TSMC founder Morris Chang

Summary

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.

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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 Morris Chang, recorded in Taipei at TSMC's headquarters, leveraging an unpublished English translation of Dr.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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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."

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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.

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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."

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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.

Transcript

[Ben Gilbert]

The podcast about great technology companies and the stories and playbooks.

[David Rosenthal]

No, no, you said technology. Now we definitely have a cold opener.

[Ben Gilbert]

I guess I really want us to be about technology companies again.

[David Rosenthal]

Well, this is a technology company.

[Ben Gilbert]

It's a sign. All right, here we go.

[Dr. Morris Chang]

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.

[David Rosenthal]

Say it straigh the story on the way.

[Dr. Morris Chang]

Who got the truth?

[Ben Gilbert]

Welcome to the spring 2025 season of acquired the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert. I'm David Rosenthal and we are your hosts. Today we have something very special to share with you. After becoming obsessed with semiconductors from our TSMC episode four years ago, David and I wound our way through the rest of the industry studying Fabless companies like Nvidia and Qualcomm, architecture companies like ARM and chip design, software companies like Synopsys. And as we were thinking what's next in the world of chips? Unacquired, we threw the Hail Mary. We asked friend of the show, Jensen Huang if he would ask Dr. Morris Chang, the 93 year old founder of TSMC if he would be open to an interview with us.

[David Rosenthal]

Yeah, it is kind of insane and super cool that Jensen made time to help us with this. It's not like he doesn't have a lot of other things going on.

[Ben Gilbert]

Yes, well listeners, it happened. So today's episode is a conversation that we recorded in Taipei last week at Dr. Chang's office. We flew to Taiwan for a 48 hour whirlwind where we spent some time at TSMC's headquarters in Hinshu Science park where many of TSMC's fabs are located.

[David Rosenthal]

Super cool to see.

[Ben Gilbert]

Totally. So conveniently, Dr. Chang just published volume two of his autobiography a couple months ago after a 26 year hiatus from volume one. But inconveniently, it is written in traditional Chinese and not published in the western world. We managed to get our hands on an unpublished translation of the book to prepare and what you are about to hear focuses on a few crucial stories from TSMC's history that Dr. Chang shares in his memoir about Apple, Nvidia and the birth of the fabless industry.

[David Rosenthal]

Yes, and big thank you to Karina Bao, who we were lucky to connect with after we set this up and who has been translating Morris's memoirs with funding from Tyler Cowen and Emergent Ventures. Right now the memoirs are not published in English and we will Let you know if and when that happens.

[Ben Gilbert]

Yep. All right, listeners, you can join our email list at Acquired fm. Email. You'll get an email every time a new episode drops once a month. And this is also where we announce past episode corrections, plus a fun little game where we give hints at what the next episode will be.

[David Rosenthal]

I always have fun writing those.

[Ben Gilbert]

You do. That's a clear David job. This episode is presented by our partners at J.P. morgan Payments.

[David Rosenthal]

Yes. Just like how we say every company has a story, every company's story is powered by payments. And JP Morgan Payments is a part of so many of their journeys from seed to IPO and beyond.

[Ben Gilbert]

Yep. So with that. This show is not investment advice. David and I may have investments in the companies that we discuss. And the show is for informational and entertainment purposes only. Please enjoy this conversation with Dr. Morris Chang with some of David and my reflections following its conclusion.

[David Rosenthal]

We thought as a fun way to.

[Tyler Cowen]

Start things off would actually be to.

[David Rosenthal]

Talk about the man who introduced us. Could you tell us a little bit, in your words, about your relationship with Jensen and TSMC's special relationship with Nvidia?

[Dr. Morris Chang]

Yeah, it started my relationship with Jensen started with a letter that he sent to me, I think it was 1997. And the letter was sent to the post office and I received it in Hsinchu. And the letter said that they were Nvidia, the company that Jensen was the CEO of, was a small company, but they had developed some really promising chips. But they were looking for a foundry. And they had approached TSMC's San Jose office, but they really got no answer from San Jose office. Would I please contact Jensen? Because Nvidia really wanted to do business with tsmc. So I was going to the US in the next week anyway. So the letter frankly raised my curiosity and also irritated me a little bit because, you know, I had always 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.

[Karina Bao]

And at this point, Nvidia was four years old.

[Dr. Morris Chang]

They were facing bankruptcy, I think. Yeah. And they had maybe 50 or 60 employees. So TSMC, I think at that time already had a few thousand employees. We had exceeded, I remember we had exceeded US$1 billion in revenue in 95 and this was 97. So we were, relatively speaking, we were.

[Karina Bao]

A pretty big company, which is very impressive. You were yourself only a 10 year old company doing over a billion dollars in revenue.

[Dr. Morris Chang]

Yeah, right. So the following week I went to California and I called him Back without advance notice. I called Jensen. I looked up, I think there was telephone number on the stationery that he sent me the letter on. Jensen himself picked up the phone and there was a lot of background noise. He was arguing something with his people. But as soon as I introduced myself, this is Morris Chan. He immediately shouted to those people that were making noises, Quiet, Morris Chan is calling me. So I then proceeded to make an appointment with him to visit him to visit Nvidia the next day or something like that. And that was our first visit, our first meeting. And he immediately impressed me with his articulateness and also impressed me with his optimism. While he was also very frank. He told me that Nvidia was in financial difficulties. But the chip that he wanted now to have boundaries would not only save the company, it will also make Nvidia a major customer of tsmc. I mean, that was actually quite a bold statement. We were over a billion dollars and to be a major customer of ours, he would have to produce revenue for us of at least 50 million a year.

[David Rosenthal]

Okay, was that chip the Riva 128?

[Dr. Morris Chang]

I forgot the number, but it was a very successful chip. Yeah, I don't think it was Riva anything. It was a games chip. Of course it was successful. In fact, his prediction came true. Not only did it solve ambidious financial problems, it prevented it from being bankrupt. You know, not only did it do that, it also started to make them a major customer of tsmg. Within two or three years they were. They did become one of the biggest five customers. Yeah, very successful chip. Yeah.

[Karina Bao]

So Tyler, there was a great partnership forged there. TSMC would fab the chips, would manufacture them, Nvidia would design them. That is true all the way to.

[Ben Gilbert]

Today at immense scale.

[Karina Bao]

But it hasn't always been easy and it hasn't always been perfect. And I want to go to this moment in 2009 on the 40 nanometer node where development was slower than TSMC had hoped and it was costing customers like Nvidia time and money. Can you share the story of how this came to be and how it was resolved?

[Dr. Morris Chang]

Well, I decided to give the CEO job to a potential successor of mine. While I will still retain the chairmanship in Taiwan, usually the chairman is the top man anyway, even though CEO is another person. So the problem you just mentioned happened during the period when someone else was the CEO. Apparently it was a manufacturing problem. It was also a quality problem. And it was the quality problem that the CEO first reported to me. But the CEO insisted that our people we had a director of quality insisted that we were not tsmc, it was not at fault. And so on that basis, on the basis of our quality manager's arguments, he had not offered Nvidia anything. Now, as far as the manufacturing problem was concerned, it was a yield problem and everybody was suffering from it. And of course, Nvidia at that time was perhaps the biggest customer of that node, the 40 nanometer node.

[Karina Bao]

And a yield problem in the context of this industry is when you are trying to make a bunch of very high quality chips, but you just can't get the percentage that actually work up.

[Ben Gilbert]

Very high.

[Dr. Morris Chang]

Something like that, yes. But the problem apparently just continued. And I was, even though I was not the CEO, I was getting a little impatient. And then of course, some other problems cropped up, other problems than this 40 nanometer Nvidia. So I decided to take the CEO position back. So in 2009 I did that. And there were several priority problems that I had to deal with when I took the CEO job back. And one of them was this continuing problem, continuing argument, controversy with Nvidia. Anyway, I remember in the first few days after I took back the CEO ship, I called all the major customers, including Jensen and Qualcomm was, I believe that Qualcomm was also. Yeah, And Qualcomm, the top customers didn't change very much since then, except for maybe one Apple. Apple, yeah, Apple came later. Yeah. And in my call with Jensen, he was still very friendly with me, but he also reminded me in a very serious tone that we had the quality delivery manufacturing problem on the 40 nanometer. All right? So I said I knew that and it's one of my priority problems. Give me a couple weeks and I'll get back with you. And as I said, I did have several problems aside from the 40 nanometer manufacturing problem. And the problem was the argument that we were having with Nvidia. Aside from that, we also had the problem of pricing was dropping faster than the cost. I mean, you don't want to see that your gross margin percentage kept dropping.

[Karina Bao]

Because you had committed to a schedule of price drops with customers, but you weren't able to drive down your manufacturing costs at the same rate. Rate.

[Dr. Morris Chang]

All right, so that was one problem. Another problem was the immediate one that triggered me to retake the CEO ship because the previous CEO had laid off. Except he didn't use the term layoff, you know, he used bad performance review, the worst performance review people. And there were about six or seven hundred of them, you know, and he laid them off on the basis of their poor performance review? Well, we never did that, you know, I mean, the worst we would do was to put them on, place them on probation for six months. And quite often, you know, at the end of the six months, everybody would go back to his or his or her old job and some of them would get transferred because they were in the wrong jobs, you know, so some of them would get transferred. But we almost never really fired people, even after the probation period.

[Karina Bao]

So under your watch, you never did a layoff and you never looked at performance reviews which are meant to help coach people as the means to determine who to layoff.

[Dr. Morris Chang]

That's right, yeah. And I actually, you know, have told the managers that, you know, but. And, well, in 2008, of course, there was a financial crisis and the semiconductor business impact got affected and our revenue dropped. Our business dropped pretty seriously. Yeah, I was not a CEO, I was the chairman. But I just knew that anyone, any general manager, any CEO, general manager without very much experience, what he or she would do in a situation like that, it's kind of a knee jerk kind of reaction, you know. Oh, he says, oh, this is my test. I got to save all the money possible and I got to lay off people.

[Tyler Cowen]

But this is the semiconductor industry. And Moore's law means no matter what happens, you will always need people.

[Dr. Morris Chang]

Well, I know, I know, but. Well, semiconductor engine. But semiconductor engine people actually think the same way as I described. You know, I mean, they are layoff. They are, they are people too. I had a lot of experience at Texas Instruments, but at Texas Instruments, I was not a CEO. I was just one of the top managers under the CEO level. And when the company decided to have a layoff, the CEO conferred with the top managers, who included me. And their first reaction was exactly the same. And I'm Talking about the 70s, early 70s. Their first reaction on who to lay off was exactly the same as what our TSM CCO did in late 2008, 2009, which was, you know, go by performance. Well, now, I was the only one at Texas Instruments in the early 70s that said, no, that would not be credible way of doing it. People would not respect us if we lay off by performance ratings.

[Karina Bao]

And why is that?

[Dr. Morris Chang]

Because it's very subjective. Performance reviews, the performance ratings are done by everyone's own supervisor. So 700 worst performing people in the company. And who gave the 700 people the bad ratings? 700 supervisors, you know, very subjective. It's not something that people will respect. If in a year you have to Hire people back. You have to hire the laid off people back. Then you shouldn't lay off. Because the layoff, the separation expense is usually half a year, about half a year. And it takes at least half a year to train a person. So if you need the people back within a year, you shouldn't have, you shouldn't lay off.

[Ben Gilbert]

So what did you do when you.

[Karina Bao]

Came back as CEO, both about the employment issue and about the customer issue?

