Loading summary
Transcript98 lines
- [00:00]
A
Hello, Odd Lots listeners. This is Carmen, producer of the show, here to tell you that we're recording the show live at the Untitled Supper Club in Chicago on September 25th. Check out the show notes for a link to purchase tickets or go to bloomberg.com oddlots Hope to see you there.
- [00:19]
B
Bloomberg Audio Studios Podcasts Rad.
- [00:35]
C
Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
- [00:39]
D
And I'm Tracy Alloway.
- [00:41]
C
Tracy, did you catch any of the clips from the big Chinese military parade?
- [00:45]
D
I did, I did. So this was the. This is actually really good timing. So we're recording this.
- [00:49]
C
They know how to put on a parade. They really know how to put on a military parade.
- [00:52]
D
We're recording this on September 4th. We just had a massive military parade in Beijing that Xi Jinping put on. This was while Putin was there and also Kim Jong Un and there tanks, There were helicopters, there were lots and lots of drones, nuclear capable missiles.
- [01:09]
C
There were robot dogs, robot wolves.
- [01:11]
D
Much more sinister. There were also 80,000 doves to mark China's victory in World War II. And I have to say, when I first saw that, I was reading a translation of the parade and it said 80,000 pigeons. And I thought, like, wait a second, are we bringing back carrier pigeons for military use or What? But it's 80,000 symbolic doves.
- [01:31]
C
So you're of the view that China won World War II? Now that's a joke. I don't want to. I'm not interested in.
- [01:36]
D
Is that what the episodes are going to be?
- [01:37]
C
I'm not interested in getting into debates about attribute. That's actually, I'm not that interested in that topic. I feel like that would be a big diversion. But yes, whenever I see the, I don't know, I don't know anything about weapons. I'm like a bad man in that respect. No, I feel I'm a.
- [01:51]
D
What happened to all the military history books you're reading? I guess those are outdated weapons.
- [01:55]
C
I'm interested in like sort of the economics of the politics. But when I see people posting about, oh wow, this is a 4th gen hypersonic whatever, I like, I have no idea. It's probably like what some people think about when you and I post about, you know, the UK210 linkers spread or.
- [02:13]
D
Whatever, something like that, you know it means something. You know it means something.
- [02:16]
C
You don't know what you know. It also is like, okay, a lot of people like to flex their knowledge. Again, a lot of men on the Internet like to flex their knowledge about Stuff like that.
- [02:25]
D
Everyone wants to be an armchair military strategist or procurement specialist.
- [02:29]
C
All that being said, there are a couple of things that I'm interested in. One is sort of did the military parade tell us anything new about the state of the art of Chinese military technology? But also, you know, of course, several months ago there was a sort of brief conflict between India and Pakistan. It was sort of, I believe, earlier in the summer or late spring, and there were battles between fighter jets. And for a moment there was a lot of question about did this reveal something about the state of the art of who has the best Air force, who has the best Air Force technology? And everyone was like pouring over the data to see what we learned. And so it is a good time to maybe get a temperature check on some of these questions about who has the best weapons and the concerns or the anxiety in D.C. about where we stand, where our allies stand and so forth. Lots of interesting questions being raised right now.
- [03:19]
D
Right. And there's clearly a lot of angst about the US's position in terms of military power right now. I gotta say, when it comes to India, Pakistan, everything I know about India, Pakistan Air Force tensions comes from the Bollywood movie Veer Zara. Have you ever seen that? So basically, I don't know a lot, but it's a great movie. It actually really encapsulates like Pakistan India relations quite well. But anyway, you should do a screening. Yeah, There we go. Okay.
- [03:45]
C
Okay. Well, I'm really excited to say we have someone who knows about this much more than the two of us. We literally have the perfect guest, someone we've wanted to talk to for a long time. Kelly Grieco, senior Fellow at the Stimson Center. So, Kelly, thank you so much for coming on Odd Lots.
- [03:59]
E
Hi, thank you for having me.
- [04:00]
C
Let's start with the parade. Anything strike you there?
