It’s always nice when someone else confirms one’s own experience and conclusions. In this situation, perhaps “nice” is the wrong word, but I’m glad I’m not alone in the experiences that SVB and I had in China. Even Apple did not succeed in China. Read on.
Apple in China
Not long ago a new book was released—Apple in China, by Patrick McGee. It’s fabulous. Patrick McGee is an experienced China hand, having written for both the Wall Street Journal out of Beijing and then for the Financial Times from Hong Kong. His book tells the entire history of Apple’s China adventure, in considerable detail. This adventure does not end well.
The story told in my own book about Silicon Valley Bank’s (SVB’s) China adventure, The China Business Conundrum, which came out last November, did not end well either.
Central to my book is my description of what I call the “arc.” The arc refers to the pattern of the evolution of many, if not most, western companies that take their business to China. When we (my wife and I) came back to the U.S. from our four years in China at the end of 2014, I tried to talk to some people at Apple about SVB’s experiences, thinking that Apple might end up experiencing a similar arc. I made no headway whatsoever. Either I just wasn’t at all convincing; or I wasn’t talking to the right people; or Apple, notwithstanding its enormous size and wild success not just in the west but in Asia as well, was oblivious to where it was heading and what might lie in store for it somewhere down the road. In any case, I got nowhere.
As a result, I was both shocked and then again not so much when I read this book about Apple’s experience in China. At a high level, Apple’s experience was similar to ours. In other words, the pattern of our arcs looked awfully similar.
Let me explain. There are, of course, many points on an arc. However, a description of the high points usually serves to define the nature and fundamental pattern. SVB’s arc looks like this:
1) We were seduced. Of course, willingly. In 2009, our “sponsor,” the Party Secretary of the Yangpu District, one of the approximately 19 districts in Shanghai, introduced us to Yu Zhengsheng. Yu was the Party Secretary of all of Shanghai at that time. In 2012, after Xi Jinping came to power, Yu was elevated to the Standing Committee. In other words, he became of the of seven most powerful people in China, at least formally.
It was Yu who “seduced” us. I remember it so clearly. Yu and I sat in a conference room, each accompanied by a member or two of our teams. Yu told me that his team had researched the entire world and had concluded that our bank, SVB, was the most important bank in the entire world—at least relative to what China wanted to achieve, elevating themselves to first-world status in terms of their technological knowledge base. We knew how to finance technology companies, especially startups. They needed us in China, and Yu himself would pave the way for us. He would help us get the banking license that we were seeking.
Having stated his goal and his willingness to help us achieve our goal, he lathered us with compliments. Our bank was THE most important. More important than Morgan Stanley. More important than Goldman Sachs. And I, Ken Wilcox, was one of the smartest Americans he had ever met. I really understood China, he said. I knew I was being played, but I can assure you, it felt good, and I believed it was bringing us closer to our goal, a license to do business in China.
2) We were hamstrung. We received a license, and were then tied up in arbitrary regulation so that we couldn’t use it. About two years after my meetings with Yu, and a year after we had actually moved to China, SVB was granted our license. And it was useless.
First of all, it turns out that operating a bank in China requires about 20 different licenses, one for each discreet banking activity: a license to open checking accounts, a license to open savings accounts, a license to make working capital loans, a license to make term loans, a license to exchange currency, etc. The list goes on. You even need a license for a website that enables clients to move money. And you can’t apply for it until your bank has been in business for at least a year! Our license entitled us to call ourselves a “bank” and nothing more.
But it gets worse. We then learned that we wouldn’t be able to even start applying for additional licenses and actually doing business for at least three more years. There was a law in China, they told us, that precluded any new bank with any foreign ownership from using Chinese currency for three years. Without being able to use Chinese currency, we could not do any business in China anyway. What we had been granted, after all that flattery about how important we were, was a license to wait three more years. It was like a license to open a fully staffed restaurant, but not being able to serve food for three years. It was a license to do nothing.
No, no, no, the Chinese government assured us. There was plenty to be done. We should try to be “good citizens,” like our hosts were. “Chinese help each other,” they said. We should spend the next three years teaching other (Chinese) banks our business model, so they could help finance Chinese technology startups, while the market waited for us to catch up.
3. We were robbed. The third point that defines our arc came three years later, when the Chinese government came to us with good news. We could finally begin using Chinese currency. Oh, and one other thing in passing: They so admired our business model that they’d decided to start a new bank of their own, using our business model. It would be opening in three weeks. However, the new management team did not yet fully understand our business model (probably because we had not been allowed to do any business, so there was nothing to observe and emulate…that is, copy.) Would we be so kind as to spend some time with this new management team, helping them to understand some of the things about which they still had questions? I pointed out that the Chinese government was our joint venture partner in our bank, Shanghai Silicon Valley Bank. Therefore, they already owned half of our bank and didn’t even need this new bank. “Yes, yes, we know,” they assured me. But they wanted a bank of their own. So much for partnership.
Such was our arc. To learn what the rest of our story looked like, buy my book, The Chinese Business Conundrum, from your local bookstore or Amazon.
Hence, particularly after Apple had shown no interest whatsoever in my warnings ten years earlier, I was surprised (and, admittedly, somewhat gratified) to learn that over time, Apple’s arc revealed a shape similar to that of our own.
I read Apple in China last week. I’m a slow, deliberate reader. It took me 16 hours. Here are some of the high points:
Apple was encouraged to embed itself in China. It wanted to find low-cost manufacturing, in order to increase its margins. Out of this quest emerged the tagline, “Designed in California, Manufactured in China.” However, by the time Apple reached the other end of the arc 17 years later, it appeared that more than just manufacturing had migrated to China. By the early 2020s, Apple had in some ways become a Chinese company, in terms of how much of its value-added came out of China versus California.
Tellingly, California had sent its engineers to China for many years to teach those in the factories exactly how to manufacture the iPhone. But in the 2020s, when Apple attempted to set up a (comparatively) smallish factory in the U.S. to provide a backup, it had to send a multitude of Chinese engineers from China to the U.S. to help this new factory get up to speed.
According to the book, Apple spent billions of dollars each year for many years, cumulatively a far larger amount of DFI (direct foreign investment) in developing Chinese knowhow than any other U.S. company in U.S. history. McGee claims that Apple did more to transfer technological skill to China than any other U.S. company and more than of all the others combined. In some sense, by the later part of this arc, Chinese “vendors” controlled Apple to a greater extent than Apple controlled its Chinese vendors.
But it doesn’t stop there. Somehow, all that knowledge found its way into smart phones being made in China by Huawei, which now has greater market share in China than the iPhone. And Huawei-made smart phones are increasing their global share as well.
One of the author’s conclusions, with which I wholeheartedly agree and which took me years to understand—but apparently took Apple even longer— was this quote from an Apple executive (p. 226): “We approach everything from this Western mindset of fairness. The Chinese approach it from positional power — who’s got more strength?”
Apple in China is available from Amazon and your local bookseller.
Ken’s insights never fail to deepen my understanding of China’s complexities. Grateful for your perspective, Ken.
Ken-great summary. I’m still reading the “Apple in China” book.