrests in a second. But tell me a little bit about your relationship with Mr.. Do Mr. local police Officer and if you don't mind I love the story of the man who comes in with, 25 fake ids. Okay. So it's the same picture over and over, but it's a different name every time. Yeah.

45:29 And the guy says, I would like 20 to 50 phones. Yeah. So Mr.. Mr. do is a local police chief who kind of ran the local precinct office. And so everywhere in Beijing you've got a district, there's a district head who runs, the police at a district level, and then there's a kind of a sub district area. Stanley Tuna is where our store was. Mr. do was a had a police office very near us. He was the one we talked to every time there was an issue.

45:51 A challenge or problem, we had to arrest someone for stealing. That was he was the person that we worked with, so knew him fairly well. He, he was helpful for the most part, but he was very traditional Chinese in how he dealt with issues. Well. And what I love about this story. So this person comes in with 25 fake IDs. You're saying you just laugh? I'm not gonna. I'm not going to sell you any phones. So he calls the police? Yes.

46:12 So that's that's the difference in when you call the police in China, when someone in Cupertino would say, call the police, they don't understand. So this person with these fake IDs, all different names, same pictures, same person calls the police. Mr.. Do comes over and I tell them this to do I'm not going to sell this person any phones. And Mr. Dude looks at the cards. And so these are all fake IDs. And he said I how do I know which which one's fake or not?

46:35 And, and and essentially how it works out. Mr. Du's job is to keep the peace. That's it. It's not. To really enforce the law is to keep the peace and not make waves and keep things subtle. And so this goes to the a very common thing in China, which is to compromise. Right? So he says, why don't you sell them 15 phones? I'm sorry. Yeah. And what's interesting, the way I describe it in the book, which I hope readers find interesting, is you sort of realize in the moment, oh, you've actually put Mr..

47:01 Doing a little bit of a bind here. He doesn't know who this person is. Yeah. Because who's going to be able to make fake IDs of that quality? These looked completely legitimate to me. So it's either someone that has government connections or it's someone with triad connections. And if you're sort of in the moment trying to get Mr. Do to sort of like tell this guy to f off, essentially you're putting him in a bind and maybe there's a threat to his life or something if he doesn't sort of work with this person that might be connected.

47:25 It's a it's a. Challenge in China for local police, and they really don't have a lot of authority. And I you told a story about my brother who would come visit me in China frequently and, he always loved when I would do things in my car that you wouldn't be allowed to do here in America, and things like pull up to a stoplight and next to a police officer and run the red light right in front of them.

47:42 And and it was an example of my brother would ask me all the time, how in the world can you do that? And I said, because the police officer doesn't know who I am, he assumes if I'm doing it, I must be able to. And there's a perception of that. I've got some positional power or authority that allows me to break the rules. And so the police officer doesn't want to touch that. And so it's very common.

48:02 I tell my to teach my, my kids this. And when they were young living there for police officer comes and wants you to go with them. They're not carrying a gun. Ignore them and walk away. They're carrying a gun. Do whatever they say because then they're a military police officer or a provincial police officer. They have a lot of authority and they will use it very, very heavily. So yeah. So this is what I love about the sort of street smarts that you have in this understanding.

48:23 Because even if you maybe can't read the Mandarin fluently, you, speak the language because, you know, you're trying to convert someone to the Mormon faith, right? So you, you know, you knew how to speak to someone about the meaning of life. And so you really sort of had to understand a certain psychology. And you get this understanding of law enforcement by dealing with it at the, at its at a time when, you know, there's just conspicuous demand for it, which.

48:45 Leads to my arrest. Which leads to your arrest. Yes. Thank you. Gosh, I almost forgot. Yeah. So the, one of these riots happens, and at the end of the riot, it was a big one. Made national news, probably the first one. They made really big news. There was a moment in it where, I was working the crowd walking, the crowd kind of trying to keep things calm, just talking to people. I typically would spend time trying to just chat with the resellers, chat with people that they brought in, and there was a moment where someone got really aggressive with me and wanted me to help them get a phone.

49:11 They were pretty adamant. The lady grabbed my arm and kind of had her fingernails in my arm, like she was pretty insistent. She wanted something. A young man came up next, and so this thing kind of escalated quickly, and I kind of reached over and pushed the young man away from me. It was right in my face. And I'm a big person, so I know I could push, but I did really didn't push. And he collapsed on the ground, did a nice Karl Malone, if you know, the basketball reference, collapsed on the ground and writhed in pain.

