Apple in china, p.23
Apple in China, page 23
The opportunity had presented itself after Apple got upset with Samsung for copying the iPhone, which led to years of courtroom battles on three continents. Any company mimicking the look and feel of the iPhone would draw the ire of Steve Jobs, but with Samsung, such actions felt like betrayal. The Korean giant had been a close partner, providing chips for multiple iPods, as well as supplying flash memory, displays, batteries, and processors. Nobody in Cupertino was pleased with Samsung’s first chip for the iPhone, known as the H1, so Apple’s custom silicon team—led by Alan Gilchrist—got deeply involved in the process. Apple bulked up its understanding of chips with the purchase of P.A. Semi in late 2008, a hugely consequential deal allowing Apple to take greater control of the chips inside its phone—and, eventually, across its entire lineup of products.
The Apple-Samsung partnership was more intimate than is widely known. The Korean company even had separately badged engineers working full time at Apple’s Infinite Loop campus, on the bottom floor of De Anza 3. The top two floors housed Apple’s semiconductor team, led by Johny Srouji, a chips savant who’d worked at IBM and Intel before Apple hired him in 2008. The two companies jointly worked on the design of the subsequent iPhone chips, so when Samsung then copied the iPhone with an Android-enabled device, Apple wanted to distance itself.
In 2010, Apple operations chief Jeff Williams reached out to Morris Chang through his wife, Sophie Chang, a relative of Terry Gou. Dinner between them launched months of “intense” negotiations, according to Chang, as Williams pressed TSMC on prices and convinced the Taiwanese group to make a major investment. “The risk was very substantial,” Williams recalled at a gathering for TSMC’s thirtieth anniversary in 2017. “If we were to bet heavily on TSMC, there would be no backup plan. You cannot double-plan the kind of volumes that we do. We want leading-edge technology, but we want it at established technology… volumes.”
Williams’s narrative leaves out some of the most interesting facts about the early partnership. One is that Chang wouldn’t commit to Apple’s demands. In a 2025 interview with the podcast Acquired, Chang said that TSMC would’ve had to raise substantial amounts of money, either by selling bonds or issuing more stock. Williams had another idea: “You can eliminate your dividend.” Morris balked at the aggressive suggestion. “If we do what Jeff Williams says, our stock to going to drop like hell,” he recounted. Chang agreed to take only half of Apple’s order. Even this partial commitment forced TSMC to borrow $7 billion, so it could invest $9 billion and devote 6,000 full-time employees working round the clock to bring up a new chips fab in eleven months, according to Williams. “In the end, the execution was flawless,” he said. The partial commitment forced Apple to toggle between Samsung and TSMC, which some in Cupertino saw as a plus—it meant that Apple wasn’t beholden to just one supplier for what serves as the brain within the iPhone. But Srouji’s team found it nightmarish to manage both suppliers. So Apple turned to TSMC on an exclusive basis, establishing over-the-top contract terms to protect itself. A person familiar with the contract characterized it as saying: “We need to make sure that you’re gonna go out of business—if you’re gonna put us at risk of going out of business.” It was a “mutually assured destruction” type of situation, this person says, because if TSMC didn’t perform in any given year, there’d be no iPhone. So the Apple decision was made: “We are going to put all of our eggs in one basket, and then we’re gonna guard the basket.”
TSMC’s bet would prove critical for making it the world leader in semiconductor fabrication, with Apple as its biggest client. From Cupertino’s perspective, it was a shrewd move that aided Samsung’s biggest competitor and helped to ensure the iPhone had a computing edge over its biggest rivals. But since Taiwan is considered a rogue region that could eventually be reincorporated into China, possibly by force, the shift doubled Apple’s exposure to the geopolitical risk of a more belligerent Beijing.
iSad
Steven Paul Jobs died on October 5, 2011, aged fifty-six, leaving behind a company worth $350 billion and a trusted lieutenant, Tim Cook, to manage it. Millions of people mourned, often leaving bitten apples at the company’s stores or holding up digital flickering candles on their iPads. In China, social media sites recorded 35 million tributes. The New York Post captured the sentiment of many with its one-word lead: “iSad.” Despite the loss, Apple’s stock continued to climb, peaking eleven months later, in September 2012, when its market capitalization surpassed $620 billion.
