Acquired Podcast Episode Summary: TSMC Founder Dr. Morris Chang

Podcast Information:

• Title: Acquired
• Hosts: Ben Gilbert and David Rosenthal
• Episode: TSMC Founder Morris Chang
• Release Date: January 27, 2025
• Description: An in-depth conversation with Dr. Morris Chang, founder of TSMC, exploring the strategic decisions, challenges, and successes that propelled TSMC to become a leading semiconductor foundry.

1. Introduction

The episode kicks off with Ben Gilbert and David Rosenthal reflecting on their deep dive into the semiconductor industry, particularly focusing on TSMC (Taiwan Semiconductor Manufacturing Company). They reveal an exclusive interview with Dr. Morris Chang, recorded in Taipei at TSMC's headquarters, leveraging an unpublished English translation of Dr. Chang's recently released autobiography.

2. Founding and Early Partnerships

Establishing TSMC and the First Major Partnership with Nvidia

Dr. Morris Chang recounts the genesis of TSMC and its early strategic partnerships. A pivotal moment was receiving a letter from Jensen Huang, CEO of Nvidia, in 1997, seeking TSMC's foundry services as Nvidia faced financial difficulties. Despite Nvidia being a relatively small company with 50-60 employees, TSMC, then a decade-old company with over $1 billion in revenue, saw the potential.

Dr. Morris Chang [05:39]: "I told our salespeople that we should never be negligent in talking to future customers, even if the customer seems to be a very small one."

After a proactive response, Dr. Chang visited Nvidia, leading to a fruitful partnership where TSMC manufactured Nvidia's chips, significantly contributing to Nvidia's survival and growth.

3. Overcoming Leadership Challenges

Addressing the 40 Nanometer Crisis

In 2009, under new leadership, TSMC faced significant challenges with the 40 nm node, impacting major customers like Nvidia. Manufacturing and quality issues led to strained relationships and threatened TSMC's reputation.

Dr. Morris Chang [10:08]: "I decided to retake the CEO position to address the ongoing problems, including our dispute with Nvidia and the broader manufacturing issues."

Upon reassuming the CEO role, Dr. Chang prioritized resolving these issues by directly engaging with key customers, including Jensen Huang, and implementing strategic changes to improve manufacturing yields and quality.

4. Strategic Commitment to 28 Nanometers

Betting Big on Technology Advancement

Dr. Chang describes the bold decision to commit to the 28 nm node, drastically increasing capital expenditures to ensure TSMC's leadership in semiconductor technology.

Dr. Morris Chang [39:00]: "I decided to set R&D at 8% of revenue, regardless of economic conditions, to propel our technological advancements."

This strategic investment paid off as the 28 nm node coincided with the advent of the smartphone era, positioning TSMC at the forefront of the industry’s growth.

5. Navigating the Apple Partnership

Securing a Major Client Amidst Technological Shifts

A significant turning point was TSMC's engagement with Apple. Initially, Apple sought TSMC's services for the 28 nm node but later requested a shift to 20 nm, a process node TSMC had not planned to develop at the time. Dr. Chang faced the dilemma of balancing capital expenditures and meeting Apple's demands.

Dr. Morris Chang [90:25]: "When Jeff Williams approached us with a request for 20 nm, it was a surprise and a challenge, as our focus was on 28 nm."

Leveraging his strong relationship with Goldman Sachs, Dr. Chang secured the necessary financing to take on Apple's ambitious orders, even amid evolving market demands and technical challenges.

6. Embracing the Learning Curve

Applying Strategic Economics to Scale

A core theme discussed was the learning curve theory, which Dr. Chang credits to his collaboration with Boston Consulting Group during his tenure at Texas Instruments. The learning curve emphasizes reducing costs through increased production volumes, enabling competitive pricing and market dominance.

Dr. Morris Chang [130:44]: "The learning curve taught us that accelerating to become the largest volume player allows us to spread fixed costs and achieve economies of scale."

TSMC's strategic focus on high-volume manufacturing and continuous technological investment has allowed it to maintain leading gross margins and reinvest in cutting-edge technologies.