- [04:04]
E
You know, I think as an aviation geek, I was a little disappointed because we didn't really see any new aircraft. There were some support aircraft, enabling aircraft, they displayed. I was really hoping we might see their new sixth generation bomber, the H20, but they didn't give us preview of that or the aircraft, you know, the 6th gen fighters that we had seen earlier in this past year. So it was sort of the, you know, the J20 that their fifth gen was certainly flying. I think the biggest takeaway though, for me that I was thinking about what would a US military parade look like and how would that compare to a Chinese military parade? And what really struck me was actually the number of unmanned systems, the drones I don't think you would see that in an American parade to the same degree. And also just a variety of types of drones. You know, if you were having the Air Force do a parade and you said, okay, you have to come out with, you know, your drones, we would see really high end capabilities that look more like fighter aircraft and we might see some of the smaller drones, but really not anything in between as much. And that's the space where China is clearly developing that in between. Space in particular to have a lot of options and variety.
- [05:11]
D
Yeah, so one of the things we did see was a new like unmanned air vehicle. I think it was called like Loyal Wingman or something like that. It does seem that China is putting more emphasis on, I guess like a sort of holistic approach to its air capabilities where like maybe some of the traditional aircraft are basically playing support roles for drones and vice versa. Is that the direction that they seem to be going in?
- [05:36]
E
Yeah, I think that is actually a fair conclusion to say, which given the emphasis they placed on drones. And that word these days is almost. It's really useful and in some ways it's not. It means different things to different people. But I'm going to use it just to mean that there's not a human being inside the platform. So we saw, you know, across domains, the air domain, the sea domain, the land domain, lots of these kinds of drones. And it does seem that they're moving towards a model where they lead with the drones and the human beings are more in a role of enabling that as opposed to perhaps the drones helping to support or enable the human beings that are operating. And so that is quite a different model potentially.
- [06:16]
D
Joe, there's one thing we should say before we go any further, which is I know European defense stocks have gotten all the attention this year, but actually if you look at Chinese defense stocks, they went absolutely crazy. So pull up, I wrote this down earlier. Pull up. Avic, Chengdu aircraft.
- [06:32]
C
Okay.
- [06:34]
D
I'm looking at the chart that had a massive run up this year. It's come down basically. Yeah, yeah, the military parade, but it's still up like 15% year to date. And in general, Chinese defense stocks have been outperforming the broader market. So you can see people are getting excited about defense.
- [06:50]
C
In January 2023, this was a $10 UN stock. Now it's at 83. So yeah, it's not just Europe that's rallying. You mentioned your disappointment. What was it? The 6th gen plane that they didn't show? What do these things mean? I see this. Oh, they're unveiling their 5th gen plane, their 6th gen plane. Are gens generations, are they comparable? Are they like for like are these useful terms? Talk to us about what these terms mean and how you understand them or how you state them.
- [07:17]
E
Yeah, so this is a great question. You know, we talk a lot about generations. I'd like to think that you know, say that these are scientific terms that are used with these very clear criteria. The reality is that's not entirely the case and people will even disagree about what aircraft, whether it belongs in, you know, 5th gen or 4th gen or. But what basically what we try to do with the generational term is group aircraft together where it seems like there's some leap or magnitude difference in terms of the kinds of capabilities it has. So if you look at 4th gen, which was developed mostly in the 70s, it was really the emphasis was on maneuverability and being able to dogfight. Whereas when you get to the 5th gen, this is when we see stealth, the aircraft that look much more futuristic, the weapon bays are internal to try to help with that stealth. And then we also see the start of really these turning into much more computer based systems with sensors and trying to integrate some of these sensors. That's where like the F35, the F22 come in. And now the reality is those aircraft were developed say 20 years ago. We're now moving into the sixth generation which is a continuation of the stealth. And I'll just say there's two really defining features for 6th gen. One is that it's tailless, it doesn't have a vertical tail to again improve with that stealth also help with range. And then the other part of it is something that you mentioned earlier, which is this loyal wingman concept that it won't just be a manned fighter, you know, with a human inside, but that it will also be cooperating with these really high end drones that are capable of operating either alongside it or ahead of it.
- [08:51]
C
By the way, Tracy, I have to say I'm not totally surprised that there is not nice definitions of various gen. And the only reason I say that is because based on our semiconductor episodes, you can't even get consistent definitions of like what is a 4 nanometer. And so if you can't even get an agreed upon definition of what is the sort of nanometer size of the chip, I'm not surprised that there is not agreed upon definitions of things more vague like a generation of aircraft technology.
- [09:15]
D
Absolutely. On this note, when it comes to developing new aircraft, is it mostly an iterative process, like we just improve upon the existing technology and I guess, like, what's the catalyst or the decision that goes into, you know, what, we're going to scrape this existing design, it's no longer useful or whatever, we're going to start something entirely new.
