Former Microsoft Executive on Apple’s Hidden China Problem

Steven Sinofsky 0:00 As Tim Cook says, people think that China is about cheap manufacturing. It's the skills they have.

Erik Torenberg 0:06 Apple would just argue there was no way we could even have started the iPhone anywhere else.

Steven Sinofsky 0:10 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 gonna stay a third-world dictatorship forever. They couldn't have been more wrong. [upbeat music]

Erik Torenberg 0:32 Steven, I've been looking forward to this episode because this is a full circle moment for me. You are how I got introduced to a16z. You were on the board of Product Hunt, uh, over eleven years ago, uh, which is-

Steven Sinofsky 0:43 Wow. [laughs]

Erik Torenberg 0:43 -how I was introduced to you and the firm, and I'm glad to be back in business together.

Steven Sinofsky 0:47 I couldn't be more excited for us to be working together on this one, and then more in the future, I hope.

Erik Torenberg 0:53 Exactly.

Steven Sinofsky 0:53 And yeah, definitely a reunion of sorts.

Erik Torenberg 0:55 Yeah. Absolutely. So, uh, for those who, uh, haven't been longtime fans of, uh, of the podcast or the firm, before-- you've been at a16z for, for over a decade as a, as a board partner, et cetera. And, and before that, you spent many years at, at Microsoft helping lead both, uh, Office and Windows. Um, and you helped introduce the Surface PCs, which is relevant to the, the conversation we're, we're about to have. So, um,

Erik Torenberg 1:17 we're here to talk about Apple. We're here to talk about in-- Inspired by the book, Apple in China. But first, let's, let's briefly cover, uh, WWDC. Uh, what, what, what reactions or hot takes do we have from it?

Steven Sinofsky 1:27 WWDC is, you know, their big yearly developer event. It's a remarkable platform that's been doing yearly releases for twenty-six years. Uh, it blows my mind, the-- what they've done and the scale that they operate at. But I think, look, there are three big things that came out of it. The, the first was, you know, obviously the big push. It was also the big reaction, which is, was called Liquid Glass, and it's the new user interface design. So having gone through multiple big user interface redesigns of widely used products, although to be humble about it, n-not one used by a billion people, the reaction is extremely predictable, which is a bunch of people, their heads just explode, and they, they don't want it. They don't like it. You can always tell they, they dive in immediately to what problem does it solve? So if there's change, it must solve a problem. But there are lots of reasons that designs change. And then there's the reality, this was the developer conference, so it's not done. And, and Apple is very, very good at finishing these things, and all the bugs and all the issues, I can't read it, it's blurry, it's noisy, the-- those will all get fixed. You know, and what's left is, i-is it, is it great, and is it unique enough? And time will tell. I, I basically am reserving judgment and not joining in the hysteria on, on either side. I have no need to defend it and no need to say it's the worst thing to happen to computing, you know, since ternary processors or something. Um, the second thing that I thought was huge, um, personally, was just that the iPad gets Windows with a lowercase W.

Erik Torenberg 3:07 [laughs]

Steven Sinofsky 3:08 Um, and I think that's just fascinating, like twelve different ways. You know, it goes back to the original toaster refrigerator comment, or the iPad is different, or Steve holding the iPad only like th-this 'cause it was a book. And it, it's just a recognition of who uses it and what they use it for. I, I, I worry it's a little late. Like, 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, and people who don't use them don't understand that, that it-- they sell more iPads, you know, than the laptop run rate in the US. Like, it's a big number. And they're enormously popular with different segments. It'll be interesting to see how this plays out. The weird, weirdest thing about it is, you know, the iPad is a Mac.

Erik Torenberg 3:57 Yeah.

Steven Sinofsky 3:57 The Mac is an iPad in terms of the hardware. And so you're really talking about a difference in software and how they, they deal with that over time and what apps run where and where is the experience is, is gonna be super interesting.

Steven Sinofsky 4:11 The third thing was more an act of omission than commission, and which was AI.

Erik Torenberg 4:17 Right.

Steven Sinofsky 4:18 And it-- the whole event sort of started with Craig, like, apologizing in a, not really apologizing, but in an Apple way, which was like it, it took more time than we planned, so we're not gonna talk about it anymore. And I personally think that, you know, months ago when they, with a great fanfare, launched all these AI features, that was out of character for them. They, they announced a bunch of stuff that they weren't done with yet, that hadn't baked. It was the right stuff, but they, they didn't capitalize on it, to be polite. And I think what, what they're probably doing is saying, "We're not really good at this pre-announce-

Erik Torenberg 4:55 Right. [laughs]

Steven Sinofsky 4:56 -catch up to our own announcements thing," which of course I grew up doing.

Erik Torenberg 4:59 Right. [laughs]

Steven Sinofsky 4:59 So I'm, like, completely comfortable in that world of just make stuff up and hope you catch up-

Erik Torenberg 5:03 Yeah

Steven Sinofsky 5:03 ... or people forget. And so I think that they're back to, like, we're not the first mover company.

Erik Torenberg 5:08 Right.

Steven Sinofsky 5:08 We're the first integrator company.

Erik Torenberg 5:11 Yeah.

Steven Sinofsky 5:11 And they're gonna just sit back and watch the technology mature a little bit more. But they do have a hole in, in a perception sense, which is Siri and, and what they're gonna do about that. And to not talk about it very much i-is interesting.

Erik Torenberg 5:27 You know, a lot of people have commented on the sort of the failures of, of Apple Intelligence or just Apple's, uh, sort of, um, inability to capitalize on this, on this innovation.

Erik Torenberg 5:35 What-- You know, we just saw Meta, uh, sort of, um, you know, purchase forty-nine percent of, of Scale. So, so they're making some big moves. How do you make sense of, of, of Meta's move, and could we see Apple do a similar type of play where they b-- sort of buy the talent in-house or, or buy the comp... How do you think about that?

Steven Sinofsky 5:51 I, I think what, what Meta is doing is, at the very least, it's great for AI.

Erik Torenberg 5:57 Yeah.

Steven Sinofsky 5:58 You know, I'll let Meta decide how great it is for Meta or whatever, but it's great for AI. And the reason is, is that if you go back, the way platforms have been evolving-You know, the, the, the era of, you know, in mainframes, IBM had a hundred percent. In PCs, Microsoft had ninety-five percent. Then you start getting out there, and then in servers actually ended up being like at best case fifty-fifty, and it's been downhill, and it's all Linux now. In phones, you, you have this split, you know, eighty-twenty globally, but you have to really dig down by country where it's eighty-twenty the other way.

Erik Torenberg 6:34 Yeah.

Steven Sinofsky 6:35 And in cloud, it's very likely we're gonna end up in a s- you know, in a sort of a forty-forty/twenty kind of world.

Erik Torenberg 6:41 Yeah.

Steven Sinofsky 6:42 And, and so AI, i-it's almost inconceivable that there'll be one winner.

Erik Torenberg 6:48 Right.

Steven Sinofsky 6:49 And there's-- the overlay is China and how that plays out, and the mobile industry is a really good example of how difficult it is. You know, the smartphone, so to speak, Japan had this huge lead in this thing called i-mode, but it only existed in Japan. And so i-i-- you know, like they were leaders in technology and experience. They had all these micropayments, all this stuff, but, like, it w-- it didn't go anywhere outside of the country. And so the biggest risk to AI is that it, it becomes either it... Someone tries to think it's only one player, which at times the federal government has acted like that, or one player says it should only be us, which there is a, a player sort of claiming that, or it gets geographically constrained. It doesn't matter which one of those might happen. To prevent any one of them, you just need a lot of players operating at huge scale.

Erik Torenberg 7:43 Yeah.

