01:01:02 · Ethan Thornton
[01:01:02] S1: You and I talked earlier about how deeply successful companies of one generation will form these, like, rules or laws for the next generation that don't actually hold that true given how different the next company needs to be. SpaceX has been so successful that I think everyone is vertical integration obsessed right now. I don't see vertical integration as a metric for success in manufacturing. Like, if I were an investor looking at a company, I would not mark that company up if they were vertically integrated. Vertical integration, like anything, is a is a tool, and depending on your industry, it makes varying levels of of sense. Like, Apple's superpower is their vertical integration philosophy, which is where it's nuanced. It's not a it's not a binary thing, by the way, vertical integration. They form excellent, excellent partnerships with suppliers that they help get to rate, that they help define processes on. And because of that, as as technology changes, they can change with it. Like, when you track Apple's CapEx investment compared to basically any other, like, scaled hardware manufacturing businesses CapEx investment, it's so shockingly low, which is just... It's beautiful. Because it's so easy to end up upside down on vertical integration. Like, if you go and build a factory and the process changes under you, you're you're screwed. And so that's how Apple has been able to ride the wave of radically changing manufacturing, both in terms of location and technology for decades now. Contrast that with SpaceX. And so I guess all that to say Apple, like, makes sense for their pistols. For SpaceX, they're operating in an industry where, like, ULA's industrial base was screwed. There's nothing that you would wanna touch out of that. And so there's there's nothing good. It's a super rotten industrial base They they had to vertically integrate.
01:02:55 · Ty Morse
[01:02:55] S0: Is this similar for, like, Boeing where they have... At one point, I watched this interview where the guy was excited about having a 120,000 suppliers.
01:03:03 · Ethan Thornton
[01:03:03] S1: I think there are good reasons to not vertically integrate and bad reasons to not vertically I think a lot of the primes... I'm not generally anti crime, but I think that was a pride point to optimize, like, quarterly accounting is is probably mean of me, but I think generally true. And then you also see companies during really hard times start to vertically integrate less because it's hard, or if you've innovated poorly and things are changing out from under you. So I think there are certainly times where it is very bad. It is a bad sign to not be vertically integrated, but vertical integration shouldn't be a maximization function. It should be a tool. I think for our specific industry, there are some things that look a lot more like the ULA supply chain. Solid rocket motors, micro turbine engines, radars. Like, these things cost, in many cases, hundreds or thousands of times more than they should. There are two reasons for that. One is cost plus contracted. Right? And we talk a lot about it for the for the primes. Right? This idea that my margins are fixed, and so if I spend more, I make more. It's bad for the primes, but the primes also have the government breathing down their throat or down down their neck all the time. It's more acute in the supplier level. Because if I'm Lockheed and I'm buying a radar from you, I'm incentivized for you to take longer and charge me more in many cases. The difference is I'm being audited all the time. You're being audited, but you're a level a level deeper. By the time you get to tier two, tier three, tier four, the incentive structures that have existed in this industry for so long are so much worse than they are at the prime level. So that's the first reason. The second reason is a lot of this stuff has been qualified for manned flight. The actuator you put on, like, a seven thirty seven compared to the actuator you put on glide is not at all the same. Same with the jet engines, same with the solid rocket motors. And so these things are are overbuilt for, like, two or three orders of magnitude too much reliability. Now you need safety, and safety and reliability are different. Right? Like, for us is specifically surrounding the warhead and, like, the flight termination system. But for us, in most cases, like, an aircraft crashing is not the end of the world if the aircraft is a 100 times cheaper.
