TSMC (Remastered)

Summary

Acquired Podcast Episode Summary: TSMC (Remastered)

Hosts: Ben Gilbert and David Rosenthal
Podcast: Acquired
Episode: TSMC (Remastered)
Release Date: January 21, 2025

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Introduction

In this special remastered episode of Acquired, hosts Ben Gilbert and David Rosenthal delve deep into the extraordinary journey of Taiwan Semiconductor Manufacturing Company (TSMC). Originally recorded in 2021, this episode has been revitalized to reflect TSMC's pivotal role in the global semiconductor landscape, especially amid the burgeoning AI and smartphone eras. As Ben notes, "semiconductors have become so much more important in our world," highlighting TSMC's dominance in manufacturing cutting-edge chips that power devices like MacBooks, iPhones, and AI hardware from giants like Nvidia and Qualcomm (00:00).

Morris Chang: The Architect Behind TSMC

The episode chronicles the life of Dr. Morris Chang, TSMC's founder, whose resilience and visionary leadership transformed the company into a semiconductor powerhouse.

• Early Life and Education

  Morris Chang's journey began in Ningbo, China, in 1931, a time marked by turmoil and war. Fleeing multiple conflicts, Chang eventually secured a scholarship to Harvard in 1949, followed by a transfer to MIT to study mechanical engineering (04:18). Despite facing challenges, including failing his PhD qualifying exams twice, Chang's determination led him to secure a pivotal role at Ford Motor Company before transitioning to Sylvania's burgeoning semiconductor division (11:35).

• Career at Texas Instruments (TI)

  At TI, Chang quickly rose through the ranks, significantly improving transistor yield rates from near failure to a respectable 20% (12:06). His innovative approach to pricing—introducing "learning curve pricing" with the assistance of Boston Consulting Group—propelled TI's integrated circuits division to become the most profitable in the world by the late 1960s (33:44).

  However, Chang's trajectory at TI wasn't without setbacks. In 1978, he was moved to oversee consumer products—a domain outside his expertise—leading to his eventual demotion in 1983 (38:53). This unexpected turn paved the way for Chang's unprecedented move to Taiwan.

Founding TSMC: A Strategic Pivot

In 1985, amidst personal and professional crossroads, Morris Chang accepted an offer to lead Taiwan's Industrial Technology Research Institute (ITRI). Tasked with establishing a new semiconductor company, Chang conceived the pure-play foundry model—TSMC. This innovative approach focused solely on manufacturing chips for other companies, without engaging in chip design or branding.

• Challenges and Market Dynamics

  Initially, TSMC struggled with inconsistent orders, as major semiconductor firms saw it as a last-resort option for excess manufacturing capacity. Chang recognized the latent demand from emerging fabless companies—startups focused solely on chip design without owning manufacturing facilities. By enabling these companies, TSMC unlocked a scalable business model that would drive exponential growth (74:33).

• Strategic Partnerships and Growth

  A landmark moment occurred in 2012 when Apple, led by CEO Tim Cook, partnered with TSMC to produce the A4 chip for the iPhone. Despite the substantial initial investment of $9 billion to build a dedicated plant, this collaboration solidified TSMC's role as a critical manufacturer for tech giants, fueling a flywheel effect of growth and technological advancement (98:19).

TSMC's Business Model and Competitive Advantage

TSMC operates with a pure-play foundry model, manufacturing semiconductor chips designed by other companies. This model offers several competitive advantages:

• High Operating Margins and Scalability

  TSMC boasts impressive operating margins of around 40%, reinvesting profits into advanced manufacturing technologies and expanding capacity. This financial strategy ensures continuous technological leadership and market dominance (78:24).

• Process Power and Technological Prowess

  TSMC's partnership with ASML, the Netherlands-based maker of extreme ultraviolet (EUV) lithography machines, exemplifies its process power. These state-of-the-art machines are pivotal for producing the smallest and most efficient chips, allowing TSMC to stay ahead of competitors like Intel and Samsung (86:00).

• Global Foundational Role in the Semiconductor Ecosystem

  As the industry has evolved, TSMC became indispensable to fabless companies like Nvidia, AMD, and Qualcomm. By enabling these companies to focus on design while TSMC handled manufacturing, a symbiotic relationship flourished, reinforcing TSMC's market position (77:34).

Financial Performance and Market Position

Since its IPO in Taiwan in 1994, TSMC has demonstrated remarkable financial growth:

• Consistent Revenue Growth

  TSMC has achieved a compound annual revenue growth rate of 17.4% over 27 years, with its market capitalization soaring from $4 billion at IPO to over $550 billion by the episode’s release in 2025 (105:53).

• Accelerated CapEx Investments

  Responding to escalating demand and technological advancements, TSMC has committed to staggering capital expenditures, planning to invest $100 billion over three years. This aggressive expansion ensures TSMC remains at the forefront of semiconductor manufacturing (114:05).

Geopolitical Implications and Future Outlook

TSMC's strategic importance extends beyond business:

• Geopolitical Risks

  Located in Taiwan, a region of geopolitical sensitivity, TSMC faces potential risks from regional conflicts. The company has begun diversifying its geographical footprint by establishing fabs in the United States and Japan, though significant manufacturing capacity remains in Taiwan (118:23).

• Monopoly and Market Dominance

  With over 50% market share in foundries and controlling 90% of the leading-edge chip manufacturing, TSMC is poised to maintain its monopoly in the semiconductor industry. Its unmatched scale economies, process power, and deep integration with advanced chip designers ensure its enduring dominance (110:57).

Conclusion

TSMC's evolution from a struggling semiconductor division to the world's leading foundry exemplifies strategic ingenuity and relentless pursuit of technological excellence. Under Morris Chang's visionary leadership, TSMC not only transformed the semiconductor industry but also became a cornerstone of modern technology, underpinning innovations across smartphones, AI, and beyond. As Ben aptly summarizes, "the flywheel is just unreal," emphasizing TSMC's unparalleled role in driving global technological progress (80:40).

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Notable Quotes

1. Ben Gilbert (00:00):
   "Since then, semiconductors have become so much more important in our world and TSMC has essentially become the only manufacturer of the leading edge chips."

2. David Rosenthal (04:51):
   "Morris Chang got his first big managerial job at TI, creating a germanium transistor development department with 20 plus engineers reporting to him."

3. Morris Chang (33:44):
   "We used loads of data, a lot of theory and a lot of effort. The result was so called learning Curve pricing. So start low and then continually automatically reduce the price every quarter, even when the market did not demand it."

4. Ben Gilbert (42:24):
   "So Morris is a hero. All these engineers, they all look up to him and he knows a lot of them personally."

5. David Rosenthal (81:34):
   "The semiconductor business is like a treadmill that speeds up all the time. If you can't keep up, you fall off. And that's Moore's Law."

6. Morris Chang (55:04):
   "This was like in the movie the Godfather. It was an offer I couldn't refuse."

7. Ben Gilbert (107:42):
   "They have 50% market share and 90% of the profit. That's insane."

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Key Takeaways

• Visionary Leadership: Morris Chang's resilience and innovative strategies were instrumental in establishing TSMC's dominance.

• Pure-Play Foundry Model: By focusing solely on manufacturing, TSMC enabled a new wave of fabless companies, creating a scalable and profitable business model.

• Technological Excellence: Continuous investment in advanced manufacturing technologies, particularly EUV lithography, ensures TSMC's leadership.

• Financial Acumen: High operating margins and aggressive CapEx investments fuel TSMC's growth and technological advancements.

• Geopolitical Awareness: Strategic diversification of manufacturing locations mitigates regional risks and reinforces global stability.

Conclusion

TSMC's story is a testament to how strategic vision, combined with relentless execution and adaptability, can transform a company into an indispensable global leader. As the semiconductor industry continues to evolve, TSMC stands poised to drive the next generation of technological innovations, solidifying its place among the world's most valuable and influential companies.

Transcript

[Ben Gilbert]

Hello, acquired listeners. We regularly get feedback that this episode on tsmc, the Taiwan semiconductor manufacturing company, is one of the best acquired episodes ever. And interestingly, it predates our Nvidia episodes. We did it way back in 2021 when the acquired audience was about 12% the size of what it is today. Which means that the vast majority of you have never heard it. So we definitely wanted to fix that. Since then, semiconductors have become so much more important in our world and TSMC has essentially become the only manufacturer of the leading edge chips. They make the primary chip inside every MacBook and iPhone shipped. Today, they're powering the AI wave, manufacturing all of Nvidia's chips. They make the chips for a whole bunch of other fabless companies like Qualcomm, amd, Broadcom, and hyperscalers like aws.

[David Rosenthal]

And it turns out they even manufacture a lot of chips for intel too. Yes, little known fact. Yeah, TSMC rode the smartphone era to crazy heights, as we all know. And here now, in the next AI era, here in 2025, it turns out that they are the manufacturing superpower behind all of that too.

[Ben Gilbert]

Yep. Well listeners, without doing too much foreshadowing, now is a very good time for anyone to listen or re listen to the TSMC episode. So we decided we should go all the way back to the raw audio tracks and remaster this whole thing from scratch for your listening pleasure, Ben.

[David Rosenthal]

In fact, I looked it up since we were going back to 2021 when we initially recorded this. TSMC's market cap has doubled since then from 550 billion to over a trillion dollars. And in fact, you were the one that tipped me off to this as we were re researching here. They and Saudi Aramco are the only trillion dollar companies in the world that are not located on the west coast of the United States. Wild.

[Ben Gilbert]

This is such a crazy stat. It's crazy that the rest are located on the west coast of the United States. But it really underscores what an extreme outlier TSMC is. So without further ado, the story is truly unbelievable and we hope you enjoy this presentation of TSMC Remastered. Who got the truth?

[David Rosenthal]

Is it you? Is it you? Is it you? Who got the truth? Is it you?

[Ben Gilbert]

Is it you?

[David Rosenthal]

Is it you?

[Ben Gilbert]

Sit me down.

[David Rosenthal]

Say it straight. Another story on the way.

[Ben Gilbert]

We got the truth. Welcome to season nine episode three of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I am Ben Gilbert. And I'm David Rosenthal and we are your hosts. Today's episode is on tsmc, or the Taiwan semiconductor company. It is your classic. Most people have never heard of it, but it's the ninth largest company in the world. Episode this is Wild.