49:36 And on the video, it's quivering. He's shaking. I spoke to four people who'd watched the video. Black and white, no sound, but basically all that they're looking is, is that someone gets in your face. And this big guy wearing a blue t shirt, I think Apple t shirt, you know, pushes them to the ground. And if you don't know that the guy's acting, I mean, it looks like he's in real. Bad on video. Well, let me tell you, what happens with the video?

49:58 It gets sent to Steve Jobs. Steve Jobs watches this video and calls up the senior vice president of hardware with three choice words about John. Fire. That motherfucker. So that's, one of. My legacies. I was fired by Steve Jobs. Yeah, except he did tell me a funny line that you had at lunch today. We. By the way, we just met today for the first time. I mean, he's instrumental to the book, but we never actually met in person.

50:22 Steve. Steve fired me if it wasn't wasn't powerful enough to actually fire me. Yeah. So it was over in red. So and so. Okay, so to help Mr. do out. So I know this issue happens. It's very global. It's very vocal. You're as a local provincial police officer, you're trying to keep that peace in the area. So he needs to save face somehow because his his superiors are gonna hear about this and call and go, what happened?

50:44 And he need some way to say he did something in this moment. So I offered to let him take me to jail. And it sounds horrible, like, oh, are you going to go sit in a Chinese jail? And who knows what happens? I went and sat in the jail office nearby for four days with my phone and surf the web and called people. It really wasn't. About did your right feel about it? She was nervous. However, she was a bit more panicked, I think, and we kept it very tight.

51:05 Not a lot of people in Cupertino knew. Yeah, we tried to make sure I let the ambassador know. Like, if you hear about it, please do not make an issue. I'm just sitting here, just hanging out. I volunteered to do this. I can walk out at any moment. I want to walk out. And so, correct me if I'm wrong. This is also the day that the glass doors had shattered. Shattered. And so what that meant is that there had been rowdy crowds in the past, but the shattering of the doors really told CNN and all the foreign media covering it, oh, something has happened here that is on a greater scale than ever before.

51:34 Right? And so your sort of smarts in the moment were, okay, I'm going to let the police officer arrest me so that when his superiors call up and say, what's going on in this chaotic scene, he can say, don't worry, I've arrested the main guy in charge. And so you sit in jail for four days just waiting for this media cycle to be over. Basically giving Mr. do face. Giving him face, giving him the ability to say he did something, hoping that in the future, when I need a thousand police officers to show up my store, they'll show up.

52:05 And there were stories that said a foreign employee that's you had pushed somebody, but they didn't know your name. They didn't know the position. Nothing ever came of it. And what would have happened if that if you were named and there was a story on, on CNN, I. Probably would have been fired and said, oh, yeah, yeah. I think, I think I put it in the book. It would have been your last day at Apple and probably your last week in China, because Apple family did.

52:27 To save face with the Chinese consumers, you would have then insisted that they do something. And so I'm pretty sure that's the direction that would have gone. The time I felt it was more important that we try to protect Mr. Do because he was supplying we would bring our own security in and he would usually double that number with people. So each of the district police were bringing people in to help their local. They would kind of I wouldn't call them police officers, but they have a group of people that are that are secondary support.

52:50 They would bring them in to help manage a line. We had our people managing the line, so it was good to have his support. You really needed. It, right? Okay, I'm not totally sure I understand the Q card situation. So if there are questions then yeah, great, great. We'll move to the Q cards and. Who knows if the questions are for me or you, but we'll figure it out. So you speak of the yellow cows like they were a neutral channel.

53:10 Didn't figure out, didn't figure, didn't figure it out. Apple's own distribution efficiency threatened the yellow cows. And how was this navigable. So yeah, so is we. So the question really is about, you know, us figuring out our channel distribution in China. Was I going to be a problem for the yellow cows? Yellow cows knew this would happen eventually. We needed more stores. We eventually solved it through the online store. When we first started pushing phones through the online store, they we call it hacked, but they were able to go in and book every appointment we had online, every reservation, online, every, and not even in my stores while they're trying.

53:44 We're trying to do reservation systems in the store. We created subcultures of different people. We had one group of people that would go to our computers and capture the reservations, you know, one group who would sell that to another group who would come by the phones and other group would take the phones and sell them. And during all of this, if you wanted to buy an iPhone, walk out the front of my store and there'd be someone with the phone in their hand selling the phones directly in front of the store, ten feet in front of the store.

54:07 Yeah. And again, this is from a different source, but Apple had actually hired Ticketmaster, people from Ticketmaster to come look at our systems, you know, make sure reCAPTCHA is installed and that kind of stuff. And Ticketmaster looked at the systems and said they're. Great, best in the world. And they were breaking them. And you yeah, you just had basically migrants and later bots just drowning out any actual customers attempts to book an appointment. Yeah. So so the, the supply chain piece of it took probably ten years to solve.