[Dr. Morris Chang]

You mean customer issue being Nvidia? Yeah, yeah. Well, to finish the employment issue, the laid off employees, as I said, there were 700 of them. Six or 700 of them came to my home to demonstrate and protest. Now the company TSMC was pre warned that hundreds of people would appear in front of my home. So they notified the police department in my district. So the Police Department sent 50, 60 police officers to try to maintain the order. Now more than 100 protesters appeared. And the neighbors, my neighbors, they had trouble getting in and out. That was only the first time. A month or so later, the problem was still not solved. I was still not the CEO. So they appeared again. Some were protesters. About 25 of them decided to spend the night, sleepover in the little park that's about a block away from my home. My wife literally didn't sleep that night. You know, I bet she wake up and went over to that window to take a look to see what was going on. But then very early the next morning, my wife, 6, about 6:00 the next morning, my wife, you know, got up and she took one of the bodyguards and went to a neighborhood market and got the Chinese style breakfast or Chinese bread, you know, fried bread, you know, I don't know whether you ever had it or not. Probably not. Yeah, yeah. Bun, buns, you know. Yeah. Soybean milk. And take enough of that breakfast, enough for 25, 30 people and back to, to the park, to the park and distribute them to the protesters. And they were thankful, you know. Yeah. And they actually decided to not go to the President's palace, President's mansion. And they told my wife that they would not do that that day. And all this kind of precipitated my taking back the CEO job. There's another thing I told the previous CEO before he laid off the 6, 700 people. I said if you. Because I knew, as I said I knew that it would be his knee jerk reaction to confront a crisis such as the crisis we had. It would be his knee jerk reaction to lay off. So I said to him, if you want to lay off, bring it to the board. I'll call a special board meeting. And I knew what I would ask the board to do, which was not to grant the permission, but he decided to circumvent that, the CEO, because what he did, he did not consider it to be layoff. You know, it was just punishment for the poor performers. Well, as far as the CEO is concerned, I did keep him. I had more than one nice talk with him. I intended to. And I told him that he was still a potential successor to me. So I kept him at the same job grade. We have job grades and the same salary and bonus. But he was now the present of new businesses. And back then we had high hopes for the so called new businesses, which was solar cells and led.

[Karina Bao]

It's the great irony that your core business of manufacturing integrated circuits ended up becoming the largest market opportunity of all. You didn't need any new businesses, ended.

[Dr. Morris Chang]

Up the biggest marketing, biggest market opportunity. Why is it so ironic?

[Karina Bao]

Well, it's always interesting to me when companies think, oh, we should look at other new businesses. When in reality semiconductors became a $600 billion a year market. And you know, solar is a small fraction of that. LEDs are a small fraction of that. You were already in the best market.

[Dr. Morris Chang]

I know and I knew that. I did not really mean, I did not really think that solar or LED would really replace our integrated circuits business. But I knew the integrated circuits business was going to be great, you know, but at that time, which was 2, 0 at that time, we also thought that solar and LED was going to be very promising. But it didn't work out. Of course, the solar business could have been pretty good. However, China ruined it. It subsidized the hell out of it. And they now control their business, solar cells. The prices were extremely low. Still low. Still low. So it didn't take off. TSMC Solar didn't take off and LED did not take off either. Because led, the market is not as big as solar. However, it's controlled, the patents are controlled by just a few companies. And they wouldn't let the few companies that control the patterns of LED will not let up at all. So a few years later, the CEO that was put on the new businesses decided that his new assignment wasn't working out either.

[Karina Bao]

So he quit and he's now running MediaTek. Is that correct?

[Dr. Morris Chang]

He is now a vice chairman and the CEO of MediaTek. Yeah.

[Karina Bao]

So coming back to this moment, in 2009, you offered to rehire anyone who was laid off that was interested in coming back. And you're setting the new sort of vision and strategy as CEO, or in many ways returning to the old one. How did you resolve the Nvidia dispute?

[Dr. Morris Chang]

Yeah, in the first four or five weeks after I retook the CEO job, I probably spent almost half of the time on how to resolve the problem with Nvidia as far as youths were concerned. Well, we were doing our best because, you know, we had to do it anyway. You know, Nvidia was just one of the customers.

[Tyler Cowen]

Yeah, not just Nvidia, but Qualcomm and intel.

[Dr. Morris Chang]

And it was a very important node. 40 nanometer was very important. Note in the progression of Moore's Law, you know, only after 40 can we, if we do the 40, well, can we do the 28? 28 was the next one. And I called the salespeople that were in direct, that had been in direct contact with Nvidia and of course I called everybody that was somehow involved, somewhat involved in the problem. So it was a matter of money as far as the progress on the manufacturing lines, we were already doing what we could. I mean, it was, as I just said, it wasn't just for Nvidia, it's for tsmc, you know, But Nvidia, because they had borne the brunt of the problem, the damage. So it's a matter of money. I worked hard in number. I familiarized myself with all aspects of the problem and then I worked out a number. And I also knew that Nvidia's customers were after them. They had demands on Nvidia too. So I used all the intelligence I could get and I think it turned out that it was good. So about a month after I retook the CEO job, I sent an email to Jensen. I said, I'm coming to Silicon Valley next week. On this date, I will be at your home at 6:00, let's have just salad and pizza. Which was something that we had had many times in the past. Now, immediately he sent back an email. He said, when do we discuss business? Then.

[Tyler Cowen]

Did he ask who was going to pay for the pizza and salad?

[Dr. Morris Chang]

He didn't ask that. So I anticipated that. So I said, 6:30 we'll start having pizza and salad. 8:00, shop, we'll go to your office, at your home and we'll discuss business. So on the appointed day, I showed up and we followed a schedule exactly. 6:30, I showed up. We had a very pleasant pizza and salad. Thing is that his wife Lori would make the salad and the pizza was delivered from outside. Maybe they made their Own pizza too. I forgot.

[Karina Bao]

Would not surprise me.

[Dr. Morris Chang]

Yeah. Anyway, I had had it many times at his home. All right, so at Carl's shop, it was I who looked. The watch said, Jensen, why don't we go to your study? You know, And I gave him.

[Karina Bao]

It was on the order of $100 million, right?

[Dr. Morris Chang]

Yes. More than 100 million. Yeah. And I also said, our offer is effective 48 hours. If you do not, there is not going to be. We are not going to argue, we're not going to bargain. If you don't accept the offer within 48 hours, we'll have to go to an arbitrator, which was what he had suggested to the previous CEO anyway, that we go to the arbitrator, you know, but the previous CEO did not even give him a number, you know, the previous CEO gave him zero.

[Tyler Cowen]

You probably don't want to go to arbitration with your best customer.

[Dr. Morris Chang]

No, I didn't want to, but, you know, I had to say that. And because, I mean, that number, the number we offered him was arrived at after, as I said, weeks of work on my part. And I thought it was fair to both sides.

[Karina Bao]

And did Jensen accept the offer?

[Dr. Morris Chang]

Yeah, he did, within two days.

[Karina Bao]

I think it's an amazing example of a situation where you had strong partnership together for many years. You built this close personal relationship such that you could have an hour and a half family dinner and not talk business. You were able to then come up with a large sum of money, over $100 million. Settle, and then since then, there have been many, many, many billions of dollars of business done together. It's a great success of working out your differences.

[Dr. Morris Chang]

I know. I liked it too. That's why I included the story in my autobiography.

[Ben Gilbert]

Now is a great time to thank our presenting partner, JP Morgan Payments. You don't often hear stories of how important payments are to supply chain success, but the last few years have really shown how critical it is to the global economy. In our remastered TSMC episode, you heard how JP Morgan's Trade and Working Capital Group helps companies manage risk and access liquidity for their global trade. And we just got a new stat from them. 18 of the top 20 largest corporates are payments clients, so they have an unparalleled view into global trade flows.

[David Rosenthal]

So, zooming in on supply chain, think about a typical manufacturer. They're trying to balance paying their suppliers quickly to keep good relationships, while also optimizing their own working capital. Meanwhile, their suppliers, especially the smaller ones, often struggle with cash flow while they wait 30, 60, 90 days to get paid. So this is where JP Morgan Payments Technology and global expertise comes in. They've taken traditional supply chain financing and made it much more dynamic and technology driven. Their solution enables businesses to provide suppliers with early payments at favorable rates based on the buyer's credit rating. Buyers can easily switch between supply chain finance and dynamic discounting as business needs change too. It's also real time. You get complete visibility into supply chain finance's data so you can track invoices and optimize payment timing all in one place.

[Ben Gilbert]

To simplify it, here's an example. Imagine you're a lumber mill working with dozens of furniture manufacturers. The terms you've negotiated with a big furniture manufacturer mean you have to wait 60 days for payment on multimillion dollar monthly invoices. Of course, this limits your ability to maintain optimal timber inventory and process orders quickly. With JP Morgan Supply chain Finance solutions, you could receive payment in just days while the furniture manufacturer gets to keep their original payment terms. So now you can stock up on premium hardwoods and reduce order processing times even through seasonal spikes in demand. This is why it's used by over 2 million suppliers around the world. It's really win win. It makes the whole supply chain become more resilient. JP Morgan Payments is at the financial and operational aspects, really the forefront of both of supply chains with trusted innovative infrastructure that you can rely on. So whether you're looking to strengthen your working capital or just make sure your supply chain is more efficient, check out jpmorgan.com acquired and see how they can help your business grow.

[Tyler Cowen]

After the 40 nanometer node after you fix these problems. As you said, the next node was 28nm. And as we understand your story and the company story, 28nm is when TSMC really started to take the leadership role at the leading edge in the industry. How did you decide to go commit so hard to 28nm after having had all the problems at 40nm?

[Dr. Morris Chang]

Well, I had a lot of trouble at TI. My peak job at TI was the head of Worldwide Semiconductors. TI, of course had many businesses, defense business, materials and controls, and also their origin which was geophysical and so on. But TI's semiconductor business was their biggest. And I was the head of that worldwide semiconductor business. I wanted at that time when I was the head of Worldwide Semiconductors, our R and D budget was 4.8% of revenue of our revenue. And I thought it was not enough. I just wanted to raise it to 5.5% of the revenue. But my request Was denied every time I raised it. Now coming back to tsmc, I wanted to set a number, A number, a percentage of revenue number so we don't have to argue every year how much R and D, which is spent. So at about a time, 2008, 2009, when I came back, I just almost like at that time we were running I think 6 or 7% a year, but it was negotiated every year between the R and D director and the CEO. So I want to stop that. I want to make him at ease, you know, I mean, doesn't have to argue, doesn't have to request every year. So I almost just literally picked a number out of our head. We've been running 6 or 7% already. So I said, oh, let's pick 8%. Okay, yeah, 8%, regardless of whether there's a recession or not, and just 8% of revenue. And that was the best news. If you ask our RD director who was back then, I think in the second place of R and D, he would tell you. I mean, he has told me many times in the last 10, 15 years that this was really the best thing that we did for rnd. So they were not concerned. The R and D director was not concerned at all about having his planned budget cut back, his planned resource people allocation cut back. None of that. So he has been working 8%. And so it has been like that. And that is what propelled our R and D effort in this period.

[Karina Bao]

In 2010, it wasn't just ramping the R and D budget was also the capital expenditures. You had had almost a decade of two to two and a half billion spent building the fabs every year. And in 2010, you ramped that to almost six billion. What was it about the competitive environment, the 28 nanometer node that caused you to push all your chips in on that?

[Dr. Morris Chang]

Yeah, I think it was kind of a mutual feeding thing. As I settled the R and D budget at 8% of revenue, I mean, to the satisfaction of the R and D people, they began to have big ideas. They began to be telling me how 28 is going to be the term they use. And they have used it several times. But the first term, the first time I heard them using it is the 28. 28 is going to be the sweet spot. It's just like tennis racket. You know, you hit. You hit the ball with the sweet spot of your racket. Yeah, yeah. Do you play tennis?

[Karina Bao]

I have played tennis.

[Dr. Morris Chang]

Not well, good. I was like you, you know, like 40 years ago. I was like you. I Don't play anymore. But, you know, so I know the feeling of hitting a ball in the sweet spot. You know, 28 down here is in the sweet spot. And so I said, why? He gave me a lot of technical reasons trying to narrator. So I decided I would believe him. And he now had the resources to push it, to do it as fast as he could. So, you know, now the capital spending. Now, of course, back then we had already built up pretty good infrastructure, organizational infrastructure. We had a pretty good market forecasting group. And I had set up the business development department, which was like the marketing department. We always had a pretty strong sales effort. But to me, sales effort is just the tactical side with the customers. Marketing is the strategic side to the outside world. Now, from all these inputs, the marketing, the business development department, which as I said, was our strategic marketing group. And from the technical, from the R and D side, that 28 was going to be sweet spot. I decided that. And I quoted Shakespeare in my autobiography that there's a tide in the affairs of man which taken at its flood, leads on to fortune. I decided this was 28 nanometer was going to be of our tide, our next tide anyway, there will be others. 7nm was another, was the next sweet spot. The R and D people told me. And again, you know, reminded myself of.

[David Rosenthal]

Shakespeare, you know, taking it the flood.

[Dr. Morris Chang]

Taking it at the flood. Yeah. So I mean, that took that. However, you know, I mean, setting the R and D at 8% of did not invite any opposition from the board. But suddenly increasing capital spending threefold, I think did invite a lot of questions from aboard our practice in the board meetings. Because back then, even now, most of the directors are from overseas, US and England. And we would email the agenda to them two weeks before the board meeting. Then the night before the board meeting, I would invite the independent directors to dinner. And that dinner, the conversation at that dinner was not on record. So the independent directors, actually three quarters of our directors were independent. Are independent directors. Anyway, so in the night before and the evening before the meeting, they had the opportunity to ask me questions if they had any. But on this matter of vastly increased capital spending, they didn't even wait until they got to that dinner because this.

