Taylor Ogan, Snow Bull Capital: China's tech frontier, the view from Shenzhen — #47

Taylor Ogan, Snow Bull Capital: China's tech frontier, the view from Shenzhen — #47

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Welcome to Manifold. My guest today is Taylor Ogan. He is the CEO of Snow Bull Capital, a hedge fund based in Shenzhen, China.

Taylor, welcome to the podcast. Thanks for having me. It's great to have you on. Uh, I understand that it was just earlier this year that you moved to China.

Am I correct about that? Yep. January, 2023, And, uh, you're a rather unique entity because you might be the only wholly foreign owned enterprise in the hedge fund space based in China. Is that, is that true? at least by Americans. Yes. The government told us, great.

So I, I wanted to start by just asking a little bit about your, your background and how you got into the hedge fund industry and then maybe culminating on why you decided to move to China. um, so in 2018, um, founded snowball capital in Boston originally. And, uh, the plan was never really even to have a focus on China. Uh, our focus centered around investing in green technology.

So high tech, new tech, clean tech. And it just so happened that since 2018, um, China, Chinese companies happen to start really dominating those industries. And so the focus had to start shifting more towards Chinese companies. And. It definitely isn't popular among most American investors, um, to kind of, you know, discuss Chinese investing opportunities, uh, but we couldn't leave it out of the conversation.

And if we tried to ignore China, it felt wrong. And so. Um, that, that's kind of how we, we focused more and more on China.

And five years later, I mean, now we're, we're in China. Um, we, we expected to be in China, uh, but definitely not living here. We expected to even three months out of the year.

I mean, a significant amount of time, uh, but then COVID happened. And we realized that the research was, was the first thing we noticed. The research just fell off and equity Reese. I mean, everyone pulled their analysts out of China and a lot of them were never in China. They were in Hong Kong or in Singapore. And so they would go on a China trip, oftentimes less often than we, and the research, it just, it was always bad, but it got.

It just went to zero. And so we had, we had no like real grasp and trying to talk with executives from Chinese companies, Chinese IR it's. They don't like to do it over zoom or, you know, skype or anything. They want you to be there. And if you are there on a site visit, they'll open the doors to you. I mean, they'll, they'll answer so many of your questions, but they will barely even respond to email.

I mean, if you have WeChat, you may get a response, but so we had no communication with these amazing opportunities. And we also couldn't find, we didn't have a good feeling that we could find new opportunities. Um, because we physically couldn't get there.

And so we started looking at ways of how we could cleverly get into China. Um, visa wise and, and then the U S started to, you know, kind of spiral, um, down, I'd say in, in terms of innovation, uh, during COVID. And I mean, all of the disinformation and people couldn't trust their own government. Um, it was, it started just getting socially ugly for the United States. And so we kind of looked at how China was handling a lot of this and, and it kind of, um, I'd say, I'd say it divided us. Um, our office was, was like an outsider would say, wow, you guys are really pro China.

And, and it was, you know, we were, we needed to see like the daily COVID numbers and you couldn't get that even in Boston. I mean, you had to, it was, there were large estimates. Um, but, but China was just so transparent and this may surprise a lot of people, but they really were.

And now we have the perspective that. They definitely were, um, and so China kind of reopened like pretty quickly within itself, right? So not to outsiders and it's still I mean that you look at the tourism numbers in China. It's still not Nearly, it's like 20 percent of what it was pre pandemic. So it was we really wanted to get to China and One one night at dinner with my team. I floated the idea Of what if just for a year or two, maybe three, we actually moved to China.

Now keep in mind, one of our analysts had never been to Asia before. So, and she actually was the first one who said, I thought you'd never ask. And so, uh, it suddenly became really real.

And like the next day at work, we started looking into, could, could we actually like set up an entity in China? Um. And so each of those days got more and more serious, and we started having real meetings with the few firms that help companies do this, and they're mostly factories, right? They're not, you know, white collar firms. So, uh, it was, we had to do a lot of things that really had never been done. And we started measuring our paperwork in terms of pounds. So, uh, and, and so the entire process took a year and a half from when, from that dinner to when we actually stepped foot this January in China. And, uh, it was, we kind of expected that process.

We were initially quoted six months. So for a year we had to be bogged down by thinking, basically tell, I mean, it's, it sounds crazy, but like telling family members, like some of them were elderly, like kind of having to say, but like, this is a very serious move. And I mean, we don't have, no, one's married in my company. Um, and so, you know, we didn't have to give up maybe as much as a company moving their entire headquarters to China would. Uh, but. And no pets, which maybe would have put like a flash on it.

Uh, but it was, it really was like telling friends, like I'm moving to China. I don't know when I'm going to see you next. It was, it's, it's more than just the business element. I mean, it is actually personal. there anybody at your team that was opposed to the move or did you lose any team members over the move? uh, we, we, no one was opposed.

We did have an analyst, Connor, who's great, um, who was not eligible for his visa. Um, and so. We parked him at a, uh, at a, a company that, um, needed some help internally. Um, and he, since twice with this company.

So, um, he's very happy and we're very happy to get him back once he's eligible. Um, but he didn't have enough working years out of college. And so the Chinese are very strict about this. Um, and, and so.

Yeah, I mean I would call that a loss. Um, but he I mean, I was just we chatting him a few minutes ago. I mean, he's he really wants to to live here. Um, so Yeah, we we did have a loss. Um, but the point is that the again a fly on the wall would see these only americans and One of whom had never been to the continent before Agree and very seriously have conversations every day leading up to it for a year and a half about especially amid all of this I'm moving to china Uh, so even the chinese side like our counterparts in china. We're like, are are you sure? Like this is you know lockdowns and everything we were prepared We were prepared for not just three weeks of lockdowns, but also flying into hong kong and going through those lockdowns so that's kind of why it became extra personal like when we had to Say to our friends and families like it doesn't make sense for us to hop back and forth all the time like We would before COVID.

