Nvincible? What could curb Nvidia’s supremacy

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The Economist.

Hello and welcome to the intelligence from the Economist. I'm your host, Rosie Blore. Every weekday we provide a fresh perspective on the event shaping your world. Some of the best driving you can ever do is on Highway 1 along California's coast. And it looks like you'd better do it soon. Erosion, climate change, landslides. It's as if much of the road wants to be claimed by the sea. And Europeans are known for their love of stripping off. There are naked beaches, naked campsites, even naked petom tournaments. But increasingly, young Europeans are putting on their clothes and nudity is becoming the preserve of the over 65s. But first, Sometimes it seems as though everyone is talking about one company.

Nvidia. Nvidia.

Nvidia.

Nvidia. Nvidia.

Nvidia.

Nvidia. Nvidia designs the chips that power today's AI revolution and has been riding high in the markets.

Right now, Nvidia is popping the champagne as we see in terms of that.

Guidance range, that's historical.

It's now valued at just over $3 trillion, more than eight times what it was worth at the beginning of 2023. Yesterday, the firm reported yet another blowout quarter. In the three months to July, its revenue was above market projections at $30 billion, an all time high. Investment bankers reckon that Nvidia's annual sales will double this year to over $100 billion and continue to grow by double digits until at least 2027. But those market folk, wow, they are hard to please. Nvidia's shares actually fell on the news. So why might some investors be starting to question the company's prospects?

But Wall street is certainly incredibly excited about Nvidia.

Jan Piotrowski is the economist. Schumpet Economist.

When you look at the analysts that cover its stock for investment banks, basically all of them are telling their customers to buy more shares. A few are telling them to hold onto their shares and not buy anymore. None that are tracked by Bloomberg actually are telling their customers to sell. So that's one very clear sign of excitement when you look at projections for how much money Nvidia will be making. Revenues grown by multiples in the past couple of years on the back of the AI frenzy. Its chips are obviously incredibly useful for crunching numbers that go into artificial intelligence models. They expect them to double next year and then grow by double digits in the years after that. But if you think about the sort of long term growth story for Nvidia and you really look into it, these two contradictions or possible contradictions emerge.

Okay, Jan, explain these contradictions to me.

So the first tension concerns Nvidia's relationship with its biggest and most important supplier, which is tsmc, a Taiwanese contract manufacturer which actually produces Nvidia's chips. Nvidia only designs them. It doesn't do any manufacturing of its own. Now a couple of years ago, Nvidia was just one among many of TSMC's clients. The biggest has for a very long time been Apple. But in the past couple of years, as Nvidia's sales of AI chips have ballooned, it has become a much, much bigger client and now is almost certainly its second biggest, responsible for more than 10% of TSMC's revenues. And that if you look at Nvidia's purchase commitments for the coming years, is probably only likely to grow. It might actually displace Apple as the biggest customer of TSMC's before long.

Okay, so if Nvidia isn't producing its own product, it's only designing it, then its growth is dependent on TSMC's growth.

That's right. And TSMC is investing incredibly heavily in order to expand capacity. But it can only do so much because unlike blueprints, designs that you can work on on your computer, you actually need to build these factories to produce these chips. And these chips are getting more complicated. So they're only becoming more difficult and more finicky to actually erect. And the tension here is that even as these two companies are growing closer together, their product cycles appear to be diverging. So on the one hand, part of the excitement about Nvidia this year has been that Jensen Huang, its boss, said that it would now be launching a new chip every year as opposed to every couple of years. But TSMC still needs 18 to 24 months to actually build a new factory. And it typically begins conversations with its prospective clients about these factories and what exactly these factories are meant to be doing and whether it's worth the effort a year or two ahead of putting any shovels in the ground. So you've got this tension between the accelerated pace of decision making at Nvidia and a more demure pace of decision making at tsmc, which is constrained by the physical reality. And the fact that Nvidia does not have ultimate control over its actual output. Brings me to the second contradiction. If Nvidia is constrained by TSMC's capacity, it in how many chips it can sell, the only way it can actually guarantee that its revenues are growing in line with expectations is to raise prices.

Seems like a time honored proposition to raise your prices. What's wrong with doing that?

