Beijing

"The initial business model was hotel franchising, which is common in the West. We used Ctrip’s marketing power to attract three-star hotels to adopt the Home Inn brand. Though facilities, quality of service and pricing varied, we persevered with the brand. But the hotels had different operators and many hotels displayed two brands. This profit model brought in little income because brand identity was not distinguishable enough Also, financing was not smooth. Neil Shen and I visited numerous venture capital companies in Beijing, but it never resulted in anything. No one…"

"I came to this view as a Canadian who has spent almost equal amounts of time living in the United States and China. To me, these two countries are thrilling, maddening, and, most of all, deeply bizarre. Canada is tidy. I sometimes find myself relaxing as soon as I cross into its borders. Drive around America and China, on the other hand, and you’ll see people and places that are utterly deranged. That’s not a reproach. These two countries are messy in part because they are both engines for global change. Europeans have a sense of optimism only about the past, stuck in their mausoleum economy because they are too sniffy to embrace American or Chinese practices. And the rest of the world is either too mature or too young to match the impact of these two superpowers. It is Americans and Chinese—Silicon Valley, Shenzhen, Wall Street, and Beijing—that will determine what people everywhere will think and what they will buy."

"The Chinese state builds gleaming public works and doesn’t flinch from locking up ethnic minorities or locking down whole cities. Too many outsiders see only the enrichment or the repression. Living there puts you face to face with both a sustained rise in living standards and the authoritarian pulses emanating out of Beijing. It became no contradiction for me to appreciate that things are getting better *and* getting worse. I saw how China is made up of both strong entrepreneurs *and* a strong government, with a state that both moves fast and breaks things *and* moves fast and breaks people."

"But the capital is also a city of gravity and substance. Beijing attracts many of China’s smartest people, including scientists, technology leaders, and those seeking to advance in the Communist Party. The po-faced members of the Politburo don’t fool around. Greatness isn’t only a slogan for them: It’s a full-on, life-or-death pursuit. Beijing, for the rest of this book, stands in as the Communist Party and the central government. China’s leaders are driven by intense paranoia, doing everything they can to control the future."

"The year 2008 offers a direct comparison between California’s speed and China’s speed. That year, California voters approved a state proposition to fund a high-speed rail link between San Francisco and Los Angeles; also that year, China began construction of its high-speed rail line between Beijing and Shanghai. Both lines would be around eight hundred miles long upon completion. China opened the Beijing–Shanghai line in 2011 at [a cost of $36 billion](private://read/01k3jwt46q240aq6fe12mqkyr0/16_Notes.xhtml#_idTextAnchor281). In its first decade of operation, it completed [1.35 billion passenger trips](private://read/01k3jwt46q240aq6fe12mqkyr0/16_Notes.xhtml#_idTextAnchor282). California has built, seventeen years after the ballot proposition, a small stretch of rail to connect two cities in the Central Valley, neither of which are close to San Francisco or Los Angeles."

"Liupanshui locals greeted Li’s plans mostly with skepticism. Though their region is home to waterfalls, karst caves, and stunning green mountains, the city itself has little of beauty. Local industry consisted of coal and iron mining. One man wondered to a TV crew, “We don’t have much to see here. How much money would we have to spend to create something worthwhile?” Li Zaiyong believed a great deal, and he mobilized a great deal of funds to make things happen. Since he was the top official in the city, local banks had a hard time saying no to him. But none of Li’s efforts bore fruit. Liupanshui never developed into an appealing ski destination: China’s skiers went to the northeast in the winter, which has real slopes and real snow. Richer tourists from Beijing and Shanghai skipped Li’s gaudy European facsimiles for the real deal in Venice and Vienna. The faux European town squares have been taken over by local black goats, which treat the lawns as grazing grounds. Even the chestnut rose bushes died."

"Low-wage ecosystems like Shenzhen became a giant magnet for US process knowledge. Beijing made a deliberate decision not to be like Japan, which kept its market limited to American companies; rather, China mostly welcomed foreign manufacturers to train its workers. It is some sign of China’s economic openness that so much of its exports are driven by Apple and Tesla, while Japanese exports have been driven almost entirely by its own companies. After it built up a critical mass of process knowledge, however, Shenzhen became as much an innovator of new electronics as an implementer of American ideas."

