Invest Like the Best with Patrick O'Shaughnessy
· Scott Nolan
[00:00:00] S1: Yeah, I think there's the on-shoring piece, but maybe even simpler, it's just vertical integration. So even domestically, you have companies in the nuclear space, the aerospace industry, like defense – many different sectors where subcontracting is the norm. And you're going to subcontract a subsystem to somebody who subcontracts a component. And then that component has different inputs and they subcontract that all the way down. I think in aerospace at the SpaceX days, it was 30 layers of subcontractors in this one system somehow, I think it was the case from the space shuttle, some crazy number of subcontractors. And then in the nuclear space recently, there was one analyst call where a company was bragging about having something like 900 subcontractors, and so many that they needed regional organizers of the subcontractors. And on one hand, it's like okay, clearly what you're doing is really complicated then and there's deep barriers to entry. But every one of those interfaces that crosses another company is typically a fixed interface that's not going to move very quickly. And so you have to treat it as fixed. And so everyone's designing their individual piece against preconceived interface requirements, and you end up with a really calcified architecture of your system. This is just at the system design level, and you can't optimize across layers for the overall goal. Now, if you bring all that in house and don't have a lot of subcontractors, you can actually, as an engineering team, optimize with every iteration, trade off interface requirements. Hey, this thing that you asked of me over in the electrical team, for me, the mechanical team it's going to be really, really hard. Do you mind giving me a little bit of breathing room on that? I'm going to make it up somewhere else. And so you can have those conversations much more easily when two people are sitting side by side at a desk than when you have two separate companies across the country. And so at a minimum, I think you need to pull the engineering together and vertically integrate and just sign up for doing more of the engineering yourself and not outsource it. And then part two is the manufacturing.
· Scott Nolan, Patrick O'Shaughnessy
That's just on the design side, if you're actually going to make the thing and you're trying to design for manufacturing, well then maybe you want your manufacturing actually co-located with engineering. And so that's what all of the great hardware companies are now doing, is you at least have your first of a kind manufacturing co-located with engineering, under the same roof. You basically talk it out of – here's why this thing that you just designed is hard for me to make. If you can make it this way, I don't need a 6-axis CNC. I can use this with a laser cutter and make this part. We're going to get 10X throughput at one tenth the cost. And so I think you need to, at a minimum, put your first of a kind manufacturing co-located with engineering. And then better yet, small scale manufacturing, mid scale manufacturing. Maybe at large scale, you can push it somewhere else and go to a lower cost center, as opposed to like Southern California where so many of these companies are. But I think it's mandatory. You've got to bring it all together. [00:00:00] S0: What have you learned about the role that energy plays in a civilization or a society? It's funny, we didn't really talk about energy for a long time. I think the per capita growth of energy was flat for a couple of decades prior to this recent surge because of AI and data centers and everything. What is your framework for thinking about the role of energy in general? And then we'll get into the specifics of what you're doing.
· Scott Nolan
[00:00:00] S1: There's two of my favorite charts around this topic. One is GDP per capita versus energy consumption per capita. The R-squared on it is certainly over 0.8. You cluster every country on earth. You plot GDP per capita, you plot energy consumption per capita, and there's a very obvious line through them. There's outliers, but it's so predictive. It is the thing. Energy use and production is the ultimate proxy for human prosperity, for economic activity, for all these things. This has been, I think, pretty well understood for a while, but completely under discussed. And then you look at the US – this is the other chart I always look at – we grew our grid for a long time, and then starting around the 90s, essentially no growth until today. China was growing a long time, 2010 we were equal neck and neck. I think this year they now will be triple us on total energy production. And so the US just needs to do something if it wants to continue to be relevant economically. You need more energy production if you want to grow your economy. And I think just purely outsourcing stuff overseas just gives up capability, especially as it gets to new manufacturing techniques, how to scale manufacturing rapidly, all these things that are so important.
· Patrick O'Shaughnessy
[00:00:00] S0: How do you think the causality runs? One idea could be if China surpasses us on a per capita basis, and let's say they get to double. Is there some rule of the way things work that will just mean they'll find ways to use that energy in some way that raises GDP per capita and drives all this progress? Or is the causality the other direction as GDP rises or we find new innovations, like energy catches up to rise to meet that demand or something? It's curious to imagine if I just airdropped, I don't know, three times the US per capita capacity of energy on some random country, would that country necessarily become prosperous?
· Scott Nolan
[00:00:00] S1: The whole argument from the 90s almost till 2020 was something like, even if it would increase the economy, would you want to? So, okay, do I want to have dozens of aluminum smelting facilities in my country or is that better done overseas? And it's low margin and not interesting and not going to accelerate your economy, and why do you have people working on that when they can be in the services world and do more interesting things? Certainly that was an argument, but I think we're seeing it right now – what happens when you're not proactive about it, when you don't have the capability even of expanding rapidly. And you don't want to be caught completely flat footed when there's a large demand for energy production, and now here we have it with AI and data centers. And you look at some of these curves and it looks like data centers could consume, if they were allowed to, the entire grid by 2030 at this growth rate. And so I think in theory, you would say energy production will come online as we need it, but then in practice, if you don't develop it, you may bias yourself towards other things – because while our energy costs are kind of high or our energy cost is higher than other countries because we're tighter on supply, and they've overbuilt and they're subsidizing. But then they take those industries and then they take the front of the supply chain and just start marching forward to where they can dictate a lot of different things about the economy. That was the classic view – economies are efficient, markets are efficient. If there's a demand for energy, we will bring it online when we need to, but physical world stuff has a timeline with it. And then in the U.S. it can be very hard to get stuff permitted to go do things. And so when there's unexpected demand that's very rapid in its increase, you might be caught completely off guard, which I think is the situation in the U.S. now with data centers, and them scrambling to find power. And where, a few years ago, if you looked at a data center and you thought, okay, where are they going to place it? The answer was they'll put the data center where there's stranded power. Stranded wind in West Texas, stranded flare gas in South Dakota, North Dakota. And now those stranded assets are gone and now it's time to build new capacity.
· Scott Nolan, Patrick O'Shaughnessy
And data centers are completely backed up on getting natural gas turbines, and nuclear takes a few years to get installed. So I think just from an energy stability, economic robustness point of view, you want to have capabilities, and at least the ability to stand those up as you need to. [00:00:00] S0: Obviously you're doing something about it, but how do you feel about the state of things overall? The state of energy in the United States overall, both state and direction? [00:00:00] S1: The state's been fine until now, and then the direction is completely flat. So to me, the issue is that we have not increased at all in decades on the supply side. The direction doesn't feel great. The state, I wish we had more. I wish we were not one third of China. I think we could be doing a lot more things if energy was not just abundant, but cheap. And so, just making more high cost energy also won't bring back certain industries. It won't cause us to start doing things we used to do. [00:00:00] S0: You think energy is the bottleneck to us bringing back some of these industries that have left? Or is it more labor? [00:00:00] S1: I think the labor is actually the one that's probably the most responsive. If there's really compelling jobs in a field, people will shift over to that. The classic one, the last couple of years has been electricians. [00:00:00] S0: Massively undersupplied. [00:00:00] S1: Massively undersupplied, can't get enough to build all the data centers. They're commanding very high, great wages. Can make more than people who went and got a masters.