Steven Sinofsky 7:43 And so we have, you know, in, in the startup world, you have Anthropic, and you have OpenAI, i, you know, and you have, um, in pure open source, you have Meta, you know, and then, then you have, um, Microsoft and Google. So we, we have like innovation happening on all cylinders and all fronts, which is great because the competition, you know, is basically making the call that it's gonna be one, and it's sort of gonna be this government-driven approach. It might not be one company, but it will be one approach that's sort of sanctioned in some way, and it'll be interesting to see how that, that plays out. So I'm-- There's nothing better than more and open for AI right now.

Erik Torenberg 8:24 Well, it's, it's, it's worth just commenting on the market structure point because when we look back at the last few years of our sort of growth investing in, in this category, we, we, we've been very aggressive, but we regret not being even more aggressive. And because one of those principles was, "Hey, we wanna back the market leader."

Steven Sinofsky 8:38 Yeah.

Erik Torenberg 8:38 And so when you see a, a second-place company, we're like, "Hey, it's not the market leader," but in this market, as you mentioned, it's not winner take all, or just the market is so big that even the second place or third place can be, you know, generational companies.

Steven Sinofsky 8:51 Right. And we're not even at the point yet, which is where I believe we'll get, which is the, the, the initial go-to-market has all been this cloud-based thing, but there's all these challenges with that, like privacy and security and, and, and cost. And so we're-- You know, 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. So I think we're still gonna... There's a whole wave of AI on the edge-

Erik Torenberg 9:20 Yeah

Steven Sinofsky 9:20 ... that's gonna happen, which only benefits from open.

Erik Torenberg 9:23 Right.

Steven Sinofsky 9:24 Uh, like, and so I'm very-- There's nothing but positive to say.

Erik Torenberg 9:28 Yeah. And so I won-- You know, does it make sense to look at this Alexander Wang or this sort of scale, um, you know, pr- as something of like a fifteen billion dollar acqui-hire of Alex plus the top talent at scale, and does... If you're Apple, if you're advising Apple, or, or, you know, do they or even some of the other big incumbents need to do something similar? Obviously, Microsoft, you know, is what we'll start with op-opening out to begin with. But if you're Apple, h-how do you think about how to play here?

Steven Sinofsky 9:51 Well, I think, you know, the, the two plays are g- or three. One is gonna be the sort of the weird partnership dance play that Microsoft and OpenAI have. I, I... It, it seems obvious that at some point, you know, Microsoft will have much more first-party software. There's the, we have always made our play by just having everything, which is, which is, um, Amazon. And so you could... Anything that comes out, they're gonna end up supporting, which is just how retail works. Like, you don't... You get all the cereals, not just Froot Loops, you know. And, and then I, I think there's just the where we're gonna go it our own way, in a sense, which is Gemini taking their approach or OpenAI itself or Anthropic itself. And I, I think that Apple needs to pick one.

Erik Torenberg 10:36 Right.

Steven Sinofsky 10:36 You know, they did announce, like, "Hey, you can call any model through our API," but the real thing that Apple needs to do is figure out what model is gonna be tuned to run on their unique hardware on the edge and their unique offering or constraint, depending on per- of privacy-

Erik Torenberg 10:51 Yeah

Steven Sinofsky 10:51 ... and how that plays out.

Erik Torenberg 10:52 And just to evaluate one of those paths, if Satya could go back in time knowing what he knows now, do you think he w- might have done something or would you have considered doing something different? Um, h-how should we think about how this has worked out for Microsoft?

Steven Sinofsky 11:04 Oh, these are tricky things. You can't ask me questions about my friends.

Erik Torenberg 11:07 No, no, no pressure.

Steven Sinofsky 11:07 But I, I, like, I wouldn't... Putting it aside as advice, I, I would say, look, I, I genuinely, to those listening, I do not know anything that's going on. Like-

Erik Torenberg 11:16 Yeah

Steven Sinofsky 11:16 ... um, but th-there-- Microsoft has been involved in, 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. And, you know, 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 because that's what Google was doing in, say, 2006, '7, something like that. And I think that, um, I, I would not be at all surprised, I don't know anything, I swear, people, you know, that there's some first-party thing that they're just trying to figure out when and how good does it have to be. 'Cause if you are Microsoft, it turns out that, like, the strength of Microsoft is that you never have to be best.

Erik Torenberg 12:02 Yeah.

Steven Sinofsky 12:03 You just have to be included.

Erik Torenberg 12:05 Yeah.

Steven Sinofsky 12:06 And, and so it's, it's likelyThat that will be their play. That's generally how enterprise software works. It's the inclusion and the bundle-

Erik Torenberg 12:13 Right

Steven Sinofsky 12:13 ... that customers value-

Erik Torenberg 12:15 Yeah

Steven Sinofsky 12:15 ... and pay lots of money for.

Erik Torenberg 12:16 Yeah.

Steven Sinofsky 12:17 Not being the very, very best at any given moment.

Erik Torenberg 12:20 Right. It's fascinating how all the big players have kind of, um, sort of crystallized their approaches kind of in response to each other.

Steven Sinofsky 12:26 Oh, yeah.

Erik Torenberg 12:27 I wanna segue to, 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, by the book. And I was just-- there's a few, few things I just wanna say. You know, fir-first, just the, the notion that I believe they said Apple invests fifty-five billion dollars a year in, in China, and I, I think the author said that's equivalent or, or maybe even bigger than the, the entirety of the Marshall Plan. Uh, it is just astronomical. And, and this, this book talks about how Apple not only built its company in China but also helped build China it-itself. Uh, China's sort of manufacturing economy and, and introduced the, the level of talent and, and knowledge or, or sort of taught China, um, not just how to build phones but that same sort of knowledge then led, uh, then to build, uh, help build Tesla, you know, which are phones on wheels, and then led to other sort of, um, you know, uh, technologies used for the military, which we'll, we'll get to. But, but first, I, I just wanna a-ask, was this inevitable or, or, or was this-- did this make sense at the time? How do we make sense of this twenty years later? H-How did this all happen?

Steven Sinofsky 13:26 It is crazy that how it all happened. I mean, I think you go back, like of course, Apple, we all know it was in the garage in Palo Alto. They, they famously built the computers there. Um, but the thing was, from the very beginning, Apple itself was all about super tight control. I mean, first you had Woz, you know, basically creating works of art on the motherboard. And then they built a factory.

Erik Torenberg 13:48 Yeah.

Steven Sinofsky 13:48 You know, there was the factory right here, and that's where they built computers. And, and they, they just kept doing more of that. Tight control, build the whole computer. Then, um, Steve left Apple. Macintosh, of course, was famously the same thing, but and Steve pushed and pushed on costs and the shape of it, made the famous toaster that you carry around, and things like that. But a-after Steve left, the company had enormous difficulty competing with the IBM, uh, PC. One of the things that it did sort of, um, um, later, like in the, in the late 1990s, was a super innovative laptop. Now everybody's like, "What does an innovative laptop mean?" Well, it turns out in the late 1990s, laptops, nobody bought them.

Erik Torenberg 14:31 Yeah.

Steven Sinofsky 14:32 They were, they were slow, expensive, bad computers. They were just portable.

Erik Torenberg 14:38 Yeah.

Steven Sinofsky 14:38 That was their big thing, and if you had to have one, you did. But they built this thing that was the original portable for Mac called PowerBook. And they tried to cram a lot of-- they tried to make the best laptop possible. And in order to do that, they ultimately were hitting the limits of manufacturing in the US, and so, uh, Jean-Louis Gassée, who was running the Macintosh business at the time, he was very famous French, uh, executive for Apple f- that Steve hired to run Apple France, working for Sculley. He actually pushed to do an experiment of like partnering with Sony in Japan to build a PowerBook. And so the original PowerBook line had sort of three computers of different sizes, power, and whatever. And the one model was done as a joint design effort with some, which was just incredibly brazen for Apple culture to like break out like that. And they did, and, and like it came back, and the people at Apple were like, "Wow, man, this, this is, this is not so bad."

