CIV's Josh Zoffer: data centers are America's rare-earth moment — and we can't afford to get it wrong

We'll talk to you soon.

Congratulations on everything.

Oh, I appreciate it. Congrats to you guys.

Appreciate it.

Well, our next guest is

about to join us. I need to put my headphones back on. We have Josh from CIV on his Financial Times argument that data centers are the industrial test of the era. Here he is.

Josh, how are you doing?

Welcome to the show.

How are you?

We're doing great. We were just hanging out talking to Alex Herozi. How are How is your day going?

Uh, it's good. I'm up in San Francisco. I'm actually in the Merkel that Oh, no way. Huge numbers.

I know. I live in LA, so uh usually I would I'd love to do this in person, but uh

next time

up in the bay today,

next time

suffering through the cold weather.

So take us through the thesis of the latest uh piece you put together. Uh I have a bunch of questions, but I'd love for you to sort of uh reiterate the thesis statement for the audience first.

Yeah, I mean the thesis is really kind of three things. Um point one is we are living through this era where um we are on the losing end of a bunch of supply chain dependencies in areas like rare earths, permanent magnets, critical minerals and just you know uh manufacturing and industrial capacity more broadly. Yeah.

Um and that is a result of choices in part that that we made in the 1980s and 1990s. Um as well as policies that China undertook to try to pull all of that capacity into China. um that now I think everybody

when you say choices we made is we the US government WTO ascension of China that choice or are we talking about choices made by the free market a company just says I'm choosing to buy from China because it's cheaper and I don't care about my supply chain.

Um I think it's a little bit of both I would say. Um you know starting in the 1980s we had a big wave of offshoring where we int companies large American companies intentionally move production into places like China um because they wanted to move it off balance sheet take advantage of lower labor costs looser environmental regulations abroad um and then as well I think you know we didn't do ourselves any favor with um you know the trade policies uh that we have pursued over the last call it 30 years um before we realized what had happened. Um so point one is you know when you have sort of import you know systemically important industries um and you push them overseas you know you never know what's going to happen. You could find yourselves on the losing end of of really important supply chains and technologies. Yeah. Um point two is I think you know there's a real risk that uh if we you know stop or pause the construction of data centers or make it really hard to do that in the United States um we could find ourselves in a very similar position right that data centers are not just you know piles of chips but there are also uh important other technologies power electronics like transformers and switch gear um the kind of stuff that our portfolio company Giga Energy makes as well as you know more more basic industrial inputs like steel and that has to be made somewhere. And today, because of the shortages for a lot of those goods, as well as the fact that, you know, data centers are at the very cutting edge and they're they're financed by some of the deepest pocketed developers on the planet, there's a willingness both to pay for faster uh and more advanced technology. And so companies that, you know, like Giga are both able to do some of this stuff in America in a way that would wasn't possible or wouldn't be possible without this kind of generational demand pull. And there's also demand for new technologies, things like you know optical links or solid state transformers um that you know now there's sort of a chance for the US to get ahead and again because there's a source of demand to pay for it all. And then point three is again because these are sort of some of the deepest pocketed uh corporations out there you know financing all of this that to the extent there are trade-offs and the in the you know in the form of things like higher energy costs that in some cases do arise when data centers are built that that can be solved by having the the hyperscalers pay for some of that. And so I think there's a better outcome here when that better advantages or supports America's long-term economic competitiveness than just saying we don't want to do this here let it be done offshore. uh do you have an idea of uh a a thesis particularly around why America is currently so strong in data center construction? It feels like when I when I count up the the gigawatts uh America is doing fantastically. Uh we we are in the lead. Of course I agree with you on everything. We got to hold the lead. But I want to retreat to the source of strength that got us here in the first place. Because when you tell the story of there's going to be a new industry. It's going to be industrial and it's going to really start in 2000 and run until 2026. If you had said shoes, I would have said that's going to happen in China. I you know if you had said any other any other piece of the economy I would have said that absolutely would have been pushed offshore pushed out of the United States and yet we got here to this place where we do have you know Virginia and and you know AWS and GCP and Azure and so many uh massive campuses and the question is really just are we going to go bigger but why why didn't we build the data centers abroad in the last two decades before there was all this discussion about nearper competition, geopolitics, it feels like that would have been the natural choice and yet we did choose to build here throughout the last two decades.

