Rebuilding America's Industrial Backbone

0:01Manufacturing is just debt by a thousand paper cuts and it's also just really really overlooked. When America was crushing it in the Apollo era, we got to the moon quick. We can't go back to the moon decades later at the same speed that we did when a computer was like the size of the room. Everyone operates like we are still the industrial superpower and we're making really poor decisions because of it. There's another phrase when you're fed you're not hungry and I think this is why we don't build things fast enough in the US. If a carrier fleet went across Taiwan and we had to ship a bunch of missiles over there and fire them, our entire inventory of every munition in the country would last three days, and then it would take us three years to replace it.

0:40If we don't do it now, we're going to do it 30 years later. America is a country of immense wealth, but we're also a country that's gotten used to wire harnesses on the back of airline seats that cost $10 ,000 a piece. or as of 2022, building one commercial ship compared to nearly 800 comparable ships in China. Or, going starliner that cost over a billion dollars and the heavily reported on failure. You'll hear more about all three of those things in today's episode, but of course it's not all doom and gloom. There are tons of companies working toward rebuilding our industrial base, including three founders you'll hear from today, from this recording at LA Tech Week.

1:20We have Jordan Black from Center Systems, Chris Power from Hadrian and Ryan Hargis from Castellan. That was all of our suit. Partner on our American dynamism team who moderated this conversation with Jordan Black CEO, Center Systems. We designed and manufactured wire harnesses and probably everyone in this room is asking themselves what the hell is a wire harness. So thinking of as like an iPhone charger but really really really complex. Very manual labor -intensive thing to manufacture, 25 % of the cost of your car, and almost every company hates building it. You might also recognize Chris, who was on the podcast in 2022.

1:57We'll link that episode in the show notes. We build autonomous factories for aerospace and defense. The product that you get is either a factory or a bunch of high -precision components, but really we're a manufacturer masquerading as a software company, like fully vertically integrated. And finally, Brian, who's building something entirely different. At Castellan, we are actually developing hypersonic weapon systems. National power stems from central cores, whether it's economic, cultural, industrial, as well as military strength. None of us at Castellan actually hope to use what we're building, but by the very fact that the US has it actually acts as an attorney.

2:33So what will it take to revive the industrial base and build the next generation of manufacturing? What role has regulation played here and how can vertically integrated companies turn this ship? around. Listen in to find out. 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, and is not directed at any investors or potential investors in any A16z fund. Please note that A16z and its affiliates may also maintain investments in the companies discussed in this podcast.

3:08For more details including a link to our investments, please see a16c .com slash disclosures.

3:18When we start with the present and I know all of you have a lot of thoughts about this, so expand on how you see the state of affairs right now in your field. I think the one word answer is a complex. I think manufacturing is just death by a thousand paper cuts and it's also just really, really overlooked. I've been in manufacturing for a while and I was the kid that was made fun of in college to work at the plants at Ford and to go around behind the computer and now it's really amazing that we're making it sexy again. But overall, it's the most complex thing and it's from not only processes, raw materials, the design of it, but I think it's the most exciting but also challenging problem ever because it's bits and atoms and you can only make something so cheap or so fast and you need the world's greatest minds working on it.

3:59So you look at company SpaceX and it takes a lot of money and a lot of time to develop something that amazing. And so I think we are in a really any exciting pivotal point, but I think the one word answer is complex. I fully agree that we are on the op as far as the cultural change that needs to happen to make manufacturing more robust and more resilient, but we're not out of the woods yet by any stretch of the imagination. So I love to understand Chris, your thoughts on how we got to where we are and what you see as the road that took us here. Financial power is a bad proxy for military power and military power is ultimately a bad proxy for industrial power.

4:34So basically the story is We kicked ass in World Board II in the 1920s because we were really good at domestic manufacturing. We pivoted all to the industrial base. We kicked the shit out of everyone else. Even though we had worse technology, we just built more of everything. We just outbuilt everybody. And what ends up happening over multiple generations is it's like real estate traders forgetting that market crashes exists. And the reason why real estate market crashes happen is because there's a bunch of 27 -year -olds that don't know the anxiety of losing their shirt and then everyone keeps clicking the buy button and it all falls apart.