54:32 And that took multiple Apple stores, other distribution points. Working more with China Unicom, China mobile, the the local operators to sell more phones. So we had to get enough distribution channels around the country so that it would no longer be a profit margin for the for those resellers. And I know one thing that you were always telling Cupertino is that, like, this isn't really a cultural issue with China per se. This is a distribution problem. Like a billion people want to buy this phone and we've got four Apple stores.

54:58 Yeah, even if you understand the culture, it's not enough to just blame the culture and say this is because of how we have to solve the problem. And so the, you know, the ability to overcome it was, you know, we have to put our, our, our best people forward and try to figure out, to figure this problem out. And we just kept iterating ways to do it. But at the end of the day, we just need the distribution points.

55:16 We needed lots of places. The customers could buy it all over the country, which could supersede anything that the yellow House could offer. Yeah, and their margins drop and they can no longer make money. So yeah. And it it took a good ten years for that to get solved. Crazy. What is the reality of Trump's tariff war bringing manufacturing back to the U.S. and how his and how his tariffs against necessary machinery may impede this process?

55:37 Yeah, you can probably take this piece. So it's really the question, can we build iPhones in America, essentially? Yeah, it's it's really a question. And I'm so scathing about it. So let me just preface it by saying, like, ideologically, I mean, I would love if iPhones could be built in America, but there's probably 20 good reasons why they can't be. And just a few of them would be the obvious things like our wages are much, much higher.

55:59 We're just not competitive versus the Chinese. The Chinese also have, a density of population that we're just not going to match. So, Zhengzhou, known as iPhone city, that has 500,000 people working on iPhones. There was someone in the media recently saying that would be like if everybody in the city of Boston gave up, they were doing what they were doing just to assemble iPhones. And it's actually worse than that or more difficult than that, because the the floating population of seasonal workers in China moved from one town to another in order to actually get all this done.

56:29 And that's not something we're going to replicate. And then even like, philosophically, this isn't really what we want to be doing. We don't have the same like Nietzsche and Will to power to do nothing but manufacturing. I mean, China really has put all their eggs into the, in the basket of, of manufacturing against all sorts of economic advice, of rebalancing their economy and, and that sort of thing. So, like, we're just not going to be competitive in any way, shape or form.

56:49 And 25% tariff basically doesn't change that at all. It. Yeah, there's there's no way to overcome that, that, that there's 3 to 400 million people in the, in the middle class. But that still leaves 6 or 700 million people that are in a really poor class. Yeah. Great book about this. They still need. Jobs. Yeah, they still need these jobs. So even as the middle income grows, they still have 706 hundred people to pull from to keep these jobs going that need the jobs, need the work.

57:13 And these aren't jobs that I think a lot of people in, in the US would actually want to do. No, not at all. So looking into your crystal ball, how does the relationship between Apple and China play out and how does this story end? This might be a total lack of imagination on my part, but I think the status quo is actually the most, I don't know, the most obvious way to keep things going. So the reason I say that is because iPhone production, Mac production is not going to move to the US.

57:41 The logical place that Apple should be moving it, and it's in a sense trying to move it is to India. But Tim Cook is in a real bind right now because Donald Trump has explicitly said, don't move to India so that gives him two options. One, just totally contravene the president and continue to make investments in India. That's not a great plan. Or or indeed cancel plans to go to India, which means just more consolidation into China.

58:04 So so neither of those is a good option. China just has a manufacturing juggernaut of a machine that is just orders of magnitude more efficient and capable than anything else that's happening on the rest of the planet. I just don't see it moving anytime soon. My hope is that, like, you know, if you've been following the news, like Johnny, Johnny Ive's latest sort of move with Sam Altman is to create a next generation device. I mean, I hope that could be built in America because you'd be starting with such small quantities that it's feasible in a way, that building 230 million iPhones in a new country is not.

58:39 And of course, you could say, oh, but you don't have to build 230 million. Maybe you build 10 million somewhere else. Well, China is going to make that really difficult. Beijing is going to make that really difficult. And so there have been instances and I think the question I might have alluded to this, that all of the machinery these days is really made in China for the production line. And the Chinese have basically just said, like, we're not exporting that to India, we're not exporting that to America.

59:01 The experiential knowhow is in the minds of the Chinese, entrepreneurs and engineers that Apple has trained. And so India needs thousands of those engineers on visas over to India to help on the production lines. And China just said, well, we're not giving them visas. So, like, I don't have a great solution for why the what Apple should do or what's more likely to happen. It's, this pretty untenable situation where it's probably just all going to stay in China.