Now, we actually can do that. Um, but we didn't know when China would really fully reopen. So, yeah, I mean, it sounds like a little emotional, but it really, I think that's an important part of this. And so finally, and I will, the other thing is what delayed us another year is actually the U. S.

The Chinese side was very fast. Um, they're, the consulate website would say this is, this document's going to take You know, three weeks and it would take like two and a half weeks. Um, so the very accurate granted, I don't think they're processing a lot during that time. Uh, but yeah, the U S side was just so slow. And the sad thing is we kind of thought that we tried to not put that we are going to China. Like this document needs to be authenticated because.

It's going to China, um, as much as possible, which is really sad. Um, and still we were delayed that long. Um, so eventually in mid January, we, uh, fly in land in Shenzhen and it was, it was surreal, um, because it was, it was such a long time coming and it just, I hadn't been back in four years. And, um, and you know, for one of my colleagues, she had never even. Um, so yeah, it, we, we finally got here and the only regret that we have is not moving here sooner, uh, even with the lockdowns, we would have done it and, uh, it, the opportunities here are tremendous.

And I think maybe I have a very unique perspective and just since, you know, 2023 is a huge year for. Especially Chinese tech, um, even the EV penetration rate, like I can see that with my own eyes since I first landed here. Uh, so it's pretty remarkable in such a short period of Can I ask you just a couple in the weeds questions about the logistics of what you went through? So are you on something like a 10 year business visa or something like that? Yeah, so that is, it, it renews every single year or two years after your first six months. So it's, I'm right now on a, on a two year work visa. Um, it's not a business visa, it's, it's even better.

Um, and. Yeah. And our, by the way, our company is wholly technically our parent company is still based in the U S um, as a Delaware company doing business in Massachusetts.

Um, but our Shenzhen, it's Shenzhen snowball company. Uh, that is, that is wholly owned by our parent company. Um, but that allows us some pretty unique, um, things in China and some things we, I think we're going to be trailblazers, I have to say, uh, in.

crafting some, some frameworks that have never existed, uh, because the Chinese government. At the, you know, Beijing and even down to the district that our office is in they want people like us They they don't care if we're america. I mean, it's almost better because it you know helps bridge things Um, they're very supportive of us being here and Honestly, we, we didn't know what to expect. We thought that even from, you know, counterintelligence perspective, like this could look bad, right? Um, one of our, one of our analysts worked at the state department. So like we were worried about that. Um, and no, nothing has, uh, we're a little slower at, uh, the, the borders just because they haven't seen many American passports.

Um, so yeah, but no, it's been fine. just for my own personal interest, because when I first heard your story and your story is actually really unique. I think I bet during the whole COVID era, you're, you know, not even, I mean, beyond finance, you're one of very few companies that relocated to China during this period of time, probably.

So everybody else was going the other way. So I was kind of thinking through, like, how would you do this? And I was wondering, like, if you were some kind of like Cayman Islands registered entity, how would you Could you not just somehow get to China and operate there, but all the trades are executed abroad, and you're, you're telling, you're, you're making the trades from China, but you don't actually have to be a China based company? What, like, would that, something like that have actually worked? You could do that, but not in terms of actually, like, getting a permanent residence. It's actually, it's really hard. Um, you'd, you'd be better off, like, I guess, pretending to be a teacher or something. And, you know, but they, they even, a day trading teacher. yeah, yeah, right.

Um, that would be a good movie. Um, but they, they check that. Like, they, they will send people and, like, take a picture of, like, you in your office to make sure that, like, you're actually there. I mean, they do that in the U. S. too, but, uh, yeah, so it was, we, we also really didn't want to go offshore because.

If things got nasty, China may fully contain itself and we still have to consider that. So because of that, there is, we face ourselves no delisting risk. There is still actually a risk of American individuals cannot invest in certain companies. For example, SMIC, that, that hurts us. Um, and so we're looking to establish even, um, I would say safer, um, uh, structure in China so that we actually could, and this is all not to get around anything. It's to be as pure, as legitimate as possible.

And that will mean closing off access to American investors. And that's, uh, another, another route that we are going towards, uh, which is. It surprised us, but Chinese people, you hear about Chinese people want to move their money out of China and everything. Certainly some do, uh, but they are surprisingly receptive to, they've shown a lot of interest in having us manage their money investing in Chinese stocks.

When I say it, it sounds crazy because, like, my Chinese is horrible even, like, they, how, how, why, what, what do we know that Chinese people don't know about their own companies? And, it's the Western perspective, and it's something that I, I guess I've taken for granted, but it is very different, like, mainland born Chinese are, have very different perspectives than Americans. And, uh, it, it translates into a lot of Chinese actually have, they have, they're too bearish on things that are happening before their eyes. And I could give you a million examples, but, uh, that's something that surprised us. And so that's even better for us.

Like the, the risk, the risk that, you know, the anxiety that I feel every day is, is dwindling since I've been here. And I definitely did not expect that. I thought, you know, I'd have to put up with a lot.

Um, but no, it's, it's actually, you know, especially in China, the more pure you do something, the more clear your structure is. The better you're going to be and that sentence may surprise a lot of yeah. No, I, I think, I think I understand where you're coming from. So, um, it sounds like before you went to China, your LPs were all, uh, Western or, yeah, and, but now you might be picking up some LPs that are, uh, in, in China. When, Yeah, it would be a separate fund.

I see. Before you went though, your exposure to China, was it always through shares that were listed on Western exchanges? Or, okay, and now, good question. but now, but now you're actually investing in country. Yeah, if you could go into that a little bit.

