Decoder with Nilay Patel
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.
00:30:48 · Willy Shih, Nilay Patel
We have to make the product more efficiently and we have to make better product, right? So there's this internal competition in the Chinese marketplace that is really fearsome and it is hard for western companies to compete there, but that that is an important dynamic that's going on as well. [00:31:08] S2: The interesting thing about that is I compare and contrast, China with The United States is the system in China is understood, but it's stable. You can make a lot of criticisms of that system. I think you can make an endless number of human rights criticisms of the Chinese government. They're obviously a repressive government in lot of ways. But the economic system is understood and it's controlled at the top in a meaningfully stable way. Right? The goals are apparent, the investment is apparent and there's a lot of competition to achieve those goals with that investment.
00:31:37 · Willy Shih
[00:31:37] S3: Two things about that which I think are significant. The first is, they engage in long term planning. Okay. Five year plans. Now, when I was a kid growing up, I used to look at China's five year plans and I thought this is a big joke because they would make a lot of mistakes, right? Like Mao Zedong's Great Leap Forward and, you know, we're going to do this new type of tillage on farming and they cause this huge famine and millions of people die. Okay. But to the credit of the government there, when they do this type of long range planning, they learn from their mistakes and they get better. And, you know, if you look at their current five year plans and the last couple of five year plans, you know, they're good plans, right? They understand, what's important and they focus on those things that's important. Then the second point is, it's like what kind of people do they have implementing these plans? I was in one of these third tier cities some number of years ago and I was having dinner with the Economic Development Commission there. And I said, you know, at the beginning of dinner, it's like, hey guys, just for fun, let's go around the table and talk about what did you study in school, right? Mechanical engineering, industrial engineering, electrical engineering, metallurgy, metallurgy, mechanical engineering, right? You go to Washington, it's like what do you study in school? Political science, economics, government, you know. And so you have these technocrats competing in technology intensive businesses and having that kind of understanding, okay? And by the way, that's one of the reasons I wrote this book, right? Because I was serving on these committees appointed by the Commerce Secretary on supply chains. And I realized, it's like we have civil servants who don't have the exposure to supply chains and how stuff is actually made. And China had this plan that was called the 863 plan. Okay. And the 863 plan was when four scholars went to the government in Beijing in March 1986. That's why 863, right? 'eighty six March, right? So the 863 plan. I remember the first time I looked at the 863 plan and it was all about, if we want to be a modern economy, we got to be good at these things. And I looked at that plan in the 1990s and I said, this is a good plan. And they've executed every one of those things.
00:34:04 · Willy Shih, Nilay Patel
They said, we need to be good at all these things like information technology, biotechnology, you know, semiconductors, they still have a ways to go but you know, they identified civil aircraft, they identified all these different technologies, communications technology, software, you know, robotics. [00:34:23] S2: I would contrast that with the Trump administration here in in in Trump's second term where we already talked about Liberation Day. Howard Lutnick is on television saying, we're gonna move manufacturing back to The United States. This is the goal of the tariffs. And then three weeks later, there's 900 lawsuits about the tariffs and Howard Lutnick is back on TV saying, robots will do all the manufacturing now. This is the goal. We're gonna do heavy automation and then the tariffs get struck down. And they find a new law for different tariffs. And it does not seem like the same kind of long term planning that can be stuck to, or the same kind of environment where businesses understand the stability of the trading system such that they can compete ferociously. Every CEO who does manufacturing comes on the show, usually ends up talking to me about how they scramble to buy RAM at affordable prices to make their products, which has to keep them from doing anything else. How would you contrast that? Can we get out of this moment where it's a pure scramble or is this fully shaken everything up?