But then investors started to worry about Apple’s prospects. Over the next twelve months the stock fell around 40 percent. Investors and journalists focused on a perceived lack of creativity. Analysts were clamoring for “the next big thing,” another hit product to succeed the iPhone and iPad. They obsessed over the iPhone market share, which stagnated between 15 percent and 20 percent worldwide, while Android’s share of the smartphone market shot up from 10 percent in late 2010 to 40 percent within three years. It was far from clear that Apple could battle so many competitors collaborating on software and hardware then undermining the iPhone on price. It looked like the PC battle all over again.
But the ensuing years would prove this wasn’t a repeat of the 1990s. Apple had captured the richest consumers around the world, and developers knew that iPhone owners spent more money not just on the phone, but on their apps. Horace Dediu, a former Nokia executive turned market analyst, calculated that iOS users were spending, on average, four times as much as Android buyers. “Half the users, paying four times as much, means double the income,” he wrote. If anything, developers prioritized iOS.
Apple’s ecosystem was being wildly underestimated. Whether it was the way its products synced content across devices or locked the consumer in, the company’s dual control of hardware and software acted as a protective moat from the onslaught of new competitors. Investors worried that cheap Chinese handsets would emerge as a massive threat—but they were more of a threat to Samsung’s dominance, not Apple’s. While Samsung, relying on Android, struggled to differentiate its phones and would see its sales in China plummet, Apple’s narrow focus on the high end paid off. In hindsight, Apple’s share price and media image were suffering for all the wrong reasons in 2013. The company was facing an existential threat—but it wasn’t from Android; it was from Beijing.
CHAPTER 25 “THE NAVY SEALS”
John Ford was arriving in Beijing from abroad in the spring of 2011 when his phone started pinging with notifications. Four American contractors working the security line at the Apple Store in Sanlitun had been arrested; their passports had been confiscated while they sat behind bars. Unlike his own arrest a few months earlier, this wasn’t a voluntary gesture. Once again, Ford would have to work his connections. What ensued was a headache but also something of a personal victory.
Cupertino’s concern with the resellers had been escalating. Around-the-block lineups for iPhones in China were a gravy train for Apple. But managing the crowds proved so difficult that they had to stop selling iPhones every afternoon. “We did phones in the morning until about one o’clock. Then we stopped selling phones so you could come in to buy a computer, etcetera, later in the day,” Ford says. “You could view the phones, you could play with them. You just couldn’t buy them.” Ford, with the backing of Ron Johnson, had tried to inform Cupertino that the problem wasn’t cultural. “This is a distribution issue,” the two declared. “The resellers are taking advantage of a distribution challenge that we’ve created.”
Unsure if Ford was part of the problem, Apple flew in “hot teams” from the United States to help manage the issue. Tactically, these security teams were top-notch; it seemed obvious they had military backgrounds. Ford half jokingly calls them “the Navy SEALs.” But it soon became clear they hadn’t spent much time in China. They tried to impose order in a Western way: Set the rules and be firm. Don’t let people break the rules. They implemented a hard approach, restricting who could enter the store, in direct opposition to the soft, relationship-building approach that Ford favored.
But Chinese law didn’t allow that. If a store was open to the public, it was open to everyone. Efforts to exclude people proved disastrous. Trying to impose order, the Navy SEALs turned physically aggressive, a tactical no-no, culturally. “We’re in their country,” says MacKay. “And they’re very sensitive to Westerners telling them what to do and taking advantage of them.” The resellers responded by having their minions flood the store, clogging the sales channels to such a degree that sales would freeze. “They’d all come to the front, where the cash register is, screaming and yelling and holding out money: ‘I want my phones! You’re selling phones! I want my phones!’ ” Ford recounts. The resellers were sending a message: Work with us, or we’re going to shut you down so nothing happens.