- [09:36]
E
Yeah, those are great questions. Once the Air Force itself is often wrestling with. I would just say one thing that you asked about is this sort of iterative improvements on technology. And the answer to that when it comes to fighter aircraft and bombers is yes, I was thinking about this, you know, preparing for this podcast and thinking about the historical development of fighter aircraft. And you go back and look, it really hasn't, in some sense, it hasn't changed that much. You know, the missions that these aircraft were doing in World War I and World War II, you know, trying to clear the airspace of other aircraft, trying to support, you know, ground forces or surface forces through attacks on the ground, delivering effects, that hasn't really changed. The missions haven't really changed for these aircraft. And you know, once you get to, you know, certainly, you know, second, third generation, they start to look like fighter, modern fighter aircraft to the naked eye. And so each generation is improving in some way iteratively the technology. This is evolution, not revolution in terms of the technological developments, even things like stealth, right. We see that as often revolutionary, but it's really an improvement on the existing technology. And because it's evolution and not revolution in terms of capabilities that are being added, there's marginal gains. So the more you're trying to improve this existing technology and sort of extend, extend this existing technology, the costlier it's becoming, but you're getting perhaps less in terms of the actual capabilities that you're gaining each time. So it's becoming more and more expensive to create a new generation with more fancy tech. And then that raises the question, their second question, which is, when do you decide, okay, it's worth investing in a new aircraft with new technology versus trying to extend existing aircraft. You know, there was talk, for example, of taking us fifth generation aircraft like the F35, the F22, and pairing those with these, you know, high end drones that are called collaborative combat aircraft, pairing them together to this manned unmanned teaming. Or do you really need a whole new manned fighter aircraft to operate alongside those? Is it worth the investment? And so those are hard choices in terms of what you really think you're gaining in terms of capability with a new aircraft versus trying to sustain what you have in terms of maintenance costs and the ability to upgrade those systems.
- [11:51]
C
So obviously we don't know that much about the 6th gen jet in China. I know there were like a few clips that were on the Internet several months ago and people like yourself tried to divine as much as you could based on a few seconds of video. And I'm sure you learned something. Although to the naked eye I was like, oh, it looks like a plane to me.
- [12:09]
E
Don't you just love though that the Chinese just happen to be flying over cities?
- [12:13]
C
Yeah, yeah, but where do we stand here? Like from the you inside the Pentagon or at the Air Force, et cetera, when they see those same videos and they know where we're at, what do people feel about where the US stands in comparison to China right now in terms of our cutting edge versus their cutting edge?
- [12:30]
E
Yeah. So you know, I think the truth is that you get different answers from different people and sometimes I think that might also reflect different interests that they have in the development of 6Gen aircraft. Just as a caveat, let me just say that the Chinese actually demonstrated what looked like two 6Gen aircraft in late December to mark Mao's birthday. You know, one that looks like it might be more of a fighter bomber was much larger, the J36, and another that looks more like a fighter aircraft in terms of size and things, what people are calling the J50. We don't know a lot about those aircraft. My guess is that they were demonstrator aircraft, not things that are operational in production, that they're very early in their flight process and testing. You know, you heard a lot of people saying oh look, see we're behind, they're flying these aircraft already the 6th gen. But the reality is the United States has been flying 6gen, what we know about since at least 2020, its own demonstrator aircraft. So I don't think the United States is actually behind in terms of 6 gen technology. Same thing with the collaborative combat aircraft, the drone portion. I think we're actually ahead in that, probably against China on the exquisite side of things. The United States I think is ahead of China and certainly there was already a discussion happening about whether to Proceed with the 6th gen Air Force aircraft, a fighter aircraft which is now called 47. China flew it around the time that that decision was being made. The Trump administration decided to go ahead with it. So we're continuing with the development of our own 6 gen fighter aircraft. We already have a 6 gen bomber, the B21. So we're ahead of the Chinese certainly there. So I don't think we're certainly behind. The issue might be it's not just like who gets there first in terms of 6gen, but who's able to really scale up. And I think that's when we maybe should be a little bit more concerned about China, is their ability to scale might be greater.
