--:-- Host (Erik Torenberg): If you look back in 1999, it's like completely upside down from today. As Tim Cook says, people think that China is about cheap manufacturing, but it's the skills they have. For the global view of trade, it was working exactly as planned for everybody. 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.
--:-- What if the rise of Apple also built modern China? Today's guest is Steven Sinofsky, board partner at A16Z and former president of Microsoft's Windows division. He led major efforts behind Office, Windows, and the introduction of Surface. And he's one of the sharpest minds in tech.
--:-- We kick off with reactions to WWDC, Apple's new UI, the iPad's big software shift, and why Apple's AI story still feels unfinished. Then we dive into the heart of the conversation: Apple's entanglement with China, how it started, what it enabled, and whether it's now a strategic liability. Let's get into it.
--:-- As a reminder, the content here is for informational purposes only. It should not be taken as legal, business, tax, or investment advice, or be used to evaluate any investment or security, and is not directed at any investors or potential investors in any A16Z fund. Please note that A16Z and its affiliates may also maintain investments in the companies discussed in this podcast. For more details, including a link to our investments, please see a16z.com forward slash disclosures.
--:-- Stephen, 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. I'm glad to be back in business together.
--:-- Guest (Steven Sinofsky): I couldn't be more excited for us to be working together on this one, and more in the future, I hope. It's definitely a reunion of sorts.
--:-- Host: Absolutely. 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. Before that, you spent many years at Microsoft helping lead both Office and Windows, and you helped introduce the Surface PCs, which is relevant to the conversation we're about to have.
--:-- We're here to talk about Apple, inspired by the book *Apple in China*. But first, let's briefly cover WWDC. What reactions or hot takes do we have from it?
--:-- Guest: One of the exciting things about this book is that there are lots of interesting things to talk about with Apple. But WWDC is their big yearly developer event. Of course, it's always disappointing. We're here to talk about supply chains and China and gadgets, but there are never any gadgets at WWDC. But there are lots of big things to talk about. It's a remarkable event, a remarkable platform that's been doing yearly releases for 26 years. It blows my mind what they've done and the scale they operate at.
--:-- I think there are three big things that came out of it. The first was the big push, and also the big reaction, which was called Liquid Glass. It's the new user interface design. Having gone through multiple big user interface redesigns of widely used products, 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?" If there's change, it must solve a problem. But there are lots of reasons designs change.
--:-- 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 issues — "I can't read it, it's blurry, it's noisy" — those will all get fixed. What's left is: is it great and is it unique enough? Time will tell. I'm reserving judgment and not joining 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.
--:-- The second thing that I thought was huge personally was 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 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.
--:-- Now, the iPad sells an enormous number of units. 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 that the iPad is a Mac, and the Mac is an iPad in terms of hardware. So you're really talking about a difference in software, how they deal with that over time, what apps run where, and where the experience is going. That will be super interesting.
--:-- The third thing was more an act of omission than commission: 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."
--:-- Guest: I personally think that months ago, when they launched all those AI features with great fanfare, that was out of character for them. They announced a bunch of stuff 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. I think what they're probably doing is saying, "We're not really good at this pre-announce, catch up to our own announcements thing," which of course I grew up doing. I'm completely comfortable in that world of just make stuff up and hope you catch up or people forget. I think they're back to being the first integrator company, not the first mover 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.
--:-- Host: A lot of people have commented on the failures of Apple Intelligence, or Apple's inability to capitalize on this innovation. We just saw Meta purchase 49% of Scale. 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? How do you think about that?
--:-- Guest: I think what Meta is doing — at the very least, it's great for AI. I'll let Meta decide how great it is for Meta, but it's great for AI. The reason is that if you go back, the way platforms have been evolving: in mainframes, IBM had 100%. In PCs, Microsoft had 95%. Then you start getting out there. In servers, it ended up being at best case 50-50, and it's been downhill — 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 40-40-20 kind of world.
--:-- For AI, it's almost inconceivable that there'll be one winner. The overlay is 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 iMode, but it only existed in Japan. They were leaders in technology and experience, they had all these micropayments, but it didn't go anywhere outside the country. The biggest risk to AI is that either someone tries to think it's only one player — which at times the federal government has acted like — or one player says it should only be us, or it gets geographically constrained. To prevent any one of those, 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. Innovation is happening on all cylinders and all fronts, which is great because the competition is basically making the call that it's going to be one. It might not be one company, but it will be one 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.
