Information is the new oil
Shortages shed light on role of microchips in unlocking information's value.
Semiconductors (or microchips or just chips) are the brains of modern electronics and launched the exponential growth of computing/processing power. In 1965, Intel co-founder Gordon Moore observed the rapid increase of transistors on microchips accelerated their computing power and decreased their cost. Back then, he predicted the number of transistors would double ever year for the next decade. In 1975, he revised his prediction to a doubling every two years. Known as Moore’s Law, it proved to be true, with today’s microchips containing tens of billions of transistors.
In an increasingly data-driven world, semiconductors will power the next decade of global growth, much like oil fueled (pun intended) the rise of industrial economies in the last century. Just as oil is a commodity, so is raw data. From lubricants for machines to fuel for transportation, oil contributed to ever-expanding economic outcomes, further enabling trade and globalization (adding along the way a new category to the GDP calculation: net exports) and giving birth to completely new industries and economic potential. Nonetheless, it is a commodity—the underlying functionality of petroleum hasn’t changed. Productivity gains from it stem from how efficiently we use it, and for what purposes.
Today, information is the valued commodity. It is the product and access to it—in the form of search engines, data science, artificial intelligence and machine learning—is the service, accelerating widespread use of information. Those giant tech companies that run on information enjoy wide competitive moats and continue to benefit as potential uses of information increase with the scale and reach of their platforms—at little incremental cost. It’s a powerful business model that has created the world’s more profitable enterprises.
Moving forward, the continuation of Moore’s Law and semiconductor advances will be increasingly essential to innovations that require gathering and processing information: autonomous vehicles and robotics (utilizing Internet of Things and connected device technology), smart grids, drug discovery and development, data modeling and simulation, digital worlds that increasingly resemble reality (such as the metaverse and associated technologies like virtual reality, augmented reality, graphic processing units and mobile edge computing).
Semiconductors’ island linchpin
Given semiconductors’ implications for growth and innovation in our digital world, it’s easy to understand why something that is about the width of two DNA strands (and getting smaller) could be of consequence to the complex political relationships between the U.S., China and Taiwan. Because of the enormous capital cost of building foundries and the manufacturing precision and complexity required, only three firms in the world are currently able to manufacture the most advanced semiconductors: one in Taiwan, one in South Korea and one here in the U.S.
Of the three, Taiwan’s chip manufacturer controls more than half the global market for made-to-order chips, and more importantly, has the dominant position with the most advanced processors (approximately 90% of market share by some estimates). For example, the U.S. sources its most advanced chips for military hardware from Taiwan. And as the world’s largest consumer of semiconductor chips, China is also heavily reliant on its relationship with Taiwan. China’s domestic chip manufacturing meets less than a fifth of its domestic demand for chips and is about five years behind the technology frontier.
Because of Taiwan’s dominance, its semiconductor industry has been a diplomatic asset, entrenching U.S. and Chinese interests in the island nation. However, Taiwan’s status as a neutral player is becoming harder to maintain, with U.S.-China tensions rising. Obviously both sides fear the influence of the other over their supply of chips, given both countries’ still-limited semiconductor manufacturing capabilities. And we won’t even mention China’s claims on Taiwan (I guess we just did). Beyond that, the Covid-related chip shortage has stalled production of everything from cars to washing machines to smart phones on a global scale, highlighting just how reliant manufacturers are on these microscopic-sized wafers.
Increased investments have more chip foundries breaking ground around the world, including Intel’s plans for a $20 billion facility in Columbus, Ohio. With Build Back Better now on the back burner, the Biden administration continues to push for passage of a key component of the legislation—one that has garnered bipartisan support—to provide financing and assistance for chip plants in the U.S. Nonetheless, the industry’s stringent demands, along with ongoing supply disruptions and a history of boom-and-bust cycles, will result in winners and losers. For now, it’s difficult to know exactly “where the chips may fall.” But for countries, industries and investors the world over, the answer is of critical importance.