At the moment, the bulls appear to think that Nvidia can both keep its prices high and therefore its margins very juicy, and keep selling more and more of its chips. But if you think about the way that technologies become widespread, it typically happens because they become much less expensive. So with a lot of previous eras and waves of technological change, like the early days of the Internet, they became widespread because prices fell. If you think that Nvidia's volumes, the number of products that it's going to be selling, are going to be rising inexorably, it probably means that it can't maintain the sort of margins that the market has grown accustomed to. And if it maintains the sort of margins that the market has grown accustomed to, that might hurt its growth prospects because fewer people will be willing to splurge on its expensive chips. There's already a little bit of backlash among Nvidia's biggest customers about the pricing of its chips. So Andy Jassy, the boss of Amazon, which was the world's biggest cloud computing provider through Amazon Web Services, aws, recently admitted to investors that he's heard loud and clear that they want better price performance from its equipment. It's designing its own chips, which almost inevitably will actually also be produced by tsmc, other big customers. So other Big cloud providers like Google. Google already has a lot of its own chips. And then you have Microsoft, which is another huge cloud provider which is also investing in its own designs.

And are there other companies that are responding to that? Are there rivals?

Well, so there's one company that is also a chip designer that does not manufacture its own chips. It's called AMD. And that's basically gone from selling virtually no AI useful chips three years ago to something like $5 billion worth forecast for this year. So not nearly as much as Nvidia, but already eating into its market share. And just last week it acquired a large company that provides networking equipment to be able to offer end to end solution for customers that Nvidia has so far only been able to provide. And then you have other companies got startups working on their own chip designs. And there's the question of China, where American sanctions mean that a lot of the big tech firms have reduced access to Nvidia's chips and as a result you might expect them to be thinking about designing their own. Just as Chinese electric car makers have eaten into Tesla's share of the market for electric cars globally, it is not inconceivable that Chinese chip makers or tech firms with chip making ambitions, like Huawei for example, might try and come out of left field and also try and grab a little bit of market share.

The history of tech is riddled with companies whose technology was overtaken by the next one. You know, I'm thinking of Nokia or the video machine. I mean, the list is huge. Is there any prospect that actually the technology could move on from what Nvidia is doing?

It's very, very possible. You know, at the moment, the generative artificial intelligence models, they rely on a certain sort of mathematics. And it turns out that the sort of chips that Nvidia has been making turns out to be particularly useful for doing that sort of mathematics. It is not preordained that this is the best way of doing AI related mathematics. Somebody could come up with a new way of doing it. It is not preord ordained that Nvidia's designs will remain the best and the only game in town. Nvidia has done a good job of reinventing itself a couple of times already. It began as a company that basically sold graphics processing units, GPUs which were useful for generating computer animation to video gamers. It then cottoned onto the fact that that same type of chip is excellent for mining cryptocurrency and it had a brief boom during the crypto craze. A couple of years ago. And now it turns out that very similar chips are also incredibly useful in doing the calculations on which large language models rely. It's not inconceivable that it might reinvent itself one more time, but it's also highly possible that others will come for its lunch. Wherever you have excess profits, you tend to get competition. And that also has happened in tech a lot of times.

Jan, thank you so much.

Thank you.

That point that's sticking right out there is where the I'm sitting in a tiny four seat plane high above California's central coast, cruising at about 180 miles per hour.

Aaron Braun writes about the American west for the Economist.

We're flying over one of the most gorgeous and untouched bits of California's coast, Big Sur. It's maybe a three hour drive south of San Francisco. My pilot is Bob Van Wagenen and he's my guide for the day. He starts pointing out some of the sights we can see from the sky. Where the sea otters live, where great white sharks come in to feed.

I have seen as many as 60 great white sharks right here at the surface. Not threatening the bathers.

Bob contracts with the government to do all kinds of environmental work. He tracks endangered species and tells me a little bit about habitat restoration.

Again, the brown stuff you see offshore is kelp.

That's what I specialize in, management measurement. But today, 2,000ft above the ground, he's showing me something man made. I see this line along the landscape between the mountain's peaks and the ocean. It's a two lane highway and it winds its way along the cliff face overlooking the Pacific. This, Bob tells me, is Highway 1. Highway 1 is one of the world's most famous roads. It begins south of Los Angeles, where I live, and runs north along the coast up past San Francisco to a tiny town called Leggett. It'll take about 16 hours to drive if you do the whole thing. But going fast isn't really the point. It's to see the scenery. A lot of people do this. Last year the state brought in $9 billion in tourism revenues from the Central coast, parts of which you can only get to by Highway 1. But while Big Sur is Highway 1 in all its glory, it's also the highway at its most vulnerable. Parts of Highway 1 around Big Sur are falling into the ocean. Landslides have cut off the region. That's why Bob took me up in the air, to show me the missing middle of the highway that nobody can drive through in their car right now. Yes, both of the flies were being repaired.

