EVERY SPOKEN WORD
140 min read · 27,849 words- 0:00 – 2:31
Why TSMC matters now: remastered episode and the chip-world stakes
- BGBen Gilbert
Hello, Acquired listeners! We regularly get feedback that this episode on TSMC, the Taiwan Semiconductor Manufacturing Company, is one of the best Acquired episodes ever. And interestingly, it predates our Nvidia episodes. We did it way back in 2021, when the Acquired audience was about twelve percent the size of what it is today, which means that the vast majority of you have never heard it. So, uh, we definitely wanted to fix that. Since then, semiconductors have become so much more important in our world, and TSMC has essentially become the only manufacturer of the leading-edge chips. They make the primary chip inside every MacBook and iPhone shipped today. They're powering the AI wave, manufacturing all of Nvidia's chips. They make the chips for a whole bunch of other fabless companies like Qualcomm, AMD, Broadcom, and hyperscalers like AWS.
- DRDavid Rosenthal
And it turns out they even manufacture a lot of chips-
- BGBen Gilbert
[chuckles]
- DRDavid Rosenthal
-for Intel, too.
- BGBen Gilbert
Yes.
- DRDavid Rosenthal
Little-known fact. Yeah, TSMC rode the smartphone era to crazy heights, as we all know, and here now in the next AI era, here in 2025, it turns out that they are the manufacturing superpower behind all of that, too.
- BGBen Gilbert
Yep. Well, listeners, without doing too much foreshadowing, now is a very good time for anyone to listen or re-listen to the TSMC episode, so we decided we should go all the way back to the raw audio tracks and remaster this whole thing from scratch for your listening pleasure.
- DRDavid Rosenthal
Ben, in fact, I looked it up since we were going back to 2021 when we initially recorded this, TSMC's market cap has doubled since then, from five hundred and fifty billion to over a trillion dollars. And in fact, you're the one that tipped me off to this as we were re-researching here. They and Saudi Aramco are the only trillion-dollar companies in the world that are not located on the West Coast of the United States. Wild.
- BGBen Gilbert
This is such a crazy stat. It's crazy that the rest are located on the West Coast of the United States, but it really underscores what a extreme outlier TSMC is. So without further ado, the story is truly unbelievable, and we hope you enjoy this presentation of TSMC Remastered.
- SPSpeaker
Who got the truth? Is it you, is it you, is it you? Who got the truth now? Is it you, is it you, is it you? Sit me down, say it straight, another story on the way. Who got the truth?
- 2:31 – 4:51
TSMC episode framing: the unknown giant and Morris Chang’s improbable arc
- BGBen Gilbert
Welcome to season nine, episode three of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I am Ben Gilbert.
- DRDavid Rosenthal
And I'm David Rosenthal.
- BGBen Gilbert
And we are your hosts. Today's episode is on TSMC, or the Taiwan Semiconductor Company. It is your classic, "Most people have never heard of it, but it's the ninth largest company in the world" episode.
- DRDavid Rosenthal
This is wild. Morris Chang founded TSMC at age fifty-six, retired at seventy-four, then came back at age seventy-eight, inked the deal to make all of Apple's chips, and... yeah, we're gonna tell the whole story here. It's wild.
- BGBen Gilbert
It's nuts. They make literally every chip in every iPhone sold today, and soon to be in every Mac sold. If you're excited at all about Nvidia, AMD, Qualcomm, or even any of the chips that Amazon, Microsoft, Facebook, Apple are making, all of those chips, or nearly all of them, are actually made by TSMC, along with all the chips in your cars and your smart home devices and fighter jets and everything. Unbelievably, this company that the entire world relies on is on an island that some countries feel is a sovereign nation, and the People's Republic of China feels is actually theirs. So today's episode has it all, ascending from startup to tech superpower, an underdog founder, and of course, a good dose of geopolitics.
- DRDavid Rosenthal
Indeed.
- BGBen Gilbert
All right, well, listeners, it finally felt like the right time to do this episode amidst this global chip shortage that we've got going on, that, David, I think I've heard even Ford has paused the production of F-150s because of this. So it is, like, a massive impact on the world, and we've had TSMC on the agenda to do for, like, two and a half years now-
- DRDavid Rosenthal
Yeah
- BGBen Gilbert
... in our little Google doc.
- DRDavid Rosenthal
Totally. Well, I feel like we haven't called it a miniseries, but let's call it a miniseries on semiconductors and, like, silicon.
- BGBen Gilbert
The Arm episode...
- DRDavid Rosenthal
Yep. Sequoia part one, PA Semi.
- BGBen Gilbert
Yep. Okay, listeners, it is time to jump into the history and facts, and David's gonna lead us in that. But as usual, even though we're gonna be probably very excited about some companies, less excited about other companies, this show is not investment advice. We may have investments in the companies we discuss. It's for entertainment and informational purposes only, and you should do all of your own research.
- 4:51 – 8:54
Morris Chang’s early life: war, displacement, and the path to America
- DRDavid Rosenthal
Okay, speaking of, we start in Ningbo, China, in July 1931, just about one year after Warren Edward Buffett was born in Omaha, Nebraska. And there are gonna be quite a few parallels here as we go through this episode. But in July 1931, in Ningbo, China, our protagonist, Dr. Morris Chang, Order of the Propitious Clouds with Special Grand Cordon, which is the highest civilian honor that anyone in Taiwan can hold.
- BGBen Gilbert
Sweet.
- DRDavid Rosenthal
So he's like a knight of Taiwan. It's the Order of Propitious Clouds, and then I think there's, like, nine ranks of it, and the highest is Special Grand Cordon.
- BGBen Gilbert
And he's Special Grand Cordon?
- DRDavid Rosenthal
He's special. Yes, he's very special. [chuckles] So he was born then. For those who are unfamiliar with Chinese geography, Ningbo is a small city, just a bit south of Shanghai. You know, small. It's about eight million people, just casual, no big deal.
- BGBen Gilbert
China's scale is ridiculous, but certainly wasn't eight million people when Morris was born in 1931.
- DRDavid Rosenthal
No, but I bet it was still probably pretty big. But yeah, today, eight million people. Crazy. So Morris's father was a county official and later became a bank manager.... So the family moved around a good bit within China as his father was transferring for work. This is pre-People's Republic of China. This is pre-World War II. This is a very different place.
- BGBen Gilbert
Right, the leadership is not communist.
- DRDavid Rosenthal
No. No, no. So his early childhood years were, like, middle class, not wealthy, but pretty well-to-do relative to your average Chinese citizen. Then when he was six, the Second Sino-Japanese War breaks out, and Morris and his mom flee the main part of China to Hong Kong, and they go to live in Hong Kong for a few years to escape the air raids and the fighting. And then on December 8th, 1941, three hours after Pearl Harbor, the Japanese attack and invade Hong Kong, and Morris talks about this. He's like, "Yeah, everybody knows Pearl Harbor, December 7th, 1941. What people don't often talk about is the same thing happened in Hong Kong three hours later-
- BGBen Gilbert
Whoa, yeah.
- DRDavid Rosenthal
... on the next day." So they're in Hong Kong, so they flee again back to China. They end up in Shanghai this time, and they stay there for a few years until 1948, after World War II is over, but that's when the Chinese Civil War breaks out that would lead to the Chinese Communist Revolution, and so they flee again back to [chuckles] Hong Kong. So this is crazy. Morris, before he turns 18, he has lived through three major wars: the Second Sino-Japanese War, World War II, and the Chinese Civil War. So the next year, in 1949, which is the same year as the establishment of the PRC, the People's Republic of China, Morris turns 18, and with the help of an uncle that he has in Boston, his life completely changes. He gets accepted to Harvard. So he goes to the US. He goes to college at Harvard. Wow!
- BGBen Gilbert
Talk about a change of fate.
- DRDavid Rosenthal
Talk about a change of fate, a change of scene, everything. Morris says much later, "My reaction entering Harvard was sheer ecstasy, almost disbelief. What a country! The United States was at its peak in its moral leadership and its political leadership in terms of democracy, and it was the richest country in the world."
- BGBen Gilbert
Not to mention stable. I mean, you could say what you want. You could count on the fact that it's likely that 10 years from now, whatever economic structure or political structures exist will continue to exist. If what you wanna do, and what he ended up doing with his whole life, is innovate, having that stability around you and all those structures enable you to do that.
