a16z Podcast - China Has Scale. Can America Catch Up?

Episode Date: October 2, 2025

Ben, Marc, and Erik Torenberg are joined by Brian Schimpf, Co-Founder & CEO of Anduril, and Chris Power, Founder & CEO of Hadrian. Together, they dig into America’s defense production gap: why the U.S. can out-innovate but not out-produce—and what it will take to turn that around.They discuss why U.S. war games show we run out of munitions in a week, the myth of “exquisite-only” systems, how to rebuild industrial capacity with software-led automation, financing factories like data centers, and what it takes to create real deterrence in a Taiwan scenario. Timecodes: 0:00 Introduction0:27 Technical Superiority vs. Industrial Scale  3:59 The Decline of US Manufacturing  7:23 Challenges in Onshoring & Skilled Labor  13:27 Supply Chains & Rare Earths  15:34 Automation, Software, and Catching Up  17:15 Complexity of Modern Production  23:34 Strategic Policy & Industrial Planning  26:37 Regulatory Barriers & State vs. Federal Roles  35:27 Talent, Data Centers, and Financial Engineering  38:33 China’s Industrial Policy & US Response  46:07 US Manufacturing, National Security, and the China Challenge  52:00 Demographics, Long-Term Outlook, and Closing Thoughts   Resources: Find Chris on X: https://x.com/chris_powerFind Brian on LinkedIn: https://www.linkedin.com/in/bschimpf/Marc on X: https://x.com/pmarcaMarc’s Substack: https://pmarca.substack.com/Ben on X: https://x.com/bhorowitz Stay Updated: Find us on X:https://x.com/a16zFind us on LinkedIn: https://www.linkedin.com/company/a16zThe views expressed here are those of the individual personnel quoted and are not the views of a16z or its affiliates. This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors and may not under any circumstances be relied upon when making a decision to invest in any a16z funds. PLEASE SEE MORE HERE: https://a16z.com/disclosures/ Stay Updated:Find a16z on XFind a16z on LinkedInListen to the a16z Podcast on SpotifyListen to the a16z Podcast on Apple PodcastsFollow our host: https://twitter.com/eriktorenberg Please note that the content here is for informational purposes only; should NOT be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security; and is not directed at any investors or potential investors in any a16z fund. a16z and its affiliates may maintain investments in the companies discussed. For more details please see a16z.com/disclosures. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Russia today is out-producing NATO on 155 munitions and took about two years. We have no strategic plan as a country for how we preserve supply in a catastrophic situation. Every war game we run, we run out of munitions missiles in like six to seven days. And then it takes about two to three years to refill that battery. We shoot all our missiles in one week and then we have none for two years. If the next conflict demands both brains and bulk, Can the U.S. combine innovation with industrial scale fast enough to win? On this episode of The Ben and Mark Show, we're joined by Brian Schim, co-founder and CEO of Andrewil,

and Chris Power, founder and CEO of Hadrian. They break down what it really means to out-invent and out-adapt. Ukraine proved that mass production matters and that advanced weapons without industrial capacity don't deter. We also discussed the future of U.S. manufacturing, supply chains in rare earths, automation, off-take agreements, regulatory bottlenecks, and how China's anti-ex. anti-access systems shape the fight over Taiwan. Let's get into it. Brian, I believe Palmer has said in an interview that as we think about competition with China,

it's going to be hard to match the scale from the get-go, but where we can continue to win is in innovation and R&D, and that can make up for it. How would you edit that characterization or want you want to flesh out more of what that means? Well, I think the, like, so the U.S. has taken this strategy over the last 20 or 30 years based on this like probably very anomalous and incorrect Gulf War experience, where the US having prepared to fight on like the most aggressive ally with the Soviet Union

had invested in all this technology, believe that somehow punching down on a third world nation and winning was indication that the strategy was vindicated. And so it went down this like conclusion of technical superiority is the only strategy and that every marginal improvement we can make to these things being exquisite, these weapons, these aircraft, all these things,

was going to be the dominant strategy. And then Ukraine happens, and the reality ended up being much more historically common. That these wars are protracted, that they are industrial and scale, and that the probably, if you were to bring it down to one variable, the amount of kilograms that the, you know, you can throw each other turns out to probably be the single most important factor things have to be technically

superior all this stuff but like just mass really does matter and so i think the you know the technical superiority is a huge advantage right like we're not going to just outproduce china on like you know dumb ammunition right like that that clearly we have to have an edge around you know our space capabilities how we can sense like how we can confuse them all these things like how sophisticated our weapons are But I think the part that got so clear out of Ukraine was that industrial production has a deterrence factor all itself, and that it is critical for winning a conflict. And when most of the war games with China show that we'd be out of munitions in, you know, kind of the key high-in munitions in like eight days, that's not a deterrence factor really anymore, with no apparent ability to, like, substantially increase production for a variety of reasons. And so I think the technological superiority does matter, but I think the belief for a long time was that was sufficient.

But a low number of really exquisite weapons is not going to win a conflict. And I think you've Crane kind of definitively showed that to the world that that is not a winning strategy. So what do you think, or like one of the factors that cause us to be so behind in manufacturing, and, you know, are they correctable?

I'll take a stab at this, and then Chris will have a lot more opinions on the matter. You know, I think the erosion on these things, it eroded quite quickly, and I think it takes decades to build back. The, you know, we kind of systematically outsourced all of the, you know, kind of key-scale manufacturing things at a time when, you know, electronics, all these new generations of technologies became so prevalent. We just never built the skill sets in the US for mass manufacturing at scale with very, very few examples.

Or counter examples to that sort of pattern. And I saw it like, you know, when we kind of anything we've tried to run down on the manufacturing side, looking for a great head of manufacturing. There's basically no, like, tier one execs we could find that were American-born. We ended up finding someone who is from Canada, but everyone I found who was, like, great thinking about this differently, like really novel approach, almost all were foreign-born.