[Karina Bao]

Was effectively betting a huge amount of the company's cash on this node, this process, this generation.

[Dr. Morris Chang]

Yeah. And so they called the chief general counsel. The general counsel is also the secretary to the board. They called him at that time, it was an American, the general counsel was an American and said, we want to talk to the chairman we don't like this idea at all. Anyway, so I talked with them on the phone about a week or so before the board meeting and. All right, you know, this is something that of course I told them what I have now just told you. Inputs from market forecast, inputs from rd, inputs from our business development, the new Business development department. And of course they didn't believe it. You really can't convince anybody on something like this. So at the end I had to say, well, look, I heard you, but I am still the guy that's responsible for the operation of the company, so you need to let me go ahead with this one. So they were satisfied with that.

[Karina Bao]

And what was the result? What happened around this era of 28 nanometer that created so much demand?

[Dr. Morris Chang]

I think you know, the result that.

[Tyler Cowen]

Was good and that was the smartphone era coincided with 28nm when the business development group was looking at this and you were looking at this, did you see how big smartphones were going to become and the immense opportunity that that would unlock for you?

[Dr. Morris Chang]

No, I didn't. Maybe the business development guy, that was another interesting story. Yeah, maybe he knew. Maybe he, or at least I now hope, and I of course hoped at that time too, that he had a more detailed visibility than I did. But I mean, of course his was not the only, it was not the only input. You know, I had the, A few other advisors too. Yeah.

[Tyler Cowen]

So that takes us to Apple.

[Karina Bao]

Could you share with us how you end up meeting Apple?

[Dr. Morris Chang]

Yeah, but before we, before we do that, let me offer how we made CC actually, the business development director, the current CEO. The current CEO. The current chairman and CEO. When Rick was the CEO between 2005 and 2009, he had split operations into two groups, advanced technology and mainstream technology. And CC was the head of the mainstream, actually. Really? I should say the lesser one. Okay. Mark Lu was the. The head of the advanced. And each group had a small Business development section, maybe 30 or 40 people each. All right, So I came back to be the CEO. And I never thought the split up of two groups was a good idea anyway. In fact, back in 1996, the president, he was not a CEO, but he was the president. We didn't have the CEO title back in 1996, but the president, who was American, Don Brooks. Yeah, right. He wanted to split. He got a little, I think he got a little tired of running this company. He was going to be here for only a year at first, but he winded up. He ended up staying, spending six, seven years in Taiwan towards The end. He was getting a little tired of running this thing and he thought that he would do it like TI for instance, when TI had a germanium transistor department, silicon transistor department, integrated circuits, bipolar integrated circuit, MOS integrated circuit.

[Karina Bao]

You know, it's the divisional org structure instead of a functional org structure.

[Dr. Morris Chang]

Right, right. Yeah, but I really did not think that the foundry business, TSMC business, was suitable for the divisional structure because, you know, we have almost the same group of customers. How do you divide up the group, divide up the company if you want the so called divisional structure? Well, you know, Don Brooks was going to divide it by fab, you know, my goodness, you know, the customers move from one FAB to another. The same customers, you know, not to.

[Karina Bao]

Mention TSMC has 21, 22 fabs now. And so what are you going to have?

[Dr. Morris Chang]

22 divisions? Of course, he only had three or four. Perhaps back then. Yeah, but he was not convinced. He kept arguing. And I said, look, why don't we get a consultant, McKinsey, McKinsey, why don't we get McKenzie? Okay, so we got McKinsey in. And McKinsey, after a month or two, two months actually, and a couple million dollars, I guess, told us the same answer, you know, that functional is best. And then Don Brooks said, well, tell me one company, one big company that's functionalized. And McKinsey immediately answered Boeing, which is a good answer, you know.

[Karina Bao]

Yeah, yeah, except it's not true. Boeing has commercial and government.

[Dr. Morris Chang]

Well, they probably have commercial and government, but they don't have 707, 747, 757. You know, they don't have, they don't do better. And if we divide up by fab, it would be like dividing up 707 from 757, 737, you know. Yeah. Well, anyway, Don Brooks attempt was in 1996 and well, by 2005, Rick Tsai decided to tread the same ground and he did this time. I didn't stop him. My idea, my principle when I was the chairman and not the CEO was, well, sometimes you have to let the CEO make his own mistakes and learn from them. Of course, not if the whole company is going down the drain, so you have to interfere then, but only then. Well, anyway, so that was the background. Two groups when I came back to be the CEO, the Advanced group and Mainstream group. And each group had a small business development section, 30 or 40 people. I think Advanced has had more a bigger group than mainstream. All right, So I wanted to combine the two operations. Oops. And I also wanted a real marketing and I didn't call it marketing because I decided to use business development in English because has a good translation in Chinese. All right, now I've decided to combine the two groups, operation groups. Now back in 2009 when I decided to combine the two groups, I think the advanced group had something like 10,000 employees and the mainstream group had a little less. But also seven or eight thousand employees.

[Karina Bao]

And the mainstream group, just because we haven't explained this concept yet, is taking those older fabs that have the higher nanometer nodes and they're finding customers that don't necessarily need the leading edge to automotive parts or its CMOS sensors for cameras and finding customers to keep the utilization high on those older fabs from previous generations.

[Dr. Morris Chang]

Yeah, right. But also quite often the same customers use both mainstream and advanced technologies. Now take Qualcomm, I'm quite sure that they use the most advanced and even Apple I think they use.

[Tyler Cowen]

Yeah, if you think about all the chips in an iPhone, the A16 Pro is built on the leading edge, but there are many, many other chips in there.

[Dr. Morris Chang]

Yeah, right.

[Karina Bao]

So you combine to one business development organization, 80ish people.

[Dr. Morris Chang]

Yeah. We had Mark Lu in charge of the advanced and ccwei in charge of. The question is who's going to be in charge of what? The combiner or you need only one for the combined operations. You're the only one. But the truth is that we had a lot of operational talents, you know, operation meaning manufacturing, taking the developed technology from R and D, you know, and converting it into mass production. We had a lot of talents there, but business development or marketing there. And neither Mark nor CC had any real previous experience in marketing business development. So that was my main worry. We combine the two groups. We needed a combined operations manager, but even more importantly in my mind we needed a combined market business development manager. So I first offered the marketing business development job to the guy who was in the bigger job, advanced technology Mark. And I explained to him that I did not think he had had any significant marketing experience in the past and this would. This new job, if he takes it, would give him the opportunity of being professioned in that area. But he declined it. He said, my goodness, I have 10,000 people reporting to me now you want me to take a job that has only 60, 70 people in it? That was the end of that conversation.

[Karina Bao]

And your goal was for him to become a well rounded executive in hopes of leading the company after he sort.

[Ben Gilbert]

Of did that tour of duty and.

[Dr. Morris Chang]

I explained to him that, yeah, not.

[Karina Bao]

To mention it's a very important 60 or 70 people. They're responsible for finding all the next business.

[Dr. Morris Chang]

I know, I know. Actually, back in my mind, I was thinking of the time when Kissinger was Nixon's National Security Advisor and somebody else whose name I have even forgotten was the Secretary of State. And Kissinger probably had a couple hundred people reporting to him, whereas the Secretary of State had thousands of people all over the world reporting to him. And who had more power, Kissinger.

[Karina Bao]

Certainly not the name, who you've forgotten.

[Tyler Cowen]

And before this period, you were doing the business development and marketing for the company.

[David Rosenthal]

Right.

[Tyler Cowen]

You were the one finding the Nvidias, the Jensens, the Broadcoms, the next great customers and great markets for you.

[Dr. Morris Chang]

That's right, that's right. I was.

[Karina Bao]

You were always on a plane meeting with the current top 15 customers and trying to find the next top 15.

[Dr. Morris Chang]

Yeah. Except for those four years when I was not the CEO. Yeah, yeah, but you were right. I was on the plane most of the time visiting customers. That was my pleasure. I really liked it. Well, anyway, so I then of course offered the business development job to CeCe and he accepted. I mean, I thought he accepted it even delightfully, you know. Yeah.

[Tyler Cowen]

And he's now the Chairman and CEO of tsmc.

[Dr. Morris Chang]

Yeah.

[Tyler Cowen]

So this had just happened and you came home from a board meeting, we understand, one evening.

[Dr. Morris Chang]

That's right. The board meeting had ended and it was 6 o'clock or later and I went home. This was Taipei. We had our board meetings back at that time. In fact, here you have seen my conference room.

[Tyler Cowen]

Yes. Across the hall.

[Dr. Morris Chang]

Yeah, yeah, right. Yeah. We had all our board meetings in Taipei in that conference room. Anyway, it was 6:30 or so when I got home and I think my wife knew that I would not be home until around 6:30 because as soon as I. She actually, she met me at the door, which wasn't very often, but this time she had something to tell me. That's why she met me at the door. She said Terry Gow called in the afternoon and said he was coming to dinner.

[Karina Bao]

And who is Terry Gow for listeners?

[Dr. Morris Chang]

Terry Gow is a relative, is actually a second cousin of Sophie's. Sophie is my wife and they share the same grandparents. That's what makes them second cousins, I think. Yeah.

[Tyler Cowen]

And for our Western listeners who this won't be obvious to, Terry Gow is the founder and CEO of Foxconn.

[Dr. Morris Chang]

Right. Terry Gao is a second cousin of Sophie's and he's Also, he is also, he was also at that time the.

[Karina Bao]

Chairman of Han Hai, which.

[Dr. Morris Chang]

Hong Hai.

[Karina Bao]

Hong Hai Foxconn to American listeners.

[Dr. Morris Chang]

The name slipped my mind for a second. Yeah, Hong Hai, which is a, a very important supplier to Apple and a pretty big company. And in fact, Terry Gao is reputed to be one of the richest men in Taiwan. And she said, Sophie is lovely but she, she doesn't know too much of my business. I don't think she understood the significance of Terry Gao coming to dinner, bringing a vice president from Apple. I don't think she quite understood quite. She didn't really, she wasn't very interested either in the significance of that.

[Ben Gilbert]

And you had been trying for months.

[Karina Bao]

Strategizing with the business development team. How do we go win Apple's business? The iPhone seems to be working.

[Dr. Morris Chang]

Yeah, I mean, well, strategizing is probably too strong a word, you know, I mean, just thinking, thinking also knowing that we just can't do anything, we can't do anything about it. Apple is a very close mouth company. If you try to talk to them, if you offer, you know, your service, I mean they would just tell you to go away. They will come to see you when they are ready. And that's what I knew about Apple even then. And I know the same thing now. You know. Yeah. All right, all right. So 8:00. Now Sophie did know that I would not be home until after 6:00. So she had told Terry that and Terry had set the time of arrival of their arrival at 8:00. So 8:00 was a bit late for my dinner but I said, what the heck, waiting. All right. So they showed up. I didn't ask her, Sophie just said a vice president. And I just thought to myself it wouldn't be just an ordinary vice president. Yeah. So because, you know, there was no reason for Terry to just bring any Apple vice president to my home for dinner. It must be something special. It must be someone special for tsmc. All right, so Jeff Williams came. He was not just a vice president, he was the chief operating officer of Apple. And they, Jeff was a pretty straightforward person. He didn't spend much time in ordinary chit chats.

[Tyler Cowen]

There wasn't the same pizza and salad period before.

[Dr. Morris Chang]

It wasn't, but it wasn't formal either. My wife Sophie just added, we have a cook. You know, we had a cook and pretty good cook. So Sophie just told the cook to add a few dishes. She's a Chinese cook, she doesn't do any western food. And you know, Terry Often said he grew up on Chinese food. And I would imagine that the apple guy that he bought would also like Chinese food. Anyway, so she just asked the cook to cook a few more dishes. But, you know, it wasn't important. The food was not important. Either the quantity or the quality was not important because almost Jeff almost immediately started his pitch almost as soon as he sat down to dinner.

[Karina Bao]

And what is the pitch from someone like Jeff Williams?

[Dr. Morris Chang]

Like, we would like you to Foundry hour waivers, something like that. Pretty straightforward. I mean, so I listened that night. I think Jeff talked maybe 80% and I talked 20%, if you don't count the. The relative to relative talk between Sophie and Terry, you know, which was not very much either. Yeah.