- DRDavid Rosenthal
Yeah, like, we just take this for granted, but this is a good reminder. At the very least, he's probably not gonna have to flee Boston to [chuckles] continue his studies.
- BGBen Gilbert
[laughing]
- 8:54 – 17:43
Harvard to MIT: engineering focus, failure, and a career detour into semiconductors
- DRDavid Rosenthal
But he does end up fleeing Harvard, as we'll get into. So Morris loved it. It was like that quote we read. He was so overjoyed to be there, but he realizes he has kind of a new problem in America and at Harvard: his parents aren't coming over. He's on his own. He's gotta support himself and make his own way, and at that time, his race is probably gonna limit his opportunities. So as he says, quote, "In the early '50s in the United States, there were Chinese laundrymen, Chinese restaurateurs, Chinese engineers, and Chinese professors. Those were the only respectable professions for Chinese. No lawyers, no accountants, no politicians." And what does Harvard turn out? Lawyers, sort of accountants maybe, politicians, yes-
- BGBen Gilbert
Yeah
- DRDavid Rosenthal
... not a lot of engineers.
- BGBen Gilbert
Certainly finance professionals, if not accountants.
- DRDavid Rosenthal
Certainly finance professionals. As we will see, as we will go along, Morris is much more than a finance professional, but Harvard actually didn't have an undergrad engineering program at the time.
- BGBen Gilbert
Huh! That's crazy to think about.
- DRDavid Rosenthal
If you're really, really focused, you're probably gonna go down the street in Cambridge from Harvard-
- BGBen Gilbert
To MIT.
- DRDavid Rosenthal
To MIT, which Morris does. So he only spends his freshman year there, and then for his sophomore year, he transfers to MIT so that he can study mechanical engineering. So Morris, our man, he has learned the ways of the world in the US. He's focused. He starts mechanical engineering a year behind at MIT. He finishes both undergrad and his master's in the remaining three years.
- BGBen Gilbert
And what year is this?
- DRDavid Rosenthal
This would have been 1951 when he transferred, fall of 1951.
- BGBen Gilbert
Okay, so to contextualize what's going on in the tech world right now, with quotes around it because it's not so much a world as a very small continent, I mean, you have all of the post-World War II defense spending that went in, particularly on the West Coast, with the innovations from Stanford. But has Fairchild Semiconductor been started yet?
- DRDavid Rosenthal
Nope. Nope, no, no.
- BGBen Gilbert
So maybe Shockley Semiconductor.
- DRDavid Rosenthal
Shockley Semiconductor was probably just getting going, but we're probably still in vacuum, too.
- BGBen Gilbert
Like Bell Labs land.
- DRDavid Rosenthal
Yeah. To give you a sense, silicon is years away. Transistors are probably just getting going. We're not in the integrated circuit yet, and it's all being done in germanium, not silicon.
- BGBen Gilbert
Wow.
- DRDavid Rosenthal
So it's... Like, this is OG.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
So after he gets his master's in the three years, Morris wants to stay and do a PhD, fully complete his technical training, but [chuckles] he ends up failing his qualifying exams twice. They give you two chances to take, and he fails twice.
- BGBen Gilbert
By the way, this is a good time to say... So David and I watched and listened to every footage that Morris has ever spoken that has been released publicly to prepare for this. He is very funny.
- DRDavid Rosenthal
Oh, he's great.
- BGBen Gilbert
The way he talks about this, he says that, unfortunately, the biggest impediment to him going forward was that he failed the qualifying exam, but fortunately for him, they were kind enough to let him take it a second time, which he also failed.
- DRDavid Rosenthal
Yeah [chuckles] .
- BGBen Gilbert
And he has this really dry, clever sense of humor.
- DRDavid Rosenthal
So in one of the interviews, he talks about, one of the Stanford ones, he gets a question from the audience about how did he kick his smoking habit?
- BGBen Gilbert
Oh, yeah. [laughing]
- DRDavid Rosenthal
[laughing] That, like, the questioner is like, "I know you used to smoke. How did you finally stop?" And he's like-... I never stopped. I still smoke. [chuckles]
- BGBen Gilbert
Yeah. [chuckles]
- 17:43 – 24:27
Leaving Sylvania: recognizing mismanagement and discovering where the industry’s center really is
- DRDavid Rosenthal
So this goes on for three years. Morris is, like, rolling hard. [chuckles] He's burning the candle at both ends, working and at the bar, but not drinking, [chuckles] uh, learning. But as he, like, is learning the industry and coming up to speed, it becomes pretty clear to him that if he really wants to go places in this new emerging industry, Sylvania, not really the right bus to be on-
- BGBen Gilbert
Hmm
- DRDavid Rosenthal
... so to speak. And obviously, Don Valentine figures out the same thing and jumps to Raytheon and then to Fairchild.... Morris says the moment when this crystallized for him was there was a talk that a senior manager at Sylvania gave at the plant, and the quote that the senior manager said that stuck with Morris for the rest of his life was, "We at Sylvania cannot make what we can sell, and we cannot sell what we can make." [laughing] Real great position to be in. So Morris is like, "Damn, I gotta get-
- BGBen Gilbert
Yeah.
- DRDavid Rosenthal
-the hell out of here."
- BGBen Gilbert
That's a signal to move on-
- DRDavid Rosenthal
Yeah
- BGBen Gilbert
-if you've ever heard one.
- DRDavid Rosenthal
Ah, totally. So like Don, Morris leaves Sylvania for greener pastures, however, not to California.
- BGBen Gilbert
Halfway in between?
- DRDavid Rosenthal
Or to Silicon Valley. Yep, halfway in between. So we talk a lot about, you know, Fairchild and the Traitorous Eight, Silicon Valley, blah, blah, blah, you know, the place to be. Here's the secret: Silicon Valley's all marketing! The biggest semiconductor company in all types, digital analog, everything at that time was not in California, it was in Dallas, Texas. It was Texas Instruments.
- BGBen Gilbert
Which, of course, me, you, many people in our generation know of as the people that made our graphing calculators in high school and college. But, of course, at this time, I don't even think they had a consumer division yet. They were just making-
- DRDavid Rosenthal
No, no, no. No, and that's, that's gonna come up later. No, TI was the juggernaut. Like, now Silicon Valley is Silicon Valley, but then it was, yeah, okay, California, I don't know, West Coast, whatever. Like, TI was the big incumbent. They were the juggernaut. TI actually got its start, I had no idea before doing the research here-
- BGBen Gilbert
Hmm
- DRDavid Rosenthal
... in the '30s. You're like, how did a technology company and a semiconductor company end up in Dallas, Texas? They started making instruments, Texas Instruments, for measuring seismic activity for oil exploration.
- BGBen Gilbert
Whoa!
- DRDavid Rosenthal
So all the oil companies-
- BGBen Gilbert
Oh, that makes sense about Texas.
- DRDavid Rosenthal
They were like the TSMC, or like the technology provider to oil companies, and that's what led them into computing and into digital to power that business.
- BGBen Gilbert
Oh, wow.
- DRDavid Rosenthal
They were huge. Not just huge in terms of the company, but they were the technology leader. So Bob Noyce, like I was saying a minute ago, is credited, you know, when he was at Fairchild, inventing the integrated circuit and all that. While he was the co-inventor, simultaneously, it was co-invented by Jack Kilby, who was at TI, and Jack was actually the one who got the Nobel Prize-
- BGBen Gilbert
Oh!
- DRDavid Rosenthal
... for inventing the integrated circuit. Gordon Moore, who was also, you know, at Fairchild and then founder of Intel, along with Noyce, he would coin Moore's Law. But Jack has a great quote, too, about the implications of the integrated circuit and semiconductors. He says, "What we didn't realize then," this was a little later, when they were inventing it, "was that the integrated circuit would reduce the cost of electronic functions by a factor of a million to one. Nothing had ever done that for anything before." [chuckles]
- BGBen Gilbert
Wow.
- DRDavid Rosenthal
It's such a great way to frame it, too. Like, this had never happened in human history. There was this thing that used to be X expensive in terms of resources, and then magically, one day, it's a million times cheaper.