Erik Torenberg 15:38 Hmm.

Steven Sinofsky 15:38 You know? And, um, it wasn't the best-selling model, a lot of complexity, and you could read all about it in this book or other places. But it, it, sort of a light bulb went off, like, "Maybe this helps us solve some of our constraints." Now, they had other constraints, like the chips were wrong for the Mac. The PC was like half the price, like a lot of problems they had. But it was like a wow moment. And, and that, that was really interesting. But they were failing at computers.

Steven Sinofsky 16:06 Tim Cook joins Apple in like 1997, and he comes from IBM. And at IBM, he was like about making PCs. And he shows up, and he's already working this whole kind of world of, of supply chain and all this other stuff. He then later goes to, um, to, uh, Compaq, which is a famous-

Erik Torenberg 16:27 Yeah

Steven Sinofsky 16:27 ... Texas-based computer maker, um, and does-- really helps them drive that whole, whole motion of building in China. And I'll, I'll talk about that maybe in a minute. But the thing that gets built by Apple then in 1999 is, is this iMac G3. Now, most people aren't old enough to remember it, but it was this sort of gumdrop shape, translucent Jony Ive creation. And you look at that, and you're like, "Wow, that's, that's neat." And you're like, "No, no, you don't understand. It was impossible." Like, every element of that computer couldn't be built.

Erik Torenberg 17:02 Right.

Steven Sinofsky 17:02 Uh, it-- not just the stuff that they left off, like it didn't have serial ports and parallel ports and all this other stuff, but it, it was like clear plastic. Computers came in gray, stamped aluminum metal boxes with screws, and this was like a toolless, fanless, like amazing thing. And it total- and it was all done through this, this kind of China-based manufacturing stuff. But it was done in a very unique way at the time, which was the Apple people just went there and smothered the manufacturing line. And they every step, and samples back and forth, and this whole deal. And I'm glossing over a very complex timeline of events, and it, it sounds a little bit more all or nothing and sudden, but it's a very gradual transition. But this product was, was, was huge. And then the next one was the iPod.

Erik Torenberg 17:52 Right.

Steven Sinofsky 17:52 And, and so now they're already comfortable with this model a little bit, but the iPod was like all of a sudden the, the assembly of it starts to look like, like almost like a war games screen of all these incoming things 'cause it's, it's like a disk drive invented in Japan, manufactured in, in, um, Thailand, and all the stuff is coming together. And all the parts, the click wheel and everything are in China. And it's all of a sudden being made in one place in this incredible form factor. Like, if you were to look at the other media players at the time, they were these big honking plat-

Erik Torenberg 18:24 Yeah

Steven Sinofsky 18:24 ... they looked like game console things.

Erik Torenberg 18:27 Yeah.

Steven Sinofsky 18:27 Like, not thisSolid deck of cards

Erik Torenberg 18:30 Right

Steven Sinofsky 18:30 ... glued together with no tolerances. I mean, it's incredible. And so that was really the start of designed in Cupertino, manufactured in China.

Erik Torenberg 18:40 Right.

Steven Sinofsky 18:40 And that whole, that whole process.

Erik Torenberg 18:43 And, and that was celebrated at the time, right? Because we were excited about sort of more integration with China, so that wasn't seen as such a problematic thing at the time, right?

Steven Sinofsky 18:52 Oh, it's, it's absolutely. It's even more than that. Like, this was like hailed as like this is the modern way-

Erik Torenberg 18:58 Yeah

Steven Sinofsky 18:58 ... to do business. Like a, like a very, an example of this that's just super close to home about how things have changed was that in 1999, the World Trade Organization gathered in Seattle to, um, ratify China as a member of the World Trade Organization.

Erik Torenberg 19:15 Yeah.

Steven Sinofsky 19:15 And this is the organization that, like, that sort of navigates tariffs and trade rules-

Erik Torenberg 19:20 Right

Steven Sinofsky 19:20 ... between countries. All the cool countries were in it, but not like communist, socialist China, you know, without, with, you know, a totalitarian government, all that. And so the Clinton administration had really pushed for China to come in, and it actually split the Democratic Party. People today, their heads would explode if you tried to sell it. And it turns out the Republicans were split too.

Erik Torenberg 19:43 Yeah.

Steven Sinofsky 19:43 Because half the Republicans were like, "Free trade, free trade, free trade," and the other half were-

Erik Torenberg 19:47 Yeah

Steven Sinofsky 19:47 ... were like, "We hate communism, we hate communism." And, and-

Erik Torenberg 19:49 Yeah

Steven Sinofsky 19:49 ... so the whole world, if you look back in 1990, look, it's like completely upside down-

Erik Torenberg 19:54 Yeah

Steven Sinofsky 19:55 ... from today. And, and there were huge riots in Seattle.

Erik Torenberg 20:00 Right.

Steven Sinofsky 20:00 Like, the city was like a mess over this moment 'cause it was viewed as this basic, like this, this pro-business, anti-labor-

Erik Torenberg 20:08 Yeah

Steven Sinofsky 20:08 ... kinda thing 'cause it just meant cheap outsourcing in China. Now, the reason for that was because that was the whole direction of American business.

Erik Torenberg 20:16 Yeah.

Steven Sinofsky 20:16 There's a very famous book in the '80s called In Search of Excellence. And In Search of Excellence is sort of this Jack Welch and GE management mantra of like, what you do, you stick to your knitting. Like, you do the stuff that you're good at, and you outsource everything else, and you figure out that, that core part of your company. And, and it was like that was what you just did. Like, 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.

Erik Torenberg 20:45 Right.

Steven Sinofsky 20:45 You just do that elsewhere. And that was the state of American business. It was like, let's get into China. Let's-- We got the support of the president. It's the whole global market. Let's reduce trade barriers between countries. A-and so it was celebrated-

Erik Torenberg 21:02 Right

Steven Sinofsky 21:02 ... as the start of a whole new industrial era.

Erik Torenberg 21:06 Uh, so at what point did that change both for Apple as a company, that they realized, "Hey, maybe we're, maybe we have some risks here," uh, but also from a geopolitical standpoint? Was it, was it when Xi, uh, came to power? Was it when Trump, uh, was elected? H-H-How did things start to change?

Steven Sinofsky 21:20 It, it helps on this one to go a little bit

Steven Sinofsky 21:22 backwards-

Erik Torenberg 21:22 Sure

Steven Sinofsky 21:23 ... uh, I think too, because I, I... Before we get to, like, when did Apple recognize, we, we should say, like, there are other examples of-

Erik Torenberg 21:29 Yeah

Steven Sinofsky 21:29 ... of everybody doing this, and, and it-- the reason it's important is 'cause it contrasts with Apple, which is-

Erik Torenberg 21:34 Right

Steven Sinofsky 21:34 ... the PC industry created what enabled Apple to do what Apple did. So Apple was on this path of like, let's manufacture in China, and let's keep very tight control. But the PC industry had a whole different approach, which was this much more classical In Search of Excellence outsourcing method. So, you know, Dell and Compaq, which were the two big makers with IBM, were, were in Texas, and, you know, Michael was building PCs in his dorm room, and then they had a factory in Texas.

Erik Torenberg 22:03 Yeah.

