Former Microsoft Executive on Apple’s Hidden China Problem

As Tim Cook says, people think that China is about cheap manufacturing. It’s the skills they have. Apple would just argue there was no way we could even have started the iPhone anywhere else.

All the experts in 1999 were like, “Two things: yay for global trade. This is what we all want. And also, don’t worry, China—they’re going to stay a third-world dictatorship forever.” They couldn’t have been more wrong.

Steven, I’ve been looking forward to this episode because this is a full-circle moment for me. You were how I got introduced to a16z. You were on the board of Product Hunt over 11 years ago, which is how I was introduced to you and the firm, and I’m glad to be back in business together. I couldn’t be more excited for us to be working together on this one and then more in the future, I hope.

Exactly. It’s definitely a reunion of sorts.

For those who haven’t been longtime fans of the podcast or the firm, you’ve been at a16z for over a decade as a board partner, and before that you spent many years at Microsoft helping lead both Office and Windows. You helped introduce the Surface PCs, which is relevant to the conversation we’re about to have.

We’re here to talk about Apple. We’re here to talk about you, inspired by the book Apple in China. But first, let’s briefly cover WWDC. What reactions or hot takes do we have from it?

WWDC is their big yearly developer event. It’s a remarkable platform that’s been doing yearly releases for 26 years. It blows my mind, what they’ve done and the scale that they operate at.

I think there were 3 big things that came out of it. The first was obviously the big push—and also the big reaction—which was called Liquid Glass, the new user-interface design.

Having gone through multiple big user-interface redesigns of widely used products, although, to be humble about it, not one used by a billion people, the reaction is extremely predictable. A bunch of people’s heads just explode, and they don’t want it. They don’t like it. You can always tell they dive in immediately to, “What problem does it solve?” So, if there’s change, it must solve a problem.

But there are lots of reasons that designs change. And then there’s the reality: this was the developer conference, so it’s not done. Apple is very, very good at finishing these things. All the bugs and all the issues—“I can’t read it. It’s blurry. It’s noisy.”—will all get fixed. What’s left is: is it great, and is it unique enough? Time will tell. I’m basically reserving judgment and not joining in the hysteria on either side. I have no need to defend it and no need to say it’s the worst thing to happen to computing since ternary processors or something.

The second thing that I thought was huge personally was just that the iPad gets windows with a lowercase “W.” I think that’s fascinating in 12 different ways. It goes back to the original toaster-refrigerator comment, or the iPad is different, or Steve holding the iPad only like this because it was a book. It’s just a recognition of who uses it and what they use it for.

I worry it’s a little late. I think a lot of people have made up their minds about what to use where. The iPad sells an enormous number of units, and people who don’t use them don’t understand that they sell more iPads than the laptop run rate in the U.S. It’s a big number, and they’re enormously popular with different segments.

It’ll be interesting to see how this plays out. The weirdest thing about it is, the iPad is a Mac and the Mac is an iPad in terms of the hardware. So, you’re really talking about a difference in software and how they deal with that over time, and what apps run where. Where the experience goes is going to be super interesting.

The third thing was more an act of omission than commission, which was AI. The whole event sort of started with Craig apologizing—not really apologizing, but in an Apple way—which was, “It took more time than we planned, so we’re not going to talk about it anymore.”

Personally, I think that months ago, when they launched all these AI features with great fanfare, that was out of character for them. They announced a bunch of stuff that they weren’t done with yet, that hadn’t baked. It was the right stuff, but they didn’t capitalize on it, to be polite about it.

I think what they’re probably doing is saying, “We’re not really good at this preannounce-and-catch-up-to-our-own-announcements thing,” which, of course, I grew up doing. I’m completely comfortable in that world of just making stuff up and hoping you catch up or people forget.

I think they’re back to, “We’re not the first-mover company. We’re the first-integrator company.” They’re going to sit back and watch the technology mature a little bit more. But they do have a hole in a perception sense, which is Siri, and what they’re going to do about that. To not talk about it very much is interesting.

A lot of people have commented on the failures of Apple Intelligence, or just Apple’s inability to capitalize on this innovation. We just saw Meta purchase 49% of Scale AI, so they’re making some big moves. How do you make sense of Meta’s move? Could we see Apple do a similar type of play, where they buy the talent in-house or buy the company? How do you think about that?

I think what Meta is doing is, at the very least, great for AI. I’ll let Meta decide how great it is for Meta or whatever, but it’s great for AI.

If you go back to the way platforms have been evolving, in mainframes IBM had 100%. In PCs, Microsoft had 95%. Then you start getting out there, and in servers it actually ended up being, at best, 50/50. It’s been downhill, and it’s all Linux now.