- BGBen Gilbert
Yeah, that's crazy. I didn't realize it was on that scale. This is probably a good time to talk about some definitions, 'cause there are some things that we've thrown around already. I think everyone has a general understanding of what these things are, but it's worth understanding more precisely before we move on. The first of which is a transistor. The best way to think about a transistor is not the tiny little transistor that's on a silicon die today, but think about it as a little encased piece of circuitry with three prongs coming out of it, and those three prongs, we'll save the technical names, basically have an input, an output, and something that controls the input and the output. It's a switch. It has two purposes, the first of which is being a switch, where you can decide that either stuff is gonna go through it, stuff being voltage, current, or none, or it rounds to none, and so that way you can decide, hey, this binary piece of equipment is either off, zero, or on, one. Okay, so that's a transistor. Now, a transistor can be made out of lots of different things.
- DRDavid Rosenthal
Yeah.
- BGBen Gilbert
It can take any implementation. Why is everybody talking about silicon? Well, silicon as an element is a semiconductor. It is a metalloid. It has some properties that make it like a metal, like a conductor. It has some properties that make it non-conductive. Imagine trying to move electrical signal through a piece of wood. It's not gonna work, but imagine moving it through copper. It's gonna work really well, and you're never gonna be able to interrupt it. Well, geez, wouldn't it be great if we had some material, a semiconductor, where we could modify whether current was flowing through it or not, so we could-
- DRDavid Rosenthal
Make it a switch really easily.
- BGBen Gilbert
Exactly.
- 24:27 – 30:33
Texas Instruments breakthrough: yield engineering, credibility, and rapid ascent
- DRDavid Rosenthal
Yes, and in Texas. So Morris gets assigned as his first project to a sort of problem child within TI. They have entered into a deal with IBM. IBM is working on their first mainframe computer, major project, that's gonna use transistor logic instead of vacuum tubes, the IBM 7090, and they anticipate so much demand for this product. Usually, IBM manufactures everything for all their products themselves, but they're like, "We need more chips than we're gonna be able to make ourselves-
- BGBen Gilbert
Hmm.
- DRDavid Rosenthal
- so we need a second source for our chips." They turn to TI, and they're like, "Hey, we can give you all the designs for you to know how to do this, for this chip that we want for our product. We want you to additionally manufacture some of these in addition to our own line." You might even say almost like a contract manufacturer of chips. [chuckles]
- BGBen Gilbert
[chuckles]
- DRDavid Rosenthal
So like a foundry business almost, you know? [chuckles] Hmm, interesting, but it's not going too well. So IBM's own plant is churning out transistors with about a 10% yield, which means that of every 100 chips that they turn out of the plant, 90% of them fail and only 10% of them work.
- BGBen Gilbert
Yikes!
- DRDavid Rosenthal
That's the first-party line. The TI line [chuckles] has about a 0% yield.
- BGBen Gilbert
Really?
- DRDavid Rosenthal
They're lucky if they're getting any that work. Almost everything coming off the line fails at TI when Morris shows up. So Morris would say about this later, quote, "The supervisor was concerned. The operators were concerned. Everybody was concerned." [laughing]
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
So Morris, remember, he's a mechanical engineer by training.
- BGBen Gilbert
Right.
- DRDavid Rosenthal
So he starts tinkering. He's like, "Well, I know this is a mechanical process, chemical and mechanical process, creating this stuff. I'm just gonna use my training and optimize it like a good mechanical engineer." So he starts doing some stuff. After about four months, he gets the yields at the TI plant up to 20%, so twice as good-
- BGBen Gilbert
Hmm
- DRDavid Rosenthal
... as the first-party line at IBM. And there's a great profile that was one of the main sources for this episode in IEEE Spectrum.
- BGBen Gilbert
Oh, yeah.
- DRDavid Rosenthal
Great industry magazine that we'll quote from here. They write, "Suddenly, even TI President Pat Haggerty knew Morris's name. IBM thought Chang had just gotten lucky, but when the company, IBM, sent engineers down to talk to him, Morris described the theories he'd been testing and explained why his experimental process worked. This achievement propelled him into his first managerial job, creating a germanium transistor development department with 20-plus engineers reporting to him." So this is his first big win here in the foundry business. So on the back of all this, TI is like, "All right, we got a rising star here." They offer to sponsor him to go finally get his PhD. They even offer to continue paying his full salary while he's getting his PhD-
- BGBen Gilbert
What?
- DRDavid Rosenthal
... which they're paying for. [chuckles]
- BGBen Gilbert
All right, so they think, like, very highly of him.
- DRDavid Rosenthal
Very, very highly of Morris. I mean, this one probably made them millions doing this in 1958.
- BGBen Gilbert
It's funny, I don't know anything about the commercial success of that particular IBM mainframe, but if it's the first one that's transistor-based instead of being vacuum tube-based, I have to imagine it was far more efficient for customers. Customers are probably lining up for it.
- DRDavid Rosenthal
I bet there's a lot of demand. And what's Morris making a year? Like $20,000, maybe?
- BGBen Gilbert
Maybe. Yeah.
- DRDavid Rosenthal
You know, how much does it cost to go to Stanford then? Not much, so they're like, "Sure." So Morris goes to Stanford, but he's now like a pig in mud. He has found his calling. He can't wait to get back to Texas, back to TI.
- BGBen Gilbert
Hmm.
- DRDavid Rosenthal
So he finishes his PhD in two and a half years. [chuckles] Wild. One of the Stanford interviews is with John Hennessy, the president of Stanford at the time. John's like, "Morris, tell the students, how did you finish your PhD in two and a half years?" Morris is like: "I don't know, I was focused. I didn't do much else." So by 1964, he's done, he's back at TI, and this is right as people have discovered that silicon is way more cost-effective and scales up way better.
- BGBen Gilbert
And if I remember right, the initial attempts at using silicon were that people didn't know how to work with it yet, and so even though it was more abundant and cheaper, there's some particular manufacturing process that you have to do to silicon in order to make it as viable as it became.
- DRDavid Rosenthal
Yes, how to dope silicon to make it function and produce it at scale as a semiconductor.
- BGBen Gilbert
And listeners, this is where you should start to get the idea that, especially today, manufacturing these products involves the most advanced process in human history, consisting of layers of innovation in chemistry, physics, mathematics. It's breakthrough after breakthrough after breakthrough, all building on top of each other, which need to all happen in the manufacturing process. So even here in, what, 1964, we're starting to get into the level of complexity where it's some of the most advanced science ever done being applied in an engineering and manufacturing fashion to get even marginal results, you know, at 20% yields off the manufacturing line.
- 30:33 – 36:14
Learning-curve pricing: Chang’s business innovation that made TI #1 in ICs
- DRDavid Rosenthal
notices what they're doing, setting up these new plants for all these successive new methodologies and processes of manufacturing, you know, at this point, integrated circuits and silicon and pumping out these chips, it's super expensive to do this, super cost capital-intensive. So what TI and everybody else in the industry did when they would start a new product line that would use a new fab for chips, they charged a lot of money for it, 'cause, like, man, they put a lot of money into these things. So right off the gate, you want the latest new hotness in the end products that TI is selling, they- they're gonna charge a lot of money for them.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
Morris realizes, he's like, "That's not actually optimal to do that," because as evidenced by his first big win at TI with the IBM line, there's a learning curve to getting the yields right and learning how to manufacture a new process, and in the beginning, you're gonna have really low yield. And so what you want, ideally from a fabrication perspective, is you wanna have a ton of volume from the get-go. Like, as soon as the plant is online, you wanna be running at max capacity so that you can, A, learn as fast as possible, get yields up to the profitable levels, and then you wanna still be running at max capacity as long as possible because you already spent the fixed cost-
- BGBen Gilbert
Right
- DRDavid Rosenthal
... to make the plant. Basically, you always want max capacity. So when you started out by pricing so high, you kept demand low, and you-
- BGBen Gilbert
Oh
- DRDavid Rosenthal
... weren't able to get up to capacity fast enough.
- BGBen Gilbert
It's almost like they didn't realize the benefit of the potential operating leverage that they had 'cause they were just passing their exact economics onto their customers and saying, "You basically have to pay us for us to do all these fixed costs, and then you'll get all the benefits of-
- DRDavid Rosenthal
New hotness
- BGBen Gilbert
... how cheap it is to stamp it off the press every time." Whereas, what they really should have been doing is saying, "We will make an investment. You know, we'll eat the cost of having to spin all this up, but boy, are we gonna be super profitable on every chip that comes off the line."