01:05:05 · Ethan Thornton
And you end up paying you end up paying, like, an order of magnitude more for that reliability. And so for those two reasons, across a lot of our business, specifically the more traditional aerospace stuff, vertical integration makes a ton of sense. And then you have stuff where vertical integration makes absolutely zero sense. Like, when you look at making PCBs, it's like the clearest example, or like regular visual cameras. I'm not gonna be better than Apple at doing those two things. It's just not gonna happen. And so let me go and rely on Apple supply chain to the greatest degree I can. Now the weird thing is a lot of this process... A lot of these things specifically in consumer electronic, less so in auto, but still largely the case, is done overseas. And so there is this act of, okay, how do I take this knowledge that exists with the companies? It's not me vertically integrating in the SpaceX sense, maybe vertically integrating in the Apple sense. How do I pull that into The US to create sovereignty? And then you got this middle region, which the camera conversation we're having earlier. Like, how vertically integrated do we wanna be on cameras? Well, the answer is for visual cameras, not that much. It's called EO in industry, but I'm trying to avoid acronyms. But for IR cameras, for thermal cameras, that's a pure defense thing. But I can take the processes that are used to make visual cameras that right now are very different than the processes used to make thermal cameras and stand up something in the in between area. So, like, likely my design, likely me doing some of the production, but working with someone who's already excellent at cameras. And you end up doing this across your entire supply chain. There's the cost optimization function here. That's important. There's the timeline optimization on revs. That's important. For this specific one, the key thing you care about is rate. Like, the thing that is happening so much right now is companies are going to the Pentagon and saying, can make 5,000 of this for you. I can make 5,000 of this. And different companies will go and say, I can make 5,000 of these things, but they're all touching on the same supply chain. And that supply chain can make 5,000 of that thing. Let's say it's seekers or let's say it's warheads. Yeah. They can make 5,000 of that thing, but that 5,000 is being split to Ukraine.
01:07:08 · Ethan Thornton, Ty Morse
It's being split to Europe. It's being split to rearming our existing legacy systems that just got shot in Iran, and it's being split between, like, four different companies. And that's during a pretty peaceful period for The US compared to what, I think, unfortunately, we need to prepare for in the coming years. And so the reason... The biggest argument for vertical integration, if you're Mach, which is different than SpaceX or Tesla, is surge capacity. Like, I need to be able to step up and say, you cut me an order for a million of this thing, you may have to give me eighteen months to surge, but I own this. Like, I can surge and I can deliver as many as you need. And so we end up being very vertically integrated as a company, but there's a lot of nuance that has to be captured in that. [01:07:49] S0: One of the things that we talked about earlier was this idea of, like, acquisitions. And ideally, you could just build everything in house and you don't have to go out and acquire a team or acquire a company. But in the event that you do have to do that, you want to make sure that the, like, culture on the other side is cohesive and you don't have, like, two separate organizations that run completely differently. So how do you successfully do that?
01:08:11 · Ethan Thornton
[01:08:11] S1: Absolutely. So there's the strategy and the tactics of acquisitions. So on the strategy piece, specifically for our industry, for defense, I am more more bearish than I am bullish. I think it is very, very hard to organically grow this business, but there is so much to be said for creating that unified process that I think I think you wanna acquire as little as possible. And then also, we are in a period right now where companies like Mach are able to raise at an unfair advantage. Like, we have to be honest with ourselves that a lot of these aerospace companies are trading at two to three x revenue for a reason. And that's because there's boom and bust cycles in the industry. And so you have to be very, very careful about not replicating these companies' unit economics, calling them your own, marking it up. You're gonna you're gonna really struggle if there's a if there's a down period as a business, which from a financial perspective is one thing. Was actually so so so important for the warfighter. It's so important for The US that you can earn your right to have a high market cap with high margins as a company. And we can go back to why I think it's actually, like, it's very important for defense suppliers to have high margins. It's like a controversial take. And then you get in... Oh, I guess, staying on strategy. What type of acquisitions make sense for us as a company? Because I'm also not trying to point fingers here. Like, different companies do have different growth models. This is ours, and I just don't think it makes sense. The specific acquisitions that do make sense are ones that you literally cannot grow organically. Like, specific IP, in some cases, but very rarely teams. Usually, it's IP or licensing. Right? So for solid rocket motors, it was both. Like, they had built up over two decades an index of the most cutting edge programs and had executed on those and built a really, really deep bench of IP across air breathing, like, ramjets, across solid rocket motors, across liquid rocket motors, get... Across in space propulsion. That was important. The thing that was equally important was the fact that they had the infrastructure built. Like, it is hard to go from nothing to, like, testing hypergolic motors and takes years of red tape. And so that acquisition made sense for us.