March 1, 2021

PC TECH THERAPY

PC Tech Therapy Blog by Daniyal Computer

Apple Is the $2.3 Trillion Fortress That Tim Cook Built

17 min read


Joe Biden had a question for Tim Cook: Why, the then-vice president wanted to know, couldn’t Apple make the iPhone in the US? It was January 2012, during President Barack Obama’s reelection campaign and three months after the death of Cook’s predecessor, Steve Jobs. Biden was in Palo Alto for a dinner meeting with Cook and a group of tech leaders that included Netflix Chief Executive Officer Reed Hastings, Google Executive Chairman Eric Schmidt, and Facebook Chief Operating Officer Sheryl Sandberg.

As everyone at the dinner well knew, the idea of mass-producing an iPhone, or any advanced consumer electronics, in a domestic factory was an exceptionally tall order. The big Asian contract manufacturers, especially Apple’s main partner, Foxconn, had built city-size factories in China with armies of hundreds of thousands of skilled labourers. None of that scale existed in the US Chinese factory employees generally worked much longer hours, for a fraction of what even the lowest-paid American workers make. “I’m not sure, short of dictatorial practices, that you could ever make that work,” says John Riccitiello, another Silicon Valley executive who witnessed the exchange between Cook and Biden.

Biden’s question put Cook, who’d become Apple’s CEO the previous August, in an awkward position. He was the architect of the strategy to outsource Apple’s production to China, a trend of increasing concern for the Obama administration. But Cook was also, as it turned out, extremely effective at deflecting political pressure. He was certainly more diplomatic than his old boss. Obama once asked Jobs the same question, and Jobs’s characteristically blunt reply landed on the front page of the New York Times: “Those jobs aren’t coming back.” Cook, though, was smooth and noncombative—so much so, in fact, that Riccitiello can’t recall exactly what he said to Biden. By the end of that year, Cook announced a small yet politically significant shift. Apple, he said, would start making some Mac devices in the US.

Then, Apple’s reliance on China only grew. You might think its ever-tighter embrace with the country would have put Cook in a worse political position after Donald Trump was elected president in 2016 based on a campaign marked by anti-China rhetoric, threats of a trade war, and promises to bring jobs lost to Shenzhen back to American shores—not to mention challenges of the coronavirus pandemic, and rising antitrust fervour during his term in office. Strangely, though, Apple thrived under Trump. In August 2018, the company’s market value reached $1 trillion (roughly Rs. 72,85,950 crores); 24 months later, even as Trump railed on the campaign trail that “these stupid supply chains” in China should move home, it surpassed $2 trillion (roughly Rs. 1,45,71,900 crores).

Current and former employees, executives at rival companies, and Washington insiders credit this to Cook’s shrewd management, equally shrewd politicking, and zero reluctance to wield Apple’s market power. “Tim Apple,” as Trump once called him, charmed and cajoled his way into the former president’s good graces, while keeping Beijing happy and finding ways to squeeze more revenue from the iPhone.

Cook’s handling of Trump suggests how Apple, which declined to comment for this story, might approach now-President Biden. Over the next four years his White House will continue pushing to increase US manufacturing and may support congressional scrutiny of potentially anticompetitive practices, egged on by Facebook and other companies that say Apple exercises too much power. But Cook has been counterpunching, broadening his influence over the mobile phone industry while marketing Apple’s commitment to privacy as the antidote to the practices of social media companies. Moreover, Cook’s unflappable temperament makes him well suited to the polarised political climate. Allies praise his operational skills and diplomatic instincts. “Tim may not be able to design a product like Steve,” says Warren Buffett, who knows Cook well and whose Berkshire Hathaway has a stake in Apple worth $111 billion (roughly Rs. 8,08,700 crores), as of a September filing. “But Tim understands the world to a degree that very, very few CEOs I’ve met over the past 60 years could match.”

Cook came to Apple in 1998 after a dozen years at IBM and a six-month stint at Compaq and seemed, at least to old Apple hands, devoid of any obvious personality. He’d work 18‑hour days and send emails all through the night. When he wasn’t at the office he seemed to live at the gym. Unlike Jobs, he had no pretensions to being an artist. “Tim was always pure work: grind, grind, grind, grind,” says one former Apple executive who worked with Cook in his early years at the company and who, as with other sources in this story, spoke on the condition of anonymity because of nondisclosure agreements and fear of corporate reprisals. “I always found him exceptionally boring.”