And I think it's just not an aspirational job for young founder mentality people for quite a long time to go into manufacturing. Like, it was just not a sexy, exciting, high-growth space. We just said, nope, low-cost labor or whatever. It was the original theory was the primary strategy. And then, you know, kind of China built up this very technical, sophisticated capability on it. How to get that back, it is going to take some time, right?

And the US, the number of startups I've been seeing that are working on software to enable manufacturing, that are working on automation techniques, that are working on different approaches to all sorts of, you know, kind of composite manufacturing, wiring harness, like all over the place. It is massively ramped in the last three or four years. I think reflective of,

the drive to get these things reshorred onto America. And I think what has worked so well in Silicon Valley is that, you know, it's like this diffusion process of knowledge, expertise, people moving between jobs. You just get this insane ramp and learning that happens incredibly quickly that's got. Like there's just no concentration of those people in the US.

And so like you just had this total erosion that happened very, very quickly. Now, I think it will take a while to build back, but I think it's gonna, It's going to get there. I don't think it's going to start with, you know, making low-cost iPhones. But I think starting in defense production, starting in aerospace, areas where there's like a national interest in keeping this on the U.S., and then looking at mass-producibility there. And then we're finding a lot of great suppliers, not just in that space, folks like Chris, but also in commercial manufacturing, automotive manufacturing.

There's a lot of good folks that do exist is just figuring out smart ways to tap into it and understanding on the, the engineering side, on the practices side, how do you really do this at scale is just a lost skill set in the US. So it is just going to take a lot of practice, trial, and error and iteration to get back to. But we just ceded that. We just said, we're not going to do it. And then we shouldn't be shocked that we don't have anyone as good at it.

We just haven't even tried. Yeah, yeah. And Chris, being in that field and kind of building a new manufacturing company, like what are the kind of issues in the US with doing that here? I think there's several, and I'll break them up into three buckets. One is that most of the manufacturing that we need for the things that are onshore in defense is extremely highly skilled. And the kind of Apple McKinsey thesis was, let's offshore the easy parts of production first and then keep the value here. And it didn't really work. And it turns out that if you

disconnect design for production, you end up with really bad design at the same time. And I think Apple trained something like 28 million Chinese people on really advanced manufacturing skills and invested like, I think it's, to quote Patrick McGee's book, like 50 to 60 billion Shwapax. More than the Marshall planned just to give a... It was like 10 chipsacks basically. And so two things happened. One is like Brian said, all the jobs went away and therefore no one got into manufacturing. Why would you enter, why would you tell your son or daughter to enter a dying industry? And then secondly, you kind of people forget that we didn't have a defense industrial base in World War II.

We just had the best industrial base that pivoted to defense when we needed it. And to Brian's point, Mass was the only thing that won. Like, I don't even think our tanks were that good. We just kind of like McDonald's the shit out of them. That's a good phrase. We're operating in, like, everyone is in the mental model of we're still the America we are in World War II. And from a productive capacity standpoint, we just are.

So we kind of like, we were a data center company and then country and then we gave the data center to the Chinese. And it was like, okay, you know, the real problem here is two things. One is slack capacity because we used to be able to put defense spend on top of manufacturing hours that was commercial. So all these businesses used to run 70% on commercial, high volume, with 30% of the business with defense. So it was kind of this low balancing effect that just doesn't exist anymore. And then the real underlying problem is my thesis is that basically everyone that's highly skilled, in any manufacturing domain is basically 62.

So it is a skilled labor replacement problem because it's not just the CAPEX. The CAPEX is actually quite easy as long as you could have fundraising and you can back it with contracts. It's really the skill of it. And the only way to replace that skill in my mind is basically high levels of automation

to kind of make those jobs simpler so that a new workforce can ramp up in a month. And then from a demand side, then you've got this like demand equation right and even with brian's products or other people's products in defense that are by number of unit manufactured like there's more of them than other defense products it's still nowhere near the kind of commercial scale that you would really need to get some reps on um and i think there's two ways to approach it kind of strategically number one is subsidize a massive product and like kind of let the industrial base kind of bootstrap itself around that

or our strategy is basically kind of factory first up so the capacity exists. But it's kind of as chicken and egg problem. Brian, I'm sure outside of your business, I know you're close to the drone space still. And I don't think this applies to Andrel, but I think the army still has this real problem of like, well, we really love this drone. We want 10,000 of them. But you also don't have the factory preexisting. So we're not going to give you the demand signal.

And there's this, you either got to go top down or bottom up. I think we can get there. I just think people forget manufacturing is this like real. force equation where I think you just have to pick four to five companies and let them have at it at a scale it's never been seen before and let them figure it out. And it's in the figuring it out that you get there. There's no like real way you can plan around this. Our strategy obviously is like high levels of automation to get really leverage very fast.

But there's no like easy way to do it sort of thing. And so the way to scale it is really for the government to just place giant orders for things with U.S. manufacturing companies and say, look, if you can build this stuff, we're going to buy it all. And short of that, it's going to be slow, it sounds like. We're not seeing that. I think, you know, we are building out a lot of our kind of gigafactories well ahead of the demand because we know that we build them so flexibly that we can pivot that capacity to other products. So we're not kind of taking business risk, which is a very unique strategy. But yeah, if you wanted to kind of let the market correct for itself, someone would just have to make a purchase order of a million cars, force it to be all made onshore, and then let all these small suppliers and the skills come up underneath it kind of economically.

I don't think we have the time to do that, so we're just building them all. And the thesis has always been, in a time of crisis, manufacturing very hard. When manufacturing gets hard, people will be forced to basically partner. and we're seeing that play out basically across the board right now. But if you didn't have companies like ours aggressively doing that kind of factory first strategy, then yeah, you just have to onshore a bunch of commercial volume. And at the current manufacturing price points with no automation, you have to subsidize it to have it here and let the industry base come up.