- DRDavid Rosenthal
Yep, totally. So Morris is thinking about this. He hires BCG, and they come up with the idea of actually pricing low to start to drive this volume and speed up the yield curve, and then also the side benefit of that is if they're pricing low and everybody else is pricing high, they're gonna grab [chuckles] a ton of market share and probably keep it.
- BGBen Gilbert
Ah, paying consultants.
- DRDavid Rosenthal
I know. Well, so here's Morris's quote about this. He says, "This was in the late '60s, and Boston Consulting Group was a very small outfit when we did this."
- BGBen Gilbert
Mm.
- DRDavid Rosenthal
"And we used loads of data, a lot of theory, and a lot of effort. The result was so-called learning curve pricing. So start low and then continually automatically reduce the price every quarter, even when the market did not demand it. And this was a very successful effort, even though it was somewhat controversial. A lot of people thought we were being foolish. 'Why would you reduce the price when you didn't have to?' But we did it because we believed in it, and indeed, our market share just kept expanding. That, combined with other strategies, made the TI integrated circuits business the biggest IC business in the world and also the most profitable." This is right when Intel's getting founded, so screw Fairchild, screw National, screw Int- like, TI is kicking all of their butts, [chuckles] and it's thanks to Morris.
- BGBen Gilbert
And interestingly enough, the reason I always thought that Fairchild was sort of so successful in those days was out of all the defense spending and research that was being done at Stanford, the government as a customer, but is Texas Instruments playing in that ecosystem at all?
- DRDavid Rosenthal
Good question. Probably. I mean, I think this is a case of the rising tide is floating all boats. Yeah, Fairchild's killing it, Intel's killing it, National's killing it. TI's just killing it bigger than anybody else. [chuckles]
- BGBen Gilbert
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- DRDavid Rosenthal
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- BGBen Gilbert
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- DRDavid Rosenthal
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- BGBen Gilbert
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- 36:14 – 42:51
TI derailment: leadership track breaks, MOS transition misses, and the IBM PC CPU loss
- DRDavid Rosenthal
Thank you, Vanta. So on the back of this, Morris gets promoted to VP at TI, one level below the CEO, running the entire semiconductor business.... that happens in 1972 and he becomes the obvious leading candidate to be the next CEO-
- BGBen Gilbert
Hmm.
- DRDavid Rosenthal
-of TI, which he's like, "Yeah, [chuckles] I wanna do that."
- BGBen Gilbert
Yeah.
- DRDavid Rosenthal
"I'm focused. This is what I love. This is my goal."
- BGBen Gilbert
This is why I've been going to the bar for three years reading a textbook. [chuckles]
- DRDavid Rosenthal
Exactly. But it might be fair to say history turns on a knife point. Things don't entirely go as planned. Three different viewpoints, as far as I could identify, on what happens next to Morris at TI. He does not become the next CEO, obviously. Viewpoint number one is simply and probably fair that he was just discriminated against because he was ethnically Chinese, although at this point, I'm pretty sure already he was an American citizen, but-
- BGBen Gilbert
Hmm.
- DRDavid Rosenthal
Anyway, and he got passed over for... I have no evidence for it, but not be at all surprised that that was part of what was going on.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
So that's one. Two, second point, which Morris totally acknowledges, TI was a really big company, the semiconductor division. He had made it [chuckles] probably the most successful and the most fastest rising division within the company. But you mentioned calculators.
- BGBen Gilbert
Mm-hmm.
- DRDavid Rosenthal
They were starting to launch the consumer products-
- BGBen Gilbert
Hmm
- DRDavid Rosenthal
... division at this time. And so in 1978, so six years he's running the semiconductor division as VP, they move him over to VP of Consumer Products in 1978 because this was a big new strategic initiative, and it wasn't going super well, and they're like, "Oh, Morris is a great manager. He can fix this-
- BGBen Gilbert
Ah, true
- DRDavid Rosenthal
... and turn it around."
- BGBen Gilbert
Different set of competencies, though.
- DRDavid Rosenthal
Yeah.
- BGBen Gilbert
I mean, you need, like, marketing.
- DRDavid Rosenthal
Yeah. Here's Morris's quote on this: "Mark Shepherd, then chairman and CEO of TI, agreed with the prevailing wisdom at the time that a good manager could manage anything. In this case, I think he was wrong. I found the consumer business [chuckles] to be very different," like you were saying. "The customer set, completely different. The market, completely different. And what you need to get ahead in that business is different, too. In the semiconductor business, it's just technology and costs. In consumer, technology helps, but it's also the appeal to consumers, which is a nebulous thing." [chuckles] Not Morris' strong suit, or at least not anything he's trained in.
- BGBen Gilbert
Yeah, that makes total sense.
- DRDavid Rosenthal
So in 1983, five years after he gets moved over to take over the consumer business, he hasn't turned it around, it's still struggling, he gets demoted to, quote, "Head of Quality and People Effectiveness," which is pretty much a slap in the face.
- BGBen Gilbert
Yeah.
- DRDavid Rosenthal
Like, this dude built your semiconductor business.
- BGBen Gilbert
Is this when he says he was put out to pasture?
- DRDavid Rosenthal
Exactly. So that's number two. Here's number three. I found some evidence on this. It's unclear to me how much of this is Morris's fault versus his successor, but while Morris was definitely responsible for making TI Semiconductor a powerhouse, at some point towards either at the end of his tenure running it or under his successor, they totally dropped the ball, and this is when Silicon Valley in California takes over. So in the mid-'70s, the semiconductor industry transitioned over to the metal oxide process, the MOS. You ever hear about MOS, MOS-
- BGBen Gilbert
Yeah
- DRDavid Rosenthal
... semiconductors?
- BGBen Gilbert
The precursor to CMOS.
- 42:51 – 50:43
General Instrument and the end of a US CEO dream—then an unexpected call from Taiwan
- DRDavid Rosenthal
That's the- he wanted to be CEO of TI. That didn't happen. Like, he wants to be CEO, but he whittles it down to two opportunities he's gonna consider. One is to go to a competitor called General Instrument, which people may have heard of, another one of these old chip companies. It was based in New York, in Manhattan, in New York City, actually-
- BGBen Gilbert
Mm
- DRDavid Rosenthal
... to go be their COO, the number two there, with an understanding that, like, "Hey, if things go well, in a couple of years, you'll replace the CEO, become the CEO there," or to become a venture capitalist.
- BGBen Gilbert
Really?
- DRDavid Rosenthal
Yeah.
- BGBen Gilbert
No way.
- DRDavid Rosenthal
So he was weighing the two. I don't know where or how, I couldn't find that out, but he was weighing these two opportunities. The VC idea is gonna come back up in a big way in a second, but obviously he goes with General Instruments, GI. A, his dream is to be CEO. B, he's got this chip on his shoulder from the way TI ended, so-
- BGBen Gilbert
Yep
- DRDavid Rosenthal
... Great. So he goes off to New York, you know, he leaves Texas, lives in Manhattan, things are gonna work out at GI. The thing though is GI had a very [chuckles] different culture than TI. You know, TI was this research, build, develop technology, push the ball forward. GI is this New York-based... They were almost like, at the time, like a proto-tech private equity firm. Their strategy was, they just acquired lots of-
- BGBen Gilbert
Oh, yeah
- DRDavid Rosenthal
... different semiconductor businesses, either independent companies or divisions from other companies.
- BGBen Gilbert
And try and integrate them.
- DRDavid Rosenthal
No, they would acquire them, they would get these business units into good shape, and then they'd sell them again.
- BGBen Gilbert
Oh, really?
- DRDavid Rosenthal
Yeah, they were like [chuckles] ...