"A focus on manufacturing gives China another advantage in technological competition with the United States. It can simply wait for American scientists to do the fundamental research before Chinese companies take over the production. That is, in essence, what happened with the solar industry. Bell Labs invented the first solar cell, and German companies produced solar production equipment. Beijing’s designation of solar as a “strategic emerging industry” invited Chinese companies to rush into this industry. Chinese companies bought German equipment and competed fiercely to make the most efficient solar cells. By the mid-2010s, Chinese companies figured out how to make all the German tools, as well as the entirety of the solar value chain. The plunge in solar power costs over the last decade has been driven less by breakthroughs in science—which is the United States’ strong suit—than by efficient production, which is China’s strength. The beneficiaries are not only the climate but also China’s national power."

"“We will add 3,000 kilometers of urban rail transit” states the section on mass transit. The plan specifies the sections of highways and high-speed rail that it will build. It has major targets for energy: “We will build hydropower bases on the lower reaches of the Yarlung Tsangpo River,” which will have triple the power-generating capacity of the Three Gorges Dam, and the construction of ultra-high voltage transmission lines to connect power from the country’s west to east. It has a plan for climate change, especially water management. Beijing will work on the South-to-North Water Diversion Project, which feels like a throwback to the Grand Canal of the seventh century AD. It involves a gigantic effort to draw water from China’s southern rivers toward its parched northern cities, along three canal systems, targeting completion in 2050. The plan envisions the creation of large water reservoirs across the country and the construction of major flood-control projects."

"Shenzhen was China’s greatest boomtown and, therefore, the world’s. [Its population soared](private://read/01k3jwt46q240aq6fe12mqkyr0/16_Notes.xhtml#_idTextAnchor344) from three hundred thousand in 1980 to seven million in 2000 and eighteen million in 2020. For many Chinese, who are intently judged on the region they’re from, Shenzhen was a land of opportunity where no one was a local. One of the city’s slogans, still occasionally found on billboards, reads, “You’re a Shenzhen local the moment you’re here.” It’s a poke at Beijing and Shanghai, cities where older families maintain a certain exclusivity (as they might in Paris or London)."

"It’s not clear to me that it was part of Beijing’s grand strategy to rely on American companies to become a manufacturing leader. But in some cases, the state understood that’s what they were doing. Beijing did something unprecedented for Tesla in 2018: It allowed the company to fully own its plant in Shanghai. Previously, any automaker that wanted to produce in China had to partner with a domestic company. So Japanese, German, and American companies dutifully partnered with state-owned enterprises in order to access the enormous market. The state had hoped that these domestic companies would learn from the likes of Toyota and Mercedes-Benz and match their quality. In reality, Chinese automakers were sluggish from their research dependence on their foreign friends."

"BYD was founded in 1995 and is a private high-tech enterprise. At the beginning of its establishment, BYD had only 20 employees and was virtually unknown in Shenzhen, a city filled with many enterprises. However, unexpectedly, 14 years later, it developed into a high-tech private enterprise listed in Hong Kong. Now, BYD has built nine major production bases in Guangdong, Beijing, Shaanxi, Shanghai, and other places, covering nearly 7 million square meters in total area, and has branches or offices in the United States, Europe, Japan, and other places, with a total of more than 130,000 employees and total assets of nearly 35 billion yuan."

"BYD Automotive has built a first-class R&D center in Shanghai, with an automotive R&D team of over 3,000 people, obtaining more than 500 national R&D patents each year. To date, BYD has established four major automotive industry bases in Xi’an, Beijing, Shenzhen, and Shanghai, reaching an international leading level in aspects such as vehicle manufacturing, mold R&D, and vehicle model development. The ultimate goal of BYD’s development is to utilize its unique global technological advantages to find the best solution for human society entering the "automobile society," addressing issues like energy shortage, clean environment, and convenient living."

"Apple’s messaging wasn’t public, but if it had been, it would’ve turned received wisdom on its head. In 2017, a *Wall Street Journal* article had opined: “Longer term, though, Apple’s business is out of step with the Chinese government’s goal to reduce its dependence on expensive foreign technology, and facilitate the development of homegrown competitors like Huawei.” In fact, the opposite was true. The technology transfer that Apple facilitated made it the biggest corporate supporter of Made in China 2025, Beijing’s ambitious, anti-Western plan to sever its reliance on foreign technology."

