Computer – whatever its form, PC or laptop – has become an irreplaceable part of our working environment. Even for our life. In this competitive advantage in the computer industry, we try to identify the strength of competitive advantage for each node. From computer manufacturers like Dell, Lenovo, MSI, Asus, HP to upstream like chip manufacturer TSMC. By understanding the connection between these “points” along with its internal competition, we hope investors could have better insight to choose the potential company to invest in.
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Too Long, Didn’t Read
- The loser is computer manufacturers like Dell, HP, Lenovo, Asus. Tight Competition, and Relatively Low Barrier to Entry.
- Apple with Macbook and iMac is different due to its ecosystem.
- AMD and Intel dominate the processor market. AMD is more integrated, Intel has a scale but both do not satisfy our investing requirement.
Computer industries have several characteristics that tempt investor to put their money, here are these attributes:
- Needed by a large number of people. It is almost impossible to live without a computer or laptop. Education, Government, business, social services, you name it – almost everyone needs a computer.
- Having cycle, every 5 years people or business replace their laptop or PC to keep performance.
Looks like a perfect defensive portfolio, but let us take a deeper look.
No Moat Industries: Laptop and PC Vendor.
The Lenovo Thinkpad X2 series is one of my favorite laptops. It is 12.5 inches with only around 1.3 kg in weight. This little machine is compact, easy to carry yet powerful, and delivers a satisfying typing experience. Also, it is a military standard. ThinkPad is the poster child of laptops for business.
On another side of the battle, Dell with its unique business model: Instead of dictating the specs – customers, especially businesses, could request their requirements to Dell. From a customer perspective, this business model strips the expense. You just buy what you need.
But, re-paraphrasing Pat Dorsey once again: Making a good product doesn’t guarantee a decent competitive advantage. Making a unique business model doesn’t secure the economic moat. Lenovo and Dell, fall into this category, including another laptop maker. No matter good its specs, the keyboard, the feature, it doesn’t give enough protection against competition.
You can replace Thinkpad with another brand without notice a great difference. And this illustrates the whole computer-maker industry’s characteristics. Most times, people don’t care about the brand – they just looking into specs. Oh, it is Core i7 10th generation, 8 GB RAM, with Nvidia RTX series. As long as it works, it doesn’t matter which PC or laptop brand they use.
This situation creates an opportunity for new entrants to come to play.
Smartphone players like Samsung, Huawei, LG, and even brands you never hear like Xiao Mi (Redmi Book and Mi Book), Oppo (Realme Book), and Infinix try their fortune in laptop battle royal. Though the incumbent like Dell, HP, or Lenovo has better quality control, the customer maybe doesn’t care. They will throw the laptop next 5 years.
So we don’t think invest in a laptop vendor is a good idea.
Competitive Advantage of In The Computer Industry: How Macbook Difference.
M1 Apple Processor
More Power efficient than Intel
Of course, Macbook from Apple is different, especially in 2020. Like any other Apple device, it not only offers performance but also convenience and seamless integration. And this advantage is to get better due to the Apple M series processor which is the most power-efficient processor in the world.
The key to this advantage is due to Apple’s vertical integration for almost all its products. Apple creates its own chip – abandoning Intel – creates its own Operating System macOS.
Somehow, this integration locks its user in the Apple ecosystem, for instance, you need an additional peripheral to connect your Macbook with, let say, a projector or another monitor. But we strongly believe that Apple needs to be very careful, sometimes, the locked environment will make the user frustrated rather than impressed.
Apple also needs to consider serval potential Achilles heels like:
- Compatibility. In the engineering field, there is some software that can’t be run in macOS. We are sure that there are other apps from another field that also face similar issues.
- Threat from another smartphone maker that has created a similar ecosystem like Apple: seamless integration between Windows and Android.
As long as Apple keeps improving – like its processor – and continue its excellence in design, it will be far from a problem.
Intel and AMD Competitive Advantage In The Computer Industry
Duopoly market share
Intel and AMD are archival. Together they dominate the market share for PC and laptop processors and it is due to x86 architecture switching costs.
it began when IBM needed a processor for its first-generation PC. There were two companies with their own computer architecture. Motorola offered 68000 and Intel brought its x86. Short story short, Intel with scale advantages got the IBM contract. And the era of x86 was beginning.
It was simple, since it was brought by Intel, no company has better knowledge when it comes to manufacturing the hardware that can optimize the x86 architecture. As a result, Intel goes as a sole designer for the chips, enjoying a monopoly, till the court decides to bring a rival for Intel. Like God tell to Adam, it is not good if a human is alone.