In any near-term sense, like the game is going to be high, mix, low volume, right? And you've got to get good at that. And it's very different than how manufacturing, when U.S. was good at it, was really tailored which was sort of high rate relatively fixed right and the process to change the process to iterate was was not there you couldn't change the mix of what you were making year to year super easily and so this this sort of focus on just flexible factories at scale built very cheaply minimize capax minimize tooling all these things and allow it through better automation through better software and a flexible workforce and better design of the products like be able to flex into that

that kind of works i think that'll get us there where we can just lean into capacity in advance, believing that in aggregate. We don't know exactly what we're going to build, but we're going to build a lot of different things. Then I think the other side of this is there's, you know, there's kind of key supply chain issues which defense demand can't solve, right?

And we've seen this with rare earths and magnets. China has strategically kind of stranglehold of that. You know, not only did they have the processing of those rare earths, but now they've exported controlled so they don't allow the export of magnet-making technology. That is now a restricted national technology that they have banned from being exported from the country. It's a good strategy.

It's taken a great approach on it. But that creates a real bottleneck there, germanium, gallium, right? Like there's a lot of these different core materials that the US has to find industrial policy strategies to create viable commercial alternatives. I think the way they're structuring some of these is actually really clever, right? They basically, with one of these, this empty materials company, they basically guaranteed minimum offtake and a price floor.

That's a really good strategy, right? And so, like, you know, that way China doesn't have as many abilities to do dumping strategies or subsidization strategies to undercut other competitors trying to break into the market. And this is where I think tariffs applied on more of like, you know, kind of a national security industrial policy basis can be really advantageous, create the time for, you know, American and allied industry to be able to. get price competitive. It's just going to take a number of years. You just got a big CapEx spell. You've got a learning curve. You got to go down to actually get back to the point that you have this capacity available, the expertise available, and it's efficient. So it is, it is going to take some time. I think ultimately it does have to amount to there is real commercial industrial demand that is sustaining this and driving innovation into this

industrial base. I think what ended up happening in the defense world is we ended up, it was like kind of the last spot where we insisted on manufacturing in the U.S. and became Galapagos Island where everything evolved in a totally different way than everything else in the world. And we're kind of shocked it doesn't look like anything else that's modern and efficient. And it's like, well, what? Just totally different evolutionary pressures. Like, why would it look?

It just ended up, like, kind of diverging pretty heavily. And the things we've tried to preserve look a lot closer to what they were in the 80s and 90s than what's going on in China today. As of right now, if you look at like the PlayStation 5 as a product, Like that is effectively, I would say, 90% of fully automated production line. And like writ large across the board, people really miss this. And I think it's like strategic CCP comms is like, there's a little bit of manual stuff of like things that robots can't yet do.

But I would say just on pure manufacturing autonomy, they are probably 20 years ahead of us just on that. Now, our version of this at Hadrian is, okay, most of this is actually a software problem people like see a robot do thing but it's it's actually like all of the machines are extremely dumb computers basically and it's a coordination problem and it's an autonomy problem and the one thing that we are still very very good at in this country is software engineering it's just that there was no there was no pressure to put software engineering automation in manufacturing because our version of automation commercially for the last 30 years was just give it to

china and then defense didn't need to do manufacturing automation innovation because it was so high priced and protected that there was there was no pressure. So I completely agree with Brian, but I think that we forget that if you're still assuming that we are great at automation and software as a country, then if you dump enough and go hard and fast enough, you can actually catch up. And that's effectively the macro bet that we're doing at Hadrian. So a question, you guys alluded to this, but, you know, there's this famous book, Freedom's Forge, you know, talking about the ramp up of U.S. industrial production during World War II and the re-purposing of all these car factories and everything. But as you, one of you guys

said, you pointed out, like, a tank in like 1940 was not like a tank today, right, or an airplane or anything else. You know, like, you put any of us in, you know, a plane or a car driven in 1940, and we would be, like, absolutely shocked on, you know, on a relative basis of how crude and primitive it was, you know, technologically. And, you know, a tank in 1940 or a car has no chips, you know, it's got, you know, it has nothing that we would consider to be modern technologically. Today's, you know, weapon or vehicle or whatever is far more sophisticated, both in hardware and software. You know, the typical car has like 500 chips now or something,

so I can only imagine what a, you know, what a drone has or something. So the fact that the products themselves are so much more technologically sophisticated and have so many more components, both soft components and hard components. Does that mean that, you know, wow, like the country that's best at technology over time is going to be the best producer of those things because they're so complicated. And if, you know, all the software is written here and so forth, like, you know, that sort of gives us It's usually like, oh, to build these things, or is it, is it actually the opposite, which is, okay, now the supply chain is like sort of infinitely more complex, you know, the kinds of parts that are in these things are all themselves extremely complicated. And, you know, if they're all kind of by default made in China, like they just own so much of the supply chain of these things that were kind of at this, you know, more or less permanent, you know, or at least very long-term disadvantage.

Like, which way does that dynamic tilt when you think about the after the products themselves? Supply chain, supply chain. I think it's like you look at COVID and it was like it wasn't the microprocessors that were the bottleneck. It was the power regulators, right? It was these analog components. It was all these things way down. And then when you even look at semiconductor manufacturing and everything going into it, China still controls upstream components of that in a substantial way. And so I think from the point of view of, you know, industrial independence in a conflict, like who has more of it.