They still kind of are cut off, actually.

For now, the plan is to rebuild and reopen the highway. But the question is, for how long? This place was always an inhospitable one. And with climate change, that's only going to get worse. Can Highway 1 survive in the long term? And even if it can, should it? People started talking about the idea of a scenic coastal highway at the end of the 19th century. But it wasn't until 1919 that construction began on that middle part of the road that is right up against the mountains, the part that would be hardest to build. The highway has been known by a ton of different names. At first it was Roosevelt highway because it was finished when Franklin Delano Roosevelt was in office. Some people know it as the Pacific Coast Highway. The route changes so much as you go. You know, it starts in Orange county when you're along the beaches, and then you get into the kind of industrial parts of Los Angeles that turns into Malibu, where you can see dolphins jumping out of the water. As you get further north, you start to see these kind of tangled, twisted Monterey cypress trees that like, soak up the fog in the region. And then you're confronted with California's incredible biodiversity. I pulled over off the side of Highway 1 because there were signs for an elephant seal rookery. So you have to pull over. Elephant seals are basking on the sand. They smell so strongly. Oh, my gosh. There's dozens of them all laying in the sand. And you can hear them as they burp and bark and gurgle in these piles on the beach. Really, it's this kind of 70 mile stretch around big Sur that is threatened. The rock that makes up the Santa Lucia Mountains, which is the range that rises right above Highway 1, is really crumbly. Parts of the rock are much weaker than parts right next to it. And so it's really hard to know what part of the mountain is vulnerable and where and when landslides might happen. Climate change is making landslides more likely now, and that's because California can expect to see more, more intense periods of rainfall, but it can also expect to see more intense, hotter wildfires. And when those happen back to back, the chance of a landslide or debris flow increases a lot because the ground has no vegetation to hold back the rock. And the soils can turn almost water repellent in some circumstances. And then that rain just slides immediately off the mountains and onto Highway 1. When I was in Big Sur reporting this story, I talked to a lot of locals, including Kirk Gaffel. And he owns a famous restaurant in the area called Nepenthe. And he's also the head of the local chamber of commerce. And he told me that he has noticed that this is happening more often and it's affecting his business.

You know, it's undeniable that since 2016, the last eight years, we've had more events of magnitude, combination of fire or road closures due to slip outs or landslides than in the prior 60 years. I mean, really more than any other generation that lived in this community had since the highway opened in 1937.

You've got this real sense of anxiety that with another landslide, people may have to close their businesses. They might not have enough tourists to stay open. And then what does that mean for their livelihoods?

I think the highway is the most.

Important thing to the community. It is the lifeline. There's no port, there's no airport, there's no east, west alternative. And this is a vastly misunderstood concept. I mean, for visitors, you know, when they see the road close by and they still think that somehow they're going to be able to get through or.

Get around and the state will continue what they've been doing for decades. And that is when a landslide happens, they will repair it. But there are real limits to what the state can do, even with scores of engineers and construction crews. And it's become a very expensive proposition. The four slides this year, the state's transportation department reckons that it'll cost upwards of $100 million to fix. And so then I think the question becomes, what happens to the people who live there as it gets worse. One person who expressed this intimate really strongly to me is Magnus Torren. And he is a Swede who came to Big sur in the 1980s and now runs the Henry Miller Memorial Library there.

I think I would say that my impressions were very much like many others, which is astonishing. Awe in the face of these cliffs, you know, jutting down into the ocean the way they do.

I met Magnus in the library itself. And we sat in a corner surrounded by the artwork of Henry Miller and his cat, which is named Jack Kerouac, is wandering around my feet and meowing. How do you think about the highway then, as this thing that gave you access and people who came before you, access to this place where no one would see otherwise, but is also now the source of this kind of congestion?

Yeah, if I were to say that I'm deeply considering what would be best right then that deep, deep consideration would be we all should leave. Right? We should all just leave Big Sur and leave it to be wild. And then as far as access goes, well, then you have to walk in. Or you have to paddle in on a day where you can put your kayak on a beach and then walk into this wonderful wild, wild land. That would be an ultimate dream.

