Decoder with Nilay Patel
00:20:02 · S4, Nilay Patel
[00:20:02] S4: This holiday, switch to the Simplicity plan from Verizon. It's one plan, one price. Just $30 a line per month for you or the whole family and on their best five g network. Switching to Verizon and shopping their best deals makes the holidays simple. Head to verizon.com or your nearest Verizon store today. [00:20:28] S2: It's funny. The first Friday book, which I highly recommend the audience reads, it's a it's a fun read, is just setting up the first principles of why we trade it all in the very concept of labor arbitrage, which seems like we're having a a national policy conversation that is 500 steps removed away from these basic ideas of why we would trade. And it is entirely centered around, can you bring manufacturing back to America because we let all the manufacturing jobs go to Mexico and then go to China, and particularly in high-tech, and we're behind. And there might be some extraordinarily bad event like a war where it's exposed how little manufacturing capability we have in United States. And that sort of has nothing to do with the basics of specialization in various countries around the world. Right? It... It's it's another problem, and the blunt instrument is, boy, it's bad that all of our drones are made are made in China. We're gonna we're gonna prevent the drones from being sold here. And, of course, our industry will set up drone manufacturing in The United States. I don't see that connection. Do you see that working?
00:21:28 · Willy Shih
[00:21:28] S3: No. I I think that's, kind of a transactional view where you look at one piece at a time as opposed to looking at the bigger picture, right? I think we have to start with a core principle that The US is a high cost country, okay? And therefore, if you want manufacturing jobs coming to The US, then you've got to have high labor productivity, okay. And in fact, if you look at the types of jobs that are coming back to The US, they tend to be using a lot of automation, using a lot of sophisticated manufacturing processes and stuff that is high skill that you can justify the high, high labor cost. Either that or they are... They are things where we have a technological lead that nobody else knows how to do in the world, right? I was looking at like, the high temperature super alloys that are used in the hot section of jet engines. Right? There are only three companies in the world who know how to cast those, and two of them are in The US and one of them is in The UK. And there's things like that the rest of the world has to buy from us. Okay. So, you know, if you have high labor productivity or, you know, highly differentiated products, those we can make in The US, we can make them successfully. And by the way, most of them never left the country, right? Jet engines, you know, The US and France and UK are major suppliers of those to the entire world market. Even the Chinese buy those from the West, okay. And so, it's like, if we have these things that we do better than anybody else, we should invest in those and make it, make sure that we're always in the lead and then everybody else will buy from us and then nobody will hold, you know, then you'll have some balance where you can't be held up, right? There's a lot of this thinking is like, I wish I could turn the clock back to the 1980s or the 1970s when manufacturing was the path to the middle class in The US. It's like, no, manufacturing has changed worldwide. Okay. And those jobs that you want to have manufacturing in The US, you've got to have the high labor productivity or the high differentiation that'll go with it.
00:23:52 · Nilay Patel
[00:23:52] S2: I want to stay on the iPhone for for one more second. Apple just inked a new deal where they're gonna source a bunch of titanium from a Pennsylvania based company called Pyramin for the iPhone 18 Pro and the new iPhone Duo. They're gonna source that titanium here, they're gonna ship it to China, they're gonna assemble the phone in China, they're gonna ship the phones back to us. They do that with Corning and Glass as well. I've always looked at that at at Tim Cook's job in particular is he's a statesman. Right? He... He's got to negotiate with Donald Trump and Xi Jinping about iPhone production and tariffs in these supply chains, and the iPhone kind of holds the global economy together. Like if the price of the iPhone gets too high because of tariffs, like, maybe there's an electoral impact in The United States. How do you see products like that? Are they as as load bearing as it feels to me? Or are they just examples of the larger system?