Once again, Mr. Du was on the scene. But with Ford on an airplane, out of reach and unable to placate him, he got angry at the disorder. He told the Navy SEALs to follow him to the police station and hand over their passports. Lacking cultural savvy, they did as they were told. Ford, reading updates as he arrived in Beijing from a business trip, called the US embassy looking for MacKay, who’d often dealt with Chinese police and could help sort out the situation. They were able to negotiate for the contractors’ immediate release, on the condition they left the country right away. Ford scolded them for heavy-handed tactics as he put them in a car to the airport.
His handling of the situation earned him some credibility in Cupertino. It was now easier to accept that a soft approach to the reseller issue wasn’t the problem. But as Apple’s business boomed in China, the yellow cows were just one challenge. More broadly, Ford worried that Apple was losing leverage with the Chinese government and failing to exert its own power. As early as 2010 he’d told Bob Mansfield, Apple’s head of hardware: “All you gotta do is open up a factory in Vietnam and you’re gonna get some nervous Chinese government officials.”
But as Apple grew exponentially, it doubled down on manufacturing in China. A few peripheral devices such as keyboards and cables were shifted to Vietnam, where labor was cheaper. But these were tactical moves to save on costs, not strategic shifts to de-risk China exposure. Executives had presumed that doubling down on China helped their cause—“look at how many jobs we’re creating!”—but Ford’s understanding of Chinese culture was more nuanced. “They call it big potato, small potato,” he says. “It’s an analogy for social status.” Sure, Apple was creating a lot of jobs, but it was also making a lot of money, so these things balanced out—China didn’t “owe” Apple anything. The job creation didn’t give Apple leverage; it just deepened its vulnerabilities and reinforced that it was the small potato. “I didn’t think Apple understood China very well,” he says. “I don’t think the American government does, either. They don’t get the culture of how the Chinese operate or how the [Chinese] government works. We approach everything from this Western mindset of fairness. The Chinese approach it from positional power—who’s got more strength?”
Ford reckoned that Apple had more pull than it understood, but it was unwilling to make the necessary moves. As a result, the company still faced major problems “importing” products made in China, opening new stores, and getting help from local police to manage the networks of yellow cows.
American Dream Kids
The huge success of the Apple Store in Beijing and Shanghai convinced the company it needed to build more locations. Real estate developers were happy to help. Each store was pulling in more than $200 million in revenue, so there was a sense that putting one in your mall would be a cash cow for the entire project, says a former Apple executive. Ron Johnson had predicted in 2010 that Apple would have twenty-five stores in China by the end of the following year. But actual growth happened far more slowly. By the start of 2015, the store count in China was just fifteen. The company found that it lacked the right political connections. The IT malls had felt threatened by Apple, and since they were often controlled by wealthy entrepreneurs with political clout, they’d successfully put up roadblocks. Without a keen understanding of regional politics and institutions, Apple wasn’t able to grow where and how it wanted to. Its second store in Beijing, for instance, was a two-story location descending into the basement of an older mall called Xidan Joy City, right next to an old septic tank. Every few days the tank’s seal would break, releasing an awful odor into the basement and then up the spiral staircase.
Apple’s diminishing leverage became more apparent in 2012 when a lawsuit emerged over its use of the term iPad. The trademark had been filed in 2001 by a Taiwanese company called Proview Technology. Before unveiling the iPad, Apple had set out to purchase naming rights around the world. It cleverly obfuscated who the “real” buyer was in these transactions, aware that sellers would inflate the price if they knew Apple was involved. It set up a British company called IP Application Development—abbreviated to IPAD. The entity paid £35,000 to Proview, securing the rights. But once the iPad became a massive hit, Proview felt tricked. Its China subsidiary argued the trademark sold to Apple was valid only in Taiwan and that it still had rights to the name in mainland China.
Ford found the argument dubious. And when, during the dispute, a Chinese government authority attempted to confiscate iPads from the Apple Store, Ford walked to the inventory room where his staff was bundling them up for the official and told him to “fuck off”—in English—declining to hand over a single iPad. He had his team translate his frustration on his behalf, a face-enhancing move that gave him leverage. “You want to create an impression that you’re an executive who is at a level where it’s not required to speak their language,” he says.
