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OPINION OF THE WEEK: How Silicon Chips Drive So Much Of Our Wealth
13 September 2023
I imagine that one of the pleasures gained by being a wealth manager is working with people who have created their riches by excelling in innovative, important enterprises that change lives for the better. To advise a hard-charging entrepreneur who knows how to “look around corners,” who anticipates patterns of demand and products yet undreamed of, must be quite a buzz. A related point about investment is that government intervention in this sector is a mixed bag. The Cold War and Space Race encouraged a lot of the initial miniaturisation and development of chips; Taiwan’s government has arguably played a blinder in this, and the US defence organisation DARPA is an important actor, but heavy-handed regulation and the dangers of reliance on subsidy are a danger (Miller writes about all this incisively).
More than half a century after the academics, entrepreneurs and European emigrés in California’s Silicon Valley began to create the modern world we know of today, the skill and determination involved in producing transistors and semiconductor chips still has the capacity (forgive an electrical pun) to blow my mind. Fantastically small and precise equipment, such as laser machines, and remarkably smooth mirrors and other materials, are used in creating chips. Tiny “grooves” the width of a few nanometres are cut into silicon and all kinds of chemicals are used, the names of which I cannot easily recall. Chip design is itself so complex that specialist software firms write it. Hundreds of billions of dollars are required to run chip foundries. They are probably the most complex factories in human history, involving staggeringly elaborate supply chains and management.
In all their variety and complexity, these chips are the base of so much of our commerce, entertainment, communication and yes, military forces. A modern automobile uses hundreds of chips; a F-35 fighter aircraft of the sort used today would fall from the sky like a brick without them. Elon Musk’s recoverable rockets, drones (civilian and military), TV screens, refrigerators, cell phones, tablets, autonomous vacuum cleaners (I have a small one) and digital cameras use them. The whole phenonemon of bitcoin would not exist without modern computing power.
The computer system that a US immigration officer used to check me out at passport control in Chicago this week used them; air traffic controllers use computers – and we see what happens when systems go wonky. The wealth management sector, once a pen-and-ink industry, is now moving to be digital by the second. (Arguably, it lags certain other sectors and there’s more to do.) Many of the articles you read here, for example, about AI, “embedded finance,” and onboarding systems, all rest on the presumption that we have chips. Loads of them.
I thought about all this for several reasons. Firstly, this week the team at ClearView is in New York for its fintech summit, and that’s a natural place to think about tech. It’s going to be a great event.
Second, trade and geopolitical tensions, particularly between the West and China, have the tech issue in the background, as brilliantly explained by Chris Miller, in his recent book Chip War: The Fight For The World’s Most Critical Technology. Taiwan, the jurisdiction that Beijing insists is a part of China, is home to a business that produces most of the world’s most advanced chips. (Naturally, I read the Miller book on a tablet reader during a flight in a plane where the avionics are digital.) The Covid-19 pandemic, and China’s stance on Taiwan, naturally beg the question of how the world can adjust its supply chains in case of conflict (and don’t discount natural events such as earthquakes). The recent moves by the US Biden administration to encourage chip manufacturing in the US may be a wise move, or an expensive, statist folly. In some of the investment notes from wealth managers, these issues are in mind. Asset allocators need to take this “chip force” into account.
Family offices, private banks and wealth managers more generally want to know about themes to invest in, and with some, they provide the kind of “patient capital” needed to get chip production up and running. While the most ambitious manufacturing may be beyond the pockets of even larger family offices, specialist areas can be attractive, although the risks involved can be high. A good chunk of the newly-minted family offices in the US and internationally are tech-driven, and natural sources of investors as well.
Another thought that inspired me to write about semiconductors is that private bankers, and other financial professionals, live and die by accuracy and a commitment to precision. There’s an argument to be made that much of the prosperity we enjoy today isn’t just down to a division of labour, as Adam Smith worked out in the 1770s, or comparative advantage via trade, or the harnessing of fossil fuels and other fuels to multiply Man’s productive power during the Industrial Revolution and in subsequent phases with the development of electricity. (These are clearly important.) It’s also down to precision: cutting tools, microscopes, lasers, rulers, thermostats, compasses, gyros, navigational sextants, radar, X-rays, MRI scanners, etc. And bankers of all people should see this mirrored in their industry: ledgers, bills, reports of meetings, investment reports, analysts’ studies of investments, etc.
At the core is something deeper and moral: a commitment not just to telling the truth, but to seek objective reality in its tiniest details. The bankers of Switzerland, for example, can see the examples of when this happens in the dazzlingly precise wristwatches that country is famous for – Rolex, Patek Philippe and Vacheron Constantin, to name a few. And they can, alas, see when a commitment to accuracy goes wrong in the misadventures of some of the world's banks. (Would Silicon Valley Bank have gone down the tubes had management been tighter on risk reporting and oversight?) A relentless focus on accuracy speaks to a culture that takes things seriously and avoids distractions from fashionable ideologies and obsessions.
As Miller eloquently puts it, while not without its dangers and temptations to raise tech into an almost a religion, the chip is so much part of our lives that we take it for granted. We shouldn’t. And above all, we should acknowledge the genius, work ethic and passion of the people who have driven this sector and made many people – including the clients of private bankers – rich beyond their dreams, and lifted the living standards of billions of people.
I imagine that one of the pleasures gained by being a wealth manager is working with people who have created their riches by excelling in innovative, important enterprises that change lives for the better. To advise a hard-charging entrepreneur who knows how to “look around corners,” who anticipates patterns of demand and products yet undreamed of, must be quite a buzz.
A related point about investment is that government intervention in this sector is a mixed bag. The Cold War and Space Race encouraged a lot of the initial miniaturisation and development of chips; Taiwan’s government has arguably played a blinder in this, and the US defence organisation DARPA is an important actor, but heavy-handed regulation and the dangers of reliance on subsidy are a danger (Miller writes about all this incisively).