A couple of weeks ago, a research note landed on our desk with the opening paragraph reading as follows: Earth-2 is an Artificial Intelligence supercomputer used to power a digital twin of the Earth in Omniverse (metaverse equivalent) and is dedicated to predicting climate change. The very next day, Intel Corporation, via its official website, advised the world that company co-founder – Gordon Moore – had died peacefully at the age of 94 at his home in Hawaii. These two messages are inextricably linked by an industry, born in the mid-1950s, which delivered revenues of US$602bn in 2022 – an all-time record. The semiconductor sector represents 0.59% of total global GDP and McKinsey forecast revenues will surpass the US$1tn threshold, by 2030. Moreover, to support this level of revenues, it is estimated US$150bn will have to be spent on semiconductor precision equipment over this timeframe, including lithography and process control systems. Finally, various governments have recently provided unprecedented financing to expand and/or establish a local semiconductor manufacturing footprint and improve supply resilience. The US CHIPS and Science Act will direct US$280bn in spending, over the next 10 years, and the EU Chips Act has been introduced to funnel €43bn of public and private investment. Both China and Taiwan are set to invest significant capital too.
What makes this industry so remarkable?
Gordon Moore was born January 1929, in San Francisco and earned his PhD in chemistry and physics from CalTech, at 25. He co-founded Intel in 1968, with Bob Noyce, whom he had first helped create Fairchild Semiconductor International Inc – a very early Silicon Valley business – a decade earlier. Intel, of course, went on to become one of the most famous and profitable companies in US corporate history. However, despite this success, he is most famous for the legacy created because of an article he had published in Electronics magazine, a trade journal, about the radio industry. The article, also printed in 1968 and with a title only an engineer could love, ‘Cramming More Components onto Integrated Circuits’ is arguably the most influential trade magazine article ever published. By extrapolating from his observations in the nascent semiconductor industry, Moore managed to foretell the entire future of computing. Most notably, he predicted the number of transistors an engineer could load on a chip of silicon would double about every two years. This projection has been borne out so impressively over the following decades, that it is now known as ‘Moore’s Law’. Sixty years ago, four transistors could fit on a chip; today, 100 billion can.
Moore’s Law is not actually mathematical or science-based, but its importance to the global semiconductor industry lies in its role as a guiding principle for industry growth and competition. This prompted Intel, and other chip makers, to actively invest billions of dollars in research and development resources to ensure the continued progress of the industry.
In the same article, Moore also predicted ‘Integrated circuit home computers – or at least terminals connected to a central computer – would emerge, as would automatic controls for automobiles, and personal portable communication equipment.’ These comments were made 20 years before the personal computer revolution and 40 years before Apple’s iPhone.
So, what comes next?
Without microchips, entire industries grind to a halt – a concept we became all too familiar with as we emerged from the Covid pandemic. Most of the world’s GDP is produced with devices that rely on semiconductors which, for a product that simply did not exist 75 years ago, is an extraordinary ascent.
To answer our question, reference to the opening paragraph of this edition of VFTD does shine a light on what themes are developing, all of which are entirely reliant on the sector. The concept of a digital twin emerged because of the NASA Apollo space program where, thanks to its deployment and adoption – namely a digital representation of a real-world entity or system – mission control was able to safely return the crew of Apollo 13 to Earth. Today, digital twins exist across many industries and sectors and are used to simulate and test before any production or ongoing changes must be made at significant cost. They are also used to monitor and maintain plant and equipment – with the latter relying on legacy equipment installed with IoT-enabled sensors. At the climate level – and separate to the objectives of Earth-2 – the island nation of Tuvalu has created its own digital twin in the metaverse, so it could continue to function as a sovereign state, even if its people were forced by climate change to live somewhere else. Astonishing and not easy to get your head around.
The faster adoption of digital twins will undoubtedly be linked to the utilisation and application of Artificial Intelligence (AI). Through data mining and machine learning, AI creates ‘thinking’ digital twins which – from a manufacturing perspective – would support value chain and product optimisation, emissions’ reductions and the maximising of profit margins. Smart cities, smart factories and the industrial metaverse (omniverse) all come into view thanks to these merging themes. Accenture estimates a combined cumulative economic value of US$1.3tn could be unlocked by 2030 through the use of digital twin solutions across 5 sectors; EVs, electronics, construction, consumer packaged goods and life sciences.
The Industrial Metaverse built by Siemens and Nvidia
A virtual world to solve real world problems; these two companies are collaborating to enable the industrial metaverse and increase use of AI digital twin technology, helping to bring industrial automation to a new level. On the right of the image, below, is the factory floor, to the left is the virtual world engine. Together they enable Siemens’ production lines to maximise manufacturing agility.
Beyond what we have written, there is much more to say around robotics, machine vision, predictive maintenance, gaming, quantum computing and clean energy. The application of Healthcare AI, in terms of diagnostics and drug discovery and development, is a whole subject on its own – however, we will have to leave all these for another edition.
Implications for portfolios
There is clearly a lot to understand and reflect on here, given the complex and fast evolving nature of this space. Our Investment Committee have all just finished reading ‘Chip War’, by the historian Chris Miller, who provides historical context for what he describes as ‘the fight for the world’s most critical technology’. We then met to debate the implications for our industry, firm and portfolios. We see the development, proliferation and strategic deployment of semiconductors in ‘everything’, as an underpin to why the sector remains an important investment consideration for ‘everyone’. However, the important message from this commentary is that the chip industry now determines both the structure of the global economy and the balance of geopolitical power.
Taiwan Semiconductor Manufacturing Company (TSMC) is the key supplier within ‘chipworld’. TSMC works with all the major chip designers, including Apple, meaning Taiwan is arguably the epicentre of both the silicon chip supply chain and the geopolitics surrounding China’s very high-stakes rivalry with the West. In this context, Xi Jinping is ever more aware of the nation’s reliance on a few key manufacturers located in Europe, the USA and, of course, the small island nation that is Taiwan. This is not going to end any time soon, as China does not have access to the necessary skills or specialist equipment needed to produce high-end chips. And, unlike oil, there are currently no potential substitutes to semiconductors.
Geopolitics is an ever-present risk. However, today, we are cognisant the dramatic shifts in the international system, compounded by the Russian invasion of Ukraine, are straining global leaders, exacerbating socio-economic tensions, reducing living standards, prompting new alliances, testing military capabilities and re-shaping global dependencies; at an alarming pace. At the same time – the themes expressed above also offer significant investment opportunities. Consequently, readers may not be surprised to learn we have meaningful allocations in TSMC, ASML, Nvidia and Microsoft – across the majority of our client portfolios. At face value, these businesses might seem rather unconnected with sustainability. However, chips, AI and digital twins are undoubtedly fundamental components for solving many of the environment and social challenges we face. For example, engineers and architects are already designing hydrogen powered aeroplanes and low carbon buildings in the metaverse; thereby delivering cost savings and enabling teams around the globe to collaborate efficiently and without travelling. The metaverse will also enable virtual interactions with healthcare providers and educators – facilitating vital access for individuals located in isolated places or in poorer nations, lacking the necessary infrastructure and expertise.
The world is truly indebted to the visionary that was Gordon Moore (January 1929 – March 2023) and the capital his ideas have helped mobilise.
Sources: Polar Capital Global Technology Team 2023 Strategy Report; Tina Fordham, Founder and Geopolitical Strategist, Fordham Global Foresight.