- [14:35]
B
This message is brought to you by Nuveen. How would you invest if you knew the future was watching at Nuveen? This isn't a theoretical question. It's a perspective that comes from navigating 125 years of market cycles, using foresight to innovate and adapt to the changing needs of investors around the world, and remaining steadfast in the pursuit of lasting performance for clients, communities and the global economy. Nuveen Invest like the future is watching. Visit Nuveen.com future to learn more. Investing involves risk. Principal loss is possible.
- [15:12]
C
Tracy, there's this very good book, Wages of Destruction.
- [15:16]
D
Oh, God.
- [15:17]
C
No, but it really.
- [15:17]
D
I thought you were gonna say Moby Dick for a second.
- [15:19]
C
You never know what shit I'm gonna throw at you. Of the three books that I've read in my entire life.
- [15:23]
D
Wait, what's the third one?
- [15:24]
C
I don't know. Morality and Literacy by Walter Ong.
- [15:27]
D
Oh, yeah, you do bring that up a lot.
- [15:29]
C
But wars are won, obviously, partly on the advanced tech, but also on just the ability to produce at scale, which is of course a major concern here.
- [15:38]
D
Well, wait, does that actually apply to fighter jets? So does quantity matter in air combat in the sense that, you know, if I have like 100 mig 21s or something really outdated, can I actually succeed against like one F47, the new, like, next generation fighter jet?
- [15:58]
E
Yeah. So this is something the United States again, has debated for a long time. When we go back to the Cold War and the Soviets and we were facing an enemy that had a quantitative advantage, they were just able to produce more numbers, more people. And one of the things the United States decided to do is develop what's called an offset strategy. And it did try to gain an advantage through quality, a quality advantage in terms of the technology to make up for the lack of numbers. And so to some extent, yes, you can do that. But there comes a point in which you can't make up for a lack of simple mass and numbers. You know, one of the challenges I would just say is against China is they may have a sufficient quality and quantity. Right. That, you know, it's a little bit of a different kind of adversary in that way, but in just in terms of how much you can make up for it. I think there are a Couple things that are specific as well to the Indo Pacific theater that make it harder to operate with a smaller number of exquisite high end platforms, even if they're enormously capable. I would say one is just simply that air warfare itself has changed. And so particularly with the sensors that are now available, you know, in all kinds of domains, to be able to look for these aircraft and try to find them, you know, the threat environment has changed and that having a small number of very expensive aircraft is inherently kind of fragile because if you start losing some of these, you start attriting significant amounts of capability very quickly. And with the kinds of sensors and the kind of surface to air missiles, air defense systems that China's developed, that kind of threat environment, that's more likely to happen. So that's one. And then the second, I would just say is that an aircraft cannot be in two places at once. I know that seems pretty obvious, but in the Indo Pacific, this really matters because of the ranges we're talking about. You know, fighter aircraft were originally developed for the European theater. And you see that reflected in the kinds of ranges. So they have a range often of around like on average about 600 nautical miles without aerial refueling. That works great in Europe because there are plenty of airfields you can land at, backup airfields, and to be able to, even on the ground, get refueled in the Indo Pacific, if you look at a Taiwan contingency, potentially you can maybe operate fighters from say, Okinawa, US Fighters from Okinawa, without aerial refueling. Even if you were to operate them from other places in Japan, the main island of Japan, you would need aerial refueling in order to be able to get to, to the theater of operations in return. And so when you need that kind of aerial refueling capability, but you also are traveling these longer distances, it means you can't do as many sorties every day or limits the number of sorties. You need more aircraft just to be able to even create some kind of consistent presence in the area of operations. So mass does matter in certain ways. And this is, I think, something we're seeing in Ukraine. You know, we've seen it, I think even in the Middle east and kind of a return back to that time when, you know, industrial scale matters, particularly in great power conflicts.
- [18:55]
D
That makes sense. Can I ask, this is a slightly personal question, but since Joe mentioned at the beginning of this conversation how much men like to sit around and talk about military strategy, it actually reminded me. So occasionally when I visit my dad, I am forced to go to the American Legion club and, and there are a lot of old guys there talking about Air Force and other military things. And one thing that always comes up is this idea of air superiority. And I never really know quite what they mean because it just sounds like, okay, if you're, if you have air superiority, then you're going to win. But my understanding is it's something like much more subtle than that, like something that actually comes on a range, even though it sounds very binary. What is it? What's air superiority?
- [19:41]
E
Yeah, well, let me first just say if air superiority allows you to win wars, then the Taliban should not be in power in Afghanistan.