- BGBen Gilbert
Ah
- DRDavid Rosenthal
Literally, they were like a financial engineering firm-
- BGBen Gilbert
Huh
- DRDavid Rosenthal
... basically. Definitely not Morris' [chuckles] cup of tea. So he only stays there a year. It's clear that's not a good fit, so he resigns again. So within less than 18 months, he's had two major setbacks. Basically, you know, his dream is over. Like, here's the quote from him. He says: "After these two setbacks at TI and GI, I did not think that my aspiration to be the CEO of a major US company was in the cards." Well, turns out he was right. He was not going to be the CEO of a major US company. So how do we go from this dude in his mid-50s, former rising star, now washed up, from that to he's in Taiwan, he's CEO of TSMC? I don't think you could ever script this out. I think this is probably the most unique-- Every founding story is unique, but I think this might be the most unique founding story we've had on Acquired so far. So back when Morris was at TI, when he was running the semiconductor business there, he went over to Taiwan a couple times to talk about building a manufacturing plant there. TI would own and build the manufacturing plant, but outsource to Taiwan. Not like a TSMC-style business, like as a TI plant there. Anyway, he had no connection to Taiwan. Remember, he's Chinese. He's not from Taiwan. People are like, "Oh, Morris, you went back to Taiwan." He didn't go back to Taiwan.
- BGBen Gilbert
Yeah, he talks about how Taiwan was a strange land to him when he first got there, that it's not going back. So it's not the land is a strange place to him, but if he is gonna call some place home and return there, is it the People's Republic of China?
- DRDavid Rosenthal
Well, I think he would say at this point, it's America. He's been in America for 30 years.
- BGBen Gilbert
That's a great point.
- DRDavid Rosenthal
He's a US citizen. Well, I don't know what he would say. It's complicated. So anyway, so he had met a bunch of government officials in Taiwan when he was talking about building this plant over there, and that was back in the '70s. Now we're in the '80s, mid-'80s. Taiwan, at this point, it's a manufacturing nation. You know, they have no IP, [chuckles] they have no technology.
- BGBen Gilbert
Okay, the quote's great. All right, so this is Morris: "We had no strength in research and development, or very little anyway. We had no strength in circuit design, IC product design. We had little strength in sales and marketing," and this is, of course, referring to Taiwan as a nation, "and we had almost no strength in intellectual property. The only possible strength in Taiwan that we had, and even that was just a potential one, not an obvious one, was semiconductor manufacturing, wafer manufacturing. And so what kind of company would you create to fit that strength and avoid all the other weaknesses? The answer was a pure-play foundry."
- DRDavid Rosenthal
Yeah, I mean, that was Taiwan at the time. So to give you a sense, the average gross margin of a Taiwanese company at this point in time in the mid-'80s is 4 to 5%, zero four to zero five percent gross margin.
- BGBen Gilbert
Gross, before you even have overhead operating costs.
- DRDavid Rosenthal
Yeah, I mean, it was like, um, you know, if you were, uh... grew up around when Ben and I did, you know, sort of born in the '80s in the US, you see "Made in Taiwan" on everything like-
- BGBen Gilbert
Right
- DRDavid Rosenthal
... you know, Barbie dolls, toys, clothes, everything was made in Taiwan. You know, now it's made in China or made in Vietnam or elsewhere, but made in Taiwan was super low-end physical manufacturing stuff.
- BGBen Gilbert
Yeah, and to way pull forward, the Seven Powers section, as Hamilton Helmer would sort of explain, if your margins, particularly your gross margins, are only 4 or 5%, you're in an industry or a business where all the profits are arbitraged away, and everyone's just race to the bottom on prices, and no one's able to build any real enterprise value because everyone's just out-competing each other for pure commodity.
- 50:43 – 58:13
From ITRI to TSMC: the ‘Godfather offer’ and inventing the pure-play foundry
- DRDavid Rosenthal
Yeah, totally. Totally. So 1985, he goes over, he takes over as president of ITRI. It's kind of a culture clash. [laughing]
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
So this is retirement for Morris, but he's still coming from this hard-charging industry. All of the employees of ITRI are people in government jobs in Taiwan, and government jobs, mm, not even, you know, in, like, a democracy, 'cause Taiwan is, like... It's under martial law, [chuckles] or I think that it just ended. You know, this is not the same... You know, this is, like, jobs for life, you're a government official in a non-democracy type organization.
- BGBen Gilbert
Right.
- DRDavid Rosenthal
Morris says, "Back then, they considered me a foreigner who suddenly became their boss. They were scared of me," and they were right to be scared of him. [chuckles] So there was one thing, though, that the government had done right before Morris showed up, which was they had successfully negotiated one technology transfer license in the semiconductor industry from... Did you find out what company this was? This is probably what they were trying to negotiate with TI for.
- BGBen Gilbert
I, too... It's a three-letter acronym, isn't it?
- DRDavid Rosenthal
Oh, yep. Yep, yep, yep. We haven't talked much about it on this show, but this is another-
- BGBen Gilbert
Yeah, who was it?
- DRDavid Rosenthal
Talk about captains of American industry, RCA.
- BGBen Gilbert
RCA, that's right.
- DRDavid Rosenthal
Yeah, so RCA [chuckles] had a semiconductor line, and the government in the '70s, the Taiwanese government, had negotiated a tech transfer [chuckles] from RCA.
- BGBen Gilbert
But this is, like, 10-year-old-
- DRDavid Rosenthal
Yeah
- BGBen Gilbert
... semiconductor technology, right?
- DRDavid Rosenthal
Yeah.
- BGBen Gilbert
This is not, like, the latest generation.
- DRDavid Rosenthal
No. TI, and Intel, and everybody, like, you know, and Fairchild, they're, you know, National, they're leading the way. They're at the bleeding edge of semiconductor manufacturing process. RCA was already at least a generation behind. By the time it actually gets onto the ground in Taiwan, they're two and a half generations behind-
- BGBen Gilbert
Wow
- DRDavid Rosenthal
... the leading producers.
- BGBen Gilbert
So it's like the only thing that you could do with that is-
- DRDavid Rosenthal
Super low-end stuff.
- BGBen Gilbert
Right. There are some category of goods that don't need a fast or the latest processor, and-
- DRDavid Rosenthal
Totally.
- BGBen Gilbert
Yeah.
- DRDavid Rosenthal
Even today, when TSMC, or Intel, or Samsung, or whoever builds a fab, the leading-edge fabs, they produce the leading-edge stuff for a while, and then the new generations come on. They don't shut down the old ones.
- BGBen Gilbert
Right.
- DRDavid Rosenthal
It's just chips that don't need the same bleeding-edge performance-
- BGBen Gilbert
Yep
- DRDavid Rosenthal
... they keep getting made on the old ones.
- BGBen Gilbert
And often, that's automotive or now what we think of as IoT, but the stuff in your smartphone obviously is the-
- 58:13 – 1:13:51
Funding the ‘bad idea’: Philips backing, forced local capital, and the shocking $0 pre-money
- DRDavid Rosenthal
No. No, no, no, no, no. Far the opposite of that. You know, we said a minute ago, this is a bad idea. So Morris says... Now, however, there was one problem with the pure-play foundry model, and it was a fatal problem. [laughing]
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
It could be a fatal problem, which was, where's the market? He sounds like Don Valentine here. "Where's the market? Show me the market!" This whole idea, it was really a solution looking for a problem.
- BGBen Gilbert
And, of course, the solution being that all we have is manufacturing capability here, so let's start a company that just manufactures. And it's like you're looking around like, "Okay, whose-
- DRDavid Rosenthal
You got Jerry over at AMD
- BGBen Gilbert
... stuff are we gonna manufacture?"
- DRDavid Rosenthal
... who's like, "Real men have fabs."
- BGBen Gilbert
Yeah.
- DRDavid Rosenthal
You know, there are no real startup- I mean, there are startups, but all these startups are building their own fabs. Like, nobody wants to do this. So nonetheless, you know, he has to [chuckles] start a company. He's literally got a gun to his head.
- BGBen Gilbert
But he does have the core insight here. It's interesting. These companies don't exist yet, but Morris has reason to believe that people will wanna start fabless chip companies, and that they will need a foundry to fab those chips. And so he says, "When I was at TI and General Instrument, I saw a lot of integrated circuit designers wanting to leave and set up their own business, but the one thing, or the biggest thing, that stopped them from leaving those companies was they couldn't raise enough money to form their own company." Because at the time, as we were just saying, real men, it was thought that every company needed manufacturing, needed their wafer manufacturing, and that most capital-intensive part of a semiconductor company, of an IC company, does the manufacturing. "And so I saw those people wanting to leave but being stopped by the lack of ability to raise a lot of money and build a wafer fab."
- DRDavid Rosenthal
Totally, right? But those companies, this, like, if you build it, they will come. [chuckles]
- BGBen Gilbert
They haven't started yet. [chuckles]
- DRDavid Rosenthal
They haven't come yet.