Steven Sinofsky 22:03 Compaq were some business guys who, like, built a whole factory in Texas. And the parts were being flown in from wherever they came from, disk drives from this country, CPUs from Intel in the US-

Erik Torenberg 22:12 Yeah

Steven Sinofsky 22:12 ... whatever, cables from China and stuff like that, and assembling them in the US. But the problem was they were all standard parts. Like, the, whatever-- When you bought a computer from Dell and from, from Compaq, if you open them up, i-Intel processor, Seagate disk drive, also from US, you know, like all... And, and so they were really not 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 Ps of the marketing mix, which is price, place, and promotion, not just product. And so if you go back to In Search of Excellence, well, the idea is, well, since we can't compete on manufacturing, let's just make it as cheap as possible.

Erik Torenberg 22:53 Hmm.

Steven Sinofsky 22:54 And so they, Compaq led, and they, they were c- they were making the cases for Compacs, which were these, like, fifteen-pound aluminum... Like, you could, they were like shipping containers basically that held the PC. They were making those in China, so it was the biggest, heaviest part. So it sort of made sense to see, like, how many parts could we get in the box before we ship the box to the US, which was two-thirds of the market. And so they just started going to these assembly plants and, and they went to one and said, "We want you to build our PC." And they said, "You got it," 'cause these guy- these, they are hungry.

Erik Torenberg 23:26 Yeah.

Steven Sinofsky 23:26 They, they want-- And they were just having the ability 'cause of WTO and all this other stuff to, like, open up and just do business. And so they were like the capitalists in, in South China. And so, um, they were like, "Whatever you want us to do, we're gonna do it." And so Compaq being very, you know, they want secrecy and intellectual property, so they were like, "Then we'll build you a building." And so all of a sudden, Compaq had, like, a building that was theirs. And then they went to Dell, and they're like, "We'll build you a building too." And also, there's this other company that makes music players. They have a building over here. And all these makers were starting to serve multiple PC companies. And, and then the PC companies were like, "Hey, this is kinda working for us because we're crushing Apple in the marketplace, and our PCs are getting cheaper, and people are buying more, and, and the Windows 95 thing is taking off. Everything is just dandy." And so they, they started just, like, saying, "Hey, we don't even need engineers." Like, we-- Whereas Apple was, like, flying more and more people to do more and more advanced stuff, they were like, "More gray boxes, more interchangeable parts, more lower cost. We'll just keep selling more and making it up in volume," and that's exactly what was happening. And so-The, these people, which were called ODMs, original design and manufacturers, were saying, "You just tell us roughly what you want, we'll make it."

Host 24:46 Yeah.

Steven Sinofsky 24:46 And, and so you'd go to meetings with them, and they would just show prototypes of all the computers they could build. And they would just... You'd pick. You want this one? You... And they're like, "Well, have it a little taller, smaller, thicker, thinner." "We wanna be able to swap out graphics cards." "Yes, yes, yes, and yes, and here's the Dell logo on it." And then they got very, very good. So they were effectively moving up the stack-

Host 25:08 Hmm

Steven Sinofsky 25:08 ... and becoming product makers and designers. And they be-- And the reason is very simple. They also couldn't compete on labor. Like, the way that the government's working, the socialist part of this experiment was y-you, you can't live anywhere you want in China. You have to, you live where you're born, and if you wanna move, it's a whole thing. You're not allowed to just move. But what China was doing was taking all the hundreds of millions of poor people and letting them live temporarily in all the factories of all kinds, clothes and cars and computers, whatever, and live for part of the year and then bring massive amounts of cash back to the rural. And that's how China lifted a billion people out of poverty.

Host 25:46 Yeah.

Steven Sinofsky 25:46 Well, those are all the same workers. So you, you can't keep, get a better deal on labor.

Host 25:52 Right.

Steven Sinofsky 25:53 And, and then 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. So the ODMs were just... They, in order to compete, they were moving up the food chain. And the American electronics world, whether it was TVs or whatever, we're like, "Yeah." Or Japan with doing it with Sony. We're like, "We love this. Just keep showing us more stuff we can put our brand, our name on, and we'll just focus on sales and marketing, distribution and branding. We're awesome." And so the start of all of this was really... And by the way, like little things, like there were all of a sudden, uh, 50 different music players.

Host 26:24 Yeah.

Steven Sinofsky 26:24 Because all that knowledge was distributed throughout all these makers. And so it was very, very

Steven Sinofsky 26:31 interesting. Now, what was really going... And so what's it like to visit one of these ODMs? Like these guys-

Host 26:36 Yeah. Wow

Steven Sinofsky 26:36 ... are crazy. Like, so you think, like when I first went, they're like-

Host 26:40 You've been there a few times?

Steven Sinofsky 26:41 A bunch. Oh, I, I lived in China-

Host 26:43 Wow

Steven Sinofsky 26:43 ... like in 2004 even, and that's all I did was visit all these people all the time-

Host 26:46 Wow

Steven Sinofsky 26:46 ... and the government, and we go on forever about it. But the, the thing about these was, um, you know, you'd think you'd go and it's like a factory. Like how exciting. And I've been to like car factories-

Host 26:55 Yeah, yeah

Steven Sinofsky 26:55 ... and washing machine factories 'cause they're all Microsoft customers.

Host 26:58 Right.

Steven Sinofsky 26:58 So you go and you visit them, and they all show you plants and stuff.

Host 27:01 Yeah.

Steven Sinofsky 27:01 And you know, you go and like all of a sudden you're like, "Oh my God, this is like a hospital." [laughs] Like, and I'd been to Intel, which is like an operating room. Like it's all bunny suits and all the... But this is like they're just joining parts. It's the same thing I do in my living room when I buy a PC. [laughs] Like I'm just putting all the parts here. But they, you know, these things are football field size. And I should say-

Host 27:18 Wow

Steven Sinofsky 27:18 ... just for a baseline, I, I did summer jobs at the factory that built, um, intercontinental ballistic missiles and surface-to-air missiles in Orlando. So I've seen big giant factory floors before.

Host 27:30 Right.

Steven Sinofsky 27:30 There are like thousands of people on ten, hundreds of-

Host 27:33 Wow

Steven Sinofsky 27:33 ... acres of assembly, and you just watch like computers flying off. And, and so the owners of these are very proud, and they, they take you on tours. You go and you meet the CEO, founder of these ODMs, and they take you on the tour. They show you everything. They show you every step in the line. And then they... But you know, they show you the one you're allowed to see.

Host 27:52 Yeah.

Steven Sinofsky 27:52 So like I was at Microsoft, I couldn't see any of them.

Host 27:54 [laughs]

Steven Sinofsky 27:55 So, but I could see he was very proud to always show me like one step in the process, and that was the step when they attached the Windows logo to the PC, something Steve Jobs would never have allowed.

Host 28:06 Yeah.

Steven Sinofsky 28:06 But 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, and my job was to sort of somehow help to see if we could stop that.

Host 28:16 [laughs]

Steven Sinofsky 28:16 But, but they were very proud and very legal about that step.

Host 28:20 Yeah.

Steven Sinofsky 28:20 And so I have lots of photos of stickers being put on, on computers. And then you go and you go outside and he goes, "That's where we make HP laptops, that's where we make... And this is where we make those other laptops-

Host 28:33 [laughs]

Steven Sinofsky 28:33 ... that we're not allowed to tell you about." And that's the difference. Like it... And, and what was going on in the Apple building was just super important.

Host 28:41 Right.

Steven Sinofsky 28:42 And that's where we get to the answer to your question. Like, the Apple building was, like, fast-forward a little bit, and they're building what became the MacBook

Steven Sinofsky 28:49 Air.

Host 28:50 Yeah.

Steven Sinofsky 28:50 And so, like, the MacBook Air goes back to the original PowerBook 100 experiment, which was, how can we take what basically suck, which are laptops that people, Windows people use? Like, give you an idea. Like, when the MacBook Air came out, the typical knowledge worker in a company was traveling with about six pounds of computer gear.

Host 29:08 Yeah.

