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The a16z Show
China Has Scale. Can America Catch Up?
00:57:16
Ben, Marc, and Erik Torenberg are joined by Brian Schimpf, Cofounder & CEO of Anduril, and Chris Power, Founder & CEO of Hadrian. Together, they dig into America’s defense production gap: why the U.S. can out-innovate but not out-produce—and what it will take to turn that around. They discuss why U.S. war games show we run out of munitions in a week, the myth of “exquisite-only” systems, how to rebuild industrial capacity with software-led automation, financing factories like data centers, and what it takes to create real deterrence in a Taiwan scenario.
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- [00:00]
Brian Schimpf
Russia today is out producing NATO on 155 munitions and took about two years. We have no strategic plan as a country for how we preserve supply in a catastrophic situation.
- [00:13]
Chris Power
Every war game we run we run out of munitions missiles in like six to seven days and then it takes about two to three years to refill that battery. We shoot all our missiles in one week and then we have none for two years.
- [00:26]
Host (Ben)
Well, if the next conflict demands both brains and bulk, can the US combine innovation with industrial scale fast enough to win? On this episode of the Ben and Mark show, we're joined by Brian Schimpf, co founder and CEO of Anduril and Chris Power, founder and CEO of Hadrian. They break down what it really means to out invent and out adapt. Ukraine proved that mass production matters and that advanced weapons without industrial capacity don't deter. We also discussed the future of US manufacturing supply chains and rare earths, automation offtake agreements, regulatory bottlenecks and how China's anti axis systems shape the fight over Taiwan. Let's get into it.
- [01:06]
Brian Schimpf
Brian.
- [01:07]
Host (Mark)
I believe Palmer said in an interview that as we think about competition with China it's going to be hard to match the scale from the get go. But where we can continue to win is in innovation and R and D and that can make up for it. How would you edit that characterization or why you want you flesh out more of that what that means?
- [01:26]
Brian Schimpf
Well I think the like. So the US has taken this strategy over the last 20 or 30 years based on this like probably very anomalous and incorrect Gulf War experience where the US having prepared to fight on like the most aggressive ally with the Soviet Union had invested in all this technology, believed that somehow punching down on a third world nation and winning was indication that the strategy was, was vindicated. And so it went down this like conclude, like this conclusion of technical superiority is the only strategy and that every marginal improvement we can make to these things being exquisite, these weapons, these aircraft, all these things was, was going to be the dominant strategy. And then Ukraine happens and you know the reality ended up being much more historically common that these wars are protracted, that they are industrial in scale and that the probably if you were to bring it down to one variable, the amount of kilograms that the, you know, you can throw at each other turns out to probably be the single most important factor. Things have to be technically superior all this stuff but like just mass really does matter. And so I think the, you know, the technical superiority is a huge advantage.
- [02:43]
Interviewer/Moderator
Right?
- [02:44]
Brian Schimpf
Like we're not going to just Outproduce China on like you know, dumb ammunition, right like that, that clearly we have to have an edge around, you know, our space capabilities, how we can sense like how we can confuse them, all these things like how sophisticated our weapons are. But I think the part that got so clear out of Ukraine was that industrial production has a deterrence factor all itself and that is critical for winning a conflict. And when most of the war games with China show that we'd be out of munitions and you know, kind of the key high end munitions in like eight days, that's not a deterrence factor really anymore with no apparent ability to like substantially increase production for a variety of reasons. And so I, I think the, the, the technological superiority does matter, but I think the belief for a long time was that was sufficient. But a low number of really exquisite weapons is not going to win a conflict. And I think Ukraine kind of definitively showed that to the world that that is not a winning strategy.
- [03:45]
Interviewer/Moderator
So what do you think or like what are the factors that cause us to be so behind in manufacturing and you know, are they correctable?
- [03:59]
Brian Schimpf
I'll take a stab at this and, and then Chris will have a lot more opinions on the matter. You know, I, I think the, the erosion on these things, it eroded quite quickly and I think it takes decades to build back the, you know, we, we kind of systematically outsourced all of the, you know, kind of key scaled manufacturing things at a time when you know, electronics, all these new generations of technologies became so prevalent. We just never built the skill sets in the US for mass manufacturing at scale with very, very few examples or counterexamples to that, that sort of pattern. And I saw it like, you know, when we kind of anything we've, we've tried to run down on the manufacturing side looking for a great head of manufacturing. There's basically no like tier one execs we could find that were American born. We ended up finding someone who is from Canada. But everyone I found who was like great thinking about this differently, like really novel approach, almost all were foreign born and I think it's just not an aspirational job for young founder mentality people for quite a long time to go into manufacturing like it was just not a sexy, exciting, high growth space. We just said no low cost labor. Whatever it was. The original theory was, was the primary strategy. And then you know, kind of China built up this, this very technical, sophisticated capability on it. Now to get that back, it is going to take some time, right? And the U.S. the number of startups I've been seeing that are working on software to enable manufacturing, that are working on automation techniques, that are working on different approaches to all sorts of composite manufacturing, wiring, harness all over the place. It is massively ramped in the last three or four years. I think reflective of the drive to get these things reshored onto America. And I think what has worked so well in Silicon Valley is that it's this diffusion process of knowledge, expertise, people moving between jobs. You just get this insane ramp and learning that happens incredibly quickly. It's got like, there's just no concentration of those people use amongst it in the US and so like you just had this total erosion that happened very, very quickly. Now I think it will take a while to build back but I think it's going to, it's going to get there. I don't think it's going to start with, you know, making low cost iPhones, but I think starting in defense production, starting in aerospace areas where there's like a national interest in keeping this on the US and then looking at mass producibility there. And then we're finding a lot of great suppliers, not just in that space, folks like Chris, but also in commercial manufacturing, automotive manufacturing, there's a lot of good folks that do exist. It's just figuring out smart ways to tap into it and understanding on the engineering side, on the practices side. How do you really do this at scale is, is just a lost skill set in the US So it is just going to take a lot of practice, trial and error and iteration to get back to. But we just ceded that. We just said we're not going to do it and then we shouldn't be shocked that we don't have anyone as good at it. We just haven't even tried.