[Karina Bao]

And Jeff had proposed economic terms at this first dinner, right?

[Dr. Morris Chang]

No, nothing so concrete.

[Karina Bao]

Okay.

[Dr. Morris Chang]

He did say that we will let you have 40% gross margin. And I think. I didn't say anything. I didn't answer him. I didn't respond to that. But our margin at that time was already 45%. And I was trying to push it up to 50% was a announced effort in the company to push the gross margin. And I had that effort for many years after I came back to be the CEO. And I really didn't even succeed, even at my retirement. Now, of course, what happened later was that there was Covid and so on, and also we began to have leadership, technology leadership. So our margin jumped up to over 50%, but when I retired, it was still short of 50%. Slightly short of 50%. I was almost there.

[Karina Bao]

I retired in technology leadership. You're saying that around this time, the 28 nanometer node, you were.

[Dr. Morris Chang]

We're talking about 2010.

[Karina Bao]

Yes. You were still among a select few at the leading edge, but there was fierce competition. Whereas once you got to 7nm or.

[Dr. Morris Chang]

So, that's when you really. You are neglecting. I think when you said that you were neglecting intel. Okay. Yeah. At 28 nanometers, we were very definitely the leader among foundries. Yeah. And maybe among a few other companies such as Texas Instruments and so on, but not Intel. Okay.

[Tyler Cowen]

And Apple was considering Intel.

[Dr. Morris Chang]

No, Apple was not actively considering Intel. That came later.

[David Rosenthal]

Later, yeah.

[Dr. Morris Chang]

But I'm quite sure we have time to cover that.

[Karina Bao]

Well, take us there now. So after November of 2010, you had the initial conversation with Jeff Williams.

[Dr. Morris Chang]

Yeah, he said that he would let us at 40%. And my thought was, my goodness, we're already at 45%. But I also thought that he was trying to be generous when he said that he would let us have 40%. And I also thought to myself, well, now this dinner is not the time to go into a pricing discussion. We have a lot of other things to discuss. Anyway, so I said no, we were about to go into production. We were almost in production with 28 nanometer at that time. The initial stage anyway, 28. So I said I thought it was going to be 28. I said 28. Nope. What node do you want? 20. He said, now that was a surprise to me and frankly, it was also a disappointment because the Moore's Law of progression after 28 was going to be 16. Now Apple, Jeff Williams wanted 20.

[Tyler Cowen]

A half step.

[Dr. Morris Chang]

A half step. But half step, a half step is a detour. You know, we would have to. My thought at the dinner there was that we would have to spend effort on the 20, which of course would help us on the natural next note, which was 16. But still it was a detour from 28. You know, from 28, if we could go directly to. If RD would go to 16, it would be less time than first do 20 and then. No, the point is that back then RD did not have enough resources to do two nodes at the same time. Later we did. Later we did.

[Karina Bao]

So you have this conundrum where this is right after you had just spent $6 billion in capex the previous year going all in on 28nm, you're asking Apple, which could be your biggest customer ever. This is for 28, right? And you hear back, no, we want you to go do something that you're not planning on spending any money on and have this huge distraction. And you're of course left with this question, is it worth it to land.

[Ben Gilbert]

Apple as a customer?

[Dr. Morris Chang]

It wasn't that serious. It wasn't that serious because when we figured a very big market for 28, and therefore when we planned to increase vastly our capital spending, we didn't have Apple in mind. We didn't include Apple. Apple came strictly as a present surprise anyway, for the company in total, but not for 28.

[Karina Bao]

28.

[Dr. Morris Chang]

28. Yeah, we didn't include Apple in our 28 planning.

[Karina Bao]

But it's still the question of are you willing to go do this huge distraction and spend on the order of $10 billion over the next few years doing 20 nanometer for Apple when you weren't planning on doing 20 nanometer at all?

[Dr. Morris Chang]

That's right. That is where our connection with Goldman Sachs came in. Remember, I printed a lot of seeds when I ran tsmc. I knew that one of These days will probably need top level investment bank advice. So we established a good relationship with Goldman Sachs very early in our existence. I was in fact a board director of Goldman Sachs. Did you know that? I did, yeah. We did the ADR with Goldman Sachs which opened up a good relationship with Goldman Sachs.

[Tyler Cowen]

It was your New York public listing of the stock?

[Dr. Morris Chang]

Yeah, ADI is American Deposit Receipts. Yeah, it's New York. Yeah, It's a separate market. In fact, right now the TSMC price, ADR price has a 20% premium over really? Wow. However, you need TSMC board permission to convert your shares to ADR.

[Karina Bao]

Otherwise you'd be able to arbitrage.

[Dr. Morris Chang]

Yeah, we don't want that. So as I said, as I was saying that the board has to approve any conversion of ordinary Taiwan TSME stock to adr. And the board does not give such permission easily anyway. Okay, yeah.

[Tyler Cowen]

So you had planted this seed with Goldman Sachs for when you knew you would need them.

[Dr. Morris Chang]

Right. This was very early in our history. Now we need funds. I mean this Apple thing came after we had already decided to increase capital spending. Now you know, Apple requires even more capital spending and we have to figure out where the cash is going to come from. So there were several possibilities of course were paying a dividend. Not a very big dividend back then, but a modest dividend. We could cut that dividend and then we also could sell stock, new stock offering either in Taiwan or in the US we have the ADRs. Or we can borrow money, corporate bonds.

[Karina Bao]

Or you could only fill part of Apple's order.

[Dr. Morris Chang]

Right. And in fact we did that. We first did our financial planning and we decided not to cut dividend. We decided not to sell new stock. We decided to just borrow. And this was also with consultation with Goldman Sachs. We chose borrowing. How much? I looked at the numbers and just as you said, I decided to take half of what Apple said, what Apple said they needed.

[Karina Bao]

Is this common? By the way? It seems like it would be in a customer's interest to come to you and say, I need to buy zillions of chips from you, I need all your wafers because they have no skin in the game of you spending all the money.

[Dr. Morris Chang]

I know, I know. Well, back in the 90s, in the first, let's say 15 years, first 10, 12, 15 years of our existence, we were short of capacity almost all the time. And what you just said happened all the time, you know, and so we figure out that we will require a deposit from the customer and we'll even confiscate the deposit if the time comes in, comes for him to take the wafers and he doesn't, you know, and everybody delights in the word confiscated. It was first used by me. Okay. I told the salespeople in San Jose, I said tell the customer that we need a deposit from them because you know, just as you said, you know, it's our money and it's only their words, you know, they may not want the waivers when the time comes. And I told the salesman, tell the customer they will confiscate the deposit. And ah, the salesman never heard anything like that before, you know. And so they were, they were, they were in uproar in happiness, you know, I mean now, you know, they could, they could actually stand up and tell the customer that we might even confiscate your money. But of course, really we never confiscated any money. Now it did happen quite often, particularly in the 2000, 2000 we had, I think it was called Internet recession. I think. Yeah, because Internet was, you know, people were starting companies called Pets.com or something, you know. Yeah, it was. Anyway, so we had the recession which.

[Karina Bao]

Trickled all the way back to semiconductors, TSMC's revenues. It was four years after the dot com bubble before they were [e-mail].

[Dr. Morris Chang]

Yeah.

[Ben Gilbert]

Dot com at those rates.

[Dr. Morris Chang]

Yeah, yeah. Was it, it was almost four years. Yeah, two, I remember, recovered only in 2003. Yeah, it started in 2000. No, started in 2001, the first quarter of 2001 and recovered in the third quarter of 2003. So it was three years. Three years. 0102 the third, fourth quarter of 03. Three years. Anyway, the customer, quite a few customers had placed deposits to anticipate normal good times during those years. And we did build the plant. In fact we bought, we purchased or I should say, yeah, we bought a couple of other companies. And so their plants, their fabs became hours and the customer didn't need the wafers anymore. They need the outputs of those fabs anymore. And we didn't confiscate their deposit but we let them delay demand and eventually every one of them, they all use up their deposits. But that would come.

[Karina Bao]

And so then back to at this point, early 2011 with Apple, you go to them and say, we are prepared to serve half the number that you told us.

[Dr. Morris Chang]

Well, first of course the new or relative new business development director cc he had the privilege of first telling the lower level purchasing people at Apple and he got a response back, you must be crazy. You know. So Cece did not comment on that at Least he said he didn't comment on that. He brought it back to me and then I went to Apple myself and talked to Jeff Williams. So I said to him, we have to issue corporate bonds. I think I used the word prudent. After all the prudent financial planning, we decided that we would take half of what you asked for. Now he was very quiet about it. He only made one suggestion. He said, well, I think you can eliminate your dividend. You know, your shareholders will understand that. I said, well, no, I don't think. Well, the fact is I had looked into that. I mean, that's also a reason for having high level consulting advice. About one third of our investors are shareholders are very seriously interested in the dividends. So if we do what Jeff Williams said, our stock is going to drop.

[Karina Bao]

Like hell, you know, trigger a sell off.

[Dr. Morris Chang]

Right. Anyway, but when I talked to Jeff Williams and I went to see him in. What's the place?

[Ben Gilbert]

Cupertino.

[Dr. Morris Chang]

Yeah, Cupertino. I mean he was, he took it fairly willingly, you know, no big problem at all. The only suggestion that he made was the elimination of dividend, you know, and I said no. And he then let it just lie there, you know, okay. But then that issue was settled. I mean, how much demand we would take and how we will get. We still had to borrow billions of dollars even with half of the demand.

[Ben Gilbert]

All right, listeners, this is a great time to reintroduce a good friend of the show ServiceNow. Last year we shared their incredible story from founding through becoming one of the best performing public software companies in history. Well, today we want to share a more recent story. In November of 2022, ChatGPT was released. We all lived through that moment and it totally changed everything. And so predictably, what happened next is that there was an explosion of one off B2B tools that let people do some specific department or function thing with AI to get more done faster.

[David Rosenthal]

Yep. But then again, predictably, all of this just created what Bill McDermott, the CEO of ServiceNow, calls the hornet's nest of complexity. Businesses already had too much software in different departments doing different things, and now all of a sudden they had too many different AI tools, which just compounded the problem. Ultimately, AI is powerful, but it's only as powerful as the platform and data that it's built on.

[Ben Gilbert]

Fortunately, not only is ServiceNow a powerful platform, Bill had foreseen the coming importance of AI as some of his very first moves as CEO in 2020. He took all the R&D work that ServiceNow had been doing for years in AI and elevated it within the company. They also bought a company called Element AI founded by a Turing Award winner. Over the next several years, they were heads down integrating AI into the entire ServiceNow platform. Which meant that when this new era of large language models arrived, ServiceNow was deeply prepared.

[David Rosenthal]

Yep. So how does that show up in their product? Today, ServiceNow has AI agents that you can deploy across every corner of your business. They all work with each other, architected on one enterprise grade platform and built on the same data and workflows. So whether it's your IT or HR or finance, CRM, supply chain, et cetera, you can deploy AI agents in every part of your company.

[Ben Gilbert]

David, it's funny, you hear all these Fortune 500 CEOs talking on earnings calls about the AI agents that they're deploying to increase productivity. Behind the scenes, a huge number of those are actually doing this with ServiceNow.

[David Rosenthal]

Yeah, it's incredible. So if you want to bypass the hornet's nest of complexity caused by disparate software vendors and put AI to work on one platform and in every corner of your business, go to servicenow.com acquired and when you get in touch, just tell them that Ben and David sent you.

[Karina Bao]

So this really was especially after the investment in 28nm that depleted your reserves.

[Ben Gilbert]

This is a bet the company move.

[Karina Bao]

You're taking on a bunch of debt to go build.

[Dr. Morris Chang]

Yeah.

[Karina Bao]

The fabs to make this happen.

[Dr. Morris Chang]

But yeah, I know better company. But I, I didn't, I didn't think I would lose.

[Ben Gilbert]

You know, you sound like Jensen.

[Tyler Cowen]

We said that's exactly what Jensen said.

[Dr. Morris Chang]

And so. All right. But I think that the financial discussion with Apple had already happened when Apple, when Jeff Williams called me In February of 2000, we're talking about 2 11. He said it was a very short conversation set. We need to pause our discussions for two months because the highest level of intel has approached Tim Cook and has asked Tim Cook to consider Intel.

[Karina Bao]

And at this time, intel was the major supplier for all Macs. Apple's Mac line was all Intel.