Yeah. So we have been closed off from the a share market. And even if you're familiar with V. I. E.

Structure, variable interest entity, This, this is Cayman Islands owns a share of like Jack Ma's stake in Alibaba and so through, so like all of that, we, we got out of all of that as when we could, there were like two companies that we couldn't for a while, like there was no other, but you started seeing these secondary listings or dual primary listings from Chinese companies that were listed on NASDAQ or New York Stock Exchange that realized the delisting risk was getting too high. And so they needed to have a secondary offering on Hong Kong. And so we, we owned a lot of Chinese companies, but we're limited to only owning companies that have H shares and we don't own the ADRs.

We own the pure eight shares. Um, the, the a share market. You know, granted it hadn't been doing so well, um, but there wasn't a lot of volume in it. And since, since really, I mean, we've moved here, you've seen, um, you've seen this Hong Kong stock connect with Shenzhen and Shanghai.

Where you can own northbound and southbound, like these things and dual counters, like they're, they're really trying to, to open that up, but it's still very difficult for Americans to own a shares. And so, uh, that was something that we, we didn't have. And so this is us being here. There are even rules that because I just myself am here living in China. If I live here for two years, it opens up a lot more for, for me to access right now, we can have access to that, but we'd have to go through local people.

Um, And, you know, there's some, some trust issues from some LPs with, of course, with that. Um, but yeah, after two years of me living here, it will be essentially, I mean, unfiltered Got it. So this is probably a dumb question, but for the eight shares, there's no issue of converting. Like if you, if you sell, if you, if you, uh, liquidate those shares and convert to dollars, there's no issue, right? There's no issue of getting your capital out.

But, but if you go fully into the, uh, RMB denominated shares. Uh, then like there is still like you could make huge windfall, uh, but then like getting the money out could still be challenging. Is that true? Yeah. it's, it's, it, it, it actually is challenging. Um, and I know of ways, you know, that people, um, go around that as much as they can, but I don't think they're going to last long.

Like, the Chinese government is smart. They, they know. Uh what to look for and so that's another thing with with opening a fund in china for china sense. Yeah. by chinese Is like I we had to have a discussion with my colleagues like hey if this Gets really successful and you have a lot of money, you know, that's that's gonna be you know, you build your summer home in china Um, because I don't I don't know what to tell you I don't know how easy it may be for us to get that money back to the U.S. Um, but uh, yeah, so that that definitely there is truth to that, um, and I I also though see that changing in the next 10 years, um, hopefully five years, but there's no way that China can grow to be this big and still have things like this, you know, So, yeah, you know, we might have gotten a little bit too in the weeds in the financial and regulatory details for my audience, but, uh, so maybe we could just, I, I was personally interested because I don't really quite understand what the best way to get exposure to Chinese companies is.

So. That was a little bit for me and maybe not so much for my audience in general. But yeah, let's, let's, um, backtrack a little bit and talk about, I think, so I haven't been back to China since I was there this summer, right before COVID. I was in Beijing in 2019 and I haven't been back since then. And I'm probably going to go this summer, but, um, I'll look you up.

But, uh, uh, so a lot of my listeners probably haven't been there for even longer. And so for me, every time I go there, it's just amazing how much the place has developed. Shenzhen is one of the most advanced cities.

I think I heard you talking specifically about, you know, robo taxis and drone deliveries being a real thing. Now talk a little bit for the audience, just about the wonders of like stuff you see in Shenzhen from day to day. yeah, it's funny because I, let's say I tweet a video of, of a drone delivery. Um, there will be people who comment, you know, they never can be positive comments. Um, They'll say something like, if they haven't been to China, I don't really care, I won't even entertain it.

But, there are people who say, I lived in China between 2012 and 2018, and like, you may be showing a little pocket of China, but that's not accurate, and you know it, and I know it. And it's like, wow, I didn't expect the people, like, who really want to, like, harp in on this, be, like, have lived in China, or be Chinese. Um, and so, it's, like, I don't know how else to, you know what? There, this is a little unconventional. This is how common drone delivery is. I don't, it's probably super washed out. But, uh, right there, in this park.

Is the, is the nearest drone delivery to me. We may even see one right now. Um, you'll probably see a RoboTaxi.

No, I actually don't see a RoboTaxi right now. Which is surprising. Um, and I mean, also look at all the construction. Like, this is, the drone delivery, the RoboTaxi, the, all of these things, it's real.

Um, and so, it's, I know it's not normal for other Chinese cities, maybe. But it's getting more normal. And so if you go to Beijing, I'm going to Beijing in two days. I don't think that they have drone delivery.

They have more robo taxis than Shenzhen though. It's one of the reasons I'm going. Um, so like the, the cities vary. The overall theme is I would say the period that you haven't been will be the most unrecognizable you've ever seen. And because it was for me. And this was, I spent most of my time in China in Shenzhen.

And it is like where I am right now the last time this building all of those buildings you saw that were complete Uh, we're not even built like I don't even think they broke ground when I was Last year and I was not, you know, it wasn't that long ago. So I mean when you see entire It's not neighborhoods. It's districts that are just tencent is building its own city a few miles away from here I mean it is it is crazy. So Yeah, the you will not recognize at least some parts of some cities. For Shenzhen, it's like the whole city. They're even tearing down buildings that are like 20 years old because they weren't really, you know, it's a four story building and, um, and they're building, you know, a new headquarters.

So, it's, you're not really seeing that in other cities, for sure, but, uh, yeah, in Beijing, Shanghai, even Chongqing was like, this is how can this city really modernize that much? Oh, it has. It really has. So, um, yeah, it's, it's going to be unrecognizable to you, but I really encourage you and, and anyone, especially if you've never been to China.