5:09And that happens over multiple generations, right? So what happened in the 70s, 80s and 90s is we were so wealthy that generation who ended up doing a lot of financial engineering and you can talk about this with baby voters with houses or you can talk about this with cocaine and New York was we stretched the rubber band really far to spreadsheets and super far away from reality and started using the big stick of financial warfare and weaponry and that became like a lot of America. The problem with that is it's like being Mike Tyson in your 50s, but you've got some brain disease that you believe you're still 25.

5:43So what happens is everyone operates like we're still the industrial superpower and we're making really poor decisions because of it. But this happens to every great company nation with like IBM used to just make the best products and happens to countries and people as well. and it's largely because you're so successful, you get abstracted away from reality and then you forget. Now, the road's on getting paved, like how did that happen? So the current state is bad for many reasons. One is people in the government or people in power have not updated the mental models that we are super close to retiring age and still pick and barf fights for 22 year olds.

6:21It's a really, really bad idea. And then on the practical side, it's like trying to wave a magic wand and saying, we have no software engineers in this country at all. Someone's gonna start open AI from a talent perspective, right? And you don't get really good AI researchers without having millions and millions of software engineers that train each other and build on top of these abstraction layers and the whole industry gets better over a long period of time. And that's where manufacturing's at, which is why nothing's coming out of those Intel plants for semiconductors for like a decade. Because you can't just wave a magic wand and push yourself up to the top of the abstraction stack.

6:54And it really always a control problem. I mean, you can ask the question, why are we so behind on shipbuilding? One big answer is no one cares and there's bad government incentives. The other answer is like, that leadership doesn't really know anything about shipbuilding. The workforce kind of forgot to care because no one has been unimportant for such a long time. The rate of what we can produce things in this country for defense, for space, or anything outside of very rare companies like SpaceX. There's several orders of magnitude worse than the public believe or the government believe. And our adversaries know that, which is why they're just pushing and keep boiling the frog because Here's an example in most war game scenarios If a carrier fleet went across Taiwan and we had to ship a bunch of missiles over there and fire them our entire inventory of every munition in the country would last three days and then it would take us three years to replace it That's how bad it is.

7:46There are many answers on how to solve this, but that's the main story here So there's this financialization piece that led to a lot of abstraction with real world power. And then there's the culture piece which is mutually reinforcing. We see a lot of headlines about things like the environmental hurdles that SpaceX gets put in front of them or this tweet that we saw about how wire harnesses in airplane seatbacks were constantly breaking and they cost $10 ,000 a piece to replace because of NFA approval process. I'm curious how does regulation play into the state of affairs in making these things?

8:16and how does that affect costs, timelines, things like that? Yeah, I think it kind of looked at history where we had to build one or two or a lower quantity of planes or missiles and we had all these crazy requirements and just no one is thinking a stance that any of these big prime saying we really should stop doing that. It's like trying to do an x -ray test on every single bird that comes out of it and out. That's how I would put the analogy together and those wire harnesses. There's probably some guy who comes to that shop and inspects it for three hours and then makes sure it goes into plane versus a shop like ours.

8:49We have a lot of automation and processes to do that. And so you can provide a better solution to these companies and no one is actually saying, okay, we should probably lower the cost, lead time, the quality. Overall, I think these companies aren't giving the pressure. And so there's this new age of companies like Andrew coming in the space where now I think the aerospace and defense primes are starting to get a little pressure. Hopefully in five, 10 years there will be cheaper wire harnesses. but that is a ludicrous cost and I think just no one's actually waiting to finger. Yeah. Brian, I want to turn to you for a second because Chris and Jordan are building companies that are expanding our manufacturing capabilities of things that exist today and that we are making just in a horribly inefficient and cost -effective way.