[Dr. Morris Chang]

Yeah, yeah, yeah. That wasn't an issue, of course. I mean In February of 2011, Jeff Williams was talking about the iPhone. Yeah.

[Tyler Cowen]

But they had a close existing relationship.

[Dr. Morris Chang]

Yeah, I don't know what relationship they really have. Well, it must be close enough. So that was all he said. And I wasn't all that worried because in 2011, intel was no longer a name that you would, when you hear it, you would stand up and bow. You know, interesting. I mean Heck, you know, in the 90s, in the late 20th century, I mean, they were a name in semiconductors. When you hear it, of course, I'm exaggerating the situation.

[Tyler Cowen]

Moore's law, I mean, they're Intel.

[Dr. Morris Chang]

Yeah, Intel. If you hear the name, if you hear that they are in competition with you, you know, my goodness, you'll be trembling with fear.

[Karina Bao]

You know, I mean, this is why you started TSMC as a pure play foundry business, because you didn't want to compete head to head. You said we should not be an integrated design manufacturer of the design of the chips and the manufacturing. We have to compete on a different vector because we'll never catch Intel.

[Dr. Morris Chang]

I didn't say that we never catch.

[Ben Gilbert]

Intel because fair enough.

[Karina Bao]

Look where we are in 2025.

[Dr. Morris Chang]

Okay. Yeah. Anyway, so I of course had to accept Jeff Williams request. All right. But again, you know, as I just told you, I wasn't all that worried because my, I reviewed in my mind all the characteristics that Apple is looking for in a supplier technology. At that time, we thought we were almost at par with Intel. Almost. In fact, I thought we were. I think I thought we were at par with Intel. Intel at that time, manufacturing. I thought we were better than intel and customer trust. We thought that our customers trusted us more than Intel's customers trusted Intel. So I wasn't too worried. But then, indeed. And I also thought that when Jeff Williams told me the highest level of Intel, I thought he was talking about somebody like Andy Guo, who was retired, of course, but you know, but it turned out that he was only talking about the CEO of Intel at that time. Yeah, but I knew that only later.

[Karina Bao]

Would that have been Bob Swan or Paul Adolini?

[Dr. Morris Chang]

No, it was the Italian guy, Ottolini.

[Karina Bao]

Paul Adolini, got it.

[Dr. Morris Chang]

Yeah.

[Karina Bao]

So today intel doesn't make the chips in the iPhone. What happened?

[Tyler Cowen]

And in fact TSMC makes all of Apple's chips.

[Dr. Morris Chang]

Yeah. All right. I wasn't too worried, but you know, it still was in my mind. So a month passed, I think was about the middle of February when Jeff called to tell me to pause for two months. So almost exactly a month later, March, middle of March sometime, I decided that I would pay them a visit and ask them what's going on, any progress? So I emailed Jeff and asked for an appointment. I said I was coming to the Silicon Valley anyway, which was pretty normal, and stop in at your place on such and such a day. Is that okay? And Jeff replied by saying that, yeah, come here. But I won't be here. I have asked Tim Cook to see you. I mean, this freedom, Jeff's freedom of dedicating his boss to cabinets, it was a privilege that I seldom had in my career, you know.

[Karina Bao]

Yeah. Normally someone says, someone on my team will see you, not my boss will see you.

[Dr. Morris Chang]

I know, I know. It was usually that way. It was usually the other way. But in this case it was Jeff S. Well, anyway, so I showed up and Tim was very nice to me and took me to lunch, to the cafeteria, I guess, where there was a lot of food. We each picked our food and carried our tray back to his office, you know, and anyway, he told me there's nothing to worry about because intel just does not know how to be a Foundry. That's a very short but a very satisfactory answer to me.

[Karina Bao]

What is your interpretation of the meaning behind that statement?

[Dr. Morris Chang]

I was explaining to you we had on technology, on manufacturing, subconsciously, I think I interpreted Jeff's explanation to me to be the third one. Customer trust. I mean, they were always very superior. Intel. Before this Apple thing, Apple and we, before Apple became our customer, I knew a lot of Intel's customers in Taiwan. You know, all the PC makers are Intel's customer. None of them liked Intel. None of them. Intel always acted like they were the only guy, I mean, they were the only guy, you know, for the microprocessors.

[Karina Bao]

And that's for their microprocessor business. But here we're talking about the foundry business where TSMC at their extreme core does not compete with customers. And even if intel is trying to do business in good faith, they do have the conflict where they also design chips, which is competing with Apple's chip designers or Nvidia's chip designers or any other.

[Dr. Morris Chang]

Yeah, but I really don't think Tim meant that. I think Tim meant that the customer asked a lot of things. We have learned to respond to every request. Some of them were crazy, some of them were, some of them were irrational. We had to respond to each request courteously, which we do. You know, intel has never done that. Intel, I mean, I said I knew a lot of customers of intel here in Taiwan and none of them, they all wished that there were another supplier. None of them either trusted intel or liked Intel.

[Karina Bao]

So to finish the Apple story, the short answer is it worked on 20 nanometer. Were there any trade offs? Where did pursuing 20 nanometer and spending the billions of dollars cost TSMC in any way?

[Dr. Morris Chang]

Well, mine of course. But yeah, the story certainly does not end here. All right, so, I mean, there was pricing you know, everything was not easy pricing. And Jeff came himself and we talked about pricing and we, of course we had done our homework also on the cost and what kind of price we will accept. But Jeff came and he told us just a number, you know. Well, he gave us his reasoning. He had to make his component costs meet a certain goal also. Yeah, but anyway, that was settled and Jeff said, ah, and when the pricing was settled, I said, let's go out to dinner, go to a Taipei three star restaurant for dinner. And Jeff jokingly said, ah, if you didn't like the pricing, we'll probably be going to a McDonald's. Which was never in my mind, but he said that.

[Tyler Cowen]

Could you tell us a little more about what goes into considerations around pricing? I imagine things like the yields you think you'll be able to get hugely impact that.

[Dr. Morris Chang]

Sure, of course, yeah. But the main thing that goes into pricing, of course is the cost. And then the second thing is of course whether your desired price will be accepted by the customer.

[Karina Bao]

One thing that has occurred to me is TSMC now gets mid 50% gross margins, call it 55, 57, higher than your time. But many of your customers have 70, 80% gross margins. Yeah, TSMC is creating a lot of value. The designer is creating a lot of value.

[Ben Gilbert]

How do you sort of sort out who gets to capture the value?

[Dr. Morris Chang]

Well, I don't get the privilege of sorting it out now. You know, CC Way I think has the pleasure and the duty of sorting that out. Yeah, well, I mean as a general principle you try to find a kind of a middle ground which is different for every CEO. Even though every CEO who wants to protect his reputation, every CEO says, ah, I worry about the long range, but in truth not everyone does. So it's a very personal how to sort these things out. I think it's a very personal issue now for a lot of CEOs, there's really no choice. You have to, as a supplier, you have to accept a certain price if it's a commodity particularly. We have not finished with Apple yet.

[David Rosenthal]

Please, let's finish Apple.

[Dr. Morris Chang]

Yeah. Now I think you were asking whether.

[Ben Gilbert]

There was any trade offs.

[Dr. Morris Chang]

Trade offs? Well, the trade off there was a pretty significant serious trade off. And that was the detour that I said. We talk, we at that time, back in the 2011, 2012 time, our R and D was not strong enough to do two nodes at the same time. Now we are, but back then we weren't. So the trade off of accepting the 20 node technology was that we delayed our 16 node development and then Samsung came up with the 16. They had lost the 20 business, you know, so they, they were ahead of us in the 16 nanometer development.

[Karina Bao]

Because they got to skip 20.

[Dr. Morris Chang]

Yeah, because they didn't get 20. Okay, they need to develop 20. So I got a shock, I mean it was a real shock when I heard that Apple had placed their first orders of 16 with Samsung. Now that was a real shock. We invested so much. Even though we took only half of the original demand, it was still tens of billions of dollars, I think. And we were counting on it being at least 80, 90% of the equipment being converted to 16. And now if Apple went to Samsung for the 16, where did that leave us? Do you understand what I'm saying?

[Karina Bao]

Oh yes, sounds horrible. I would feel like I got tricked.

[Dr. Morris Chang]

Well, I wouldn't say that. Okay. But I was really shocked. So I emailed Jeff Williams right away and I said, you know, we invested in all this equipment and we were counting on you to take the 16 from us. But now, you know, we found out you were buying 16 and the first six years anyway from Central. So Jeff replied immediately, don't worry, I'll be here, I'll be there. I'll be in Sinju next week and explain to you. So that made me, that relieved me a little, but certainly not completely. But next week he did show up and he explained to us, he said, well, you know, as soon as you are ready, when you are 16, we'll buy from you. We'll buy all of the needs from you when you're ready. Now of course that completely relieves me because that's what we're supposed to do anyway, you know. So indeed what he said was true. We developed, we had our own 16 about half a year later and most of apples 16 nanometer requirements still belonged to us.

[Tyler Cowen]

Yeah, most, yeah, I can imagine the shock that you must have had at the same time. This also again just illustrates the brilliance of TSMC and the Pure Play Foundry business model. Samsung is Apple's chief competitor.

[Dr. Morris Chang]

Yeah, I know, I know. It was. I said in the autobiography, you know, sitting in Hsinchu, being in the foundry business, I actually see a lot of things before they actually happen. So let me tell you the IBM Qualcomm story, please. Now Qualcomm, we consider the Qualcomm to be a prime candidate to be our customer. We really wanted Qualcomm because we knew they were a technology house.

[Ben Gilbert]

What year was this?

[Dr. Morris Chang]

This was way back, you know, when we started in the 90s anyway. Yeah.

[Karina Bao]

And they were part of that initial.

[Ben Gilbert]

Wave of fabless companies.

[Dr. Morris Chang]

Yes, they started, Erwin Jacobs started the Qualcomm actually before I started TSMC. TSMC started in 87. Qualcomm I think was a few years before that. Yeah. So we in the 90s, early 90s, all the way up to 97, maybe 96, 97 all the way up to the latter part of the 90s we wanted Qualcomm to be a customer. And I saw their Operations vp. That's what they call, that's what our customers call their purchasing people. Operations vp, Operations Senior vp. And I saw him often and he was always pretty polite but he gave us very little business. And I also knew that his foundry, his main foundry was IBM. Now sometime in the later 90s I forgot whether it was 97 or 98. Suddenly he started. First he started to tell me that he would use us. Now he didn't even tell me who our competitor was, who our competitor had been. But I kind of knew that it was IBM from other sources of intelligence. And our business with Qualcomm, the business that Qualcomm gave us pretty rapidly increased after that, after 97, 98 period. So I immediately knew that IBM semiconductor was in trouble because I mean they had their own fabs and so on but their main business was really supplying to Qualcomm and a few other very small companies where small fabulous company. So I immediately knew IBM was in trouble because they were losing Qualcomm. All right. So the next step that IBM took was not a surprise to me. The next step they took was to ask us TSMC to co develop the next generation of technology which is 0.13 micron 130 nanometer in 1999. And since I anticipated that it was no problem at all for us to refuse the. And in fact even, even if I didn't anticipate that we would never, never have accepted that kind of co developer. I mean IBM was still, you know, they still consider themselves to be the senior partner in any partnership. They established the senior partner. So we were, the company that co developed something with them will send its engineers to IBM. You know, and when we do that we lose our ability to develop our own process. We'll have to depend on this co development thing and the co development thing. It's going to have a lot of difficulties, you know, heck, you know, our people, you know, we're being a different culture. So we declined without having to think about it at all, we declined the IBM office And IBM in fact, was quite angry. You know, I mean, he thought we were still a small, Taiwan backward place, you know, Taiwan company. And they are big IBM. So they immediately went to umc, and UMC accepted only to regret seriously their acceptance a few years later.

[Karina Bao]

And UMC at that point in time was.

[Ben Gilbert]

Was it fair to call it a.

[Karina Bao]

Peer of TSMC here in Taiwan in terms of volume and size?

[Dr. Morris Chang]

Not.

[Karina Bao]

By 1999, they were already smaller.

[Dr. Morris Chang]

Smaller. They were smaller already. Yeah. That was what I meant when I said that sitting here as a foundry, I mean, I can see some things that. Like this IBM thing.

[Tyler Cowen]

This might be a good time to go back to the learning curve. Speaking about the importance of owning your own technology and process at the leading edge and controlling your own destiny, you develop the learning curve.

[Dr. Morris Chang]

I really did not develop. I certainly did not initiate it. I think I had a role at ti. I had a role in refining it to the point where a semiconductor company can use it effectively. That's my role.