- [07:10]
Interviewer/Moderator
Yeah, yeah, yeah. And Chris, being in that field and kind of building a new manufacturing company, like what are the kind of issues in the US with doing that here?
- [07:23]
Chris Power
I think there's several and I'll break them up into three buckets. One is that most of the manufacturing that we need for the things that are onshore in defense is extremely highly skilled. And the kind of Apple McKinsey thesis was let's offshore the easy parts of production first and then keep the value here. And that didn't really work. And it turns out that if you disconnect design for production, you end up with really bad design at the same time. And I think Apple trained something like 28 million Chinese people on really advanced manufacturing skills and invested like I think it's to quote Patrick McGee's book, like 50 to 60 billion worth of capex.
- [08:02]
Host (Mark)
More than the Marshall Plan. Just to give a.
- [08:05]
Chris Power
It was like 10 chips acts basically. And so two things happened. One is like Brian said, all the jobs went away and therefore no one got into manufacturing. Why would you enter, why would you tell your son or daughter to enter a dying industry? And then secondly, people forget that we didn't have a defence industrial base in World War II. We just had the best industrial base that pivoted to defence when we needed it. And to Brian's point, mass was the only thing that won. I don't even think our tanks were that good. We just kind of like McDonald's the shit out of them.
- [08:38]
Interviewer/Moderator
That's a good phrase.
- [08:40]
Chris Power
We're operating in like everyone is in the mental model of we're still the America we are in World War II and from a productive capacity standpoint we just aren't. So we kind of like we were a data center company and then country and then we gave the data center to the Chinese and like okay, the real problem here is two things. One is slack capacity because we used to be able to put defense spend on top of manufacturing hours that was commercial. So all these businesses used to run 70% on commercial high volume with 30% of the business was defense. So it was kind of this load balancing effect that just doesn't exist anymore. And then the real underlying problem is my thesis is that basically everyone that's highly skilled in any manufacturing domain is basically 62. So it is a skilled labor replacement problem because it's not just the capex. The capex is actually quite easy as long as you're good at fundraising and you can back it with contracts. It's really the skill of it. And the only way to replace that skill in my mind is basically high levels of automation to kind of make those jobs simpler so that a new workforce can ramp up in a month. And then from a demand side then you got this demand equation right. And even with Brian's products or other people's products in defense that are by number of unit manufactured, like there's more of them than other defense products, it's still nowhere near the kind of commercial scale that you would really need to get some reps on. And I think there's two ways to approach it kind of strategically. Number one is subsidize a massive product and kind of let the industrial base kind of bootstrap itself around that. Or our strategy is basically kind of factory first up so the capacity exists but it's kind of this chicken and egg problem. Brian, I'm sure outside of your business, I know you're close to the drone space still and I don't think this applies to Anduril, but I think the army still has this real problem of like, well we really love this drone, we want 10,000 of them. But you also don't have the factory pre existing so we're not going to give you the demand signal. And there's this, you either got go top down or bottom up. I think we can get there. I just think people forget manufacturing is this real brute force equation where I think you just have to pick four to five companies and let them have at it at a scale that's never been seen before and let them figure it out. And it's in the figuring it out that you get there. There's no real way you can plan around this. Our strategy obviously is high levels of automation to get really leveraged very fast. But there's no easy way to do it sort of thing.
- [11:09]
Interviewer/Moderator
And, and so the, the way to scale it is really for the government to just place giant orders for things with us manufacturing companies and say look, if you can build this stuff, we're going to buy it all. And the short of that, it's going to be slow. It sounds like we're not seeing that.
- [11:28]
Chris Power
I think, you know, we are. We're building out a lot of our kind of gigafactories well ahead of the demand because we know that we build them so flexibly that we can pivot that capacity to other products. So we're not kind of taking business risk, which is a very unique strategy. But yeah, if you wanted to kind of let the market correct for itself, someone would just have to make a purchase order of a million cars, force it to be all made onshore and then let all these small suppliers and the skills come up underneath it kind of economically. I don't think we have the time to do that. So we're just building them all. And the thesis has always been in a time of crisis, manufacturing very hard. When manufacturing gets hard, people will be forced to basically partner. And we're seeing that play out basically across the board right now. But if you didn't have companies like ours aggressively doing that kind of factory first strategy, then yeah, you just have to onshore a bunch of commercial volume and at the current manufacturing price points with no automation, you have to subsidize it to have it here and let the industrial base come up in any.
- [12:31]
Brian Schimpf
Near term sense like the game is going to be high mix, low volume.
- [12:35]
Interviewer/Moderator
Right?
- [12:36]
Brian Schimpf
Like, and that's, and you got to get good at that. And it's very different than how manufacturing when us was good at it was, was really tailored which was sort of high rate, relatively fixed.
- [12:45]
Interviewer/Moderator
Right.
- [12:46]
Brian Schimpf
And the process, the change, the process to iterate was, was not there. You couldn't change the mix of what you were making year to year super easily. And so this, this sort of focus on just flexible factories at scale built very cheaply. Minimize capex, minimize tooling, all these things and allow it through better automation, through better software and a flexible workforce and better design of the products like be able to flex into that, that kind of works. I think that'll get us there where we can just lean into capacity and advance believing that in aggregate we don't know exactly what we're going to build, but we're going to build a lot of different things. Then I think the other side of this is there's you know, there's kind of key supply chain issues which defense demand can't solve.
- [13:27]
Interviewer/Moderator
Right.
- [13:27]
Brian Schimpf
And we've seen this with rare earths and magnets. China has strategically kind of strangleholded that you know, not only did they have the processing of those rare earths but now they've exported, controlled. So they don't allow the export of magnet making technology that is now a restricted national technology that they have banned from being exported from the country. It's a good strategy. It's taking a great, great approach on it. But that creates a real bottleneck there. Germanium, gallium, right. Like there's a lot of these different core materials that you know, the US has to find industrial policy strategies to create viable commercial alternatives. I think the way they're, they're structuring some of these is actually really clever, right? Like they basically, with one of these, this empty materials company, they basically guaranteed minimum offtake and a price floor. That's a really good strategy.
