Cydia pomonella, better known as the codling moth or an apple worm, lays its eggs on apples. Once the larvae hatch, they begin to bore their way into the apple. The larvae are not capable of consuming leaves, so they must consume the flesh of the apple. This in turn allows the larvae to grow as the apple prematurely ripens, deteriorates, and rots from the inside out.
Apple in China: The Capture of the World’s Greatest Company, by Patrick McGee, explores how tech giant Apple used China to become both extremely valuable and vulnerable even as China used Apple to hone its manufacturing capabilities. According to McGee, “Apple convinced Beijing it was not merely a merchant in China, but a kind of patron and mentor, financing, training, supervising, and supplying Chinese manufacturers.” Or, in more botanical terms, Apple unwittingly entered into a symbiotic relationship with China like that of the codling moth and fruit: one—Apple—is being consumed and in danger of rotting, while the other—China—continues to grow and propagate.
How did Apple end up in such a precarious position? According to McGee, it was all by accident. McGee argues that “nobody at Apple had really architected the move to China; but in one opportunity after another, Apple operations were lured into the country.” For the past quarter century, Apple has unwittingly reshaped geopolitics between the United States and China through its manufacturing strategy. This reshaping, however, happened both furtively and unintentionally, since Apple was motived only by short-term profits. McGee puts it like this: “What Apple had realized was that, unwittingly, its presence in China was enabling technology transfer on an extraordinary scale.”
Understanding contract manufacturing as well as how Apple came to concentrate its operations in one country is vital to McGee’s book. Outsourcing production to a third-party manufacturer, i.e., contract manufacturing, enabled Apple to focus on design and product development while leaving the risk and logistics of manufacturing to other companies. Throughout the book, McGee chronicles the steady progression in Apple’s contract manufacturing strategy.
Early in Apple’s history, its manufacturing was centered in the United States. In 1976, the Apple I computer was assembled in the living room of Steve Jobs’s pregnant sister, Patty. Sitting on her couch while watching soaps on TV or talking to a friend on the phone, Patty would assemble parts onto a circuit board.
The Apple II expanded on this system. As McGee describes it: “Every few days they gave the kits to a Los Altos housewife, who coordinated a fragmented network of assembly operations spanning houses and apartments crowded with immigrant women from Southeast Asia and undocumented Mexicans.”
However, these strategies changed in the 1980s as Apple began to outsource manufacturing to places like Japan and Taiwan. While this worked for about a decade, contract manufacturing in Taiwan eventually shifted to China:
The Taiwanese were learning fast, evolving from taking orders to commanding respect as a genuine partner. … Taipei had ended a thirty-eight-year ban on traveling to China in 1987, opening the mainland for commerce and trade. Within a decade Taiwanese entrepreneurs were building major factories on the mainland, teaching their apprentices in Mandarin and attracting some of the world’s biggest PC brands.
The Taiwan-China manufacturing bridge plays an important part in McGee’s narration of Apple in China. In particular, McGee argues that a single contract manufacturer—Foxconn—is responsible for shifting Apple’s manufacturing to that country. According to McGee, “Foxconn, a Taiwanese contract manufacturer taking advantage of cheap labor on the Chinese mainland, was all about the client.” The CEO of Foxconn, Terry Gou, developed a close partnership with Apple and played a major role in the tech firm’s steady move to China.
This contract manufacturing relationship was symbiotic—Apple negotiated cut-throat contracts wherein Foxconn had almost zero profit margin while Foxconn learned invaluable skills and information from Apple. As McGee describes it:
Gou grasped earlier than anyone that the value of working with Apple wasn’t the profits; it was the learning. Foxconn might not win much profit from Apple—it might even lose money at times—but the work itself, as well as the lessons Cupertino offered by having its engineers work side-by-side with locals in the factories, gave his team a deep education.
What local suppliers learned from working with Apple enabled them to turn around and win orders from other clients—with far greater profit margins. A short-term loss in profit for these contract manufacturers resulted in the long-term benefit of knowledge acquisition that benefitted them indefinitely into the future.
The relationship between Apple and Foxconn marks an important feature in McGee’s entire thesis: Profit is not merely financial. While Apple made incredible financial gains from their contract manufacturing endeavors with Foxconn in China, Foxconn and China profited in even greater ways through knowledge acquisition. Apple was in it for the short-term profits of quarterly reports and share prices; Foxconn and China were in it for the long-term profits of manufacturing capability and capacity. It remains to be seen who will ultimately benefit most in all this, but McGee thinks it will be China and not Apple.
McGee makes it clear that there were unintended consequences to Apple’s strategy: “Apple was making spectacular investments in China; it’s just that the contributions weren’t found within the iPhone, but in the machinery and processes that made it.” This took the shape of Apple engineers routinely going to and living in China to train workers there in practical knowledge.
What kept Apple going in its China investment was the short-term success from the strategy. In other words, all the profit reports were up and to the right. Apple found its China strategy to be very successful for a long period:
It married the best of both worlds, imposing a zealous level of control over its manufacturing processes, but with the lower costs and added flexibility of not actually running a factory. Curiously, the nuances of Apple’s strategy in China—what it was doing differently from everyone else—had been largely absent from media narratives, investor reports, and earnings calls.
