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Will Apple ever leave China?

With 20% of its sales and most of its manufacturingin China, Apple has little choice but to comply – censoring apps, podcasts, and services inthe world’s largest country. But, as risks grow and strategic calculationschange, will this tension ever reach a boiling point? Will there come a day when, either by choiceor force, Apple leaves the country altogether? Every year, Apple faces an impossible task: To source the materials for, assemble, deliver,and meet the demand for millions of new iPhones. In total secrecy. The insane scale of the device is both itsbiggest blessing and its biggest curse. The single most expensive component of theiPhone, for example, is thought to be the OLED screen, at around $110 per unit. If Samsung increased the price of that onepart by just $5, it would cost Apple an extra billion dollars over two hundred million devices. The previous-generation, 2013 Mac Pro wasassembled in Austin Texas but only because of its relatively low demand.

The iPhone simply doesn’t have that luxury. The vast majority of Apple products, therefore,are assembled by contract manufacturers like Foxconn, Pegatron, and Wistron in China. Although not, contrary to popular thinking,strictly because of cost. Average monthly wages in China have more thandoubled from $449 US dollars in 2010 to nearly a thousand in 2018. That’s about the same as many European countries,like Latvia, Lithuania, and Croatia, and far higher than other south and southeast Asiancountries like the Philippines and Vietnam – where companies like Nike, Adidas, and UnderArmor have moved much of their production. But while makers of clothing can, for themost part, hire the cheapest hands, Apple and companies like it, have to be a bit moreselective. What China has, more than any other country,are massive amounts of technically-skilled workers in highly concentrated areas, on demand. Here factories are more cities than buildings. When one manufacturer of electronics neededto quickly increase production to keep up with demand, it was able to hire 35,000 workersin under six weeks. It’s this flexibility that allows Appleto rapidly scale-up production in the summer months leading up to the release of a newiPhone. Altogether, about a million and a half Chineseare involved in assembling Apple products, and another two and a half million Chinesedevelopers create iOS apps. But even before assembly, Apple relies heavilyon Chinese materials. Everything from cameras, to speakers, motors,and batteries are made with 17 elements called lanthanides, or Rare Earth Metals. And, despite their name, they aren’t thathard to find.

There are also significant reserves in Brazil,Vietnam, Russia, and India. Having and being willing to use them, though,are two very different things. Measured by actual production, China has a near monopoly, generating 70% of the world’s supply. 120,000 metric tons a year to 2nd place Australia’s20,000. The problem is that, although abundant, onlyin a few areas are these metals clustered in high enough concentrations to justify miningthem. And even then, they’re an absolute headacheto deal with. Because they bond so easily with other compoundsand minerals, after mining, they have to be chemically separated, often from radioactiveand carcinogenic materials. Processing one ton of rare earths may generate2,000 tons of toxic waste. In other words, it’s expensive, time-consuming,and really bad for the environment. From roughly 1965 to 85, over half of theworld’s supply came from a single source in California, called the Mountain Pass Mine. Then, around 2000, it was shut down for environmentalreasons. At the same time, China realized their strategicvalue and took the golden opportunity they had just been given to dominate the entireindustry. Should China ever withhold them for politicalleverage, it would, at least temporarily, devastate the U.S. military, and, in the process,American companies. China’s president Xi Jinping has hintedat this possibility by visiting a Rare Earth mine during the trade war. And the supply chain is only the first ofApple’s challenges. The other is the consumer market. Under Tim Cook, China has been a major focusof the company – launching a dual-sim version of the iPhone, QR-code support, and localizedfeatures like improvements to Cantonese typing. It’s also leaned-in to its cultural preferences- offering a special red edition of the iPhone and raising prices which helps it be seenas more of a luxury product. And, for the most part, it’s worked. The year it was introduced, the iPhone X wasthe most popular phone in China, and the country became about as big a market for Apple asall of Europe combined. But it’s also seen the risks. As Chinese economic growth slowed, so didApple’s success. And it now finds itself caught in the crossfireof US-China tensions. The same conspicuous design which made theiPhone a status symbol, becomes a liability during times of increased nationalism. When China’s government plays anti-Americanpropaganda films and Huawei’s ban is perceived as protecting weaker American competitors,owning an iPhone can become embarrassing. According to Goldman Sachs, a retaliatoryban could lose Apple almost a third of its overall profit. Of course, interdependence is a two-way street- Apple also contributes an estimated $24 billion US dollars a year to China’s economy.