- [14:18]
Interviewer/Moderator
Right.
- [14:18]
Brian Schimpf
And so like, you know, that way China doesn't have as many abilities to do dumping strategies or subsidization strategies to undercut other competitors trying to break into the market. And this is where I think tariffs applied on more of like, you know, kind of a national security industrial policy basis can be really advantageous. Create the time for you know, American and allied industry to be able to get price competitive. It's just going to take a number of years. You just got a big capex bill. You've got a learning curve you got to go down to actually get back to the point that you have this capacity available, the expertise available and it's effective, efficient. So it is, it is going to take some time. I think ultimately it does have to amount to. There is real commercial industrial demand that is sustaining this and driving innovation into this industrial base. I think what ended up happening in the defense world is we ended up, it was like kind of the last spot where we insisted on manufacturing in the US and became Galapagos island where everything evolved in a totally different way than everything else in the world. And we're kind of shocked. It doesn't look like anything else that's modern and efficient and it's like well what? Just totally different evolutionary pressures. Like why would it look just ended up like kind of diverging pretty heavily. And the things we've tried to preserve look a lot closer to what they were in the 80s and 90s than what's going on in China today.
- [15:34]
Chris Power
As of right now. If you look at like the PlayStation 5 as a product like that is effectively I would say 90% of fully automated production line and writ large across the board. People really miss this. And I think it's like strategic CCP comms is like there's a little bit of manual stuff of things that robots can't yet do. But I would say just on pure manufacturing autonomy they are probably 20 years ahead of us just on that. Now our version of this at Hadrian is okay, most of this is actually a software problem. People like see a robot do things but it's actually like all of the machines are extremely dumb computers basically and it's a coordinate problem and it's an autonomy problem. And the one thing that we are still very, very good at in this country is software engineering. It's just that there was no pressure to put software engineering automation in manufacturing because our version of automation commercially for the last 30 years was just give it to China and then defense didn't need to do manufacturing automation innovation because it was so high priced and protected that there was no pressure. So I completely agree with Brian, but I think think that we forget that if you're still assuming that we are great at automation and software as a country, then if you dump enough and go hard and fast enough you can actually catch up. And that's effectively the macro bet that we're doing at Hadrian.
- [16:54]
Interviewer/Moderator
So question you guys alluded to this but you know there's this famous book Freedoms Forge, you know, talking about the ramp up of US industrial production during World War II and the repurposing of all These car factories and everything. But as you, one of you guys said, you pointed out, like a tank in like 1940 was not like a tank today, right? Or an airplane or anything else. You know, like you put any of us in, you know, a plane or a car driven in 1940 and we would be like absolutely shocked on, you know, on a relative basis of how crude and primitive it was, you know, technologically. And you know, a tank in 1940 or a car has no chips, you know, it's got, you know, it has not nothing that we would consider to be modern technologically. Today's, you know, weapon or vehicle or whatever is far more sophisticated both in hardware and software. You know, typical car has like 500 chips an hour or something. So I can only imagine what a, what, know, what a drone has or something. So the fact that the products themselves are so much more technologically sophisticated and have so many more components, both soft components and hard components, does that mean that, you know, wow, like that the country that's best at technology over time is going to be the best producer of those things because they're so complicated. And if, you know, all the software is written here and so forth, like, you know, that sort of gives us this huge leg up to build these things. Or is it actually the opposite? Which is. Okay, now the supply chain is like sort of infinitely more complex. You know, the, the, the, the, the kinds of parts that are in these things are all themselves extremely complicated. And you know, if they're all kind of by default made in China, like they just own so much of the supply chain of these things that we're kind of at this, you know, more or less permanent, you know, or at least very long term disadvantage. Like which way does that dynamic tilt? When you think about the, the actual, the products themselves.
- [18:29]
Brian Schimpf
Supply chain, supply chain. I think it's like you look at Covid and it was like it wasn't the microprocessors that were the bottleneck, it was the power regulators, right? It was these analog components. It was all these things way down. And then when you even look at semiconductor manufacturing and everything going into it, China still controls upstream components of that in a substantial way. And so I think from the point of view of, you know, industrial independence in a conflict like who has more of it? China has definitively more industrial independence and the ability to continue production absent, you know, kind of like their choke points are, are quite a bit more, more mineral, minimal, right. Like some key things on energy which they're strategically trying to solve and some raw Materials which, you know, they don't have as much natural sources of. If you look for the production perspective, I think it's, it, it's quite clear to me that the supply chain constraints, if there was a conflict, if China wanted to cut it off, seem pretty determined. The US would have very little leverage or ability to respond in any timely way or with allies. Then when you get to like, okay, who can build better, smarter weapons, have different offset strategies and think more technologically sophisticated way about how technology influences war fighting, I think the US has a significant advantage there. Like we are, we are much better at that. We have a more sophisticated military that is more practiced and understands how to infuse technology into war fighting in a better way. Like, I think that is quite clear to me. But the, but then the question becomes like, do you have enough? Can you actually produce it at scale and can you afford to. To produce it? And that's where, you know, I think under a conflict scenario is quite hard and the freedoms forged. Things quite interesting to me where we had about two years of lend lease to retool American industry, right. Like we weren't in the war, but we had about two years to retool industry. And that, that seemed to be about how long it took. Russia today is out producing NATO on 155 munitions and took about two years.
- [20:39]
Interviewer/Moderator
Right.
- [20:40]
Brian Schimpf
And so the, there is a time lag even if you have the industrial capacity or have the potential for industrial capacity that takes to ramp and repurpose and retool these things. And so I've heard various theories that like, you know, sort of in a conflict the US would would, you know, band together, make all these amazing things and repurpose. And I believe it's like probably true, but is it too late? And can we get the very basic components that are necessary for any modern technology? And, and both of those seem to be pretty clear answers to me. I don't think it could be fast enough. And we have no strategic plan as a country for how we preserve supply in a catastrophic situation.