China has definitively more industrial independence and the ability to continue production absent, you know, kind of like their choke points are quite a bit more minimal, right? Like some key things on energy, which they're strategically trying to solve and some raw materials, which, you know, they don't have as much natural sources of. If you look for the production perspective, I think it's quite clear to me that the supply chain constraints, if there was, was a conflict, if China wanted to cut it off, seem pretty determined. The US would have very little leverage or ability to respond in any timely way or with allies. Then when you get to like, OK, who can build better,

smarter weapons, have different offset strategies, and think more technologically sophisticated way about how technology influences warfighting. I think the US has a significant advantage there. Like we are much better at that. We have a more sophisticated military that is more practiced and understands how to infeastern. use technology into war fighting in a better way.

Like, I think that is quite clear to me. But the, but then the question becomes, like, do you have enough? Can you actually produce it at scale and can you afford to produce it? And that's where, you know, I think under a conflict scenario is quite hard. And the Freedoms Forge thing is quite interesting to me where we had about two years of lend lease to retool American industry, right? Like we weren't in the war, but we had about two years to retool industry. And that seemed to be about how long it took.

Russia today is outproducing NATO on 155 munitions and took about two years, right? And so there is a time lag, even if you have the industrial capacity or have the potential for industrial capacity that takes to ramp and repurpose and retool these things. And so I've heard various theories that, like, you know, sort of in a conflict, the U.S. would, you know, and together make all these amazing things and repurpose. And I believe it's probably true, but is it too late? And can we get the very basic components that are necessary for any modern technology? And both of those seem to be pretty clear answers to me.

I don't think it could be fast enough. And we have no strategic plan as a country for how we preserve supply in a catastrophic situation. Yeah, I think we have a mythological, based of what I've read, I think we have a mythological. There's a book by this guy Alexander Field there's an economist who goes through the economics of the cut over the production in wartime,

and then back to peacetime in the 1940s. And basically, the picture he paints is it was like, to your point, it was like a two-year ramp up to cut over, like, all the car factories to be, like, playing in tank factories. It was like a very short production time. It was like, you know, within two years, we then basically made all of the weapons

and all of the vehicles that basically, you know, won World War II, the ships, like, it was like, the production happened, like, extremely quickly. And which it could, because these were not that complicated, you know, these were still mostly, you know, bent metal, you know, in rubber. They weren't that complicated, you know, they didn't have that many parts. And then, at least according to Alexander Field, the spin down of wartime production actually happened before the end of the war because, you know, by 44 or whatever, you know,

we all knew that the U.S. was going to win. And so the factory started to be cut back over to making civilian products in, you know, in preparation for peacetime. And so, Brian, to your point, like, I think we have this, like, mythology that when push comes to shove, this stuff just kind of happens by magic. And because it happened by magic 80 years ago, it will have. my magic again and that seems to your point like very much not the case yeah and i think we also miss one important point which is here's my guess on like what we call parallel production which is

like you take an existing defense product how much could you go mass produce and how much is some secret source my guess is like any given missile about 15 percent of it is secret source or like critical the rest of it's just like ray production not that hard i think the thing people miss to your point mark is CAPEX or skills were kind of at a call it like 10 to 1 ratio and then you can pivot to the fence like we we don't even make

the CAPX that goes into the factories in the US anymore like it's all German South Korean Japanese or whatever and they're controlled products so it's like you know if you wanted to go scale a gigafactory at a time of crisis it's probably already too late and by the way to Brian's point all those machines have rear earth magnets in them

and like guess who so and so And so if you guys were in the, you know, White House or Congress, Brian, let's go back to your supply chain point. Like, this is not a bit, like, part of what we talked about earlier was this, there's like, you know, you could place like a strategic bet on like five companies and like spin them up and have them get big. But I think, check me if this is right. It's not just those five companies. It's the other 5,000 companies that are the supply chain for those five companies. Yeah. And so like what's what's the policy approach to that like passes the, you know, passes the sniff test of like something that would both work and, you know, would be achievable over a over a five or 10 year period. It's number one, I think you need data, right? Like, there's very little data on, like, what two, three levels down into the supply chain is actually on that bill of materials and what are the, you know, kind of critical components.

And I think, you know, again, COVID examples, like, we had no idea, right? And then we found out that the market was constrained on the thing. No one would have ever guessed that the market was going to be constrained on. Then if you have data, now, you could start to look at interesting strategies on this, right? It's like, okay, is stockpiling, like, you know, like power regulators that expenses, like probably extremely cheap, right? Like, you know, and a lot of these things. So you don't have the industrial capacity, but I need to very quickly create mitigating resilience strategies. Okay, like if I can actually get some visibility on these things, like maybe I can actually take some strategies to either

pay industry to stock, like, you know, there's a lot of basic things you can do there. The second thing that I think is is pretty key is more of these, you know, kind of MP material style deals. Identify the key supply chain constraints way upstream so that we even have the possibility of being able to ramp in a crisis period. But if we are looking at, you know, we've got to at a crisis work all the way back to the raw materials that we didn't plan for, now you're looking at five years of lag

of being able to reconstitute that supply chain. So if I can start cutting that lag and working from the bottom up in terms of, you know, either allies who already have capacity that I can, you know, get them to invest and, you know, do some sort of guarantees or I can invest in U.S. capacity around these things and then regulatory relaxation around some of the constraints of why is it hard to build in the U.S. I think you can start to systematically

reduce China's leverage, create competitive industry, and secure supply chain for national security. But it's just going to take a degree of targeted focus and understanding of what those key bottlenecks are. And I think there's an understanding of like maybe the obvious five or six, but I actually suspect it's 10 or 20 things that we need to have more of a kind of sophisticated and holistic policy around it uses all of our economic levers. Look, if everyone else is subsidizing

and playing a different game on cost of capital and how they want strategic industries to grow, like, why is the U.S. not doing it? I think the government's terrible capital allocator historically, but like low-cost loans, sharing risk with bank. There's a lot of these strategies guaranteed offtake. Like US is the best capital market system, we could just use like a lightweight of government backstopping to substantially create a different incentive structure in the U.S. and get these industries basically up to competitive very quickly.