[David Rosenthal]

Morris Chang founded TSMC at age 56, retired at 74, then came back at age 78, inked the deal to make all of Apple's chips. And yeah, we're going to tell the whole story here. It's wild.

[Ben Gilbert]

It's nuts. They make literally every chip in every iPhone sold today and soon to be in every Mac sold. If you're excited at all about Nvidia, amd, Qualcomm, or even any of the chips that Amazon, Microsoft, Facebook, Apple are making, all of those chips, or nearly all of them are actually made by tsmc, along with all the chips in your cars and your smart home devices and fighter jets and everything. Unbelievably, this company that the entire world relies on is on an island that some countries feel is a sovereign nation and the People's Republic of China feels is actually theirs. So today's episode has it all ascending from startup to tech superpower, an underdog founder, and of course, a good dose of geopolitics indeed. All right, well listeners, it finally felt like the right time to do this episode amidst this global chip shortage that we've got going on that David, I think I've heard even Ford has paused the production of F150s because of this. So it is like a massive impact on the world. And we've had TSMC on the agenda to do for like two and a half years now in our little Google Doc.

[David Rosenthal]

Totally. Well, I feel like we haven't called it a mini series, but let's call it a miniseries on semiconductors and like.

[Ben Gilbert]

Silicon the Arm episode.

[David Rosenthal]

Yep. Sequoia Part 1 Penns Semi.

[Ben Gilbert]

Yep. Okay, listeners, it is time to jump into the history and facts and David's going to lead us in that. But as usual, even though we're going to be probably very excited about some companies, less excited about other companies, this show is not investment advice. We may have investments in the companies we discuss. It's for entertainment and informational purposes only and you should do all of your own search.

[David Rosenthal]

Okay, speaking of, we start in ningbo, China in July 1931, just about one year after Warren Edward Buffett was born in Omaha, Nebraska. And there are going to be quite a few parallels here as we go through this episode, but in July 1931, in Ningbo, China, our protagonist, Dr. Morris Chang, order of the Propitious Clouds with special Grand Cordon, which is the highest civilian honor that anyone in Taiwan can hold.

[Ben Gilbert]

Sweet.

[David Rosenthal]

So he's like a Knight of Taiwan. It's the Order of Propitious Clouds. And then I think there's like nine ranks of it. And the highest is Special Grand Cordon.

[Ben Gilbert]

And he's special. Grand Cordon.

[David Rosenthal]

He's special. Yes, he's very special. So he was born then. For those who are unfamiliar with Chinese geography, Ningbo is a small city just a bit south of Shanghai. You know, small. It's about 8 million people. Just casual, no big deal.

[Ben Gilbert]

China scale's ridiculous. But certainly wasn't 8 million people when Morris was born in 1931.

[David Rosenthal]

No, but I bet it was still probably pretty big. But, yeah, today, 8 million people. Crazy. So Morris's father was a county official and later became a bank manager. So the family moved around a good bit within China as his father was transferring for work. This is pre People's Republic of China. This is Pre World War II. This is a very different place.

[Ben Gilbert]

Right? The leadership is not communist.

[David Rosenthal]

No, no, no. So his early childhood years were like, middle class, not wealthy, but pretty well to do relative to your average Chinese citizen. Then when he was six, the second Sino Japanese War breaks out, and Morris and his mom flee the main part of China to Hong Kong. And they go to live in Hong Kong for a few years to escape the air raids and the fighting. And then on December 8, 1941, three hours after Pearl harbor, the Japanese attack and invade Hong Kong. Morris talks about this. He's like, yeah, everybody knows Pearl Harbor, December 7, 1941. What people don't often talk about is the same thing happened in Hong Kong three hours later on the next day. So they're in Hong Kong. So they flee again back to China. They end up in Shanghai this time, and they stay there for a few years until 1948, after World War II is over. But that's when the Chinese Civil war breaks out that would lead to the Chinese Communist revolution. And so they flee again back to Hong Kong. So this is crazy. Morris, before he turns 18, he has lived through three major wars. The Second Sino Japanese War, World War II, and the Chinese Civil War. So the next year, in 1949, which is the same year as the establishment of the PRC, the People's Republic of China, Morris turns 18, and with the help of an uncle that he has in Boston, his life completely changes. He gets accepted to Harvard. So he goes to the U.S. he goes to college at Harvard. Wow.

[Ben Gilbert]

Talk about a change of fate.

[David Rosenthal]

Talk about A change of fate, a change of scene. Everything Morris says much later. My reaction entering Harvard was sheer ecstasy, almost disbelief. What a country. The United States was at its peak in its moral leadership and its political leadership in terms of democracy. And it was the richest country in.

[Ben Gilbert]

The world, not to mention stable. I mean, you could say what you want. You could count on the fact that it's likely that 10 years from now, whatever economic structure, political structures exist, will continue to exist if what you want to do and what he ended up doing with his whole life is innovate, having that stability around you and all those structures enable you to do that.

[David Rosenthal]

Yeah, we just take this for granted. But this is a good reminder at the very least. He's probably not going to have to flee Boston to continue his studies. But he does end up fleeing Harvard, as we'll get into. So Morris loved it. It was like that quote we read. He was so overjoyed to be there. But he realizes he has kind of a new problem in America and at Harvard. His parents aren't coming over. He's on his own. He's got to support himself and make his own way. And at that time, his race is probably gonna limit his opportunities. So as he says, quote, in the early 50s in the United States, there were Chinese laundrymen, Chinese restaurateurs, Chinese engineers, and Chinese professors. Those were the only respectable professions for Chinese. No lawyers, no accountants, no politicians. And what does Harvard churn out? Lawyers, sort of accountants, maybe. Politicians, yes. Not a lot of engineers.

[Ben Gilbert]

Certainly finance professionals.

[David Rosenthal]

Certainly finance professionals. As we will see as we will go along. Morris is much more than a finance professional, but Harvard actually didn't have an undergrad engineering program at the time.

[Ben Gilbert]

Huh. That's crazy to think about.

[David Rosenthal]

If you're really, really focused, you're probably going to go down the street in Cambridge from Harvard to MIT to mit, which Morris does. So he only spends his freshman year there, and then for his sophomore year, he transfers to MIT so that he can study mechanical engineering. So Morris, our man, has learned the ways of the world in the US he's focused. He starts mechanical engineering a year behind at mit. He finishes both undergrad and his master's in the remaining three years.

[Ben Gilbert]

And what year is this?

[David Rosenthal]

This would have been 1951 when he transferred. Fall of 1951.

[Ben Gilbert]

Okay, so to contextualize what's going on in the tech world right now with quotes around it, because it's not so much a world as a very small continent. I mean, you have all of the post World War II defense spending that went in, particularly on the west coast, with the innovations from Stanford. But has Fairchild Semiconductor been started yet?

[David Rosenthal]

Nope, nope, nope.

[Ben Gilbert]

So maybe Shockley Semiconductor.

[David Rosenthal]

Shockley Semiconductor is probably just getting going, but we're probably still in vacuum, too.

[Ben Gilbert]

Like Bell Labs land.

[David Rosenthal]

To give you a sense, silicon is years away. Transistors are probably just getting going. We're not in the integrated circuit yet, and it's all being done in germanium, not silicon.

[Ben Gilbert]

Wow.

[David Rosenthal]

So it's like this is OG.

[Ben Gilbert]

Yep.

[David Rosenthal]

So after he gets his master's in the three years, Morris wants to stay and do a PhD, fully complete his technical training, but he ends up failing his qualifying exams twice. They give you two chances to take, and he fails twice.

[Ben Gilbert]

By the way, this is a good time to say so. David and I watched and listened to every footage that Morris has ever spoken that has been released publicly to prepare for this. He is very funny.

[David Rosenthal]

Oh, he's great.

[Ben Gilbert]

The way he talks about this. He says that unfortunately, the biggest impediment to him going forward was that he failed the qualifying exam. But fortunately for him, they were kind enough to let him take it a second time, which he also failed. And he has this really dry, clever sense of humor.

[David Rosenthal]

So in one of the interviews, he talks about one of the Stanford ones, he gets a question from the audience about how did he kick his smoking habit?

[Ben Gilbert]

Oh, yeah, that.

[David Rosenthal]

The questioner is like, I know you used to smoke. How did you finally stop? And he's like, I never stopped. I still smoke. He's like 94 years old.

[Ben Gilbert]

And he goes on to make the case for why he's a pipe smoker. And actually, even though smoking is hurtful to his lungs, it's actually beneficial for his mental life. So he's pretty sure it's prolonged his life.

[David Rosenthal]

Well, he says he's delved into the data, and pipe smokers live longer than.

[Ben Gilbert]

Non smokers, which I'm sure you can find data to support that. I'm also sure you can find plenty of data to refute that. But, yes, this gives you a sense of who Morris is.

[David Rosenthal]

Okay, so he's failed his qualifying exams. He's got to go out and get a job. And not as a PhD, he's got to go get a job as a super entry level as an engineer. I mean, he has a master's degree, but still. Okay, so legend has it, he has a couple job offers. The one he really wants, remember, he's a mechanical engineer. And this is like super early days of technology. It's not really a thing anymore.

[Ben Gilbert]

There was electrical engineering at this time.

[David Rosenthal]

Right, right, right. Yes, he could, but he didn't study electrical engineering. In terms of where you would want to work. It's not really on anybody's radar screen, especially Morris's, that you're gonna go enter the tech industry. So he gets his dream job offer from the Ford Motor Company.

[Ben Gilbert]

Oh, no way.

[David Rosenthal]

Yes.

[Ben Gilbert]

I didn't hear that.

[David Rosenthal]

And I'm sure this is apocryphal, but.

[Ben Gilbert]

Let'S repeat the apocryphal story. Let's repeat this out to hundreds of thousands of people here. Totally.

[David Rosenthal]

So the legend has it that Ford offers him a salary of $479 a month to go take an entry level job. And then he has a competing offer from Sylvania's new semiconductor division.

[Ben Gilbert]

And Sylvania. I know of this company only because my vacuum growing up was made by Sylvania.

[David Rosenthal]

Yeah. Oh, well, we're gonna talk much more about Sylvania in one second. This is the competing job offer he's considering. They offer him a salary of $480 a month. $1 more. And Legend has it that Morris asked Ford to beat Sylvania's offer. They didn't, and so he took the Sylvania job offer.

[Ben Gilbert]

I'm sure that is a.