- [21:23]
Interviewer/Moderator
Yeah, I think we have a mythological. Based on what I've read, I think we have a mythological. There's a book by this guy, Alexander Field is an economist who goes through the economics of the cutover of production in wartime and then back to peacetime, the 1940s. And basically the picture he paints is it was like to your point, it was like a two year ramp up to cut over like all the car factories to be like plane and tank factories. It was like a very short production Time it was like, you know, within two years. We then basically made all of the weapons and all of the vehicles that basically, you know, won, you know, won World War II. The ships, like, it was like the production happened like extremely quickly and which it could because these were not that complicated. You know, these were still mostly, you know, you know, bent metal, you know, and rubber. They weren't that complicated. You know, they didn't have that many parts. And then at least according to Alexander Field, the spin down of wartime production actually happened before the end of the war because, you know, by 44 or whatever, you know, we all knew that the US was to win. And so the factory started to be cut back over to making civilian products in, you know, in preparation for the, for, for peacetime. And so Brian, to your point, like I think we have this like mythology that when push comes to shove, this stuff just kind of happens by magic. And because it happened by magic 80 years ago, it will happen by magic again. And that seems to your point, like very much not the case.
- [22:33]
Chris Power
Yeah. And I think we also miss one important point, which is here, here's my guess on like what we call parallel production, which is like you take an existing defense product, how much could you go mass produce and how much is some secret source? My guess is any given missile, about 15% of it is secret source or critical. The rest of it's just ray production and not that hard. I think the thing people miss to your point, Mark, is Capex or skills were kind of at a, call it like 10 to 1 ratio and then you could pivot to the fence. We don't even make the Capex that goes into the factories in the US anymore. It's all German, South Korean, Japanese or whatever, and they're controlled products. So it's like if you wanted to go scale a gigafactory at a time of crisis, it's prob already too late. And by the way, to Brian's point, all those machines have rare earth magnets in them and like, guess who?
- [23:24]
Interviewer/Moderator
And so if you guys were in the White House or Congress. Brian, let's go back to your supply chain point. This is not a bit like part of what we talked about earlier was there's like you could place like a strategic bet on like five companies and like spin them up and have them get big. But I think, check me if this is right. It's not just those five companies, it's the other 5,000 companies that are the supply chain for those five companies.
- [23:45]
Brian Schimpf
Yes.
- [23:45]
Interviewer/Moderator
And so what's the policy approach to that that passes the sniff test of something that would both work and would be achievable over a five or ten year period.
- [23:55]
Brian Schimpf
Number one, I think you need data, right? There's very little Data on what 2, 3 levels down into the supply chain is actually on that bill of materials and what are the kind of critical components and I think again Covid examples we have no idea. And then we found out that the market was constrained on the thing no one would have ever guessed that the market was going to be constrained on. Then if you have data now, you can start to look at interesting strategies on this, right? It's like, okay, it's stockpiling like you know, like power regulators that expenses like probably extremely cheap, right? Like you know, and a lot of these things so you don't have the industrial capacity. But I need to very quickly create mitigating resilience strategies. Okay. Like if I can actually get some visibility on these things, like maybe I can actually take some, some strategies to either pay industry to stock. Like, you know, there's a lot of basic things you can do. There's the second thing that I think is pretty key is more of these kind of MP material style deals, identify the key supply chain constraints way upstream so that we even have the possibility of being able to ramp in a crisis period. But if we are looking at we've got at a crisis work all the way back to the raw materials that we didn't plan for. Now you're looking at five years of lag of being able to reconstitute that supply chain. So if I can start cutting that lag and working from the bottom up in terms of either allies who already have capacity that I can get them to invest and do some guarantees on, or I can invest in U.S. capacity around these things and then regulatory relaxation around some of the constraints of why is it hard to build in the US I think you can start to systematically reduce China's leverage, create competitive industry and secure supply chain for national security. But it's just going to take a degree of targeted focus and understanding of what those key bottlenecks are. And I think there's an understanding of like maybe the obvious five or six, but I actually suspect it's 10 or 20 things that we need to have more of a kind of sophisticated and holistic policy around. It uses all of our economic levers and it's like look, if everyone else is subsidizing and playing a different game on cost of capital and how they want strategic industries to grow like why is the US not doing it? The government's terrible capital allocator historically. But like low cost loans sharing risk with like there's a lot of these strategies guaranteed offtake, like US is the best capital market system. We could just use like a lightweight of government backstopping to substantially create a different incentive structure in the US and get these, get these industries basically up to competitive very quickly.
- [26:37]
Interviewer/Moderator
Chris, you know, Brian mentioned the kind of regulatory inhibitors. What are the regulatory inhibitors that you face now in terms of, you know, what you're doing at Hadrian?
- [26:50]
Chris Power
It's, it's pretty extreme, but it's state by state. Oddly a lot of the stuff that we would stand up in California, frankly is just flat out banned from an environmental or permitting perspective and our teams just frankly fight through it. But it is truly a permitting regulatory issue. I mean mining is obviously a big one. Even the basics, like some of the exquisite stuff can only be made in a certain state to feed the defense ecosystem because all the other states banned it or they're literally in facilities that got certified 50 years ago and you could, you literally could not build a new one today because you would never get the permit to do so. So it's stuff like that. I think the biggest unlock is certainly the government creating large offtake agreements. And I think in the last six months, I would say, I think there's two big realizations. One is like we kind of just have to pick seven to eight entrepreneurs that we really trust who are kind of making a lot of money, but like we really, they're just patriots basically. And then the second one is creating these large offtake agreements so that the capex and the commercial market can come behind it I think is the two smartest things. But the regulatory side is still heavily environmental permitting nightmare.
- [28:02]
Interviewer/Moderator
Yeah, actually speak about that because there's this weird tension in politics between so you have entrepreneurs who can do it, but if there are two where it's like Elon being the classic example, then all of a sudden the government doesn't want them to do it. And then they imagine that General Motors can take Elon's place or something like that. So I guess how is that playing out today and how should it change?