It’s not, unless things get significantlyworse, in China’s best interest to push out Apple completely. But it is in its best interest to keep pushingthe boundaries by exerting as much control over Western companies like Apple as possible. If Apple will ban VPNs, censor dissentingapps, and move iCloud data on its orders, there’s no reason to think it’ll stopthere. The idea that Apple would give up on one ofits most important sources of revenue is almost unthinkable, but that’s exactly why Chinacan ask so much of it. At some point, the things that, individually,wouldn’t be reason enough for Apple to leave China: Slowing economic growth, Tariffs, Censorship,Data storage laws, competitors like Huawei and WeChat, and poor respect for intellectualproperty, together may hit a critical mass that Apple will no longer tolerate. In the U.S., Tim Cook can persuade the publicand successfully hold back the FBI. In China, though, it’s all or nothing. With every demand, Apple has to decide whethersaying ‘no’ is worth losing 20% of its revenue and, perhaps even, the most importantpart of its supply chain. In 2010, Google did just that. After years of following China’s censorshiprules, it was, ultimately, a straw that broke the camel’s back: Google noticed the Gmailaccounts of human rights activists were being hacked into. Thus far, Tim Cook has always preferred toengage. Unlike other tech CEOs, for example, he continuestaking meetings with the U.S. president, despite disagreeing on many issues. Apple argues better it stay in China thancede the market to a more questionable competitor, or someone who doesn’t minimize the amountof data they collect in the first place. In the meantime, it’s preparing for theworst. Pegatron is investing in production sitesin Indonesia, while Foxconn and Wistron look to India.

In 1909, Norman Angell wrote The Great Illusion,for which he received a Nobel Peace Prize. In it, he argued the economies of the worldwere so connected and so dependent on one another that the cost of conflict would simplybe too great. States, he said, now had too much to losefrom going to war. He was right. And so is anyone who dismisses conflict betweenChina and Apple. Strategically, financially, logically speaking,it would be foolish for either one to give up the economic benefits. And yet five years after The Great Illusionwas published, began one of the most deadly conflicts in history. Circumstances can change in an instant, andeven the most profitable company on earth is vulnerable. Likewise, in 10, 20, 30 years the programminglanguages that are relevant today may no longer be, and that’s why, instead of having youmemorize code, Brilliant explains the big ideas behind it in their new course calledComputer Science Essentials. Like all of Brilliant’s courses – on math,puzzles, science, and logic – it teaches with examples, pretty graphics, and easily understoodlanguage. You can learn science with pool, logic, withpuzzles, and geometry with art, for example. There are also quick, fun, daily challenges. You can use the link in the description tostart learning for free, and the first 200 people will get 20% off the annual premiumsubscription, so you can view all Daily Challenges and unlock dozens of problem-solving courses. Thanks again to Brilliant and to you for watchingthis video.

This video is sponsored by Brilliant. The first 200 to use the link in the descriptionget 20% off the annual subscription. If there’s one word you associate with Apple,the culmination of every commercial, product, feature, and perfectly-rehearsed keynote,the company would like it to be privacy. Anyone can use the word, just as I can puta Tesla bumper sticker on my Hummer, but only Apple has the business model to prove it. And it certainly takes every opportunity toremind us. In 2016, when the FBI demanded it create aspecial backdoor, Tim Cook personally and very publicly refused, saying it would “underminethe very freedoms and liberty our government is meant to protect.” It was one of the highest-profile, riskiest,and most controversial debates over privacy in recent times. But, ultimately, whether you think for profitor on principle, it fought the government and won. That same year, on the other side of the world,China passed The Cyber Security Law, requiring that Apple store Chinese iCloud data insidethe country and prompting fear that the government could access it for surveillance. This time, though, no letter to customers,no principled stand, no long, protracted fight.