--:-- Host: It's worth 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 think, "It's not the market leader." But in this market, as you mentioned, it's not winner take all. The market is so big that even second place or third place can be generational companies.
--:-- We're not even at the point yet where I believe we'll get, which is the initial go-to-market has all been this cloud-based thing. But there are all these challenges with that: privacy, security, and cost. The idea that we would foist variable cost on the entire world of software — very tough for me as a fixed cost, low price volume mindset to think we'll sustain. I think there's a whole wave of AI on the edge that's going to happen, which only benefits from open. There's nothing but positive to say.
--:-- Does it make sense to look at Scale as something of a $15 billion acqui-hire of Alex Wang plus the top talent? If you're advising Apple, do they — or some of the other big incumbents — need to do something similar? Obviously, Microsoft is well-suited with OpenAI to begin with. But if you're Apple, how do you think about how to play here?
--:-- Guest: I think there are two or three plays. One is 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 get all the cereals, not just Froot Loops.
--:-- Then there's the "we're going to go our own way" approach, which is Gemini taking their approach, or OpenAI itself, or Anthropic itself. I think Apple needs to pick one. 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 their unique hardware on the edge, and their unique offering — or constraint, depending on your view — of privacy and how that plays out.
--:-- Host: 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 different? How should we think about how this has worked out for Microsoft?
--:-- Guest: Oh, these are tricky things. You can't ask me questions about my friends. But putting that aside as advice, I genuinely do not know anything that's going on. 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 — that's what Google was doing in 2006, 2007.
--:-- I would not be at all surprised — I don't know anything, I swear — that there's some first-party thing that they're just trying to figure out when and how good it has to be. Because if you are Microsoft, the strength of Microsoft is that you never have to be best. You just have to be included. That will likely be their play. 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 best at any given moment.
--:-- Host: It's fascinating how all the big players have crystallized their approaches in response to each other. Meta's approach, Google's approach, Microsoft's approach.
--:-- Anyway, 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 inspired by the book. A few things I want to say. First, the notion that Apple invests $55 billion a year in China. I believe the author said that's equivalent to — or maybe even bigger than — the entirety of the Marshall Plan. This is astronomical.
--:-- This book talks about how Apple not only built its company in China, but also helped build China itself: China's manufacturing economy. Apple introduced a level of talent and knowledge, taught China not just how to build phones, but that same knowledge then led them to help build Tesla — which are phones on wheels — and then led to other technologies used for the military, which we'll get to.
--:-- First, I want to ask: was this inevitable? Did this make sense at the time? How do we make sense of this 20 years later? How did this all happen?
--:-- Guest: It is crazy how it all happened. If you go back, of course, Apple was in the garage in Palo Alto. They famously built the computers there. But from the very beginning, Apple was all about super tight control. Woz basically created works of art on the motherboard. Then they built a factory right here, and that's where they built computers. They just kept doing more of that: tight control, build the whole computer.
--:-- Then Steve left Apple. The Macintosh was famously the same thing. Steve pushed and pushed on costs and the shape of it, made the famous toaster that you carry around. But after Steve left, the company had enormous difficulty competing with the IBM PC. One of the things it did later in the late 1990s was a super innovative laptop. Everybody asks, "What does an innovative laptop mean?" In the late 1990s, nobody bought laptops. They were slow, expensive, bad computers. They were just portable — that was their big thing. If you had to have one, you did.
--:-- But Apple built the original portable for Mac called the PowerBook. They tried to cram a lot into it, tried to make the best laptop possible. In order to do that, they were hitting the limits of manufacturing in the U.S. Jean-Louis Gassée, who was running the Macintosh business at the time — a very famous French executive for Apple that Steve hired to run Apple France, working for Sculley — actually pushed to do an experiment of 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, which was incredibly brazen for Apple culture to break out like that. They did it, and it came back, and the people at Apple were like, "Wow, this is not so bad." It wasn't the best selling model — a lot of complexity — but a light bulb went off. Maybe this helps us solve some of our constraints.
--:-- They had other constraints: the chips were wrong for the Mac, the PC was half the price, a lot of problems. But it was a "wow" moment. That was really interesting. But they were failing at computers.