Steven Sinofsky 29:09 Which was a laptop. It was probably an inch and a half thick, you know, nine by twelve. It had one of these padded laptop cases that you sometimes see. It was awful. I actually wouldn't even travel. I only used, like, Japanese laptops that, that would fit in envelopes and stuff. And then, um,

Steven Sinofsky 29:25 they would, uh... So they, Apple was building the MacBook Air, and so now we know it was this machine-milled aluminum chassis in that building that, that they showed us and, and it, and it was, like, remarkable.

Host 29:38 Yeah.

Steven Sinofsky 29:39 Now, you, Steve held it up and put it in an envelope and everybody, "Ooh, fits." And I'm like, "My Sony fits in an envelope," but my Sony was $3,500 made by hand in Japan.

Host 29:49 Yeah.

Steven Sinofsky 29:49 And, and this was kind of a miracle. And the problem was that the, the ODM who was on tour with me, you know, we went up... So this is what happens. You go on the tour, they take you up a secret elevator, and then you're, it's like you're literally above the factory, and all of a sudden I'm, like, in a Bond movie.

Host 30:08 [laughs]

Steven Sinofsky 30:09 And, and, like, I... The, the elevator door opens, and you're in this football field-sized office with, like, a tea ceremony room and, like, weird ancient suits of armor for art and-

Host 30:20 Were you ever terrified?

Steven Sinofsky 30:21 I, I was completely terrified.

Host 30:23 [laughs]

Steven Sinofsky 30:23 I'm like, I'm like, oh my... And of course nothing ever, no one ever gets hurt.

Host 30:26 Yeah.

Steven Sinofsky 30:26 It is like, but, like, what the hell? Like, I'm like looking. Is there a stairway that's gonna turn into a slide-

Host 30:31 [laughs]

Steven Sinofsky 30:31 ... and I'm gonna end up being eaten by Japanese sharks, Chinese sharks or something? But there's like ancient scrolls, and we have to go through, and every single piece of art I'm getting a story.

Host 30:39 [laughs]

Steven Sinofsky 30:39 And every... And I, and I'm like, I'm jet lagged.

Host 30:41 [laughs]

Steven Sinofsky 30:41 I have to pee. And like, I'm here to just make sure the stickers are going on the laptops.

Host 30:45 [laughs]

Steven Sinofsky 30:45 But

Steven Sinofsky 30:46 I'm getting the full deal. And then we sit down and he's like-The Windows people are losing.

Erik Torenberg 30:51 Hmm.

Steven Sinofsky 30:52 That's me.

Erik Torenberg 30:53 Yeah. Same here.

Steven Sinofsky 30:54 And because I am building these great things and, and then he shows me prototypes for all these Windows computers. So these are the ones that he built without any help from the Apple people.

Erik Torenberg 31:05 Wow.

Steven Sinofsky 31:05 And he's like, "We could build these, but we can't convince, you know, Michael or, or D- or Compaq or anybody to build them. They're too expensive or whatever. I can make them cheaper." But I-- And I also, and this is where they get candy, he's like, "It's very difficult to work with th- those people." They, they don't give him any degrees of freedom.

Erik Torenberg 31:23 Right.

Steven Sinofsky 31:23 He can't be creative, but he also can't move up the stack.

Erik Torenberg 31:26 Yeah.

Steven Sinofsky 31:27 And, and the PC people just wouldn't do it. And so two lessons from that. One is that Apple taught them-

Erik Torenberg 31:36 Yeah

Steven Sinofsky 31:36 ... how to do this. Now, they didn't plan on doing that.

Erik Torenberg 31:38 Right.

Steven Sinofsky 31:39 But osmosis happens.

Erik Torenberg 31:41 Yeah.

Steven Sinofsky 31:41 And they got all these skills, and then the other was, Apple was still gonna uniquely do it, and no one else was gonna come and invest that money.

Steven Sinofsky 31:49 Now, we were there also at one point to help them, help get Surface built. We were actually doing it to solve the problem. Uh, the reason Surface exists is because the PC makers wouldn't build like an aluminum computer, basically.

Erik Torenberg 32:02 Mm-hmm.

Steven Sinofsky 32:02 Or an all-in-one, for that matter. And so, like, we actually-- we did a whole different approach to metal. We actually built a whole metallurgy plant to do injective magnesium alloy for the original Surface computer that ran Nvidia chips and all this other stuff. And then, um, and, and we were gonna light-- we were willing to make cases of any size or shape for the OEMs, but they just saw it as a niche. And so Apple-- So the PC makers just 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.

Erik Torenberg 32:43 Yeah.

Steven Sinofsky 32:44 And, and but Apple just continued to do that, and they were building that expertise just inadvertently. And then Intel came in and piled on more. And so more people knew, except in the sort of the slightly more open part of, of China.

Steven Sinofsky 32:58 And so it, it just, it, it was like this slow-moving osmosis that gets us to the point where, as Tim Cook says, "People think that China is about cheap manufacturing, but it, it's the skills they have." Like, nobody else in the world could run five hundred prototyping aluminum milling machines at one time and produce the right defect rate and save all the waste and develop all the stuff. You know, all these things. Like, when we were making Surface, you know, you have to use all this pressure-sensitive adhesive and keep all the things together to make it USB thickness, and like nobody here knows how to do that. They were telling us what they were doing.

Erik Torenberg 33:36 Yeah.

Steven Sinofsky 33:36 And, and that is what happened. And it was not by... It was not a design, and 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. And I, I don't-- Not only do I not see that we could have, I-- there was no interest in stopping it. Like it, for the global view of trade, it was working exactly as planned-

Erik Torenberg 34:00 Right

Steven Sinofsky 34:00 ... for everybody.

Erik Torenberg 34:01 Yeah. And so let's get, now get back to when did that start to change? Is it, I don't know if it's going to the book or someone said, "Hey, China is Apple by the balls or has us by the balls." Let's talk about that-

Steven Sinofsky 34:11 Yeah, yeah

Erik Torenberg 34:11 ... and when did we realize that happened?

Steven Sinofsky 34:12 At one point, it's the point of no return.

Steven Sinofsky 34:14 So the point of no return was basically, I would say, two years into the iPhone. The scale was such-

Erik Torenberg 34:19 Yeah

Steven Sinofsky 34:19 ... there was nowhere else. I ev- I'm sure Apple would just argue, "Oh, there was no way we could even have started the iPhone-

Erik Torenberg 34:24 Yeah

Steven Sinofsky 34:25 ... anywhere else." Uh, and I could tell you, we, the, the, like Surface, there was no chance. We were... And that's a low volume product.

Erik Torenberg 34:31 Right.

Steven Sinofsky 34:31 Like there was no, no chance. And most things are very low volume, which makes the, the non-recurring engineering costs much higher, so even more impossible to build. All the startups, y- you know, you can't even consider-

Erik Torenberg 34:45 Yeah

Steven Sinofsky 34:45 ... doing that. So I, I, like the point of no return happened so long ago that it's sort of a weird thing to think about fifty billion dollars a year in investment, 'cause that's not what did it.

Erik Torenberg 34:56 Yeah.

Steven Sinofsky 34:56 What did it was, was this unique blend of socialism or totalitarianism and entrepreneurship.

Erik Torenberg 35:04 Yeah.

Steven Sinofsky 35:04 And that's the thing that 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 is, is... They're gonna stay a third world dictatorship forever." They couldn't have been more wrong. And I, frankly, that's how I felt living there.

Erik Torenberg 35:26 Right.

Steven Sinofsky 35:27 Like I, I was like, it, it do- you know, like yes, obviously it feels totalitarian. Like you turn on CNN and you're watching-

Erik Torenberg 35:33 Yeah

Steven Sinofsky 35:33 ... and then it vanishes, and you're like, "Well, that was weird." You know, you try to connect to a website randomly from the link, and you can't see it anymore.