59:27 Yeah, I certainly missed the crystal ball in zero eight. I told you the story that my staff, the time of oh eight, if you were in your 30s or below you, you were living the American dream of, maybe we perceived that in the 50s and 60s that anything's possible. The economy's great. There's plenty of opportunity. We can go change the world, do anything, influence anything. And those 35 or above sort of saw it as they grew up in the Cultural Revolution.

59:51 They had blinders on. They were taught by their parents. Don't pay attention to things that you can't control. And they were much more stoic about the world. And I really thought that as these younger generation became the feared future Politburo and people in the Communist Party, that you'd start to see a major change in the in the country, and you kind of saw it for about 5 to 6 years as it went past the Olympics up to about 2013.

60:12 And it's sort of shifted with XI Jinping. I certainly have, yeah. I mean, that sort of I mean, that really was like that wasn't in the sense, you know, your era that was like America's where it really in a bipartisan way that we thought by trading with China, we were going to inculcate the next great democracy, and instead we got another boot. I also think Apple missed a window to make these adjustments. Yes, in 2012, 20, 2011, 2012.

60:33 I remember telling Bob, Bob Mansfield, he was out of, head of hardware manufacturing, that if you want to really leverage China, start, build, start alluding to or start building factories in Vietnam or India or somewhere else, and they'll wake up pretty quickly that you're in business. But if you're not willing to go play hardball with them and keep treating them with this sort of equal balance respect, you're going to keep giving the same answer, which is they'll take advantage of you.

60:56 And in some, you know, interviews about the book, I've been saying, like that was the strategic error on Apple's part, and I do think it was, but it is a hindsight 2020 thing. I mean, you have to remember just how quickly they were growing and going back to the insatiable demand thing. I mean, the engineers that were building this products were not sitting around pontificating matters of state. It was so difficult to meet the scale of global demands that the idea that you were going to consolidate from China at the time was actually just kind of nuts.

61:24 Add to the fact that you had just lost the founder, right? So Steve Jobs probably could have done something different because he has that founder mentality where if someone told him to kowtow, he'd probably say, I don't mind if there's no iPhone for production for two years. I'm going to go do something else. Tim Cook really couldn't do that. I mean, he was the shareholder guy who came in after Steve Jobs. I just don't think he had a really smart, clever ploy, to pull.

61:48 But it's of course, 12 years, 12 or 13 years later, he's even a bigger problem now. You know, Steve was known for, killing the iPod nano when it first came out, the black and white one and switched to a different model. And at the time, that was the world's best selling mobile MP3 device in the world. And a lot of people were very concerned about it, and they kind of alludes to that visionary side of that.

62:08 He wanted to do the next best thing, the next great thing, the evolutionary thing. And I don't know that that lives in Apple in the same way. They're they're quite large today, very successful. This I, I was also interested you talked briefly about when you started writing this book. You know, I, I personally I think I've read some articles online or people that didn't really read the book that thought maybe this was going to be a hit piece on Apple or hit piece on China, right?

62:29 I walked away after reading there like, this is an anti apple. It's not anti-China. It's more historical what happened and the sort of the effects of what happened. Yeah, it's very matter of fact the way it's told. And I'm aware of that. As I try to condense 400 pages of research into a few sound bites that I can sound combative with, and I necessarily am simplifying. But the book itself is really just sort of a natural unfolding of how these things happen.

62:52 It's really written in a nonpolitical, neutral, neutral fashion, and, you know, it was written on Apple product, and I love Apple Music. So with where primary Apple products are in their life cycle, do you have any concerns over potential future products decisions like what happened with the battery life lawsuit? I'm not sure I understand the question. Do you understand the question. Alluding to the life cycle, the current products, decisions that they're making, and then the battery issue with, you know, are we maybe someone can highlight what they're trying to get out of this question.

63:22 I know. Yeah. I'm not I'm not the. Primary product on their life cycle. We'll put it this way. I don't have a smart answer because I don't understand the question. So let's just go to. Apologize for that one. Was the company called Apple created solely to capitalize on the name of Apple? You know, any history of Apple? I don't know. So hope oh. Or oh yeah. Right. Because it sounds like Apple could be I never heard this.

63:41 I mean I know the company Oppo, but yeah. I do too. I've never thought of it that way. I could see that happening in China though I don't know. I don't know either. Sorry. Oh, for two on this. How seriously should we take the moves of the internationalization of the yuan and its potential impacts on Apple supply chain for our pricing model? Talk about above. My pay grade got over three. I have no. Idea. Yeah. Yeah.

