China’s drone edge comes from deep component process knowledge

Transcript

From the transcript TBPN publishes with the episode.

1. 1:37:33

   Yeah. I feel like a lot of the reason people are discussing this so much on the timeline lately is because of Dan Wang's, new book, Breakneck, where, you know, breaks down basically the, like at least his argument is that, you know, China is the engineering society. We're the, you know, sort of lawyer society, and everything basically, you know, sort of stems from there, which I think is probably a little bit you know, it it I like a lot of parts of his book. That actually particular argument is probably one of my, like, less favorite, you know, sort of parts. Partially, because, look.

2. 1:38:02

   There are things that China is obviously, you know, sort of very good at. I think I it was, you know, hearing your last guest talking about, like, you know, mass production of solar panels. They're obviously, like, phenomenal at that type of, like, commodity cost curve, relatively complex, but not deeply complex type of manufacturing. Right? Like, they've stepped up from, like, you know, the early days of Shanghai being, you know, sort of toys and knickknacks, etcetera.

3. 1:38:23

   Obviously, now into, like, you know, mass consumer electronics, unit tree is obviously, like, by far the best, you know, sort of humanoid robotics company, and then obviously in solar panels. But there's, you know, I think some limitations to their approach. Like, you know, when I think about it from, like, the aerospace perspective, look, a Falcon nine rocket landed for the first time a decade ago now. The Chinese basically, like, stole the IP and planes that clearly have something that is, like, the equivalent to a Falcon nine, and they're still basically doing the, like, early days of, like, you know, Starhopper, which was, you know, back or grasshopper, I mean, which is, the SpaceX project in, like, 02/2013, I wanna say. Mhmm.

4. 1:38:55

   They was just doing the suborbital little, like, hop ups and downs to practice for Falcon nine. And so I think I do think they, like, have this limitation when it comes to, like, deep, deep systems engineering and requiring some creativity that they, like, miss out on, and I think that's why you've seen them partially succeed in semis. Right? They're good at the, like, you know, sort of last generation of semis and, you know, sort of reassuring that to China. But I don't think you've really seen any progress on them, you know, sort of, you know, domesticating cutting edge, you know, sort of semis.

5. 1:39:25

   TSMC Arizona, you know, is at least a very subscale version, you know, of, you know, being of being able to do actually some amount of cutting edge domestically. And I do think it, you know, sort of shows that there's just some breakdowns in Dan Wang's argument where, like, we are able to import that type of, like, everybody calls it, like, industrial process or process knowledge Yeah. In The United States and even develop it ourselves. Right? The other area that obviously, like, we do quite well on, you know, it's not the perfect company, but, like, look, like, the the, you 99% of commercial airliners in the world are still developed by the West.

6. 1:39:53

   Right? You know, Boeing and Airbus and continue to be, and it's not obvious that China has really been able to displace that. You know, the only other areas that I think about actively that you need to be you know, sort of reshorred some amount of it is like, hey. If we want to, you know, to compete against China and Taiwan, it is gonna be almost certainly like a mass scale production, you know, sort of game more so than anything else. And so when you think about, like, mass scale drone manufacturing, mass scale metal cutting, mass scale, like, fighter jet production, that's something that, like, we're obviously behind on even, the munitions.

7. 1:40:23

   Right? Like, you know, Ukraine has shown that, like, you know, artillery is back to being relevant again. It was not relevant at all in any of the, like, Middle East conflicts. But now with, like, but now with, like, continuous, you know, Internet coverage and continuous, basically, you know, spy satellites, you know, you could actually justify, basically, just, like, you know, anytime that your, you know, enemy makes a move, you just artillery shell the crap out of them, and that's actually, like, back to being, you know, sort of relevant on the battlefield. And they are far better. They have these, like, you know, lights off, you know, artillery shell production facilities that basically just, are twenty four seven fully roboticized, you know, produce, you know, way more than The United States can. And so I don't know if those are gonna be necessarily, like, the equivalent of TSMC where you're, like, taking somebody's preexisting industry and like dropping it here and that like there's not an obvious place to go import from basically Mhmm. For that type of stuff.

8. 1:41:08

   I think we kind of saw that on our own and obviously Founders Fund were making some investments, you know, in that space. Obviously, you know Is that

9. 1:41:14

   true too that in in China, like, yes, there there's flagship lights out factories that are truly cutting edge, the kind of thing we just don't really have here in The United States, but yet still the vast majority of manufacturing in China is just a lot of labor, like, you know, assembling cheap components?