--:-- Tim Cook joins Apple in 1997. He comes from IBM, where he was about making PCs. He shows up already working this whole world of supply chain. He later goes to Compaq, a famous Texas-based computer maker, and really helps them drive that whole motion of building in China.
--:-- The thing that gets built by Apple in 1999 is 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 think, "Wow, that's neat." But you don't understand: it was impossible. Every element of that computer couldn't be built. Not just the stuff they left off — it didn't have serial ports or parallel ports — but it was clear plastic. Computers came in gray stamped aluminum metal boxes with screws. This was tool-less, fan-less, amazing. It was all done through this China-based manufacturing, but in a very unique way at the time: Apple people just went there and smothered the manufacturing line every step, samples back and forth. I'm glossing over a very complex timeline — it sounds more all-or-nothing and sudden, but it was a very gradual transition. This product was huge.
--:-- Then the next one was the iPod. Now they're already comfortable with this model a little bit. But the iPod — all of a sudden, the assembly of it starts to look like a war games screen of all these incoming things. A disk drive invented in Japan, manufactured in Thailand, all the stuff coming together. All the parts — the click wheel and everything — are in China. It's all being made in one place in this incredible form factor. If you looked at other media players at the time, they were these big honking things that looked like game consoles, not this solid deck of cards glued together with no tolerances. It's incredible.
--:-- That was really the start of "Designed in Cupertino, manufactured in China." That whole process.
--:-- Host: And that was celebrated at the time, right? We were excited about more integration with China. That wasn't seen as such a problematic thing.
--:-- Guest: Absolutely. It's even more than that. This was hailed as the modern way to do business. An example that's super close to home about how things have changed: in 1999, the World Trade Organization gathered in Seattle to ratify China as a member. This is the organization that navigates tariffs and trade rules between countries. All the cool countries were in it, but not communist, socialist China with a totalitarian government. The Clinton administration had really pushed for China to come in. It actually split the Democratic Party. People today would have their heads explode if you tried to sell that. The Republicans were split too: half were "free trade, free trade, free trade," and the other half were "we hate communism."
--:-- If you look back in 1999, it's completely upside down from today. There were huge riots in Seattle. The city was a mess over this moment because it was viewed as pro-business, anti-labor — it meant cheap outsourcing in China. The reason was that was the whole direction of American business. There's a very famous book in the 80s called *In Search of Excellence*. It's this Jack Welchian GE management mantra: stick to your knitting. Do the stuff you're good at and outsource everything else. That was 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.
--:-- That was the state of American business: "Let's get into China. We got the support of the president. It's the whole global market. Let's reduce trade barriers between countries." It was celebrated as the start of a whole new industrial era.
--:-- Host: At what point did that change — both for Apple as a company, that they realized they might have some risks here, and also from a geopolitical standpoint? Was it when Xi came to power? When Trump was elected? How did things start to change?
--:-- Guest: It helps to go a little bit backwards. Before we get to when Apple recognized the risk, we should say there are 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 and keeping very tight control. But the PC industry had a whole different approach: the classical *In Search of Excellence* outsourcing method.
--:-- Dell and Compaq, the two big makers with IBM, were in Texas. Michael was building PCs in his dorm room, then they had a factory in Texas. Compaq were business guys who built a whole factory in Texas. Parts were flown in from wherever: disk drives from this country, CPUs from Intel in the U.S., cables from China, and assembled in the U.S. But the problem was they were all standard parts. When you bought a computer from Dell or Compaq, if you opened them up: Intel processors, Seagate disk drive from the U.S. They weren't competing on who could buy those parts and put them into a gray or beige box more quickly. They were competing on the other three P's of the marketing mix: price, place, and promotion — not just product.
--:-- Going 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. They were making the cases for Compaqs — these 15-pound aluminum shipping containers that held the PC — in China. It was the biggest, heaviest part. It made sense to see how many parts could be put in the box before shipping it to the U.S., 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. Because of WTO and all this other stuff, they could open up and do business. They were the capitalists in South China. "Whatever you want us to do, we're going to do it." Compaq wanted secrecy and intellectual property, so the plants said, "We'll build you a building." All of a sudden, Compaq had a building that was theirs. Then they went to Dell: "We'll build you a building too. Also, there's this other company that makes music players — they have a building over here."
