Invest Like the Best with Patrick O'Shaughnessy
· Shyam Sankar
[00:00:00] S1: Two things I just want to put down that will make this make more sense. The first is that we want to make software that makes you more different, not more similar. We think about it as alpha, not beta. The second thing is that we are a wildly inductive company. We would never show up to a customer with some preconceived notion of – this is the aerospace ontology. I'm gonna pick an aerospace example in a second here. It's rather all the values and understanding what makes your aerospace company different than all the others. How do I make you more different there? That's the differentiation you're competing on. When we first came to Airbus, Airbus was in the midst of ramping the A350. The A380 was a wonderful plane, structurally unprofitable program. So the A350 was this bet that the whole company was effectively riding on in 2015. The first time you make an airplane, you're always going to have issues. There's a learning curve to the production. And one of the most important things to figure out as quickly as possible is, what is an issue that is just a nonconformity, like "Hey, I'll give this guy some training and he'll learn how to figure it out. It's teething pain, it'll go away." And what is a recurring issue that is actually a design defect that I need to go work with my suppliers, or upstream? How quickly you can solve that becomes fundamental to the shape of the ramp and the cost of the ramp. The first thing we did is we just started sitting with users on the final assembly line in Toulouse. These are wrench turners effectively. And understanding, hey, what makes your life suck? What's hard about this? What's the challenge in working on these nonconformities? Basically, they're going through Excel. They're looking at reports in SAP, trying to figure out, how do I bucket all of these issues that are coming in? So we just helped them automate all of that. And the ontology at that point was really related to parts, sequencing of work, defect rates, everything related to quality. Once you had this immense quality asset though, you were able to pivot it to realize, okay, now I'm up the learning curve. It naturally leads to the next problem, which is production planning. So quality to production planning to then in service. Now you have the greatest data asset possible for this tail.
· Shyam Sankar, Patrick O'Shaughnessy
As this plane enters service, how do I help maximize the uptime of this asset for my customers? How am I gonna compete against the other aerospace manufacturer? That's the natural evolution that we see with most customers. You start with one problem, but of course they exist in the context of this connected decision chain. [00:00:00] S0: What's the difference between dealing with military customers and government customers, which you did for a long time, and commercial customers?
· Patrick O'Shaughnessy, Shyam Sankar
[00:00:00] S0: What's the difference between dealing with military customers and government customers, which you did for a long time, and commercial customers? [00:00:00] S1: There's a lot more non-market forces in the military. The military is the only institution in the world that profoundly divides up supply and demand. The beating heart of most companies is that integration, that sales and operation planning process. You have the combatant commands, we call them, that deal with real world events. If you're fighting Russia, that's the European command, EUCOM. And then you have the services, like the Army, Navy, Air Force, Space Force, et cetera. Their job is to man, train, and equip. That's the supply side. You have a group that has no responsibility for demand, essentially deciding what to build, how much to build, how am I gonna man, train, and equip this? And then they present these forces to the combatant commands and say, this is what you have to solve this problem. That adds an additional level of complexity. So if the demand side says, hey, I really want this, this is the capability we need, they can't buy it. So how do you kind of square that? So I think you have all these other non-market forces to deal with. But I think one of the things that is really advantageous to being both a commercial and government-oriented company is that the intrinsic rewards on the government side are so high, so motivating. It enables you to get through and solve really hard problems in a way that is kind of like a rising tide for the whole business.
· Patrick O'Shaughnessy
[00:00:00] S0: How would you define the state of our military today? I know it's a big question, but it's an important question. You've gotten to see so many sides of it and serve many aspects of it. How would you describe the state of the U.S. military?
· Shyam Sankar
[00:00:00] S1: We are the best military in the world. Our uniformed service members are better than we deserve. Actually, I had someone tell me, "Hey, when are you going to stop being shocked at how good this E4 is at building this app or doing this thing?" It's like, the amount of talent is eye-watering. I think we encumber them in a lot of process. We deprive them of a lot of agency. And I certainly have a lot of critiques of the bureaucracy. But I think the structural challenge we have is actually something that we just need to observe from a distance from the military we have today, per se, which is the whole point of the military is to deter our adversaries from conflict. If you look back over the last 10 years, we've not been able to deter a lot of conflict. We had the annexation of Crimea in 2014. The militarization of the Spratly Islands – after they told President Obama we will not militarize it, they militarized the Spratly Islands. We've had a pogrom in Israel. We've had the invasion of Ukraine. We have unprecedented gray zone phase zero operations by the Chinese in the South China Sea. I would say arguably in the last year we've started to restore deterrence. Whatever you think about it, Midnight Hammer was a massively deterring operation. Maduro was massively deterring. You have it on multiple levels. With Midnight Hammer, it's obviously the overwhelming strength, the precision of what we're able to do, the incredible complexity of the operations. No other military in the world could have done that. But we need to view that as a single strike and the deterrence capability against a peer adversary is can you generate that strike every single day until the enemy submits to your will? You think about Maduro, it also shows our capability, like literally the raid happened the day the Chinese were in town. Maduro has all these Chinese and Russian weapons, Venezuela, and they don't seem to work at all. And that sends a very strong message to everyone else who thinks that their security is coming from buying Chinese and Russian weapons. Now, I think we trace back – and this is what I really wrote about in the 18 Theses. So if we start, we say we've lost deterrence. Let's be clear eyed about that. In the last year, we’ve started regaining it. What happened? Because we had it for a long time.
· Shyam Sankar
We were the sole superpower in the 90s, and we spend a fair amount every year on defense. People want to talk about narrow things like acquisition reform or the mix of weapons. I think it comes back to people. It comes back to the heretics. At the dawn of World War Two, we were the best at mass production. Effectively, our country invented it. And in order to create an industrial base, we took the number two at GM, who was previously number two at Ford, Bill Knudsen, who was a Danish emigre, who was really the perfecter of mass production. And we direct commissioned him a three-star general and we put him in charge of war mobilization. And Knudsen was a world class engineer. And what did we do? We gave him the authority to go meet other world class engineers all around America. We had one key advantage in World War Two in terms of timing, which is that we had Lend-Lease. There was a period of time that we actually mobilized production when we were not fighting. We were building stuff that we gave to our allies, to the Brits in particular, and the Soviets. But that allowed us to build factories and retool existing factories and hit a production ramp so that after Pearl Harbor happened, we were basically at full rate production and were able to go after these things. And put this in context of our adversary, the Germans, they were actually better engineers than we were. They just made a very small number of very exquisite things. Now, if you come to the present moment, we sound like the Germans. We make a very small number of truly exquisite, eye-wateringly exquisite thing, and our adversary is the world's best at mass production. So this should give us all a little bit of discomfort here. The second part of this is the nature of the industrial base. Today, we call it the defense industrial base. I think it used to be the American industrial base. Until the fall of the Berlin Wall, only 6% of spending on major weapons systems went to defense specialists, i.e. companies that only did business with the Defense Department. Most of that spending, 94%, went to what I call as dual-purpose companies. A missile is single use. There's no dual-use missile. But the idea that Chrysler would build missiles and minivans meant that all the R&D that they were doing on production, material, equipment, machine tooling could be leveraged.