[Karina Bao]

So how would you explain it to a novice?

[Dr. Morris Chang]

Well, explaining learning curve theory is simple, but one would be foolish if one just takes the symbol explanation and thinks that that's all it is. The simple explanation of learning curve is that as you make more of one thing, anything actually started with refrigerators and cars. If a company makes more cars, then its cost per car, unit cost goes down. That's why it's also called experience curve. You gain more experience, you become more efficient. That's a simple explanation. But if one just takes that simple explanation and thinks that's all it is about, you know, you really haven't learned anything at all. All right. Anyway, the learning curve. Well, Bruce Henderson, who is now considered the father of.

[Tyler Cowen]

Strategies, founded Boston Consulting Group.

[Dr. Morris Chang]

Yeah, he would. He. He was the founder of Boston Consulting Group. And now, you know, I mean, there's a branch in. In business economics that's. That's called competitive strategy or something. Competitive strategy, I guess. And Michael Porter was at one time considered a big figure in this competitive strategy. I mean, he wrote three or four books, you know, big books, you know, 700 pages each. You know, I have all of them.

[Karina Bao]

His original competitive strategy memo, I think it's like 20 pages, is still some of the best business writing ever.

[Dr. Morris Chang]

Whose?

[Karina Bao]

Michael Porter.

[Dr. Morris Chang]

Oh, well, good.

[Ben Gilbert]

Who was a director of TSUC at one point.

[Dr. Morris Chang]

Right? Yeah, yeah. I had this story about him in my autobiography too, which because of time, we probably won't go into. Not Michael Porter, but Bruce Anderson. We will talk about him. He is now considered to Be the father of the competitive strategy. He came to Texas Instruments one day in, I think around 1970, or I should say he first called the TI CEO, Mark shepherd, and told him that Boston Consulting Group, he had founded the Boston Consulting Group, and we have BCG has a experience curve theory that would benefit semiconductor industry. And TI was the largest company in the semiconductor industry then. And would Mark Shepard like a presentation of this theory? Mark Shepard said yes. So Bruce Henderson brought Bill Bing, you probably know that name, with him and came to Dallas and made a presentation. And Mark Shepard invited the coo, the COO and me to attend the presentation. And it was a very eloquent presentation because, you know, Bruce Henderson was a very eloquent man. And Bill Bain was on the side, apparently, Bruce Henderson's portrait. Anyway, Mark Shepard was impressed and he decided that TI would work with BCG on this learning curve theory. And Bruce Henderson then assigned Bill Bang to work most of the time at TI, you know, most of my, like, three days a week. And Mark Hepper assigned me as TI's guy. So Bill Bing and I became partners. And I assigned Bill Bing a small office, very close to my office at ti, in the same building and small office, because he needed a lot of things from me. He needed permission to get our costs, our prices. We had a lot of families of integrated circuits and transistors. I mean, he had a lot of requests, so it was easier if he was nearby. And every time when he arrived at some interesting, useful conclusions, he would also discuss them with me. So we had a very pleasant association for, I would think, two years, maybe even more. And he would, you know, fly to Dallas every Monday and go back to Boston either Wednesday night or Thursday night. And of course, every time he went back to Boston, it would be to tell Bruce Henderson what he called what he had done that week. So this happened, this went on for, I think, two years. And then finally Bill Bang came to see me one day. And it was in those two years that I absorbed a lot of learning curve stuff, which I used up to now. I found it highly fruitful, just as a thinking tool.

[Karina Bao]

Yeah, it seems so fundamental to the industry that you want to get through the low volume period as fast as you can. Ideally, you spend no time in the low volume period. And it seems like over time, all the returns in the industry, the winner.

[Ben Gilbert]

Is the one with all the volume because they'll just have the lowest prices.

[Karina Bao]

And there's a flywheel where once you.

[Ben Gilbert]

Have the lowest prices, you get all.

[Karina Bao]

The business, then you can Reinvest that in the next node.

[Ben Gilbert]

It's almost.

[Karina Bao]

I couldn't have told you that TSMC was going to be the winner, but once you internalize the learning curve and globalization, you can sort of intuit that in the future there will be one.

[Ben Gilbert]

Winner in semiconductor manufacturing.

[Dr. Morris Chang]

But one day, after a couple of years, Bill bank came to me in Dallas, said, you are the first one I tell this to outside the Boston Consulting Group. I am leaving Boston Consulting Group to start my own consulting company. So I said, why? I said, you know, obviously Bruce Henderson thinks very highly of you. And Bill Baines said, yes, but there is the most imperative. That's the first time I heard that term, you know, quote, imperative.

[Karina Bao]

He meant for him personally.

[Dr. Morris Chang]

Yeah, for him personally. Well, anyway, that was that.

[Ben Gilbert]

All right, listeners, now is a great time to thank friend of the show Fundrise. We've gotten to know Fundrise's CEO Ben Miller and the folks there quite well over the last several years and their huge acquired listeners. Just like all of you.

[David Rosenthal]

And since we first worked together three years ago, fundrise itself has gone through quite a transformation. Longtime listeners may remember that they have a growth stage venture that they actually first launched here via an acquired sponsorship back in 2022. At the time, fundrise was primarily known as the US's largest real estate investment platform for retail investors. And it wasn't necessarily obvious that Ben. Fundrise. Ben, that is that his kind of crazy idea to bring their model to venture capital would work.

[Ben Gilbert]

Well, fast forward to today and incredibly, they have demonstrated they could break into the venture industry in a big way. Ben Miller and Fundrise have invested in databricks, Anthropic Canva, Anduril Ramp and fellow friends of the show Vanta and also Servicetitan, which just went public in December in a successful ipo.

[David Rosenthal]

Yep. It's genuinely awesome what Funrise has done here, which is something that many have tried over the years but no one else has actually been able to accomplish. In venture, they've taken a retail platform that any American can invest in and gotten pre IPO access to some of the best private companies in the world. It's democratized access to all the value creation that otherwise has been locked in these private companies over the last decade. Plus, as these growth companies are delaying IPOs and staying private longer.

[Ben Gilbert]

Yep. So when the service titan IPO happened, thanks to fundrise, tens of thousands of regular investors got to celebrate alongside the VCs elsewhere.

[David Rosenthal]

Yep, we'll be talking about fundrise all season long. And you can go check out the full portfolio that Ben and the fundrise team are [e-mail] venture. And if you're a growth stage founder looking for a great Series C or later investor, just get in touch and tell them that Ben and David sent you.

[Karina Bao]

As our time comes toward a close, one question David and I wanted to ask you is TSMC is essentially the only trillion dollar company in the world not on the west coast of the United States. It is this incredibly important thing in the world. It's this unlikely success of grand scale.

[Dr. Morris Chang]

Unlikely in your opinion.

[Karina Bao]

I mean, you started it when you were 56.

[Dr. Morris Chang]

Yeah, yeah.

[Karina Bao]

There are many things.

[Dr. Morris Chang]

I'm not going to argue with you. Okay. I'm merely asking as a point of curiosity. I didn't realize. I didn't think it was that unlikely. Well, it did exceed my expectations. TSMC's size and importance exceed my expectations, but not by an order of magnitude.

[Karina Bao]

But wasn't the original plan to stop.

[Ben Gilbert]

Building after Fab 2?

[Dr. Morris Chang]

That was never. That was only the very initial plan. Okay, yeah, we were never going to stop there, you know, I mean, we were just talking about learning curve. You know, that, you know, how could we plan to. If I didn't know anything about learning curve? I would say, yeah, maybe we'll stop after two, perhaps, you know, But I was a serious student of learning curve, and I would never stop at the stove apps.

[Karina Bao]

Here's why I say unlikely success. There were so many reasons why the original incarnation of TSMC was kind of a bad business. Fabless was not a thing yet. And so all of your initial customers were the integrated device manufacturers, the Intels of the world, and you were taking their worst excess. You were their second source supplier for manufacturing on the stuff that they didn't.

[Ben Gilbert]

Want to make on their own.

[Karina Bao]

Did you see Fabless coming or was that a very lucky thing?

[Dr. Morris Chang]

No, I saw it coming. And in fact, I just had dinner or two months ago at dinner with the first guy, Gordon Campbell. Gordy Campbell. Have you heard his name? Anyway, Gordy Campbell came to see me in General Instrument in my final months at General Instruments. He came to see me. He did not know that I was leaving. Frankly, I did not know when I saw him that I was leaving yet. But the reason he came to see me at General Instrument was that he wanted funding, he wanted investment from General Instrument. $50 million. He said he wanted to start a new company. $50 million. So I said, do you have a business plan? No, it's all in my head. So I said, well, I need at least A business plan. I mean, I have to go to the board of journalism. So he said, all right, I'll send it to you within three weeks. Three weeks later there was no business plan. And I was interested because I knew that he had the good reputation of starting companies. So I called him and he said, ah, Morris, I'm sorry, I didn't send you anything because I don't need you anymore. I said, how come? He said, I don't need $50 million more anymore. I need only $5 million and $5 million I can gather up very easily. I said, why do you need only $5 million? He said, I'm not going to build a fab. See, that was the start for me that there will be fabulous companies. Another guy came to General Instrument and said he had already started a company which was called Atmel A T M E L. And they did not have any fabs. And this guy wanted the General Instrument to make the wafers for them. And back then General Instrument, you know, had empty fabs. So I said, I told the semiconductor manager of General Instrument, I said, I'll go ahead and work with him.

[Tyler Cowen]

Don Valentine, who I'm sure you, you knew.

[Dr. Morris Chang]

Yeah, I knew him. Yeah.

[Tyler Cowen]

He had a great, great quote when asked about starting Sequoia. And he said, well, I had an advantage. I knew the future. And it sounds like you knew the future too.

[Dr. Morris Chang]

Well, at least I had a glimpse of it, you know. So Atmel, you know, and they were still fighting. I mean, at mel. He wanted the Fab to be run his way. Now, of course, the General Semiconductor manager wanted to run the Fab his way. You know, MJ Instrument owned the Fab anyway, for heaven's sake. So that was just a very early situation in which the difficulty and the advantage of running a foundry business already appeared. The difficulty was you have to satisfy a lot of customers, you know, and everyone, you know, wanted the Fab to rerun his way, you know. But you can only run Fab one way, you know, which will satisfy more or less all the customers. And the advantage, of course, is you have a lot of customers, you know.

[Karina Bao]

Well, we can't thank you enough, Dr. Chang.

[Tyler Cowen]

Dr. Chang, thank you.

[Dr. Morris Chang]

All right, very good. Was my pleasure. Even though it's the first time in a long, long time that I have talked so long.

[David Rosenthal]

We appreciate it.

[Ben Gilbert]

Thank you for doing it with us. All right, listeners. Well, David and I are coming at you now from our home studios back in Seattle and San Francisco, and we wanted to do a little post game on that interview. A Little bit of analysis, kind of our conclusions, the things that are still sitting with us a few days later after we've crossed the ocean. And David, this felt essential to me because it felt like we were just recording history there with Morris. I didn't want to interrupt him to try to make a business model point or it just kind of felt like we should let him talk and then we could do our part after.

[David Rosenthal]

Yeah, totally. And fortunately we have a model for doing analysis at the end of Storybook, our Playbook. So let's do it.

[Ben Gilbert]

Okay. So the first thing that I can't shake that just keeps sitting with me is this idea that is genius in hindsight of not competing with your customers. Being the dedicated Pure Play Foundry which we actually saw in the TSMC Museum of Innovation. They have Morris's original pitch, like his.

[David Rosenthal]

Original slide, his original business plan that he pitched to the Taiwanese government, the.

[Ben Gilbert]

Government and then to investors. There's like two different versions of this extremely simple pitch deck. And one of the bullet points it's right in there of be a dedicated Pure Play Foundry. At the time I get the sense it was actually much more about what can we win at versus what will be the most important and valuable semiconductor company in the world in the future.

[David Rosenthal]

Right at the time they didn't have the capabilities, certainly not TSMC and didn't exist in Taiwan to be able to design chips and products. So like it was impossible for them to compete with customers. This was all they could do.

[Ben Gilbert]

Right. It crossed Morris's mind for sure, hey, we could compete with Intel. But then he scrapped that. I get the sense because the thing that they were good at was this manufacturing angle. And it's almost like an accident of history. The Pure Play Foundry ended up being the best way to do this, I guess best as evaluated on market cap versus other foundries and integrated device manufacturers such as Intel.