This is a key point for McGee: Investor reports and earnings calls revealed the financial success of Apple’s China strategy, but they did not reveal the syphoning of manufacturing knowledge that was occurring. It’s hard to quantify things like knowledge, skill, capability, and the common good in an earnings report. However, these are of exceeding value in the long term.
Yi Wen, an economist with the Federal Reserve Bank of St. Louis cited by McGee, maintains that the acquisition of knowledge was the “secret recipe behind England’s Industrial Revolution in the eighteenth century, as well as China’s over the past four decades.” What is gained from the trade in ideas can be as valuable—or even more valuable—than what is gained from trade in commodities.
Exactly how detrimental has this knowledge transfer been for Apple and manufacturing in the United States? McGee provides a lucid and alarming example of how damaging this brain drain has been. In 2019, Tim Cook vowed to produce Mac Pros at a factory in Texas. This only demonstrated the struggles of making computers in America. Relying on a U.S. contract manufacturer, Flex, Apple eventually shipped computers from Texas. Yet McGee points out how the manufacturing happened:
In the end, Mac Pros were indeed shipped from Texas, and Apple made a snazzy video demonstrating the processes—scoring whatever political points it could. But the project made it only because Apple leveraged relationships with suppliers in the one country where it knew the talent existed. “We flew people from China to get it fixed,” one of the engineers says. “People working for Foxconn.” The irony is hard to over-state. After more than a decade of sending its top engineers to China, to train staff on how to build things at Apple quality, Cupertino needed to fly Chinese engineers into America’s heartland to complete the project.
McGee concludes the book by exploring how Apple is trying to de-risk. India is the primary contender in the shift away from China. While there has been some progress on this front, McGee and others are skeptical: “Apple is only in the earliest phases of diversifying iPhone production. As Morgan Stanley analysts estimated in mid-2023: ‘90–95% of Apple’s production is still in China; we believe a full decoupling would likely require hundreds of billions of dollars of investment at least, which would prove an outsize burden for the supply chain.’”
McGee sums up with a very critical assessment of Apple:
The problem was, shareholder-first capitalism enabled—indeed, even encouraged— corporations to ignore, if not undermine, the national interest. Executives found that they could focus on actions to reap short-term benefits—gambits such as cutting costs and outsourcing jobs to Asia—and ignore wider societal impact. As this book has demonstrated, Cupertino’s interests have significantly diverged from Washington’s since the death of Steve Jobs; the wider implications could end up tarnishing Cook’s legacy.
On the whole, McGee’s arguments are convincing and clear. His assertion that Apple myopically followed short-term profit into a subservient relationship with China is compelling. Yet one cannot help but wonder whether McGee is failing to see the whole picture himself. McGee does a masterful job of detailing the symptoms of this problem but offers almost nothing as to what caused this short-termism and profit myopathy in Apple’s contract manufacturing strategy. McGee has adduced the penultimate problem of Apple in China, but what is the ultimate problem here in the U.S.?
Connecting good intentions with sound economics, free markets and the common good, helps us understand the underlying pathology of Apple’s manufacturing gambit. Driven only by free market success and short-term profits, Apple has become over-risked in China and helped to diminish U.S. manufacturing capabilities. Had wider societal impacts and the common good been a larger part of Apple’s strategy, it could have avoided the existential crisis it’s in now.
Profit is not truly profitable when it has no place for flourishing, common good, virtue, and justice. Augustine of Hippo put it like this:
Gold is loved wrongly by misers when they desert justice for its sake, although the fault lies not with the gold but rather with the man. This is true of every created thing. For, although it is good, it can be loved both rightly and wrongly—rightly when the proper order is preserved, wrongly when the proper order is overturned.
Apple’s pursuit of profit squeezed out proper order and the common good. They invited an apple worm into their midst if it would help them in the short term. And it did. Yet the longer-term flourishing has been transferred from Apple to China. While McGee is right to argue that Apple could benefit from shifting manufacturing to India, there is something more that needs to be done.
Apple—and other companies seeking to make a profit in free market economies—need to couple their efforts with good intentions and virtue. As Jordan Ballor of the Center for Religion, Culture, and Democracy puts it: “Money is very powerful, and as the classic bit of wisdom also advises us, the corruption of the best is the worst. And so money, that powerful creature of God intended to do us good with its proper use, is a tyrannous master” (The Deceitfulness of Wealth).
Apple has schlepped into serving a tyrannous master while navigating an overly risky minefield of political and supply-chain challenges. De-risking from its China concentration and opening up more operations in India poses the risk of fomenting backlash from Beijing and Chinese consumers. Meanwhile Huawei, a Chinese company that is a major competitor to Apple, is now designing and manufacturing phones with features that Apple is not expected to match until 2027. Though the signs of rotting are becoming apparent, there may still be time to restore proper order with both profit and manufacturing—if Apple can discovery the profitability that comes from making money and fostering a free and virtuous society.