- [28:34]
Chris Power
Brian and I, I think you're both on the same page about this. I think that my perspective, without going to specifics is that I think there's been two realizations. Realization number one is that you're just going to have to instantiate six to eight massive companies and instantiating 100 kind of medium sized players is just not going to have any effect because you need to get some scale, you need to get some talent aggregation, all these other things. I think alongside that certain areas of the government where there's a lot of immature companies, they're going to spend the next year making eight bets and seeing how it plays out. And in certain other areas, I think in the next two years what you're going to see is basically people getting pulled into rooms and saying, cool, we picked you for this category, start running. And that will come alongside it with some MP material style deals and a lot of head banging on that. But I think my opinion is we've reached the point and I think this will play out publicly over the next three years where I think that has started to already happen in some of these critical industries. And I think what it is going to look like is not dissimilar from. Let's imagine you all at Andreessen funding startup and Apple, they're doing a million in revenue and Apple gives them a billion dollar revenue deal and Apple's going to take some warrants. And I think that is a perfectly reasonable strategy. Otherwise I don't think there is any other structural way to go this fast where the market's not playing it out. And I think you're going to see a macro cultural return to hey guys, there's 10 of you. Go figure this out. You fix this, you fix this, you fix this with a lot of strings and public embarrassment attached if there's failures. But that's my viewpoint on what is going to have to happen to make that work. And there are going to be some real winners and losers, but the spreading the capital around 100 different companies is not going to work. I think there is going to be great. Ten of you get to experiment and we're going to scale two and I think that's going to happen across every program if we're serious about it. And I think it's the right thing in this type of era to do.
- [30:43]
Interviewer/Moderator
And is there going to be in order to make this work, will there need to be like some kind of federal override of the kind of state by state regulatory regimes or can you work around it with like enough money and whatnot?
- [30:58]
Brian Schimpf
I think you can have like you're going to have competition between states, right? And we, we've seen this with, you know, running a factory search, all these things and you can really tell the difference between states who are trying to drive growth in manufacturing, how they think about, you know, enabling companies to be Successful and the states who kind of take it for granted to be honest.
- [31:20]
Interviewer/Moderator
Right.
- [31:20]
Brian Schimpf
They're like obviously you want to be here so we're not going to go out of our way to help. And, and you can really get that sense quite quickly. So I think you have a natural competitive function on the state side that's not overwhelming. But then I think it's like if people are trying to, you know, maybe California gets more efficient but it's probably not going to get as efficient as Texas.
- [31:38]
Interviewer/Moderator
Right.
- [31:38]
Brian Schimpf
And that's just kind of what it is. But companies are rational, they know this and they can make informed decisions about where they put their plants, trading off talents and you know, like labor access and everything else. Right. It's pretty straightforward. So I don't think you have to solve the federal override on the, on the state level per se. Then I think there are things the federal government can do with, you know, there still is federal EPA issues. Right. So like states don't even have a lot of say in certain cases. Like there's this one aspect of an area can be designated a non attainment zone that has over polluted on a certain pollutant. And so then going forward the EPA says that any new construction requires to remediate that pollutant by any means available, not cost benefit, not that there is any due process by any means attainable. Dems and Republicans alike, when they get that designation, they don't like it.
- [32:27]
Interviewer/Moderator
Right.
- [32:27]
Brian Schimpf
Because it is, it is a death now to getting new manufacturing and new investment in that area. And so I think there's a lot of things that, you know, I have been historically a Dem, I, you know, lifelong Dem and I believe that we need some environmental conservation pieces. But I think the balance has not gotten to this correct trade on. There are ways to mitigate the harms and a practical matter of like expediting these decisions to get there quickly. So I think the time factor is often undervalued in business. The time factor is extremely valuable.
- [32:59]
Interviewer/Moderator
Right.
- [33:00]
Brian Schimpf
Like if it takes me five years to build a data center that doesn't, it's irrelevant. I need a one year timeline and I think for a lot of these places the view is well I'll get you to the same outcome. It just might take five years and they don't view that as a problem. So I think that on the state by state basis there's, there's a ton of competition. I think the federal government can do a lot of things to expedite getting to. Yes, I think they have unique Authorities, especially in defense, to push things on nuclear, to push things, push the envelope on a lot of things that there is a lot of risk aversion to. And they have a huge opportunity to take the lead on showing what's possible. But I don't think we need to like march into every state house and say we're taking over. Like there's a lot of easy states and there's a lot of hard states and that's okay.
- [33:45]
Interviewer/Moderator
Yeah. And the talent is movable because you know, you have this talent shortage in manufacturing, but if you've got the job, they'll go.
- [33:57]
Chris Power
I think it, I think it depends. I mean we've seen as, as we're launching Arizona and Brian, I know you've got this perspective from Ohio as well is it's the way we think about it is we will probably do most of our advanced engineering in California because it's very hard to get the conflagration of software engineering and manufacturing in one building to. But once you've worked out how to do welding, for example, and it's now a simple system that can go anywhere. And what we look for uniquely is kind of the technician workforce. What we're also seeing is the people at Hadrian, as we expand to different states, they're like great, I get to keep my software engineering or manufacturing engineering job, but I get to buy a house because now I get to go to Arizona or another state. It's less shiftable than people think, especially for the highly skilled jobs. But everything else I think is a grand adventure for probably most of Brian and I's teams of like hell yeah, let's go two years in Texas or two years in Arizona or wherever and follow the companies around.
- [34:57]
Brian Schimpf
Completely agree. And for a lot of these, particularly as you get to more hardware skill sets, manufacturing skill sets, getting them to come to California is a huge problem. How much does the house cost? They're just not that interested in it. And so the it's actually easier when it's lower cost of living locations for a lot of these skill sets. But completely agree with Chris. A lot of the advanced software still going to be California is what it is, but that technology is then relocatable with relatively little difficulty.
- [35:27]
Host (Mark)
Why are we so much better at building data centers than factories? Colossus, the biggest data center in the world was built in under five months.