"Guthrie argued this was a mistake. And he was purporting to solve a major riddle: why Apple was perceived as a negative force in Beijing. Apple contributed greatly, creating millions of jobs and supporting a sophisticated supply chain that ricocheted well beyond its own needs. But its contributions were unknown because of Apple’s secretive, insular culture. He advocated something radical: Get the message out to everyone, sing it from the hilltops if necessary, until every government official understands just how much the country is gaining from Apple’s presence. “China wants the constant learning,” he says. “The fact that Apple helps bring up 1,600 suppliers for China—it’s an incredible benefit.”"

"In the years since, two narratives within Apple have developed regarding what happened in those eighteen days. One is that CEO Tim Cook underwent something of a twenty-first-century show trial: Beijing had deliberately accused Apple of something it knew wasn’t true, to demonstrate its power. The whole episode was a spectacle designed to make Cupertino understand its junior position in the partnership and then publicly kowtow. Some hard-liners in China certainly saw Cook’s apology this way: On social media one rejoiced that Apple had been compelled to “bow its arrogant head.”"

"It’s not merely that Apple has exploited Chinese workers, it’s that Beijing has *allowed* Apple to exploit its workers, so that China can in turn exploit Apple."

"The Guangdong Model is what made China the workshop of the world, particularly once Beijing took the blueprint and established it across the country."

"But if hindsight is twenty-twenty, a former senior designer at Apple says it looks like Beijing’s strategy was to “brain drain” Taiwan, learn everything that is needed, then “cash them out,” and take over."

"Apple’s ecosystem was being wildly underestimated. Whether it was the way its products synced content across devices or locked the consumer in, the company’s dual control of hardware and software acted as a protective moat from the onslaught of new competitors. Investors worried that cheap Chinese handsets would emerge as a massive threat—but they were more of a threat to Samsung’s dominance, not Apple’s. While Samsung, relying on Android, struggled to differentiate its phones and would see its sales in China plummet, Apple’s narrow focus on the high end paid off. In hindsight, Apple’s share price and media image were suffering for all the wrong reasons in 2013. The company *was* facing an existential threat—but it wasn’t from Android; it was from Beijing."

"Over the following three weeks, as the media attacks widened, Cupertino learned that treating Chinese government officials like vendors in their supply chain wasn’t going to fly. Only then did Cook pen an apology letter, in Mandarin, for Apple’s China website. (According to one person, the Apple CEO also flew to Beijing for a secret meeting with China’s top officials. “The Chinese would never accept a written apology,” this person says. “You have to lose face in front of them, and bow.”)"

"“The central government has control over personnel, whereas subnational governments run the bulk of the economy; and they initiate, negotiate, implement, divert, and resist reforms, policies, rules, and laws.” Such decentralization allowed for experimentation on a grand scale: what worked in Guangdong could be replicated in Shanghai. But Beijing was often patient: It waited for the results of these experiments rather than rushing ahead with them. This combination of decentralized decision-making, experimentation, and gradual adoption of new policies played a critical role in how China became a manufacturing powerhouse."

"Behind the basic principle was a wider legal history in China. Unlike the Rule *of* Law developed in the West, Xi was returning China to a Rule *by* Law tradition, a system of governance dating back more than 2,000 years. Rule *of* Law is about creating an impartial framework; Rule *by* Law is about controlling the population—or in this case, nudging corporate behavior. Beijing was not *explicitly* demanding anything for market access—that was illegal under WTO rules. But it was redesigning the system to make wink-wink arrangements more likely. As one Western businessman living in China at the time characterized the changes, “voluntary is the new mandatory.”"

"The flexibility of this exploited population was instrumental in China’s rise. There was no way Beijing was doing away with it; instead, the regime was designing legislation to compel companies like Apple to respond with favors. The labor dispatch law was federal, but enforcement was local. So if Apple realized its operations ran afoul of the new rules, it had three choices: overhaul the way it did business; leave China; or find out what the local officials wanted. In this circuitous fashion, Beijing was telling Western corporations that if they wanted access to China’s 1.4 billion people, they’d have to give up something."

"Terry Gou’s bet exemplified his tenacity, ambition, and daring disposition. What made him such a good competitor was his ability to predict his clients’ needs before his clients did. By the time Apple realized it needed to double production of some hit product, Foxconn would’ve already increased capacity by expanding its factory and moving the precision machinery into place. But more than that, the bet demonstrated Gou’s political savvy. When the global financial crisis hit, big investors and entrepreneurs based in Taiwan and Hong Kong retreated from China, a natural response, as demand for goods from North America and Europe sputtered. Gou, by contrast, was willing to invest, and he did so in ways that aligned his political interests with Beijing’s."