Then comes AMD.
In the long history of both duels, Intel has always been at the upper hand. Till complacency kicks in, Intel still dominating the market share, but it is eroded by the AMD Ryzen series.
Another threat comes from another architecture. What if, instead of using x86 which is Intel – AMD playground, another company develops a brand new processor based on another kind of infrastructure. Qualcomm and Microsoft ever tried for Surface laptop. At that time, the ARM-based devices really consume much less power than x86, making the laptop last much longer than its counterpart. Unfortunately, it fails to deliver adequate computing power. At the moment, x86 still reigning in the market.
Then Apple drops the atomic bomb when launch its M1 processor. Like The failed Surface, it is based on ARM architecture and conserve much energy. But Unlike Surface, it delivers satisfying computing power. This is due to its 5 nm manufacturing process. The shorter wafer allows more transistors in the same chip, which means, more computing power. And because it is in a single chip, the power needed also be reduced.
Qualcomm surely will try again. Intel maybe, but it has no deep knowledge in ARM.
Back to our concern, investing both in Intel or AMD doesn’t make us comfortable. We know ARM has compatibility issues, but this real threat and Intel so far – also AMD, has no answer.
Competitive Advantage in The Computer Industry: The Graphic Card.
We make it short.
Both AMD with its Vega and Radeon series and Nvidia with Gforce enjoy long duopolistic status. And we believe this trend will continue in the next years. Nvidia has an advantage in performance especially for its ray tracing while AMD offers a lower price.
Let us remind you about Intel and its integrated graphic card. For most ordinary use like simple Office spreadsheet, graphic card is unneeded. And with some of the gamers prefer to play their favorite in console, this leaves GPU to use for design, editing video, or mining crypto.
So invest in Nvidia or AMD only for its duopoly is a little bit questionable.
TSMC: The Taiwanese Giant
So far only Apple – with its excellence in both software, hardware, and packaging – that we assess feasible to invest. TSMC may offer a similar opportunity with another unique competitive advantage.
TSMC manufacturing chip for AMD, Apple, Nvidia, Qualcomm. Even, in the future when its 3 nm technology is ready, TSMC will also manufacture chips for Intel though the Santa Clara-based company has its own fabs factory. TSMC seems like a more solid and resilient choice.
We recognize at least two durable competitive advantages that incorporated by TSMC:
- Economies of scale. Like we stated earlier in this article, the computer industry is like a consumer good today. Everyone uses it. Consequently, demand for chips is also high – and globally. TSMC and Intel practically are the duopoly of fabs manufacturers. Supplying global demand is not easy.
- This brings us to the second advantage – a high barrier to the new entrants. Chip only gets smaller and smaller, manufacturing something in the nano unit is extremely difficult. You need advanced technology and people with rare skills to execute it.
TSMC is surely one on your list – the only risk is political tension, Thanks Jinping.
ASML, The Lithographer.
ASML is a supplier for TSMC, Samsung, Intel. ASML doesn’t make a chip but it makes machines for chipmakers. This machine is responsible for writing in tiny pieces of silicon that will be the processor or GPU or SoC. The writing determines how the chip will works. Sound simple? Ok, let imagine that the silicon is 45 mm x 42.5 mm, ASML is your pen and Ultraviolet will be your ink.
Similar to the supermodel in the Milan fashion show, the thinner is better. Think about brush or pencil, the thinner the line, the more detail the graph. UV is the same, the shorter wavelength, the better for the processor – more powerful yet more energy conserved. Now if Apple said that its M1 processor is 5 nm technology, means that it uses 5 nm UV as its pen and ink.
This process is called lithography.
ASML Lithograph machine weighs 180 tons. With all these characteristics and processes we told, we are sure that the reader could imagine how high its barrier to the new entrants. And with tailwinds like cloud, artificial intelligence, 5G, and Internet of Things, ASML is surely in the right position.
But investors need to be careful since ASML isn’t ready to deploy its full capacity yet. Check Here. Another red flag is that this juggernaut machine is company CAPEX, which means that not every day or even every year that Chipmakers need to buy it. Simply said, it doesn’t have customer goods characteristics. Investors need to analyze its financial report to get better confirmation.
Final Thought: Quantifying Competitive Advantage in Computer Industry
Here is our benchmark for the competitive advantage of each actor in this industry.
We will follow up this post in detail for each name, but for now, investors could assess the computer industry at a glance through this post.
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