Apple in china, p.30
Apple in China, page 30
Meeting with Cook, she broke the ice with a joke: “Our company’s legal name is called ‘little orange,’ ” she said. “We figured a company named after a fruit could always achieve something big.” Cook was charmed. He’d later say he was impressed by Liu’s environmental ambitions and messaging on social responsibility. “Jean has… built a company that is dedicated to serving the community around it,” he wrote in 2017. “By analyzing commuter patterns the way oceanographers track the tides, Didi may help traffic jams go the way of the flip phone.”
Here to Stay
Just twenty-two days after their meeting, Apple announced a $1 billion investment in the ride-hailing start-up. Liu said it happened “like lightning.” The investment stunned tech observers. Sure, Apple had acquired plenty of companies outright in the past, and it certainly had the cash, but the Cupertino behemoth almost never took a stake in a start-up—especially not an app developer that competed against rivals within its own ecosystem. It was the largest single investment Didi had ever received. Cook’s explanation didn’t exactly hold water: “We are extremely impressed by the business they’ve built and their excellent leadership team, and we look forward to supporting them as they grow.” His comments weren’t wrong so much as beside the point. Hundreds, even thousands of app companies would have been good investments since the App Store debuted in 2008, but Apple hadn’t bought a stake in any. Most observers had an inkling of what was really going on. “The deal seems like a calculated move by Apple to curry favor in China,” wrote The Information.
Even Apple executives were surprised. “That was a signpost event,” said one person who’d helped Apple build out its Asian supply chain in the early 2000s. “Like, this is how organized the graft is. It used to be a roll of hundreds out of your pocket, under a table in a restaurant. Now it’s in public: ‘You’re going to write us a billion-dollar check to invest in our autonomous driving and machine-learning start-up.’ ” Apple executives in the immediate aftermath told this person that Beijing had specified the investment and that Apple followed through to “show we’re committed to the CCP.” This, however, is unlikely. Chinese politics rarely work that way. Rather, officials set the conditions where such demonstrations of commitment are warmly welcomed, but the commitments are not well defined. That way, nothing untoward is put into writing, China avoids breaking WTO rules, and the corporation is left wondering if its actions are enough.
There’s a parallel here to Apple’s own negotiating tactics. People familiar with Tony Blevins say he was averse to drawing red lines or asking for specific prices; rather, his feedback, until a contract was signed, would consistently involve uncertainty. He created the conditions where suppliers would pitch selling components well below the price he’d hoped for. But now the tables had turned, and these tactics were used by a nation-state against Apple.
Both parties downplayed this narrative. When Liu was asked if the deal could help Apple’s political standing in China, she demurred, saying there was a “good foundation where we can help each other in many ways.” But it surely hadn’t escaped Cook’s notice that his new partner was the daughter of Liu Chuanzhi, among the most politically connected tech entrepreneurs in China. Jean’s father founded Lenovo in 1984, building it into China’s largest PC maker by the late 1990s, then expanding internationally by purchasing the IBM ThinkPad PC business in 2005 and Motorola’s handset business a decade later. Lenovo was born out of the Chinese Academy of Sciences, a government research institute that had remained its biggest shareholder. A variety of US government bodies have reportedly warned about the risks of using Lenovo equipment, citing cybersecurity concerns. For Apple, Lenovo’s proximity to the state wasn’t a liability, but its attraction.
The nature of the Didi investment would set an Apple precedent. Nothing it did was pure political window dressing. The team was getting savvy in how to work the political system in China, and if it had to make political overtures, it would do so in ways that achieved other aims, too. The Didi investment served at least two functions. At the time, the Next Big Thing in Silicon Valley was self-driving cars—a technology that, according to Google cofounder Larry Page, might be “bigger than Google.” Apple wasn’t immune to the hype, and in 2014 it had launched Project Titan, a secretive car project envisioning a driverless ride-hailing service in both the United States and China. Didi could offer Apple a “fast track into the world of autonomous vehicle and mapping,” says a former Apple engineer on Project Titan, explaining that autonomy requires mapping out the roads and that foreign companies aren’t allowed to collect such data. If Apple was serious about autonomy, it had to establish the right connections. And Didi had them, including a relationship with a Beijing-based mapping company called Auto Navi, the best and most widely used such service in the country.