Erik Torenberg 35:39 Yeah.

Steven Sinofsky 35:39 And there are all these people that work for the government in our office, and I can't talk to them, and I don't know why they're there-

Erik Torenberg 35:44 [laughs]

Steven Sinofsky 35:44 ... and I'm their boss. It's super weird. Like there's a lot of stuff that as an American you're like, "This is just kind of strange." But you go to the ODM, I, I could've been visiting Kimberly-Clark in-

Erik Torenberg 35:55 Yeah

Steven Sinofsky 35:55 ... a plant or-

Erik Torenberg 35:56 Right

Steven Sinofsky 35:57 ... 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." And, and so you're, you're in this weird hybrid world that was completely predicted wrong.

Erik Torenberg 36:11 Right.

Steven Sinofsky 36:11 And, and so you wake up and, and you're like, "Oh, well, they were really working." And a great way to think of it is like the car industry. So the car industry, there was no auto industry when I was living in China. All the cars were Volkswagen or, or Mercedes, and that's what everybody drove around. That's what... If you owned a car, you owned a Volkswagen. If you got driven around, you got driven around in a Mercedes, and that's just how it was. And the ra- the way they got there was by doing these joint ventures with, with the Chi... And that was the mandated way, and the joint venture came with like, you know, these terms that were onerous. Like you had-

Erik Torenberg 36:42 Yeah

Steven Sinofsky 36:42 ... to give them all your IP.

Erik Torenberg 36:43 Right.

Steven Sinofsky 36:43 You know, and so for us, like even to get a license to sell software, not that anyone was buying it legally, but to sell software, you had to sort of allow these inspectors to come in-

Erik Torenberg 36:51 Yeah

Steven Sinofsky 36:51 ... and see stuff. And like we had to shut down Hotmail for forever because, like, we wouldn't let them see the data center servers, which weren't even in China, and all sorts of complexities. But if you wanted to sell into the world's largest population market-

Erik Torenberg 37:05 Yeah

Steven Sinofsky 37:06 ... that was your choice.Comply or not. In the meantime, they're-- the, the entrepreneurs in southern China are-- they're not looking at, at Beijing for government direction. They're actually going, "Well, we have to beat Korea. We have to beat Japan."

Erik Torenberg 37:20 Yeah.

Steven Sinofsky 37:20 "We have to beat Singapore. We have to beat Vietnam or Indonesia." And those are all their neighbors, and they see them all. And, and like we met once with, um... And so the car companies, if you just fast-forward, they all are out of China now.

Erik Torenberg 37:32 Yeah.

Steven Sinofsky 37:32 These joint ventures, they could never get their money out. They lost all their IP, their manufa- It's just horrible to-- like Volkswagen, Ford, Mercedes, it's just been a nightmare. Uh, Tesla doesn't have-- didn't have to do a joint venture, which is sort of the modern thing, just like Apple, where they were allowed to operate. But it turns out there are all these soft ways-

Erik Torenberg 37:50 Yeah

Steven Sinofsky 37:50 ... that the company could be miserable. That's where it goes from entrepreneurship-

Erik Torenberg 37:54 Right

Steven Sinofsky 37:54 ... to the so-socialist totalitarian, where they can just, you know, the Communist Party could just say, "We all need to have phones, and we like this model from Huawei."

Erik Torenberg 38:03 Yeah. [chuckles]

Steven Sinofsky 38:04 Or, "We're picking a new 5G standard, and it's gonna step all over the Qualcomm patents, but it's only in China where we enforce the laws." And you're like, "But the WTO says the what, says what?"

Erik Torenberg 38:16 [chuckles] Right.

Steven Sinofsky 38:16 Like, and, you know, you're, you get really stuck-

Erik Torenberg 38:18 Yeah

Steven Sinofsky 38:18 ... on, on this kind of stuff. And, and I think what, what everybody learned was in, you know, say 2000s to 2010, was very easy to pour money into China.

Erik Torenberg 38:27 Yeah.

Steven Sinofsky 38:28 But it doesn't come out. Nobody-- The returns just aren't, aren't there. And then it's also easy if you're one of the blessed sort of companies to sort of grow, but, but then all these soft things happen. Now, a lot of people love to say how that's just totalitarian governance, but they forget, like, the history of trade in America.

Erik Torenberg 38:47 Yeah.

Steven Sinofsky 38:47 You know, like it's actually, you know... Or we talk about the EU a lot, but, you know, we have a lot of these soft things, too. You know, like when San Francisco County wants to buy fleet vehicles, they, they don't, they just say, well, they have to be American cars.

Erik Torenberg 39:02 Right.

Steven Sinofsky 39:03 Like, they don't even think about it. They're like, "Step one, it has to be an American car."

Erik Torenberg 39:06 Yeah.

Steven Sinofsky 39:07 And when the Defense Department buys stuff, like, there's a massively thousand long, thousand-page list of all the things that you have to check off in order to be sold to the Defense Department. To the outside world, that looks like safety and security, but it, it, it, it also could be viewed just as much as-

Erik Torenberg 39:23 Right

Steven Sinofsky 39:23 ... protectionism.

Erik Torenberg 39:23 Yeah.

Steven Sinofsky 39:24 And it's this, it's just two sides of a coin.

Erik Torenberg 39:26 Yeah. Um, okay, so the... When we look at Apple's dependency on, on China, when does this go from sort of, "Okay, um, this is great," to, "Okay, this is actually an existential risk for the, for the company?" Uh, or, or would you say we, we, we aren't there yet, or how has this developed, you know, into the, into the current era?

Steven Sinofsky 39:47 The easiest

Steven Sinofsky 39:48 way to view the wake-up call is, is through the lens of COVID.

Erik Torenberg 39:52 Right.

Steven Sinofsky 39:52 I, I think. Which is 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 knitting and what you do well, it turns out it's, it's actually pretty fragile.

Erik Torenberg 40:06 Yeah.

Steven Sinofsky 40:07 And it's fragile because there's single points of failure all over the place.

Erik Torenberg 40:11 Yeah.

Steven Sinofsky 40:12 And, and in this case, the single point of failure turned out to be like, well, you can't go all... If this city is closed, no one can go into the factory.

Erik Torenberg 40:20 Yeah.

Steven Sinofsky 40:20 And then if, if transit is closed, then the stuff can't make it. And so I, I just think COVID was the wake-up call for the whole system. And of course, at the national security level, it's, it's massively important now because, you know, you can't afford to have a, a nation shut down-

Erik Torenberg 40:40 Right

Steven Sinofsky 40:41 ... because of these things. And 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, that you go, "Well, that's, that's sort of a problem." Now, the Defense Department long ago figured this out for, like, guns and rockets. Like, those are all made in the US. Like, you know, the, the military sidearm is a Beretta pistol, which is, uh, the oldest company in the world in Italy. And, you know, the first thing Italy did to win the bid was set up a factory in the US. And so good news, we have plenty of sidearms-

Erik Torenberg 41:12 Yeah. [chuckles]

Steven Sinofsky 41:12 ... that we could throw at the drones or something. Uh, you know. But drones is the opposite end of the spectrum. Like, all of a sudden, drones are the most important thing, and like, all of a sudden, we were like, we don't even... We don't, not just we don't make the drone, we don't make any of the parts for the drone.

Erik Torenberg 41:27 Yeah.

Steven Sinofsky 41:28 And they're all made... The only person who makes them is our enemy-

Erik Torenberg 41:31 Yeah. [chuckles]

Steven Sinofsky 41:31 ... so to speak. So this seems-

Erik Torenberg 41:33 Yeah

Steven Sinofsky 41:33 ... to be a problem.