Um, but like the other thing is, I, if you haven't been to China really since COVID your opinion, especially on tech and innovation can't be complete. It's impossible. Even if you're not talking about like Chinese specific innovation, it is, if you don't actually see it, if you don't hear people on the street talking about semiconductors, like that's just normal, at least in Shenzhen, that's like normal.

And so you really need to get a good pulse. Um, and so, yeah, I really encourage anyone to come here now. So for the, um, those internet people that you just mentioned, like on Twitter that, uh, have, you know, everything about China has to be negative, there's a big, you know, meme or I guess propaganda idea in the Western media, which I'm sure you've seen, which is that, you know, the economy is close to collapse in China and things like this. And granted, for sure, they're having some problems with the property sector.

What's the general, what's your general feel? Uh, does it seem like, uh, do you see a bunch of empty buildings with no one in them? And, uh, does it seem like the economy is about to collapse? Yeah. I, I do see a lot of empty buildings. Because they haven't put the glass on the outside yet. they, the, you know, real estate is the biggest concern. Um, and I will say the Chinese with whom I speak are, they're warriors. Um, and.

They, they really like, they'll send me a Reuters article about like China's economy is collapsing and they'll be like, Taylor, check this out. Like, what do you think? And I'm like, you, you're the Chinese, like you, why are you sending me Western like media? And, and it is because the, the Chinese media doesn't really comment on the economy. Like it, it's like, they're not opinionated about it.

Like Western media is, um, so yeah, I mean, China's collapse has been, people have been calling for it for the last 20 years. Uh, I don't see any signs of it. I see in definitely some, there's some sectors that I would just completely avoid. Uh, there are also some sectors that.

I won't name names, but we probably are thinking of a lot of the same names. Uh, if you think about that company and this is, this is like a list of companies in five years, it would so much would have to go wrong. Like we're talking full out war, China, complete crackdown on technology as we know it, like for it not to. For its stock price not to be higher than it is today And I can't say that about american companies. I really can't even some of some of the darlings right nvidia Apple, I don't know and that that's those are kind of deemed like safe Investments right now and that's no longer true.

And this may have been a different conversation six months ago. Um, but we can get into specific technologies later if you want, but the, the economy as a whole, I don't see it. Um, Like you've probably read Um, I I will say that people do right now.

They're calling shenzhen like There's China and then there's Shenzhen. So I am living in a bit of a bubble, um, but I travel all over China and, and yeah, you don't see growth as much, but again, we're talking about growth. So if, if GDP growth declines. Year over year.

I mean, we're still talking about GDP growth at quite high numbers. Not, not 2010 China numbers, but we're, we're it's that maybe slow. I don't call that slowing.

Uh, and so the, I mean, there's. I live above a mall, which is kind of weird to say very common in China. Um, but the Right now it's 9 42 in the morning There probably is a line 15 people long at louis vuitton Mhm. to get in like that is not What I think of right.

It's not the best barometer either. Uh, definitely not. But like when you see this all over, um, it is, it is quite crazy.

I do think that there's some overdevelopment. Um, but that's just companies thinking that they need a floor of an office building for their six employees just to have it, to have three T rooms. Um, and now they're like realizing they maybe they shouldn't do that. Um, so there are vacancies. Um, Like I would expect my my office's rent to go down this year.

Um a little bit But yeah, other than that, I mean it depends like as a whole china's economy is not collapsing It's not on the verge of collapsing. Uh, if when you come here, I think you'll you'll see that You know, the, I just had a conversation, the, the, the, the episode of Manifold that just came out, uh, most recently was with this MIT economist, Yasheng Huang, who I listened to the, the, the netizens, the Chinese netizens really don't like this guy because he, he does say some critical things about the Chinese economy and Xi Jinping and things like this. But, you know, one of the things I said to him is I said that if you just follow innovation across many, many sectors in China, whether it's commercial air. Aerospace, uh, space, um, EVs, semis, solar, you know, on every front, uh, their technologies is advancing very fast. So it's just hard to believe that, uh, that isn't gonna pay off for the economy as a whole in the future. And it's not little niche industries, it's industries that are gonna employ large number of people.

So, um, yeah, so I, I can imagine there's gonna be some difficult headwinds maybe from the property, uh, sector, but other sectors seem to be very healthy and, uh, obviously you're right in the middle of it in sheen. Yeah. And I would say I've said very similar sentences you many times in the last four or five months. Um, it's hard to believe a future, not just in China, but in Southeast Asia, in India. In Africa, in Central America, um, in the United States where technology does not tech, not the role that technology plays in our daily lives in 10 years will be unrecognizable from even what most people can predict right now.

And. To get there. We will get there. I promise you we will get there and Even look at the last year like people's lives really are changing the way professors teach like has completely had to change right so um it it will be unrecognizable to get there A lot of things must happen and they will happen. And so, because they will play such a pivotal role in our lives, look how much people talk about cars, because it's the second largest asset that people own.

It's like, sometimes I think, guys, stop talking about cars, it's kind of getting boring. But then I think back to, cars are pretty awesome, and, you know, it is, it has a lot of investment implications. And so these things are going to be bigger than cars Like the amount of time that you discuss with your friends about like getting a new car It's not it's not really that much think about the role that technology even today plays But will play in 10 years in just the average conversation you have It is going to be you're going to spend you're going to have so many subscriptions You're going to have so the way, subscription models, like not like Netflix, like subscribing to entire things that we don't even have right now. Um, even like bat battery as a service, like these are all things that, yeah, most people don't even think about, but you, you will, you will, this will be a part of your life very soon. And so, uh, to get there, I think it, these things have enormous economic implications and.