Apple’s turnaround in the ensuing years has generally been attributed to Jobs’s product genius, beginning with the candy-colored iMac gadgets that turned once-beige appliances into objets d’office. But equally important in Apple’s transformation into the economic and cultural force it is today was Cook’s ability to manufacture those computers, and the iPod models, iPhone gadgets, and iPad models that followed, in massive quantities. For that he adopted strategies similar to those used by HP, Compaq, and Dell, companies that were derided by Jobs but had helped usher in an era of outsourced manufacturing and made-to-order products.

Back when Cook was managing Compaq’s hardware inventory, he became friendly with Foxconn founder Terry Gou, according to two people who’ve worked closely with Cook. The Taiwanese company had started as a lower-end manufacturer: Early products included the plastic channel-changing knobs for televisions and connectors for Atari joysticks. But by the late 1990s, Foxconn had graduated to more complex manufacturing, such as making computer chassis for Compaq. Foxconn eventually moved on to other PC parts, which it produced in sprawling factories around Shenzhen, near component suppliers. By the time Cook joined Apple, these centralised factory hubs were far more efficient than anything in the US Apple sold off a huge Colorado plant in 1996, and after Cook arrived, he temporarily cut its Ireland-based manufacturing workforce, closed what was then its only remaining American production line, in Elk Grove, California, and outsourced more and more production to China, starting with laptops and webcams. (The Elk Grove facility is now used for refurbishing and repairs.)

Cook’s global supply chain greatly improved upon the fabrication approaches that Dell and Compaq had developed. The big PC brands often outsourced both manufacturing and significant design decisions, resulting in computers that were cheap but not distinctive. Cook’s innovation was to force Foxconn and others to adapt to the extravagant aesthetic and quality specifications demanded by Jobs and industrial design head Jony Ive. Apple engineers crafted specialised manufacturing equipment and traveled frequently to China, spending long hours not in conference rooms as their PC counterparts did but on production floors hunting for hardware refinements and bottlenecks on the line.

Contract manufacturers worked with all the big electronics companies, but Cook set Apple apart by spending big to buy up next-generation parts years in advance and striking exclusivity deals on key components to ensure Apple would get them ahead of rivals. At the same time he was obsessed with controlling Apple’s costs. Daniel Vidaña, then a supply management director, says Cook particularly fussed over fulfillment times. Faster turnarounds made customers happier and also reduced the financial strain of storing unsold inventory. Vidaña remembers him saying that Apple couldn’t afford to have “spoiled milk.” Cook lowered the company’s month’s worth of stockpiles to days’ and touted, according to a former longtime operations leader, that Apple was “out-Dell-ing Dell” in supply chain efficiencies.

Gou always seemed happy to accommodate, often building entire factories to handle whatever minimalist-chic design specs Apple threw at Foxconn. Jon Rubinstein, a senior vice president for hardware engineering during Jobs’s second tour at Apple, recalls almost having a heart attack in 2005 when he went with Gou to see a new factory in Shenzhen for the iPod Nano—a tiny device 80 percent smaller than Apple’s original MP3 player—only to find an empty field. Within months, though, a large structure and production line were in place. “In the US you couldn’t even get the permits approved in that time frame,” he says.

Jobs and Ive had expensive tastes, which made it all the more crucial for Cook’s team to be unforgiving when negotiating with suppliers. For a custom enclosure designed by Ive’s team to elegantly hold the USB ports on a Mac laptop, the former longtime operations leader recalls the company paying roughly triple the 5¢ or so that PC rivals were spending for a generic version of the same basic part. This person remembers “literally negotiating down to four decimal points” to make it economic. A former product operations manager says even if a supplier promised something as simple as a delivery date for a part, it was normal to press for the tracking number of each individual shipment, as part of a litany of detailed logistics and pricing demands.

Apple’s power over suppliers grew after the release of the iPhone, which Foxconn manufactured and which sold 4 million units in its first 200 days. By 2009, an iPhone supply manager says, Apple increasingly took on a “brute-force” approach to dealing with suppliers in Asia. “I could say, ‘You do it this way or you’re toast,’ ” this manager says, adding that Apple started to “just beat the crap out of its vendors.”

