This is an audio transcript of the FT News Briefing podcast episode: ‘Apple’s bargain with Beijing

Sonja Hutson
Good morning from the Financial Times. Today is Monday, November 14th, and this is your FT News Briefing.

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FTX is in bankruptcy and the crypto world is on edge. The Fed is entering a trickier phase of monetary tightening. And the FT’s Patrick McGee tells us how Apple became the most profitable tech company in China.

Patrick McGee
There’s just a symbiotic relationship between Beijing and Cupertino.

Sonja Hutson
I’m Sonja Hutson, in for Marc Filippino, and here’s the news you need to start your day.

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The week begins with one of the largest US cryptocurrency companies in bankruptcy. FTX founder, Sam Bankman-Fried, couldn’t come up with the billions he needed to meet a flood of customer withdrawals. Over the weekend, our correspondents learned that FTX had less than $1bn in liquid assets and 9bn in liabilities. Here’s the FT’s Josh Oliver on what’s next for FTX.

Joshua Oliver
You know, the filing says there’s between 10 and 50bn of assets and liabilities in play, over 100,000 creditors. So this is gonna be, you know, a really long and complicated process as the bankruptcy practitioners just try and get their heads around, you know, where are the assets? And the more we learn about how FTX was run, the more kind of chaotic it appears. I think we’re looking at, you know, probably a years-long process at the very least.

Sonja Hutson
So Josh, what concerns does this raise about the broader crypto industry?

Joshua Oliver
FTX was viewed as solid, whereas some of the others that have fallen were already viewed sceptically in the crypto community. So for FTX to go down is a real crisis of confidence for crypto. And what we’ve seen is an immediate pressure for other exchanges that survive to be way more transparent with what assets they actually have. And that pressure is undoubtedly gonna continue and also, I might think, kind of dovetail with regulatory efforts to make these companies much more accountable.

Sonja Hutson
What comes next? I mean, what are you looking out for in the coming days and weeks?

Joshua Oliver
The two big things to watch are contagion, you know, within the crypto market. Who is gonna be affected by this? You know, almost all the big players in crypto used FTX one way or another. We already had a story, my colleagues, about a hedge fund that had, you know, a significant number of its assets trapped in FTX, had to come out and apologise to its investors. So there will be other hedge funds, trading shops, lenders in the crypto world that will be scrambling to cope with the demise of FTX. And we already know that regulators in a number of countries, including the United States, are looking carefully at this. And there are a lot of hard questions to be asked. I think a lot of pressure for accountability. So that’s something to keep a very close eye on.

Sonja Hutson
That’s the FT’s asset management reporter, Josh Oliver.

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Markets begin the week on the back of a huge rally in US stocks on Friday. The euphoria came after a better than expected US inflation report. It showed that the Federal Reserve’s rate hikes are taking effect. And now the tough work begins. That’s according to the president of the San Francisco branch of the Federal Reserve, Mary Daly. She told our US economics editor Colby Smith that this next phase of policy tightening will be harder to navigate.

Colby Smith
Her chief concern here was the fact that at this stage of the tightening cycle, when rates are as high as they are, which is between 3.75 per cent and 4 per cent, that means that the Fed’s policies are just having a broader impact on the economy. And essentially, at this phase of the tightening cycle, the Fed has already done a lot of tightening that’s already in the system. But also, policy takes time to effect to the economy so that there are lags that they also have to deal with as well. And on top of that, there have been mounting concerns about financial stability risks as interest rates rise. So I think taken together, this is why she kind of came to this conclusion that the next phase of policymaking is going to be much more difficult. And that’s, you know, not necessarily a comforting thing to hear from a Fed official.

Sonja Hutson
That’s the FT’s US economics editor, Colby Smith.

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US president Joe Biden meets with China’s president Xi Jinping today in Bali. Their goal is to try and reverse the deteriorating relationship between the two countries. But the world’s two biggest economies are still tightly intertwined. To illustrate that point, consider that the number one most profitable tech company in China is an American company based in Cupertino, California. Yep, it’s Apple.

Patrick McGee
So it was first by a long shot.

Sonja Hutson
That’s our San Francisco correspondent, Patrick McGee.

Patrick McGee
So Apple made $31bn of operating profit in China alone last year. And that ended up being double the combined global profit of Tencent and Alibaba, China’s biggest tech companies.