- [19:49]
C
We would have had a cakewalk in Vietnam, too.
- [19:51]
E
Yeah, exactly. If only we're so simple. So air superiority. So I think first I would just say is to start with the term air control, which is this idea that what degree are you able to actually control the airspace? To be able to, on the one hand, use it, access it yourself and use it militarily, but also to deny the adversary the ability to access and control the airspace. And so if you think about that air control, there is a spectrum, as you said, of degrees of air control, and it can be completely contested and neither side has it. It's mutual air denial. Neither side is really able to exploit, access the airspace or deny the other side the ability to access it. Or air superiority is a higher degree of control. And the way it's defined as it's usually time bound in terms of area and the amount of time you're able to have this degree of control, but you're able to operate, conduct operations without prohibitive interference from the adversary. So you're able to basically do what you want with the airspace generating effects on the ground to support the joint force without the adversary being able to unduly interfere in your operations. And, you know, that's pretty subjective criteria, I would just note. Whereas, you know, there's a degree beyond air superiority, which is actually air supremacy, and which is something I would argue the United States has had by and large, you know, the last 20 years has been air supremacy, which is effectively, you are the only actor really operating in the airspace. The adversary, you know, is not able to really bother you at all in terms of the airspace. And it's essentially a permanent condition. The United States ruled the skies over Afghanistan, over Iraq during those wars. It was really more air supremacy, which is, and I'll just say we've gotten very used to it, but it's actually an historical anomaly. That's really not the reality. We've usually had to fight for air superiority even and including against Vietnam, particularly over North Vietnam. It was really quite back and forth in terms of air superiority and fighting for air control.
- [21:51]
C
So this might be actually a good time to pivot a little bit to the recent conflict. I guess it was in May where we saw Indian and Pakistani air force, the air forces shoot at each other. What did we learn? This wasn't a dogfight in the sort of classical sense, but it was in a situation which, it seems to be fairly rare in modern times, in which we had competing air forces shooting at each other in the sky. So why don't you talk to us a little bit, big picture, maybe then we'll drill down about who backs either side in terms of where they get their planes and what we learned, what kind of data we amassed from that period.
- [22:27]
E
Yeah. So, you know, it is unusual to see two essentially modern air forces attacking each other or fighting each other, having some kind of exchange, particularly in air to air, you know, and also an air to air exchange as well as ground to air. So, you know, the Indians were operating kind of a mix of, of, you know, some French aircraft, some, you know, Russian aircraft, whereas on the other side we had the Pakistanis were, it seems, using Chinese aircraft, older Chinese aircraft, the J10, and also Chinese missiles. They were using something called the PL15. It's an export version, so it's not quite as good as what the Chinese operate as a PL15. But it's interesting and I think surprising to many people because it is clear, clear that in this exchange that kind of happened almost like Western style. You know, they're meeting towards, at the border. What was surprising to think to many people is that it's clear the Indians lost some aircraft. And it's still debated how many aircraft, what type of aircraft. But, you know, there is some photographic evidence to suggest they lost some aircraft. And I think that surprised people to see that they did lose these aircraft. And, you know, certainly both sides, you know, engage, use this as, you know, as part of their, you know, narrative. Right. But we got to see the PL15, you know, in action, this missile for the first time, and also see these Chinese fighters. And I think it just surprised people to see that the Pakistanis were successful in the sense of actually achieving some kills.
- [23:52]
D
You know, you mentioned India having some Russian aircraft, and that reminded me of another question that I wanted to ask you, which is, you know, India still famously flies MiG21s, aka the flying coffin, although I think they're about to retire them. So this is also good timing for this particular discussion. But how do countries make the decision to, I guess, buy aircraft from other places rather than try to develop their own industry? Because I think India isn't even planning to replace the migs with something homegrown. It's going to buy something from France. So why do countries choose to do that?