In phones, you have this split—80/20 globally—but you have to really dig down by country, where it’s 80/20 the other way. In cloud, it’s very likely we’re going to end up in a sort of 40/40/20 kind of world.

AI—it’s almost inconceivable that there’ll be 1 winner, right? Then there’s the overlay of China and how that plays out. The mobile industry is a really good example of how difficult it is.

Japan had this huge lead in this thing called i-mode, but it only existed in Japan. They were leaders in technology and experience. They had all these micropayments and all this stuff, but it didn’t go anywhere outside of the country.

The biggest risk to AI is that it becomes either—someone tries to think it’s only 1 player, which at times the federal government has acted like, or 1 player says it should only be us, which there is a player sort of claiming, or it gets geographically constrained.

To prevent any 1 of those from happening, you just need a lot of players operating at huge scale. In the startup world, you have Anthropic and OpenAI. In pure open source, you have Meta. Then you have Microsoft and Google.

We have innovation happening on all cylinders and all fronts, which is great, because the competition is basically making the call that it’s going to be 1 and it’s sort of going to be this government-driven approach. It might not be 1 company, but it will be 1 approach that’s sanctioned in some way. It’ll be interesting to see how that plays out.

There’s nothing better than more and open for AI right now.

It’s worth just commenting on the market-structure point. When we look back at the last few years of our growth investing in this category, we’ve been very aggressive, but we regret not being even more aggressive.

One of those principles was, “Hey, we want to back the market leader.” When you see a second-place company, we’re like, “Hey, it’s not the market leader.” But in this market, as you mentioned, it’s not winner-take-all, or the market is just so big that even the second-place or third-place company can be a generational company.

We’re not even at the point yet—which is where I believe we’ll get—where the initial go-to-market has all been this cloud-based thing. There are all these challenges with that, like privacy, security, and cost. The idea that we would force variable costs on the entire world of software is very tough for me, as someone used to fixed-cost, low-price volumes, to think we’ll sustain.

I think we’re still going to see a whole wave of AI on the edge that’s going to happen, which only benefits from open source.

I’m very positive. There’s nothing but positive to say.

I wonder, does it make sense to look at Alexander Wang or Scale AI as something like a $15 billion acquihire of Alex plus the top talent at Scale? If you’re Apple, if you’re advising Apple—or even some of the other big incumbents—do they need to do something similar? Obviously, Microsoft was with OpenAI to begin with. But if you’re Apple, how do you think about how to play here?

I think the 2 or 3 plays are going to be, first, the weird partnership-dance play that Microsoft and OpenAI have. It seems obvious that at some point Microsoft will have much more first-party software.

There’s the “we have always made our play by just having everything” approach, which is Amazon. Anything that comes out, they’re going to end up supporting, which is just how retail works. You don’t get all the cereals, not just Froot Loops.

Then I think there’s the “we’re going to go our own way” approach, in a sense, which is Gemini taking its approach, or OpenAI itself, or Anthropic itself. I think Apple needs to pick 1.

You know, they did announce, “Hey, you can call any model through our API,” but the real thing Apple needs to do is figure out what model is going to be tuned to run on its unique hardware, on the edge, and within its unique offering—or constraint, depending on how privacy plays out. And just to evaluate one of those paths, if Satya could go back in time, knowing what he knows now, do you think he might have done something, or would you have considered doing something different? How should we think about how this has worked out for Microsoft?

Oh, these are tricky things. You can’t ask me questions about my friends. But putting it aside as advice, I would say: I genuinely, to those listening, do not know anything that’s going on. I swear, people, I do not know anything. Microsoft has been involved in AI research since 1993.

They were the first hires into Microsoft Research when the labs were formed. I was working for Bill way back then. Satya worked closely with those researchers when he was the manager of the Bing team for a while, because that was the cornerstone of what Bing was doing—and that’s what Google was doing in, say, 2006 or 2007.

I would not be at all surprised if there’s some first-party thing that they’re just trying to figure out: when and how good does it have to be? Because if you’re Microsoft, it turns out that the strength of Microsoft is that you never have to be the best. You just have to be included.

That’s generally how enterprise software works. It’s the inclusion and the bundle that customers value and pay lots of money for, not being the very, very best at any given moment.

Right. It’s fascinating how all the big players have crystallized their approaches in response to each other. I want to segue to the main focus of our conversation today, which is not a book review of Apple in China, though it’s a great book, but a conversation inspired by the book.

There are a few things I just wanted to say. First, the notion that—I believe they said Apple invests $55 billion a year in China, and I think the author said that’s equivalent to, or maybe even bigger than, the entirety of the Marshall Plan—is just astronomical. This book talks about how Apple not only built its company in China, but also helped build China itself: China’s manufacturing economy.