The second function the Didi investment served related to Apple’s surprise at how slowly its digital payments platform, Apple Pay, was taking hold. It saw Didi as a solid platform for expansion. At the time, WeChat Pay and Alipay were vying for dominance, spending as much as RMB 40 million ($7 million) per day to acquire new customers. Apple was looking for a way to compete. An investment in Didi and a relationship with Liu helped Apple establish guanxi—political relationships—in two budding industries, aided by Apple taking a seat on the board. Meanwhile, the Apple investment gave Didi international name recognition, further fueled by Cook. The week Apple’s investment was announced—five days before his secret meeting at the CCP headquarters—Cook met with Liu in Beijing, where they hailed a ride together and visited an Apple Store. The next year Liu was named one of Time magazine’s 100 most influential people in the world. Her profile was penned by Cook.
Each of these moves was part of a wider effort to give Apple what one scholar of China calls bureaucratic protection. The moves were carefully calibrated and had the fingerprints of the Gang of Eight all over them. The investment in Didi was the first concrete action demonstrating that their key argument—Apple needed to demonstrate how it was creating partnerships and “giving back”—was taking effect. Cook amplified this narrative by pandering to his audience, declaring China not just an important market but a bedrock of technological ingenuity. “The thing I like to do most in China is to spend time with entrepreneurs,” he told Xinhua. “There are so many entrepreneurs that are driving the next wave of innovations.”
If Cupertino was looking for signs that this new plan was working, all they had to do was tune in to China Central Television—the state broadcaster that had laid into Apple for its warranty deficiencies. “Apple had no investment strategy in China before. Its strategy used to be ‘sell products only and invest nothing,’ ” an analyst said on CCTV. “Its investment now may not necessarily reverse its downtrend for good, but it may contribute to formulating a layout for the next growth engine.”
R&D
Cook’s visit to Beijing that week was the first of three trips he would take to China in 2016, reflecting just how loud and clear he’d received the message that Apple needed to launch a charm offensive. By August he’d returned to China, touting to officials including Vice Premier Zhang Gaoli that Apple was launching its first R&D lab in the country. In October, Cook told the mayor of Shenzhen that Apple would open a second R&D hub in the vibrant city. Chinese media trumpeted the centers as a sign that Apple recognized the need to compete with homegrown competitors. In March 2017, Apple announced two more R&D centers, in Shanghai and Suzhou. Documents from Apple explained to the officials what sort of innovation the centers would work on, but they were carefully crafted so as not to give away anything confidential or to provide competitors with clear direction as to what Apple was up to.
Although none of the four centers were joint ventures, they employed hundreds of local staff and demonstrated to a variety of officials that Apple was committed to China. “It was about making sure that Apple, as a company, doesn’t just use people but actually allows them to grow in terms of competence and respect for what people do,” says one person familiar with the company’s interactions.
The extent of the actual importance of the R&D hubs, beyond politics, was hotly debated in Cupertino. “It was all a facade,” says one former senior executive. “And we knew it, internally. But we were stuck in China.” An American engineer based in China says tension with the local employees was often palpable. This person was involved in hiring and says the caliber of the R&D hubs was “much lower” than what Cupertino would accept. During a web-based interview, “You’d be asking them a question and you’d hear the keyboard clattering—and it’s like, ‘Hey, can you come back on camera?’ And they’re, like, doing a Bing search of ‘metal springback’ or something.” The experience solidified the manager’s view that the hubs were primarily for political optics.