- [24:26]
E
Yeah, so this is a great question. Air power from the beginning has been very expensive to have an air force, to have a major air force, because it's not even just the fighter aircraft that you need to develop. You need to develop all the other supporting aircraft, things like awacs, airborne warning and control systems, aerial refueling, potentially intelligence surveillance, reconnaissance aircraft. So it's a whole group of aircraft and then being able to maintain them and then develop that whole industrial scientific base. It's actually significant barriers just in terms of the scientific industrial base, the scientists, the engineers, the materials that you need to collect, the secure supply chain. So there's a lot of barriers to entry in terms of developing your own indigenous aircraft. One of the options, and these aircraft themselves are quite expensive to develop, is to develop, you know, is to buy it from another country, whether that can be Russia or China or the United States or the French, you know, even the South Koreans now. So that it can be an attractive option because you avoid a lot of those startup costs. And the price point might actually be lower than in developing your. It's likely to be lower than developing your own indigenous system, in part because unless you're able to export that indigenous system to others, it's going to really drive up the cost, the per unit cost for yourself. So like even the United States, the F35, for example, our cost isn't is dependent what we pay for it for the US Military, it's dependent on our ability to sell it to others. It helps drive down the per unit cost.
- [26:10]
C
When we think of civil aviation, there's Boeing, Airbus, and then there's the Brazilian one, Embraer Air. And then of course, people are interested in what's going to happen with comac, but that's about it, right? There's two and a half to maybe three, whatever, maybe four potential players in this space that are of any scale. It does seem as though when it comes to military aircraft that the geographic range of production is much wider.
- [26:36]
E
I mean, in terms of geographic range. Yes, I would say that is true. Like the Turkish Turkey is now.
- [26:41]
C
Yeah, the Turks. That's what I. That's where I was going. I know, I knew that the Turkish had their own fighter jet, etc. So it does seem as Though countries that aren't in the civil aviation game at all are in the military game.
- [26:52]
E
Yes, they're, you know, they range in terms of their quality. You know, they squeeze even with the Gripen. That's a great fighter aircraft, the Gripen, especially the price point. So it is a competitive market in certain respects in terms of, certainly in terms of geographic range, the number of countries that have had traditionally these kinds of industries and continue to support them. And you know, it's interesting that countries, you know, to see the kinds of choices they make about what kind of aircraft they're going to purchase. You know, often we're in competition with our own allies for these contracts with others, which I think is always interesting, you know, with the French and you know, the Japanese joined a 6Gen project with the Brits and the Italians. So it's interesting that we're competing with our own allies often for, you know, other countries contracts.
- [27:37]
C
Since I mentioned civil aviation, obviously we all know about the troubles at Boeing and the door flies off or whatever. It's been one thing after another. It seems like it's been a few months, knock on wood, since we've had a Boeing.
- [27:49]
D
You probably just jinxed it.
- [27:50]
C
Yeah, I hope not. But I don't, you know, I don't follow the goings on on the defense side of the American aviation industry does not garner nearly the same headlines or the same types of headlines, et cetera. But if you just take it in isolation, if you were to look at Lockheed Martin over the last several years, how well is it operating as a company, as far as we can tell, in terms of its ability to ramp output at scale and to continue to produce high quality goods at scale.
- [28:20]
E
Yeah. So if we're talking specifically the defense industry in the United States in general, I'd say scale is a real problem. You know, one of the things about the US preference often for exquisite systems means exquisite systems with lots of components, you know, and these are technologically complex and it's really hard for us to ramp up production of these things. It's been much easier to ramp up production of artillery, for example, as opposed to the Patriot system. And that just simply has to do with the reality of the complexity and concerns and also some challenges around supply chain bottlenecks.
- [28:55]
D
Yeah, this is what I wanted to ask. So there have been production problems with like the next gen F 1547, famously. Right. Which is being developed by Boeing. How much does the sort of ecosystem of supply chains and component manufacturers matter when you're making new military aircraft and trying to, you know, do something that's.
- [29:15]
E
Cutting edge a lot. You know, I would just say if you look at the F35, the 5th gen fighter that the United States operates, it's had a very troubled history. It has been constantly delayed and, and cost overruns have been extraordinary for that aircraft. And it's had a lot of difficulties even in the upgrades. And there was just another, I think it was a Congressional Budget Office study talking about the challenges related to there's supposed to be a series of upgrades that are being done and it looks like they're going to be delayed. And some of that is related to problems with supplies. Even when we were talking around tariffs, you might remember with the Chinese and they put these export controls on some of the rare earth minerals. Believe it or not, some of those rare earth minerals are things that we actually use in our fighter aircraft that China has, you know, the majority of the refining capacity. So trying to make this with a secure supply chain, including the materials in particular, is a challenge and one that, you know, I think there's bipartisan support right now for trying to address this issue. But it's not one I would just say that I think the United States can address alone. I think it's going to require, you know, other allies and partners to try to create that ecosystem, but in a way that's more secure.
