"It was the government that created the large demand that facilitated mass production of the microchip." - Fred Kaplan, author of 1959: The Year Everything Changed (Discussing the role of the US Department of Defense in early microchip adoption)
"Before Silicon Valley became today's hub, or central processing unit, for technology, there were numerous foundational discoveries dotting the US landscape along the way." - UBS Authors (Reflecting on the geographically diverse origins of US tech innovation)
"The early semiconductor industry was highly reliant on federal government policy and financial support, especially for defense and aerospace, to achieve scale and ultimately realize resounding commercial success." - UBS Authors (Highlighting the crucial role of government funding in the sector's infancy)
"While there is much anticipation about the future for semiconductors, nearly 70 years after their initial discovery, there is also no room for complacency." - Ulrike Hoffmann-Burchardi (Concluding on the modern AI race and US manufacturing lags)
1. Executive Overview: Semiconductors as the Core of Modern Innovation
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This report situates semiconductors at the center of 250 years of US innovation, arguing that microchips are foundational to modern economic growth, AI development, national security, and geopolitical competition.
Key thesis:
The semiconductor industry was initially catalyzed by US government demand (defense and aerospace).
It evolved into a commercial powerhouse through scaling, Moore’s Law, and globalization.
Today it stands at the center of the AI arms race, massive hyperscaler capital spending, and geopolitical rivalry (US–China).
The current AI infrastructure buildout may become the largest megaproject in human history.
2. Foundational Origins (1940s–1970s)
Early Breakthroughs
The mythology of Silicon Valley overlooks early national innovation hubs:
1947 – Bell Labs: Invention of the transistor.
April 1954 – Texas Instruments (Gordon Teal): First commercially viable silicon transistor (superior to germanium for high-temperature military/industrial use).
1957 – Jay Lathrop: Photolithography breakthrough (miniaturization via inverted microscope lens).
1958 – Jack Kilby (TI): First integrated circuit.
1959 – Robert Noyce (Fairchild Semiconductor): First practical silicon microchip suitable for mass production.
1968 – Intel founded by Noyce and Gordon Moore.
First Microchips
Contained 4 transistors
Cost USD 31 in 1960 (~USD 330 in 2025 dollars)
Used in:
US Air Force Minuteman II missile systems
NASA Apollo missions
As shown in Figure 1 (page 5):
US integrated circuit sales were initially military-dominated.
Commercial sales eventually overtook military demand.
3. Moore’s Law and Exponential Scaling
Moore’s Law (Gordon Moore): Transistors double every ~2 years.
From Figure 2 (page 5):
Process nodes shrank from thousands of nanometers (1970s) to a few nanometers today.
Producer price index for integrated circuits fell sharply over decades.
Early 1970s: US Department of Defense mass production reduced chip costs to USD 1.25 per unit.
Fred Kaplan quote:
“It was the government that created the large demand that facilitated mass production of the microchip.”
4. Productivity Explosion (1970s–1980s)
From Figure 3 (page 6):
Semiconductor industry productivity growth (1972–1986):
+13% annualized
Overall US productivity:
~2%
Output per hour rose more than twice as fast as employment.
AI compute capacity increasing ~3.4x per year since 2022
Doubling roughly every 7 months
NVIDIA = >60% of total compute
Google & Amazon = majority of remainder
Power distribution insight:
GPUs = ~40% of peak power consumption
Majority of energy used by cooling, inefficiencies, interconnects
12. Geopolitical Positioning
From Figure 8:
Global GPU cluster performance share (2025):
US: ~75%
China: ~15%
Others (EU, Japan, Norway, etc.): smaller shares
China:
Domestic AI chips (Huawei Ascend series)
State-backed capex
Estimated localization rate:
~40% domestically made GPUs by 2027
US:
CHIPS and Science Act (2022)
Export controls on advanced AI chips
Goal: regain manufacturing edge
Semiconductors framed as:
National security asset
Economic sovereignty pillar
Geopolitical leverage tool
13. Hyperscaler Capex Explosion
Q4 2025 earnings season:
Alphabet, Meta, Amazon:
Capex ~30% above initial consensus
Top five hyperscalers (incl. Microsoft, Oracle):
CY 2026 capex: USD 630bn
CY 2027 capex: USD 729bn
Upward revisions:
+18% (2026)
+20% (2027)
Free Cash Flow impact:
2026 FCF: USD 91bn (–49% vs YE 2025 estimates)
2027 FCF: USD 149bn (–38%)
Meta may become net debt positive if capex exceeds internal cash generation.
14. 2030 Capex Projection and Productivity Threshold
UBS estimate:
AI capex could reach USD 1.3 trillion by 2030
Implies 25% CAGR (2025–2030)
To justify:
~USD 6 trillion productivity gains by 2030
Equivalent to ~10% of today’s global labor market
UBS view: achievable based on historical productivity trends.