It introduced a level of talent and knowledge, or taught China not just how to build phones, but how that same sort of knowledge then helped build Tesla—phones on wheels—and led to other technologies used for the military, which we’ll get to. But first, was this inevitable, or did it make sense at the time? How do we make sense of this 20 years later? How did this all happen?

It is crazy how it all happened. I think you go back to the beginning. Of course, Apple, we all know, was in the garage in Palo Alto. They famously built the computers there. From the very beginning, Apple itself was all about super-tight control.

At first, they were basically creating works of art on the motherboard. Then they built a factory—there was a factory right here—and that’s where they built computers. They just kept doing more of that: tight control, building the whole computer. Then Steve left Apple. The Macintosh, of course, famously followed the same approach, and Steve pushed and pushed on its costs and shape, making the famous toaster that you carry around and things like that.

After Steve left, the company had enormous difficulty competing with the IBM PC. One of the things that it did later, in the late 1990s, was build a super-innovative laptop.

Now everybody’s like, “What does an innovative laptop mean?” Well, it turns out that in the late 1990s, laptops were something nobody bought. They were slow, expensive, bad computers. They were just portable. That was their big thing. If you had to have one, you did.

But they built this thing that was the original portable for the Mac, called the PowerBook. They tried to make the best laptop possible. In order to do that, they ultimately hit the limits of manufacturing in the United States.

Jean-Louis Gassée, who was running the Macintosh business at the time, was a very famous French executive at Apple. Steve had hired him to run Apple France, working for Sculley. Gassée pushed to do an experiment, partnering with Sony in Japan to build a PowerBook.

The original PowerBook line had three computers of different sizes and power. One model was done as a joint design effort with Sony, which was incredibly brazen for Apple’s culture—to break out like that. It came back, and the people at Apple were like, “Wow, this is not so bad.”

It wasn’t the bestselling model. There was a lot of complexity, and you can read all about it in this book or elsewhere. But it was a light-bulb moment: maybe this helped solve some of their constraints. They had other constraints—the chips were wrong for the Mac, the PC was half the price, and they had a lot of problems—but it was a “Wow” moment, and that was really interesting.

What Apple built next, in 1999, was the iMac G3. Most people aren’t old enough to remember it, but it was this gumdrop-shaped, translucent Jony Ive creation. You look at that and you’re like, “Wow, that’s neat.” But you don’t understand: it was impossible.

Every element of that computer couldn’t be built. It wasn’t just the things they left off, like serial ports and parallel ports and all this other stuff. It was clear plastic. Computers came in gray, stamped-aluminum metal boxes with screws. This was a toolless, fanless, amazing thing.

It was all done through this China-based manufacturing model, but it was done in a very unique way at the time. The Apple people just went there and swarmed the manufacturing line at every step, with samples going back and forth.

I’m glossing over a very complex timeline of events. It sounds a little bit more all-or-nothing and sudden, but it was a very gradual transition. This product was huge.

Then came the iPod. They were already somewhat comfortable with this model, but the iPod was when the assembly started to look almost like a war-games screen, with all these incoming components. It was a disk drive invented in Japan and manufactured in Thailand, with everything coming together: the click wheel and all the other parts were in China, and it was suddenly all being made in one place in this incredible form factor.

If you looked at the other media players at the time, they were these big, honking plastic things. They looked like game-console devices, not like this solid deck of cards, glued together with no tolerances. It was incredible. That was really the start of “designed in Cupertino, manufactured in China,” and that whole process.

And that was celebrated at the time, right? We were excited about more integration with China. So that wasn’t seen as such a problematic thing at the time, right?

Oh, it’s absolutely even more than that. This was hailed as the modern way to do business. A very close-to-home example of how things have changed is that in 1999, the World Trade Organization gathered in Seattle to ratify China as a member of the World Trade Organization. This was the organization that navigated tariffs and trade rules between countries.

All the cool countries were in it, but not communist, socialist China, with its totalitarian government. The Clinton administration had really pushed for China to join, and it actually split the Democratic Party. People today, their heads would explode if you tried to sell it.

It turns out the Republicans were split, too. Half the Republicans were like, “Free trade, free trade, free trade,” and the other half were like, “We hate communism. We hate communism.”

The whole world, if you look back in 1999, was completely upside down from today. There were huge riots in Seattle. The city was a mess over this moment because it was viewed as this basic pro-business, anti-labor kind of thing. It just meant cheap outsourcing in China.

The reason for that was because that was the whole direction of American business. There’s a very famous book from the 1980s called In Search of Excellence. In Search of Excellence is this Jack Welch–style GE management mantra: what you do is stick to your knitting. You do the stuff that you’re good at, outsource everything else, and figure out that core part of your company. That was simply what you did.