9:30What your building is actually in many ways like a net new capability for the country. Do you see any differences in making something that is net new in that way versus making things that exist far better. So I'm gonna actually build off of the previous question and get to the new one all over. So when you look at not only just regulation, but how do you do aerospace engineering? Why is it that traditional companies, and especially Boeing right now is really just eating it hard? Why is it going so poorly for them? And why is the regulatory environment so harsh? My opinion is what's happened over time is with any process or experience, eventually something goes wrong, somebody makes a bad decision and they replace that bad decision with process to basically accommodate the lowest common denominator.

10:20So if all your decisions making process so that you can't do anything innovative, you can't move fast because there's a presumption that you might screw it up, which is always true when you do anything, you end up going incredibly slope. And now you are the lowest common denominator. And that's what we have done to ourselves as a country, both on the regulatory front. It's also what traditional aerospace has done to themselves in terms of how they do their internal engineering culture. And so why does traditional aerospace so awful at developing new capabilities without sight of certain exceptions like SpaceX and some other newer companies?

10:56Well, it's because they have 50 years of process they've layered on top of themselves that has literally killed their ability to innovate and to move affordably and to build at scale. And this just happens with age unless you actively work to keep it out. And so the most important thing, whether you're building a wiring harness or whether you're doing something new, is how do you not layer on process that basically turns everybody from an individual who has skills and the ability to make a mistake to just paper pushing. you have to look at that at every level. And in regulatory it's the same way.

11:30It's not unreasonable that the FAA wants to keep people safe from something falling on their head, but it is unreasonable to take 180 days. That's holding the progress of the country. We have to do better than that, but there's a process they put in a place because some point somewhere is somebody made a bad decision. It's like if you filled your company with lawyers, nothing's gonna get done because everyone wants to keep their job. And now every report coming up to the CEO is like look at many legal compliance processes. That's what it implies. So one of the reasons why people are absolutely correct about government overspending is because if you have regulatory agencies with thousands of people, they get promoted by blocking stuff.

12:11100 % true. Yeah. It's rare you get promoted because hey, I did a good thing and I saved money like, especially with good This is really bizarre with the government. If you don't spend all the money that you were given that year, they literally give you less as punishment next year. So what is set of structure is that we spend so much time thinking like how do we prevent becoming what we're complaining about and it's not easy because things creep in constantly. You have to look at everything with an unbiased opinion of like why are we making this decision, why are we putting in place this process and is it more damaging than what it's supposedly fixing?

12:47I think what people miss about SpaceX and you can override me here, but I think people miss that a big chunk of the value of vertical integration is just not dealing with a bunch of regulatory things with a bajillion different sub tier suppliers or processes. Oh, it's 100 % true. If you build a product and you put in place a thousand legal contracts with all your suppliers that have been negotiated, God untold number of someone's billion engine and someone's built in the way. And then you determine later from an engineering perspective that, hey, man, if I change this, This would just make everybody's life easier, including your suppliers.

13:22But then you have to go and renegotiate every contract. You're just like, oh hell with that. Forget it, we're gonna make unoptable now. This is the boat we're on, let's do it. And that's bad. You hit on something there around vertical integration, right? This is something I really wanna spend a bit of time on because all three of you guys are building companies that can be characterized as ones where the factory is the product, right? To take that famously on saying, what do you see as the reasons for doing this aside from that organizational culture piece, from a technology perspective, from a sales perspective, how do you think about that?

13:52We think about vertical integration is the control schedule. Because if you look back at when America was crushing it in the Apollo era, we got to the moon quick. We can't go back to the moon decades later at the same speed that we did when a computer was like the size of the room and their handsuttering discrete components onto a board. How is that possible? But a large part of it is because to do engineering of anything difficult or manufacturing at anything difficult, easy, completely unreasonable request to have your engineers just sit down and design the perfect system through analysis the first time through.

