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Biting the hand

There is a huge change occuring in the way companies have been developing our tech products for the past three decades. Check the label on nearly all tech products and accessories and you’ll usually see Made in China. Sometimes it will say Made in China and Designed in the U.S. or designed in California. It’s been the result of a close collaboration between U.S. and Chinese companies that began in the 1980’s and has been growing rapidly up until this year. But that collaboration is now going through a major disruption because of China’s new government led by President Xi Jinping.

Thousands of companies have been sending their employees to China to work with local companies to develop and manufacture technology products. Apple typically sends hundreds every day. This collaborative effort between U.S. and Chinese companies has allowed our companies to expand its product offerings and produce their products at lower costs. While it also led to the loss of our manufacturing jobs because we were unable to compete with their low labor costs and their local source of components, many US companies have prospered and grown, creating more high paying jobs here, and outsourcing the low paying work to China.

Typically the initial design, refinement, and testing would be done in the U.S. Then the Chinese partner, under close supervision of U.S. engineers, would refine the design for mass production, build an assembly line, create test fixtures, and scale up production.

We’re rapidly seeing much of this come to an end, now that onerous new rules have gone into effect in China, such as allowing the governement to detain and arrest visitors without due process. In fact, our governement has issued a warning against traveling to China. This is a startling change.

Nearly thirty years ago when I brought Apple’s first products to China, I was following the recipe that others like Dell, Compaq, and Sony were doing at the time. That model has been used by nearly all consumer tech companies throughout the world.

But President Xi’s national-security agenda of attacking what he perceives as foreign threats has suddenly uprooted this model. According to the Wall St. Journal, “China’s exports contracted in June at the fastest pace since the start of the Covid-19 pandemic…..and… is yet another indication that China’s leaders will not be able to entirely count on external factors in reviving the faltering growth momentum in the world’s second-largest economy.”

Xi is simply biting the hand that feeds him and cannot put American engineers in danger, while expecting collaboration in new products. Perhaps he doesn’t understand how his policies are impacting this relationship or perhaps he’s just ignorant. But what he is doing will only make matters worse and further tank his economy. He’s turned a win-win policy into a lose-lose one.

What does that mean for future tech products? We’re alreading seeing it: an accelerated flight from China to Taiwan, Vietnam, Korea, Indonesia, India, Mexico, and the U.S. Apple, who has a huge presence in China, is already building millions of iPhones in India. They have no choice as their dependency on China is an existential threat. I’m sure it keeps Tim Cook up at night.

At the same time Chinese companies will be on their own and will need to design and develop their own products for worldwide markets. We see many of their products on Amazon now with thousands of Chinese companies selling accessories and lower tech products directly to customers. While China on its own is already building electric cars, cellphones and other sophisticated appliances, they’re not going to find us such a willing customer.

The point is the world has become so dependent on one another that Xi will find he can’t untangle those relationships without seriously damaging China.