I see it as, especially with the US and China, China can get there without the US. The U. S. can have a future if it closes itself off from China. But, if it wants to have the future that I'm talking about, it has to work with China. And I think, I hope, that we will get to that point.

And it will be glorious and we'll be happy again. Um, but, it would be great. like I'm very positive.

As I, as I said to Yasheng, I, it would be great if we could get back to a positive sum instead of zero sum game with between the China and the United States. So, um, it is still positive sum because actually so many things are still going on in collaboration between American companies and Chinese companies. It's just that, you know, the zeitgeist is kind of against it. So it's, it's, it's kind of not something you talk about, but there's still very fruitful collaborations going on.

very much. Yes, Let's, let's maybe talk about EVs because I know you follow Tesla and BYD very closely. Um, now, my audience is not expert on EVs, so don't assume they're experts on, you know, that they're insiders in this industry, but maybe, well, maybe I'll say a few things that there is this huge transformation that's already taking place in China, that the fraction of the car sales every year now that are EVs in China is pretty substantial. I don't know what it is, 20%, 30%.

Um. almost 40. 40%. And, um, I think there's pretty good evidence that a lot of the most competitive EVs in the world right now are produced by Chinese companies. Maybe only Tesla, uh, is the one that could be competitive with companies like BYD. Um, and although I think the U.

S., it's maybe a very risky move for these Chinese companies to try to export directly to the U.S., almost every other country in the world, including, say, Germany, Israel are getting tons and tons of Chinese EVs right now. So maybe Taylor, you can just say what, like, maybe give us your view of what's going to happen in the space. Sure. Yeah, I'll try to talk as broadly as I can.

Um, yeah, almost 40 percent of new passenger vehicle sales in China are, they call it new energy vehicles, electric vehicle, which includes battery electric vehicle and plug in hybrid electric vehicle, not mild hybrids. People think of like a Prius, like that's not an electric car. Yeah, no, it's not an electric car, but I think this is mostly Americans.

They, they don't know that like plug in hybrid electric vehicles. Are like basically an electric vehicle, a BEV with a little range extender gas tank, um, to alleviate range anxiety. So, yeah, PHEVs are very real, um, very much an EV. In fact, a PHEV, a 2023 BYD PHEV, the least efficient TONG, uh, driving for a year. It, and over its lifetime, including the emissions that, you know, where it took to actually make the car, um, will be better for the environment than a Tesla, the most efficient Tesla 2023 driving in Europe over its lifetime.

If we assume the same lifetime, um, that's, that's pretty crazy. So yeah, that, um, should hopefully squash people who say PHEVs aren't EVs, but anyway, uh, almost 40 percent of EVs. of new car sales are electric in China.

Uh, you can see it. They make it very easy. It's good for, for car spotting because the license plates are green instead of blue. And so we, we kind of talk about green plates. The green plates are just, it's like not even a neighborhood.

Like, let's say you have a really wealthy neighborhood and a very not so wealthy neighborhood in the same city. Well, normally to observe a car trend, The same trend wouldn't be well for it to be a real trend. It would have to happen in both communities here It's happening at all levels. It's happening at the most expensive cars like people are literally Selling their, their Rolls Royce for, for like a hi fi because it's just cooler. The tech is just better. Um, it has these like neat tricks that, and then at the same time in the other communities, they, there are very attractive.

You're not, most people don't know about them. Um, because you know, they're not the sexiest cars, but those are also electrifying at a very rapid rate. And, and both actually in all price segments, it's like. The lines are essentially the same, uh, in terms of EV adoption. So, what I say to my American friends who don't follow any of this, and maybe if they're a certain type of American, they think all Chinese stuff is crap.

And so these Chinese EVs can't be any good. I just tell them, do the following thing, go to YouTube, type in BYD EV, and you'll find an Australian guy in Australia or a British guy in the UK or a German guy in Germany, reviewing the car, like a guy who makes his money from his YouTube channel, reviewing the car that you could buy in Munich, which is made by BYD and saying, this car is, you know, competitive. They might say, you know, it's this good or this good, but you can see the car is a quality car and people in those countries believe that. So right away, you should just realize, wait a minute, this is not how the world was a few years ago, right? There, the Chinese China was nowhere near the number one car exporter in the world, but now they're, they might be.

So, um, that's, that's the, that's the, the, the way that I can get people to upgrade their understanding very quickly is just to find a YouTube video where it's a Westerner in a Western market, reviewing an exported Chinese EV. And then they'll suddenly realize, wait, the world changed in the last few years and I didn't catch it, but of course you're let me see if I can... If I can even surprise you in this, um, I have a lot of friends who work at automotive companies and some of them are legacy auto companies. Some of them are the newest ones, uh, and a lot of them are Americans. They have torn down, you know, obviously they're not going to publish this. They have torn down the Chinese cars, the Chinese EVs and their engineers are terrified.

And surprised and like just so impressed so to hear that you're not going to hear that that often but I keep hearing this and I'm, mostly I like to ask like the logistics of how they how they get them. Um, but uh, I mean even the new Huawei phone like hearing about how the US intelligence agencies were trying to figure out how they could like, how do we get someone to wait in line at a store to actually get one of these so we can tear it down? So they relied on YouTube to tear it down. Hilarious.

But, uh, the, the, these, uh, legacy auto companies, they're, they're tearing down these Chinese cars. People at Tesla are tearing down These Chinese cars, and I don't want to accuse anyone of reverse engineering, um, but they are blown away. And that is something that, um, you know, you can, you can appreciate the build quality by looking at a, an average car in a parking lot. I do it all the time.