14:31The first design is complete crap and you're going to do it again. So the only thing that's important is optimizing for pace of learning. Vertical integration can allow you to go so much faster because everybody's incentives are now aligned to the speed that you want, especially in development. And a lot of times what happens in traditional aerospace is your supply chain when you're not vertically integrated. I mean, how you'll get like a new rev, it'll be a year or two years. Well, how can you learn? And how can you say, oh, I made a mistake and I'd like to undo it without a two -year penalty?

15:05You can't. It's not like one traditional aerospace program is behind schedule and over budget, they all are. It's not because the people are bad or stupid, it is because they work in a process that just fundamentally broken. And vertical integration in my mind, the control schedule, is just what you have to do, because in the poll area, they would launch multiple rocket flights a day to test. I mean, SpaceX is getting back to that, but I mean, we had that decades ago. So, when you look at from an adversarial perspective, China, North Korea, Iran, they can't afford to do aerospace the way the US does aerospace.

15:45One of the best things that could ever happen to them is they get wealthy enough, they're like, we got to do it like the Americans and they just destroy their ability to go fast. But right now, they approach aerospace the same way the US did in like the 60s and they're kicking our butt. They're going much faster and that's what we have to bring back to the US. My opinion. One of the big thesis is for our company is no one bothered to put software engineers in manufacturing for like 40 years, big macro statement, and by proxy all the software is terrible. And one of the reasons why all software manufacturing is bad as a SaaS vendor is because the context you need from the customer is so deep that almost every SaaS company builds the wrong product.

16:24So the counter example for that is if I gave anyone in this room a couple of software engineers as a new interviewed 10 HR managers and said, build an onboarding workflow. If all being onboarded as employees, you naturally get it. Matter factory is being such a hidden problem for such a long time. That vertically integration for us, it just means that one, it's the only way to build the correct system and software because you're really feeling the right problem and pain. And then the rapid iteration, or one of our rules is automated as operate, which is like you can't build software for the factory until you can run that part of the factory yourself.

16:56There was literally the only way to build automation that works in the real world versus a cool industrial robot that people buy and put on the shelf. It's a context problem and you got to own your own pain. I love that phrase, own your own pain, that's 100 % true. This is what Boeing used to do when they first invented autopilot for landings. On the three last test flights, they just made all the chief engineers who built the autopilot software go on all the test flights. That's the best bug fixing process in the world. And that's what you get with too many layers removed at just other work. For us, we need to be the fastest and highest quality contract manufacturer.

17:29We look at what software, what solutions are out there. And we realize that the design of wire harnesses is also incredibly fucked up. And so when we get like Excel spreadsheets and PowerPoint slides from some of the largest companies out there, and have to tell them this thing won't work. Yeah, so you all touched on software there. Sometimes there's this misconception that companies like your guys are not software companies because you are primarily building physical products and running physical processes. I'd love to have you guys comments on that. I don't know if this is contrairen anymore, but selling SaaS, stop word, a hard -tech company is almost impossible.

18:04It gets very, very difficult. It's always going to be a unicorn solution. I agree that the way Centera makes money is because we sell a physical product, because that's what the world needs more of versus some of these other SaaS tools. I think the second thing that might be more contrairen is like software's not going to solve all your problems, sometimes writing it on a post -enote and giving it to the person next to you is going to be a faster process than having all the software overhead. I think the way software helps a manufacturer companies for us is to be scalable. I call the McDonald's approach, which is you wanna work in McDonald within an hour, you could start flipping burgers and start building something.

18:35And that just goes from just being able to look at a screen and just execute versus all the manufacturer companies I've worked at from large companies like Ford to smaller companies like it is gonna take you months in almost years to be just like really skilled in a craft and actually know what the hell you're doing. and so I think that's the whole plug and play in scalable model that it suffers really really important. I couldn't have said it better. The reason why we have five software companies is because there's two big problems to solve in autonomous manufacturing. One is the task layer, which is someone takes 40 hours to do something, make it two hours.

