The most important product of the 20th century, Daniel Yergin showed in his Pulitzer Prize winning book The Prize, was oil. Since the century’s early years, he wrote, “Oil has meant mastery.” Those who had it or could get it ruled the world. It’s now increasingly clear that the prize of the 21st century is the semiconductor. Just as oil influenced momentous events of the 20th century, semiconductors are playing the same role.
Secretary of State Antony Blinken declared the new era in October 2022, just days after the federal government imposed historically broad controls on export of chips and chip-making equipment to China. “The post-Cold War world has come to an end,” he said. “and there is an intense competition underway to shape what comes next. And at the heart of that competition is technology.”
To see the primacy of chips within the larger world of tech, consider the stock market panic of August 5. Investors stampeded out of technology stocks and pulled the broad indexes down with them—but look closer. While the glamorous Magnificent Seven stocks (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, Tesla) lost hundreds of billions of dollars of market value that day, a different set of tech stocks were going their own way. Largely unnoticed, most of the major names in the chip-manufacturing industry (not companies like Nvidia that design chips but don’t make them) defied the panic and rose. Taiwan Semiconductor Manufacturing Company, Micron Technology, ASML (the world’s sole maker of machines needed to make leading-edge chips), Applied Materials, and Broadcom finished the day higher; Intel was flat; Texas Instruments was down slightly. (South Korea’s Samsung and SK Hynix, caught in a Korean market plunge much deeper than anything in the U.S. that day, were down.)
Investors bedazzled by the Mag7 could be missing a huge opportunity. Even in a tech-sector meltdown, the market said the valuation of chipmakers reaches beyond conventional economics. Rightly so—when a product is the most important in the world, it’s subject to forces that most products never experience. It’s happening now with chips just as it did with oil in the 20th century. The parallels are striking:
-Everyday life is inconceivable without the product. In the 20th century (and still today), the world’s economies would screech to a standstill without gasoline, natural gas, and plastics made from petrochemicals. In the 21st century, chips aren’t just in our phones and computers. They’re in cars, refrigerators, toasters, furnaces, air conditioners—John Neuffer, president of the Semiconductor Industry Association, tells Fortune, “Chips are in just about everything with an electric current flowing through it.”
-Small countries suddenly become major players in global geopolitics. In the oil era, think of Saudi Arabia and Iran. In the semiconductor era, Taiwan and South Korea produce 100% of the most advanced logic chips.
-Governments intervene heavily in the industry. In the 20th century, more than a dozen countries in Africa, Asia, Europe, and Latin America took and still hold ownership or control of a state oil company. Today, China, Japan, South Korea, Taiwan, the U.S., and other countries munificently subsidize their chip industries.
-The industry is a key factor in wars and war plans. Access to oil and its byproducts was a critical factor in every significant war of the 20th century. Today virtually all weapons include chips, so access to them is a top-level national security issue. In the Ukraine war, both sides are using missiles that include hundreds of chips; many of the chips in Russian missiles are from U.S. companies, despite sanctions.
Investors pondering chip stocks should brace for volatility. Remember that while oil created unimagined wealth in the 20th century, the road was rocky; just in the century’s second half, prices lurched between $150 and $25 a barrel. Something similar could affect chipmakers, especially U.S. chipmakers, but for new reasons.
That’s because China is America’s main adversary, and U.S. export controls aim primarily to hobble the Chinese military and parts of the economy. But the U.S. isn’t the only player in the game. Chipmaking requires many technologies that other countries—notably Germany, Japan, the Netherlands, South Korea, and Taiwan—can supply. If those countries sell their component technologies to China, U.S. sanctions could be nullified. Gregory Allen of the Center for Strategic and International Studies, a think tank, has written that “U.S. companies could suffer a huge loss of market share and revenue”—because they can no longer sell their best technology to China—“in return for only a fleeting national security benefit.”
Bottom line, chips are increasingly a unique commodity with a unique market that successful investors must understand.
Daniel Yergin saw it coming. In 2008 he acknowledged that “as we look forward, it is clear that mastery will certainly come as much from a computer chip as from a barrel of oil.” In this century as in the one before, global geopolitics revolve around a quest for a prize.