- [30:30]
C
One of the things that has come up on the few times we've talked about the defense industry is it's very spread out because obviously these big players like to have a little employment in almost every congressional district or at least every state for obvious reasons that need no explication. Does this create diseconomies of skill though, spreading out of the supply chain for no economic reason?
- [30:55]
E
Yeah, I mean one of the things, it certainly does. And we see this in the case of the famed A10. The A10 is an attack aircraft that's used for in a close air support role. Is that the Air Force? I don't know how many times now it has tried to retire the A10 arguing that it's not likely to be survivable in a future war because it is quite vulnerable to especially ground based threats. And every time it's tried to retire it, there's always someone in Congress that is upset about that because their district has A10s and wants to see it, the program continue. It looks like they're going to finally be successful in that retirement. But the spreading out of these programs to the districts has often made it much harder to actually end programs when they need to be ended so that you can actually develop new capabilities. I think that's one of the really big challenges. And the other I would just say is also is just the fact that we have the concentration of the market around these primes. These firms are long standing. You know, they're well developed. But I think to have a really vibrant defense industrial base, particularly in terms of innovation, you need a lot more players. And it's much harder for these smaller defense startups to get into the market, to survive in the market and not be squeezed out by the primes. You know, there's efforts to try to support them in some ways to try to encourage that. But that's a real concern for me, particularly when I look at like the drone space, for example. I don't see the same kind of vibrancy commercial market or the defense market around drones like what we see in say China, for example.
- [32:26]
D
So this is something that came up in our conversation with the Palantir cto, this idea of like creating a more even playing field, I guess so that you do get this network of like competing players. Just on the China note, can you compare and contrast a little bit like China's military manufacturing and development capabilities and it's again, its ecosystem of manufacturers versus the US like what exactly are the key differences in your, in your mind?
- [32:54]
E
Yeah, so I think there are a couple differences is that their capacity to scale up seems to be much greater. And so some of that is just simply that they're able to turn things out faster in terms of manufacturing. Some of that is, you know, attention that they've paid to manufacturing capabilities and more advanced, you know, methods. That's certainly one, you know, and they can get sufficient workers. I mean, they have a larger workforce in terms of attracting people into, into the factories to be able to make these things. And there's also, I think the other difference is, and you hear this a lot from American defense industry firms is that the lack of like consistent orders, you know, they don't want to build these factories, for example, for, you know, say we're talking Patriot missiles, build these additional factories to produce these missiles so that they're only doing it for a couple of years. For the U.S. military. Right. That would be highly inefficient. They want to know that they're getting long term orders. And the US has not been as great about being clear about the long term demand signal, whereas I think China has been much more successful. And part of that's just because of the nature of their system to be able to Send those signals and work with, you know, what are effectively state, you know, somewhat private, somewhat state owned firms, supporting them through tax breaks often and also placing much larger orders in.
- [34:13]
D
China at least, you know, you're always going to need military products for military parades. At least there's always going to be a parade.
- [34:19]
C
But this is the way, I mean, what you're describing is essentially the, I don't know, the malignant way in which the defense industrial complex only grows over time because you build these factories and then there are people there and you can't just turn them off or. Because what if you're in a war? And so you just end up in this situation where we have this beast that just constantly needs to be fed. There is no such thing as, okay, we have enough now when it comes to a given weapons system.
- [34:46]
E
Yeah. You know, and I think one of the other things is we tend to start with the platform or the system we want to develop, and then we think about how are we going to manufacture it. And I'm always struck by that quote by Elon Musk where he says about, I think it's Tesla, the factory is the product.
- [35:01]
C
Yeah.
- [35:01]
E
And so I think one of the problems is this, the mindset we have, which is like, okay, here's the platform, here's what we wanted to have in capabilities. Like, this is the perfect system. Right. And then we think about manufacturing it as opposed to saying, listen, this system is only good to me if I'm going to be able to scale it up and scale it up rapidly and easily enough. And that needs to, I think, be much earlier in the process. And the company is showing that like there's going to be that ability to ramp that production. That's just not how we've really approached it, in part because we've been accustomed to this paradigm of smaller numbers of expensive, exquisite systems, but we now need a good enough systems in larger numbers. And so that requires a different model.
- [35:43]
D
Okay, well, on this note, just to sum it all up, how screwed is the US militarily versus China?