The R&D hubs were overseen by Steven Marcher, the former Nokia executive in the Gang of Eight. Those who dismissed the R&D centers as window dressing saw his ambitions as doomed to fail from the start. Apple needed to win political points by charming local politicians with new investments and jobs, but Marcher failed to recognize the reality of his role and took himself too seriously. “Steve was a complete outsider with a mega ego,” adds one former Apple executive.
Others, though, say real work was performed by the China hubs; it was just “noncore” work that didn’t conflict with Cupertino. Much of the work was software-based, such as building a Mandarin-speaking Siri and ensuring that iOS worked well for Chinese users. The Beijing lab was the most software focused, working on wireless payment technology and issues with telecom carriers. Shanghai focused on hardware, including a battery testing lab. The Shenzhen hub did so much manufacturing and supply chain work that visiting Apple engineers from California would be perplexed at finding the lab mostly empty. It wasn’t thinly staffed, though—the local engineers were just working intensely in suppliers’ factories.
Supporters of the R&D hubs say the negative view of them reflects the insecurities of engineers in Cupertino, who were losing their power as more decision-making got done in China. Before the hubs were built, Apple had been sending so many engineers to China on temporary trips that Cupertino convinced United Airlines to begin direct flights from San Francisco to Chengdu, three times a week, arguing that Apple would regularly buy enough of the thirty-six first-class seats to make it profitable. The 6,857-mile flight became United’s longest nonstop flight. Two years later, Apple again convinced United to begin flying nonstop—to Hangzhou, a tech hub on the outskirts of Shanghai. “Hangzhou is a bit of a schlepp from Shanghai,” says a former Apple executive. “Yes, you can take a bullet train, but for all the American guys getting off the plane from Cupertino, navigating the train station is kind of complicated. So Apple basically said to United, ‘Look, you put up a flight to Hangzhou and we’ll fill it for you.’ ” Apple’s signature line had long been that its products were “designed in California,” but the hubs began to indicate otherwise. China’s influence was growing, and as the hubs performed more work, the engineers there would openly question the need for so many of their counterparts to constantly fly in from America.
Whatever the quality of work in the R&D hubs, Cook used their opening to hammer home Apple’s new narrative to local media. “We’re not just someone who’s here to access the market,” he told the Chinese magazine Caixin. “We’ve created almost five million jobs in China. I’m not sure there are too many companies, domestic or foreign, who can say that… There’s deep roots here. I think very highly of the country and the people in it. We’re here to stay.”
App Bans
But if the Gang of Eight could pat themselves on the back for a job well done, the next eighteen months would demonstrate the limits of their approach. However effective Apple’s friendly tactics in China were, the country was still led by an increasingly powerful ruler intent on remaking China in his image. In the process, Apple risked having its image remade, too.
In late December 2016, Apple pulled The New York Times from its China App Store, following a demand from local authorities. Apple told the paper its app was in “violation of local regulations,” though it didn’t disclose which. Tim Cook acknowledged: “We would obviously rather not remove the apps, but like we do in other countries, we follow the law wherever we do business.” But this “other countries” defense lacked substance. Phillip Shoemaker, head of the App Store from 2009 to 2016, says the entire app review team during his tenure was in Cupertino, with one exception—a single employee in Beijing. “If any ministers in China had an issue with apps on the store, they had a hotline to my employee, who could call me,” Shoemaker says. “I didn’t do this for any other country.”
Beijing even employed app developers to test the vulnerabilities of the App Store. “The Chinese government would put things in our store, to see if they’d get by the review process,” Shoemaker says. “And then during the negotiation process they’d bring it up: ‘Hey, by the way, we have an app in the store that, when you play the game, each time you kill an enemy, a contact is deleted from your list of contacts, just randomly.’ ” The claim was alarming. The App Store was designed to be both safe and open, a hybrid that maximized the closed system of Apple’s OS with the openness of a PC-style platform. Cupertino’s original idea was that the store would be “curated,” each app rigorously reviewed one by one by a dedicated team. But the App Store had proved so popular that the team was almost immediately overwhelmed. In internal documents, one of Apple’s top fraud detection engineers compared the App Store review process to being more like “the pretty lady who greets you with a lei at the Hawaiian airport than the drug-sniffing dog.”