Erik Torenberg 41:34 And so let's say Trump brings you in and says, "Hey, I've noticed that, uh, you know, nearly all of computing is, uh, you know, every layer of the stack is, is done in China and, and, you know, Asia more broadly, uh, and I'm trying to sort of decrease our dependencies. Um, Microsoft man, what, what should I do?" [chuckles]

Steven Sinofsky 41:50 Well, obviously, there are much smarter people who know more and have much more at stake than I do trying to solve this. I, I mean, you have to do it.

Erik Torenberg 41:58 Yeah.

Steven Sinofsky 41:58 Like, it, I... The thing is, it, it goes against all these academics that were experts in 2000 that said it was good.

Erik Torenberg 42:04 Yeah.

Steven Sinofsky 42:05 But they didn't think about all of these. Like, nobody thought that the dependency would be on, on, you know, sort of the replacement for the Soviet Union in terms of-

Erik Torenberg 42:14 Yeah

Steven Sinofsky 42:15 ... longtime enemy. And, and so you, now you, you know, no more would we be dependent on the Soviet Union for something than we would be on, on China. Like, you, there's no choice i-in that matter. Now, hopefully, our détente with China is already vastly more open than anything that up until 1990 that the Soviet Union was. So we're in a very good, sort of peaceful situation there. But that doesn't change the posture.

Erik Torenberg 42:43 Yeah.

Steven Sinofsky 42:44 And so, you know, Apple is, like, doing this experiment. It's obviously more than an experiment to build in India, which solves their problem. It doesn't necessarily solve the, the current administration's view of the solution.

Erik Torenberg 42:58 Right.

Steven Sinofsky 42:58 I mean, 'cause if you think of it, like the other part of free trade that inverted, twisted and, you know, split the party, the political parties in half in the US was NAFTA in, in the early 1990s, which was like free trade with Canada and Mexico. What could be, uh, more of a no-brainer?Well, it turns out it was also the global view of things

Erik Torenberg 43:19 Yeah

Steven Sinofsky 43:19 Like, in fact, NAFTA, half the Democrats voted against it, half the Republicans voted against it, the same as WTO kind of stuff. And, and here we are like, well, that meant that all the jobs just moved to Canada and Mexico.

Erik Torenberg 43:32 Yeah.

Steven Sinofsky 43:32 And, and, you know, long term, also not having employed people is a bad thing. It doesn't matter if it's manufacture or anything. It's just like-

Erik Torenberg 43:39 Yeah

Steven Sinofsky 43:40 ... weird that just being across a border would so substantially change the economics of what's made.

Erik Torenberg 43:46 Yeah.

Steven Sinofsky 43:46 I mean, especially when you literally just drive the parts back and forth through Texas-

Erik Torenberg 43:49 Yeah

Steven Sinofsky 43:50 ... is kind of weird, or Minnesota or whatever. And so, so I think this reset is happening broadly. I don't like the idea that, that the people who are very much in favor of this global world sort of ignore inherent risks of the polarized world, but also just immediately jump to, "No one's gonna pay five thousand dollars for an iPhone."

Erik Torenberg 44:09 Yeah.

Steven Sinofsky 44:09 I think, what an incredibly silly argument. Because if you were to look at an iPhone and think about making it by hand, you would go, "Well, it's gonna cost like a hundred thousand dollars each one." It's like a fancy watch.

Erik Torenberg 44:18 Yeah.

Steven Sinofsky 44:19 And so what-- the reason that it's a thousand dollars or fifteen hundred dollars or whatever is because of the innovation in manufacturing. So all that needs to happen is like another step function change in manufacturing. And of course, for decades, that's all Apple woke up and thought about. So they, they remained that whole operating mode of Apple's, of being-- sending zillions of people, being on the factory floor, desi- That's what they do.

Erik Torenberg 44:46 Yeah.

Steven Sinofsky 44:46 They rely on skills, but they are there inventing these things.

Erik Torenberg 44:50 Yeah.

Steven Sinofsky 44:51 And, and so, you know, if you look at, you know, the Apple, um, Apple Vision Pro, like it has all these lenses and all-- They were on top. They made all of that stuff. And so what they're gonna do is they're gonna focus on, "Okay, if we have to do this, we're, we're gonna also end up with giant factories of robots or better automation or new packaging technologies that don't require as many st-..." All the stuff that they have already the world leaders in.

Erik Torenberg 45:17 So you're, you're sort of optimistic or that this is a solvable problem that they can decrease-- that Apple can decrease its dependency and figure out whether it's French or Chinese.

Steven Sinofsky 45:25 I think everybody is in-- I know, I, I-- You know, it's easy 'cause of the book to focus on Apple.

Erik Torenberg 45:29 Right. But everyone's in that situation.

Steven Sinofsky 45:30 But like, everybody-

Erik Torenberg 45:31 Tesla

Steven Sinofsky 45:31 ... faces this problem.

Erik Torenberg 45:32 Yeah.

Steven Sinofsky 45:32 Like, you know, even if you make cars in Detroit that are really ma-man-manufactured-

Erik Torenberg 45:37 Right

Steven Sinofsky 45:37 ... and assembled in Canada, like, where do all the in-dash electronics and all the car computers come from?

Erik Torenberg 45:42 Right.

Steven Sinofsky 45:43 They're just flown in on a plane to be glued in. And so they're-- I, I'm, I'm not, I'm not just optimistic. I mean, this is literally how innovation happens.

Erik Torenberg 45:51 Yeah.

Steven Sinofsky 45:51 Like, innovation isn't invention. Invention is like, Woz just sitting around thinking, "What would be really cool to make?"

Erik Torenberg 45:58 Yeah.

Steven Sinofsky 45:58 But innovation is like, "This is the constraint that I have to work in."

Erik Torenberg 46:02 Yeah.

Steven Sinofsky 46:02 Like, "I'm gonna solve this problem." And nobody loves to do that more than engineers.

Erik Torenberg 46:06 Yeah.

Steven Sinofsky 46:07 And, and so like, if you're a packaging engineer, like in the software-

Erik Torenberg 46:11 Yeah

Steven Sinofsky 46:11 ... hardware motherboard, like this is like, you live for this. How do we reduce the steps? How do we reduce the components? How do we cram more in? This is like your whole-

Erik Torenberg 46:19 Right

Steven Sinofsky 46:19 ... focus in life.

Erik Torenberg 46:21 Yeah.

Steven Sinofsky 46:21 It's your mission. So of course, I mean like, yes, and they've been working on it. And so the way innovation happens is, the people who've been working on stuff go, "I have a totally better idea." And then you try it-

Erik Torenberg 46:31 Yeah

Steven Sinofsky 46:31 ... and like, "Oh, this one worked. The other thousand didn't work."

Erik Torenberg 46:33 Yeah.

Steven Sinofsky 46:33 I mean, that translucent case, like, it's not like people hadn't thought of making plastic cases before.

Erik Torenberg 46:39 Yeah.

Steven Sinofsky 46:39 And translucent plastic was like a thing. And then they sat down, and they just made it.

Erik Torenberg 46:44 Yeah.

Steven Sinofsky 46:44 'Cause you can build things.

Erik Torenberg 46:45 Right.

Steven Sinofsky 46:45 Like, that's a thing that happens.

Erik Torenberg 46:47 Yeah.

Steven Sinofsky 46:47 And factories are things that can be built.

Erik Torenberg 46:50 Yeah.

Steven Sinofsky 46:50 And so like, I, there-- I don't see any reason why. I just... I think that the mistake is either thinking that China is about cheap labor, or the mistake is thinking that for things to be made in the US, it has to recreate three hundred million migrant workers on buses working-

Erik Torenberg 47:07 Right

Steven Sinofsky 47:07 ... temporarily and going back home. Like, I don't know, that's just one way. That was their constraint.

