Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, swarms, and whatever else made me think last week. Please grab me on Twitter with any thoughts or feedback.

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In today’s post: rising risk of US-China conflict puts spotlight on the misunderstood TSMC Arizona announcement; the mutually assured destruction of decoupling and deglobalization; live streaming nearly doubles; corporate culture requires better transparency with remote work; Nvidia driving AI charge; fragility of power laws; and, lots more below...

Stuff about Innovation and Technology
On the Road Again
Tesla’s charging station usage has rebounded to near-peak levels across China and the Asia-Pacific, while North America and Europe/Africa/Middle East have bounced from ~30% utilization to ~40-45% (vs. pre-virus levels of ~80%). Bloomberg also reports that driving is making a resurgence as commuters avoid public transport in China and Europe. Meanwhile, NYC is suggesting people might have to make reservations to ride the subway!

Tesla in Autonomous Driver’s Seat
Speaking of driving, EE Times has an interesting report on the state of autonomous driving systems, including all the convoluted partnerships and collaborations. Outsourcing innovation has historically been a great way for incumbents to ensure their timely irrelevance. This certainly seems to be the case with Ford, GM, VW, Daimler, BMW, Volvo, etc. When I look at the mess of partnerships, all I see is Tesla continuing to speed away in the driver's seat. 

AI-Enhanced Image Sensors
Sony, a leader in CMOS image sensors for cameras, has developed a new image sensor with a built-in AI signal processor. The integrated chip could be programmed to look for specific activities, such as a person approaching or objects on a conveyor belt, and it could parse information locally or selectively choose what to upload for further analysis. We will continue to see intelligence and algorithmic decision making pushed deeper and deeper into connected devices.

Pass the Dip
With consumers snacking in place, Frito-Lay is the latest company to launch their own website and go direct with ecommerce to meet consumers’ salty cravings. Frito-Lay’s parent Pepsi did $2B in ecommerce sales last year. The ecommerce push by brands may come in handy if you shop at Trader Joe's because the natural grocer said it has no plans to do curbside pickup or delivery. It’s a remarkably short-sighted position to take given that consumer preferences are changing rapidly, irrespective of the pandemic. Taking an opposite approach, Whole Foods is converting some of its stores to delivery only.

Store-Based eCommerce Difficult to Fulfill
Retailers are increasingly using stores as mini distribution centers for ecommerce orders, but the surge is straining FedEx, who is now restricting the practice for companies like Kohls. This is a bitter outcome for struggling retailers, further exposing distribution weaknesses in our increasingly digital world. 

Department-Store/Fine-Dining Mash-Up
The 3-star Michelin restaurant, the Inn at Little Washington, will stage tables with dressed up mannequins to fill the gaps between social-distancing diners.

Video Streaming Killing the Audio Streaming Star
Live streaming is up 99% from last year, driven by a 45% increase from March to April. Hours watched on Twitch rose 50% in April, vs. the prior month, to 1.65B (this still pales in comparison to the 20B+ hours of TV Americans watched April). I think this increase underscores a shift away from audio-only to video streaming in general as we spend less time in cars and at the gym and more time in front of a screen. The shift in streaming preference is happening as Google announced plans to shut down its long-suffering Play Music App to focus on YouTube Music, which is also struggling. Video could supplant audio streaming for both music and podcasting, particularly in an ambient computing world with always-on, augmented-reality glasses. Audio leader Spotify is also testing video podcasts in its App.

AI Falters when Faced with Real-World Deviations
Algorithms have needed a lot of human intervention as standard deviations blew out and the world became much more unpredictable. With complex adaptive systems (see Complexity Investing for more), it’s likely that algorithms will perhaps always rely on tweaking from fleshy non-computes. MIT Technology Review reports on the issues, including those faced by Amazon, which relies almost exclusively on computers to man its supply chain. 

Work-from-Home Mindset Driving Real Estate Trends
Redfin continues to see surging interest for homes in smaller towns as folks rethink their work-life scenarios. A Zillow poll concurs, indicating that 75% of Americans working from home want to continue to do so – at least half time – going forward. This interview with Nationwide CEO in Fortune also reveals it’s not just tech companies that are embracing a permanence of working from home. Seasonally-adjusted, home-buying demand is now above pre-pandemic levels. Redfin CEO Glenn Kelman remarked on Twitter: “It feels like the economy has officially split in two. For the lucky ones, this hasn’t been a recession at all, but a sale: on stocks, on money itself, & on houses, which dipped in March.” This is a point worth pausing on.