Um, and, but, but then you have to ask yourself, why is it that these Chinese cars are so consistently well built? And it's simply because, well, 90 percent of it is because it is built with robots and I've toured these factories. Um, and, you know, I wish that these companies would, would really showcase their factories more. I understand why they don't, but, uh, you know, I was just at a factory in Changzhou last month where it was 98 percent automated. That kind of rate of automation you don't see in factories.

Um, it is. Almost and I actually would accuse them of like a little bit over automated because like I mean Did you really need to buy the kooka? you know three million dollar robot to like pick up the car and move it over here like probably not but um, yeah, the Automation and it's also why the batteries the chinese batteries are so much better. It's why? The iPhone right now, the new iPhone is like having some issues because it's built in India and it's more, you know, uh, hand assembled, uh, Chinese factories are the new Japanese, the new Toyota factories. Um, and.

Not so ironically that they have a lot of Japanese robots in them. Uh, but that is, that is why the build quality, that is why the, the range has gotten so good because they're able to, to jam a lot more things into it because they have this precise manufacturing. And, uh, it is, it is hard to explain. Um, just how it's like, it really is like a symphony. Um, to see two months ago, I saw 15 to 18 robots working on one part. It was, it was crazy.

You just see these sparks flying. You couldn't even get within 10 meters of it, but they like, I can't believe that humans are this smart, that they've created something to do a task that they're not capable of. And you know, it's. The thing with AI is that, you know, you have to have an algorithmic process that does it, but once you have it and you can validate that it works at a slower speed, but then once it's really working, it seems instantaneous to humans. So in the same way, if you have a concert of robots cooperating to do something, the human can't even tell what's going on.

But of course, the engineers who designed it did it in a systematic way. And then, of course, now it's, you know, now it's running super, super fast. So, yeah.

And and another another way I explain this and I think you would appreciate this Um, I said this to some of my friends and they're like taylor. Why did you just tell me? I don't I don't understand what you're saying. Um, it is very cool for me as a human to see AI or a sensor show me something that I can't see with my eyes and so for autonomous vehicles The technology is LIDAR and I commute almost every single day to work and from work in a robo taxi Just because like that's just how life is here. Um And I, I love it. And, um, you know, it's work, um, but I, I, every single day I'm blown away by what the LIDAR picks up because not only would I have to turn my head on a swivel to sometimes see these things, it is seeing through buses because the LIDAR is mounted up higher, um, same thing with radar. It's, you know, it's, it's bouncing off of the lead car and seeing a car, two or three cars ahead of you, like to have a complete obstruction.

And then have so much visibility, something about it just is, is so, it's a very interesting feeling. Um, and I don't know if you've ever experienced something yeah, it has a different completely different set of sensors than what we're used to using when we drive. Um, we have researchers, I'm in Michigan. Michigan State has a pretty strong autonomous vehicle research program and also a lot of LIDAR experts, actually, so I'm familiar with what you're talking about.

And the interesting thing for me was that Elon actually thought he could go without LIDAR. And he said, well, if humans can drive with just You know, vision, ordinary vision, surely we can get the AI to do that. That may have been a mistake. I mean, obviously the dust hasn't completely settled on that strategy. But, um, yeah, to me, it's like give the engineers. I know the professors who work on autonomous vehicles here at Michigan and Michigan State, they're, they're like, give us all the info feeds we can possibly get at a particular price point.

Uh, and the AI will incorporate all of that into its decision making. Yeah. And, you know, with that decision, um, that for a lot of people in the industry is what really, Elon Musk. Because it was in, in Elon's, in Elon Musk, you know, history. It will go down as possibly the worst decision technology wise that he made because he, I mean, I know people now who were involved in those conversations really early on, even the original room that he was in when he was told about, you know, AP one right with with mobile, um, before that, uh, so I know, I know the entire history of it. Um, that was an Elon Musk decision.

And there were people who said, Elon, you can't do this, especially when human lives are at stake, and he fired them. So, you know, my respect for him went down a lot after hearing this and following, and now, you know, we can see the New York Times has posted things, Wall Street Journal, Washington Post, um, about, you know, the paint it black video where they first showed in 2016, this Tesla is driving itself, the human's only there for, you know, that video was completely faked. Uh, we know a crash during that. Uh, so like, yeah, the can of worms is opening up, but LIDAR specifically, um, I, we consulted people who are experts. You know, I didn't study this in university. Like I have a LIDAR is very complex thing.

Um, so we had to consult a lot of people and now we actually do. Like I can have an entire dinner with a LIDAR engineer and like, we can only talk about LIDAR. So, um, I'm not a complete idiot now, but, uh, it, it was, it was so crazy to see people in the technology industry who were like, I can't believe. Not just that he said this, but that people still want to work for him after he said that. Um, and, and so, but the cool thing about LIDAR specifically is that when he said that, the cost of a LIDAR, a Velodyne puck, um, 128 line, was like 28, 000.

Right now a LIDAR unit is less than five hundred dollars in the technology hall of fame Will have a dedicated section to LIDAR and that is something that I don't think a lot of people appreciate you can really only buy one car in the united states a lucid It's not even turned on. So like Americans don't really know much about LIDAR. Um, they know that like looks ugly and everything now in China, I, we really want data on this and just, there's no, no one keeps track of this, but we, we estimate that 10 percent of new energy vehicles, new, new energy vehicles, um, have LIDAR. And it is like, again, when I first moved here in January, I saw very, I was taking pictures of LIDAR. I mean, I was taking pictures of LIDAR like I would take pictures of Tesla in 2012 when I saw one.

So it was still so rare, but now it is becoming, this is crazy, it is like trendy. To have like a little LIDAR bump on your Neo or like, Oh, you can't buy that Lee without like, you got to get the LIDAR. It's safety. Like, come on, you're buying this for your family. You need that safety. And some of it's actually a little like overblown because some of these companies aren't really doing much with the sensor right now.