Chris, you know, Brian mentioned the kind of regulatory inhibitors. What are the regulatory inhibitors that you face now in terms of, you know, what you're doing at Hadrian? it's pretty extreme but it's state by state um oddly a lot of the stuff that we would stand up in california frankly is just flat out banned from an environmental or permitting perspective um and our teams just frankly fight through it but it is it is truly a permitting regulatory issue i mean mining is obviously a big one even the basics like some of the exquisite stuff can only be made in a certain state to feed the defense ecosystem

because all the other states banned it. Or like they're literally in facilities that got certified 50 years ago and you could like, you literally could not build a new one today because you would never get the permit to do so. So it's stuff like that. I think the biggest unlock is certainly

the government creating large offtake agreements and I think in the last six months I would say I think there's two big realizations. One is like we kind of just have to pick seven to eight entrepreneurs that we really trust. who are kind of making a lot of money, but, like, we really, they're just patriots, basically. And then the second one is creating these large off-take agreements

so that the CAP-X and the commercial market can come behind it, I think, is the two smartest things. But the regulatory side is still heavily environmental permitting nightmare. Yeah, actually, speak about that because there's this weird tension in politics between, so you have entrepreneurs who can do it, but if there are two, where it's like Elon being the, a classic example, then all of a sudden the government doesn't want them to do it. And then, you know, they imagine that, like, General Motors can take Elon's place or something

like that. So I guess how is that playing out today and, like, how should it change? Brian and I, I think you're both on the same page about this. I think that my perspective without going to specifics is that I think there's been two realizations. organization number one is that you just go to have to instantiate six to eight massive companies and instantiating 100 kind of medium-sized players is just not going to have any effect because you need to get some scale you to get some talent aggregation all these other all these other things I think alongside that certain areas of the government where there's a lot of immature companies

they're going to spend the next year making eight bets and seeing how it plays out and in certain other areas I think in the next two years what you're going to see is basically people getting pulled into rooms and saying, cool, we picked you for this category, start running. And that will come alongside it with some MP material style deals and a lot of, a lot of head banging on that. But I think, I think my opinion is we've reached the point and I think this will play out publicly over the next three years where I think that has started to already happen in some of these critical industries.

And I think what it is going to look like is not dissimilar from, you know, let's imagine you all at Andreessen Fundick startup. And Apple, you know, they're doing a million in revenue and Apple gives them a billion dollar revenue deal. And like Apple's going to take some warrants. And I think that is a perfectly, perfectly reasonable strategy. Otherwise, I don't think there is any other structural way to go this fast where the market's not playing it out. And I think you're going to kind of see a macro cultural return to like, hey, guys, there's 10 of you go figure this out. You fix this, you fix this, you fix this with a lot of strings and public embarrassment attached. if there's failures, but that's my viewpoint on what is going to have to happen to make that work.

And there are going to be some real winners and losers. But, you know, the spreading the capital around 100 different companies is not going to work. I think there is going to be great. Ten of you get to experiment, and we're going to scale two. And I think that's going to happen across every program if we're serious about it. And I think it's the right thing in this type of error to do. And is there going to be, in order to make this work, well, there need to be like some kind of federal override

of the kind of state-by-state regulatory regimes? Or can you work around it with, like, enough money and whatnot? I think you can have, like, you're going to have competition between states, right? And we've seen this with, you know, running a factory search, all these things, and you can really tell the difference between states who are trying to drive growth and manufacturing growth in manufacturing, how they think about, you know, enabling companies to be successful and the states who kind of take it for granted, to be honest, right? They're like, obviously you want to

be here, so we're not going to go out of our way to help. And you can really get that sense quite quickly. So I think you have a natural competitive function on the state side. That's not overwhelming. But then I think it's like if people are trying to, you know, maybe California gets more efficient, but it's probably not going to get as efficient as taxes, right? And that's just kind of what it is. But companies are rational. They know this and they can make informed decisions about where they put their plants, trading off talents and, you know, like labor access and everything else, right? It's pretty straightforward. So I don't think you have to solve the federal override on the on the state level per se.

Then I think there are things the federal government can do with, you know, there still is federal EPA issues, right? So like states don't even have a lot of say in certain cases. Like there's this one aspect of an area can be designated a non-attainment zone that has over-polluted on a certain pollutant. And so then going forward, the EPA says that any new construction requires to remediate that pollutant by any means available, not cost benefit, not that there's any due process by any means attainable. Dems and Republicans alike, when they get that designation, they don't like it, right? Because it is a death now to getting new manufacturing and new investment in that area. And so I think there's a lot of things that, you know, I have been historically a dem. I, you know, lifelong dem, and I believe that we need some environmental conservation pieces,

but I think the balance has not gotten to this correct trade on. There are ways to mitigate the harms and a practical matter of like expediting these decisions to get there quickly. So I think the time factor is often undervalued. And in business, the time factor is extremely valuable, right? Like if it takes me five years to build a data center, that doesn't, it's irrelevant. I need a one-year timeline. And I think for a lot of these places, the view. is, well, I'll get you to the same outcome.