Kelman’s “Diary of a Pandemic”
Glenn also posted a series of essays on Redfin’s pandemic roller-coaster ride, which you can find here, here, and here. It’s a lesson in transparency and communication that a lot of companies should learn from. Increasingly, as more employees work from home, internal and external communication is going to become even more critical to maintaining core values and a healthy corporate culture. Companies will need to enhance their focus on marketing – and living – their values in the future. And, of course, I cannot help but repeat Glenn’s quote that I posted in last week’s newsletter, because it’s so damn good: “When the world is changing this fast, what is most valuable is our own ability to change. The company you want to stake in isn't a big fat incumbent. It's the crazy little mammal, crawling out of the crater of the asteroid strike.”

Epic’s New Engine is Unreal
Epic, the leading platform in game design and maker of Fortnite, released Unreal Engine 5.0 (UE5) last week. The new game engine is so real that it’s, well, unreal. A key angle on UE5 is that a game can look great on a smartphone as well as a leading-edge console. The system also takes great advantage of the SSD storage on the new PS5. Epic has also made its pricing even more disruptive: UE5 will be royalty free for the first $1M revenues, with a 5% fee after that. The Verge has more details, including the demo video, which is so impressive, in fact, that I am not sure Hollywood needs to return to real-world sets anytime soon, even after the pandemic ends.

Nvidia Ups Ante in AI Acceleration
An update on Nvidia from NZS Capital’s Jon Bathgate: Jen-Hsun Huang delivered a highly entertaining virtual “kitchen” keynote for Nvidia’s GTC on Thursday, highlighted by the long-awaited introduction of the A100 platform for AI and high-performance computing. The new silicon is already in volume on TSMC’s 7nm process, and the accompanying software and ecosystem improvements will drive up to 20x improvement in performance relative to its hugely successful predecessor, the V100. The step function in performance is needed to keep up with the evolution of AI models, which are following their own Moore’s Law, doubling in size every 3-4 months. Nvidia continues to be a moving target for challengers – assorted VC-backed startups, Intel’s recently acquired Habana Labs, and internal silicon efforts at Nvidia’s cloud customers – and appears, yet again, to have raised the bar substantially last week. What caught fewer headlines from the event is Nvidia’s continued push into edge computing. Ericsson is using Nvidia GPUs to accelerate their 5G base stations. In factory automation, Jen-Hsun showed a fascinating demo on how Nvidia’s Isaac platform (also based on the A100) allows factory managers to train robots in a virtual environment and then push that learning to robots on the factory floor – Nvidia is partnering with BMW to drive more intelligence onto their factory floor. The keynote narration was done by AI, and AI wrote the music for it all on Nvidia chips. For more on Nvidia’s new data center stack, see SITALWeek #243.

Miscellaneous Stuff
Partly Cloudy, with a Chance of Surrealism
After a depressingly long hiatus, David Lynch is back with his daily LA weather reports on YouTube.

Spring Swarm Season
NZS Capital’s Chief Beekeeper Brinton Johns had a busy “swarm season” week. He posted a few pictures on his Twitter. As we like to say at NZS, you can learn a lot more about investing from bees (and ants) than you’ll find in pretty much any investing book. 🐝🌺

Beam Me Optimism
The second worst thing about the current “Golden Age of TV” is the unbearably drawn-out, twisting and turning, multi-year plot arcs that actually require binge watching just to have a chance to understand what the heck is going on. The worst thing is the dark, antihero, too-complex-for-their-own-good characters that have been apparently mandatory ever since ‘Breaking Bad’. So, I’m very glad to read that the new ViacomCBS ‘Star Trek: Strange New Worlds’, which focuses on Spock and Captain Pike aboard the enterprise before the Kirk era, will have more self-contained episodes and “harken back to some classical ‘Trek’ values, to be optimistic”.