15. Vendor Financing Risks (Dotcom Echo)
Dotcom peak:
Vendor financing >120% of pretax earnings
Today:
NVIDIA vendor-linked collaborations ≈ 10% of 2026 pretax earnings
Risk present but materially smaller than 2000 bubble conditions.
16. Structural Conclusion
The semiconductor industry has evolved from:
Government-supported defense technology
→ Mass commercial adoption
→ Globalized supply chains
→ AI megaproject infrastructure backbone
Key framing:
The AI buildout may become the largest megaproject in human history
Transition toward:
Artificial General Intelligence (AGI)
Token-based digital economy
AI tokens as fundamental economic unit of compute and intelligence
Semiconductors positioned as core driver of economic value capture
UBS frames this within its:
AI Transformational Innovation Opportunity (TRIO) thesis.
17. Strategic Implications
US leads in AI compute dominance but lags in manufacturing.
China accelerating localization (~40% domestic GPUs by 2027).
Hyperscaler capex peaking but structurally expanding.
AI productivity gains must justify trillion-dollar infrastructure.
Chips are now inseparable from:
National security
Energy infrastructure
Cloud economics
Labor productivity
Digital asset ecosystems
Fascinating Facts & Infographic Statistics
Transistor Growth: Transistor counts per chip evolved from 4 in 1961, to 2,300 in 1971, to 1.35 million in 1994, to an astounding 16.6 billion in 2025.
CPU Speed: Speeds have surged from 100-300 kilohertz in 1961 to 4.3 million kilohertz in 2025.
Top US Exports in 2024: Semiconductors ($57bn), Cars ($61bn), Natural gas ($62.6bn), Aircraft ($123.3bn), and Refined oil ($123.4bn).
Quantum Leap: A standard computational benchmark that would take today's fastest supercomputers 10 trillion years to complete takes Google's Willow (Quantum chip) less than 5 minutes.
Miniaturization Perspective: The size of a microchip node in 1971 was 10,000 nanometers; if transistor sizes had stayed constant from 1971, a 2025 microchip would measure 3,824,900,000 nanometers.
Memory Capacity: The computer used for the Apollo moon missions possessed 4 KB of RAM and 73.7 kB of ROM, whereas modern smartphones boast 12.6 million kB of RAM and 268.4 million kB of ROM.
Chemical Complexity: The number of periodic table elements used to manufacture a semiconductor increased from 17 in the 1980s, to 21 in the 1990s, to 62 in the 2000s, to 66 in the 2010s.
Stories & Anecdotes
The Apollo Mission's Modest Computing: To illustrate the staggering pace of innovation, the report contrasts the computer that guided the Apollo missions to the moon with a modern smartphone. The Apollo computer operated on a mere 4 KB of RAM and 73.7 kB of ROM. Today, a standard smartphone carries roughly 12.6 million kB of RAM, holding exponentially more power in a consumer's pocket than what NASA used to reach space.
The Minuteman II & Mass Production: Early microchips were incredibly expensive. The narrative details how the US Department of Defense stepped in as the ultimate "early adopter." By procuring these chips for the Minuteman II missile guidance systems, the government effectively subsidized the creation of mass production lines, ultimately driving consumer prices down from $31 to $1.25 and launching the digital revolution.
The Scale of Miniaturization: The report provides a striking hypothetical to explain miniaturization: The size of a microchip node in 1971 was 10,000 nanometers. If transistor sizes had stayed constant from 1971, a 2025 microchip would measure a staggering 3,824,900,000 nanometers to achieve current capabilities.
References & Recommendations
Books:
1959: The Year Everything Changed, Fred Kaplan - Quoted to emphasize how early US government demand created the mass production necessary for the microchip's success.
People Referenced:
Gordon Teal - Texas Instruments team leader who commercialized the first silicon transistor in 1954, paving the way for military and industrial uses.
Jay Lathrop - Advanced the field in 1957 by developing photolithography using an inverted microscope lens, a critical step for miniaturization.
Jack Kilby - Engineer at Texas Instruments who successfully integrated all electronic circuit components onto a single piece of semiconductor material in 1958, inventing the first microchip.
Robert Noyce & Gordon Moore - Engineers at Fairchild Semiconductor who filed the patent for the first practical silicon microchip in 1959 and later founded Intel Corporation in 1968.
Tools/Platforms/Products:
Intel 4004 - Released in 1971, noted as one of the first commercially available microprocessors that integrated an entire CPU onto a single silicon chip.
Google Willow - A modern quantum chip referenced for completing a standard computational benchmark in under 5 minutes, a task that would take a traditional supercomputer 10 trillion years.
Speakers & Credentials
The report is authored and compiled by the Chief Investment Office at UBS Wealth Management, featuring contributions from senior leadership:
Ulrike Hoffmann-Burchardi - Chief Investment Officer Americas and Global Head of Equities, UBS. (Provides strategic oversight and concluding remarks on the future of US semiconductor capabilities).
Kurt Reiman - Head of Fixed Income CIO Americas & Editor-in-Chief.
Delwin Limas & Kayden Lee - Equity Strategists, CIOAPAC.
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