You don't have full-time people to water the plants. You don't have full-time people to cook in the kitchen. You don't have full-time people manufacturing. You just do that elsewhere, and that was the state of American business. It was, “Let's get into China. We’ve got the support of the president. It's the whole global market. Let's reduce trade barriers between countries.” So it was celebrated as the start of a whole new industrial era.

At what point did that change, both for Apple as a company, when they realized, “Hey, maybe we have some risks here,” but also from a geopolitical standpoint? Was it when Xi came to power? Was it when Trump was elected? How did things start to change?

It helps on this one to go a little bit backward. Before we get to when Apple recognized that, we should say that there were other examples of everybody doing this. The reason it's important is because it contrasts with Apple: the PC industry created what enabled Apple to do what Apple did.

Apple was on this path of manufacturing in China while keeping very tight control. But the PC industry had a whole different approach, which was the much more classical In Search of Excellence outsourcing method. Dell and Compaq, which were the 2 big makers along with IBM, were in Texas. Michael Dell was building PCs in his dorm room, and then Dell had a factory in Texas. Compaq was started by some business guys who built a whole factory in Texas. The parts were being flown in from wherever they came from: disk drives from one country, CPUs from Intel in the United States, cables from China, and so on, all assembled in the United States.

The problem was that they were all standard parts. When you bought a computer from Dell or Compaq and opened it up, it had an Intel processor, a Seagate disk drive, and so on. They really were not competing on who could buy those parts and put them into a gray or beige box more quickly. They were competing on the other 3 Ps of the marketing mix: price, place, and promotion—not just product.

If you go back to In Search of Excellence, the idea was, “Since we can't compete on manufacturing, let's just make it as cheap as possible.” Compaq led the way, and they were making the cases for Compaq computers in China. These were 15-pound aluminum cases—basically shipping containers that held the PC. They were the biggest, heaviest part, so it made sense to ask how many parts they could get in the box before shipping it to the United States, which was two-thirds of the market.

They started going to these assembly plants and said, “We want you to build our PC.” The plants said, “You got it,” because they were hungry. They had the ability, because of the WTO and all this other stuff, to open up and do business. They were the capitalists in South China.

They said, “Whatever you want us to do, we're going to do it.” Compaq, being very concerned about secrecy and intellectual property, said, “We'll build you a building.” All of a sudden, Compaq had a building that was theirs. Then they went to Dell, and the plant said, “We'll build you a building, too.” There was also another company that made music players with a building over there.

All these manufacturers were starting to serve multiple PC companies. The PC companies thought, “This is working for us. We're crushing Apple in the marketplace, our PCs are getting cheaper, people are buying more, and Windows 95 is taking off. Everything is just dandy.”

They started saying, “We don't even need engineers.” Whereas Apple was flying more and more people around to do more and more advanced stuff, they were saying, “More gray boxes, more interchangeable parts, lower cost. We'll just keep selling more and make it up in volume.” That's exactly what was happening.

These companies were called ODMs, or original design manufacturers. They were saying, “You just tell us roughly what you want, and we'll make it.”

You'd go to meetings with them, and they would show prototypes of all the computers they could build. You'd pick one: “You want this one?” Then you'd say, “We want it a little taller, smaller, thicker, or thinner. We want to be able to swap out graphics cards.” They would say yes to everything, and then show you the Dell logo on it.

They got very, very good. They were effectively moving up the stack and becoming product makers and designers. The reason is very simple: they also couldn't compete on labor.

The way the government was working—the socialist part of this experiment—was that you couldn't live anywhere you wanted in China. You lived where you were born, and if you wanted to move, it was a whole thing. You weren't allowed to just move.

What China was doing was taking hundreds of millions of poor people and letting them live temporarily in all kinds of factories—clothing, cars, computers—where they would work for part of the year and then bring massive amounts of cash back to the rural areas. That's how China lifted a billion people out of poverty.

Those were all the same workers. You couldn't get a better deal on labor, and everyone was going to the same ODMs, which were building in the same factories. It was hard to get a better deal on that, so the ODMs, in order to compete, were moving up the food chain.

The American electronics world, whether it was TVs or whatever, and Japan with Sony, loved this. They said, “Just keep showing us more stuff we can put our brand on. We'll focus on sales, marketing, distribution, and branding. We're awesome.”

The start of all this was really interesting. There were suddenly 50 different music players because all that knowledge was distributed throughout all these manufacturers.

What's it like to visit one of these ODMs? These guys are crazy. I mean, you've been there a bunch.

I lived in China in 2004, and that's all I did: visit all these people all the time. We also visited the government, and we could go on forever about that.

