Overview
A planned economy is unlike others in the sense that normal checks and balances are removed. To maintain GDP and employment targets, China is reinvesting its impressive trade surplus (near $1 trillion per annum) in industries it views as strategic, with massive implications.
For sophisticated institutional investors and risk managers, this theme is likely to have a major impact on portfolio holdings over the next couple of years and beyond.
- Chip Making
For years, Intel dominated chip making because of its partnership with Microsoft. The leading demand for chips was for PCs and servers, and Intel dominated both markets. That leadership declined as the industry became more specialized with the emergence of the following:
- ARM as the leading designer of more specialized RISC (Reduced Instruction Set Chips), which used less power and were less expensive (better, faster, cheaper),
- ASML as the producer of the machines for addressing the main step in chip production, which is the etching of circuits onto silicon wafers, and
- TSMC as the leading fabricator (or “fab”), which became the contract manufacturer for a variety of chip designers. Via economies of scale, TSMC has become the most efficient manufacturer of chips.
- NVIDIA as a packager of chips into superchips used mainly for data centers.
While Intel remains a major firm, it has lost leadership.
Emerging Challenger - As is often the case, technology is a two-headed monster that facilitates the creation and destruction of firms. In the chip-making industry, the new wave might be the use of x-rays, which have shorter wavelengths and therefore facilitate the production of denser chips. Additionally, the technology might enable the printing of the entire silicon wafer in one step rather than multiple steps. Time will tell whether the process is scalable, but if so, this will be a major paradigm shift.
- Automobiles
We have spoken at length about the promise of the new technologies of electric powertrains and self-driving, which are soon likely to prove superior (faster, better, cheaper). The recent development is the announcement that Geely plans on building a factory in the U.S., which enables the company to sidestep the tariffs and other entry barriers. The current administration has encouraged the entrance of Chinese manufacturers. Another development is that Toyota is planning on introducing a $20K pickup truck into the United States.
Emerging Challengers - Given the fact that many pickup truck users are focused on utility, the proposed low price point, compared to the $60K+ typical price from the domestic manufacturers, is likely to be a game changer.
- Banking
Electronic apps have changed the dynamics in the banking world, facilitating the rapid movement of funds. Historically, deposits were viewed as a stable source of funding, but as evidenced by the rapid run on SVB, this is no longer the case. Our view is that it might not stop there. Mr. Musk has touted the concept of an everything app and might have the platform to do it via “X.”
Emerging Challengers - Perhaps “X” will succeed, but there are numerous other avenues into the mass financial services market, and some are already there. Likely competitors are the “usual suspects”: Apple, Google, Amazon, and Facebook.
- Brokerage
Like Banking, this area faces challenges mainly via firms which have used new technologies to better connect with potential clients.
Emerging Challengers - Watch for increasingly aggressive moves from Coinbase, Kalshi, Polymarket, Robinhood, and a variety of others.
- Energy Generation and Transmission
The data centers need massive power, and a variety of sources are emerging to meet the needs. Few would have thought that Three Mile Island would be restarted, but it has.
Emerging Challengers - Small nuclear reactors, massive solar, thermal, and even fusion power are attempting to fill the needs.
- Data Centers
Data centers need power, cooling, and data links. Some emerging technologies and processes might push some industry changes. For the training centers, locations like Greenland and space might become more attractive because of the low ambient temperatures and the availability of lower-cost energy: Greenland via geothermal and easy cooling and space via solar and even easier cooling. The challenges of building and maintenance are present (particularly in space), but those might be simplified via robots, AI, and more standardized designs. Additionally, quantum computing might reduce the need for mega-facilities.
Conclusions
We focused on this topic because of the maxim that change is constant, and change creates risks and opportunities. For the Dow Jones Industrial Average, none of the firms from the 1930 list remain today and only five of the 30 (AXP, IBM, MCD, MRK, and PG) are on the list today.
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