[David Rosenthal]

This is 100% a pocket for. Yeah, but you know Morris, he's great. So, speaking of Sylvania, do you remember. I'm sure some portion of our audience remembers, but do you, Ben, remember who else started their career in Sylvania's semiconductor division right around this exact same time? We have talked a lot about this in this person on the show.

[Ben Gilbert]

No.

[David Rosenthal]

Donald T. Valentine.

[Ben Gilbert]

No way. Yep, that's right.

[David Rosenthal]

So he started at Sylvania after Fordham, or maybe it was after the military.

[Ben Gilbert]

He ended up at Shockley.

[David Rosenthal]

Well, no. Then he was at Raytheon, and then he joined Fairchild.

[Ben Gilbert]

Fairchild, okay.

[David Rosenthal]

Right after the Traitorous. He left Shockley and started Fairchild.

[Ben Gilbert]

You're better at remembering these deep details of older episodes than I am.

[David Rosenthal]

Well, I do a lot of research for this show, and sometimes research includes past acquired episodes.

[Ben Gilbert]

There you go. So they didn't overlap. Don Valentine.

[David Rosenthal]

And they were never in the same place. They were in different locations and different job functions. Very different job functions. But they were both, I believe, both at Sylvania.

[Ben Gilbert]

Amazing.

[David Rosenthal]

At the same time. Crazy. So Don is out chilling in California, like we were talking about, and falling in love with California. He's playing water polo. He's like, oh, my gosh, I'm never Going to leave this place. Morris, he's on the grind. He gets posted as a junior engineer at Sylvania's Ipswich, Massachusetts plant. Not quite the same glamour as Don out in Southern California. So remember, Morse is a mechanical engineer. He doesn't know anything about electrical engineering, but he's working in this new semiconductor division. So after work he's living in a hotel, by the way, he doesn't even get an apartment. It's like some company sponsored hotel. He goes home, back to the hotel from work and he studies the best textbook that he can find about electrical engineering, which is entitled Electrons and Holes in Semiconductors with Applications to Transistor Electronics. Written just recently, a couple years before, in 1950, by William Shockley.

[Ben Gilbert]

Oh, wow.

[David Rosenthal]

Yeah.

[Ben Gilbert]

Shockley and two other guys basically invented the. I'm not sure it was the first transistor, but the first transistor of the type that everything else would then be built upon. When they were at Bell Labs not too long before this.

[David Rosenthal]

Yeah, not too long at all. I mean, ENIAC was vacuum tubes and then Shockley invented the transistor. And then in a sec we're going to talk about the integrated circuit that Bob Noyce and Jack Kilby, who we're going to talk about invented, co invented. But anyway, okay, back to this moment in time. So Morris is just studying this Shockley textbook in his hotel room. But like, he's not a college, he doesn't have any teachers, he just has the book. Wow. But he's very resourceful. So he figures out that one of the senior engineers at the plant is kind of an alcoholic and hits up the hotel bar almost every night. So what Morris does is he comes home from work in the early evening, he studies in his room for a couple hours. And then later at night when the older colleague shows up at the bar, Morris goes down to the bar, not to drink, but he brings the textbook and he's the guy. He's like, I don't understand this, I don't understand that. Like girl, me. And he's just like buying drinks for his buddy. So great.

[Ben Gilbert]

Incredible.

[David Rosenthal]

Here's the quote he says later. He being the older colleague didn't solve all my problems, but he solved enough so that I could move ahead. He was my main teacher about electrical engineering, so great.

[Ben Gilbert]

Wow.

[David Rosenthal]

So this goes on for three years. Morris is like rolling hard. He's burning the candle at both ends, working and at the bar, but not drinking, learning. But as he is learning the industry, coming up to speed, it becomes pretty clear to him that if he really wants to go places in this new emerging industry, Sylvania, not really the right bus to be on, so to speak. And obviously Don Valentine figures out the same thing and jumps to Raytheon and then to Fairchild. Morris says the moment when this crystallized for him was there was a talk that a senior manager at Sylvania gave at the plant. And the quote that the senior manager said that stuck with Morris for the rest of his life was, we at Sylvania cannot make what we can sell and we cannot sell what we can make. Real great position to be in. So Morris is like, damn, I gotta get the hell outta here.

[Ben Gilbert]

That's a signal to move on if you ever heard one.

[David Rosenthal]

Totally. So, like, Don Morris leaves Sylvania for greener pastures. However, not to California, halfway in between, or to Silicon Valley. Yep, halfway in between. So we talk a lot about, you know, Fairchild and the Trader's eight, Silicon Valley, blah, blah, blah, you know, the place to be. Here's the secret. Silicon Valley. It's all marketing. The biggest semiconductor company in all types. Digital, analog, everything at that time was not in California. It was in Dallas, Texas. It was Texas Instruments, which of course.

[Ben Gilbert]

Me, you many people in our generation know of as the people that made our graphing calculators in high school and college. But of course, at this time, I don't even think they had a consumer division yet.

[David Rosenthal]

They were thinking, no, and that's going to come up later. No, TI was the juggernaut. Now Silicon Valley is Silicon Valley. But then it was, yeah, okay, California, I don't know, west coast, whatever. TI was the big incumbent. They were the juggernaut. TI actually got its start. I had no idea. Before doing the research here in the 30s, you're like, how did a technology company and a semiconductor company end up in Dallas, Texas? They started making instruments. Texas Instruments for measuring seismic activity for oil exploration.

[Ben Gilbert]

Whoa. So all the oil makes sense to Texas.

[David Rosenthal]

They were like the tsmc, the technology provider to oil companies. And that's what led them into computing and into digital to power that business. They were huge. Not just huge in terms of the company, but they were the technology leader. So Bob Noyce, like I was saying a minute ago, is credited when he was at Fairchild inventing the integrated circuit and all that while he was the co inventor. Simultaneously, it was co invented by Jack Kilby, who was at ti, and Jack was actually the one who got the Nobel Prize for inventing the integrated circuit. Gordon Moore, who was also at Fairchild and then founder of intel, along with noyce it would coin Moore's Law. But Jack has a great quote too about the implications of the integrated circuit and semiconductors. He says, what we didn't realize then, this was a little later when they were inventing it, was that the integrated circuit would reduce the cost of electronic functions by a factor of a million to one. Nothing had ever done that for anything before.

[Ben Gilbert]

Wow.

[David Rosenthal]

It's such a great way to frame it too. Like this had never happened in human history. There was this thing that used to be X expensive in terms of resources and then magically one day it's a million times cheaper.

[Ben Gilbert]

Yeah, that's crazy. I didn't realize it was on that scale. This is probably a good time to talk about some definitions because there are some things that we've thrown around already. I think everyone has a general understanding of what these things are, but it's worth understanding more precisely before we move on. The first of which is a transistor. The best way to think about a transistor is not the tiny little transistor that's on a silicon die today, but think about it as a little encased piece of circuitry with three prongs coming out of it. And those three prongs will save. The technical names basically have an input, an output and something that controls the input and the output. It's a switch. It has two purposes, the first of which is being a switch where you can decide that either stuff is going to go through it, stuff being voltage, current or none, or it rounds to none. And so that way you can decide, hey, this binary piece of equipment is either off zero or on one. Okay, so that's a transistor. Now a transistor can be made out of lots of different things. It can take any implementation. Why is everybody talking about silicon? Well, silicon as an element is a semiconductor. It is a metalloid. It has some properties that make it like a metal, like a conductor. It has some properties that make it non conductive. Imagine trying to move electrical signal through a piece of wood. It's not going to work. But imagine moving it through copper. It's going to work really well and you're never going to be able to interrupt it. Well, geez, wouldn't it be great if we had some material, a semiconductor, where we could modify whether current was flowing through it or not?

[David Rosenthal]

Make it a switch really easily.

[Ben Gilbert]

Exactly, exactly.

[David Rosenthal]

Well, and lots of things are semiconductors. Germanium was the main material for a while, but germanium is expensive and rare. Silicon sand.

[Ben Gilbert]

I think it's like the second Most plentiful mineable element on earth.

[David Rosenthal]

Yeah. I mean, it's sand, right?

[Ben Gilbert]

Yeah.

[David Rosenthal]

There's one other major thing though. So we've been talking about transistors.

[Ben Gilbert]

The ic.

[David Rosenthal]

Yeah, the ic.

[Ben Gilbert]

The integrated circuit.

[David Rosenthal]

The integrated circuit. A transistor, it's a switch. Before the ic, people are making switches. Like you make one switch at a time, you wire it to another switch. You know, if you've seen photos of ENIAC and vacuum tubes, literally they're plugging one tube into another. You're still doing that with transistors?

[Ben Gilbert]

Yep.

[David Rosenthal]

When Noyce and Kilby invent the IC now you can put a lot of switches on one thing and you know, fast forward. Today, the latest processor, you know, the five nanometer processors that TSMC and basically nobody else is churning out, I don't know, billions, trillions of switches are in.

[Ben Gilbert]

Like a tiny little integrated circuit.

[David Rosenthal]

Without the integrated circuit, that never would have happened. So this invention, this miraculous invention of the integrated circuit, it happened in 1958. When did Morris Chang join Texas Instruments? 1958.

[Ben Gilbert]

Ooh, fascinating coincidence.

[David Rosenthal]

Yes, totally a coincidence.

[Ben Gilbert]

Absolutely coincidence.

[David Rosenthal]

Absolutely a coincidence.

[Ben Gilbert]

And again, to peg us in history here, we're still, I think, 10 years before the founding of Intel.

[David Rosenthal]

Yes, exactly. 10 years. Yeah. MORRIS obviously wasn't working directly with Jack on inventing the IC, but this gives you a sense ti, this is the place. This is like Google + Facebook without.

[Ben Gilbert]

The world paying attention to them.

[David Rosenthal]

Yes. And in Texas. So Morris gets assigned as his first project to a sort of problem child within ti. They have entered into a deal with IBM. IBM is working on their first mainframe computer major project that's going to use transistor logic instead of vacuum tubes. The IBM 7090. And they anticipate so much demand for this product. Usually IBM manufactures everything for all their products themselves, but they're like, we need more chips than we're going to be able to make ourselves. So we need a second source for our chips. They turn to TI and they're like, hey, we can give you all the designs for, you know, how to do this for this chip that we want for our product. We want you to additionally manufacture some of these in addition to our own line. You might even say almost like a contract manufacturer of chips or like a foundry business almost, you know. Hmm, interesting. But it's not going too well. So IBM's own plant is churning out transistors with about a 10% yield, which means that of every hundred chips that they turn out of the plant, 90% of them fail. And only 10% of them work.