It just might take five years. And they don't view that as a problem. So I think that on the state-by-state basis, there's a ton of competition. I think the federal government can do a lot of things to expedite, getting to yes. I think they have unique authorities, especially in defense, to push things on nuclear,

to push the envelope on a lot of things that there is a lot of risk aversion to. And they have a huge opportunity to take the lead on showing what's possible. But I don't think we need to do that. to like march into every state house and say we're taking over like there's a lot of easy states and there's a lot of hard states and that's okay yeah and the talent is movable uh because you know you have this talent shortage in manufacturing um but if you've got the job they'll go

i think it i think it depends i mean we've seen as as we're launching arizona and brian i know you've got this perspective from ohio as well is it's the way we think about it is we will probably do most of our advanced engineering in California because it's very hard to get the conflagration of software engineering and manufacturing in one building too. But once you've worked out how to do like welding for example and it's now a simple system, that can go anywhere. And what we look for uniquely is kind of the technician workforce. What we're also seeing is the people at Adrian as we expand to different states, they're like, great, I get to keep my like software engineering or manufacturing engineering job, but I get to buy

house because now I get to go to Arizona or another state. It's less shiftable than people think, especially for the highly skilled jobs, but everything else is, I think, is a grand adventure for probably most of Brian and I's teams of like, hell yeah, let's go two years in Texas or two years in Arizona or wherever and follow the companies around. Completely agree. And for a lot of these, you know, particularly to get to more hardware skill sets, manufacturing skill sets, getting them to come to California is a huge problem. But like, how much is the house cost? Not that interested in. And so it's actually easier when it's lower cost of living locations for a lot of these skill sets.

But completely rude, Chris, a lot of the advanced software, still going to be California, is what it is. But that technology is then relocatable with relatively little difficulty. Why are we so much better at building data centers than factories? Colossus, the biggest data center in the world was built in under five months. How do we explain this? I think it's very easy, which is the financial markets understand data center offtake agreements. Because what that enables you to do is, Brian says to me, Chris, please build data center, and I'll give you this kilowatt hour of compute at X cost unless you screw it up.

And then all of the big capital allocators say, great, I'm going to let you put 10 billion in CAPEX in the ground. And as long as you can credibly execute. This is how we build power plants as well. It's like there's a price per minute. And then you put the CAPX in the ground. There's like a 30 year payoff period. Because manufacturing is high, mix, low volume, and defense spends money every year, you financially have a one-year agreement.

You literally can't get the capital markets to underwrite it unless you're at such a sufficient scale, which is what we're doing now, where you can functionally underwrite across many different contract vehicles, and then you can actually have this 10-year CAP-X spread, and then you can build more data centers if you're good at it. I am fully convinced it is literally just because there's like Amazon wants data center, and it's a 30-year off-take agreement, and then you could put the CAP-X in the ground. Whereas because Defence spends contracts once a year,

you can't have that long-term revenue agreement, and therefore you can't have this structured finance agreement underneath it for the CAP-X, which we've solved by kind of having this aggregated portfolio strategy. But my one answer is just if the Defense Department looked or factories created off-take agreements for a capability or capacity overnight. And data centers just have that. naturally I think the other part of this is we've been doing data centers for

40 years 30 years right like we've just been doing it it's like it's a thing US knows how to do it and like is putting up the wall the concrete walls and building the cold shell the hard part for any of these factories like no that goes up really quick right like we've been able to distribution centers are extremely efficient to build at this point so like a cold trail called concrete building trivial trivial easy right it just go up in like less than 12 months you probably even get it in three or four if you want to once you get to manufacturing then the the question is okay what are you putting inside of it do you

actually understand the process like have you built the technology to go in there so the end copy that chris is going to build of his plant will go up extremely fast right if he can finance it and you can capitalize it like you're saying but the first copy of that thing took quite a while and so for a lot of these manufacturing plants there's the first one and you have all the unique regulatory approvals and you've got the unique chemicals that you got to bring in the health and safety risks and how do you mitigate all those things and so the so it just ends up like I think you're sort of end of one on a lot of these cases but if you're on the 10th copy it's

gonna it's gonna go fast it's just gonna go fast when people talk about China's success some some people point to their industrial policy their their protection is and their subsidization of certain certain industries we've you know recently experimented with that a little bit. What can we learn or not learn about what they've done? Or how should we think about it here? Maybe, Chris, do you want to take a first step? Yeah, so I think the most important thing for people to realize is that China's stuff is not

cheap because they have low cost of labor. It's because they subsidize CAPEX, CAPEX energy, which is the main cost of manufacturing. Like, 95% of the cost of aluminum is just the kilowatt hour of the power price. and then they also do export subsidies which is kind of like a reverse tariff so if I sell a million dollars worth of stuff to ban I get a refund from the government they did that for the last 30 years

in part to drag the capability off the US because they knew they're very long-term thinkers unlike the US we tend to operate only when we get punched in the face and it was a strategic subsidy so the kind of byline is it's not economic protectionism it's just an unfair playing field because right now it's companies like Brian and me

versus the CCP, not versus Chinese innovated companies. I think we're happy to go toe to toe on an even playing field, but it's not an even playing field and it's not by 10%. It's, you know, 70, 80% in some cases. So if you want to have the US as an exporter, you kind of have to do tariffs or some economic policy that just correct for that structural imbalance. And then we'll fight over how efficient we can get in America and how many products we can produce. And I think that narrative is really wrong. Like the level of subsidies they do

from the government into their national champions is, is crazy. And it's one of the reasons why most of the commercial manufacturing is offshore because of that price function. So if you want to compete and we can, you have to just create an even playing field. And that's like, there are many mechanisms to do that. Um, tariffs are one, but you kind of have to. Otherwise, it's just the playing field is so uneven that no amount of technology can catch up to like the China cost. And there was, I mean, China has a track record of laying out five-year plans like Made in China 2030.

OK, they prioritize targeted industrial areas and that aligns all the way down to the provincial level around these subsidies, around these export strategies, around the finance structure of how these things are capitalized, zero percent loans, all these different things. And so there's just more of a strategic framework of what are the key areas that want to Not everything they've succeeded on is in that category, right?