- BGBen Gilbert
Yeah. [chuckles]
- DRDavid Rosenthal
They haven't come yet. So Morris, he knows what the long-term market is gonna be, but he's gotta find the short-term market. He needs some, like, real politic here. Like, so what's that gonna be? So he says, "Well, maybe I can go around to the big guys. They've been doing, you know, just like my first thing back at TI, they've been doing some line sharing, you know, for either new products that they need excess capacity for or for older products that they need to transition some fabs, but they still need to make components. Maybe I can take some of that off their hands." And so he goes around, and he talks to Intel, he talks to TI, he talks to everybody in the industry, and they're like, "Yeah..." He talks to Motorola, like, "Sure, fine." And the government had told him-... We know it's gonna take a lot of money to set up a fab. We're good for half of it, but you gotta go raise the other half of it, and we want you to raise it from, like, an Intel or a TI, you know, somebody who's gonna be your first customer, and that they're gonna be bought in." So he does the rounds, he goes and talks to everybody. He gets meetings with Intel, he gets meetings with TI. They're both like, "You know, Morris, we like you, but no." [laughing] So he's at the last-ditch effort, and he has a meeting with Philips, the Dutch company. They have a semiconductor business. [chuckles] And this- so Morris, he has a great quote about this. He says he would describe Philips as, "The first rung of the second raters- [laughing]
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
... in, in semiconductors," but they were the only interested option. So they put up 28% of the capital, government puts up 50%. It ends up being $220 million in total.
- BGBen Gilbert
The 110 is probably a lot more than what the Taiwanese government-
- DRDavid Rosenthal
Yeah [laughs]
- BGBen Gilbert
... thought they were gonna be buying here.
- DRDavid Rosenthal
And I think they were. And then, literally, the premier of Taiwan, like the head of the government, has to then go around to all the other business leaders in Taiwan and, like, strong-arm them into- [laughing]
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
... investing the rest of it, the other, what is that? 22%, I guess.
- BGBen Gilbert
Yeah. We also should say, remember that Philips was a Dutch company, 'cause that's gonna come into play later.
- DRDavid Rosenthal
Ooh, I don't know how that's gonna come into play.
- BGBen Gilbert
Yeah, putting a pin in Dutch.
- DRDavid Rosenthal
Oh, okay, we got a surprise coming. I'm gonna be surprised here. We're doing it real time, doing it live. This may be the craziest part about the whole TSMC founding story. I'm 99.9% sure, Ben, you do not know this.
- BGBen Gilbert
Ooh.
- DRDavid Rosenthal
Do you know what the pre-money valuation was on TSMC?
- BGBen Gilbert
No, I couldn't find that anywhere.
- 1:13:51 – 1:18:01
Creating the fabless era: surviving on IDM ‘dregs’ until startups arrive
- DRDavid Rosenthal
With Intel and DEC in the middle. [laughing] Wow. Okay, so back to TSMC. The short-term market is Morris basically begs all of his old colleagues in the US and European and Japanese semiconductor industries to just give the dregs to TSMC, and it really was the dregs. So here's Morris on what this was: "The IDMs would let us manufacture their wafers only when they didn't have capacity or when they didn't want to manufacture the stuff themselves anymore. Now, when they didn't have the capacity and asked us to do the manufacturing, then as soon as they got the capacity, they would stop giving us orders. So it wasn't a stable market. When they didn't-
- BGBen Gilbert
So it wasn't actually a thing they wanted to outsource. They were just using them-
- DRDavid Rosenthal
No, it's just like-
- BGBen Gilbert
... for available
- DRDavid Rosenthal
They didn't have the capacity, so they needed some extra excess space, but then when they got the capacity online, they took it away.
- BGBen Gilbert
Right.
- DRDavid Rosenthal
And then the chips that they gave us that they didn't wanna make anymore, well, the reason they didn't wanna make it was it was [chuckles] losing money. So they basically were just transferring their losses on producing these chips-
- BGBen Gilbert
Ugh
- DRDavid Rosenthal
... to TSMC.
- BGBen Gilbert
So how did they get out of this?
- DRDavid Rosenthal
So Morris continues, "The conventional conclusion at the time was that there was no market. That's why the pure-play foundry idea was so poorly thought of. What very few people saw, and I can't tell you that I saw, was the rise of the fabless industry. I only hoped for it." And then, as you said, "But I had better reasons for hoping for it than the people at Intel, at TI, and Motorola because I was now standing outside. When I was at TI and General Instrument, I saw a lot of these IC designers wanting to leave, start their own businesses-
- BGBen Gilbert
Mm
- DRDavid Rosenthal
... and the constraint was setting up their own fabs." So, like, yes, he saw that at TI, but remember, he had been considering becoming a VC instead of going over to Itri. [chuckles]
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
So this is the ultimate end-around. He becomes essentially, like, the world's best semiconductor VC. He takes an index out on the whole future-
- BGBen Gilbert
Mm
- DRDavid Rosenthal
... innovation and entrepreneurship market in semiconductors by becoming the platform that they're gonna build on-
- BGBen Gilbert
Right
- DRDavid Rosenthal
... instead of, [chuckles] like, going and investing in them, like, he enables all of it. He's like the Y Combinator of semiconductors.
- BGBen Gilbert
Right, or in many ways, the Tencent. Tencent, of course, also does direct investing, but the idea that you could get distribution through WeChat-
- DRDavid Rosenthal
Yep
- BGBen Gilbert
... it's kinda like it's not distribution, but it is manufacturing. There is a thing that you have to raise 10 to 20% of the capital that you otherwise would have needed to raise if TSMC exists.
- DRDavid Rosenthal
Yep. And just like Don Valentine, uh, you know, kind of when he left to go join VC a generation earlier, and again, this is not VC, it's TSMC, it's building the platform, but Morris is a hero, so all these engineers, they all look up to him. And he knows a lot of them personally. The ones he doesn't know, like, who's not gonna take a meeting with Morris Chang, right?
- BGBen Gilbert
He almost ran TI.
- DRDavid Rosenthal
Totally, like, he did all this amazing stuff.
- BGBen Gilbert
It's interesting because it's like with the incumbents, of course, because they had it in their DNA to be a manufacturer, of course, they wanted to take the most profitable things and manufacture them in-house. But if you actually are betting on all these startups that will never develop DNA to be their own manufacturer, they never wanna take that back.
- DRDavid Rosenthal
Yeah, and so Morris is now going out and evangelizing, and he's like all these crazy scientists, like, "We're an option for you now. Like, you wanna leave, you wanna start your own company, you don't need a fab. We'll be your fab." You know, it takes a couple years. For a couple of years, TSMC has to survive on the dregs from the IDMs, the big guys. But after a couple of years, these startups get going. You know, little companies like Qualcomm, Broadcom, Marvell, [chuckles] Nvidia, these are all started with TSMC.
- BGBen Gilbert
Nvidia was started in 1993, only ever raised $20 million-
- DRDavid Rosenthal
$20 million
- BGBen Gilbert
... and never opened their own fab.
- 1:18:01 – 1:30:06
The flywheel and the hard-tech moat: CapEx, ASML/EUV, and leading-edge consolidation
- DRDavid Rosenthal
So this is what's super cool. I don't think Morris saw this. Like, this even exceeds his wildest dreams. He was hoping for this fabless market to take off, but this creates this insane flywheel for TSMC. So the fabless market starts to grow, which they're like seeding and enabling it. As that happens, TSMC's revenue grows.
- BGBen Gilbert
And because they have 50% gross margins and 40% operating margins, they can take that profit and buy-
- DRDavid Rosenthal
Plow it
- BGBen Gilbert
... more advanced machinery.