The thing about these places was that you'd think you'd go to a factory and ask, “How exciting could that be?” I've been to car factories and washing-machine factories because they're all Microsoft customers. You go, visit the plants, and see the operations. Then all of a sudden, you're like, “Oh, my God, this is like a hospital.”

I've been to Intel, which is like an operating room: it's all bunny suits and everything. But these factories were just joining parts. It was the same thing I did in my living room when I bought a PC. I was just putting all the parts together. These places were football-field-sized.

For a baseline, I did summer jobs at the factory in Orlando that built intercontinental ballistic missiles and surface-to-air missiles. So I've seen big, giant factory floors before. There were thousands of people on hundreds of acres of assembly, and you just watched computers flying off the line.

The owners of these companies were very proud, and they took you on tours. You'd meet the CEO-founder of the ODM, and they would show you everything. They'd show you every step in the line, but they showed you the one you were allowed to see.

When I was at Microsoft, I couldn't see any of the others. But I could see that he was always very proud to show me one step in the process: the step when they attached the Windows logo to the PC, something Steve Jobs would never have allowed.

The Windows logo meant it was a legal copy of Windows. The whole reason I moved to China was that they were stealing Windows and Office left and right, and my job was to somehow help see if we could stop that. They were very proud and very legal about that step, so I have lots of photos of stickers being put on computers.

Then you would go outside, and the person would say, “That's where we make HP laptops. That's where we make [other laptops], and this is where we make those other laptops that we're not allowed to tell you about.”

That's the difference. What was going on in the Apple building was super important, and that's where we get to the answer to your question. Fast-forward a little bit, and they're building what became the MacBook Air.

The MacBook Air goes back to the original PowerBook 100 experiment, which was, “How can we take what basically sucked—laptops that Windows people used?” To give you an idea, when the MacBook Air came out, the typical knowledge worker in a company was traveling with about 6 pounds of computer gear. It was a laptop that was probably 1.5 inches thick and 9 by 12 inches. It had one of those padded laptop cases that you sometimes see. It was awful.

I actually wouldn't even travel with one. I only used Japanese laptops that fit in envelopes and stuff. Apple was building the MacBook Air, and now we know it was this machine's aluminum chassis that they showed us in that building. It was remarkable.

Steve Jobs held it up, put it in an envelope, and everybody said, “It fits.” I thought, “My Sony fits in an envelope, too, but my Sony was $3,500 and made by hand in Japan.”

Yeah. This was kind of a miracle. The problem was that the ODM who was on tour with me took us up. This is what happens: you go on the tour, they take you up a secret elevator, and suddenly you’re literally above the factory. All of a sudden, I’m in a Bond movie—the elevator door opens, and you’re in this football-field-sized office with a tea ceremony room and weird ancient suits of armor as art.

Were you ever terrified?

I was completely terrified. Of course, no one ever gets hurt, but I’m thinking, “What the hell?” I’m looking around, wondering if there’s a stairway that’s going to turn into a slide and I’m going to end up being eaten by Japanese-Chinese sharks or something. But there are ancient scrolls, and we have to go through every single piece of art while I’m getting the story behind each one. I’m jet-lagged, I have to pee, and I’m there just to make sure the stickers are going on the laptops, but I’m getting the full deal.

Then we sit down, and he’s like, “The Windows people are losing.” That’s me, because I am building these great things. Then he shows me prototypes for all these Windows computers. These are the ones that he built without any help from the Apple people.

Wow.

He’s like, “We could build these, but we can’t convince Microsoft or Dell or Compaq or anybody to build them. They’re too expensive or whatever. I can make them cheaper.” But—and this is where they get candid—it’s very difficult to work with those people. They don’t give him any degrees of freedom. He can’t be creative, but he also can’t move up the stack. The PC people just wouldn’t do it.

There are 2 lessons from that. One is that Apple taught them how to do this. They didn’t plan on doing that, right? But osmosis happens, and they got all these skills. The other was that Apple was still going to do it uniquely, and no one else was going to come in and invest that money.

We were also there at one point to help get Surface built. We were doing it to solve the problem—the reason Surface exists is because the PC makers wouldn’t build an aluminum computer, basically, or an all-in-one, for that matter. We actually took a whole different approach to metal. We built a whole metallurgy plant to do injection-molded magnesium alloy for the original Surface computer, which ran NVIDIA chips and all this other stuff.

We were willing to make cases of any size or shape for the OEMs, but they saw it as a niche. The PC makers just continued to stamp out routine things for at least 3 more years, until Intel finally invested a bunch of money in the OEMs via pricing to get them to build what today look like Windows laptops called Ultrabooks.