- [35:34]
Host (Ben)
How do we explain this?
- [35:37]
Chris Power
I think it's very easy, which is the financial markets understand data center offtake agreements because what that enables you to do is Brian says to Me Chris, please build data center and I'll give you this kilowatt hour of compute at X cost unless you screw it up and then all of the big capital allocators say great, I'm going to let you put 10 billion in capex in the ground and as long as you can credibly execute. This is how we build power plants as well. It's like there's a price per minute and then you put the capex in the ground there's like a 30 year payoff period. Because manufacturing is high mix low volume and defense spends money every year you financially have a one year agreement, you literally can't get the capital markets to underwrite it unless you're at such a sufficient scale which is what we're doing now where you can functionally underwrite across many different contract vehicles and then you can actually have this 10 year CAPEX spread and then you can build more data centers if you're good at it. I am fully convinced it is literally just because there's like Amazon wants data center and it's a 30 year offtake agreement and then you could put the capex in the ground. Whereas because defense spends contracts once a year you can't have that long term revenue agreement and therefore you can't have this structured finance agreement underneath it for the capex which we've solved by having this aggregated portfolio strategy. But my one answer is just if the Defense department looked or factories created offtake agreements for capability or capacity overnight and data centers just have that naturally.
- [37:05]
Brian Schimpf
I think the other part of this is we've been doing data centers for 40 years, 30 years, right? Like we just been doing it. It's like it's a thing, USA knows how to do it and like is putting up the wall, the concrete walls and building the cold shell. The hard part for any of these factories like no, that goes up really quick, right? Like we've distribution centers are extremely efficient to build at this point. So like a cold shell concrete building, trivial, trivially easy, right? Those go up in like less than 12 months. You probably even get it in three or four if you want to. Once you get to manufacturing then the, the question is okay, what are you putting inside of it? Do you actually understand the process? Like have you built the technology to go in there? So the nth copy that Chris is going to build of his plant will go up extremely fast, right? If he can finance it and you can capitalize it like he's saying. But the first copy of that thing took quite a while. And so for a lot of these manufacturing plants, they're the first one. And you have all the unique regulatory approvals and you've got the unique chemicals that you got to bring in the health and safety risks and how do you mitigate all those things? And so the, so it just ends up like, I think you're sort of n of 1 on a lot of these cases. But if you're on the 10th copy, it's gonna, it's gonna go fast. It's just going to go fast.
- [38:23]
Host (Mark)
When people talk about China's success, some people point to their industrial policy, their protectionism, their subsidiary sedation of certain industries. We've recently experimented with that a little bit. What can we learn or not learn about what they've done or how, how should we think about it here? Maybe Chris, you want to take a first step?
- [38:42]
Chris Power
Yes. I think the most important thing for people to realize is that China's stuff is not cheap because they have low cost of labor. It's because they subsidize capex cabex energy, which is the main cost of manufacturing. Like 95% of the cost of aluminum is just the kilowatt hour of the power price. And then they also do export subsidies, which is kind of like a reverse tariff. So if I sell a million dollars worth of stuff to Ben, I get a refund from the government. They did that for the last 30 years in part to drag the capability off the US because they knew they're very long term thinkers. Unlike the US we tend to operate only when we get punched in the face. And it was a strategic subsidy. So the kind of byline is it's not economic protectionism, it's just an unfair playing field. Because right now it's companies like Brian and me versus the ccp, not versus Chinese innovated companies. And I think we're happy to go toe to toe on an even playing field. But it's not an even playing field and it's not by 10%, it's 70, 80% in some cases. So if you want to have the US as an exporter, you kind of have to do tariffs or some economic policy that just corrects for that structural imbalance and then we'll fight over how efficient we can get in America and how many products we can produce. And I think that narrative is really wrong. The level of subsidies they do from the government into their national champions is crazy. And it's one of the reasons why most of the commercial manufacturing is offshore because of that price function. So if you want to Compete and we can, you have to just create an even playing field. And that's like, there are many mechanisms to do that, tariffs are one. But you kind of have to. Otherwise it's just the playing field is so uneven that no amount of technology can catch up to like the China cost.
- [40:28]
Brian Schimpf
And there was, I mean China has a track record of laying out five year plans like made in China 2030, okay. They prioritize targeted industrial, industrial areas. And that aligns all the way down to the provincial level around these subsidies, around these export strategies, around the finance structure of how these things are capitalized. Zero, you know, zero percent loans, all these different things. And so the, there's just more of a strategic framework of what are the key areas they want to control. Not everything they've succeeded on is in that category. Right. They've also been commercially successful on a number of areas, but I think facilitated by a lot of things Chris was saying around, you know, lower cost of capital as well as some of these export subsidy pieces. So I think there's just a handful of these policy levers that are just effective and it's not, you know, like, I think if we end in a world where like the government's like, oh, we must make X company succeed, but we all know this company's bad, it's not going to work, right. It's not competitive company, they're just dead. And that I think is where the US policy is landed on where it's like, let's give grants to these industrial giants that everyone agrees are no longer competitive and we'll try to save them. And you're like, it's obviously not going to work. Why don't we create a scenario that allows next generation companies that can actually compete a level playing field to fight and let's go with that. And I think that strategy has a lot more legs to it than just handouts to a couple of companies that are like just zombies.
- [42:01]
Interviewer/Moderator
And how would you structure something like that, given that? Not to say that the government has some corruption in it, but like, you know, these kinds of things, like if you're naming or hand picking the companies that you're going to subsidize, you particularly in the US system, there could be some issues with that. So how would you structure the subsidy so that would be merit based?