They've also been commercially successful on a number of areas, but I think facilitated by a lot of things Chris was saying around, you know, lower cost of capital, as well as some of these export subsidy pieces. So I think there's just a handful of these policy levers that are just effective. And it's not, you know, like, I think if we end in a world where like the government's like,

oh, we must make X company succeed, but we all know this company's bad, it's not going to work, right? It's not a competitive company. There's dead. And that I think is where the U.S. policy has landed on, where it's like, let's give grants to these industrial giants that everyone agrees are no longer competitive and we'll try to save them. And you're like, it's obviously not going to work. Why don't we create a scenario that allows next generation companies that can actually compete a level playing field to fight? And let's go with that.

And I think that strategy has a lot more legs to it than. to it than just handouts to a couple of companies that are like just zombies. And how would you structure something like that, given that, not to say that the government has some corruption in it, but like, you know, these kinds of things, like if you're naming or handpicking the companies that you're going to subsidize, particularly in the U.S. system, there could be some issues with that. So how would you structure the subsidy so that would be merit-based? I think you could do, like, get the government out of the underwriting process.

Say you would take loans, okay? I want the banks who are pretty effective underwriters to actually execute the loans, but the government will backstop and help them on, like, lowering the interest rate and absorbing half the default risk. Banks still has skin in the game. Company has skin in the game because if they default, they default and the government is effectively a zero cost actually going to make money off that deal so the so i i think in like those those scenarios you can uh just take advantage of what is

like the u.s capital market structure is it's not like it's 10% better than anyone else it's it's like several thousand times better than anyone else uh like it is just wildly better and so if you're if you're leaning into that and saying hey we actually have great capital allocations that know how to underwrite companies and like lean in on these things like great let's just juice the capital stack in a way that is aligned with national priorities around certain industries certain capabilities things like that that's kind of like one side and then tariffs export subsidies are another exporting you know export financing a lot of these things also work right and so those are not winner specific those are segment and you know kind of uh

strategy specific targeted policies and you're staying at like the grants are in my opinion the worst possible form of this it's like you know giving intel an outrageous amount of money to build a facility that they didn't believe they had demand for it's like why would they not take the money to build a facility they didn't skin it again it's like just totally distorts their incentives to actually be an efficient competitive company um and so like keeping keeping companies accountable using the capital markets we already have and the allocators we already have. It's like that feels pretty good. Lean into what we're good at and then put some of the like, you know, counteract kind of more of a national level, some of these unfair

practices from other countries or areas where we want to incentivize growth and we're doing productionism because we need it for national interest. Those seem pretty reasonable. It's ironic that we as a country sometimes get critiqued for being overly financialized or too much into financial engineering, but we've noted a number of examples on this call, on this episode where we can actually benefit from leading into that strength and greater kind of financial engineering in terms of aligning sort of, you know, good outcomes for the markets with strategic priorities. Well, like, where else could you finance $200 billion of data center investments with like

basically no real revenue to show for it? Like it's crazy. Like a government can't even do that. Like, so it is like so, like we have, like, it is such a. asset. Like, is it always right? Is it a little like bubbly, right? Like, is it like, you know, whatever, right? It's like, certainly not worse than how most governments operate on these things. But it is enabled the West to do such outrageous things and like the US do such outrageous things that are capital intensive in a way that nobody in history has ever seen. Like,

that is a huge asset. And so like, yeah, does it get a little crazy with some of the like really exotic instruments? Sure. But like, that's on the margin compared to like the massive asset we've created with this. Yeah, Orrick, you guys saw Oracle earlier this week. Orgo on one day added more market cap based on a single AI data center build deal. They added more market gap that day than most national stock markets in there. Right. And so we have this, you know, kind of your point.

This is actually my big takeaway from it. It is astonishing how good we are at things like that. And then the, and then it's just, you know, the pessimistic view is, you know, the fall off to the world that you guys are trying to fix. the other view would be wow imagine if we could be at sophisticated at manufacturing in industrial systems and military systems as we as we are in data centers and yeah to eric's point like it's not completely clear why they're that different when it comes down to it guys we brought up a couple examples but i want to get more into what's misunderstood or not fully appreciated about our competition vis-a-vis china whether it relates to

manufacturing or security defense either the state of today but also where things are going America has a very hard challenge and has picked a we always fight in a way game right like we're always we're not fighting wars on our homeland you know we're always projecting power somewhere around the globe that is a very hard challenge and I think in the the recent history you know these in the Ukraine and I think what would pragmatically happen in Taiwan scenario there's American support with you know the the ally under attack being able to defend themselves. And so I think that's, you know, kind of the backdrop of how the U.S. sort of thinks about these things. Well, that presents a very hard problem, right? Which is, in a Taiwan scenario, your ability to stage, your ability to resupply, your ability to get things in is the critical question. But China knew this. And so they have invested systematically in technologies that and push back the U.S. and push our whole strategy way, way out, right? So they've invested in space-based sensing.

They can find our ships. They can find a lot of aircraft way out thousands of miles away. They've invested in this DF-26 missile called the carrier-killer missile commonly, which is able to shoot, I want to say it's something around 1,200 miles out, which makes it so that carriers, warships, all these things we would use for resupply typically are massively at risk. They've got very long-range anti-air missiles, so things that can shoot down aircraft.