"Speaking to Cupertino, Ford struggled to convey just how powerful the demand was. One time, when he told an Apple executive visiting Beijing that he needed such and such number of iPhones, the executive looked incredulous. “You’re asking for a quarter of the entire planet’s supply of iPhones!” Ford looked back at the executive. “Yes! Welcome to China!”"

"The situation escalated until, after eleven p.m., central authorities in Beijing called in an elite special unit of police—100 guys wearing all black with expressionless faces that, according to a person present, handled security for senior members of the Chinese Communist Party. Another person present called them “the SWAT team.” This elite unit directed Apple store managers to cut the security cameras, cordon off the staff, and isolate the whole area. The black-clad cops told the villagers: “You’re either going to leave voluntarily or leave in body bags.” As the size of the crowd dwindled to under 1,500, a young female villager pulled out her smartphone to snap a photo. A member of the elite unit of enforcers knocked her on the floor, grabbed her by the scalp, and dragged her behind the Genius Bar. “They beat her pretty badly,” says a person present. Fourteen years after the episode, he still has nightmares about it. “She was screaming in pain.” For the next forty-five minutes the other villagers were beaten one by one. Part of the tiled floor was left so bloodstained that Apple had to replace the stones. Employees present had their phones wiped. No record of the event exists. “It shows you how quickly the Chinese can brush everything under the carpet,” says a person present. “It was like a mini–Tiananmen Square.”"

"In light of Xi’s other actions, the *Consumer Day* attack on Apple the year before didn’t look, to Guthrie, like some one-off misunderstanding that Cook had neatly solved with an apology. It was a signal that Apple was in trouble. Guthrie began to see that Beijing was pivoting in ways that were bound to catch Apple off guard. It was becoming clear Xi would welcome foreign corporations only if they were “in China, for China”—and if they didn’t like it, they could leave. Guthrie began to fret that Apple’s enormous operations and retail presence in China were at great risk."

"Hard-liners in Beijing had viewed Apple as an exploitative power because through their conventional lens, it looked that way. Samsung had several dozen formal partnerships in the country; Apple had none. Samsung had its own manufacturing plants; Apple had none. But Guthrie’s argument turned this logic on its head. He emphasized that Apple was embedding its top engineers into more than 1,600 factories, making a few dozen partnerships look paltry. The difference was that the likes of Intel and Samsung were trumpeting their joint ventures and investments in the country, while Apple was silent. Worse, Apple was allowing Foxconn to take credit for all manner of investments that ultimately traced back to iPhone and iPad demand."

"Qualcomm’s case was the most public. China possessed great leverage over the California-based chip designer, an instrumental force in creating the 4G and 5G tech used in smartphones. The case has broadly been seen as a shakedown. Qualcomm revenues rest on being paid a licensing fee for every smartphone using its technology. As China became the world’s largest market for smartphones, Beijing demanded the fees be cut. Qualcomm put up a fight, but there was little it could actually do. In 2015 it agreed to launch a joint venture and pay a $975 million fine, the largest in China’s corporate history, to end the state’s three-year antitrust investigation. “They held us hostage for a billion dollars and stole our intellectual property. And there was no negotiating. We were just grateful that we got to keep our business model,” says one Qualcomm executive. During one ten-day period, two Qualcomm executives say the company grew so concerned about arrests that it stopped sending its people to the country. “We were afraid they would get kidnapped,” says one. The single negotiator Qualcomm did send opted to sleep on the company’s private jet during his stay. “He’d go to the meetings, but then he’d go back to the plane and would spend the night [there].”"

"The regulatory move thwarted Apple as it expanded into entertainment and services, which made it more like a Google or a Facebook. Bloomberg noted that Apple had been “allowed to grow almost unimpeded in China” in the previous decade, but now it looked like Beijing wanted to tilt the field in favor of domestic companies."

"Cook had cautiously chosen to broadcast Apple’s $275 billion deal with Beijing quietly, so Cupertino needed to take other action as well. In effect it deployed a two-track approach. The private investment demonstrated its positive impact across multiple industrial clusters, while a second track would more publicly showcase new partnerships, more job creation, and the local R&D hubs. Liu might not have known all the details of Apple’s predicament, but she was no amateur in getting deals done with strategic rivals and potential partners."