Three Laws of Innovation For Growth Over The Next Decade
This guest article was originally published by Capital Group on 4/1/2021 and has been shortened for column purposes
You’ve probably heard of Moore’s Law, the observation that semiconductors would get meaningfully faster and cheaper over time, improving computing power. But what about Flatley’s Law and Wright’s Law?
None of these observations of technological progress exactly qualifies as an immutable law of nature (like Newton’s theory of gravity), but they have helped paved the way for some of the most compelling advances of the last 50 years. And in doing so they have helped improve the lives of consumers and drive long-term opportunities for savvy companies and investors.
1. Moore’s Law and the proliferation of semiconductors
Intel co-founder Gordon Moore, while working as a researcher in the 1960s, somewhat famously observed that the number of transistors that fit onto an integrated circuit doubled roughly every 18 months to two years, effectively providing more processing power at the same cost. He further observed that there was no reason that progress couldn’t continue.
Flatley’s Law is an analog to Moore’s Law, which refers to the much more rapid advances and cost reductions in sequencing one human genome. This pace of progress helped fuel the personal computing revolution in the 1980s and 1990s and paved the way for mobile phones, self-driving cars, and health care devices.
Moore’s Law and Flatley’s Law are driving costs lower and innovation higher
Source: National Human Genome Research Institute. Data as of August 31, 2020. Values are shown on a logarithmic scale.
As semiconductors become cheaper and more efficient, they will penetrate more aspects of our daily lives. By and large, they will continue to drive improvements in things we already use, like phones and tablets, cars, entertainment systems, and appliances. “The costs are dropping to the extent that we can start creating new business models that allow companies to generate money, and that's what we're seeing,” says Isaac Sudit, one of Capital Group’s analysts.
Two other dramatic advances have changed the landscape of the semiconductor industry: cloud computing and artificial intelligence. “Processing data in the cloud has transformed computing from a cost center to a profit center. Servers are now rented from companies like Amazon or Microsoft, which has further allowed for the creation of new business models,” Sudit says. In the case of artificial intelligence, virtual assistants like Alexa and Siri, and smart thermostats like Google’s Nest are already in use by consumers. “The poster child for advances in artificial intelligence, of course, is the self-driving car.”
Semiconductors are infiltrating every corner of our lives
Source: Bloomberg. Data represents the share of all semiconductor device applications in 2025, as forecast by Bloomberg.
So what does all of this mean for investors?
The expanding use of semiconductors is a bullish sign for the industry over the long term. “The semiconductor industry is still relatively young — about 60 years old.”
2. Flatley’s Law and the power of gene sequencing
When the human genome was first sequenced about two decades ago, it took a team of researchers at the National Institutes of Health (NIH) some 15 years at a cost of more than $2.7 billion... it soon became clear that machines used for genetic sequencing would need to be faster and cheaper.
Enter Jay Flatley, former chairman of medical technology company Illumina. He set his company not on a mission to discover some innovation, but to maintain a laser focus on execution. Today, thanks to improvements driven largely by Illumina, a human genome can be sequenced in about a day for around $500. The cost is expected to soon fall to $100. Flatley’s Law, an analog to Moore’s, exemplified even quicker advances and greater cost reductions.
subsequent breakthroughs in DNA analysis have led to a new era in medicine. ”Today we can sequence tumors and compare their mutations to the map of the human genome,” equity portfolio manager Richmond Wolf says. “We can then identify specific mutations and match therapies to them.” Indeed, testing and therapies derived from genetic testing have the potential to extend lives and generate billions of dollars in revenue for the companies that develop them.
We are developing tools that are rapidly advancing the pace of drug development. “Exciting new modalities like gene therapies, immunotherapies, and cell-based therapies that are now changing the trajectory of many cancers could not happen without DNA sequencing,” says Wolf. “Very often the companies that develop and supply the picks and shovels to an industry can make powerful investments. If it were not for DNA sequencing many of these new therapies would not be possible.”
More recently, genomic research has been a key contributor to the fight against COVID. Not only has DNA sequencing identified and tracked variants, but U.S. biotech company Moderna was able to get a jump on developing its vaccine because a scientist had published the genetic code for the virus.
Quick, accurate, and cheap gene sequencing has the potential to put medical researchers on a path to developing personalized therapies for patients. “There’s never been a more exciting time in health care,” Wolf adds. “It started with the sequencing of the human genome. We've developed and improved these tools over the last two decades, and now we’re using them not only to provide more accurate diagnostics but to develop better therapies and to match therapies to those diagnostics.”
3. Wright’s Law and the coming dominance of electric vehicles
A third law related to declining production costs, Wright’s Law, predates Moore’s by a few decades and has broader application. Theodore Wright, an aeronautical engineer, observed in 1936 that when the production of airplanes doubled, costs declined by a fixed rate. Taking Wright’s observation and applying it to advances in lithium-ion batteries, those most commonly used in electric cars, prices should drop significantly for every doubling of production.
Today electric vehicles (EVs) typically run on a 40-60 kilowatt lithium-ion battery pack, which accounts for about a third of the vehicle cost. Electric cars become cheaper than conventional cars when the battery cost drops under $100 per kilowatt-hour (kWh). As a result, EV makers have recently been introducing models with lower prices, better performance, and longer range. Typically, EV batteries can run 200 to 400 miles before they require recharging.
Plunging battery costs will make EVs more affordable
Sources: Bloomberg New Energy Finance, Statista. Prices shown for 2023 and 2030 are forecasts as of December 2020.
The International Energy Agency expects global EV sales to rise 28% a year over the next decade. But with emissions standards tightening worldwide and costs becoming increasingly attractive to consumers, those estimates may be too conservative, says equity investment analyst Kaitlyn Murphy.
“New developments will potentially make EVs cost competitive not only with new gas-burning cars but with the entire fleet of cars on the road, including used cars… That’s about 270 or 280 million vehicles in the U.S. If you take a long-term view, that suggests there could be much stronger growth than the market expects.”
Indeed, the emergence of battery-powered cars is changing the economics of the global auto industry. As companies build out their EV fleets, they are also building a base of potential service revenues — from managing your battery to providing updatable software that can improve consumer experience as well as car safety.
“Whether they are legacy automakers or startups, companies that embrace structural change and introduce these advancements quickly have a better chance of winning over the long term,” Murphy adds.
Investment Implications
Moore’s Law, Flatley’s Law, and Wright’s Law should continue to push the pace of innovation across industries and help smart companies take advantage of new opportunities. The sheer speed of change means investors must remain alert as to which companies will be disruptors and which will be disrupted.
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