10. 1:41:35

    It shifted. I think that's like a, you know, sort of decade out or a decade old sort of, you know, sort of thinking where it's like, yeah. The reason that China won for a long time was because of just, the labor arm and cheap cost of labor. When you talk to people

11. 1:41:46

    But but I'm just saying, like, with with the truce, like, we can't buy the like, when you talk about China's advantage of just being able to produce overwhelming mass, right, across every different sector, there's certain key areas where they are just light years ahead, and then it's they're still getting this massive benefit of even the components that get made that go to the lights out factory to be assembled, you know, but with robotics.

12. 1:42:14

    Like, there's Yeah. I mean, when I think about, like, their advantages in, like, your drone manufacturing, it's mostly due to automated facilities. Right? Like, it's not because they, like, you know, have a bunch of, like, you know, sort of mass assembly, super precise, small hand, you know, sort of laborers or something like that. It actually is because when you think about, like, the PCB boards, largely, basically, fully automated. The, like, you know, propellers that they make, largely fully automated.

13. 1:42:37

    The battery lines, largely fully automated. And so, yeah, I I just like, I when I think about, like, the edge that they have in drones, yeah, there's maybe some amount that's, you know, sort of this, like, assembly edge, but, like, I'd put that at, like, five to 10% of the edge. Like, 90 of the edge is that they, like, have such deep process knowledge across all these individual, like, different, you know, basically, like, subcomponent sectors and a lot those co location.

14. 1:42:57

    You know, are fully. Say again? Co like, co location effectively. Yeah. And the collocation is just, you know, sort of wild. Right? This is also there's sometimes the problem with, like, this stuff in America when we, like, try and reimport it. It's like, you know, the CHIPS Act, one of the biggest battles was, like, the, you know, the size of funding required support from a broad set of senators and congressmen.

15. 1:43:13

    But then by default, they want, you know, sort of jobs everywhere, and so it's been more difficult to fully, you know, sort of centralize all of the, like, you know, reshoring of semis in The United States into a, you know, sort of single location. Like, you know, Arizona is definitely you know, it's been impressive, but, like, ideally, it's not just the, like, fab. At some point, you wanna do, like, lithography there and a bunch of other parts of semis centralized there. But, like, in The United States, we actually kind of have a bit of a chips hub. Obviously, still some amount in Silicon Valley.

16. 1:43:36

    Austin's become, like, a, you know, sort of really big area. Ideally, those would all be in, you know, sort of the same place rather than so spread out. And so it is harder given that we're not like China that's willing to sort of like put their finger on a scale to a single, you know, city and just be like, you are going to become like the guitar producing city and everything is going to be, you know, sort of based there. Mhmm. We don't we don't do that.

17. 1:43:55

    Need a new guitar executive order. It does feel like we're starting to do that with the neo clouds, with some of the big data center build outs, Abilene, Texas. Like, we're we're marshaling capital

18. 1:44:06

    by individual deal makers going and talking to these local governments and figuring out Yeah. Can we do this here? Okay. No. I'm gonna go across the state line over here. I'll do it over here. Sure.

19. 1:44:18

    They're chasing Yeah. We're just much less top down coordinated. But, like, at the same time, I think you're starting to see, like, the faults and the brakes in that system, you know, in China. And Dan Wang talks about this user as well where it's like, look. You know, they clearly still excel in certain areas, but they've also, mean, like, think about it even over the course of time that I've been a founder's fund.

20. 1:44:35

    In 02/2021, like, the number of unicorns being minted in China was starting to approach, you know, The United States, and there's, like, some real risk and fear that it's going to supersede. Now four and a half years later, you know, the Chinese venture capital ecosystem is effectively, you know, totally negligible. And so, you know, I do think that they've, you know, done a decent job on, like, you know, sort of prioritizing the industries that matter the most, but also their, like, capital markets are, like, you know, sort of way worse than they were, you know, sort of four and a half years ago. Mhmm. You know, they have reimported a bunch of, you know, sort of Chinese nationals from The United States back as scientists into China, you know, pretty good, but they've also, like, lost, you know, something on the order of, I forget what the number was, like, 25,000 Chinese millionaires, like, are, you know, exporting their capital.

21. 1:45:13

    They lost the Manus team. The Manus team's over in Singapore now. So they might be working on the Benchmark office soon.