Apple just continued to do that, and they were building that expertise inadvertently. Then Intel came in and piled on more, so more people knew how to do it, except in the slightly more open part of China. It was this slow-moving osmosis that gets us to the point where, as Tim Cook says, people think that China is about cheap manufacturing, but it’s the skills they have.

Nobody else in the world could run 500 prototyping aluminum-milling machines at one time, produce the right defect rate, save all the waste, and develop all the other things. When we were making Surface, you had to use all this pressure-sensitive adhesive and keep all the things together to make it ultra-thin. Nobody here knows how to do that. They were telling us what they were doing.

That is what happened. It was not by design. That’s one of the differences I have with the book. The book is clear that it wasn’t on purpose, but it still makes it seem like we could have stopped it at any point. I don’t see that we could have. Not only that, there was no interest in stopping it. For the global view of trade, it was working exactly as planned for everybody.

Let’s get back to when that started to change. I don’t know if it’s in the book, but someone said, “China has Apple by the balls,” or “has us by the balls.” Let’s talk about that. What did we realize had happened at one point—the point of no return?

The point of no return was basically—I would say 2 years into the iPhone. The scale was such that there was nowhere else. I’m sure Apple would argue, “There was no way we could even have started the iPhone anywhere else,” and I could tell you that, like Surface, there was no chance we were going to build it anywhere else. That’s a low-volume product. There was no chance, and most things are very low volume, which makes the nonrecurring engineering costs much higher, so it’s even more impossible to build them. All the startups—you can’t even consider doing that.

The point of no return happened so long ago that it’s a weird thing to think about $50 billion a year in investment, because that’s not what did it. It was this unique blend of socialism or totalitarianism and entrepreneurship. That’s the thing that all the experts got wrong.

All the experts in 1999 were saying 2 things: “Yay for global trade. This is what we all want.” And also, “Don’t worry. China is going to stay a third-world dictatorship forever.” They couldn’t have been more wrong.

Frankly, that’s how I felt living there. It obviously feels totalitarian. You turn on CNN and you’re watching it, and then it vanishes, and you’re like, “Well, that was weird.” You try to connect to a website from a link, and you can’t see it anymore. There were all these people who worked for the government in our office, and I couldn’t talk to them. I didn’t know why they were there, and I was their boss. It was super weird. There’s a lot of stuff that, as an American, you’re like, “This is just kind of strange.”

But you go to the ODM—I could have been visiting Kimberly-Clark in a plant or Kellogg’s. It looked like a factory with a person who was like, “Just tell me what I can make and sell. I’m there for you.” You’re in this weird hybrid world that was completely predicted wrong.

A great way to think of it is the car industry. There was no auto industry when I was living in China. All the cars were Volkswagen or Mercedes, and that’s what everybody drove around. If you owned a car, you owned a Volkswagen. If you got driven around, you got driven around in a Mercedes. That’s just how it was.

The way they got there was by doing these joint ventures with the Chinese, and that was the mandated way. The joint venture came with terms that were onerous—you had to give them all your IP. For us, even to get a license to sell software—not that anyone was buying it legally—you had to allow inspectors to come in and see stuff. We had to shut down Hotmail for what felt like forever because we wouldn’t let them see the data-center servers, which weren’t even in China, and all sorts of complexities. But if you wanted to sell into the world’s largest population market, that was your choice: comply or not.

In the meantime, the entrepreneurs in southern China weren’t looking to Beijing for government direction. They were actually saying, “We have to beat Korea. We have to beat Japan. We have to beat Singapore. We have to beat Vietnam or Indonesia.” Those were all their neighbors, and they saw them all.

If you fast-forward, the car companies are all out of China now. These joint ventures—they could never get their money out, they lost all their IP, and their manufacturing—it’s just horrible. For Volkswagen, Ford, and Mercedes, it’s been a nightmare. Tesla didn’t have to do a joint venture, which is sort of the modern thing, just like Apple, where they were allowed to operate. But it turns out there are all these soft ways to make the company miserable.

That’s where it goes from entrepreneurship to socialist totalitarianism, where the Communist Party can just say, “We all need to have phones, and we like this model from Huawei.” Or, “We’re picking a new 5G standard, and it’s going to step all over Qualcomm’s patents, but it’s only in China where we enforce the laws.” And you’re like, “But the WTO says the what? Says what?” You get really stuck on this kind of stuff.

I think what everybody learned was that, in the 2000s and 2010s, it was very easy to pour money into China. But it doesn’t come out. Nobody—the returns just aren’t there. It’s also easy, if you’re one of the blessed companies, to grow, but then all these soft things happen.