--:-- All these makers started serving multiple PC companies. The PC companies thought, "This is kind of working for us because we're crushing Apple in the marketplace. Our PCs are getting cheaper, people are buying more. Windows 95 is taking off. Everything is dandy." They started saying, "We don't even need engineers." Whereas Apple was flying more and more people to do more and more advanced stuff, the PC companies were doing more gray boxes, more interchangeable parts, more lower cost. "We'll just keep selling more and make it up in volume." That's exactly what was happening.
--:-- These people, called ODMs — Original Design and Manufacturers — were saying, "You just tell us roughly what you want. We'll make it." You'd go to meetings with them and they would just show prototypes of all the computers they could build. You pick. "You want this one? I'm a little taller, smaller, thicker, thinner. We want to be able to swap out graphics cards. Yes, yes, yes, and yes. Here's 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's working — the socialist part of this experiment — you can't live anywhere you want in China. You live where you're born. If you want to move, it's a whole thing. But China was taking hundreds of millions of poor people and letting them live temporarily in all the factories — clothes, cars, computers — for part of the year, then bring massive amounts of cash back to the world. That's how China lifted a billion people out of poverty. Those are all the same workers. So you can get a better deal on labor. But you're all going to the same ODMs who are building the same factory, so it's hard to get a better deal on that.
--:-- To compete, the ODMs were moving up the food chain. The American electronics world — whether it was TVs or whatever — said, "We love this. Just keep showing us more stuff. We can put our name on it and focus on sales, marketing, distribution, and branding. We're awesome." By the way, all of a sudden there were 50 different music players, because all that knowledge was distributed throughout all these makers.
--:-- Host: What's it like to visit one of these ODMs?
--:-- Guest: These guys are crazy. When I first went — I've been there a bunch. I lived in China in 2004. All I did was visit all these people all the time, and the government. We'd go on forever. But the thing about these was, you'd think you'd go and it's a factory. How exciting? I've been to car factories and washing machine factories because they're all Microsoft customers. You go and visit them, they show you plants. You go in and all of a sudden you're like, "Oh my God, this is like a hospital." I'd been to Intel, which is an operating room — all bunny suits. But they're just showing me parts. It's the same thing I do in my living room when I buy a PC: just putting all the parts here. But these things are football field size.
--:-- For a baseline, I did summer jobs at the factory that built intercontinental ballistic missiles and surface-to-air missiles in Orlando. I've seen big, giant factory floors before. There are thousands of people on hundreds of acres of assembly. You just watch computers flying off.
--:-- The owners of these are very proud. You go meet the CEO, founder of these ODMs, and they take you on the tour. They show you everything, every step in the line. But they show you the one you're allowed to see. At Microsoft, I couldn't see any of them. But he was very proud to always 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 because they were stealing Windows and Office left and right. My job was to help see if we could stop that. They were very proud and very legal about that step. I have lots of photos of stickers being put on computers.
--:-- Then you go outside. He goes, "That's where we make HP 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. That's where you get the answer to your question.
--:-- The Apple building — fast forward a little bit — they're building what became the MacBook Air. The MacBook Air goes back to the original PowerBook 100 experiment: how can we take what basically suck — which are laptops that Windows people use — and make something better?
--:-- Guest: Like, give you an idea. When the MacBook Air came out, the typical knowledge worker in a company was traveling with about six pounds of computer gear, which was a laptop. It was probably an inch and a half thick, nine by 12. It had one of these padded laptop cases that you sometimes see. It was awful. I actually wouldn't even travel. I only used Japanese laptops in envelopes and stuff.
--:-- Guest: So Apple was building the MacBook Air. Now we know it was this machine-milled aluminum chassis in that building that they showed us. It was remarkable. Steve held it up and put it in an envelope and everybody, "Ooh." And I'm like, my Sony fits in an envelope. But my Sony was $3,500 made by hand in Japan. This was a miracle.
--:-- Guest: The problem was the ODM who was on tour with me. You go on the tour, they take you up a secret elevator. It's like 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 for art.
--:-- Host: Were you ever terrified?
--:-- Guest: I was completely terrified. No one ever gets hurt, but what the hell? I'm looking, is there a stairway that's going to turn into a slide and I'm going to end up being eaten by tiny sharks? There's ancient scrolls. We have to go through every single piece of art, I'm getting the story. I'm jet lagged, I have to pee. I'm here to just make sure the stickers are going on the laptops, but I'm getting the full deal.