Um, they will in the future, but, uh, yeah, it is, it's crazy that in the United States, you only have Tesla pretty much for electric cars. And that's even such a small percentage in China, you have most, almost most new energy, new cars are electric. Then you have in the U in the U S people don't know what the word LIDAR is in China, people are like kind of poking fun at each other because they didn't get a car with LIDAR.

Cause it's cool. Um, and it's safe and it's super high tech. I could make a bunch of comparisons like this. Um, but yeah, LIDAR is like suddenly sexy. When, uh, I mean, from the perspective of engineering professors who do research on autonomous vehicles at Michigan universities, and this is going back a few years, when LIDAR was super expensive, it was, it was, it was, it was too expensive to be placed on an ordinary car. But for the research vehicles that we were using, they had LIDAR and the whole question was, what is the cost curve of LIDAR going to look like? And now we've reached the point where, yes, you can afford to have it in almost every car.

And so for sure, it's going to happen. Um, and the people who invested the time to build the software that can really use the LIDAR signal, the information that's gathered by the LIDAR, those people are going to build much better autonomous vehicles than the people who didn't invest in, in that. Let's I have a question. Um, what, what, what was the consensus of those who thought that it would fall to, I don't think anyone thought that it would go sub 1, 000, but like sub 5, 000. What was the reasoning? would have to go back and look at the, because this was a few years ago when I was, I was the vice president for research and part of my portfolio was actually allocating money to the autonomous vehicle researchers on our campus.

So they could do this work. And, um, I remember having lots of LIDAR discussions with them. And the whole, and so having to read up on it myself and the whole question is, what is that cost curve going to look like? And I think the most ambitious, most optimistic people probably were not optimistic enough.

About the cost decline for LIDAR, and so it's one of these great stories. Now, I don't know to what extent it's Chinese companies that are driving the cost curve for LIDAR. And maybe you're going to tell me it is, but it's just amazing because the thing with complex new technologies, you never quite know how fast it's going to get cheap.

And that's often the real constraining thing. Question, but what you're telling me now is like, we're going to see a ton of LIDAR in the future. Yeah. And I think I made this prediction, um, I think in 20, 2018 that China may, require LIDAR in some aspects, and I think the deadline was 2025, so we still have some time. Um, I'd maybe push it back a little bit, but you never know.

Uh, but it is, it is, it may be seen as the safety belt, you know, the seatbelt of the automotive industry. And especially like when it, when it's so cheap, this is also why Elon Musk is an idiot in a lot of ways. He was wrong about it because he was told how much it would cost. Now it's at a point where he, you most certainly could have it. He toys, you know, 3, 000 between the price of full self driving capability. Um, so you definitely could.

Why doesn't he? And people have quit over this because there have been very recent conversations. Hey, Elon, let's, let's, it's time to put the LIDAR in the car and like you're fired. Um, so it, LIDAR, it may be politicized. I hope it isn't. Um, but American companies, Luminar has great LIDAR, but it has yet to scale. Um, actually, I just got an email from their IR that, um, first.

At scale test, uh, was successful. Um, but that, you know, we'll see it in some Volvo's first and, and then that's a Chinese, that's a Chinese car though. Yeah, I know, I know, right? , they, I, I know the team well, they're in China often.

Um, they, uh, yeah, the, the great company and great technology and, and some of their engineers will actually, one was just inducted to the, I think the Florida Hall of Fame of inventors or something for his role in, in developing LIDAR for, you know, much cheaper. But the, you're talking about the National Academy of Inventors. I'm one of the, I'm also in that, uh, groups. Really? Congratulations. I, I didn't know that.

Yeah. So, so American companies, like, yeah, they, they've, they've made a lot of progress and definitely are responsible for this. Um, I'm kind of surprised that, that academics didn't pursue, they were just buying it, I think, and not really reinventing it as much and.

Those who were Waymo pretty much poached all them so that they could develop their own in house ladder Which is also like people don't talk about it because we don't know the cost but like it's not like they're at You know fifty thousand dollars a unit right now. They clearly have brought it down tremendously and their ladder is really good um, but the chinese companies quietly have have done this and this shows especially for Huawei it just shows like Jokingly in the office in, I think, 2019, we said, Watch Huawei. This is before they were, I mean, they had like an automotive division, but it was mostly like for, you know, their, their OS in a car. Um, and we said, Watch Huawei. Just, just make LIDAR. Like, just do it itself.

And it did. And I, we should have bet each other because it did. And.

Then DJI, the drone manufacturer based in Shenzhen, also always based in Shenzhen, uh, it, it also just came out of nowhere and made its own LIDAR, like automotive grade LIDAR. Um, and now what we, we do have a bet on is BYD will do this in house. And right now it's invested in a few LIDAR companies, so, um... That kind of complicates it, but they definitely could. And I would expect them to make, develop their own LIDAR. Um, and I mean, a company in which they invest just, just sold 20, 000 LIDAR units last month, take that people who said it wouldn't scale.

So it, you know, this is the Chinese are doing some really great things. The, the, the tech, like it's one of those things that you develop the tech. And it, do we really need to improve it past this? Like, then we're going to start having like energy consumption concerns. And like, we don't need like a point cloud, mostly because we don't have the software to do a lot of what they want for level two, which is, you know, still you have to monitor the car. Um, but for taking the driver out of the loop, everyone agrees.

LIDAR is, uh, is essential. Um, and so, yeah, this is, that's happening with, with Chinese. Companies faster. And the other thing is the process, the, um, the software iteration really, really shortens when you have a huge fleet.