Yeah, I think it's a great question. Um I think it really comes down to two things. One is that um even today still latency really matters, right? If you are trying to serve customers that care about getting their data or their inference uh as quickly as possible, um you need data centers to be sort of, you know, close to to the customers they're being served. Um, I think there's a real chance for what it's worth that that matters less and less over time as um, you know, as as inference uh, workloads become more agentic, right? Like agents don't care if they have to wait 5 seconds if you're away from your computer for two hours running a long a long query and you know it takes a little longer because the data center is somewhere else. You're not going to notice that. And so I think to me what that means is these supply chains are going to be formed today, right? The data centers are being built today. the the the factories that supply them are being set up today when speed and reliability and industrial capacity matter. And so I think there's also a real risk that if we wait and those supply chains are built somewhere else, it's going to be really hard to reverse this. And the point I'm trying to make with the rare earth comparison is like we know how devastating that can be. Let's think really hard before we make that mistake again. When you think about the rare earth uh situation, it feels like a lot of that stems specifically from China's leverage over the United States. I think it would be a very different discussion if it was Canada or uh you know, Germany. And when I think about the AI supply chain, I go to Zeiss and Trump and ASML and TSMC and SKHEX and I'm in Western countries. Do you think that there is a that there is a discussion to be had about uh the the the the sphere of influence beyond America but uh in the west where we can partner on data center construction reliably or is this uh is it is it actually critical to have uh the vast majority of data centers built out within the the 50 states?

I don't think they have to be um in the 50 states for sure. I think there's definitely room to collaborate with allies both in where the physical data centers are located as well as um in the supply chains, right? We're not going to make every single thing that goes in every single data center um in the United States. But but I would say maybe two things that concern me. Um one is, you know, it came out a couple of weeks ago that the Chinese government um is reportedly planning a $295 billion fund for data center construction. So the Chinese government, unsurprisingly, because they run this play before, they get it right. they understand how important all of these technologies and supply chains are. Um the second is today there are lots of important pieces of the data center supply chain from you know the GPU manufacturing at places like TSMC to the ASML EU lithography machines that really can only be made in you know western allies like Taiwan and the Netherlands. Um, I think if the the history of industrial development tells us anything, it's that we can't rely on that being true forever. Um, and so, you know, taking action today to make sure that, you know, while there's a chance to take advantage of this capacity and this demand to build next generation technology, industrial capacity in the United States when these technologies aren't commoditized and can't be bought more cheaply from a place like China is kind of, you know, it's it's an important window of opportunity. And if we miss that opportunity again, I think there's a a world where we really regret it. You know, that doesn't mean just we should build all the data centers. We should have no no restrictions, no regulations. I think that would be a big mistake. And I think that is a way to politically get wrong, you know, wrongfooted and and generate a lot of opposition, which is why it's important that, you know, some of these energy costs be moved onto onto developers as well as, you know, things like environmental restrictions being put in place to make sure that we do this the right way. But I think it's important that you know that to me the lesson of the rare earth example is you've got to balance these things, right? It can't be all of one or all of the other.

Last question. You uh you wrote this in the Financial Times. It clearly will land with a geopolitically minded audience, but uh while I agree with a lot of what you said, I can't imagine it uh translating very well to everyday American voters who see AI as very deeply unpopular. How are you thinking about the the jumps and the translation layer that needs to happen to actually get, you know, American voters on board with this plan?

Yeah. I mean, look, to me, first of all, completely agree. I think there there is a real opposition to data centers in part because, you know, yes, they're they're big and they can be kind of ugly, but the reality is I my view is a lot of that has to do with the fact that they are the physical representation of of AI, right? If you look at the Instagram comments, like you can very clearly tell that uh the vast majority of people that are like commenting on like data center bad content have never seen a data center. Like they're nowhere near one. Uh they might live in a major city that they don't even see them. But

yeah, you can see data centers putting up signs that say no AI served here.

Yeah. But they don't like the idea of they're losing a job or losing out financially or watching companies get even bigger than they already are. All of that. So yes, it's a referendum, but then how do you bridge that gap?

Yeah, I I think it's really uh a few things. Um one is when a data center is built, right? Making sure that you know if we have policies in place that uh you know push data center developers to build their own clean generation and ultimately connect it to the grid that having a data center could mean your energy costs go down, right? So that's point one is make the the localized costs go away. And that's something that's that's very achievable. Um, point two would be, you know, I think when we talk about, um, what the effects of AI on the labor market are going to be, I think taking a more, you know, reasoned view than just, you know, saying, oh, it's going to wipe out 50% of all white collar jobs by some date that's not that far in the future. You know, I think the evidence is pretty mixed and the jury is still out and we have a lot of chances to use public policy tools to make sure that that's not the case. uh and to tell a sort of a more balanced story and ensure that the American people know that um you know it is not going to be job apocalypse and that you know it's going to be the kind of transition that that other large technology transitions have been where you know over time the composition of the labor force changes but ultimately it's a source of growth and a source of new job creation and then the last one and this is really the point I'm trying to get across in this article is there are lots of parts of a data center from the steel to the transformers that need to be made somewhere in a factory and somebody's going to be working in those factories and there is a real opportunity to make sure that those jobs are American jobs and that's something that I would also be in favor of using public policy to encourage not just because you know those jobs themselves are valuable but also because the industrial capacity they represent is valuable and for all the reasons that we all know that re-industrialization is important.

Yeah. Yeah, that makes a lot of sense. Uh actually while the data center doesn't have that many people working inside of it, the supply chain is very deep and complex. Uh so that makes a lot of sense. Thank you so much for taking