--:-- Guest: 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 he built without any help from the Apple people. He's like, "We could build these, but we can't convince Michael or Compaq or anybody to build them. They're too expensive. I can make them cheaper."
--:-- Guest: Also, and this is where they get candy, it's very difficult to work with those people. They don't give them 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.
--:-- Guest: Two lessons from that. One is that Apple taught them how to do this. They didn't plan on doing that, but osmosis happens. They got all these skills. The other was Apple was still going to uniquely do it. No one else was going to come and invest that money.
--:-- Guest: We were there also at one point to help get Surface built. We were actually 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 did a whole different approach to metal. We built a whole metallurgy plant to do injective magnesium alloy for the original Surface computer that ran NVIDIA chips. We were willing to make cases of any size or shape for the OEMs, but they just saw it as a niche.
--:-- Guest: The PC makers continued to stamp out routine things for at least three more years until Intel finally invested a bunch of money in the OEMs via pricing to get them to build what today look like laptops for Windows called Ultrabooks. Apple just continued to do that, building that expertise inadvertently. Then Intel came in and piled on more. More people knew, except in the slightly more open part of China.
--:-- Guest: It was slow-moving osmosis that gets us to the point where, as Tim Cook says, people think 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 and produce the right defect rate and save all the waste and develop all the stuff. When we're making Surface, you have to use all this pressure-sensitive adhesive and keep all the things together to make it USB thickness. Nobody here knows how to do that. They were telling us what they were doing.
--:-- Guest: That is what happened. It was not a design. That's one of the differences I have with the book. The book is clear it wasn't on purpose, but it still makes it seem like we could have stopped it at any point. Not only do I not see that we could have, there was no interest in stopping it. For the global view of trade, it was working exactly as planned for everybody.
--:-- Host: Let's now get back to when did that start to change? I don't know if it's going to the book or someone said, "Hey, China has Apple by the balls" or "has us by the balls." Let's talk about that. When did we realize that happened? At one point, it's the point of no return.
--:-- Guest: The point of no return was basically two years into the iPhone. The scale was such, there was nowhere else. I'm sure Apple would argue there was no way we could even have started the iPhone anywhere else. I could tell you, like Surface, there was no chance. And that's a low volume product. Most things are very low volume, which makes the non-recurring engineering costs much higher. Even more impossible to build. You can't even consider doing that.
--:-- Guest: 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. What did it was this unique blend of socialism or totalitarianism and entrepreneurship. That's the thing all the experts got wrong. 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.
--:-- Guest: Frankly, that's how I felt living there. Yes, obviously it feels socialitarian. You turn on CNN and you're watching and then it vanishes. You're like, "Well, that was weird." You try to connect to a website randomly from a link and you can't see it anymore. There are all these people that work for the government in our office and I can't talk to them. I don't know why they're there. I'm their boss. It's super weird. As an American, you're like, "This is just kind of strange."
--:-- Guest: 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. You wake up and you're like, "Oh, they were really working."
--:-- Guest: 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. That's what everybody drove around. If you owned a car, you owned a Volkswagen. If you got driven around, you got driven around a Mercedes. The way they got there was by doing these joint ventures with China. That was the mandated way. The joint venture came with onerous terms. You had to give them all your IP.
--:-- Guest: For us, even to get a license to sell software, not that anyone was buying it legally, you had to allow these inspectors to come in and see stuff. We had to shut down Hotmail forever because we wouldn't let them see the data center servers, which weren't even in China. All sorts of complexities. If you wanted to sell into the world's largest population market, that was your choice: comply or not.
--:-- Guest: In the meantime, the entrepreneurs in southern China aren't looking at Beijing for government direction. They're going, "We have to beat Korea. We have to beat Japan. We have to beat Singapore. We have to beat Vietnam or Indonesia." Those are all their neighbors, and they see them all.
--:-- Guest: The car companies, if you fast forward, they all are out of China now. These joint ventures could never get their money out. They lost all their IP, their manufacturer. It's just horrible. Volkswagen, Ford, Mercedes, it's been a nightmare. Tesla didn't have to do a joint venture, which is the modern thing, just like Apple, where they were allowed to operate. But it turns out there are all these soft ways the company could be miserable.