Food Supply and the Fragility of Power Laws
Michael Pollan’s essay “The Sickness in Our Food Supply” is an interesting read that highlights the fragility and lack of resilience that comes with the efficiency of centralization. Some information-based power law concentrations in industries can be net beneficial; but, in the physical world, concentrations are more vulnerable. This concept weighs heavily on my mind as we see the rising dominance of Amazon in physical commerce. It’s a digital version of Walmart’s playbook, and the combined centralization of retail by these two giants should give us significant pause in terms of the supply chain fragilities it has, and will, create.

Stuff about Geopolitics, Economics, and the Finance Industry
TSMC is the Latest Pawn
The Trump administration is officially moving to block the use of US technology for the manufacture of chips for HiSilicon, the semiconductor division of the Chinese government’s tech giant Huawei. But, just beforehand, they secured an announcement of a new, $12B fab on US soil from the world’s leading chip foundry, TSMC. I say “announcement” because it’s certainly plausible that this fab doesn’t come to pass as conceived; rather, this could be another complicated chess move in a high-stakes game that encompasses the entirety of the East vs. West ideological and technological cold war.

TSMC, based in Taiwan, is one of the companies that would be barred from selling leading-edge chips to Huawei, one of its largest customers. They would need approval from the US to continue to make, at the very least, lagging-edge chips in Taiwan for Chinese customers. Chinese and Western dependence on TSMC is a complicated topic that I first wrote about in SITALWeek way back in November 2017, when I suggested we will see a duplication of the semiconductor supply chain in the West. Here’s an excerpt from my more recent March 2019 post on Taiwan as the “ultimate chess piece” between US and Chinese tensions:
“China needs Taiwan and the West needs Taiwan. The West can scramble to build semi fabs, packaging, and testing facilities on US and European soil. For China, they need Taiwan at all costs as leverage. Will the US enter a war to save Taiwan’s sovereignty, or will we instead rely on Korea, Japan, and our semi companies in the US? Even if China takes control of Taiwan’s supply chain, they need design software from Cadence, Synopsis, and Mentor (A Siemens company) and the equipment to make chips, which is all made by US and European companies. It’s a mess, and it’s going to get messier! The important takeaway for investors is that semis are the heart of the future of AI, IoT, 5G, etc. – i.e., central to the entire digital economy – and they are only becoming more vital and valuable with accelerating profit pools.”

This newly-announced TSMC Arizona fab wouldn’t be in production until 2024 (if it happens at all), and replicating the complicated semiconductor supply chain, from silicon wafers to packaging to testing, etc., could take another 5-10 years. The planned 5nm process node is certainly advanced now, but it won’t be leading edge come 2024. Moreover, the desert capacity would be a drop in the bucket (only 20,000 wafers per month out of TSMC’s 13 million annual output!) and wouldn’t create any real buffer against the risk of China taking military control of Taiwan. Instead, the US would need at least 10-20x the proposed capacity in safe locations with Western knowhow and control. In SITALWeek #189, also from over a year ago, I suggested the following:
“One interesting and provocative solution I would propose is that a group of leading-edge semi designers form a foundry JV on US soil. It would take several years to get off the ground, but Apple, NVIDIA, Qualcomm, Amazon, Google, Facebook, Microsoft, Broadcom and others that rely almost exclusively on TSM for their leading-edge chip manufacturing could easily fund $100B foundry startup in the US.”

In the meantime, China’s increasingly digital and high-tech surveillance economy depends largely on chips made with technology developed by American and European companies, and many of those chips are made at TSMC (which derived 22% of revenues from Chinese customers last quarter). And, in turn, the whole global, increasingly-digital economy, not to mention all the biggest tech companies in the US, depends almost entirely on chips made on an island whose sovereignty is clear only to people who live outside of mainland China. China has expressed a desire for semiconductor independence; but, without Western technology, that dream is an impossibility within the next couple of decades. Leading-edge semi manufacturing is essentially a miracle – a specialized, mind-blowingly complex process. The nature of the magical tools – forged by ASM Lithography in the Netherlands, which cost hundreds of millions of dollars each, and a host of other specialized suppliers and designers – ensures that China’s typical ploy of industrial espionage isn't going to work this time. Indeed, any attempted piracy has been unsuccessful over the last two decades during which China has been trying to build its own semi industry (I was first in the Chinese SMIC and Grace fabs over 15 years ago). At best, they remain well over five years behind the leaders, and that is only by using all-Western software and tools to do so, without which they would be 20 years behind.