Big Sur, the people who live there aren't at risk of being swallowed by the Pacific, but when they're cut off from civilization on both sides, you have to ask, well, how soc sustainable is this community? And so that's why you get people thinking about, well, should this community be here in the first place? And for how long can it remain to exist there?

The second of our two part Taylor Swift extravaganza airs today on Money Talk, our business and finance podcast. How did Taylor Swift take on the music industry and reclaim the right to her own songs? It's only for subscribers. Do sign up podcastconomist.com.

Man is born naked, but everywhere he is in clothes. Well, nearly everywhere.

Stanley Pignal writes Charlemagne, our column on Europe.

Visit parts of Europe like Asana in Denmark, or bits of public parks in Germany, or many a beach in France, and clothing becomes as scarce as office workers. At the height of August, Europe is the spiritual home of nudity, a continent where enough people, at least in some countries, are happy to show off their private parts in public places that it has long since lost the ability to offend. Yet a cloud is hanging over those who eschew bathing costumes. Casual nakedness is falling prey to rising prudishness. In Europe, nudist associations are losing members at a clip matched only by the church. Worse, a habit one might prefer to be undertaken by the young is increasingly the preserve of the aging. Visitors to Europe often imagine public nudity to be an offshoot of its supposed to licentiousness. Beachgoers start by stripping off together and then end up in each other's beds or tents. But something close to the opposite is true. In contrast to Americans, many Europeans insist there's nothing sexual about the naked body it's merely eroticized by those who choose to gaze at it. In that way, it thus becomes possible to hang out with colleagues, friends, or even your mother in law. In the buff. National associations, for those who don't like to wear clothes, organize everything from naked campsites to people, museum visits and even petong tournaments. Perhaps unexpectedly, it is in Europe's often chilly north that clothing is most often optional. Few in the Nordic countries give a second thought to stripping off in the company of strangers, at least of the Same sex. It takes weeks to convince a taciturn Finn to look you in the eyes, but mere hours before he shows you his genitals while you sweat together in a sauna. Southerners are less often found shedding clothes. With its legacy of Catholic norms. Standing proudly alone, naked in the nudist pantheon is Germany. A prominent free body culture movement emerged there in the late 19th century. A sort of return to nature reaction to the grim industrialization of the era. The urge to strip off became all stronger in repressive East Germany. Renewedism offered a race rare acceptable form of emancipation from the communist state's often overbearing authority. Even in Germany, nudity can raise eyebrows. In 2020, a middle aged naked sunbather caused an Internet stir after a video went viral of him chasing a wild boar that had made off with a bag containing his laptop in a Berlin park. But it is becoming rarer. In June, the Maine Nudist association canceled celebrations for its 75th birthday amid a lack of interest. France too has seen bathers cover up. Doing Le Tablesse at the beach has lost its appeal. In 1984, some 43% of adult French women under 50 had bared their breasts at the beach. The figure is now under 20%. The practice is now three times more popular amongst over 65 than it is with 18 to 24 year olds. Three factors are held up as responsible for the great European cover up. The first is the rise of Instagram and other social media. With so many perfect bodies on show, who wants to show theirs? Young people, in particular, women, are not keen on exposing themselves in that way. The second inhibitor is the ubiquity of smartphones, which are basically like souped up peeping Toms. Always a problem at the beach for naked goers. And the third is the rise of cross border tourism and migration, which means that beaches, even in nudist friendly countries, are now frequented by many for whom the practice remains taboo. I think part of the reason why nudity is fading is that it has long lost its transgressive mind mojo. For in liberal Europe, nowadays, more or less, anything goes. You can shake off the yoke without also shaking off your underwear. Feeling a duty to uncover the truth, and myself in the process, I visited a nudist beach in the town of Ra in western Sweden. It was my first time bathing naked and well, the experience does take some getting used to, but pretty quickly you do. Lots of people were going about their day, reading a book or peering into the Orson Strait. I went for a swim, attempting to find some modesty in the water only to find out that it's so shallow that it barely covers your knees, let alone anything higher up. Surprisingly soon, the novelty of nudity wore off. It is, after all, the way all of us are born.

That's all for this episode of the Intelligence. Let us know what you think of the show. You can get in touch@podcastconomist.com we'll see you back here tomorrow.