Ford’s next move with the visiting government official was to argue that the trademark covered only the original iPad, not iPad 2. He offered to quarantine the original model, and he then proceeded to negotiate for the sale of the newer one. Compromise, as ever, was a winning tactic.
Years of living in Taiwan trying to convert people to the Mormon faith, coupled with his time in China, had taught Ford unwritten rules. He possessed street smarts that let him work the system in Apple’s favor. But he struggled to convey these concepts back to Cupertino and grew dismayed by some of their decisions. In 2012 higher executives chose to deal with the iPad trademark problem by paying Proview $60 million. It was a decision they could easily rationalize—global iPad sales that year would soar 61 percent to $31 billion. But to Ford, this rationalization missed what the fine signified.
By late that year, he was done with the long hours and frequent debates. The work had been exhausting for everyone. Apple’s global revenues had climbed from $42.9 billion in 2009 to $156.5 billion in 2012—but the pace of growth in Greater China was in a different league altogether, rising 2,830 percent, to $22.5 billion. In the summer of 2012 Ford and his family left China, and a few months later he departed Apple, too. He felt confident in the company’s future. Apple didn’t have a great understanding of China, he thought, but the problem was likely to go away as Apple built more stores and the country liberalized. China’s economic success, it seemed, was really fueling change, and the growth was just phenomenal. “China [is] building the square-foot equivalent of Rome every two weeks,” observed New Yorker writer Evan Osnos around that time.
The generational divide Ford had been observing for years gave him hope. He’d nicknamed the younger staff on his team the American Dream Kids. “They were going through this 1950s Americana growth phase, [believing they could] do whatever they wanted and the opportunities were limitless,” he says. “They thought everything was possible. And the mindset I had was that by the time these kids become fifty, that’ll be the mindset of all the Chinese.”
It wouldn’t be long before he realized just how wrong he was.
Burned-Out iPhones
Just as the yellow cows in the 1990s train-ticket scheme progressed from cornering the market on tickets to acquiring expensive machinery to print forgeries, so, too, did the yellow cows running the gray market for iPhones grow more sophisticated. What happened with the SWAT team in Shanghai’s Pudong store got back to the villages, frightening would-be participants in the scheme. At the same time, the resellers orchestrating the long lines to acquire Apple products were increasingly mixed up with organized crime, and they sought ways to inflate their margins.
They began buying Apple products in large quantities in the United States, where iPhones could be acquired more readily, at a lower price, and without sales tax. Some of the yellow cows found yet another advantage: if they purchased iPhones through a carrier such as T-Mobile or Verizon, they could use fake IDs and acquire new iPhones with just a down payment on a twenty-four-month contract—with zero intention, of course, of ever paying the next twenty-three installments. So instead of purchasing an iPhone for, say, $500, then finding a Chinese city where Apple products were scarce and a willing buyer existed to pay a price marked up by hundreds of dollars, they found an ingenious but illegal way to acquire iPhones at less than $100, dramatically increasing their profits.
The problem with these iPhones is that they were carrier-locked—that is, they were restricted to a specific US network and wouldn’t function in China. But as the yellow cows elevated their tactics and grew more cunning, they developed technical know-how through factory connections. There were, after all, huge sums of money involved as the number of iPhones sold in China expanded from hundreds of thousands in 2009 to more than 20 million in 2012. At these factories the yellow cows found ways to “burn out” the main computer chip within the iPhone. They were deliberately breaking the unit, but in the process, masking its retail market country of origin. Then they started paying Chinese migrants to show up at the Apple Store and complain that their new iPhone didn’t work. Store employees at the Genius Bar were at first oblivious of the scheme and couldn’t make heads or tails of these units. Using special tools, the Genius Bar employees would open the iPhone and confirm it to be brand new, but with the processor zapped. In some instances they reported to their bosses that the returned phones had existing customers’ details attached to them—US names and addresses—which flummoxed them because that wasn’t possible for a new phone. Uncertain what was going on but wanting to provide Apple’s famously courteous customer service, the staff gave some customers brand-new iPhones—a delight to the reseller bosses who’d devised the scheme. “This was like cocaine to the yellow cows,” says a former Apple executive familiar with the episode. “They were making a fortune.”