[Ben Gilbert]

Yikes.

[David Rosenthal]

That's the first party line. The TI line has about a 0% yield. They're lucky if they're getting any. That way, almost everything coming off the line fails at TI when Morris shows up. So Morris would say about this later, the supervisor was concerned, the operators were concerned, everybody was concerned. So Morris, remember he's a mechanical engineer by training, right? So he starts tinkering. He's like, well, I know this is a mechanical process, chemical and mechanical process, creating this stuff. I'm just going to use my training and optimize it like a good mechanical engineer. So he starts doing some stuff. After about four months, he gets the yields at the TI plant up to 20%. So twice as good as the first party line at IBM. And there's a great profile that was one of the main sources for this episode in IEEE Spectrum, great industry magazine that we'll quote from here they write, suddenly even TI president Pat Haggerty knew Morris's name. IBM thought Chang had just gotten lucky. But when the company, IBM, sent engineers down to talk to him, Morris described the theories he'd been testing and explained why his experimental process worked. This achievement propelled him into his first managerial job, creating a germanium transistor development department with 20 plus engineers reporting to him. So this is his first big win here in the foundry business. So on the back of all this, TI is like, all right, we got a rising star here. They offer to sponsor him to go finally get his PhD. They even offer to continue paying his full salary while he's getting his PhD. What they're paying for.

[Ben Gilbert]

All right, so they think like very highly of him.

[David Rosenthal]

Very, very highly of Morris. I mean, this one probably made the millions doing this in 1958.

[Ben Gilbert]

It's funny, I don't know anything about the commercial success of that particular IBM mainframe, but if it's the first one that's transistor based instead of being vacuum tube based, I have to imagine that it was far more efficient for customers. Customers are probably lining up for it.

[David Rosenthal]

I bet there's a lot of demand. And what's Morris making a year? Like $20,000 maybe, you know, how much does it cost to go to Stanford then? Not much. So they're like, sure. So Morris goes to Stanford, but he's now like a pig in mud. He has found his calling. He can't wait to get back to Texas, back to TI. So he finishes his PhD in two and a half years. Wild. One of the Stanford interviews is with John Hennessy the president of Stanford at the time. John's like, Morris, tell the students, how did you finish your PhD in two and a half years? Morris is like, I don't know. I was focused. I didn't do much else. So by 1964, he's done, he's back at TI. And this is right, as people have discovered that silicon is way more cost effective and scales up way better.

[Ben Gilbert]

And if I remember right, the initial attempts at using silicon were that people didn't know how to work with it yet. And so even though it was more abundant and cheaper, there's some particular manufacturing process that you have to do to silicon in order to make it as viable as it became.

[David Rosenthal]

Yes. How to dope silicon to make it function and produce it at scale as a semiconductor.

[Ben Gilbert]

And listeners, this is where you should start to get the idea that especially today, manufacturing these products involves the most advanced process in human history, consisting of layers of innovation in chemistry, physics, mathematics. It's breakthrough after breakthrough after breakthrough, all building on top of each other, which need to all happen in the manufacturing process. So even here in what, 1964, we're starting to get into the level of complexity where it's some of the most advanced science ever done being applied in an engineering and manufacturing fashion to get even marginal results at 20% yields off the manufacturing line and little preview to.

[David Rosenthal]

Fast forward to today. Tsmc, they're a contract manufacturer for silicon. That is what they are. TSMC has 40% operating margins as a contract manufacturer. It's not like this is just. There's no technology or R and D, like they are one of the most advanced technology organizations in the whole world. There is so much IP just in the manufacturing. Take out the design, take out the functions. Just making this stuff is so hard. I mean, now it involves like lasers. Like it's. Well, we'll get to it later. It's going to blow your mind how this stuff is done. But anyway, so Morris, he's coming up, he's learning, like, literally as this whole industry is getting developed. He's right there. So a couple years after he gets back from Stanford, he's still rising through the ranks. In 1967, TI makes him a general manager of one of the divisions within the semiconductor business. And that's where he has his next big breakthrough. And this is on the business side. So Morris notices what they're doing, setting up these new plants for all these successive new methodologies and processes of manufacturing. You know, at this point, integrated circuits in silicon and pumping out these chips. It's super expensive to do this, super cost, capital intensive. So what TI and everybody else in the industry did when they would start a new product line that would use a new fab for chips, they charged a lot of money for it because like man, they put a lot of money into these things. So right off the gate you want the latest new hotness. In the end, products that TI is selling, they're going to charge a lot of money for them.

[Ben Gilbert]

Yep.

[David Rosenthal]

Morris realizes he's like, that's not actually optimal to do that because as evidenced by his first big win at TI with the IBM line, there's a learning curve to getting the yields right and learning how to manufacture a new process. And in the beginning you're going to have really low yield. And so what you want ideally from a fabrication perspective is you want to have a ton of volume from the get go. Like as soon as the plan is online, you want to be running at max capacity so that you can a learn as fast as possible, get yields up to the profitable levels and then you want to still be running at max capacity as long as possible because you already spent the fixed cost to make the plane. Basically you always want max capacity. So when you started out by pricing so high, you kept demand low and you weren't able to get up to capacity fast enough.

[Ben Gilbert]

It's almost like they didn't realize the benefit of the potential operating leverage that they had because they were just passing their exact economics onto their customers and saying, you basically have to pay us for us to do all these fixed costs and then you'll get all the benefits of how cheap it is to stamp it off the press every time. Whereas what they really should have been doing is saying we will make an investment, you know, we'll eat the cost of having to spin all this up, but boy, are we going to be super profitable on every chip that comes off the line.

[David Rosenthal]

Yep, totally. So Morris is thinking about this. He hires BCG and they come up with the idea of actually pricing low to start to drive this volume and speed up the yield curve. And then also the side benefit of that is if they're pricing low and everybody else is pricing high, they're going to grab a ton of market share and probably keep that paying consultants I know well. So here's Morris's quote about this. He says this was in the late 60s and Boston Consulting Group was a very small outfit when we did this and we used loads of data, a lot of theory and a lot of effort. The result was so called learning Curve pricing. So start low and then continually automatically reduce the price every quarter, even when the market did not demand it. And this was a very successful effort, even though it was somewhat controversial. A lot of people thought we were being foolish. Why would you reduce the price when you didn't have to? But we did it because we believed in it. And indeed, our market share just kept expanding. That, combined with other strategies, made the TI integrated circuits business the biggest IC business in the world and also the most profitable. This is right when Intel's getting founded. So screw Fairchild, screw National, screw Intel. Like, TI is kicking all of their butts. And it's thanks to Morris.

[Ben Gilbert]

And interestingly enough, the reason I always thought that Fairchild was sort of so successful in those days was out of all the defense spending and research that was being done at Stanford, the government as a customer. But is Texas Instruments playing in that ecosystem at all?

[David Rosenthal]

Good question. Probably. I mean, I think this is a case of the rising tide is floating all boats. Yeah, Fairchild's killing it. Intel's killing it. National's killing it. Ti's just killing it bigger than anybody else.

[Ben Gilbert]

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[David Rosenthal]

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[Ben Gilbert]

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[David Rosenthal]

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[Ben Gilbert]

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[David Rosenthal]

Thank you, Vanta. So on the back of this, Morris gets promoted to VP at TI, one level below the CEO running the entire semiconductor business. That happens in 1972 and he becomes the obvious leading candidate to be the next CEO of ti. Which he's like, yeah, I want to do that. I'm focused. This is what I love. This is my goal.

[Ben Gilbert]

That's why I've been going to the bar for three years. Reading a textbook.

[David Rosenthal]

Exactly. But might be fair to say history turns on a knife point. Things don't entirely go as planned. Three different viewpoints. As far as I could identify on what happens next to Morris at ti, he does not become the next CEO. Obviously, viewpoint number one is simply and probably fair that he was just discriminated against because he was ethnically Chinese. Although at this point I'm pretty sure already he was an American citizen. But anyway, and he got passed over for. I have no evidence for it, but not be at all surprised that that was part of what was going on.

[Ben Gilbert]

Yep.

[David Rosenthal]

So that's 12 second point, which Morris totally acknowledges. TI was a really big company. The semiconductor division, he had made it probably the most successful and the most fastest rising division within the company. But you mentioned calculators. They were starting to launch the consumer products division at this time. And so in 1978, so six years he's running the semiconductor division as VP. They move him over to VP of consumer products in 1978 because this was a big new strategic initiative and it wasn't going super well. And they're like, oh, Morris is a great manager. He can fix this and turn it around.

[Ben Gilbert]

Different set of competencies, though. I mean, you need like marketing.

[David Rosenthal]

Yeah. Here's Morris's quote on this. Mark shepherd, then chairman and CEO of ti, agreed with the prevailing wisdom at the time that a good manager could manage anything. In this case, I think he was wrong. I found the consumer business to be very different. Like you were saying, the customer set completely different, the market completely different. And what you need to get ahead in that business is different too. In the semiconductor business, it's just technology and costs in consumer technology helps, but it's also the appeal to consumers, which is a nebulous thing. Not Morris's strong suit, or at least not anything he's trained in.

[Ben Gilbert]

Yeah, that makes total sense.

[David Rosenthal]

So in 1983, five years after he gets moved over to take over the consumer business, he hasn't turned it around, it's still struggling. He gets demoted to quote, head of quality and people effectiveness, which is pretty much a slap in the face. Like this dude built your semiconductor business.

[Ben Gilbert]

Is this when he says he was put out to pasture?

[David Rosenthal]

Exactly. So that's number two. Here's number three. I found some evidence on this. It's unclear to me how much of this is Morris's fault versus his successor. But while Morris was definitely responsible for making Ti Semiconductor a powerhouse, at some point towards either at the end of his tenure running it or under his successor, they totally dropped the ball. And this is when Silicon Valley in California takes over. So in the mid-70s, the semiconductor industry transitioned over to the metal oxide process, MOS. You ever hear about MOS?

[Ben Gilbert]

MOS semiconductors precursor to CMOS.