19:07And the second one is the coordination layer. And we don't believe in full automation. What we do all across the company is take a 40 hour task down to two hours and then make the two hour task in software so that it's deskill enough that we can train anyone in 30 days. And that's the only way to build fast enough. And you also get a really resilient workforce. The other thing, and probably why we're going to win this market, is every single deep tech company in the history of trying to automate manufacturing has looked at four to 10 big stages of really expensive labor or coordination across the factory system, whatever product you're trying to build and said, this is too aggressive.

19:41I'm going to build one of these bits first and then venture capital Y, and eventually I'll build all five of them. And it doesn't work. So one, I think we had the right culture, But secondly, you literally just have to build six products simultaneously at a ludicrously aggressive pace. Otherwise, you end up with a system where the front end is really, really efficient, but the backside is really inefficient, or you haven't built that muscle. And there are so many problems in manufacturing that have real cost and schedule and quality ROI. And by the way, when I'm talking about scarce labor, I'm talking like some of these roles we hired 20 experts for manufacturing and then ran out of talent in the entirety of LA.

20:15And that scares. But the big thing for us of like full stack is we literally have to build everything. One thing you touched on there is the users of the software you develop are often employees of Hadrian. And there's this dynamic then, because you're doing everything vertically integrated, you have in your case machinists and software engineers and roboticists and so on, all working in one organization. Can you talk a little bit about bringing all those different disciplines together under one roof? if it's extremely complicated and an example is, so there are I think five distinct cultures at Adrian.

20:49One is, call it Silicon Valley, software engineers, our technician base, which is gonna be the larger, the most important part of our company over a long period of time, kind of expert manufacturers, like very technical experts in machining or quality or whatever, and then everyone else. And what you wanna do as a leader of a company is say, we're all running in the same direction, right? but often that has clashing incentives. So if it comes out of the CEO's mouth, like your job is to automate everything, people in manufacturing have been burned for 20 years, but really bad bosses, really bad leadership.

21:22If you're gonna lose your job, if I make you more efficient, I'm gonna fire you. So this is huge, 30 year buildup of, oh, I really hate everything about this. But we started from day one with culturally equal footing and then an economic equal footing. To the extent that California allows me to, everyone is on a salary, and if you are one of those manufacturing people who are helping operate and develop software, you have the same equity bars like a software engineer. Because we're growing so fast, like you're never gonna lose your job unless you're on a performing, but we really had to build that kind of level set economics.

21:52And the culture from day one was, and this is the biggest mistake private equity in Silicon Valley makes. The private equity version of this is, you work hammer pants and I wear a suit. So screw you on what you're doing. And the Silicon Valley version of that is, I have a PhD, I know what I'm doing. And both completely disrespect the core of manufacturing, which is, there's nothing new that needs to be invented here. You've just, you got to pick 10 smart people and get the knowledge out of their heads from 30 years of experience and get it into software and scale the hell out of it. We knew that coming in, but it is a constant fight, and every communication move you may cast to continually reinforce that.

22:27And it comes down to really little things. It's not just the executive of that operating division, like machining or quality, is giving product feedback. there is at least two to three literally hourly workers or experts that have to use that software, yelling at a software engineer being like, your product isn't good enough across the whole company. That does seem like a version of it on your pain, but I actually think that when you're putting in software or any kind of automation, you can go too far too fast and just create more process and work, especially if you're just taking something out of the box and shoehorn it into your business, and then productivity is down and everybody's miserable.

23:04Well, one of the things that we're trying to do is actually look at from like efficiency productivity aspect. You bring in automation where it has the most impact and then you fine tune that so it's not painful. There's a line that says, if you wanna get something done, give it to a lazy person. And so I think I'm very happy I'm a lazy person because I didn't get manufacturing. You really have to do the least amount of steps and the least amount of work to get something done while off so not adhering from the quality. I think the culture at CENRA is that are best technicians that people actually building the stuff, they're not gonna actually say what's a better process.