Digitalisation is one of the most compelling “megatrends’’ that we track as investors. There has been an explosion in demand for digital solutions in the last few years, made possible by huge improvements in computing power and storage.
The first transistor was produced by Bell Labs in 1947 and you could hold it in the palm of your hand. Today a microchip the size of a fingernail holds 30 billion 5-nanometer transistors. Driven by Moore’s law, which states that the number of transistors doubles roughly every two years, computing power has expanded exponentially since that post-war discovery, allowing us today to enjoy and use technology that would only ever have been dreamed of then.
We are in the midst of a digitalisation revolution, made possible by this expansion in computing power, driven by demand from consumers and corporates alike, looking for uses that stretch technology to the leading edge. The pandemic has accelerated many digital trends such as homeworking and energy efficiency, and companies have accelerated plans to automate business processes driven by the situation they found themselves in where staff were not able to attend facilities. A side effect, however, has been a global chip shortage that has slowed production of everything from automobiles to broadband routers and games consoles.
Chip shrinkage = increasing computing power
Transistor Density (transistor/mm2)
*Source: Wikipedia, Jupiter data as at 17/02/2022
For consumers, digitalisation can offer better experiences, for example, in gaming, digital banking, ecommerce and entertainment. Our smart phones allow us to shop on the go, track our health and wellbeing and pay for items at the checkout. There are opportunities for tailored advertising on websites, and for tailor-made solutions for consumer goods. You want your name printed on your new trainers? No problem. Digitalisation is transforming manufacturing techniques, increasing consumer choice whilst reducing waste. Consumer goods companies are using digital models to produce one-off products at a fraction of the cost of the pre-digitalisation days. We have come a long way from the days of Henry Ford, the mass-production innovator, who quipped that you can have your car in any colour as long as it’s black.
Wider and deeper industry applications
Companies are improving productivity, gaining competitive cost advantage and enhancing customer relations through digitalisation, and we believe the innovations will spread wider and deeper across industries. The digital twin, where 3D modelling creates a digital companion for physical objects, is changing product development and manufacturing. Sensors collect data from a connected device, and this information is used to update a digital “twin” of the object in real time. A product can be developed digitally, monitored for faults in production and tested in the market with real-time data. This helps to build products that are better, more resilient and sustainable.
In healthcare, the digital twin offers the potential to improve individual health, with personalized digital models for patients that are continuously adjusting, based on tracked health and lifestyle parameters. With the data collected, an individual’s records can be monitored and compared to the population to find patterns. Drugs can then be developed more quickly by using and analysing this “big data” for designing the trials required to gain regulatory approval. The ability to map and analyse the genome means that health risks can be identified sooner, and drugs can be tailor-made.
Another source of demand for digitalisation is in energy efficiency. Transport is becoming more sustainable driven by electric vehicles where the semiconductor content is a multiple of that found in a vehicle with an internal-combustion engine. Connected smart homes and cities will allow for a vast improvement in energy management, balancing electricity grids and reducing energy wastage. In the home, consider the humble washing machine, which uses chips to monitor load weight, water consumption and cycle length to run more efficiently – even the most basic items are getting smarter.
Opportunities and challenges
Deeper penetration of digital solutions will require even more speed and more computing power. The advent of 5G, and with 6G around the corner, makes artificial intelligence, augmented reality, autonomous vehicles and the Internet of Things viable. It will require a significant ramp up in semiconductor manufacturing, cyber security and infrastructure capacity to meet the insatiable demand for these digital solutions.
There are challenges around chip complexity, packaging and transistor architecture as well as the energy cost of computing, and some of the companies we look to invest in are attempting to solve these complex problems to pave the way to the digital future.
The four largest semiconductor companies, TSMC (Taiwan), Intel (US), Samsung (South Korea) and SMIC (China) are reported to be planning to invest nearly $400 billion to build new factories in the next few years to counter the chip shortage. The spending also reflects the desire of the US, China and Europe to secure their supply of semiconductors and to ensure technological sovereignty.
All this augurs well for the semiconductor equipment industry and for companies that are prepared to invest in new technology, to innovate and become more resilient and cost competitive. Many European companies are at the forefront of providing digital solutions, and many European companies are using these solutions to extend their competitive advantage and to take advantage of the digital disruption on a global scale. We believe the opportunities are just beginning.
- TSMC has planned capex of $40bln-$44bln in 2022, almost quadrupling since 20181
- Tesla market cap $954bln. Ford market cap $72bln2
- Japan is offering $6.8bln in incentives to lure global chipmakers, India is allocating $10bln over six years. The Biden administration has proposed spending $52bln; Europe aims to raise $49bln in public and private funding; China has proposed $1.4trln in its 5-year plan for technology advances3
- China spent more on importing semiconductors ($350bln) than oil in 2020 and has been the world’s largest importer of chips since 20054
1TSMC, Bloomberg as at 13/1/2022
2Bloomberg as at 17/2/2022
3Bloomberg as at 18/1/2022, Economist 12/2/2022
4TechNode, 29 April 2021
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