- [35:51]
E
You know, I don't think we are. You know, first of all, military parades are great, they're fun to watch, but it's a quite a different thing to actually be able to use this capability and to really have the skilled personnel that can really operate it. And I would just say this is sort of the bean counting version of parade where we get to see some cool things and we don't even really know what that looks like inside. Today, when you look at military capabilities, a Lot of it's the computer part and the sensors and the integration and that you can't really evaluate just through images. And my faith is really that I think the United States still maintains an edge in those things and certainly in well trained personnel that are able to use their equipment really well compared to the Chinese. And so I think we still maintain certain advantages in terms of military effectiveness over the Chinese. They have certain advantages in terms of their geography, but they're certainly becoming a greater competitor. But if we're trying to defend territory in allied territory like Japan, the Chinese still have a much harder problem set of trying to overturn, you know, the regional order, particularly with US on defense.
- [37:00]
C
Kelly Grieco, Fantastic conversation. Fantastic reminder to not always read too much into grand propagandistic parades. As impressive as they may as they may be visually. Fantastic conversation. Thank you so much for coming on up.
- [37:14]
E
Thank you for having me.
- [37:27]
C
Tracy. I really thought that was a great conversation just to start. I do think one thing we should do more on is these efforts to have defense startups.
- [37:37]
E
Yeah.
- [37:37]
C
Because you hear about it a lot, Right. And there are a lot of people associated with the Trump administration who are very enthusiastic about the prospect of Southern California tech startups like an anduril or whatever, to be more important contractors to the Defense Department and so forth. To what degree are these efforts successful? How hard is it to sort of break the stranglehold that a few large players have? Is an interesting question, but one we should definitely do more on.
- [38:02]
D
I totally agree. The other two things that kind of struck me from that conversation was one, the idea that quantity still matters when it comes to military warfare. And as you pointed out, like, this is a long standing theme when it comes to conflict. Whoever can make the most stuff.
- [38:19]
C
Yeah.
- [38:19]
D
Or produce the most soldiers tends to win. Not always, but mostly. And then the second thing that stood out to me was, as Kelly was saying at the end, the technological capabilities of competing military forces and the idea that even though we can see, you know, the shell of a particular product, we can look at like whatever next generation fighter China is producing, you can't see inside of it. So it is really difficult to evaluate things like sensor technology or, you know, how they're targeting their particular targets and things like that.
- [38:53]
C
The only problem is just by going on literally every other consumer industry that we are aware of, particular cars, I mean, this is. Or consumer drones. Right. Just consumer drones. It looks like they're doing pretty good, right.
- [39:08]
D
The signs aren't good for the U.S. yeah.
- [39:10]
C
I mean, maybe we don't know what's really inside some of these systems. We just see shows. We don't know how many of those robot wolves that they displayed at the parade, but I've seen some videos on Twitter, they look pretty good. And I've seen some other things and you know, it would not be crazy I would surmise that they are decent on the inside, but what do I know? And I genuinely think that everyone in all realms, including when we were thinking about the US should be on guard for the fact that we are bombarded in propaganda these days to an incredible degree.
- [39:39]
D
Maybe we should go back to carrier pigeons.
- [39:41]
C
I like that idea.
- [39:42]
D
Yeah, so do I. Okay, shall we leave it there?
- [39:44]
C
Let's leave it there.
- [39:45]
D
This has been another episode of the Odd Thoughts podcast. I'm Tracy Alloway.
- [39:48]
C
You can follow me raceyallaway and I'm Joe Weisenthal. You can follow me at the Stalwart. Follow our guest Kelly Grieco. She's a Greco. Follow our producers Carmen Rodriguez at CarmenArmond, Dashiell Bennett at Dashbot, and Cale Brooks Al Brooks. For more Odd Lots content go to bloomberg.com oddlots where we have the daily newsletter and all of our episodes and you can chat about all of these things 24. 7 in our Discord channel. We even have a defense channel in there. Discord Ggodlots.
- [40:18]
D
And if you enjoy Odd Lots, if you like it when Joe fulfills his destiny as a middle aged man and talks about the defense industry, then please leave us a positive review on your favorite podcast platform. And remember, if you if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad free. All you need to do is find the Bloomberg Channel on Apple Podcasts and follow the instructions there. Thanks for listening.
- [40:55]
E
Sam.