Invest Like the Best with Patrick O'Shaughnessy
· 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.
· Patrick O'Shaughnessy
[00:00:00] S0: Obviously, there's tons of understanding about what the State of China wants and is trying to accomplish. But if you add up all your conversations with all the people that you met across the week, how would you sum up what the people you met and interacted with wanted, and what was their attitude towards us? It seems increasingly adversarial from our direction to them – skeptical, worried about it, et cetera. Just adding up your conversation, what was your felt sense of what the people wanted and were trying to accomplish and felt about the U.S.?
· John Arnold
[00:00:00] S1: I was struck by just how much the two countries have separated since 2019. The number of flights between the two countries is down 70%. I talked to a couple of expats in Shanghai who said that the number of Western expats was down 50% to 75%. The number of American students studying there was down 90%. I started to push on this a little bit about what was happening. Part of it was when China was starting to develop and trying to copy the West, one of the ways to do that was to bring over Western expats and teach it Western business practices, and all the aspects about how to run businesses and capital formation and allocation. Those roles, those learnings, have now been domesticated. So instead of firms paying multiples of the cost to bring over a Western professional to do it, those learnings are now domestic. It's cheaper and they have those skills. So they don't need the West anymore. That was one of the big senses I got – this confidence that's building there. Of "We used to just copy the West. Now we're world leaders in many of these things. We don't need the West coming to teach us things. We're going to teach the West."