7. Building a Resilient Ecosystem

Creating a Thriving Semiconductor Hub in Taiwan

Dr. Chang elaborates on the strategic establishment of Hinchu Science Park, fostering a concentrated ecosystem of semiconductor companies, designers, and suppliers. This geographic clustering facilitated close collaboration and rapid innovation, making TSMC a cornerstone of Taiwan's semiconductor industry.

Dr. Morris Chang [147:28]: "Driving around the science park, you see the entire ecosystem working in harmony, which is unlike any other region in the world."

This ecosystem approach ensured that TSMC remained integral to the global semiconductor supply chain, attracting top talent and fostering industry-leading partnerships.

8. Handling Competition and Market Dynamics

Differentiating from Intel and Samsung

A significant challenge discussed was competing with industry giants like Intel and Samsung. TSMC's pure play foundry model, which avoids direct competition with its customers, set it apart from integrated device manufacturers (IDMs).

Dr. Morris Chang [99:40]: "TSMC’s pure play foundry model allows us to focus solely on manufacturing without competing with our customers’ design efforts."

This differentiation has enabled TSMC to attract a diverse customer base, including leaders like Apple and Nvidia, reinforcing its market position despite fierce competition.

9. Reflections on Success and Future Outlook

Sustaining Growth Amidst Technological and Market Evolutions

In concluding the conversation, Dr. Chang reflects on TSMC's journey, emphasizing the importance of strategic foresight, relentless technological investment, and maintaining strong customer relationships. He underscores the relentless demand for advancing computing power, embodying the spirit of Moore's Law, which has driven the semiconductor industry's exponential growth.

Dr. Morris Chang [166:15]: "Integrated circuits are the fabric of our world today, and TSMC is committed to continuing our legacy of innovation and excellence."

10. Hosts' Analysis and Conclusions

Key Takeaways from TSMC’s Success Story

Ben Gilbert and David Rosenthal analyze the interview, highlighting several key insights:

• Strategic Focus: TSMC’s decision to remain a pure play foundry, avoiding competition with its customers, was instrumental in its sustained success.

• Learning Curve Mastery: Leveraging the learning curve to achieve economies of scale allowed TSMC to offer competitive pricing while maintaining healthy margins.

• Ecosystem Development: Establishing a robust semiconductor ecosystem in Taiwan created a conducive environment for innovation and collaboration.

• Technological Investment: Continuous reinvestment in R&D and capital expenditures ensured that TSMC remained at the cutting edge of semiconductor manufacturing.

• Customer Relationships: Building and maintaining strong relationships with key customers like Nvidia and Apple facilitated mutual growth and long-term partnerships.

The hosts conclude that TSMC's journey exemplifies how strategic vision, operational excellence, and adaptability can propel a company to become a dominant player in a highly competitive industry.

Notable Quotes:

• Dr. Morris Chang [05:39]: "I told our salespeople that we should never be negligent in talking to future customers, even if the customer seems to be a very small one."

• Dr. Morris Chang [39:00]: "I decided to set R&D at 8% of revenue, regardless of whether there's a recession or not."

• Dr. Morris Chang [147:28]: "Driving around the science park, you see the entire ecosystem working in harmony, which is unlike any other region in the world."

• Dr. Morris Chang [130:44]: "The learning curve taught us that accelerating to become the largest volume player allows us to spread fixed costs and achieve economies of scale."

• Dr. Morris Chang [99:40]: "TSMC’s pure play foundry model allows us to focus solely on manufacturing without competing with our customers’ design efforts."

• Dr. Morris Chang [166:15]: "Integrated circuits are the fabric of our world today, and TSMC is committed to continuing our legacy of innovation and excellence."

Conclusion

Dr. Morris Chang's insightful recounting of TSMC's strategic decisions, partnership management, and commitment to technological advancement provides invaluable lessons for founders, operators, and investors. His emphasis on maintaining a pure play foundry model, mastering the learning curve, and fostering a collaborative ecosystem underscores the principles that have driven TSMC's unparalleled success in the semiconductor industry.