The author is a Reuters Breakingviews columnist. The opinions expressed are her own. Refiles to include Apple's statement on the book in paragraph three and fixes dateline.

By Robyn Mak

HONG KONG, May 13 (Reuters Breakingviews) - Apple’s AAPL.O success rests on the iPhone. The profitable pocket device helped turn it from a niche player in the personal computer industry into one of world’s largest companies, with a market capitalisation of almost $3 trillion. Much of that was due to its supply chain in China. Now geopolitical tensions and trade wars are calling that dependence into question.

The role the People’s Republic played in the company’s rise is the focus of "Apple in China: The Capture of the World's Greatest Company". The book by Patrick McGee, who covered the company for the Financial Times, draws on more than 200 interviews with former executives and engineers – as well as other material - to provide a riveting account of how Apple came to depend on Chinese suppliers for most of its products and Chinese consumers for 17% of its sales last year. Now that it is scrambling to develop other manufacturing bases, its history holds important lessons for the two economies – and for other big manufacturers like Tesla TSLA.O.

Apple's entry into the People's Republic would not have been possible without Taiwan's Foxconn, formally known as Hon Hai Precision Industry. Founded by entrepreneur Terry Gou, the contract manufacturer and its peers were instrumental in shaping China's export-driven model in the mid-1990s by establishing factories on the mainland. They were able to do so by working "hand in glove" with local officials, benefitting from subsidies, infrastructure, and critically, flows of cheap migrant labourers from rural areas. "Uncle Terry", as Apple came to know Gou, stood out due to his political savvy, McGee writes. "They subsidised the shit out of him", he quotes one senior Apple executive at the time anonymously. Apple says the claims in the book are untrue and full of inaccuracies.

The company first started working closely with Foxconn in 1999, outsourcing production of iMacs and then, a few years later, the iPod. Thanks to Foxconn's ability to assemble products at speed and scale, Apple shipped 22.5 million of the portable music players in 2005, up from less than 1 million in 2003.

Apple’s arrival in China differed from that of other large companies. Multinationals from South Korea's Samsung Electronics 005930.KS to German automaker Volkswagen VOWG.DE had previously set up wholly-owned foreign enterprises or local joint ventures. Beijing's bet was that this would facilitate the transfer of technology to local partners - though that rarely happened.

Apple had neither a joint venture nor established its own operations. Instead, it invested in and taught many local companies how to supply parts for and make its products. This allowed it to avoid being too dependent on a handful of key suppliers, improving its bargaining power. It also resulted in an epic transfer of know-how "in the art of making things, in organising practical matters, and in the way people produce, distribute, travel, communicate, and consume", according to China-born Federal Reserve economist Yi Wen, who McGee quotes in the book. It is not an exaggeration to say Apple spearheaded the development of the world's most sophisticated manufacturing supply chain, while also helping to spawn rival Chinese smartphone brands from Huawei to Xiaomi 1810.HK.

This strategy came at the expense of Taiwanese firms. Thanks to the iPhone-maker's support, mainland Chinese groups like Luxshare Precision Industry 002475.SZ and BYD Electronic International 0285.HK slowly captured an even larger share of Apple's increasingly "red" supply chain. The squeeze is evident in Foxconn's operating profit margin, which last year had shrivelled to a razor-thin 2.8%, from nearly 11% a decade earlier.

But since Xi Jinping's ascendancy in 2012, the Chinese leader has tightened the state's grip over the economy, including the private sector and foreign multinationals. In 2015 he unveiled the “Made in China 2025” plan to wean the country off foreign technology. Despite signs that political risks of doing business in China were rising, CEO Tim Cook doubled down. Apple built research and data centres across the country, banned apps that Beijing disliked from its Chinese App Store, and even invested in ride-hailing firm Didi Global 92Sy.D.

President Donald Trump’s trade war threatens to upend this relationship. So far, Beijing has refrained from retaliating against Apple, even as relations with Washington deteriorate. Chinese officials have good reasons to hold back. Cook, for instance, claims the Cupertino giant supports 5 million domestic jobs, over half of which are in manufacturing. Targeting a big foreign company would scare off other investors and undermine the country's claim to be open for business. Despite Xi's push for self-sufficiency, China still needs Western tech and capital. Even the rise of formidable local rivals like Huawei have yet to dent Apple's prospects, with analysts polled by Visible Alpha expect Apple to rake in $77 billion of sales in Greater China in 2027.

Though exports of smartphones from China are currently exempt from U.S. tariffs, and the two sides on Monday postponed most of their levies, it is clear that Apple's model of relying on one country for manufacturing is unsustainable. Cook has been stepping up efforts to diversify his supply chains: he reckons "the majority" of all U.S.-bound products will be made in India and Vietnam by the third quarter this year. The company has also pledged to spend more than $500 billion in the United States over the next four years to appease Trump's calls to bring investment back home. Over the long term, this will mean higher costs, even before factoring in tariffs: making handsets in India, for example, can be as much as 10% higher than in China, Reuters reported last month, citing sources. Manufacturing in the U.S. is even more far-fetched. Wedbush Securities analyst Dan Ives reckons an American-made iPhone could set consumers back $3,500, more than three times the current price.

Over time, Apple’s manufacturing footprint might resemble that of Tesla: Elon Musk’s electric carmaker has spread its factories across the United States, Germany and China. More uncertain is Washington's tolerance for continued support and investments in Chinese suppliers. Secretary of State Marco Rubio once warned that Apple was “playing with fire", referring to the company's now-cancelled plans to work with Yangtze Memory Technologies, a state-backed memory chip maker. As Apple pushes into artificial intelligence while Tesla talks up the prospects of building humanoid robots, Washington will be watching both companies’ Chinese operations closely.

Apple may have some time to pull off its overdue China detox. Even so, it’s bound to be painful.

Follow @mak_robyn on X

(Editing by Peter Thal Larsen and Streisand Neto)

((For previous columns by the author, Reuters customers can click on MAK/ robyn.mak@thomsonreuters.com))