In this instance, the Chinese government had exposed a security gap that the review team simply hadn’t conceived of as a potential problem. “Nobody checks to see if contacts are being deleted,” Shoemaker says. “Why would a contact be deleted?” But sure enough, Shoemaker’s team found a Breakout-style game that deleted random contacts from the user’s address book as they played. Apps were supposed to be “sandboxed,” meaning a malicious app couldn’t access data from other apps. But if a game got user permission to, say, access the user’s contact list to invite friends, all bets were off. The game developer—in this case a state-sponsored one—might even be able to upload the user’s contacts to the cloud, compromising user privacy. “There were no other checks and balances in place,” Shoemaker says. “Because once you grant access, they can do whatever the hell they want.” It’s not clear any users had their contacts stolen this way, but that wasn’t the point. Beijing was looking for vulnerabilities and telling Apple what it’d found. It was a show of power.
When Beijing asked for The New York Times to be removed, it requested that the app be removed from the global App Store, not just China’s, Shoemaker says, adding: “Because they know their citizens can get on VPNs and go to a different [geographical] store and still download it and learn all about the Dalai Lama.” Apple didn’t accede to the demand. But a few months later, when Beijing called for virtual private networks to be removed from the China App Store, Apple complied, and 674 VPN apps were deleted. This was a massive concession, placing all iPhone users in the country in a splintered-off version of the internet. ExpressVPN called it “the most drastic measure the Chinese government has taken to block the use of VPNs to date, and we are troubled to see Apple aiding China’s censorship efforts.” The compromise reflected just how different reality was from expectations. In 2000, before China joined the WTO, President Clinton sarcastically wished Beijing “good luck” in their efforts to crack down on the internet. “That’s sort of like trying to nail Jell-O to the wall,” he said. But seventeen years later, China found it didn’t need to pin anything to the wall—the world’s largest corporation was happy to just hold it for them.
Hubris
In 2017, Beijing passed a cybersecurity law requiring local user data to be stored in the country. Such data residency rules were not unique to China, but unlike in other countries, Apple couldn’t simply build a facility to house all the data. Or rather, it could—but to comply with local laws, the data center would be jointly owned by a Chinese government partner. Apple met with officials numerous times throughout 2016 to argue that its consumer-oriented cloud service shouldn’t be subject to the same laws as corporate-oriented cloud services such as Amazon and Microsoft. When regulators disagreed, their lack of a countermove demonstrated Apple’s diminished leverage in the country. The result was Apple’s first joint venture.
As with the Didi investment, Apple sought to take a long-term strategic view. Some on the government affairs team recommended that if Apple was going to be forced to invest in infrastructure, it should at least do so in an area where it could score political points. They recommended Apple build the data center in Guizhou, an impoverished province in southwestern China where they believed Apple could have more influence with local officials. Those officials, in turn, could influence Beijing and allow the company to maintain control of customer encryption keys. That way, Apple could continue to tout its narrative on user privacy, something Cook would later call “one of the top issues of the century.”
Whether Apple managed to win this concession is disputed. In May 2021, The New York Times reported that “Chinese government workers physically control and operate the data center” and that “Apple abandoned the encryption technology it uses in other data centers after China wouldn’t allow it.” However, the report didn’t find evidence that the government had accessed the user data of Chinese iPhone owners; rather, it said Apple “has made compromises that make it easier for the government to do so.” Apple posted a vigorous response: “In China, the law stipulates that iCloud data belonging to its nationals must remain in the country. We comply with the law, but we make no compromises on user security. We retain control of the encryption keys for our users’ data, and every new data center we build affords us the opportunity to use Apple’s most cutting-edge hardware and security technologies to protect those keys.”