[David Rosenthal]

Well, and best that like this is the path that has led them to being essentially alone, operating at the leading edge. Like they have surpassed technology wise, all of the other integrated, you know, integrated and quasi integrated chip foundries out there.

[Ben Gilbert]

Yeah, I guess that's my first thing is this. You can connect the dots looking backwards, as Steve Jobs said, and that famous quote, but forwards is difficult.

[David Rosenthal]

This primarily I think was the main reason why TSMC has worked so well.

[Ben Gilbert]

That they don't compete with customers.

[David Rosenthal]

They are truly the only foundry at the leading edge that does not in any way compete with their customers. They don't have their own end product division, they don't design their own chips. It is truly they only serve their customers and they do not compete at any other part of the value chain with them.

[Ben Gilbert]

Right, okay. So if you're asking yourself how did the world arrange itself in this way such that you could have a trillion dollar company that doesn't do any design, that doesn't do any architecture, that doesn't do any EDA tools like Cadence or Synopsys. So they're not Nvidia, they're not arm, they're not Cadence Synopsys, they're not asml. Like they're not their own equipment vendor. So what enabled this? One of the things that I think is under appreciated and we didn't talk that much about with Morris, but the rise of arm. If you try to play forward a world where intel and the x86 architecture had maintained its dominance, you wouldn't have had this window, this opportunity for the value chain to sort of rearrange itself. But the fact that there was an architecture, as we talked about on our ACQ2 episode with Rene from ARM, this architecture that became dominant in phones and then computers and then servers, and now is coupled with all these AI chips, you open the door to have a dedicated foundry for ARM chips in a way where if it had stayed x86, it's not like you could start a new foundry for all the fabless x86 companies. For the longest time, intel was the only x86 company. And then AMD of course is the second source that AMD is a TSMC customer. So that's sort of the One Edge case. It's like, well, there is AMD that designs x86 chips that TSMC manufactures. But that's not like the common case of the way it would have gone for in an x86 dominated world. It would have been fully integrated. Intel.

[David Rosenthal]

Yep. I mean one super straightforward and enormous example of this just is Apple. Like if ARM hadn't become such a viable CPU architecture platform and Apple hadn't standardized, you know, their Apple silicon on arm, probably intel would be making all of the chips that go into your iPhone, all the leading edge chips that go into your iPhone. Like they already had the intel relationship. Macs were running on x86 intel chips.

[Ben Gilbert]

Yeah, you have to keep peeling the onion because this of course supposes that intel actually could have gotten their act together and made a chip for mobile phones that was performant. But maybe all the baggage from x86 actually prevented them from structurally doing that. It wasn't like a competency thing, it was like a, the it never could have happened that x86 could run on phones.

[David Rosenthal]

Yeah, I think all this is true. But if ARM hadn't existed, there would have been nowhere else for this vector of innovation to go.

[Ben Gilbert]

Right. The point that we're driving at here is this world where there's a standalone architecture company, there's a standalone big manufacturing company, there are standalone EDA companies, there are standalone designers. Apple, Nvidia.

[David Rosenthal]

In a large part that's due to arm.

[Ben Gilbert]

Yes. And ARM and TSMC are sort of like coupled at the hip of history of when this, how this came to be. In fact, didn't you find that a bunch of these were started within 12 months of each other?

[David Rosenthal]

Yes, totally. The mid to late 80s were like an absolute golden period for all these companies getting started. Not only tsmc, arm, Synopsys, Cadence and asml, all founded right within a couple of years of each other. Which brings us to Hinchu Science Park. Going there in person, we talked about this on our original TSMC episode that you know, even if you wanted to, you couldn't airlift TSMC and this capability out of Taiwan and recreate it somewhere else.

[Ben Gilbert]

Yeah, we talked about that as if we knew it in sort of an abstract way. This was very different. Driving around the science park, feeling it.

[David Rosenthal]

In a physical way, the entire ecosystem, it's like if Silicon Valley were all in one, you know, kind of government sponsored, you know, industrial park, which it sort of was and was Silicon Valley, you know, as we talked about in our Lockheed Martin episode.

[Ben Gilbert]

Oh, the early Lockheed.

[David Rosenthal]

Yeah, yeah, the early Lockheed years. But that's what it's like today. It's all right there. It's not just TSMC that's there, it's all of their partners, it's all of their customers. You know, we're driving by and this is a Cadence building there. And that's a synopsis building there. And that's an ARM building there. There's Qualcomm, there's Media Tech right there, headquartered right there, right across the street. The craziest thing to me we saw there are two universities that are just.

[Ben Gilbert]

Like there in the science park.

[David Rosenthal]

Yes, like that are cranking out PhDs every year that are just getting absorbed right there in the ecosystem. I mean, this would be like if there were two universities on the Nvidia campus.

[Ben Gilbert]

The thing that really jumped out to me is you always hear people talk about how integrated this ecosystem is with each other, that Synopsys has to be closely tied with TSMC to understand what the next node will look like so that they can make it easy for people who are using synopsys tools to design chips to actually manufacture using TSMC's process. You kind of get the sense of oh, I see. Because they all are walking across the street to each other and having this extremely close communication. Not to mention, David, both of our flight experiences kind of felt like, oh, these are a bunch of chip design fabless companies that are making the pilgrimage over to Taiwan to meet with people in this ecosystem.

[David Rosenthal]

My plane felt like the semiconductor version of the tech buses that go from San Francisco down to Silicon Valley every day. I mean the backpacks that I saw on the plane, like there's a Google backpack, there's an Amazon backpack, there's an ARM backpack, there's a Marvell backpack.

[Ben Gilbert]

Yeah. Which does raise the point of this Arizona fab and the sort of outside of Taiwan fabs, you know, why is TSMC doing it? Because it's not their leading edge. It's not big volumes. It's not leveraging this really close geographic ecosystem that they have in. I believe there's three science parks in Taiwan. We saw the original, but there's one that's even bigger. I think it's the Tainan one in the south. But it just kind of becomes clear that it's. There are customers and government reasons to build fabs in other countries, but you're.

[David Rosenthal]

Not going to be able to recreate the magic of that ecosystem like physically instantiated right there.

[Ben Gilbert]

Yeah, it would take decades to recreate the ecosystem that they have in the science parks.

[David Rosenthal]

Which is funny on that front. You and I were saying as we were driving around there, this has got to be the single most successful government funded industry initiative of all time anywhere in the world.

[Ben Gilbert]

At least to spur innovation. With this particular of a mandate totally.

[David Rosenthal]

The land grant universities here in America. But this was like a, like a rifle shot. Like you know, we are going to spur semiconductor industry innovation in this industrial park, in this location. And it worked.

[Ben Gilbert]

And there you have one of the 10 most valuable companies in the world and the only, I guess one of $2 trillion companies that are not on the west coast of the United States. I would say it worked.

[David Rosenthal]

Yeah, it, it worked. It worked.

[Ben Gilbert]

And the scale too. We drove by a construction site where it looked like a quarter of the building was done. This is where they're making the 2 nanometer process, which presumably will be in the next iPhone. It's not like anyone said anything about that, but geez, I wonder after 5 nanometer and then N3E and N3P when they have this 2 nanometer process, I wonder what they're going to make on that. Lots of Nvidia GPUs and lots of iPhone chips. Massive building phase one was open, which I think is a quarter of the building. But then there's three other phases for this 2 nanometer facility that are not even ready for primetime yet. But I think they're actually doing the small production runs, getting ready to ramp in the second half of this year on the 2 nanometer process.

[David Rosenthal]

Like you said, the scale of the physical buildings of these fabs smacked me in the face. I felt like I was looking at a sphinx in Egypt. I mean like, it's huge. It's like many football fields of size. Like, you know, just per phase of the fab. These are enormous buildings.

[Ben Gilbert]

Yep. Okay, so back to things I've been noodling on since the conversation with Dr. Chang. I felt a little bit bad for saying, hey, your original business plan was kind of a bad one that basically taking the excess capacity from intel and other IDMs and giving them a place to manufacture their least critical, least leading edge, least interesting chips. But that is true. I mean, he believed that Fabless was going to be a thing. But for the first, I don't know, at least five years, the only real business that they had was IDMs who were willing to say, how cheap can you give me some of your manufacturing capacity? And it's not strategic at all. But here you go, here's some revenue.

[David Rosenthal]

This is a major difference in Intel's FAB strategy versus tsmc. Intel is constantly taking their existing fab footprint and repurposing it and upgrading it for the leading edge, which, you know, on the one hand is great. It's utilizing their assets, you know, for the most valuable, highest valuable products. On the other hand, though, they then lose the manufacturing capabilities for older process node generations. And it's not like demand goes away for those chips and those products.

[Ben Gilbert]

It does, it just does slowly.

[David Rosenthal]

It does slowly, yeah. And I mean like replacement parts is a great example. Like, you know, there are technology systems and products, you know, manufacturing things, Even automobiles built 10, 20, 30 years ago that have specific chips that were made with old process technology that when they break and they need replacing, like you need those exact same chips. So this is the business that TSMC started in.

[Ben Gilbert]

Right. So that is the fundamental philosophical difference is, I think, fab. So Fab one belonged to itri, the government where Morris was president of that organization before taking the helm at TSMC Fabs 2 and 3 were the first TSMC specific fabs that they built. And they're still running from the late 80s. And in addition to the old replacement parts, there are still applications for older nodes. If you're in this world of 40 nanometers and up and one micron, and I don't know all the names of the previous generations, but the, the less high resolution etching on silicon CMOS sensors are great examples of that. The cameras that we're talking into right now that have these great Sony sensors, those don't require a 2 nanometer process, but they do require etching the same way that you would etch a chip. And so that's a specialty use case of TSMC's older fabs, which by the way, on an accounting basis are fully depreciated. So they're almost like free to run.

[David Rosenthal]

Right, right. All the capital expenditure. Now there's maintenance capex that needs to go into it, of course, but like the initial capex. Yes, fully depreciated, you're just getting like essentially very, very high margin dollars out of those old fabs.

[Karina Bao]

Right.

[Ben Gilbert]

And it's not that it's a better or worse decision than what intel has historically decided to do, but it is a different one. Intel is going to keep closing the old stuff so they can own a smaller footprint and keep all the equipment and everything focused on making the latest and greatest. Just not what TSMC does.

[David Rosenthal]

Totally, totally.

[Ben Gilbert]

But that point of. I'm obsessed with this idea that it was funny that Morris went on the record and said, no, I knew, I knew Fabless was coming. And he had a couple of great anecdotes about that. Which is funny because in older interviews sometimes he goes, well, the timing was a little lucky on when Fabless happened, but. But I think he even said to Jensen, in the first few years of tsmc, growth wasn't very high because we were waiting for the customers to emerge. But it really is this idea that he saw the future. He made a bet and he did kind of a crappy business to build up competency capability, volume capacity. Yeah, exactly.

[David Rosenthal]

To build up literal fabs.

[Ben Gilbert]

Right. To be there when the Fabless revolution happened. And I don't know, you know, I think he. Yeah, I think he was within 12 months of when he thought it would happen. But it is crazy that when, especially in his memoir, you're reading the story about the early customers, year five, year six, year seven, the majority of the business is still not Fabless. It's someone else's, you know, worst orders.

[David Rosenthal]

Which that actually gets to the heart of learning curve pricing that we spoke about with Morris.

[Ben Gilbert]

We brought it up sort of like tangentially with him, but it's probably worth dwelling on. What is the learning curve?

[David Rosenthal]

Yeah, the core insight of the learning curve from BCG and Bill Bain and Bain and Morris that they all developed together.

[Ben Gilbert]

Which by the way, how crazy is it the founders of BCG and Bain are the ones who sort of co developed this or at least named it and formalized it with Morris when he was at ti.

[David Rosenthal]

Totally. The insight is that like the goal that you are playing for is to be the largest volume player kind of at the end of the game. So if you take that as a given of like if we get to be the largest volume player, this is a fixed cost business. This is a scale economies business. We can spread that fixed cost over the maximum number of customers. How do we get to the maximum number of customers in the early stages of the game where it's more competitive, we accelerate the pricing to where we think it will get to at the end of the game. So that's why doing these price cuts and also starting low with your prices, like you can even start unprofitable with your prices in the early days in a given node generation. But because the goal is crowd out the competition, become the industry dominant number one player, get all the customers. Once you aggregate that demand, then you get the scale and then you can get the economies of scale pricing. But just get to that as fast as possible is the name of the game.