Sonja Hutson
Patrick was stunned to learn this. He and our China technology correspondent, Ryan McMorrow, set out to find how this happened. Patrick joins me now to talk more about this. So Patrick, how did Apple become so dominant in China?

Patrick McGee
They did incredibly well globally during Covid-19, right? The work-from-home trend basically caused so many people to at least wanna have a really nice office set-up, right? And if you’re on your phone more, if you’re on your desktop more, you wanna upgrade. And that just also happened in China. Like, in 24 months, Apple’s operating profits more than doubled, which is really just incredible. The reason why this became interesting is because Beijing has really been clamping down on its own tech companies to prevent them from just dominating certain sectors and expanding into new ones. And so because their revenue and profits went down, that just made Apple’s success all the more achievable.

Sonja Hutson
And Apple wasn’t affected by the regulatory crackdown on technology?

Patrick McGee
No. (Laughter) It’s a simple answer. And that’s why we do allude to the sort of diplomacy from Cupertino, because, I mean, there’s just a symbiotic relationship between Beijing and Cupertino. Ninety-five per cent of iPhones are built in China. Even the ones that are built in India or Brazil are basically made from components that are still made in China and then sent to those countries. I believe there are upwards of 3mn people working in some fashion on the componentry and the assembly and manufacture of Apple’s products. Right? It’s massive.

Sonja Hutson
What happened to Apple’s Chinese competitors? I mean, wouldn’t Beijing prefer to have one of their own companies be the most profitable?

Patrick McGee
Apple has never really had a Chinese competitor at the top tier of the market, right. There are any number of Chinese handset makers that sell a lot of phones. We’re talking Xiaomi, OnePlus, Oppo, Vivo. Huawei is like China’s national champion and it’s the only one that really penetrated the top tier. And US sanctions, when Donald Trump was president, hit Huawei hard and the result was that they just collapsed. I mean, in a single year, their handset business halved in revenue and their market share plummeted. And while loads of companies — Xiaomi, Vivo, Oppo — kind of filled the void, Apple is really the one that filled the void in the place where it really matters, which is the premium market. That’s where all the money is made. And that’s actually the only area of the China handset market that has been growing.

Sonja Hutson
OK. So Apple’s benefited from Covid and from sanctions. But how does Apple deal with a difference in values like data privacy? You report in your story that Apple has all of its Chinese user data in a Chinese government-owned data storage centre.

Patrick McGee
Yeah. Apple would certainly still argue that it’s not just like willy-nilly available to anyone in Beijing who wants it, but I think that’s at best questionable. Apple certainly acquiesces to certain Beijing demands, but there’s just no question about this. I mean, if I wanna use WhatsApp, you know, Telegram, any encrypted messenger, in China, it doesn’t work. And Apple doesn’t allow it to work. And the reason they don’t allow it, is not their own values. It’s Beijing’s values. I think the cost of doing business with China is having to compromise on certain values. There’s just really no argument about that.

Sonja Hutson
So Apple has agreed to give up its personal data protections in China. And it also goes along with its censorship. And in return, it gets to make a lot of money there. You know, to me, it’s just so striking how dependent Apple is on China. What’s your takeaway?

Patrick McGee
I think it is so clear that every hero has its Achilles heel and Apple has just a gaping, wide-open Achilles heel, which is that 95 per cent of its iPhone production and, you know, production of most of its other devices are all concentrated in China. Somehow it got through a once-in-a-century pandemic originating from that very country, basically just fine. I mean, yes, it had billions of dollars of supply shortage headwinds. But on the whole, Apple being in China during Covid has not been some major impact. But as a long-term risk, there is something that just is baffling as an Apple reporter that the CEO, Tim Cook . . . He’s got to be one of the world’s, like, brightest minds when it comes to logistics, manufacturing, supply chain operations. And he’s the one who set up, he was very much the architect of Apple’s outsourcing strategy to China in the late 90s. That’s basically why he was named CEO by Steve Jobs. But if there was ever a scenario in which Washington and Beijing are really tussling over Taiwan, Apple probably has the most to lose.

Sonja Hutson
Patrick McGee is the FT’s San Francisco correspondent.

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You can read more on all these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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