64:03 And I, I do think there's still like when you look at the yuan versus the dollar I still think there's the capital markets are still strong with the dollar. I don't know I don't see the yuan taking a control as a foreign currency exchange. I agree. And to be fair, I'm I'm being self-deprecating over this issue extensively in Hong Kong, but it's still quite a controlled currency. You know, it's not a free floating currency and, it doesn't have much internationalization.

64:26 So long term, that is probably likely something that China is going to be, trying to do to dethrone the dollar, but probably more likely as some sort of stablecoin or crypto coin rather than the yuan. Yeah. How do you see the vaguely imminent reunification with Taiwan playing a role in the tech in China, if at all? Oh, I mean, you know, it's a meteor strike on Apple's business if China annexes Taiwan, because not only are all the issues that my book is about, which is that all the manufacturing is in China and what a problem it is, but even more so is actually that all the CPU development is in Taiwan.

64:57 And so if there's a war for Taiwan, I mean, this isn't going to happen peacefully. The, the fabs, the foundries, the manufacturing capabilities in Taiwan would go out of business in the first hour, and that means there's no AirPods, there's no iPhone, there's no MacBook for probably several years. So I mean, Avril Haines, I think director of national security a few years ago and cited in the book said that if TSMC stops producing, the effect on the world in terms of GDP would be between $600 billion and $2 trillion per year for the foreseeable future.

65:31 Even sort of maybe more lay person way of putting it. As Nicholas Kristof said, TSMC again, this is Apple's partner for making chips, is the only company in world history where if it were to stop producing, it would cause a global recession. Nobody is exposed as exposed to that risk as Apple. And Apple has been TSMC's biggest client for more than ten years. It's wonderful. Yeah. And so that's the last question I've got. That's a happy note to end on.

65:54 I have one question to go. For it before. You wrap up. So as someone who thought of this book a couple of years ago, think about the current state of, of of the economy, world affairs. How did you plan a book like this so perfectly timed to the events going on in the world and China being, yeah. I know someone called it the best timed book of 2025, and it's hard to disagree. It's certainly how I feel.

66:18 Obviously I got lucky with, like, I didn't realize the book would go to the printers. Within 48 hours of Trump announcing Liberation Day. So there's that. On the other hand, it's strange that the book hadn't already been written. I mean, after all, 80% of you probably own an iPhone. 100% of, you know that it was made in China. And yet we sort of don't know the story of why it's made in China and any of the characters.

66:45 I mean, for instance, I have a whole chapter on Isabel Mahi, who's been the head of Greater China since 2017. Unless you've read the book, you know nothing about her. I have a whole chapter on Jackie Haines, who ran supplier responsibility in China after working with Tim Cook for about 2 or 3 decades at three different companies. Why don't we know anything about her? Why don't we know anything about the manufacturing design engineers and the impact they had on on going to China?

67:07 So, you know, I want to say, yes, I've lucked out with the timing, but the actual idea of writing a book called Apple in China, I mean, there was nothing brilliant about that. The weird thing is that it hadn't already been written, and I guess the pool of people who could have written it is necessarily small. There's not that many Apple reporters, and I suppose that would be the starting point. And I don't know, I've talked to some of these people why why they didn't write the book and they just had other things going on.

67:34 And I guess what made it kind of intuitive for me was the last 12 years of the Financial Times. I spent, in Hong Kong. So I got to know China. I got to know, you know, the Hong Kongers that were going, for standing up for democracy and basically had their hopes crushed by XI Jinping in Hong Kong, is effectively a Chinese city now rather than a special territory. I mean, frankly, one that I'm not sure that I would go back to, out of safety concerns.

67:59 And yet I would call Hong Kong my favorite city in the world. Then I went to go live in Germany, where I largely covered the automotive industry, which meant I was in and out of factories, much like you were in your 20s, sort of understanding the importance, the fragility, the resilience of supply chains and telling lots of those stories. And then I covered Apple for for four years for the left. And so you sort of combine those things China supply chains and Apple, that sort of culminated in the book pitch.

68:23 Wonderful. Yeah. Patrick. Thank you. This has been a wonderful session. Thank you for joining, the author of Apple in China The Capture of the World's Greatest Company. Thank you. And we encourage everyone here to pick up a copy of the book. I actually picked one up at local bookstore today, and three other ones were out of stock. So that's a good sign there. So I would love to. Send thank you to the Commonwealth Club for for this event tonight and for everyone involved in those watching.

68:45 Please look into the Commonwealth club.org for more information on memberships and upcoming events. Thank you. Thank you.