--:-- Guest: That's where it goes from entrepreneurship to the socialist totalitarian. The Communist Party could 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 the Qualcomm patents, but it's only in China where we enforce the laws." You're like, "But the WTO says..." And you get really stuck on this kind of stuff.
--:-- Guest: I think what everybody learned was in the 2000s, 2010, it was very easy to pour money into China. But it doesn't come out. The returns just aren't there. It's also easy if you're one of the blessed sort of companies to grow. But then all these soft things happen.
--:-- Guest: A lot of people love to say how 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 just say, "They have to be American cars." They don't even think about it. When the Defense Department buys stuff, there's a massively thousand-page list of all the things you have to check off to be sold to the Defense Department. To the outside world, that looks like safety and security, but it could also be viewed as protectionism. It's just two sides of a coin.
--:-- Host: When we look at Apple's dependency on China, when does this go from "this is great" to "okay, this is actually an existential risk for the company"? Would you say we are there yet? How has this developed into the current era?
--:-- Guest: The easiest way to view the wake-up call is through the lens of COVID. All of a sudden the entire world learned that this global system, while great for prices, great for in search of excellence, focus on what you're good at, turns out it's 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: if this city is closed, no one can go into the factory. If transit is closed, the stuff can't make it.
--:-- Guest: COVID was the wake-up call for the whole system. At a 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, which are assembled in one place and packaged by these people who have all the skills to package them, you go, "Well, that's sort of a problem."
--:-- Guest: The Defense Department long ago figured this out for guns and rockets. Those are all made in the U.S. The military sidearm is a Beretta pistol, 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 we could throw at the drones. But drones are the opposite end of the spectrum. All of a sudden, drones are the most important thing. We were like, not just we don't make the drone, we don't make any of the parts for the drone. The only person who makes them is our enemy, so to speak. This seems to be a problem.
--:-- Host: Let's say Trump brings you in and says, "Hey, I've noticed that nearly all of computing, every level of stack, is done in China and Asia more broadly. I'm trying to decrease our dependencies. Microsoft, what should I do?"
--:-- Guest: 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 that were experts in 2000 that said it was good. But they didn't think about all of this. Nobody thought the dependency would be on the replacement for the Soviet Union in terms of longtime enemy. No more would we be dependent on the Soviet Union for something than we would be on China. There's no choice in that matter.
--:-- Guest: Hopefully our detente with China is already vastly more open than anything up until 1990 that the Soviet Union was. We're in a very good peaceful situation there, but that doesn't change the posture.
--:-- Guest: Apple is doing this experiment, obviously more than an experiment, to build in India. That 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 US was NAFTA in the early 1990s. Free trade with Canada and Mexico. What could be more of a no-brainer? It turns out it was also the global view of things. Half the Democrats voted against it, half the Republicans voted against it, the same as WTO kind of stuff.
--:-- Guest: Here we are. That meant 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 manufactured 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. It's kind of weird.
--:-- Guest: 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 ignore the inherent risks of the polarized world, but also immediately jump to "No one's going to pay $5,000 for an iPhone." What an incredibly silly argument. If you were to look at an iPhone and think about making it by hand, you'd go, "It's going to cost $100,000 each one. It's like a fancy watch." The reason it's $1,000 or $1,500 is because of the innovation in manufacturing.
--:-- Guest: All that needs to happen is another step function change in manufacturing. For decades, that's all Apple woke up and thought about. They remained in that whole operating mode of sending zillions of people on the factory floor. 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 they made all of that stuff. What they're going to do is focus on, "OK, if we have to do this, we're going to end up with giant factories of robots or better automation or new packaging technologies that don't require as many people." They are already the world leaders in this.
--:-- Host: So you're optimistic that this is a solvable problem, that Apple can decrease its dependency and figure out whether it's friend-shoring or something.
--:-- Guest: It's easy because of the book to focus on Apple. But I was in the situation. 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 all the car computers come from? They're just flown in on a plane to be glued in.
--:-- Guest: I'm not just optimistic. This is literally how innovation happens. Innovation isn't invention. Invention is sitting around thinking what would be really cool to make. Innovation is "These are the constraints I have to work in. I'm going to solve this problem." Nobody loves to do that more than engineers. If you're a packaging engineer in software, hardware, motherboard, you live for this. How do we reduce the steps? How do we reduce the components? How do we cram more? This is your whole focus in life. It's your mission.
