The first part in our disruption series, Investment Principal Munish Malhotra examines the massive changes taking place in the semiconductor industry.
On July 20, 1969, a little over 50 years ago today, Neil Armstrong and Buzz Aldrin left the Eagle Lunar Module and placed the first human footprints on the moon. This was an incredibly complex task in the 1960s. The computers on the Apollo spacecraft, by far the most advanced on the planet at that time, had about as much memory and processing power as the modern toaster oven, cost $3.5 million apiece and each was about the size of a modern-day sedan. For perspective, the Apple iPhone 6 is 32,600 times faster than the best Apollo mission computers and performs instructions 120 million times faster all while fitting neatly in your pocket at a price of less than $600. This parabolic increase in processing power at significantly lower cost has been fueled by Moore’s Law. Coined by the former CEO of Intel Gordon Moore in 1965, Moore’s Law is the observation that the number of transistors on a microprocessor doubles every two years increasing the speed with which microprocessors can perform computational tasks. Moore’s Law has been one of the most disruptive forces in terms of driving productivity for the global economy since the transistor was first invented in 1947 at Bell Labs and we see no end in sight to its impact on society. This is the crux behind the often-used term “The Internet of Things” which is about the increasing consumption of semiconductors across more devices enabling the proliferation of new products and services from smartphones to smart home devices, cloud computing platforms, artificial intelligence applications, autonomous driving platforms, electric vehicles and leading-edge genetic sequencing machines all at better performance each year at the same or lower cost to society. In fact, the demand for semiconductor consumption going forward will be much larger than in the past and likely to come from a more diverse range of end markets including autos, industrial machinery, smartphones, data centers, etc rather than any single killer application. Importantly, these diverse demand drivers are much healthier for the industry overall as it reduces dependency on any one application as well as to any single product cycle and its maturation curve.
Interestingly and perhaps coincidentally, this surge in demand is happening at a time when the semiconductor industry has gone through rapid consolidation. Today the top 3 makers of memory chips control 80% of global production. The top 4 semiconductor equipment makers control 85% market share. Two companies control nearly 100% of the world’s supply of graphics processing units used for gaming, high-performance computing, and artificial intelligence. The leading semiconductor foundry controls 60% of the world’s capacity for outsourced semiconductor manufacturing and over 90% for leading-edge manufacturing process. This has led to much higher structural advantages for the semiconductor ecosystem relative to the prior 10-15 years and therefore much larger structural advantages around these businesses. In fact, the recent blacklisting of Huawei from using US-made key semiconductor components highlights just how critical semiconductor technology is becoming in the continued economic success and progress of countries and their development.
We believe the market may be overly myopic with its current views around semiconductor companies given their perceived level of cyclicality. While cycles are difficult to time, they may present some compelling opportunities.
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