According to the American Automotive Policy Council, the world’s biggest auto companies can use over a thousand silicon chips in each car. This fact from Chip War: The Fight for the World’s Most Critical Technology resonated more than anything else in this fascinating book about the world’s reliance on computing power. Had I been asked to guess at the figure, I would have offered a few dozen as a ridiculously high number. Who knew? It’s estimated that in 2021, chip shortages resulted in 7.7 million fewer cars being produced.

Author Chris Miller walks us through the early days of computer chips which, like the internet, started with the Federal government. Fairchild Semiconductor, founded by Bob Noyce in 1957, found its first big customer in NASA when Sputnik ushered in the space race.

NASA paid top dollar for Fairchild’s chips, but Noyce recognized that to create a market he needed to slash prices. An integrated circuit priced at $120 in December 1961 was cut to $15 by the following October.

Demand boomed, and soon the Pentagon was looking at chips to guide its warheads. In 1962 the Minuteman II nuclear missile relied on a guidance computer that used Mylar tape with holes punched in it for instructions. Texas Instruments won the business, and by 1964 had supplied one hundred thousand integrated circuits to the Minuteman program.

By 1972 chips were being used in laser guided bombs which dramatically improved accuracy during the later stages of the Vietnam War. Many readers will remember video from the 1991 Iraq War when US bombs were dropped with precision accuracy on bridges and fortifications. I remember watching one missile drop through a ventilation shaft on the roof of the Iraqi Defense Ministry.

Global sales of semiconductors reached $556BN in 2021, but more amazing is that 1.15 trillion discrete semiconductor units were shipped. That’s around 145 new chips for every person on the planet.

Moore’s Law, that the number of transistors on a chip doubles about every eighteen months, tracked progress remarkably well for several decades but is expected to become obsolete by around 2025.

The world has been grappling with chip shortages since the pandemic. Fabrication factories (“fabs”) are wildly expensive to build and operate highly demanding processes with dust-free zones to manufacture ever more miniaturized chips.

Taiwan has 20% of the global market, and a bigger share in high-end chips. Long-time government support has helped the Taiwan Semiconductor Manufacturing Company (TSMC) build a dominant position. High fixed costs because of the complexities of manufacturing create benefits to scale.

Chips have long been a national security concern, both because of their use in modern weapons and their ubiquity in consumer products. This has led to US-led constraints on China’s ability to buy the most advanced chips as well as legislation to encourage domestic investment in fab plants. Last year Congress passed the Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 (CHIPS Act).

TSMC is investing $40BN in a fab plant to produce sophisticated chips in Arizona. It’s one more example of the reverse of globalization. Companies increasingly want vital inputs to be secure and closer to home. Ronnie Chatterji of the National Economic Council, said, “these two [factories] could meet the entire U.S. demand for U.S. chips when they’re completed.”

At a ceremony marking TSMC’s investment in Arizona in December, TSMC founder Morris Chang lamented that, “Globalization is almost dead and free trade is almost dead.” Recent trends support that. America is better situated than any other country to continue thriving in such an environment.

China’s increasingly bellicose statements regarding Taiwan’s independence have also caused concern about conflict upsetting global chip supply. The Economist recently ran a special section on Taiwan and warned in one article America and China are preparing for a war over Taiwan.

Russia has apparently struggled to access the right kind of chips for its invasion of Ukraine. There have been stories of Russia buying consumer products for the chips. Apparently, EU exports of breast pumps to Armenia almost tripled in the first half of last year, whereas their birth rate did not. But modern weapons systems use hundreds of chips of varying sophistication, and consumer products aren’t believed to be a relevant source of the type most needed. Based on developments on the ground, Russia is getting what they need.

Life without chips is unimaginable. Chip War offers a highly readable history of how we got here.

We have three funds that seek to profit from this environment:

Energy Mutual Fund

Energy ETF

Real Assets Fund

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