[David Rosenthal]

Exactly. So that happened in the 70s and TI again was. Well, they had the best engineers. They were well positioned to lead this transition. They didn't. And actually most of the talent within TI that were the ones that led the industry transition to Moz left, including probably most prominently a guy named LJ7 who left and founded a company called Mastec. And then he later became a semiconductor venture capitalist and founded seven Rosen Ventures, which was one of the early VC firms. So he was a TI guy and he left. And you know, the culture at ti, as shown by Morris's experience was not like trader estate, Silicon Valley leave. It was like, you're a company man, you know, you stay at the company, right? So Motorola poached a whole bunch of MAZ engineers from TI and it all kind of fell apart, culminating in the biggest huge loss. This is really history turning on a knife point in 1980. So Morris has already transitioned to consumer products. IBM puts out a secret RFP bid proposal for a secret project that they're working on. This is 1980, by a new group based out of Boca Raton, Florida. Do you know what I'm talking about, Ben?

[Ben Gilbert]

I have no idea.

[David Rosenthal]

Some listeners might know what I'm talking about. This is the secret project. This is the RFP to be the microprocessor, the CPU for this secret project, the IBM PC.

[Ben Gilbert]

Ah, okay, that. Was that a Boca Raton?

[David Rosenthal]

Yeah, it was a secret project, like a Skunk Works division of IBM.

[Ben Gilbert]

Oh, wow.

[David Rosenthal]

To build the PC, which was a big. You know, IBM was the mainframe company and they're like, we're going to build a personal computer. So Skunk Works project and ti, you know, a couple years earlier, under Morris, would have been an obvious candidate. Remember, he had the relationship with IBM going all the way back. TI probably should have been the processor chosen.

[Ben Gilbert]

Right.

[David Rosenthal]

Instead, of course, it was Intel. I think it was the 8088 that was chosen for that first one. Wow.

[Ben Gilbert]

And, boy, did that set things in motion.

[David Rosenthal]

Well, then the architecture standardizes on x86 and boom, there goes the whole next generation of computing away from ti, over.

[Ben Gilbert]

To intel, the sort of family of IBM with Intel processors and eventually running Microsoft operating systems.

[David Rosenthal]

Yeah. But then all the IBM clones, all running intel processors.

[Ben Gilbert]

Okay, so this is really where that is a major loss in the highway of history. TI accidentally took the off ramp there.

[David Rosenthal]

They did now. Okay, is that Morris's fault? Is that not more? I don't know. Certainly the culture at TI was we rotate you around, you're going to fix consumer. He didn't fix consumer, but couldn't. And then this, like the semiconductor powerhouse took an off ramp. As you say, all that, like, his career, TI is basically over. So he was the rising star. Everybody thought he was going to be the next CEO. And at age 52, in 1983, after he stays a couple years being the head of whatever.

[Ben Gilbert]

Yeah, he was something staff.

[David Rosenthal]

He just resigns and he's like, wow, well, I guess this is it, my career at TI. 30 years done. He's still regarded super highly in the industry, though, in the semiconductor industry. So people start calling him with opportunities.

[Ben Gilbert]

And he wants to be a CEO. I mean, that's what's on his mind.

[David Rosenthal]

That's the. He wanted to be CEO of ti. That didn't happen. Like, he wants to be CEO, but he whittles it down to two opportunities he's going to consider. One is to go to a competitor called General Instrument, which people may have heard of another one of these old chip companies. It was based in New York, in Manhattan, in New York City, actually. To go be their coo, the number two there, with an understanding that, like, hey, if things go well, in a couple of years, you'll Replace the CEO, become the CEO there or to become a venture capitalist.

[Ben Gilbert]

Really?

[David Rosenthal]

Yeah. So he was weighing the two. I don't know where or how, I couldn't find that out. But he was weighing these two opportunities. The VC idea is going to come back up in a big way in a second. But obviously he goes with General Instruments. His dream is to be CEO. B. He's got this chip on his shoulder from the way TI ended. So. Yep, great. So he goes off to New York. You know, he leaves Texas, lives in Manhattan. Things are going to work out at gi. The thing though is GI had a very different culture than ti. TI was this research, build, develop technology, push the ball forward. GI is this New York based. They were almost like at the time, like a proto tech private equity firm. Their strategy was they just acquired lots of different semiconductor businesses, either independent companies or divisions from other companies.

[Ben Gilbert]

Try and integrate them.

[David Rosenthal]

No, they would acquire them, they would get these business units into good shape and then they'd sell them again.

[Ben Gilbert]

Oh really?

[David Rosenthal]

Yeah, they were like literally they were a financial engineering firm basically. Definitely not Morris's cup of tea. So he only stays there a year. It's clear that's not a good fit. So he resigns again. So within less than 18 months, he's had two major setbacks. Basically his dream is over. Here's the quote from him. He says, after these two setbacks at TI and gi, I did not think that my aspiration to be the CEO of a major US company was in the cards. Well, turns out he was right. He was not going to be the CEO of a major US company. So how do we go from this dude in his mid-50s, former rising star, now washed up, from that to he's in Taiwan, he's CEO of tsmc. I don't think you could ever script this out. I think this is probably the most unique. Every founding story is unique, but I think this might be the most unique founding story we've had on acquired so far. So back when Morris was at TI, when he was running the semiconductor business there, he went over to Taiwan a couple times to talk about building a manufacturing plant there. TI would own and build the manufacturing plant, but outsource to Taiwan. Not like a TSMC style business, like it was a TI plant there. Anyway, he had no connection to Taiwan. Remember, he's Chinese, he's not from Taiwan. People are like, oh Morris, you went back to Taiwan. He didn't go back to Taiwan.

[Ben Gilbert]

Yeah. He talks about how Taiwan was a strange land to him when he first got there that it's not going back. So it's not. The land is a strange place to him. But if he is going to call someplace home and return there, is it the People's Republic of China?

[David Rosenthal]

Well, I think he would say at this point it's America. He's been in America for 30 years. He's a U.S. citizen. Well, I don't know what he would say. It's complicated. So anyway, so he had met a bunch of government officials in Taiwan when he was talking about building this plant over there. And that was back in the 70s. Now we're in the 80s, mid-80s. Taiwan at this point, it's a manufacturing nation. You know, they have no ip, they have no technology.

[Ben Gilbert]

Okay, the quote's great. All right, so this is Morris. We had no strength in research and development, or very little anyway. We had no strength in circuit design, IC product design. We had little strength in sales and marketing. And this is of course referring to Taiwan as a nation. And we had almost no strength in intellectual property. The only possible strength in Taiwan that we had, and even that was just a potential one, not an obvious one, was semiconductor manufacturing, wafer manufacturing. And so what kind of company would you create to fit that strength and avoid all the other weaknesses? The answer was a pure play foundry.

[David Rosenthal]

Yeah, I mean that was Taiwan at the time. So to give you a sense, the average gross margin of a Taiwanese company at this point in time in the mid-80s is 4 to 5%. 0. 4 to 05% gross before you even.

[Ben Gilbert]

Have overhead operating costs.

[David Rosenthal]

Yeah, I mean it was like, you know, if you were grew up around when Ben and I did, you know, sort of born in the 80s in the US you see made in Taiwan on everything. Like, you know, Barbie dolls, toys, clothes, everything was made in Taiwan. You know, now it's made in China or made in Vietnam or elsewhere. But made in Taiwan was super low end physical manufacturing stuff.

[Ben Gilbert]

Yeah, and a way pull forward the seven powers section. As Hamilton Helmer would sort of explain. If your margins, particularly your gross margins are only 4 or 5%, you're in an industry or a business where all the profits are arbitraged away and everyone's just raced to the bottom on prices. And no one's able to build any real enterprise value because everyone's just out competing each other for pure commodity.

[David Rosenthal]

I mean, 4 to 5% gross margins. People used to hammer on Amazon, I guess for being like a low gross margin business in the like 40%. Anyways. I can't even imagine running a company with that level of gross margins. So the Taiwanese government, though, they wanted to come up in the world, they were like, this is where we are now, this is not where we want to be.

[Ben Gilbert]

Yep.

[David Rosenthal]

So they knew that technology was the way. And so they had decided back in the 70s that they would establish an initiative called the Industrial Technology Research Institute, or itri. And the goal was for it to become like the Bell Labs of Taiwan, to do some tech transfers from the US and elsewhere and homegrow some real technology businesses in Taiwan so that, you know, maybe they can lift businesses out of poverty there at least.

[Ben Gilbert]

And so Morris wasn't going to Taiwan to start tsmc. No, he was being recruited to itri.

[David Rosenthal]

So one of the ministers, he had met a guy named KT Lee, who because of this, he would also become venerated in Taiwanese history. He's known as the father of Taiwan's economic miracle, literally because of this.

[Ben Gilbert]

Wow.

[David Rosenthal]

He recruits Morris to come over and run etri, be like the head of Bell Labs Taiwan, essentially. And this is like a ridiculous thing for Morris to do. He had been captain of American semiconductor industry. He was put out to pasture at ti, but at least he was still a ti. And then he was COO at General Instrument. He's going to go over to Taiwan and run a research park there. Like what?

[Ben Gilbert]

And every time someone starts something like this, it doesn't go well. A government top down innovation mandate from a country that's not a world power tends not to turn into a gigantic economic success.

[David Rosenthal]

This is like all the countries and cities and the like that are like, oh, we're going to build the next Silicon Valley in XYZ and we're going to recruit some former Silicon Valley person to come do that. And it's going to work. Probably not going to work. So everybody tells him not to do this. All his former colleagues, his wife at the time, tell him not to do this. His marriage was actually falling apart maybe in part because of this. And you know, he's had all these experiences. He's like, you know what, I just, I need to change the scene. I gotta get out of here. So he takes the job and he figures, you know, it's gonna be cushy. This is like a.

[Ben Gilbert]

He thinks about this as like the pseudo retirement he's going into.

[David Rosenthal]

So here's his quote. By then I was financially pretty secure. I was not rich. But you also have to realize that the standards of wealth were much lower back in 1985. And he's going to live in Taiwan where, you know, corporate magnets have 5% gross margins but says, but still in absolute standards I was financially secure, which meant that I could live according to the way I desire, which was actually pretty modest for the rest of my life without having to earn a living or a salary. This is retirement.

[Ben Gilbert]

He also makes a joke, I remember after that about how by the way, interest rates were higher back then. So that was much more achievable on less principal.