[Ben Gilbert]

Yeah, it works backwards from. It actually involves a lot of market sizing at maturity on this node. What do we think demand will be for? You know, call it 40 nanometer. How many orders of individual chips will there be in 40 nanometer? Okay, well, to have the cheapest price for customers, we need to do the biggest ordering. And so then it's just a matter of like how fast can we get into volume production.

[David Rosenthal]

Yep.

[Ben Gilbert]

Everyone sort of intuitively grasps this. Oh, economies of scale. But the implications across your whole business, your pricing strategy, the way like strategic finance. How do you. When do you decide to take on debt? When do you not. When do you decide to take on more shareholders?

[David Rosenthal]

It's this incredible orchestration to make it happen. You know, it's almost Costco like in the ballet that has to go into this.

[Ben Gilbert]

Right. I mean the example from Apple, we are about to go get the absolute whale customer and we have to balance taking on all of their order, which the learning curve would tell you you want to get the deepest down the learning curve possible, we should go take all their order. But that kind of exposes you to existential risk in your business when you're not, you know, within spitting distance of doing that volume on your own. So is it really worth betting the entire company?

[David Rosenthal]

You got to be so precise and accurate in your forecasting of the ultimate market demand, which means the ultimate demand for your customers products, which in the Apple case means ultimately forecasting accurately how many customers are going to buy the next generation iPhone in order to run your business right.

[Ben Gilbert]

Or in Nvidia's case, how big is AI going to be? You know these are, this is kind of a crazy thing for a manufacturer to have to do to have that crystal ball into the end market markets, you know, the end their customers markets. But they really do need to make bets on how big those markets are going to be.

[David Rosenthal]

Yep. Because if you're off by 5, 10%, that's going to tank your entire profitability for that node generation, which is going to tank your free cash flow, which is going to mean you can't play the game in the next turn.

[Ben Gilbert]

To this point though, if you actually are good at all of this and you are good at forecasting and the execution is flawless, once you internalize the learning curve, the story of TSMC goes from one where it's surprising and unlikely and it becomes an inevitability. Of course the company that is taking on all the orders to have the.

[David Rosenthal]

Lowest prices, of course this will be the end state of this industry is to have a dominant player.

[Ben Gilbert]

Like right now it costs, I don't know, on the order of $20 billion to build a new fab. Eventually it will cost 40 billion, 80 billion, 100 billion. How many players are really going to be left standing with the ability to deploy $100 billion to build a building with some machines in it? This market has natural monopoly characteristics.

[David Rosenthal]

Yup, yup. And that's just the CapEx side of the equation as we talked about with Dr. Chang. Like there's also the R and D side of the equation that needs to go into creating the next process node that can, you know, be built on that capex.

[Ben Gilbert]

Yeah, it is crazy that if you just look at every year the capex versus the net income of this company, they basically spend all the money, not all the money, but their capex grows in a very similar way. If you look at the bar graph to their net income from the year. And so that is even before R and D. David, to your point, if they were Looking around at competitors, at other foundries and saying, okay, how much can we invest? They can invest more than anyone else because they have the most volume. And then on top of that, they are also spending in a separate bucket of R and D on the technology for their manufacturing processes. And that's how you get coas, which is the technology that they use for packaging for AI chips. That's their proprietary thing. Which, by the way, once you have proprietary packaging, then it's even harder for customers to go and, you know, double source, double manufacture elsewhere. They have a similar technology for packaging of mobile chips that doesn't use coas. But it seems like this is a market where those in the lead are only going to get further in the lead over time, absent some big strategic mishaps or some big execution mistakes.

[David Rosenthal]

Yep, totally. And then I think the last playbook theme here for me and for us is just that Moore's Law is undefeated. I mean, at the end of the day, back from starting, all the way back, Morris's career at Ti and being a contemporary of Jack Kilby and Bob Noyce and the invention of the integrated circuit. Once the integrated circuit was invented, the compounding growth of that industry is all that mattered. Everything else is just downstream of the fact that the world is going to demand more computing at this monotonic, exponentially increasing pace every 18 to 24 months. And of course, the technical definition of Moore's Law expired a long time ago, but spiritually, the world demands roughly 2x the computing power that it had two years ago every two years. And that has continued for 50, 60 years at this point and shows no signs of slowing down. And as a result?

[Ben Gilbert]

Well, no signs of slowing down, except that they keep hitting theoretical physics limits.

[David Rosenthal]

Well, I said the demand side of the equation shows no signs of slowing down.

[Ben Gilbert]

Well, sure, but the demand side is far more than 2x. Moore's law has always been about how much can happen on the innovation side of getting better at design and manufacturing. And that is getting harder than ever because we're having to call more things Moore's Law. Packaging was never a part of the original Moore's Law and software improvements and proprietary interconnects.

[David Rosenthal]

My point is that it's a self reinforcing system. As long as the demand is there that the world wants twice as much compute as it had yesterday. There are going to be, you know, market incentives to drive the supply side. And that is why people work so hard to make it happen.

[Ben Gilbert]

All right, here's the stat. Since TSMC was founded in 1987, the world's semiconductor market has grown from 26 billion to 527 billion last year. So they rode a ridiculous tailwind.

[David Rosenthal]

Ridiculous tailwind. Yep.

[Ben Gilbert]

A ridiculous tailwind where as the industry reorganized away from the vertical integration of the intel world, you could build a trillion dollar value foundry.

[Dr. Morris Chang]

Yep.

[Ben Gilbert]

The scale of the numbers are so staggering. I keep thinking about the fact that they can go spend $20 billion to build a building, and the stuff that they spit out is so valuable that that 20 billion was a profitable investment in a matter of I don't know how many years, if it's 3, 5, 7, whatever the payback period is, they know for sure that it's a worthwhile investment to do that. The whole thing comes down to, oh, my God. Silicon has become really valuable. Like integrated circuits are the fabric of our world today.

[David Rosenthal]

Well, Ben, what an amazing experience. So glad we did this. Went to Taiwan, got to see this in person. Got to spend this special time with Dr. Chang. What a great way to start the year. Should we do carve outs?

[Ben Gilbert]

Carve outs.

[David Rosenthal]

All right.

[Ben Gilbert]

I have two. One is a kind of a hilarious. I can't believe it's 2025. And this is my recommendation for anyone who's not a AAA member, I highly recommend it. Oh, I had a spectacular AAA experience where I went to fill up the air in my tires before a road trip. And I went to the gas station, and there was something wrong at my local gas station with their pump, and I ended up draining the air in my tires to an unsafe level. And so the car was actually not drivable away from this gas station. I was like, crap, I can't even go get the other car. And I had my baby in the backseat. And my wife and I were trying to figure out what to do, and we're like, do we have to call a tow truck to tow us to. And so I signed up for AAA while I'm just sitting there in the gas station parking lot. And within I think an hour, hour and a half, they had a mobile tire inflator. On a long weekend, like a holiday weekend, when other people aren't working, drive out and fill up the air in my tire so we could be quickly on our way, not ruin the weekend.

[David Rosenthal]

Amazing.

[Ben Gilbert]

And it was like 100 bucks or something. It's really not a bad price. And you get. This was a hundred bucks to become a member, whatever it is. 150. And then the service is actually free for something as trivial as this. And you get three of them.

[Dr. Morris Chang]

A Year. Wow.

[Ben Gilbert]

So I'll take it. It was a phenomenal experience.

[David Rosenthal]

All right. Aaa, here we go.

[Ben Gilbert]

My second one is a YouTube channel called defunctland. You and I were talking about this.

[David Rosenthal]

Oh, yes. This is so good. You turned me onto this.

[Ben Gilbert]

Yeah. It is an entire YouTube channel that I actually haven't watched in a while, but I only remembered it from our conversation. And now I need to go back and watch older ones that talks about defunct theme parks. So if you, like, acquired and you wish you had something acquired, like, that's kind of visual, that's about history and intellectual property and people trying crazy stuff. Some of the most crazy entrepreneurs and executives within companies decided to build theme parks. And it is very fun to see the weird old Nickelodeon hotels or action park in, I think it's New Jersey. The like, wildly unsafe park from the 60s, 70s and 80s.

[David Rosenthal]

Oh, man, those were the days.

[Ben Gilbert]

Yes. You could get lost for hours and hours and hours watching defunct land. So I highly recommend the YouTube channel.

[David Rosenthal]

I'm really glad that you and I grew up as kids in the era where we could still take unreasonable amounts of risk. And nobody thought that that was there was anything wrong with that.

[Ben Gilbert]

Yes.

[David Rosenthal]

Oh, crap. My carve out. Speaking of, you know, it being 2025, how are we talking about this? On the plane on the way over to Taipei, I finally watched everything everywhere all at once for the first time. I can't believe I hadn't seen it before, but, you know, two kids under three and a half, not a lot of time for movies. It's so good. It's so good. I think this was your carve out when it came out a couple years ago. Just so, so, so good. Truly enjoyed it, lived up to the hype, deserves every award that it won.

[Ben Gilbert]

All right, well, we've got some thank yous to folks who helped us prepare for this episode. So first to our sponsors, JPMorgan Payments, our presenting partner, ServiceNow and Fundrise. You can click the links in the show to learn more and then some special shout outs to Art Dejius, the co founder and executive chair of Synopsys, had a great conversation with us. Well, first publicly with Sasseen Ghazi, the current CEO of Synopsys, on an ACQ2 episode a little while back. And then we chatted to prep for this episode and basically ask the question, what should we be asking Dr. Chang about? We got some similar notes from Renee Haas, who is the CEO of arm. Great conversation with Sir Peter Bonfield, a current TSMC board member and former CEO of British Telecom. David, I know you've got a few. Also.

[David Rosenthal]

Also to Wally Rines, the former CEO of Mentor Graphics. Wally is a legend in the semiconductor industry, almost on par with Dr. Chang. They were contemporaries at TI back in the day. And to John Bathgate and Britain Johns from NZS Capital. Our go to folks on anything semiconductors. I think they were more excited, even more excited than we were that we were doing this and that we got to talk to them about it.

[Ben Gilbert]

Yes. Also past acquired guests. I think that episode holds up really well where we did semiconductor and complexity theory with them totally. And actually John is the one originally who explained to me how EUV lasers work, which is still one of the most impressive accomplishments in human history. To John from the Asianometry YouTube channel. This is just an incredible channel all about semiconductors and about how all of this stuff works. I mean I learned so much about CMOS sensors, about how they make the actual silicon wafers themselves. That's a sophisticated process before the etching even starts. He's just got some awesome, awesome videos on the Asianometry YouTube channel and very kindly bought David and I dinner and hung out with us the night before the interview, which was very fun to do in Taipei.

[David Rosenthal]

Very fun.

[Ben Gilbert]

Also to Tim Culpin, a former Bloomberg journalist who now has a substack called Culpeum. Also gave us some great topics to chat about. And lastly, as always to Arvind Navaratnam at Worldly Partners. He did a great, great write up on TSMC that he'll be posting publicly right before we post this episode so you all can see it. It was great last minute prep for me after reading the memoir to get someone else's take on what makes this company so special. And actually some of the stats that we threw out in our playbook came straight out of his write up. So if you want more and kind of a more analytical view of how did TSMC become tsmc, he's got a great study on that that we'll link to in the show notes. So if you like this episode, go check out other semiconductor episodes. Nvidia. We've got four of them at this point. One of them is an interview with Jensen and then we've got the whole history of the company across three different episodes. We did a great live episode several years ago on Qualcomm, which I think is a sleeper pick.

[David Rosenthal]

That's right. That's right. Total sleeper pick. Amazing story. Irwin Jacobs, one of the greatest entrepreneurs in American history.

[Ben Gilbert]

Yes. And our diving into how CDMA works was one of the most fun technical explanations I've ever done on an acquired episode. So if you want to understand how all of our cell phones work, go check out the Qualcomm episode. Or, of course, if you did not last week, listen to the TSMC Remastered episode. I don't know how you got this far without listening to that, but you should go listen to that after this episode. Check out acq2. We've been talking about this episode with Synopsys. There's one with Rene Haas from Arm holdings that we did. It's our most recent episode, so it's spectacular. And if you're interested in semis, go check that out. Come talk about this episode with us in the Slack Acquire FM Slack. And if you want to know when future episode drops, you can find out. Sign up at Acquire FM SL and you'll also get episode corrections and hints at what the next episode will be. So with that, listeners, we'll see you next time.

[David Rosenthal]

We'll see you next time.

[Dr. Morris Chang]

Who got the truth? Is it you? Is it you? Is it you? Who got the truth now, huh?