Semiconductors: Moore's Law
Most people who have lived through the age of the internet are familiar with Moore's law (ML). Gordon Moore, one of the founders of Intel, noticed that the number of transistors per square inch on integrated circuit boards doubled every 18 months. In other words, the speed and capacity of computers would double every 18 months, which in turn led to the growth of the internet and new technologies. This law, not to be confused with the laws of physics which is a definable calculation, is an observed hypothesis or a "First Principle" which has shown to be predictive in nature. Moore's Law (ML) ended up being an oracle over the last 30 years by successfully predicting the explosion of computing power and technology. As an investor, if you applied this first principle law, perhaps you would have invested in Intel, Apple, and Nvidia with tremendous success as computation power has exploded. But Moore's law really only explains part of the premise of successful adoption of technology as an investment thesis.
Death of Moore's Law?
As computing power has continued to grow, proving Moore's law to be prophetic, the last decade has led many people to speculate that this exponential growth couldn't continue and the ML would finally lose its relevance. This prediction has turned out to be premature and the law remains prescient today. However, when it comes to investing tools, a similar and lesser known law has also shown tremendous predictive value. This law may become considerably more important in the future for judging future technology advancements as they become increasingly embedded across all industries. This law or hypothesis, which shares similarities with ML, has also been predictive of technological growth and is known as Wright's law.
Flying with Wright
In 1936 Theodore Wright wrote about a linear and measurable production of airplane wings and the costs associated with the expansion of production. Essentially Wright discovered while studying airplane manufacturing that the cost of an airplane wing is decreased by a measurable and sustainable levels as production doubles. What Wright produced was a statistical tool for analyzing production and efficiency. This production of goods tool can be applied to many products, but technology has really highlighted this principle in recent years. The importance of this principle is that having a predictable measurement of cost, as production ramps up, indicates the potential for both revenues and margin growth.
"Moore" likely the death of combustion engines?
One of the most exciting applications of Wright's law is to the electric vehicle (EV) sector.
We have seen an increase in both EV companies as well as technologies like batteries and charging stations supporting the rise of these cleaner vehicles. We could reasonably argue that Wright's Law is demonstrably excellent at explaining the momentum of EVs as the price of production continues to decline. We are at an inflection point between EVs and the traditional combustion engine, especially when we factor in all the costs of maintenance and gas. According to the International Energy Association, the cost for lithium batteries has gone from 1,110 KW/H in 2010 to 126 Kw/h in 2020 while a typical battery has 37 kw/h to 60 kw/h meaning cars can travel a longer distance before recharging. Typically these trends that are supported by Wright's or Moore's laws tend to be robust and have long-lasting cycles. With further improvement to batteries, EV infrastructure, and the support of software to provide data, this trend toward EVs seems inevitable.
Other Applications?
One of the more striking examples of Wrights Law has appeared in the healthcare industry. Both data-driven intelligence and artificial intelligence could be huge drivers of cost reduction when it comes to DNA sequencing and personalized healthcare alternatives. The principal of Wrights Law is also applicable to the energy industry. We have seen this play out through the technological advances of locating and then the fracking of natural gas as well as in the production of solar panels. Additionally, capital markets may also make huge advances in cost reduction through new technologies. Blockchain software will bring about greater efficiency through automation by smart contracts.
Why should I care?
Marc Andreessen famously said, "software is eating the world". In other words, computing power has taken a foothold across every industry and is becoming more ingrained in every aspect of a business from decision making to supply chains. This is why when evaluating a business and its technology, Wrights Law may be the essential tool to predicting mass adoption and future success. As far as the auto industry, where increasingly cars have become more reliant on computer technology, EVs will continue to be competitive in both overall performance and price.
Are we at an inflection point where the future of the combustion engine is relegated to our memories and museums? Time will certainly tell, but I wouldn't bet against Moore or Wright.
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