A lot of people love to say that’s just totalitarian governance, but they forget the history of trade in America. We talk about the EU a lot, but we have a lot of these soft things, too. When San Francisco County wants to buy fleet vehicles, they don’t even think about it. They just say, “Well, they have to be American cars,” right? They’re like, “Step 1 has to be an American car.”

When the Defense Department buys stuff, there’s a massively long, thousand-page list of all the things that you have to check off in order to be sold to the Defense Department. To the outside world, that looks like safety and security, but it could also be viewed just as much as protectionism.

Yeah, it’s just two sides of a coin. So, when we look at Apple’s dependency on China, when does this go from, “Okay, this is great,” to, “Okay, this is actually an existential risk for the company”? Or would you say we’re there yet? How has this developed into the current era?

The easiest way to view the wake-up call is through the lens of COVID, right? I think all of a sudden, the entire world learned that this global system, while great for prices, great in the search for excellence, and great for focusing on what you’re making and what you do well, turns out to be actually pretty fragile. It’s fragile because there are single points of failure all over the place.

In this case, the single point of failure turned out to be that if this city is closed, no one can go into the factory. If transit is closed, the stuff can’t make it. I just think COVID was the wake-up call for the whole system.

Of course, at the national security level, it’s massively important now because you can’t afford to have a nation shut down because of these things. If all the technologies are based on chips that are assembled in one place and packaged by people who have all the skills to package them, you go, “Well, that’s sort of a problem.”

The defense industry figured this out long ago for guns and rockets. Those are all made in the U.S. The military sidearm is a Beretta pistol, which is made by the oldest company in the world, in Italy. The first thing Italy did to win the bid was set up a factory in the U.S.

Good news: We have plenty of sidearms that we could throw at the drones or something. But drones are the opposite end of the spectrum. All of a sudden, drones are the most important thing, and we were like, “We don’t even—not just that we don’t make the drone; we don’t make any of the parts for the drone.” They’re all made by the only person who makes them—our enemy, so to speak. This seems to be a problem.

Let’s say Trump brings you in and says, “Hey, I’ve noticed that nearly all of computing—every stack—is done in China and Asia more broadly, and I’m trying to decrease our dependencies. Microsoft man, what should I do?”

Obviously, there are much smarter people who know more and have much more at stake than I do trying to solve this. You have to do it. The thing is, it goes against all these academics who were experts in 2000 and said it was good. But they didn’t think about all of these risks. Nobody thought that the dependency would be on the replacement for the Soviet Union in terms of a longtime enemy.

No more would we want to be dependent on the Soviet Union for something than we would be on China. There’s no choice in that matter. Hopefully, our relationship with China is already vastly more open than anything that, up until 1990, the Soviet Union was, so we’re in a very good, peaceful situation there. But that doesn’t change the posture.

Apple is doing this experiment—it’s obviously more than an experiment—to build in India, which solves their problem. It doesn’t necessarily solve the current administration’s view of the solution.

The other part of free trade that inverted, twisted, and split the political parties in half in the U.S. was NAFTA in the early 1990s, which was free trade with Canada and Mexico. What could be more of a no-brainer? It turned out it was also part of the global view of things. In fact, half the Democrats voted against NAFTA, and half the Republicans voted against it—the same as with WTO kind of stuff.

Here we are: That meant that all the jobs just moved to Canada and Mexico. Long term, not having employed people is a bad thing. It doesn’t matter if it’s manufacturing or anything; it’s just weird that being across a border would so substantially change the economics of what’s made. Especially when you literally just drive the parts back and forth through Texas, Minnesota, or wherever. That’s kind of weird.

I think this reset is happening broadly. I don’t like the idea that the people who are very much in favor of this global world sort of ignore the inherent risks of a polarized world, but also immediately jump to, “No one’s going to pay $5,000 for an iPhone.” I think that’s an incredibly silly argument.

If you were to look at an iPhone and think about making it by hand, you would go, “It’s going to cost like $100,000 each. It’s like a fancy watch.” The reason that it’s $1,000 or $1,500 or whatever is because of the innovation in manufacturing.

All that needs to happen is another step-function change in manufacturing. For decades, that’s all Apple woke up and thought about. They remain in that whole operating mode of sending zillions of people onto the factory floor to design. That’s what they do. They rely on skills, but they are there inventing these things.

If you look at the Apple Vision Pro, it has all these lenses and all of that was on top. They made all of that stuff. What they’re going to do is focus on, “Okay, if we have to do this, we’re also going to end up with giant factories of robots, better automation, or new packaging technologies that don’t require as many steps.” This is all stuff that they’re already world leaders in.

So you’re optimistic that this is a solvable problem—that Apple can decrease its dependency?