[David Rosenthal]

So 1985 he goes over, he takes over as president of ETRI. It's kind of a culture clash. So this is retirement for Morris, but he's still coming from this hard charging industry. All of the employees of ITRI are people in government jobs in Taiwan. And government jobs not even in like a democracy because Taiwan is like gets under martial law. I think that it just ended. You know, this is not the same. You know, this is like jobs for life. You're a government official in a non democracy type organization. Morris says back then they considered me a foreigner who suddenly became their boss. They were scared of me and they were right to be scared of him. So there was one thing though that the government had done right before Morris showed up, which was they had successfully negotiated one technology transfer license in the semiconductor industry from. Did you find out what company this was? This is probably what they were trying to negotiate with TI for.

[Ben Gilbert]

I do. It's a three letter acronym.

[David Rosenthal]

Oh, yep, yep, yep, yep. We haven't talked much about it on this show, but this is another. Yeah, talk about captains of American industry. Rca.

[Ben Gilbert]

Rca, that's right, yeah.

[David Rosenthal]

So RCA had a semiconductor line and the government in the 70s, the Taiwanese government had negotiated a tech transfer.

[Ben Gilbert]

But this is like 10 year old semiconductor technology, right? This is not like the latest generation.

[David Rosenthal]

No. TI and intel and everybody like you know, at Fairchild, they're you know, national, they're leading the way. They're at the bleeding edge of semiconductor manufacturing process. RCA was already at least a generation behind by the time it actually gets onto the ground in Taiwan. They're two and a half generations behind the leading producers.

[Ben Gilbert]

So it's like the only thing that you could do with that is super.

[David Rosenthal]

Low end stuff, right?

[Ben Gilbert]

There are some category of goods that don't need a fast or the latest processor.

[David Rosenthal]

And totally even today when TSMC or Intel or Samsung or whoever builds Fab, the leading edge fabs, they produce the leading edge stuff for a while and then the new generations come on. They don't shut down the old ones, right? It's just chips that don't need the same Bleeding edge performance. They keep getting made on the old.

[Ben Gilbert]

Ones and often that's automotive or now what we think of as IoT. But the stuff in your smartphone obviously is the.

[David Rosenthal]

The leading edge.

[Ben Gilbert]

Yeah.

[David Rosenthal]

So the government, ETRI does actually spin out a company using this old RCA technology. That would be called umc. United Microelectronics Corporation. Not a technology leader. It actually does okay in the long run. They would later spin out their own chip design business. So UMC was doing both fabrication for third party clients and designing some of their own chips. With the FAB that they created, they spin out their chip design business. Later that becomes MediaTek.

[Ben Gilbert]

Oh, no way.

[David Rosenthal]

Yeah. Which is a $50 billion company today.

[Ben Gilbert]

Huh.

[David Rosenthal]

So like, you know, the government did pretty good. Like, this is pretty good they were doing. And you know, when Morris arrives because of this, he's not starting from a standing start. Like, it's not good, but there's wired.

[Ben Gilbert]

Ip, they've created a company, there's a paved path.

[David Rosenthal]

So he gets to work at Eatri. He's working on all this. He's transforming the organization into a high performing organization. And then all of a sudden, out of nowhere, KT Lee comes back to him and is like, hey, great, you're running our Bell Labs. You're running etri. Now I want you to start a company. Morris is like, KT is like, yeah, yeah, yeah. I don't want you to have somebody else in Eatri do it. I want you, Morris Chang, to start a new semiconductor company here in Taiwan. And I want you to make it into a global leader. Morris is like, okay. He doesn't say this directly. Well, he's got a great quote I'm going to say in a minute. But again, remember, this is not a democracy in Taiwan at this time. Morris is also on his third job in three years. Yeah, he doesn't need a salary to survive, but this is kind of the end of the road for him. If he gets fired here at E3, he's legit. Done, done, done, done. So he kind of doesn't have a choice here. The quote, this is so Morris, so great. He says it was like in the movie the Godfather. It was an offer I couldn't refuse.

[Ben Gilbert]

And I do think the implication was go start an intel or go start an IBM. It wasn't go start the very first Pure Play Foundry.

[David Rosenthal]

Yeah. Lee had no. He's the government. He was a minister.

[Ben Gilbert]

Right.

[David Rosenthal]

He was like, go start a semiconductor company. Make it a world leader.

[Ben Gilbert]

Right. Those semiconductor companies, they do really well. So go do that. And that's, of course, when Morris says, okay, I'm being told I should do this. I have some latitude I can take and some liberties I can take on how I do it. And the quote that I read earlier about evaluating exactly what type of semiconductor company should I start, that's how he sort of informs the business plan.

[David Rosenthal]

So Lee is like, all right, good. We're capiche. We're clear. Come back to me in a week with a business plan, tell me what you need, and we're gonna make this happen. Right? Okay, a week. All right. And then like a day later, Lee supposedly is like, I'm gonna need you to come in on Friday. So you got like three days. You know, they say necessity is the mother of invention. And yet these three days are what creates the, you know, now ninth most valuable company in the world. Morris comes up with this brilliant idea to create a pure play foundry company to be a contract manufacturer.

[Ben Gilbert]

Sounds genius today, in hindsight, as Steve Jobs would say, you know, it's easy to connect the dots looking backwards. But at that time, was this a good idea, David?

[David Rosenthal]

Well, no. The answer is no. You know, like we've said all along, all the chip companies, all the, you know, American and European and, you know, Japanese, all the leading semiconductor companies, they made their own stuff, you know, and there was some sharing of production, and some companies were emerging that were borrowing production from the big guys. There's a great quote right around this time from Jerry Sanders, who is the co founder and CEO of AMD, and he famously said in the mid-1980s that, quote, real men have fabs.

[Ben Gilbert]

That's right. Oh, what a quote.

[David Rosenthal]

So ironic, because in the 2000s, AMD would spin out its fabs and go fabless.

[Ben Gilbert]

Globalfoundries.

[David Rosenthal]

Yeah, into globalfoundries. But yeah, like, this was not an obvious idea. Like, if you wanted to be a real semiconductor company, you made your own chips. And the idea was like, this isn't like manufacturing Barbie dolls here. This is real technology. Like, you need to control it. Soup to nuts.

[Ben Gilbert]

And already at this point in history, I mean, this is an important point to make because I didn't realize this coming in where I thought, wow, Apple really outsources their manufacturing. They outsource some of it to TSMC and some of it to Foxconn, and may maybe some of those people will start to do each other's work. No, this is a completely different thing. Assembling an iPhone is completely, completely different than taking a brand new design for a next generation chip and manufacturing that chip, one is manufacturing and one is alchemy. The alchemy can only be done by alchemists. I think even here in the late 80s, we're already at the point where it's manufacturing. You need to be a magician broadly. But yeah, it's not like, well, I got a factory.

[David Rosenthal]

No, no, no, no, no, no. For the opposite of that. You know, he said a minute ago, this is a bad idea. So Morris says now, however, there was one problem with the Pure Play foundry model and it was a fatal problem. It could be a fatal problem which was where's the market? He sounds like Don Valentine here, where's the market? Show me the market. This whole idea, it was really a solution looking for a problem.

[Ben Gilbert]

And of course the solution being that all we have is manufacturing capability here. So let's start a company that just manufactures. And it's like you're looking around like, okay, who's going to manufacture?

[David Rosenthal]

Like real men have fabs. Yeah, you know, there are no real startups. I mean there are startups, but all these startups are building their own fabs. Like nobody wants to do this. So nonetheless, you know, he has to start a company. He's literally got a gun to his head.

[Ben Gilbert]

But he does have the core insight here. It's interesting. These companies don't exist yet, but Morris has reason to believe that people will want to start fabless chip companies and that they will need a foundry to fab those chips. And so he says, when I was at TI in General Instrument, I saw a lot of integrated circuit designers wanting to leave and set up their own business. But the one thing or the biggest thing that stopped them from leaving those companies was they couldn't raise enough money to form their own company. Because at the time, as we were just saying real men, it was thought that every company needed manufacturing, needed their way for manufacturing and that most capital intensive part of a semiconductor company, of an IC company, does the manufacturing. And so I saw those people wanting to leave but being stopped by the lack of ability to raise a lot of money and build a wafer.

[David Rosenthal]

Fab, totally right. But those companies, this, like if you build it, they will come.

[Ben Gilbert]

They haven't started yet.

[David Rosenthal]

They haven't come yet. They haven't come yet. So Morris, he knows what the long term market is going to be, but he's got to find the short term market. He needs some like real politic here, like, so what's that going to be? So he says, well, maybe I can go around to the big guys. They've Been doing, you know, just like my first thing back at Ti, they've been doing some line sharing, you know, for either new products that they need excess capacity for or for older products that they need to transition some fabs, but they still need to make components. Maybe I can take some of that off their hands. And so he goes around and he talks to intel, he talks to ti, he talks to everybody in the industry and they're like, yeah, he talks to Motorola, like, sure, fine. And the government had told him, we know it's going to take a lot of money to set up a fab. We're good for half of it, but you got to go raise the other half of it. And we want you to raise it from like an intel or a ti, you know, somebody who's going to be your first customer and that they're going to be bought in. So he does the rounds. He goes and talks to everybody. He gets meetings with intel, he gets meetings with ti. They're both like, you know, Morris, we like you, but no. So he's at the last ditch effort and he has a meeting with Philips, the Dutch company. They have a semiconductor business. So Morris, he has a great quote about this. He says he would describe Philips as the first rung of the second raiders in semiconductors, but they were the only interested option. So they put up 28% of the capital, government puts up 50%. It ends up being 220 million in total.

[Ben Gilbert]

The 110 is probably a lot more than what the Taiwanese government thought they were going to be buying here.

[David Rosenthal]

And then literally the premier of Taiwan, like the head of the government, has to then go around to all the other business leaders in Taiwan and strong arm them into investing the rest of it. The other, what is that, 22%? I guess.

[Ben Gilbert]

Yeah. We also should say, remember that Philips was a Dutch company because that's going to come into play later.

[David Rosenthal]

I don't know how that's going to come into play. Yeah.

[Ben Gilbert]

Putting a pin in Dutch.

[David Rosenthal]

Okay, we got a surprise coming. I'm going to be surprised here. We're doing it real time, doing it live. This may be the craziest part about the whole TSMC founding story. I'm 99.9% sure. Ben, you do not know this.