- [42:27]
Brian Schimpf
I think you could do like get the government out of the underwriting process. Say you take loans, okay, I want the banks who are pretty effective underwriters to actually execute the loans, but the government will backstop and help them on like lowering the interest rate and absorbing half the default risk. Bank still has skin in the game. Company has skin in the game because if they default, they're, they default and the government is effectively a zero cost actually going to make money off that deal. So the, so I think in like those, those scenarios you can just take advantage of what is like the US capital market structure is, it's not like it's 10% better than anyone else. It's a, it's like several thousand times better than anyone else. Like it is just wildly better. And so if you're, if you're leaning into that and saying, hey, we actually have great capital allocators that know how to underwrite companies and like lean in on these things, like great, let's just juice the capital stack in a way that is aligned with national priorities around certain industries, certain capabilities, things like that. That's kind of like one side and then tariffs, export subsidies are another export, you know, export financing. A lot of these things also work right? And so those are not winner specific, those are segment and you know, kind of strategy specific targeted policies. And you're staying at like the grants are in my opinion the worst possible form of this. It's like you know, giving intel an outrageous amount of money to build a facility that they didn't believe they had demand for. It's like why would they not take the money to build the facility? They don't have any skin in the game. Like he totally distorts their incentives to actually be an efficient competitive company. And so like keeping companies accountable, using the capital markets we already have and the allocators we already have, it's like that feels pretty good. Lean into what we're good at and then put some of the, like, you know, counteract at kind of more of a national level some of these unfair practices from other countries or areas where we want to incentivize growth and we're doing protectionism because we need it for national interest, those seem pretty reasonable.
- [44:42]
Host (Mark)
It's ironic that you, we as a country sometimes get critiqued for being overly financialized or too much into financial engineering. But we, we've noted a number of examples on this call on, on this episode where we can actually benefit from, from leaning into that strength and greater kind of financial engineering in terms of aligning sort of, you know, good outcomes for the markets with strategic priorities.
- [45:02]
Brian Schimpf
Well, like who, where else could you finance $200 billion of data center investments with like basically no real revenue to show for it? Like it's crazy like, like A government can't even do that. Like, so it is like, so like we, we have like it is such an asset. Like, is it always right? Is it get all like bubbly, right? Like, is it like, you know, whatever, Right. It's like certainly not worse than how most governments operate on these things, but it has enabled the west to do such outrageous things. And like they used to do such outrageous things that are capital intensive in a way that nobody in history has ever seen. Like, that is, that is a huge asset. And so like, yeah. Does it get a little crazy with some of the like really exotic instruments? Sure. But like that's on the margin compared to like the massive asset we've created with this.
- [45:50]
Interviewer/Moderator
Yeah.
- [45:50]
Or you guys sort of saw Oracle earlier this week. Oracle in one day added more market cap based on a single AI data center build deal. They had a more market gap that day than most national stock markets in their.
- [46:01]
Brian Schimpf
Right.
- [46:03]
Interviewer/Moderator
And so we, we have this, you know, kind of, to your point, this is actually my big takeaway from, you know, it is astonishing how good we.
- [46:08]
Chris Power
Are at things like that.
- [46:10]
Interviewer/Moderator
And then, and then the, and then it's just, you know, the, the, the pessimistic view is, you know, the, the fall off to the world that you guys are, are trying to fix. But you know, the other view would be, wow, imagine if we could be as sophisticated at manufacturing and industrial systems and military systems as we, as we are in data centers. And yeah, to Eric's point, like, it's not completely clear why they're that different.
- [46:29]
Chris Power
When it comes down to it.
- [46:30]
Host (Mark)
Guys, we brought up a couple examples, but I want to get more into what's misunderstood or not fully appreciated about our competition vis a vis China, whether it relates to manufacturing or security, defense, either the state of today, but also where things are going.
- [46:48]
Brian Schimpf
America has a very hard challenge and has picked a. We always fight in a way game, right? Like we are always, we're not fighting wars on our homeland. You know, we are always projecting power somewhere around the globe. That is a very hard challenge. And I think in the recent history, you know, vis a vis Ukraine and I think what would pragmatically happen in a Taiwan scenario, there's American support with, you know, the, the ally under attack being able to defend themselves. And so I think that's, you know, kind of the backdrop of how the US sort of thinks about these things. Well, that presents a very hard problem, right, which is in a Taiwan scenario, your ability to stage, your ability to resupply, your ability to get things in is the critical question. But China knew this. And so they have invested systematically in technologies that push back the U.S. and push our whole strategy way, way out, right? So they've invested in space based sensing, they can find our ships, they can find a lot of aircraft way out, thousands of miles away. They've invested in this DF26 missile called the carrier killer missile commonly which is able to shoot, I want to say it's something around 1200 miles out, which makes it so that carriers, warships, all these things we would use for resupply typically are massively at risk. They've got very long range anti air missiles, so things that can shoot down aircraft. And so they've created this impenetrable bubble and that's what they've been investing in. Knowing that if they can break the ability of the US to get close to stage, to resupply, that just cripples the entirety of the US war apparatus from being able to be a real threat. And you combine that with their production capacity where there's something like 250 times the shipbuilding capacity, you know, massively, massively, probably thousands of times. On the weapon side, you know, it is just on drones, it's massive. Like you just kind of look category by category, massively outpacing on production. So even if their stuff is half as good, but they've got so much more of it and they have systematically built up a system that can target us at range, strike us at range and hold everything at risk. That breaks the entire US war strategy. So it makes it very, very hard. Now the counter to this though is, you know, in a, in a Taiwan situation, the geography is very hard to sustain the like rate you would need to like actually occupy. Because the goal is to defeat a Chinese occupation, not just an invasion, right? It's not just, you know, people on the sand, on the beach, it's like actually subverting the government and taking over control. You have to sustain extensive like maritime campaigns, you know, and that is hard, right? And there's very few places you can land. Like there's all these very challenging things. So I think the, the calculus basically boils down for Xi of is he going to be successful, right? Like he stated his intention, he stated clearly what he wants to do, he wants to reunify it if necessary by force. He stated that he wants to have the military ready by 27. But I think the whole game is really just making it clear that their strategy that in many ways broke the US war plan, there is a counteracting strategy and that Taiwan is prepared and that it will be too hard to be successful and the odds are not in your favor because the loss there is probably the thing he fears the most.
- [50:21]
Host (Mark)
Chris, any, any, anything worth adding to that or on the.