Of cars with this sensor, right? So it's not just like, you know, a university driving around its campus loop with LIDAR and saying like, all right, now pop out of the trees and Oh, yeah, picked you up now. It's like we can, you have to download all the data. So there's a big misconception that like, you just have all this data, like whenever you want.

Now you have to, you have to download the data and it's, it's a lot, and you're not going to send that over, you know, cellular, but, um, it's, it's a lot of data potential. And you could just tap the fleet for an hour and just get a million edge cases now with a new layer, and that is LIDAR. So, um, Tesla's even using it to ground truth to confirm its guesses.

Um, It's like, it's, it's just cool that there is a sensor that gives you truths, you know, whereas everyone in, in really computer vision machine learning is saying like, well, let's keep trying to guess. Let's keep trying to guess. Well, now that the sensor that you would, you would only use in testing is so cheap that you can just buy one on the internet. And you can use it yourself. So that's, that's really cool that, um, that has happened in just the last four years.

Incredible. And now, so coming, coming back to like the, the factory visit where you saw the robotics and I don't know, maybe you're calling on LIDAR companies as well. Is, is that the source of alpha for you, basically being able to actually visit these companies and see what they're doing? Um, talk about that a little bit. It, it definitely, I don't want to say it's, it's all of it.

Um, but a site visit, especially for us, is the most valuable thing that we can do. I would rather have a site visit about something I know nothing about, and we've never done this, but I'd rather this than, and not read the company's annual report. Spend a month of due diligence on one company, which would be crazy and read every single filing they've ever had read every single call they've ever had. And it, it, it pales in comparison to what you can learn from a site visit. And could you talk a little bit about like, okay, imagine you have a site visit. What's something that you learn from that visit, which could be like either a really positive signal for the company or a really negative signal? Like, what are some examples of what you might discover from the site visit? Sure.

Normally I wouldn't even. broadly answer this. Um, but at this point, like if anyone wants to compete, you know, and, and They have to move to China. all the way out here and like, yeah, and they'd have to find, find this. So, um, yeah, I'll, I'll actually tell you an example in detail.

Um, I don't, my colleagues may kill me after this, but, uh, we were at a, I guess I'll leave out the company name. Um, but a battery factory, the most advanced battery factory in the entire world, um, outside of Chongqing. And battery factories are really complex and also highly secretive. And we, so there's like, there's not much prep you can do except just comparing it to the last battery factory that you toured or the, you know, a battery comparing like CATLs battery factory six months ago to a BYD battery factory right now, like even that comparison, I need to see the new cattle factory to really They just, they change you so quickly. Um, but in this one factory, uh, well, many factories, but at this, uh, site, we. It was their, their newest one, they want to showcase everything and, and they, they flew out the, basically all of the top engineers, uh, not just for this particular factory, but for, you know, battery, their battery division.

And, uh, so we asked them all the questions that we had prepared, and then we really just observed. And, and of course we'd ask questions specifically like, what does this machine do? It does, is this a Chinese? Machine that and that's the big question. You know, is this an american machine? We didn't find any so that would have been a real concern Um, I mean look what's happening in you know semiconductors um, but so we're yeah asking specific questions about that, but um Like how long does retooling take? And if you want it to theoretically change the density or even the, the cathode, uh, makeup, like how long would that, could you even do that in this factory? Could you even do that? Like, why are you, why is this factory in this province? Like as many questions as we could. And there was one part of the factory tour that we couldn't see. And I've literally been strip searched, like not fully, but like.

Like I had to roll down my, my dress socks and, um, to see a battery factory. So like they, there's a no fly zone over some battery factories in China. So, you know, it's a pride and joy of, of Chinese right now, kind of, they want it to be quiet, but, um, so they're very, they're very secretive, but once you're in one, they kind of, you know, you can, you're here, like we, we trust you.

Um, you've signed enough NDAs, uh, but there's one section of this factory that we couldn't see. And I didn't want to be inappropriate and really try to get in there. Cause there, there are other things that companies that they're like, Oh, no, let's not, let's not go there. We don't have time, but this one was there. Being kind of weird about it. And so after the factory, um, we had lunch and I said, Hey, why, why couldn't we see that, that part of the factory? And this is the part, if I say which part it's kind of their secret sauce.

I maybe should be careful in this specific part, but it was, it was one specific, yeah, um, it was one specific part and it wasn't part that I thought was particularly advanced. I mean, the whole process is advanced, but it was, it was strange and they said, I'm really sorry, Taylor, but we just, we can't, we can't show that to you. And I tried and I tried and I tried.

And then finally they said, to be honest. The person I was talking to, I've never even seen it. And so I was like, Oh my God. All right. And I looked to my team and I was like, we are going to do a week's worth of work on this specific part of the battery manufacturing process. And so we did.

And, and in that we learned, we don't know what they're doing, but we then can talk, you know, upstream downstream. We can, there are suppliers. Like we, we know from another meeting that. This company was bragging that we are in XYZ's newest battery factory in involved and make a machine for this specific part.

Now we really investigate that company and doing that unlocks a ton of alpha. I mean, these are companies that we wouldn't have even considered you. You go to Like, um, you know, any of these like battery expos and you'd walk right past that, that booth and no one else is there, but that quietly is like holding up a lot of the innovation that's coming from, from battery.

So, um, that's just an example of, of how valuable site visits can be. And, and of course the conversations that you hear and, and really, if you ask good questions, you're going to get even better answers back. If you really do your homework. Then they, they like that you're interested and know a lot about what they work on every day.

And so it, it just, it just snowballs from there. Um, and we actually, when we do a site visit, we usually leave a day after for buffer, because almost always, in fact, even this time I was just talking about, the next day was a Saturday. And I said, I know you guys, the ones who are like showing us around and making it all pretty, uh, like

2023-11-11 00:36

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