[Ben Gilbert]

Ooh.

[David Rosenthal]

Do you know what the pre money valuation was on TSMC?

[Ben Gilbert]

No, I couldn't find that anywhere.

[David Rosenthal]

It was zero dollars. Morris Chang got no equity in the company. Zero.

[Ben Gilbert]

So 100% of the company was owned.

[David Rosenthal]

By the investors, 50% by the government, and the other 50% were owned by the investors.

[Ben Gilbert]

Morris got nothing and just got to keep his salary.

[David Rosenthal]

He was a government employee.

[Ben Gilbert]

Wow.

[David Rosenthal]

There by the grace of the government. Oh my God, isn't that unbelievable? Like, this is so the opposite of Silicon Valley.

[Ben Gilbert]

And every day is actually worth $3 billion today.

[David Rosenthal]

Well, what he did as TSMC started to work, he basically put all of his money into buying. He bought his own shares in the company. I don't know if it was privately before they went public on the Taiwan stock Exchange in 1994 and then the New York Stock Exchange in 1997. But yeah, he put basically all of his excess cash flow into buying TSMC shares.

[Ben Gilbert]

Oh my God.

[David Rosenthal]

Isn't that wild?

[Ben Gilbert]

So the government owned 50% of the whole business.

[David Rosenthal]

And you can see their perspective too. They're like, hey, we hired you to do this and then we told you to do this. You are our foot soldier. We are the Mafia.

[Ben Gilbert]

Wow. Yeah. Things had really not gone well in his career that he was willing to take that deal.

[David Rosenthal]

Yeah. Crazy, right? And okay, before we go on in the TSMC story, we need to have two real quick sidebars.

[Ben Gilbert]

Yeah.

[David Rosenthal]

So it was 1987, when TSMC gets officially stood up, they raise the money at a $0 pre money valuation. Do you know what other company, other big thing happened in 1987? We have covered it on this show in the chip world.

[Ben Gilbert]

Is this the founding of arm?

[David Rosenthal]

Yes, it is. Yes, yes. Army JV between Apple, Acorn and VLSI Logic, which was the sort of manufacturing partner they were, an Asics company. That's a whole nother sidebar we're not going to get into. But yeah. 1987. What a year.

[Ben Gilbert]

Brand new unconventional instruction set architecture that's totally different than the x86 stuff that the whole industry and world seems to have standardized on at this point.

[David Rosenthal]

The annus Mirabellus for the semiconductor industry.

[Ben Gilbert]

And useless, right? It's in 1987. It's hamstring, it's very few instructions. PCs are always plugged in. So what do we need a low power chip for? This thing's pathetic.

[David Rosenthal]

Real men have fabs and real men use power. Okay, so that's sidebar number one. ARM gets started.

[Ben Gilbert]

Okay, now I was wondering, I don't actually know the relationship because obviously today a huge amount of volume of TSMC's manufacturing is making chips for iPhones, which since the outset has used ARM chips.

[David Rosenthal]

That are used in all mobile devices, iPhones and Android, all of which are arm, and lots of servers.

[Ben Gilbert]

So presumably there's some relationship coming between TSMC and arm.

[David Rosenthal]

Well, they're really close partners. I mean, the way now this stuff is so integrated.

[Ben Gilbert]

Yeah, all the car detection companies like.

[David Rosenthal]

Arm, the design, the EDA companies like Synopsys, these guys are all deeply, like the engineering is all deeply in bed with one another.

[Ben Gilbert]

Okay, so you mentioned eda. I'm going to take your sidebar and I'm going to.

[David Rosenthal]

You're going to raise me?

[Ben Gilbert]

I'm going to raise you one more sidebar. So, listeners, we're two clicks out here. So this is a pretty good point to talk about how the value chain went from one company that created transistors and then they designed the chip, they manufactured the chip, they marketed the chip. Here's how the value chain looks today. And I think you've already alluded to, I think in the 80s it already started to look like this. First there's EDA, there's electronic design Automation. This is the software that professional chip designers use to do their work. So Synopsys, I think Cadence.

[David Rosenthal]

Yeah, Cadence.

[Ben Gilbert]

They're the two leaders.

[David Rosenthal]

Yep, they're the two leaders. So that's like, I don't know, Excel or like Figma for chip designers. Yeah, that's what they use.

[Ben Gilbert]

Productivity tools.

[David Rosenthal]

Yeah.

[Ben Gilbert]

So that's category one of four. And of course, as you can imagine, the software to design the chips probably has to be very aware of the manufacturing capability of who's going to be manufacturing the chips. But let's put a pause in that for a second. So then of course there's the fabless chip design companies. So today think Apple, Nvidia, Qualcomm, eventually amd, after they stopped being real men.

[David Rosenthal]

Apparently tons of innovative new startups now.

[Ben Gilbert]

Like Cerberus, PA Semi, Tesla before Apple acquired it.

[David Rosenthal]

Yeah. Oh, PA Semi is coming in a sec.

[Ben Gilbert]

Okay. Okay, so you've got the EDA companies that are making the software, the Fabless companies that are designing the chips using the software. Then third, there's one company that we have not talked about yet, one component of the value chain. And these are the people that manufacture the machines.

[David Rosenthal]

Oh, yeah.

[Ben Gilbert]

That go into the factories that the foundries operate.

[David Rosenthal]

There's actually one between. Well, no, actually I think above eda there is one more part of the value chain. There's a fifth which is ip. So that's all like arm. Oh, right, yeah, like architecture, ip. There's actually a ton of companies now that do just straight up ip. And I thought before this episode these were like. Oh, just shell companies that sue one Another about ip, it's not that systems are on a chip now. So like everything is on one chip. Basically you need a USB functionality in your chip. You don't need to design that, you just buy some IP off the shelf. So there are companies that do that.

[Ben Gilbert]

Yep. Okay, so that's a good point. So that's our fifth, sort of like ip, they own the instruction set architecture. They kind of create the general rules that you're playing by when you're designing a chip such that whoever's writing the compilers knows what assembly language they're targeting that can then operate on the chip that's going to be designed. So we covered the eda, we covered the ip, we covered the fabless companies. There's somebody before we get to the foundries, which is the equipment manufacturers that sell to tsmc. So more historically you've got LAM Research, you've got Applied Materials in the us, you've got Tokyo Electron in Japan. But today I just want to give everyone a taste of this and then we'll get more to it later. There's a company that is also Dutch.

[David Rosenthal]

Based called There it is. There it is.

[Ben Gilbert]

Asml, which was originally ASM Lithography. And lithography is marginally in scope for this episode. There's a whole thing we could do on the magical process that is lithography.

[David Rosenthal]

Taking me back to my high school photo lab, right? Yeah.

[Ben Gilbert]

And the L is lithography. So the company was originally called ASM Lithography. They make the most advanced chip manufacturing machines in the world. They're the only company that makes them. They're located still in the Netherlands. Their biggest customer is tsmc. They. And this is where I want to bring it all the way back around. And we of course will talk about the magic that is these machines later. It was founded in 1984 as a joint venture between Advanced Semiconductor Materials International, ASM Lithography and Philips.

[David Rosenthal]

Oh wow. I did not know that.

[Ben Gilbert]

So that.

[David Rosenthal]

That's crazy.

[Ben Gilbert]

Is the beginning of the relationship between TSMC and their equipment provider.

[David Rosenthal]

And what a strategic point. I mean because, well, it's TSMC's insane capital operating cash flow production that enables them to spend capex above anybody else. That allows them to buy more ASML equipment than anyone else. But that relationship, wow. I mean these machines. We'll get into it later. It's going to blow your mind what this stuff does.

[Ben Gilbert]

All right listeners, this is a great time to thank our big partner here at acquired JP Morgan Payments. When we told the team over at JPM that we were remastering our TSMC episode, they smiled and said, oh, we have the perfect thing for this episode that most listeners won't know about, but is super important to how international companies accomplish global trade, which of course, that.

[David Rosenthal]

Is like catnip for us. So we were like, well, tell us more.

[Ben Gilbert]

Yes, JP Morgan has a whole trade and working capital group that helps companies manage risk and access liquidity for global trade. In addition to, of course, facilitating the actual payments to drive growth.

[David Rosenthal]

Yep. Imagine this scenario. You're a global auto parts manufacturer and you build up inventory of a key car engine component because it requires a super complicated production process. But then you have to wait for the final demand forecast from the actual car company, your customer, before you can ship units to them. But in the meantime, you have to secure credit lines and manage your own supply chain.

[Ben Gilbert]

Sounds complicated. Enter JP Morgan's trade and working capital group. Not only is JPMorgan payments the leader in all the payments products we've shared over the last year that drive growth for your business, they also have 150 years of global expertise to help businesses navigate issues like this. This legacy dates back to 1799. So they literally have centuries of leading the industry through times of both economic growth, but also instability.

[David Rosenthal]

And as you all know, you can't time the market. But if you intend to be in business for decades, you know you're going to exist through all sorts of different geopolitical, macroeconomic and supply chain climates, just like TSMC has. So make sure you've got a great payments partner that's also prepared for anything as your business grows. JP Morgan really is a behind the scenes powerhouse that helps all types of businesses and industries facilitate payments, mitigate risks, access liquidity to accelerate cash flow, and so much more.

[Ben Gilbert]

Our huge thanks to JPMorgan Payments. You can learn more at jpmorgan.com acquired or click the link in the show notes and just tell them that Ben and David sent you.

[David Rosenthal]

Okay, back to my second sidebar. Also going to be worth it. PSMI. We did an episode wave. It was like episode 20 something.

[Ben Gilbert]

This is like When Acquired was a very different show when it was actually about small acquisitions.

[David Rosenthal]

Totally.

[Ben Gilbert]

Yeah.

[David Rosenthal]

So I don't know that we actually covered this, but I uncovered in the research for this episode. Do you know the origins of PSMI?

[Ben Gilbert]

No, I don't.

[David Rosenthal]

Okay, so arm my sidebar number one, 1987 also created. They're just an IP design company. Like I was saying in your sidebar.

[Ben Gilbert]

It'S like Inception over here.

[David Rosenthal]

So they just License out the ARM architecture to other companies that then design using the ARM architecture. One of their original licensees was dec, Digital Equipment Corporation. Like OG way back in the day.

[Ben Gilbert]

Yep.

