Invest Like the Best with Patrick O'Shaughnessy
· Patrick O'Shaughnessy
[00:00:00] S0: My guest today is John Arnold. John is probably the most famous energy trader of all time and certainly the most successful. One of the things John says was that he wanted to cultivate and build the best seat in his industry – the seat with the best perspective, with the most information, with the best systems. What's most interesting about John is after being the most successful energy trader of all time, you could argue that he's gone on to be the most innovative philanthropist as well. John has applied this idea of philanthropy to all different sectors, and what's so exciting about this conversation is it feels like you're talking to a talented entrepreneur or a talented operator in all of these different fields, who's willing to share exactly what him and his team have learned about what makes certain problems manifest across our country. He has an incredible perspective, not just on the things he's worked on, but on his travels, on companies, on technology. This conversation is a reminder to me that cultivating the seat is such a powerful concept that we probably underinvest in. Please enjoy this wide-ranging discussion with John Arnold. Everyone listening, I think, is somewhat interested in what's going on in China. Your lessons that you shared were so interesting, and I'd love you to just share some of the highlights from that trip, and what you learned traipsing around – studying robotics, studying AI, everything else that you did. What were your major takeaways from that trip?
· John Arnold
[00:00:00] S1: The origination for the trip was this realization that China has gone through a transformation unlike any other that's happened in the world, both economic and cultural, in the course of 30 years. This is a country that has gone from trying to replicate the West to, in many ways, leapfrogging it. I was fortunate enough to spend a week running around and met with four or five companies a day that were all very open, and got to tour factories. It was really striking. I came away incredibly impressed, and also with a lot of questions about what happens to the rest of the world as this rise of China is happening. The one big takeaway was just the speed and scale of which they can do things is unlike anything in the world. They have this highly educated population. It's a very entrepreneurial culture. They've figured out how to get capital to these companies, and they have this deep domestic market. And so it allows them to build up these supply chains and agglomeration effects to create something that I don't think exists in the rest of the world. We were talking to a battery company and asking them, are they looking at replicating factories elsewhere in the world? One of their responses was, "Every one of my suppliers is within 200 miles of here, and I can call them and meet with them same day, and you can never get that." And then the scale of labor that they have and the flexibility. If you need a thousand workers tomorrow, you can get that. It is a skilled workforce that's still very hungry, that's coming, oftentimes, from poverty. So having this factory job, which in the West might not look very appealing; for many people in China, it is highly appealing. It's kind of the first step up. This combination of things has allowed them really to create this competitive force that the world is suddenly reckoning with over the past decade. It's really interesting to think about what's the right response from Western countries that don't want to cede their markets to China for obvious reasons. But there's a lot that China can offer. So, what's the right symbiotic relationship that the West should be having with China? I think it's this massive question that policymakers are grappling with, and I wanted to try to dig into.
· Patrick O'Shaughnessy
[00:00:00] S0: Which company visit was the most illustrative of these big lessons? What was the company visit that, looking back on the trip, taught you the most?
· John Arnold
[00:00:00] S1: I've been fascinated with the EV market in China, which about 10 years ago was deemed to be a strategic market. The way this story is told is that China realized that they were behind on ICE cars and were always going to be playing catch-up. If they could leapfrog to the next technology, then they could have an advantage on the rest of the world. Right now, there are apparently over a hundred different manufacturers of EVs in China. Many of these have a contract manufacturer, so you can send in your design and do your branding independently of the manufacturing. But there’s many manufacturers there who actually have their own plants. We went to this one for NIO, which is kind of the upscale Chinese car, in the $40,000 to $80,000 range, although they've recently released one that's below $10,000. Going to their factory and seeing, number one, how quickly that factory was built. They went from first shovel in the ground to the first car coming off the line in 17 months, which was just phenomenal. And then second, the factory automation that they had. There were certainly people on the assembly line, but much of the process was done via robotics. You start looking at, what are the auto plants we have in the United States. We still have a plant that was originally built 100 years ago operating outside of Chicago. The average age of a U.S. plant, a little hard to get, but roughly 40 years. Now they've been upgraded over time, and there are certainly robotics in American car manufacturing, but I don't think they replicate what's happening with robotics in China. They have this combination of being able to do things really quickly with a skilled but low-cost labor force, and then add on the robotics, has just allowed China to create a quality product at a price that nobody in the rest of the world has really been able to figure out yet.
· Patrick O'Shaughnessy
[00:00:00] S0: Do you know anything about robotics or AI that surprised you?
· John Arnold
[00:00:00] S1: The number of robotics companies. There’s over 100 now in China. As I understand the process – each five-year plan, China specifies certain industries that are deemed strategic. And then the head of the province gets evaluated on a number of factors. The head of the province is selected, not voted on. The evaluation is based on things like employment and GDP growth, but then also, are the industries that are being created aligned with the five-year plan? There are also some subsidies coming down from the top on those favored industries, and robotics is certainly one of them. So then each province takes a couple of companies that it favors and gives them subsidies and supports to try to get the winner, or one of the winners, to be in their province. And then get the supply chain develop around them, and all the associated jobs and GDP. So you get this massive competition that happens. One of the end results is that most of these companies aren't very profitable today, because there’s just intense competition and a lot of times overcapacity, because of the province-level subsidies and supports. But it also creates this intense competition – which has the term involution for it – also creates better technology. If you're faced with that type of competition, to be one of the winners you have to be fantastic. Now I think the question that China has is, what do you do with those who are not the winners? Do you have a process where the losers stay in the industry and keep everybody unprofitable with the overcapacity, or are they closed? China has started this new process of "anti-involution," of trying to support the winners and make sure that they can build up to be healthy, strong companies and be global competitors, and not just be brought down by this overcapacity in the domestic market.