Jobs’s death two years later caused skeptics to predict Apple would stagnate without a steady stream of his inventions; in fact, the real challenge was keeping supply up in China. Operations managers were scrambling to buy enough computer-controlled milling machines and laser cutters. Every millimetre was scrutinised for savings—as were even the seemingly least consequential parts. Three people familiar with the company’s supply chain say there was an Apple employee whose job consisted of negotiating the cost of glue.

In the post-Jobs Apple, Ive’s influence began to wane, while Cook asserted a more cost-conscious approach to new products. He ordered his operations team to work closely with the industrial design group from the earliest stages of the development process, rather than joining months in, as had been the norm under Jobs. The 2014 iPhone 6 was “the poster child” of this transformation, according to a person involved in the product’s development. While the device had complex internal components and a larger screen, it dropped the diamond-polished edges and the precisely cut glass parts of the back of the iPhone 5 and 5s, which had been difficult to produce. Even the company’s spaceship-esque headquarters, the design of which Jobs had micromanaged, didn’t escape the new financial discipline, according to a person familiar with its construction. Cook’s allies tried to aggressively drive down extravagant expenses, including for the curved glass now surrounding the building, which the Wall Street Journal reported was originally expected to cost as much as $1 billion (roughly Rs. 7,300 crores). Meanwhile, Cook expanded the business in ways Jobs used to resist. Jobs loved to point out that Apple’s product lineup was so unrelentingly spare it could fit on a small table. At the time of his death, Apple sold two iPhone gadgets and one iPad; today it offers seven iPhone gadgets and five iPad models. Cook also added high-priced products that amounted to accessories for the flagship mobile devices, such as AirPod models and the Apple Watch.

And yet, even as Cook transformed Apple into a more diversified company, its dependence on China grew. The only way to drive economies of scale and manufacturing consistency was to concentrate more and more of Apple’s output in areas such as Shenzhen. “If you’re talking about making a million a day of something, launching on a dime, and having the capacity to do that, every machine has to be precise—and to have that happening in multiple countries is challenging,” says a former top executive. “The question becomes: Are you relying too much on one place?”

In November 2019, a year before the presidential election, Trump flew to Austin to meet Cook and tour Apple’s Mac Pro factory. In front of a gaggle of White House press, Cook called the Mac Pro, a $5,999 (roughly Rs. 5.3 lakhs) computer aimed at creative professionals, “an example of American design, American manufacturing, and American ingenuity.” At another point the pair leaned close together so Cook could show off the computer’s components as Trump nodded approvingly. Many of the parts, Cook noted, came from places such as Arizona and Pennsylvania—key swing states where Trump had promised to bring more manufacturing jobs.

Trump touted the plant as a campaign pledge fulfilled. “I said someday we’re going to see Apple building plants in our country, not in China,” he told reporters. “And that’s what’s happening. It’s all happening. It’s all the American dream.” Cook looked on soberly and didn’t mention what was obvious to factory employees: Trump was lying. The facility had been in operation for Apple for six years.

During Trump’s time in office, he and Cook forged an unlikely friendship that upset liberal-leaning Apple veterans, who couldn’t imagine Cook’s infamously temperamental predecessor tolerating any co-option of Apple’s brand name by someone as boorish as Trump. Cook, who supported Hillary Clinton in the 2016 presidential campaign, voiced disagreement over Trump’s approach to immigration, racial unrest, and climate change. But he also attended the president’s CEO summits, as well as dinners at the White House and at the president’s golf club in Bedminster, NJ, and bonded with his daughter Ivanka and his son-in-law, Jared Kushner. Gary Cohn, Trump’s chief economic adviser until 2018, estimates Cook came to Washington every four to six weeks, far more frequently than other tech CEOs. “He made it part of his agenda to figure out where we could work together,” says Cohn. “Our dinners weren’t talking all about Apple tariffs and technology. I’d say 75 percent was talking about life. To be a good CEO, to get things accomplished, you have to be personable, you have to be a good communicator, and a good listener, and Tim was all of those things.”

