Going for growth: Digital infrastructure

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It was much harder to teach a computer to recognise a face than to beat a grandmaster at chess. Now we tut if the AI ‘eye’ on our smartphone doesn’t let us into our online bank in milliseconds – even from an awkward angle in a dimly lit room.

It’s a small example of how quickly we take for granted the astonishing and diverse achievements stemming from the silicon-based revolution we’re living through. Amid such rapid progress, we struggle to comprehend either its scale or its accelerating pace. 

From powering the portals in our pockets, to the cloud, to automotive and other transport systems, to the internet-of-things networks that enable how we live, work and play, chip technology increasingly shapes the infrastructure of our lives.

For investors, opportunities lie in understanding this 'fourth industrial revolution'. That means thinking how the world could change and anticipating how the frontiers of chip design and manufacture, artificial intelligence and robotics will push ever forward. Further ahead, although already nearing its first commercial applications, is quantum computing. This technology exploits the quantum world’s ability to exist in more than one state at once to solve complex problems exponentially faster than classical computers.

For Baillie Gifford International Growth, our challenge is to identify the companies either innovating to drive change or benefiting from the strong tailwind of demand for compute – computational performance and functionality – and generative AI.

These are companies making themselves indispensable across broad fronts of innovation. They include TSMC, which manufactures the leading-edge advanced chips, and Advantest which tests most of them. These firms best exemplify the attractions of highly specialist businesses with dominant market shares and ‘sticky’ customers, operating in a tight-knit ecosystem where quality is paramount.

Growth from innovation

Figures bear that out. The global semiconductor industry reached $588bn in sales in 2024, a 13 per cent increase from 2023. The amount is expected to nearly double in the next five years, hitting $1tn in 2030. 

This expansion is supported by massive investment in research and development (R&D) and in chip foundries. Since 2020, in the US alone, companies have announced nearly $450bn’s worth of manufacturing in over 90 projects spread across half the country’s states.

Much of the demand now is for AI. Long used in applications such as search, commercial and political data analysis, diagnostic medicine and voice/face recognition, AI became newly visible in 2022 through ChatGPT’s ‘generative’ large language model version. 

Allowing computers to speak human as never before, it was a foretaste of AI’s potential to blur the boundary of the real and the virtual. It took us closer to a futuristic realm of voice-controlled driverless vehicles and safe co-working with robots on the factory floor.

Essential to these advances are technologies dominated by a handful of key companies. One such is ‘advanced packaging’, one of several led by TSMC. International Growth first invested in the Taiwanese company more than a decade ago. Now it’s the world's largest dedicated semiconductor foundry, manufacturing advanced chips and integrated circuits for Apple, NVIDIA, AMD and many others.  

Advanced packaging is the technique of combining multiple chips in a single package, boosting output by packing in more processor, memory, and other components. It’s the technology that’s continuously slimming down your smartphone and allowing each year’s model to include a new set of features. 
 
Homing in closer, a key subset of this advanced packaging is ‘3D stacking’, in which TSMC has invested heavily. It’s now so far ahead of competitors that we believe they will struggle to catch up. 

This is an area of almost inconceivable miniaturisation, where progress is measured in fractions of the width of a human hair. It’s about shortening the connections between chips, reducing signal delays and cutting power consumption. TSMC’s 3D stacking goal, set for 2027, is to reduce connections already eleven times thinner than a sheet of paper, into something a third thinner than that. 

This kind of capability, combined with commercial acumen, has given TSMC its competitive 'moat', allowing it to increase revenues by an average of 16 per cent per year-over-year in the last decade. In 2024, largely thanks to the increased demands of AI, that increase rose to 33 per cent. The firm expects AI-related products to contribute 15 per cent of total revenue this year, helped by poor performance from Intel, its main US would-be competitor. 

Collaborating with Samsung, SK Hynix and others, TSMC is also active in another important area of today’s chip revolution, high-bandwidth memory (HBM). This is the turbocharging of the transfer of data within the chips themselves. It promises to transform established technologies such as video calls, virtual reality and simultaneous speech translation to a quality level that would probably startle us today but, like all such breakthroughs, will be taken for granted soon after. 

All these advances are not just improving existing products but are enabling new categories of devices, from autonomous vehicles to augmented reality glasses. These will rely heavily on compact, high-performance chip packages to process vast amounts of data in real time.

Picks and shovels

If TSMC’s R&D programme, range of partnerships and sole focus on semiconductors has made it hard for rival manufacturers to compete, a more recent holding, Advantest, has done the same in testing.  

The Tokyo-based company, which International Growth bought in 2024, now produces 58 per cent of the entire global market for semiconductor testing equipment, and exemplifies the ‘picks and shovels’ suppliers’ advantage in a chipmaking upsurge, having strong relationships with nearly all the major semiconductor manufacturers worldwide. It has developed a system that can rapidly analyse data from various stages of the testing process, helping chip manufacturers improve quality and streamline manufacturing. 

Called the ACS Real-Time Data Infrastructure system, it acts like an intelligent quality control manager, processing information from multiple points in the chip-making process, helping manufacturers spot and solve problems faster and waste less. 

Advantest’s customers tend to be sticky because the processes and expertise they establish during the lifetime of a client’s product are not easily transferrable to other testers.  

Looking ahead

The silicon revolution shows no signs of slowing down. With governments worldwide investing in semiconductor manufacturing capabilities and research, we're seeing a fundamental shift in how technology is developed and implemented. Although the industry faces challenges, including talent shortages and geopolitical tensions, it continues to drive innovation across wide areas of modern life.

In other words, this is no ordinary technological advance. Like steam in the 18th century, petrochemicals and electricity in the 19th, and electronics and telecoms in the 20th, the chip age represents a fundamental transformation of our industrial and economic landscape. It promises to deliver smarter, more efficient, and more sustainable answers to the remaining stumbling blocks to human progress.  

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