Uneasy lies the head that wears the crown

Most of us who use a laptop, PC (even the non-tech folks) are familiar with the legend - Intel Inside. In fact, it is not unusual for most consumers to ascertain that the micro-processor inside is Intel, before buying a laptop/PC. Intel chips are soon expected to be on smart phones too. However, there is a new name which has raced past Intel in the dominance of the semiconductor industry, in recent years.

Nvidia joined the ranks of the top 5 companies worldwide in 2023, with trillion-dollar market cap along with Apple, Microsoft, Saudi Aramco, Alphabet, Amazon. Nvidia chips or more specifically Graphics Processing Units (GPUs) power the Artificial Intelligence (AI) based interfaces (like ChatGPT, Midjourney, etc.) that have taken the world by storm. To brush off the popularity of these interfaces and therefore Nvidia’s market valuation would be to disregard the wide-spread acceptance among the scientific and tech community for Nvidia’s GPUs in wide-ranging AI based applications.

The AI opportunity

Historically, the most important part in a computer or server had been the central processor, or the CPU. That market was dominated by?Intel, with?Advanced Micro Devices (AMD)?as its chief rival.

With the advent of AI applications that require?a lot?of computing power, the GPU is taking center stage, and the most advanced systems are using as many as eight GPUs to one CPU. Nvidia currently?dominates?the global market for GPUs which power AI interfaces, with a share of 88%.

Nvidia will face increased competition as the market for AI chips heats up. But Nvidia's high-end GPUs remain the?chip of choice?for companies building applications like ChatGPT, which are expensive to train, expensive to run and which use the generative AI based model to generate text, images, or make predictions.

Nvidia remains in the lead for AI chips because of?its proprietary software?that makes it easier to use all of the GPU hardware features for AI applications.

Intel’s Inflection Point

Intel is no longer a case study in adaptability. In the 1980’s seeing the fundamentals of the business changing, Andy Grove Intel’s former CEO moved the company from the computer memory business to the microprocessors business. The decision helped rescue Intel from a financial crisis and set it on course to becoming one of the most profitable and important technology companies of all time. Intel today, still commands a 65% share of the global CPU market.

Then came the smart phone revolution, but Intel could not develop successful chips for smart phones/tablets, by far the largest new opportunity for chip makers in the past 15 years. Today, Apple, Samsung, Qualcomm dominate the chip market for smart phones. If everything goes right, Intel latest chips will be on smart phones in 2024!

For the past few years, the world’s largest chip maker has seemed indifferent to another potentially vast market: the one in chips designed for the artificial intelligence technique known as deep learning. Intel’s revenue is 2.4 times Nvidia, but considering the explosive demand for generative AI applications, markets seem to favour Nvidia’s prospects over Intel’s, at least in the short-term.

Now comes the geopolitical twist

Nvidia, a US based company, doesn't fabricate the complex GPU chips itself, a task that would require enormous investments in new factories. Instead, it relies on Asian chip foundries such as Taiwan Semiconductor Manufacturing Co. (TSMC) and Korea's Samsung Electronics.?A large share of Nvidia’s advanced range of chips are manufactured by Taiwan based TSMC.

Considering, the US plans to restrict supply of advanced AI technology to China, and China's claim over Taiwan, US-China-Taiwan tensions could disrupt Nvidia's supply chains. Nvidia is looking to diversify its manufacturing base to avoid any hiccups in meeting rising demand for its chips. Recently it was reported in the international media that Intel may be a top candidate to manufacture Nvidia's GPUs as per Nvidia CEO.

Business indeed makes for strange bedfellows

Any possible partnership between Intel and Nvidia would be a curious one indeed, for all sorts of reasons. Intel and Nvidia?famously clashed?in the late 2000s and early 2010s over licensing for a series of motherboard chipsets, and the two companies compete in multiple markets. Historically, Nvidia's focus has been on GPUs while Intel has focused on CPUs, but both tech titans are encroaching on each other's territory with new products with every passing year.

For sure Nvidia may not manufacture its most advanced GPUs at Intel, but may partner for the manufacture of a lower line of GPUs. But you never know what the future holds.

Concentration Risk, Geopolitical Risk, Regulatory Risk

From a personal finance point of view the benefits of diversification are evident. Depending too much on TSMC, has lead Nvidia into the arms of a competitor (Intel), following geopolitical threat to manufacturing supply chains. However, a closer look will reveal how risk to business may come from unexpected quarters especially in emerging fields like technology. Geopolitical risk is a rising concern for business and in turn a growing risk for investors in such businesses. The recent rise of crypto currency (Nvidia chips were in huge demand for Bitcoin mining at the height of the crypto boom) faced push back and unviable taxation from governments leading to a scale down in the crypto currency market.

In an interconnected world, geopolitical and regulatory risks are on the rise. Being cognisant of this risk can help you better manage your investments. There are no permanent leaders, only permanent competition in business. Ditto your investments. Reminds me of the famous dialogue from the Indian movie Agneepath delivered in Amitabh Bachchan character’s insolent style: Hawa tej chalta hai Dinkar Rao, Topi samhlao, ud jayega (translated: the wind blows hard, watch your hat Dinkar Rao, it may be blown away)

Source: Bloomberg.com, cnbc.com, technologyreview.com, tomshardware.com

Author: Ashish Joseph George, MMS, CFP. The views shared in this article are my personal views and don’t reflect the views of any organization. This is not an investment advice

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