Cook was willing to do what was necessary to protect Apple’s China-centric supply chain, even if that meant letting Trump spin falsehoods. Trump told the Wall Street Journal in mid-2017 that Cook personally promised to build “three big plants, beautiful plants” in the US, which was false as well, and which Apple declined to correct. After the photo op in Austin, Trump tweeted, “Today I opened a major Apple Manufacturing plant in Texas that will bring high paying jobs back to America.” Apple let that one slide, too.

Current and former employees familiar with the Mac Pro’s development say the Texas event was an embarrassment. The factory had undergone some remodeling since it was first used to assemble the Mac Pro in 2013, but—again—it wasn’t new. Moreover, Flex, the contract manufacturer that operates the Austin plant, prepped for the event by manicuring the production floor as if it were a stage set. New computers were put on display to “look like we’re selling these things like hotcakes,” recalls one engineer. Many employees were given the day off, and the select few allowed to stay were mostly pretending to work in the background in their blue uniforms, according to another staffer. “It was very much a show,” this person says.

Cook seemed to understand that although Apple was vulnerable to Trump’s anti-China bellicosity, he also could use the company’s reputation and his glad-handing as enticement for a president who craved mainstream business validation. “Tim was very good at giving the president optics, because Apple is an iconic consumer brand,” says a former senior Trump administration official. “You’ve got their CEO working with the White House, sitting in meetings, traveling with Ivanka. You always want to attach yourself to a good brand.”

The Texas factory itself had long been a disappointment, according to former employees who worked on the project since its Obama-era inception. “It was an experiment to prove that the US supply chain could work as good as China’s, and it failed miserably,” says a former senior manager. Apple chose to produce the first iteration of its “Assembled in USA” Mac Pro in Austin in 2013 because it was expensive and sold in low volume, which allowed more margin for cost overruns while ensuring that any losses wouldn’t be disastrous, according to people familiar with the matter. The Mac Pro is also much bigger than a smartphone, meaning that in theory it should have been easier to make than something as compact and exacting as an iPhone or Apple Watch.

But then supply chain managers saw an early mock-up of the cylindrical design that Ive’s team had created, which made the Mac Pro look like something out of Star Wars. Apple’s partners in Asia had been able to handle such oddball design specs, but employees involved with the US Flex factory, who’d been expecting a boxy shape that resembled previous versions of the device, were alarmed. They initially worried about having to fit square parts in a circular case, according to a former senior-level Apple employee.

When Apple engineers started setting up manufacturing in Texas, sources familiar with the matter say, they had a difficult time finding local suppliers willing to invest in retooling their factories for a one-off Mac project. According to a former Apple supply chain worker, huge quantities of certain components needed to be imported from Asia, which caused a domino effect of delays and costs. If a shipment arrived with defective parts, for example, the Texas factory had to wait for the next air-cargo delivery; at factories in Shenzhen, supply replacements were a short drive away. It felt like the opposite of Gou’s ultra-efficient all-in-one Foxconn hubs. “We really emphasised with the suppliers to triple-check their product before they put it on a plane to Texas,” this worker says. “It was a pain.”

Recruiting was another challenge. Skills common at Foxconn were harder to find in the US, where new hires might have worked previously at a Costco rather than at a different electronics factory. An ex-Apple product engineer remembers the team struggling to determine why circuit boards coming off the assembly line were crooked. They ultimately traced the problem to a single worker who was inexplicably screwing in parts from left to right, instead of by the numbered order Flex provided. Scrap was high at first, and several sources say the teams missed their initial delivery and cost targets.

Once the product’s assembly stabilized, Apple employees moved on to other, more pressing supply chain projects, such as manufacturing the Apple Watch—which, inevitably, was made in China. Demand for the cylindrical Mac Pro was weaker than anticipated, and layoffs eventually followed at Flex.

Whatever the Austin plant’s problems, its political benefits were tremendous. In September 2019, the US granted exemptions on tariffs for importing multiple parts key to the Mac Pro’s future. Days later, Apple said it would make a new version of the computer, which the company redesigned into a simpler boxy case, in Texas. During his November 2019 factory tour, Trump said he’d be looking into more tariff relief for Apple, which it received in subsequent months on the iPhone, iPad, and Apple Watch. Cook later gave Trump the first of the new Mac Pro model produced at the Austin factory, according to a White House disclosure form. Even so, a person familiar with the Austin plant says it struggles even today. In a statement, Flex says it is “very proud of our excellent production capabilities and sustainable innovative supply chain solutions.”