00:24:42 · Willy Shih
[00:24:42] S3: I think the iPhone is a terrific example of how difficult this problem is. Okay. Because right now, you have components that have high technological complexity, right? I mean, iPhone uses the most advanced chips produced by Taiwan Semiconductor Manufacturing, right? And by the way, most of those chips are still going to be made in Taiwan. TSMC has a fab in Arizona, but its capacity is piddling compared to what they have in Taiwan. Okay. So those chips come from one place and those chips require the most sophisticated processing tools that come from ASML in The Netherlands, but also companies like Lam Research and Applied Materials in The US, right? And so it's kind of that global thing. But the key thing is iPhones also require assembly labor. Okay, they require manual assembly because we're not to the point yet where you can assemble the whole thing with a robot. There's actually a chapter in my book where I talk about it's like, what do Henry Ford and Lifestyles of the Chinese Communist Party have to do with assembling iPhones? And it turns out it's a lot, right? The lifestyles of the Chinese Communist Party have to do with how they mobilize workers in what I... What's called this Danwei model, which was, you know, established after the communist revolution where I have a production site, kind of a walled city where I have housing for workers, I have a means of production and warehouses and ways to feed them and stuff like that. If you ever go to a phone factory in China, the real question is how do I mobilize a 100,000, 200,000 workers to do this kind of manual assembly on a scale that an Apple needs, right? They're trying to do it in India. They're having some success with India, but that was really hard. But once again, is how do I mobilize manual labor at that level of scale, right? So, the iPhone, as you point out, is a great example of a global product because it needs the highest of tech and it also needs the, you know, the the huge workforce to do the manual assembly. And it's a challenge, and that's why it's a global product, as you say.
00:27:08 · Nilay Patel
[00:27:08] S2: There's actually a great book called Apple in China, which I also recommend. The the narrative is the Chinese government subsidized an awful lot of manufacturing for China. They built these cities. They built the culture that enables the labor at scale. Your example in the book, again, is LCD factories where the Chinese government invested in overcapacity and that drove the price of LCD manufacturing down. Basically, it's all centered in China now. The flip side of that is, boy, it's pretty obvious that they stole a bunch of American intellectual property along the way. Right? They developed these manufacturing capabilities. They took a lot of the know how that Apple imported in that country. They did the same with Tesla in a lot of ways. They stood up an entire electric car industry on the back of the innovation Tesla that started manufacturing in that country. And now they have those capabilities and they're racing ahead of our companies because we don't actually have the manufacturing know how. Can you rebalance that? I hear this concern a lot that you can't rebalance it. If all the manufacturing happens there, they will actually be the state of the art and we will fall behind.
00:28:09 · Willy Shih
[00:28:09] S3: I'm not sure if Stoll is the best, description of how they got these capabilities. Okay. I would say they learned it. And in many risks, in many cases we taught it to them. Okay. Being a supplier to Apple is often referred to as a golden ticket. Okay. And people say, well, why is a golden ticket? Well, obviously you get cash flow from selling product to them. Okay. But the other thing is Apple is a real taskmaster. Okay. And, you know, by making you work hard to improve your products, improve your specs, and meet their performance specs, and meet their cost targets, you get better. The same thing happened, when Tesla set up their factory in Shanghai. Okay. The fact that they qualified local suppliers, you know, it raised the game in the Chinese EV market. Another thing I think a lot of people miss about China is that there is actually this very interesting competition going on, right, which is Beijing sets policies and they set objectives, okay, but then all the regional governments, the provinces, the major cities, they're all competing with each other, right? So they set up this free market dynamic. So, you have this fierce competition between regions, okay? And the regions are also very smart about setting objectives, right? They keep raising the bar on people so the technology gets better. And so, you have a dynamic where it's really cutthroat competition in the Chinese market and it's about survival to make better products at lower prices, right? And that's something that's really driving it right now. To your point about how, you know, to the extent we've lost the ability to make things, the Chinese have a lot of capabilities. You should walk through some Chinese factories these days. They're way ahead of The US in terms of using automation, you know, because they're investing like crazy. I had a student, I was talking to him about his father's factory in Shanghai and he said, his father's answer to everything, right? Every competitive threat was, it's like more CapEx. I'm going to throw more capital at it. I'm going to buy the latest machine. I was in one factory a couple months ago where the equipment was two years, maybe three years old, and they were ripping it out and upgrading it to the latest generation, right? Because it's like, this is how we're going to survive.