Erik Torenberg 47:13 Yeah.

Steven Sinofsky 47:13 Like, their constraint was, "We have to employ all these people, but not let them move."

Erik Torenberg 47:17 Yeah.

Steven Sinofsky 47:17 That was their constraint. Like, "We have an idea. Let's build the factories in Shenzhen-

Erik Torenberg 47:21 Yeah

Steven Sinofsky 47:22 ... and get a bunch of buses and dorms."

Erik Torenberg 47:23 Yeah.

Steven Sinofsky 47:23 Problem solved.

Erik Torenberg 47:25 Right.

Steven Sinofsky 47:25 We have a different one. We don't have a hundred extra million people.

Erik Torenberg 47:28 Yeah.

Steven Sinofsky 47:28 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.

Erik Torenberg 47:36 Yeah.

Steven Sinofsky 47:37 Let's just solve, let's build things.

Erik Torenberg 47:39 And gearing towards closing here, you know, it, it felt inevitable to me, sort of that Apple, you know, would become this, uh, even much bigger than it is today in the sense of, I remember reading the stat of like-

Steven Sinofsky 47:48 Wait, I'm sorry, much bigger than, like, the [laughs] biggest company in the world much bigger?

Erik Torenberg 47:52 Only because, you know, nine out of ten, um, I think high schoolers, um, you know, prefer Apple products. Uh, uh, so if you sort of... When they get to college, when they graduate, like, why isn't sort of iPhone market share much bigger? Why wouldn't it just keep getting sig-significantly bigger? Uh, not, not just in phone, but also in, in, um, sort of laptop, desktop as well. And so the, um... But when you look at the risks, maybe sort of it's this, you know, the, the China situation just drastically increases prices if, if something were, were to materially happen in the short term, or maybe there's a new form factor that Johnny Ive at OpenAI or, or someone else figures out that replaces the phone. That doesn't seem, uh, super likely in, in the short term. But how, how do you sort of r-r-react to that, to sort of... Yeah.

Steven Sinofsky 48:34 Well, I, I think, you know, look, people always think that, like, like you're either in the school of things are just gonna keep going like they're gonna go forever, or like, "Idiot, this thing is over. There's already a new thing." But there's like, you can't buy or touch the new thing. And we are in that in-between space right now, and I do think that, um, that it's, it's highly likely that, that new ways to make things will get figured out.

Erik Torenberg 49:00 Yeah.

Steven Sinofsky 49:00 It's highly likely that it's gonna get much more competitive in phones only because the target is a little bit more stable.

Erik Torenberg 49:08 Yeah.

Steven Sinofsky 49:08 And the best way to think of it is, like, Macs are, you know, half the laptop market i-in the US at this point.You know, not quite, but with segments. And, and so nobody thought that would ever happen.

Erik Torenberg 49:22 Yeah.

Steven Sinofsky 49:22 But that's partially because the, the reason that could happen is because the use case for laptops stagnated at about two thousand. And so all of a sudden, I'm basically running a browser and Microsoft Office.

Erik Torenberg 49:34 Yeah.

Steven Sinofsky 49:34 And if you're doing that, a Mac module of the differences in Office is roughly the same. And, and so then if they're, the price is the same at one thousand dollars, why not? Half the market i-is always gonna view it as a price point. Like, and one thousand dollars is two hundred dollars more than seven hundred dollars. And, and so a certain amount of the market is gonna buy the phone that's free with the plan, and that's just gonna happen. But more and more of the market will see the phone as, like, a, a positive, uh, um, you know, a positive part of life and be willing to invest in it.

Erik Torenberg 50:10 Right.

Steven Sinofsky 50:10 Like any branded item, and I, I think that's gonna happen. So I, I don't-- But I don't know what's gonna happen on the device side. I, I think generally speaking, the form factor is gonna last much longer than even the most optimistic people think. I mean, you know, there's-

Erik Torenberg 50:24 Yeah

Steven Sinofsky 50:24 ... like, a lot of people running PCs still.

Erik Torenberg 50:26 Yeah. [laughs]

Steven Sinofsky 50:26 You know, even though nobody in Silicon Valley knows that. And, and I, I-- but I, I, I think, like, it's just gonna be up for grabs. Like, there's no, n-nothing written anywhere. Bill Gates used to always, always, always have to remind people that, you know, Microsoft, any day, somebody could just show up and do a better-

Erik Torenberg 50:47 Yeah

Steven Sinofsky 50:47 ... version of everything Microsoft does because it's software. And the, the, the, the economy of scale, all that stuff isn't the barrier that people used to think. Manufacturing devices specifically has a barrier, but also because of the automation, because of all this work that's gone on, that barrier is just gonna drop. In fact, it has dropped. The only reason that there are so many amazing Samsung phones is 'cause they've all seen the movie.

Erik Torenberg 51:10 Yeah.

Steven Sinofsky 51:11 Like, they know what to do.

Erik Torenberg 51:12 Yeah. Is there anything else you want people to, to take either from, from this book or from this c- th-this conversation, kind of in summary?

Steven Sinofsky 51:18 Well, I, I, I think I, I would sort of just drill down on one issue that I just think is, is super important for people to really consider in the competition between the US and China-

Erik Torenberg 51:26 Yeah

Steven Sinofsky 51:26 ... and also how it relates to AI, which is the difficulty we're all gonna have collectively to navigating the world of intellectual property.

Erik Torenberg 51:33 Yeah.

Steven Sinofsky 51:33 You know? I, I just think, I think it's very, very easy to say China doesn't respect intellectual property, so they can't be part of the world stage flat out. I mean, they've crushed the pharmaceutical industry that way. You know, what they've done with BYD and Tesla, arguably pretty rude and stuff like that. But on the other hand, it's just as easy to say, well, because of AI, all knowledge, all content, all information just needs to be free to train and to reuse. N-neither of those are realistic positions. And, and I, I think that this issue is far more subtle and far more important than, than I think either China thinks or the sort of the digerati in the US think. And I, I believe that that's one that's gonna need a lot... And I worry about wild cards.

Erik Torenberg 52:19 Yeah.

Steven Sinofsky 52:19 Like, I worry about the European Union going crazy in one direction or another and passing some rule, then all of a sudden, that market is weird.

Erik Torenberg 52:27 Yeah.

Steven Sinofsky 52:27 Or Japan, which was like, went the other way because they have a language challenge-

Erik Torenberg 52:31 Yeah

Steven Sinofsky 52:31 ... which is Japanese. Like, they could just, they're in control of Japanese, so they just said, "Yeah, we could train anything here."

Erik Torenberg 52:36 Yeah.

Steven Sinofsky 52:36 But it's like, yeah, but that's just Japanese.

Erik Torenberg 52:37 [laughs]

Steven Sinofsky 52:38 Or is it a loophole for English? We're not really sure.

Erik Torenberg 52:40 Yeah.

Steven Sinofsky 52:41 And so I think that that issue is the one where policymakers need to spend the most time, but it's also structured in the US that it's just, it's a litigation issue.

Erik Torenberg 52:50 Yeah.

Steven Sinofsky 52:50 And there's no way around it.

Erik Torenberg 52:51 Yeah.

Steven Sinofsky 52:51 So we're in for years of kind of market uncertainty over how this plays out, and that's been a core part of Apple's advantage, has been their ability to maintain the intellectual property of a s- of s-components-

Erik Torenberg 53:03 Yeah

Steven Sinofsky 53:03 ... and manufacturing and assembly, and, and now that's dispersed.

Erik Torenberg 53:08 Yeah. Yeah. That's a, a good place to, to end. Steven, this has been a fantastic conversation. Thank you so much for coming on.

Steven Sinofsky 53:14 Thank you. It was great to be back together. [upbeat music]