And so they've created this impenetrable bubble, and that's what they've been investing in, knowing that if they can break the ability of the US to get close, to stage, to resupply, that just cripples the entirety of the US war apparatus from being able to be a real threat. And you combine that with their production capacity, where there's something like 200,

50 times the shipbuilding capacity, you know, massively, massively, probably thousands of times on the weapon side. You know, it is just on drones, it's massive. Like, you just kind of look, category by category, massively outpacing on production. So even if their stuff is half as good, but they've got so much more of it,

and they have systematically built up a system that can target us at range, strike us at range, and hold everything at risk, that breaks the entire U.S. war strategy. So it makes it very, very hard. Now, the counter to this, though, is, you know, in a Taiwan situation, the geography is very hard to sustain the, like, rate you would need to, like, actually occupy, because the goal is to defeat a Chinese occupation, not just an invasion, right? It's not just, you know, people on the sand on the beach. It's, like, actually subverting the government and taking over control. You have to sustain extensive, like, maritime campaigns, you know, and that is hard, right? And is very, very good. few places you can land like there's all these very challenging things so i think the the calculus basically boils down for giv is he going to be successful right like he stated his intention he stated

clearly what he wants to do he wants to reunify it if necessary by force he stated that he wants to have the military ready by 27 um but i think the whole game is really just making it clear that their strategy that in many ways broke the u.s war plan there is a counteracting strategy and that Taiwan is prepared and that it will be too hard to be successful and the odds are not in your favor because a loss there is probably the thing he fears the most. Chris Martin, any anything worth added to that or on the other? No, Brian and I talk about this every time we see each other over dinner. I think the one thing that always shocks me and probably shocks Brian is how uneducated the smart people in the country are about how bad this looks and the easiest example is I think we run out

of every war game we run, we run out of munitions, missiles, whatever, in like six to seven days. And then it takes about two to three years to refill that battery of, you know, hey, you now have more missiles to shoot. So apart from the Brian's strategic layer, I just think every single war, basically, if it goes hot, you know, both sides throw everything they've got at each other over a time period. And it's basically then, if it gets protracted, how fast can you reconstitute? and it's it brian's correct it's not like we're 50% behind it's just like we shoot all our missiles in one week and then we have none for two years well that that is how kind of terrible the situation is um and and i'll make one last point to brian's point which is my thesis on this

is because of the one child policy is going to really drop off china's population very quickly at a certain period of time it creates this forcing function where in my opinion that the Taiwan scenario is more likely to happen because if they don't hit this window, they're not going to have a chance in 30 to 40 years because they just they just have this huge population drop off coming really fast down the pipe. So there really is this like yes, the Davidson window, but over the next 10 to 15 years, it's going to be this constant very CCP-style pressure game of like test, test, test, ball a frog, ball a frog, ball a frog. The only thing we can do is focus on honestly, attritable systems to because if you kill a carrier and they've got that range, there's nothing we can

about it, counteract in sensing in space, a lot of a treatable mass, mass producing those systems so that we basically blow everything in the seven days, we got to have the manufacturing battery to be able to refill the clip extremely fast. And it's going to be this pacing event, I think that unless it goes hot in 28, it's going to be 10 to 15 years. And as long as we can hold them off there, then their population drops off and we're good for another 300 years. Like, that's kind of how I view the equation. 300 years is a long time yeah it seems like on one hand there there's the sort of extreme you know bearish view that people like peter zion have about sort of uh you know demographic collapse

and it combined with sort of um their future challenges and energy and food he thinks that they're they're going to implode in the next few years and then the other hand you have this extreme bullish approach of hey they they make everything they're they're smarter et cetera and it seems like there's a gap in sort of sober you know a sober perspective that and analyzes, you know, where they're great at, but also acknowledges sort of things like, you know, how much they're over leveraged and sort of the real estate and sort of the state of their economy, the slowing growth,

and it accounts with demographic challenges as well. And I think, like, are they head of manufacturing defense production? Absolutely. Like, to Brian's point, like the buildings in China, if you, like, knock open the concrete wall, is it just cardboard? Like, yes, most likely, that is their culture. But if you were at 1,000-1 in production, it doesn't really matter.

the economy is under serious stress but again i think all these economic stresses make it more likely that they have to do something versus like they just won't because they're starting to get weak um but yeah you know if we were 50 percent behind on production it would be fine because half the missiles are not going to work because they're going to build them like they build houses and apartment buildings half of them are concrete but at a hundred or a thousand to one it's like it doesn't matter it's just mass to bryant's point yeah i think these like is historically like China's been shockingly good at overcoming a lot of these challenges if they commit the state apparatus to it right and so the you know if I think the

other part of this is like G's actions don't I think a lot of people apply the the Western sort of view which is you know prosperity for the population vis-a-vis economic growth is the the only religion right like it's the only driving principle by and large and you know there's other flavors that come in and out, but basically everyone's unified around that as the primary goal. And if you were to tank the economy, you would be voted out and it wouldn't work, right?

And like, that's the dominant factor. And he's not that, right? Like, his goal is preservation of CCP and his legacy. And all his actions are commensurate with those things. And so the economy is a supporting role to that goal. The, he has demonstrated that he does not care if he harms the economy, if he believes, is in the interest of national security and preservation.

You know, how he views allies and partners, it's always very viewed through a different lens of kind of Chinese power on these things. And so the, I don't think like a lot of people put the Western leader rational, you know, growth-first decision-making against G's strategy, but it's no evidence that's how he operates. Like all the evidence is actually,

it's much more a preservation strategy and a legacy strategy. And so when things are under threat, when things are under duress, he'll choose the thing that he thinks is most aligned to that goal. If that's, you know, deal with the economy through preservation, great. Zero the debt and like whole bunch of things take a bath. Like, you'd probably be fine with that too. Like, it keeps him in a powerful position and preserves his legacy and preserves a CCP.

So I think the calculus is just wildly different. And so when people try to apply the like Western rules to this, you get very incorrect conclusions that don't seem consistent with his actions or the or the results. You guys are and your companies are on the front lines of, you know, helping fixers and improve our situation as relates to manufacturing and national security. And we're honored to be, to be supporters. Brian is great. Thank you.

Yes. Thank you. Thank you. Thank you for coming on the podcast. Thanks, guys. Thanks for listening to the A16Z podcast. If you enjoyed the episode, Let us know by leaving a review at rate thispodcast.com slash a16Z. We've got more great conversations coming your way. See you next time. As a reminder, the content here is for informational purposes only. Should not be taken as legal business, tax, or investment advice, or be used to evaluate any investment or security

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