I think everybody is. It’s easy, because of the book, to focus on Apple, but everybody faces this problem. Even if you make cars in Detroit that are really manufactured and assembled in Canada, where do all the in-dash electronics and the car computers come from? They’re just flown in on a plane to be glued in.

I’m not just optimistic. This is literally how innovation happens. Innovation isn’t invention. Invention is just sitting around thinking, “What would be really cool to make?” Innovation is, “These are the constraints that I have to work within. I’m going to solve this problem.” Nobody loves to do that more than engineers.

If you’re a packaging engineer in the software, hardware, or motherboard space, this is what you live for. How do we reduce the steps? How do we reduce the components? How do we cram more into this? This is your whole focus in life. It’s your mission.

Gearing toward closing here, it felt inevitable to me that Apple would become even bigger than it is today—much bigger than the hugest company in the world. I remember reading the statistic that 9 out of 10 high schoolers, I think, prefer Apple products. When they get to college and graduate, why isn’t iPhone market share much bigger? Why wouldn’t it just keep getting significantly bigger, not just in phones but also in laptops and desktops?

When you look at the risks, maybe the China situation drastically increases prices if something were to materially happen in the short term. Or maybe there’s a new form factor that Jony Ive or OpenAI or someone else figures out that outplays the phone. That doesn’t seem super likely in the short term, but how do you react to that?

People always think that you’re either in the school that things are just going to keep going forever, or, “Idiot, this thing is over. There’s already a new thing,” but you can’t buy or touch the new thing. We’re in that in-between space right now.

I do think that it’s highly likely that new ways to make things will get figured out. It’s highly likely that it’s going to get much more competitive in phones, only because the target is a little bit more stable.

And the best way to think of it is that Macs are half the laptop market in the US at this point—not quite, but in some segments. Nobody thought that would ever happen.

Yeah.

But that’s partially because the reason it could happen is that the use case for laptops stagnated at about 2000. All of a sudden, I’m basically running a browser and Microsoft Office.

Yeah.

And if you’re doing that, a Mac, modulo the differences in Office, is roughly the same. And so, if the price is the same at $1,000, why not? Half the market is always going to view it as a price point, and $1,000 is $200 more than $700. A certain amount of the market is going to buy the phone that’s free with the plan, and that’s just going to happen.

But more and more of the market will see the phone as a positive part of life and be willing to invest in it like any branded item. I think that’s going to happen.

So I don’t know what’s going to happen on the device side. I think, generally speaking, the form factor is going to last much longer than even the most optimistic people think. There are a lot of people still running PCs, even though nobody in Silicon Valley knows that.

But I think it’s just going to be up for grabs. There’s nothing written anywhere. Bill Gates used to always have to remind people that, at Microsoft, somebody could show up any day and do a better version of everything Microsoft does, because it’s software, and economies of scale and all that stuff aren’t the barrier people used to think they were.

Manufacturing devices specifically has a barrier, but because of the automation and all the work that’s going on, that barrier is just going to drop. In fact, it has dropped. The only reason there are so many amazing Samsung phones is because they’ve all seen the movie.

Yeah.

They know what to do.

Yeah. Is there anything else you want people to take either from this book or from this conversation, in summary?

Well, I think I would drill down on 1 issue that I think is super important for people to really consider in the competition between the US and China, and also how it relates to AI: the difficulty we’re all going to have collectively navigating the world of intellectual property.

I think it’s very easy to say, “China doesn’t respect intellectual property, so they can’t be part of the world stage,” flat out. They’ve crushed the pharmaceutical industry that way. What they’ve done with BYD and Tesla is arguably pretty rude, and stuff like that.

But on the other hand, it’s just as easy to say, “Well, because of AI, all knowledge, all content, all information just needs to be free to train and to reuse.” Neither of those are realistic positions. I think this issue is far more subtle and far more important than either China thinks or the digerati in the US think.

I believe that’s one that’s going to need a lot of attention, and I worry about wild cards. I worry about the European Union going crazy in 1 direction or another and passing some rule. Then, all of a sudden, that market is weird. Or Japan, which went the other way because they have a language challenge, which is Japanese. They could just say, “Yeah, we could train anything here,” but it’s like, “Yeah, but that’s just Japanese, or is it a loophole for English? We’re not really sure.”

I think that issue is the one where policymakers need to spend the most time, but it’s also structured in the US as a litigation issue, and there’s no way around it. So we’re in for years of market uncertainty over how this plays out.

That’s been a core part of Apple’s advantage: their ability to maintain the intellectual property of components, manufacturing, and assembly. Now that’s dispersed.

Yeah. That’s a good place to end. Steven, this has been a fantastic conversation. Thank you so much for coming on.

Thank you. It was great to be back together.