The US decision to disallow the use of these specialized tools in making chips for Huawei necessitates some type of response from China, and forces a series of events that may ultimately have negative consequences for Western companies like Apple that have naively become overly reliant on, and complacent with, their Chinese manufacturing base. There are three possible outcomes:

1. An escalation to World War III.

2. Buildout of $100B+ of advanced fabs on US and European soil.

3. Not much changes; this is all an escalating tit-for-tat that results in each side getting some semblance of what they want out of trade negotiations, albeit with ongoing cold war tensions.

Options 2 & 3 also do not preclude option 1 down the road. The stock market, for its part, has been surprisingly irregular in reacting to all this news – in some cases punishing the wrong stocks while ignoring those companies that would be most impacted, such as Apple.

Other major, leading-edge manufacturers on US soil include Idaho-based memory-maker Micron, Intel, as well as Samsung, which operates leading-edge memory and foundry capacity in Austin. My expectation is that Samsung matches TSMC’s announcement with an expansion in Austin (where they have made leading-edge memory and semis for years, including the latest Tesla autonomous driving chip). Samsung has fewer political complications than Taiwan, but certainly has regional risk, as does Japan. ‘Processor King’ Intel has leading-edge fabs in Arizona and has long wanted to be a foundry for other chip companies but has repeatedly failed – it’s a very different business than building your own, specialized chips. Intel even uses TSMC for around 20% of its chips, including Mobileye, Altera and a few other acquisitions. Intel has also fallen several years behind TSMC (and Samsung) in leading-edge manufacturing, and rival AMD leapt ahead by having their latest chips fabbed at TSMC in Taiwan. A win-win would see Intel start to become fabless by using TSMC to make their processors on US soil. I’ll repeat what I said over a year ago: “The important takeaway for investors is that semis are the heart of the future of AI, IoT, 5G, etc. – i.e., central to the entire digital economy – and they are only becoming more vital and valuable with accelerating profit pools.”

The announced TSMC semi fab on US soil is one example of the deglobalization trend that will dominate the economy over the next couple of decades. For the last 20+ years, global economic coupling has created a fragile and dangerous lack of self-reliance – efficiency has become the enemy of resilience. Coronavirus has taught us that comparative advantage is yet another flawed economic concept once we consider the broader, real-world context. For decades, China has taken over the world’s manufacturing and, in return, has delivered deflationary pressure that has helped keep inflation and interest rates low. For the next 20 years, we will have inflationary pressure as international supply chains are decoupled and repatriated. However, that inflationary pressure will be offset by next-generation manufacturing that is more automated and software driven than ever before. The outcome of this tug of war between the inflationary and deflationary pressure is unknowable at this point. 

As I wrote in SITALWeek #242, there have been great benefits from globalization, but also hidden costs. The opportunity now is to reimagine the production of all goods and services with a digital, Information-Age lens. It’s going to be a very exciting period of innovation and growth around the world. And yet, decoupling and less interdependence will only feed rising tensions and competition between China and the rest of the world. The escalating cultural/technological clash points to many scenarios that can only be resolved in a destructive conflict. While we may not be facing the cold-war-era mutually assured destruction of nuclear weapons, we are facing an equally devastating mutually assured destruction from a hate, fear, and misinformation fueled technological cold war. Therefore, it is best to forge ongoing, collaborative partnerships globally while also seeking increased self-reliance. Non-zero sum (NZS) in game theory is the outcome where all parties in an exchange are better off doing the transaction than doing nothing at all; NZS will remain an important concept for success going forward in international relations; but, odds are, we will see some zero- or negative-sum games played too in the coming years.

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Disclaimers:

The content of this newsletter is my personal opinion as of the date published and is subject to change without notice and may not reflect the opinion of NZS Capital, LLC.  This newsletter is simply an informal gathering of topics I’ve recently read and thought about. It generally covers topics related to the digitization of the global economy, technology and innovation, macro and geopolitics, as well as scientific progress, especially in the fields of cosmology and the brain. I will frequently state things in the newsletter that contradict my own views in order to be provocative. Often I try to make jokes, and they aren’t very funny – sorry. 

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