Invest Like the Best with Patrick O'Shaughnessy
· Shyam Sankar
[00:00:00] S1: What you said is exactly right. It is daunting, but critical. So we have no choice but to lean into that and start. The best time to start would have been yesterday. The next best time is today. Let me also give the case for why it's critical, because I think we're screwed if we don't do this. The biggest lie that we bought from globalization is this concept that we will do the innovation and they will do the production. Well, you have to recognize that innovation is itself a consequence of productivity. To put it in terms that I think our audience here would understand most directly, what motivated Google to do the research behind the "Attention Is All You Need" paper in 2017? If you ask them, they'll say well, the team was working on an incremental 3% improvement to Google Translate. You cannot think of something more banal leading to something more revolutionary than that. So if you don't have the input stimulus on improving production, you're actually not going to be able to capture the innovation. And that's literally what we're seeing play out in the marketplace today, which is OK, they went from making a battery to making the whole car. WuXi went from being basically a cheap pair of hands for pipetting contract research in the pharma industry, to actually now 50% of all clinical trials are drugs that are created in China. So we have ceded the innovation. It's not that it was taken away from us. We just ceded it because we had a completely incorrect preset. So now we have to reattack that. We should do this with some asymmetric advantage. I think we have a couple of them. I don't think it's true that we're not great at building things in this country. Look at Elon and the progeny of Elon. We do know how to manufacture things here. And we're going to have to think about manufacturing things in new and novel ways. In addition, it doesn't all have to be new. It's like Ford, General Motors. These are world class manufacturers, too. We have that capability. But we also have new ways of thinking about this with much deeper, vertically integrated production. Thinking about the production process itself is something that's more iterative and software-like that you're going to keep upgrading, co-locating R&D with production itself. So I think these sorts of trade crafts are the things that we can lean on.
· Shyam Sankar, Patrick O'Shaughnessy
And probably the last piece I'd say is, AI is David's slingshot here. If we can give the American worker superpowers, if you can make the American worker 50 times more productive than a worker anywhere else, you're going to change the efficient frontier of what can be made here. I think as a consequence, we should be reindustrialization maximalist. The free traders out there like to say, like, maybe we can friend-shore or whatever. I think that stuff can let us off the hook too easily. It fails to solve the problem. The other example I'll give you from Patrick McGee's book "Apple in China" is that [00:00:00] S0: Great book.
· Shyam Sankar
[00:00:00] S1: Great book. People love to say something like, well, we don't have the machine tools engineers in America. You could hardly get two people in a room to talk about it. You could fill a whole stadium in China. But then you look, Apple has spent the equivalent on an inflation adjusted basis in the last five years of two and a half Marshall Plans building talent and capacity in China. How about we try to spend one Marshall Plan here? I think the problem is we're not even trying, in part because we're daunted, in part because parts of our economy don't recognize that, actually this isn't going to keep working. You're going to lose everything, not just something. It's why I feel I need an urgent call to action to say, like we are in an undeclared state of emergency. And it's not just manufacturing the physical things we think about. I even think about this in terms of drugs. 80% of our generic drugs come from China in one way or another, whether it's the APIs or the finished product themselves. That is a huge problem. Today, your child has an ear infection. That's pretty trivial. You think I'll have some generic antibiotics and it'll go away. If you have great power competition with China, and the will of the American people to fight when they have to really contemplate, hey, my five year old might die of an ear infection. So we need to take these things much more seriously and further down the supply chain. I'm glad we're starting with Rare Earths, but there you could say we had to get punched in the face to mobilize around it. Maybe one of the galling things we should all think about is we've been staring at this Rare Earths problem for the better part of 15 years. We more or less had solved it for like two billion bucks. It's roughly a rounding error relative to everything that we're doing. And now we're on a trajectory to do it. So I think part of it is just starting. I would love to bring everything back. I think making a marginal improvement of even 10 percent dramatically reduces the adversary's leverage.
· Patrick O'Shaughnessy
[00:00:00] S0: I just was reviewing my notes ahead of our conversation today, from Graham Allison's book on China, called "Destined for War" with China. Can you give your perspective on how you think about China as an adversary, as a country? I highly recommend the book "Apple in China". I mean, it really gives you this deep sense of how tightly integrated, arguably our most important company is with manufacturing there. It's this very strange circumstance, I have to admit, where I've been to China. It's another place filled with human beings and interesting things and amazing, interesting culture and all sorts of positives. It's a hard thing to wrestle with that they're an adversary in the traditional sense. But I think there are components of that and the nuance is important. I'd love to just hear you describe how you think about China as a political entity, as an adversary, as a country. Just feels like an especially important thing to understand your view on.
· Shyam Sankar
[00:00:00] S1: When we won World War Two, we spent our own money to rebuild Germany and Japan. Microelectronics moved to Southeast Asia, as "Apple in China" documents and "Chip Wars" documents, because we helped move it there. Yes, we got cheaper goods in return, but the economic development of these countries, their flourishing, in order to create global stability, was part of the calculus. Same thing with admitting China to the World Trade Organization. The problem is they cheated the whole way through. And even if you go back to a pre-Deng Xiaoping era, they call us the big enemy. I think part of it is our own naivety, our own belief that capitalism and human flourishing is a natural consequence of prosperity. So, OK, they're saying these things, but as they get richer, they're going to change their perspective on these things. And we're all going to find some way of having a positive sum view on the world. That's essentially what didn't happen. I think the challenge for us with the CCP, is that it's not enough for China to be prosperous. America must fail. You see this through simple acts. If you look at agriculture, it is totally their prerogative. It's a business decision whether you want to buy American soybeans or not, or you want to buy Brazilian soybeans. I do not begrudge them one bit. It's a totally different thing when you're trying to smuggle in agricultural funguses so we can't grow soybeans. Now, if you start going down the laundry list of what's actually happening, that's the shape of what's happening. They're a formidable adversary, in the sense that our conception of war is kinetic. It's the lone heroic cowboy against the odds, winning through heroism. Their conception of war is deception. It's the general who tricked the adversary to get into the valley and then flooded it. It's a cultural thing. You want to win without firing a shot. So a lot of the things that are happening are below what we would consider the threshold of conflict, but it absolutely is conflict. It is, in their system, system destruction warfare. It's waging war through all the means, because they're going to wage it where they have asymmetric strength. The American Calvinist sensibility is structurally positive sum. We're going to turn the other cheek time and time again, over and over again. But there will be some line, there'll be some point at which we just react.
· Shyam Sankar, Patrick O'Shaughnessy
And when we react – the best quote I have from an admiral I like is – it's no longer John Boyd's OODA Loop. Observe, orient, decide, act. It's the American OODA Loop. Observe, overreact, destroy, apologize. What we want to do is prevent this from happening by having enough deterrence that we're not provoked to being in a position where we even need to react. [00:00:00] S0: You've mentioned the idea of asymmetries a few times, nuclear subs being an example of one of our last huge asymmetries versus others. What are the most important asymmetries in your mind for the US and for China? Where do they have an asymmetric advantage against us? Where do we have it against them? And what do you hope shifts?