Meanwhile, Apple has moved some production of AirPods to Vietnam and iPhone devices to India, where the company has run into scale and quality issues, too. More significant manufacturing diversification is likely to take years, even as Cook faces pressure to decouple from China over censorship, human-rights violations, and criticism about labour conditions at mainland factories. In an all-hands meeting last year, an employee asked Dan Riccio, then Apple’s hardware chief, why the company continues to build products in China given these ethical problems. The crowd cheered. “Well, that’s above my pay grade,” he responded, before adding that Apple was still working to expand its manufacturing presence beyond China.

Not even the COVID-19 pandemic, which temporarily shuttered Foxconn factories in early 2020, could loosen China’s grip on the bulk of Apple’s iPhone production. While commercial flights in and out of China were suspended, Apple chartered private jets to fly hundreds of employees to the country to oversee production and testing and ensure the new models hit before the critical holiday season, according to a person familiar with Apple’s logistics. A longtime Apple operations manager also notes that Foxconn was still able to produce early versions of the 2020 iPhone, even at the height of the pandemic. “There is no way you can just move away from China, especially at Apple’s volumes,” this person says.

On Jan. 27, Apple announced there are now more than 1 billion active iPhones in the world. “It’s a stellar achievement for Cook to have navigated these unprecedented times for Apple’s supply chain with a cold tech war between the US and China. If you look back at the last few years, many investors were betting that it was going to blow up and be a huge black cloud over Apple,” says Wedbush Securities analyst Dan Ives, who believes the company, which had a market cap of $2.3 trillion (roughly Rs. 1,67,51,500 crores) as of early February, could hit $3 trillion (roughly Rs. 2,18,500 crores) in the next 12 months. “He’s done a great job being an unofficial ambassador between the Beltway and China.”

Even with Trump out of the White House, Cook’s tightrope tiptoeing isn’t finished. Two days before Apple’s earnings report, Biden announced a “Buy American” initiative to boost US production. “I don’t buy for one second that the vitality of American manufacturing is a thing of the past,” he said.

In many ways, Cook is now applying the lessons Apple learned building its China manufacturing network to other parts of the business. Its operational prowess has enabled it to churn out more product permutations, and accessories. Just as Apple uses its awesome buying power to extract concessions from suppliers, it’s now using its control over an equally impressive digital supply chain, which includes the company’s own subscription services, as well as third-party apps, to generate greater revenue from customers and software developers. In an October report on the tech industry, the House antitrust subcommittee said this influence of its App Store amounted to “monopoly power” and recommended that regulators step in.

Apple disputed the characterization, but software developers including Spotify, Epic Games, and Facebook made similar allegations. Facebook CEO Mark Zuckerberg in January accused Apple of using “their dominant platform position to interfere” with apps and targeted advertising. In August, Epic sued Apple, alleging that it maintains a stranglehold on mobile developers by forcing them to use its App Store and billing system, and taking up to a 30 percent cut of revenue in the process.

Epic CEO Tim Sweeney says that although he’s a fan of Cook and Jobs for disrupting an industry once dominated by the likes of IBM and Microsoft, he believes Apple is behaving like its old arch nemeses. “They do a lot of things that we think are awesome and totally support, and they do some things that we think are just wrong,” he says.

This summer, Epic launched an ad campaign to pressure Apple to let it handle in-app purchases in its popular video game Fortnite (and therefore avoid paying Apple sales fees). It included a viral YouTube video riffing on Apple’s famous “1984” advertisement, with a Cook-like character playing the villainous IBM/Big Brother role. Cook, of course, worked at IBM in 1984.

None of this has seemed to throw Cook or Apple. The company counter-sued Epic in September, and in late January, Cook went after Facebook, suggesting that those criticising his company’s privacy policies simply wanted to harvest more personal data and that regulators should scrutinise social media instead of Apple. “If a business is built on misleading users, on data exploitation, on choices that are not choices at all, then it doesn’t deserve our praise, it deserves reform,” he said in a speech delivered over video chat at a privacy conference. Around the same time, amid yet another surge in COVID-19 cases and continued economic uncertainty, the company reported revenue of $111 billion (roughly Rs. 8,08,500 crores) for the previous quarter, a record.

© 2021 Bloomberg LP

 


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