--:-- Guest: The way innovation happens is the people who have been working on stuff go, "I have a totally better idea." Then you try it. "Oh, this one worked. The other thousand didn't work." That translucent case, it's not like people hadn't thought of making plastic cases before. Translucent plastic was a thing. Then they sat down and they just made it because you can build things. Factories are things that can be built.
--:-- Guest: I don't see any reason why. The mistake is either thinking that China is about cheap labor, or the mistake is thinking that for things to be made in the U.S., it has to recreate 300 million migrant workers on buses working temporarily and going back home. That was their constraint. Their constraint was we have to employ all these people but not let them move. They had an idea: let's build the factories in Shenzhen and get a bunch of buses and dorms. Problem solved.
--:-- Guest: We have a different one. We don't have 100 extra million people. We have a lot of money and a lot of intellectual power and a big desire to bring low-cost, high-tech products to people. Let's build things.
--:-- Host: Gearing towards closing here, it felt inevitable to me that Apple would become even much bigger than it is today. I remember reading the stat of like—
--:-- Guest: Wait, I'm sorry, much bigger than the hugest company in the world?
--:-- Host: Much bigger. Only because nine out of 10 high schoolers prefer Apple products. When they get to college, when they graduate, why isn't iPhone market share much bigger? Why wouldn't it keep getting significantly bigger, not just a phone, but also in laptop and desktop as well? When you look at the risks, maybe the China situation drastically increases prices if something material happens in the short term. Maybe there's a new form factor that Jony Ive at OpenAI or someone else figures out that overplays the phone, which doesn't seem super likely in the short term. How do you react to that?
--:-- Guest: People always think you're either in the school that things are just going to keep going like they're going to go forever, or "Idiot, this thing is over. There's already a new thing, but you can't buy or touch the new thing." We are in that in-between space right now.
--:-- Guest: I do think 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. The best way to think of it is Macs are half the laptop market in the U.S. at this point. Not quite, but with segments. Nobody thought that would ever happen. That's partially because the use case for laptops stagnated about 2000. All of a sudden, I'm basically running a browser and Microsoft Office. If you're doing that, a Mac and the differences in Office are roughly the same. If the price is the same at $1,000, why not?
--:-- Guest: Half the market is always going to view it as a price point. $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. 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.
--:-- Guest: I don't know what's going to happen on the device side. Generally speaking, the form factor is going to last much longer than even the most optimistic people think. There are a lot of people running PCs still, even though nobody in Silicon Valley knows that. It's just going to be up for grabs. There's nothing written anywhere.
--:-- Guest: Bill Gates used to always remind people that Microsoft, any day somebody could just show up and do a better version of everything Microsoft does because it's software and the economy of scale isn't the barrier people used to think. Manufacturing devices specifically has a barrier, but because of the automation, because of all this work that's gone in, 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. They know what to do.
--:-- Host: Is there anything else you want people to take from this book or from this conversation in summary?
--:-- Guest: I would drill down on one issue that I think is super important for people to really consider in the competition between the U.S. and China and also how it relates to AI: the difficulty we're all going to have collectively navigating the world of intellectual property.
--:-- Guest: 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, arguably pretty rude. But on the other hand, it's just as easy to say, 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.
--:-- Guest: This issue is far more subtle and far more important than I think either China thinks or the Digerati in the U.S. think. I believe that's one that's going to need a lot of work. I worry about wild cards. I worry about the European Union going crazy in one direction or another and passing some rule. 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're in control of Japanese. They just said, "Yeah, we could train anything here." But is that just Japanese, or is it a loophole for English? We're not really sure.
--:-- Guest: That issue is the one where policymakers need to spend the most time. But it's structured in the U.S. that it's a litigation issue and there's no way around it. 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 and manufacturing and assembly. Now that's dispersed.
--:-- Host: That's a good place to end. Steven, this has been a fantastic conversation. Thank you so much for coming on.
--:-- Guest: Thank you. It was great to be back together.
--:-- Host: Thanks for listening to the a16z podcast. If you enjoyed the episode, let us know by leaving a review at ratethispodcast.com slash a16z. We've got more great conversations coming your way. See you next time.