- [50:25]
Chris Power
No. I mean Brian and I talk about this every time we see each other over dinner. I think the one thing that always shocks me and probably shocks Brian is how uneducated the smart people in the country are about how bad this looks. And the easiest example is I think we run out of every war game we run. We run out of munitions, missiles, whatever in like six to seven days. And then it takes about two to three years to refill that battery of, hey, you now have more missiles to shoot. So apart from the Brian strategic layer, I just think every single war basically if it goes hot, you know, both sides throw everything they've got at each other over a time period and it's basically then if it gets protracted, how fast can you reconstitute? And Brian's correct. It's not like we're 50% behind. It's just like we shoot all our missiles in one week and then we have none for two years. Well, that is how kind of terrible the situation is. And I'll make one last point to Brian's point which is my thesis on this is because of the one child policy is going to really drop off China's population very quickly at a certain period of time. It creates this forcing function where in my opinion that the Taiwan scenario is more likely to happen because if they don't hit this window they're not going to have a chance in 30 to 40 years because they just have this huge population drop off coming really fast down the pipe. So there really is this like yes, the Davidson window, but over the next 10 to 15 years it's going to be this constant very CCP style pressure game of like test, test, test, bowl of frog, ball of frog, ball of frog. The only thing we can do is focus on honestly attritable systems because if you kill a carrier and they've got that range, there's nothing we can do about it. Counteract and sensing in space a lot of attritable mass, mass producing those systems so that you know, we basically blow everything into seven days. We got to have the manufacturing battery to be able to refill up extremely fast and it's going to be this pacing event. I think that unless it goes hot in 28 is going to be 10 to 15 years and as long as we can hold them off, there Then their population drops off and we're good for another 300 years. That's kind of how I view the equation.
- [52:39]
Interviewer/Moderator
300 years is a long time.
- [52:41]
Yeah.
- [52:42]
Host (Mark)
It seems like on one hand there's the sort of extreme bearish view that people like Peter Zehan have about sort of, you know, demographic collapse and combined with sort of their future challenges in energy and food, he thinks that they're going to implode in the next few years. And then the other hand, you have this extreme bullish approach of, hey, they, they make everything, they're, they're, they're, they're smarter, et cetera. And it seems like there's a gap in sort of sober, you know, a sober perspective that analyzes, you know, where they're great at, but also acknowledges things, sort of things like, you know, how much they're over leveraged and sort of the real estate and sort of the state of their economy, the slowing growth and accounts for the demographic challenges as well.
- [53:22]
Chris Power
And I think, are they head of assume manufacturing, defense, production? Absolutely. To Brian's point, the buildings in China, if you knock open the concrete wall, is it just cardboard? Yes, most likely that is their culture. But if you're at 1001 of production, it doesn't really matter. The economy is under serious stress. But again, I think all these economic stresses make it more likely that they have to do something versus they just won't because they're starting to get weak. But yeah, you know, if we were 50% behind on production, it would be fine because half the missiles are not going to work because they're going to build them. Like they build houses and apartment buildings. Half of them are concrete, but at 100 or 1,000 to 1, it's like it doesn't matter. It's just mass. To Brian's point.
- [54:03]
Brian Schimpf
Yeah, I think these like is historically like China's been shockingly good at overcoming a lot of these challenges if they commit the state apparatus to it.
- [54:13]
Interviewer/Moderator
Right.
- [54:13]
Brian Schimpf
And so the, you know, if, if I think the other part of this is like these actions don't. I think a lot of people apply the, the Western sort of view, which is, you know, prosperity for the population vis a vis economic growth is the, the only religion.
- [54:29]
Interviewer/Moderator
Right.
- [54:29]
Brian Schimpf
Like, it's the only driving principle by and large. And you know, there's, there's other flavors that come in and out, but basically everyone's unified around that as the primary goal. And if you were to tank the economy, you would be voted out and it wouldn't work.
- [54:41]
Interviewer/Moderator
Right.
- [54:41]
Brian Schimpf
And like that that's the dominant factor. And he is not that.
- [54:45]
Interviewer/Moderator
Right.
- [54:46]
Brian Schimpf
Like his goal is preservation of CCP and his legacy. And all his actions are commensurate with those things. And so the economy is a supporting role to that goal. He has demonstrated that he does not care if he harms the economy if he believes it is in the interest of national security and preservation. You know how he views allies and partners. It's always very viewed through a different lens of kind of Chinese power on these things. And so the I, I don't think like a lot of people put the Western leader rational, you know, growth first decision making against Ji's strategy. But it, there's no evidence that's how he operates. Like all the evidence is actually it's much more a preservation strategy and a legacy strategy. And so when things are under threat, when things are under duress, he'll choose the thing that he thinks is most align to that goal. If that's you know, deal with the economy through preservation graves zero the debt and like whole bunch of things take a bath. Like you'd probably be fine with that too. Like in a, in a powerful position and preserves his legacy and preserves the ccp. So I, I think the, I think the calculus is just wildly different and so when people try to apply the like western rules to this, you get very incorrect conclusions that don't seem consistent with his actions or the over the results.
- [56:11]
Host (Mark)
You guys are and your companies are on the front lines of, of you know, helping fix ours, improve our situation as it relates to manufacturing and national security. And we're honored to, to be, to be supporters. Brian, thank you. Yes, thank you. Thank you for coming on the podcast.
- [56:23]
Brian Schimpf
Thanks guys.
- [56:24]
Chris Power
Thanks guys.
- [56:28]
Host (Ben)
Thanks for listening to the A16Z podcast. If you enjoyed the episode, let us know by leaving a review@ratethispodcast.com a16a16z. We've got more great conversations coming your way. See you next time. As a reminder, the content here is for informational purposes only. Should not be taken as legal, business, tax or investment advice or be used to evaluate any investment or security and is not directed at any investors or potential investors in any A16Z fund. Please note that A16Z and its affiliates may also maintain investments in the companies discussed in this podcast. For more details, details including a link to our investments, please see a16z.com disclosures.