- DRDavid Rosenthal
Plow it back into CapEx and, and-
- BGBen Gilbert
Build more fabs
- DRDavid Rosenthal
... advance the level of their technology. Remember, they were starting from behind on technology. Within about 10 years, they catch up, and then they start to exceed [chuckles] everybody else. So as they push the manufacturing process technology forward, they're manufacturing better chips with smaller wave, you know, process lengths. They're enabling their customers, which are the fabless companies, to get better and better performance. As they get better performance, the fabless companies can address more of the market and more-
- BGBen Gilbert
Mm
- DRDavid Rosenthal
... use cases. So their existing customers get bigger, and new fabless customers start, which gives them more revenue, [chuckles] which repeats the whole cycle. And, you know, it goes slowly. Like any flywheel, it takes a lot of effort and a lot of time to start turning it. But fast-forward to now, so in the early 2000s, when TSMC finally caught up-... to the bleeding edge level of technology with other semiconductor companies. There were 22 companies that were at the leading edge. I think it was like, I don't know, let's call it 150 nanometer process or something like that at that point in time. 22, and TSMC finally broke into the pack. They were one of the 22. By the late 2000s, it had gone from 22 down to 14 that were at the leading edge. By the mid-2010s, there are six.
- BGBen Gilbert
It's basically Samsung and TSMC, right?
- DRDavid Rosenthal
Today, there are two. A five nanometer process is the current leading edge, only TSMC and Samsung. Intel has been trying to get there, but they haven't been able to. They've fallen behind, and the next process is gonna be three nanometers. TSMC's gonna launch that next year. Samsung-
- BGBen Gilbert
Which, by the way, just slipped six months.
- DRDavid Rosenthal
Ah, interesting. Well, Samsung has already slipped to 2024.
- BGBen Gilbert
Whoa!
- DRDavid Rosenthal
So very likely in the next process, it's just gonna be TSMC.
- BGBen Gilbert
Which means that you will see that on an Apple slide somewhere announcing the next iPhone, talking about how it's a three nanometer-
- DRDavid Rosenthal
Three nanometer, yep
- BGBen Gilbert
... process. They'll take all the credit for it, and TSMC's totally fine with that because their job is not to market, it's to empower their customers.
- DRDavid Rosenthal
This flywheel, it's just unreal what happens here. They run the table on the whole industry.
- BGBen Gilbert
It is interesting. The industry went from vertical to horizontally integrated, where the very best products in the market became horizontally integrated. And it's interesting how... I'm trying to figure out what drove that, because at some point, I guess there's a couple components to it. One is the speed at which Moore's Law happens makes it such that you can't be good at everything. You can't be good at everything from EDA to making the manufacturing equipment, to running the manufacturing process, to designing the chips. You're not gonna write your own instruction set architecture. People did need to break into best of class.
- DRDavid Rosenthal
Oh, Morris has got this great quote about this that I have in here. So he says, "The semiconductor business is like a treadmill that speeds up all the time. If you can't keep up-
- BGBen Gilbert
Mm
- DRDavid Rosenthal
... you fall off, and that's Moore's Law." From 22 down to two, down to one, even when their competitors are only doing the one thing that TSMC has done, like, if you fall behind by a step, you're toast.
- BGBen Gilbert
Right, and it's because there's this big part of it that you're talking about that hasn't come up on other episodes, 'cause we tend not to talk about companies that require a lot of manufacturing prowess. But in order to stay on that treadmill, the number of tens of billions of dollars that you need to be spending into CapEx is going up. So you need to be enormously profitable so you can build the factories for the next generation.
- DRDavid Rosenthal
Yeah, I mean... Well, there's two things. So yes, that is 100% true, and the scale of this now, I mean, TSMC just announced they're gonna spend $100 billion in CapEx over the next three years, $30 billion this year, 60 over the next two, and I bet that keeps going up. So that's a lot of billions. You might even say, like, this is so strategically important, and people are talking about this. Certainly, China's talking about this. The US government's now talking about this. Governments might need to come in with a bazooka of money and create other options, 'cause almost all their manufacturing is in Taiwan. It's in this strategically, geopolitically challenged location. We need to re-onshore some of this in the US. China, of course, wants their own. You can't just spend the money and do this. The US government could come in and say, "We're gonna spend a trillion dollars this year to do this." They can't do it because we're gonna get to powers later, but there's this marriage of scale, economies, and process power that TSMC, like, in this industry. There is no amount of money you could spend to catch up next year. You can't, because the engineering is so hard, and the learning curve takes decades to get to this point. I was listening to a podcast, a Bloomberg Odd Lots podcast about this, where they were talking about this, and their reporter who covers TSMC, who's great. China, they were asking the question, like, the, well, China could just spend a billion dollars and do this, create their own fabs, and they're doing this.
- BGBen Gilbert
What's the company called? SMIC, SMIC.
- DRDavid Rosenthal
Uh, SMIC, yeah.
- BGBen Gilbert
It's the Chinese-
- DRDavid Rosenthal
SMIC, yep.
- BGBen Gilbert
'Cause basically, TSMC seems to have picked a side in the US-
- 1:30:06 – 1:41:38
Third act: Morris returns, seizes mobile (and later cloud/AI), and lands Apple
- DRDavid Rosenthal
Uh, 2008. Well, first, we'll stop in 2005. So 2005, you know, things are going well, better than Morris ever imagined. These fabless companies are getting started. Nvidia is killing it. I mean, I was making gaming PCs at the time. I wanted those Nvidia GPUs.
- BGBen Gilbert
But Nvidia wasn't a top 20 stock in the world.
- DRDavid Rosenthal
No. I mean, Intel was like, "Pfft, Nvidia, come on."
- BGBen Gilbert
Right.
- DRDavid Rosenthal
"Real men have fabs." [laughing]
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
Like... Okay, maybe we're beyond that part, but they were making GPUs. Like, Nvidia's stock tracked whether they won the next Sony contract for the next PlayStation-
- BGBen Gilbert
Right
- DRDavid Rosenthal
... or the Xbox. Like, that-
- BGBen Gilbert
That was the market for GPUs.
- DRDavid Rosenthal
That was the market. Right. You know, great market, but it's not what we're talking about here.
- BGBen Gilbert
It's not about machine learning-
- DRDavid Rosenthal
No
- BGBen Gilbert
... it's not about crypto. It's like, "Is the next PlayStation gonna include your chip or not?"
- DRDavid Rosenthal
Totally. But still, great for TSMC. It's awesome. 2005, Morris is 74 years old. He's like, "All right, I did it. I've been buying TSMC stock with my own money. It's done well enough. I don't really need to work anyway. [sighs] I'm gonna call it."
- BGBen Gilbert
Gonna retire.
- DRDavid Rosenthal
Ready to retire, ready to ride off into the sunset. He hands the reins of TSMC over to his longtime lieutenant, Rick Tsai, and he retires. He spends a couple years, he's just chilling. I don't know what he's doing. He's, he loves literature. He's, like, reading all sorts of stuff. He's on his second marriage, which he credits his second wife for really reinvigorating him and inspiring him. Then it's summer of 2009.
- BGBen Gilbert
By the way, that's right around the time that people were starting to speculate that EUV might work.
- DRDavid Rosenthal
Oh, interesting!
- BGBen Gilbert
All this had been kind of an idea to this point.
- DRDavid Rosenthal
They'd been science projects before.
- BGBen Gilbert
Yes.
- DRDavid Rosenthal
Oh, cool, I didn't realize that.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
Oh, well, this is gonna make what happens even more sense.... The financial crisis had happened in 2008.
- BGBen Gilbert
Mm-hmm.
- DRDavid Rosenthal
And you know, chaos everywhere. We've talked about it lots on this show. Surprise press conference, TSMC, summer 2009. They announce that Morris is returning to lead TSMC as CEO. Rick is out. Morris is coming back for the third act of his career. I don't even know what number he's wearing. He's not 45, 'cause that was, you know, the second act. He's like Jordan. He's beyond Jordan at this point. Coming back, he's gonna be CEO again at age 78. Rick would actually have a second act himself. Do you know what Rick is doing now?
- BGBen Gilbert
No.
- DRDavid Rosenthal
Rick is CEO of MediaTek-
- BGBen Gilbert
Oh!
- 1:41:38 – 1:53:00
TSMC today: financial compounding, pricing power, and a ‘winner-take-all’ cost curve
- DRDavid Rosenthal
Wow. So that was 2018, so I mean, let's talk about now. So 2020, TSMC, we've alluded to this, operating profit of $20 billion on $48 billion of revenue. They took 17 of the $20 billion in operating profit and plowed it all back into CapEx last year in 2020. Beginning of this year, January 2021, they give guidance that they will raise CapEx from 17 last year in 2020 to 25 to 28 billion in 2021. In April of this year, 2021, they raised it again to 30 billion forecast for the year and 100 billion over the next three years. That's like the real shot across the bow that everybody wakes up, the financial markets wake up, and they're like, "Holy crap, TSMC has cornered the market. Even Samsung's not gonna be able to keep up with this." It's wild.
