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Sunday snacks is here with reader requests!

AND WE SHALL!

We’re covering tipping and chip manufacturing this week.

The Tip Button: Ever-present in our lives

We’re not going to pinpoint how we got here. We won’t even speculate on who’s really collecting these tips.

Maybe it’s the millenial/gen-z in us that makes us feel bad about making more than the person behind the counter. But we’ll leave that to the stupid morning shows.

Our thoughts?

It’s the mix of increasingly cashless transactions, done over slick point-of-sale systems owned by huge payment processing companies that take a cut out of every transaction.

Who’s winning here?

Payment processing companies. Here’s why:

1. You walk into your local coffee shop and Jordan (sorry, Jordan), your barista, takes your order.
   

2. Jordan is shitty to you but you still hit 20%, hoping that they’ll be nicer to you one day (they never will be).
   

3. Your purchase came out to 5 bucks, but because you need to be liked, you paid 6 dollars tip included.
   

4. If it was a Square Point-of-Sale system, instead of collecting 23 cents, it just collected .25 cents* (assuming you’re not living in CA, ME, or MA).

Okay, it’s LITERALLY 2 cents, so what?

Yeah, doesn’t seem like much, but added over millions of transactions a day at hundreds of thousands of small businesses, it ends up being…a lot.

You wanna see what a payment processor business model looks like? Take a look at the graph down below:

• FiServ merged with First Data (a payment processing company) in 2019.

• Take a look at what happens from 2019 onwards. FiServ takes on First Data’s revenue but also goes from a middling financial player to a high-growth powerhouse.

TL;DR: The only one who’s winning here is are companies like Square, FiServ, and Verifone. Payment processing is a huge business, and that tip you add? It adds to their incremental revenue in the form of swipe fees.

*Used Square’s standard process fee formula here.

Chips and China: Uhh…This is bad…right?

Everyone's been shitting themselves over the announcement that SMIC's new 7nm chip was included in the now sold-out Huawei Mate 60 Pro release.

Let's break down why:

After the roll-out of a series of sanctions intended to protect the United States' domestic semiconductor supply chain and adjacent industries (See: CHIPS Act), the world has been sitting and waiting for China's (the main target of these sanctions) response.

So why the hysteria?

As dumb human beings, we often look for external validation to our dumb hypotheses about the future state of the world, including our current question which is will the U.S. or China win the Semiconductor Cold War (TM)?

In the best (or least stupid) case, we look at global geopolitics and stick our finger in the air.

In the worst case we look at stock prices of impacted firms and make a judgement tantamount to summarizing a comment section on a subreddit.

Those pointing at SMIC stock's single week 20% pop as a referendum on the CHIPS Act or anything else are making a critical error of judgement.

The Bottom Line:

• SMIC offered little information or technical specs on the 7nm release.
  

• Phones equipped with the 7nm sold out in days, which implies supply issues (echoing what we know already about the global supply chain).
  

• The mechanical ability to create 7nm chips has existed for nearly half a century, and had already been deployed by Taiwanese semiconductor giant TSMC a few years ago.
  

• The process to create a 7nm chip involves multi patterning, or running a single wafer through standard lithography machines several times to achieve the required geometry. With current tooling, this takes considerably longer than larger wafer gauges.
  

• As such, it's very unlikely that China is well-positioned to close the semiconductor gap opened by the CHIPS Act. Isolated and without free access to premium western chips (China is still waiting on a $5 Bn order of NVIDIA chips due later this year), nothing has really changed for China's AI ambitions.

Again, none of this is investment advice.

What AI made this week

Okay this was the first AI prompt. Why the hell does it look so scary though.

Have a great week!

Ahmed and Peter