- BGBen Gilbert
All right, listeners, it is time to talk about one of our favorite companies, Statsig. It's funny, David, Statsig has gone from this little startup when we first started working with them a couple years ago to this total powerhouse now.
- DRDavid Rosenthal
I know, it's wild. I was looking it up, and they have added all these customers since we started working together: OpenAI, Figma, Atlassian, Vercel, Notion, tons more. At this point, if there's a growth stage tech company out there, there's a pretty good chance they're using Statsig.
- BGBen Gilbert
Yep. So listeners, if you are unfamiliar with Statsig, they basically took what was the standard product infrastructure at every big tech company, and they built it as a standalone company. This includes advanced experimentation tools, A/B testing, feature flags, product analytics, session replays, and more. So if you're building the next great software company, this sort of infrastructure is essential because it allows your product and engineering teams to release things quickly, measure the impact of them, and track progress over time.
- DRDavid Rosenthal
Totally. So, I mean, as we've talked about on the show forever, at companies like Facebook or Netflix, data was just a part of how everything was built, which contributed to all the crazy bottoms-up organic growth that they had. Now, with Statsig, you can get that from day one at your startup, and today, they're not only trusted by startups, but also by more mature enterprises like Bloomberg and Microsoft and Electronic Arts. Turns out that a single system for data-driven product decisions is useful at any scale.
- BGBen Gilbert
... Yeah, and by the way, the scale they're operating at is completely insane. They process over two trillion events per day now. By the way, David, this is updated. The last I checked, it was one trillion, and then this morning, I pulled it up, two trillion. And they handle releases to billions of end users. If you're listening to this podcast, and you've used software in the last few years, there is a very good chance you've been a part of many experiments orchestrated by Statsig.
- DRDavid Rosenthal
Yeah, it's just awesome. And as they've gone upmarket, they've also started to offer some interesting deployment models, like being able to run the whole thing natively inside your existing data warehouse or just using Statsig's fully hosted solution.
- BGBen Gilbert
If you want to leverage Statsig to grow your business, there are a bunch of great ways to get started. Statsig has a very generous free tier for small companies, a startup program with a billion free events, that's $50,000 in value, and significant discounts for enterprise customers. To get started, go to statsig.com/acquired, and just tell them that Ben and David sent you.
- DRDavid Rosenthal
Thank you, Statsig.
- BGBen Gilbert
So more on today, David-
- DRDavid Rosenthal
Yeah.
- BGBen Gilbert
TSMC today.
- DRDavid Rosenthal
Well, okay, so speaking of data, I think this is the data point [chuckles] that really kind of says everything. So since the first IPO in Taiwan in 1994, TSMC has had compound annual revenue growth of 17.4% for 20-
- BGBen Gilbert
Revenue?
- DRDavid Rosenthal
... seven years. Revenue growth. 17.4%-
- BGBen Gilbert
Wow!
- DRDavid Rosenthal
... compounded for 27 years. Now, the IRR, the equivalent on valuation, on market cap, so it was four billion market cap at the Taiwan IPO in 1994. Today, it is $550 billion, so that is a 19.9% IRR, starting from a $4 billion base over the last 27 years. So 20% IRR over 27 years, incredible by any means, starting from a $4 billion base. It is now currently, as we record, the ninth most valuable company in the world.
- BGBen Gilbert
And I think other than Saudi Aramco, it is the only company in the top 10 that we haven't done on Acquired.
- DRDavid Rosenthal
Ooh, interesting. Yeah, the US oil companies are no longer-
- BGBen Gilbert
Correct
- DRDavid Rosenthal
... in the top 10.
- BGBen Gilbert
But Berkshire is-
- DRDavid Rosenthal
That might be foreshadowing some future episodes-
- BGBen Gilbert
Hey-o
- DRDavid Rosenthal
... this season. Ooh!
- BGBen Gilbert
I mean, they're in hallowed grounds at this point. The other thing that, just talking about financials today, so crazy that they grew 31% in revenue from 2019 to 2020.
- DRDavid Rosenthal
They doubled their CAGR from 2019 to 2020.
- BGBen Gilbert
Yeah, it's nuts. [laughs]
- DRDavid Rosenthal
Talk about accelerating growth.
- BGBen Gilbert
Okay, so in 2020, their adjusted net income was $17 billion. How are they gonna go spend 100 billion over three years? Is that gonna be out of profits of each of those years, or do you think they're doing some kind of financing?
- 1:53:00 – 2:27:49
Moats, geopolitics, and the playbook: Seven Powers, Taiwan risk, and Intel ‘what-ifs’
- DRDavid Rosenthal
Yeah. Should we do power now?
- BGBen Gilbert
Absolutely. Let's do it.
- DRDavid Rosenthal
Let's do it. So for folks new to the show, this is one of the discussion topics we do for every episode, is we go through Hamilton Helmer's excellent Seven Powers.
- BGBen Gilbert
The best business theory book.
- DRDavid Rosenthal
Totally. We've had Hamilton on the show. He's amazing. Go read the book if you haven't. He identifies seven powers, essentially sources of defensibility, which he defines as long-term differential profit margins versus your competitors, as we've been talking about [chuckles] on the whole show.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
The seven that he identifies are counterpositioning, scale economies, switching costs, network economies, process power, branding, and cornered resources. And we almost always talk about network economies. We talk about counterpositioning on this show. Sometimes we-
- BGBen Gilbert
I think we talk about branding.
- DRDavid Rosenthal
Sometimes we talk about branding.
- BGBen Gilbert
I think we're talking about none of those this time.
- DRDavid Rosenthal
Yeah. We sometimes talk about scale economies, which we're gonna definitely talk about here, but I think we're gonna have our first process power if, uh, I'm gonna forecast. But let's start. Let's go down the list. Counterpositioning. Eh, I mean, like, maybe you could-
- BGBen Gilbert
When they were starting, and in particular, would the incumbents have started with the exact business model? No, because their profit center was the integration, the... all the margin you get of integrating design and manufacturing, and by saying, "Nope, we're gonna be a pure-play manufacturer," TSMC theoretically was saying, "No, we're gonna take less gross margin, and we're just gonna make it up in volume." I'm actually not sure it played out that way.
- DRDavid Rosenthal
Yeah.
- BGBen Gilbert
I think they have more... Do you know what Intel's gross margins are?
- DRDavid Rosenthal
I actually don't know.
- BGBen Gilbert
Hmm.
- DRDavid Rosenthal
I would suspect they're higher, but I don't know.
- BGBen Gilbert
Right.
- DRDavid Rosenthal
Yeah, there was counterpositioning here. I don't think I said this when we were going through it, but before TSMC and the pure-play foundry model, if you were either a fabless company, one of the very, very few, or you were another IDM and you were trying to get some excess capacity, rent it from another IDM, most of the IDMs, they'll be like, "Okay," you strong-arm them, you got a great strategic relationship, they'll give you some capacity, but they also demanded the right to market your products under their brand, too. [chuckles]
- BGBen Gilbert
Oh.
- DRDavid Rosenthal
So, like, which obviously TSMC wasn't gonna... So yeah, there was counterpositioning. Like, the IDMs, there was no way they were gonna do what TSMC was gonna do.
- BGBen Gilbert
Right. Huh, okay. Scale economies, absolutely. That is the biggest diff- it's one of the top two with process power-
- DRDavid Rosenthal
Yep
- BGBen Gilbert
... in my opinion.
- DRDavid Rosenthal
Switching costs. Well, it's funny, now there are huge switching... You can't switch off TSMC.
- BGBen Gilbert
No, unless you're gonna stop being on the leading edge. [chuckles] If you're gonna change from being a phone company to an automotive company, you can switch off of them.
- DRDavid Rosenthal
Well, I think it's even deeper than that. Again, we haven't gone... Listeners probably think we've gone deep technically on this episode. We haven't even scratched the surface.
- BGBen Gilbert
Totally.
- DRDavid Rosenthal
But yes, if you want the leading edge, now you've gotta be TSMC, but you've gotta be so integrated with TSMC-
- BGBen Gilbert
Yeah
Episode duration: 2:27:49
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