[David Rosenthal]

So they took the ARM architecture and they tuned it for performance and they called what they did at DEC their version of ARM that they created, Strong arm. And that product line within December would later be acquired by intel of all places.

[Ben Gilbert]

Okay.

[David Rosenthal]

Crazy why intel acquired an ARM architecture, right?

[Ben Gilbert]

They're the X86.

[David Rosenthal]

Yeah. They remarketed it as Xscale. I think they ended up shutting it down.

[Ben Gilbert]

Huh.

[David Rosenthal]

So a bunch of the core engineers on the team, like the DEC team that had been working with ARM from back in the day, and they're like, we just got acquired by Intel. What the hell? Like, you know, screw this, we don't have to go work for Intel.

[Ben Gilbert]

There's no interesting flourishing alternative architectures at Intel.

[David Rosenthal]

Yeah, we're ARM engineers. We can go start our own company.

[Ben Gilbert]

That's psmi.

[David Rosenthal]

That's psmi. Ah.

[Ben Gilbert]

So the legs, of course, the underpinnings of all of Apple's chips today.

[David Rosenthal]

Totally. So the lineage of all of Apple silicon, probably the most valuable defensible part of Apple today in terms of technology was ARM and DECK to intel, to psmi, to Apple.

[Ben Gilbert]

Whoa, that's wild. I don't think I ever knew that. So you can trace Apple Silicon all the way back to Apple.

[David Rosenthal]

Yeah, because ARM was a JV with Apple crazy with intel and DEC in the middle. Wow. Okay, so back to tsmc. The short term market is. Morris basically begs all of his old colleagues in the US and European and Japanese semiconductor industries to just give the dregs to tsmc. And it really was the dregs. So here's Morris on what this was. The IDMS would let us manufacture their wafers only when they didn't have capacity or when they didn't want to manufacture the stuff themselves anymore. Now when they didn't have the capacity and asked us to do the manufacturing, then as soon as they got the capacity, they would stop giving us orders. So it wasn't a stable market when they.

[Ben Gilbert]

So it wasn't actually a thing they wanted to outsource. They were just.

[David Rosenthal]

No, it was just like they didn't have the capacity, so they needed some extra excess space. But then when they got the capacity online, they took it away.

[Ben Gilbert]

Right.

[David Rosenthal]

And then the chips that they gave us that they didn't want to make anymore, well, the reason they didn't want to make it was it was losing money. So they basically were just transferring their losses on producing these chips to tss.

[Ben Gilbert]

So how did they get out of this?

[David Rosenthal]

So, Mars continues, the conventional conclusion at the time was that there was no market. That's why the Pure Play Foundry idea was so poorly thought of. What very few people saw, and I can't tell you that I saw, was the rise of the fabless industry. I only hoped for it and then, as you said. But I had better reasons for hoping for it than the people at intel, at Ti and Motorola, because I was now standing outside. When I was at Ti in General Instrument, I saw a lot of these IC designers wanting to leave, start their own businesses, and the constraint was setting up their own fabs. So, like, yes, he saw that at ti, but remember, he had been considering becoming a VC instead of going over to Etri. So this is the ultimate end around. He becomes essentially like the world's best semiconductor vc. He takes an index out on the whole future innovation and entrepreneurship market in semiconductors by becoming the platform that they're going to build on instead of going and investing in them. Like, he enables all of it. He's like the Y Combinator of semiconductors.

[Ben Gilbert]

Right. Or in many ways, the Tencent. Tencent, of course, also does direct investing. But the idea that you could get distribution through WeChat.

[David Rosenthal]

Yep.

[Ben Gilbert]

It's kind of like it's not distribution, but it is manufacturing. There is a thing that you have to raise 10 to 20% of the capital that you otherwise would have needed to raise if TSMC exists.

[David Rosenthal]

Yep. And just like Don Valentine, you know, kind of when he left to go join VC a generation earlier, again, it's not VC, it's TSMC's building the platform. But Morris is a hero. So all these engineers, they all look up to him and he knows a lot of them personally. The ones he doesn't know, like, who's not going to take a meeting with Morris Chang. Right.

[Ben Gilbert]

He almost ran TI totally.

[David Rosenthal]

Like, he did all this amazing stuff.

[Ben Gilbert]

It's interesting because it's like with the incumbents, of course, because they had it in their DNA to be a manufacturer. Of course, they wanted to take the most profitable things and manufacture them in house. But if you actually are betting on all these startups that will never develop DNA to be their own manufacturer, they never want to take that back.

[David Rosenthal]

Yeah. And so Morris is now going out and evangelizing and he's like, all these great designers, like, we're an option for you now. Like, you want to leave, you want to start your own company. You don't need a fab. We'll be your fab. You know, it takes a couple of years. For a couple of years, TSMC has to survive on the dregs from the idms, the big guys. But after a couple of years, these startups get going. You know, little companies like Qualcomm, Broadcom, Marvell, Nvidia. These are all started with TSMC.

[Ben Gilbert]

Nvidia was started in 1993, only ever raised $20 million. $20 million and never opened their own fab. I believe 100% with TSMC. Wow.

[David Rosenthal]

Well, maybe they have other foundries too, but the vast majority of their business. Jensen talks about this. Jensen Huang. It took him actually a little while to get on Morris's radar, but once he did. The vast majority of Nvidia's chips, TSMC makes them. And Nvidia is What, like a 350, $400 billion market cap company now?

[Ben Gilbert]

It's wild.

[David Rosenthal]

And only raised $20 million. It's like the AWS for chip companies never would have been possible before. So this is what's super cool. I don't think Morris saw this. Like, this even exceeds his wildest dreams. He was hoping for this fabless market to take off, but this creates this insane flywheel for tsmc. So the fabless market starts to grow, which they're exceeding and enabling it. As that happens, TSMC's revenue grows.

[Ben Gilbert]

And because they have 50% gross margins and 40% operating margins, they can take that profit and buy more machinery, Capex.

[David Rosenthal]

Build more fabs, advance the level of their technology. Remember, they were starting from behind on technology. Within about 10 years they catch up and then they start to exceed everybody else. So as they push the manufacturing process technology forward, they're manufacturing better chips with smaller wave, you know, process lengths. They're enabling their customers, which are the fabless companies, to get better and better performance. As they get better performance, the fabless companies can address more of the market and more use cases. So their existing customers get bigger and new Fabless customers start, which gives them more revenue, which repeats the whole cycle. And you know, it goes slowly. Like any flywheel, it takes a lot of effort and a lot of time to start turning it. But fast forward to now. So in the early 2000s, when TSMC finally caught up to the bleeding edge level of technology with other semiconductor companies, there were 22 companies that were at the leading edge. I think it was like, I don't know, let's call it 150 nanometer process or something like that. At that point in time, 22 and TSMC finally broke in to the pack. They were one of the 22. By the late 2000s, it had gone from 22 down to 14. That were at the leading edge. By the mid 2010s, there are six.

[Ben Gilbert]

It's basically Samsung and TSMC, right?

[David Rosenthal]

Today there are two. A 5 nanometer process is the current leading edge. Only TSMC and Samsung. Intel has been trying to get there, but they haven't been able to. They've fallen behind. And the next process is going to be 3nm. TSMC is going to launch that next.

[Ben Gilbert]

Year, which by the way, just slipped six months.

[David Rosenthal]

Ah, interesting. Well, Samsung has already slipped to 20, 24.

[Ben Gilbert]

Whoa.

[David Rosenthal]

So very likely in the next process, it's just going to be tsmc, which.

[Ben Gilbert]

Means that you will see that on an Apple slide somewhere, announcing the next iPhone, talking about how it's a 3 nanometer process, they'll take all the credit for it. And TSMC is totally fine with that because their job is not to market, it's to empower their customers.

[David Rosenthal]

This flywheel, it's just unreal what happens here. They run the table on the whole industry.

[Ben Gilbert]

It is interesting. The industry went from vertical to horizontally integrated, where the very best products in the market became horizontally integrated. And it's interesting how I'm trying to figure out what drove that, because at some point, I guess there's a couple components to it. One is the speed at which Moore's Law happens makes it such that you can't be good at everything. You can't be good at everything from EDA to making the manufacturing equipment, to running the manufacturing process, to designing the chips. You're not going to write your own instruction set architecture. People did need to break into best of class.

[David Rosenthal]

Morris has got this great quote about this that I have in here. So he says the semiconductor business is like a treadmill that speeds up all the time. If you can't keep up, you fall off. And that's Moore's Law. From 22 down to 2, down to 1. Even when their competitors are only doing the one thing the TSMC has done. Like, if you fall behind by a step, you're toast, Right?

[Ben Gilbert]

And it's because there's this big part of it that you're talking about that hasn't come up on other episodes. Because we tend not to talk about companies that require a lot of manufacturing prowess. But in order to stay on that treadmill, the number of tens of billions of dollars that you need to be spending into capex is Going up. So you need to be enormously profitable so you can build the factories for the next generation.

[David Rosenthal]

Yeah, I mean, well, there's two things. So yes, that is 100% true and the scale of this now, I mean, TSMC just announced they're going to spend $100 billion in CapEx over the next three years, $30 billion this year, 60 over the next two. And I bet that keeps going up. So that's a lot of billions. You might even say this is so strategically important and people are talking about this. Certainly China's talking about this. The US government's now talking about this. Governments might need to come in with a bazooka of money and create other options because almost all their manufacturing is in Taiwan. It's in this strategically geopolitically challenged location. We need to re onshore some of this in the us. China, of course, wants their own. You can't just spend the money and do this. US government could come in and say we're going to spend a trillion dollars this year to do this. They can't do it because we're going to get to powers later. But there's this marriage of scale economies and process power. The TSMC in this industry, there is no amount of money you could spend to catch up next year. You can't, because the engineering is so hard and the learning curve takes decades to get to this point. I was listening to a podcast, a Bloomberg Odd Lots podcast about this, where they were talking about this and their reporter who covers TSMC is great China. They're asking the question like, well, China could just spend a billion dollars and do this, create their own fabs and they're doing this.

[Ben Gilbert]

What's the company called? Smic. Smic, yeah.

[David Rosenthal]

Smic. Yep.

[Ben Gilbert]

Because basically TSMC seems to have picked a side in the US and so with a little bit of prodding, I'm sure from various presidential administrations over the last five years.

[David Rosenthal]

Yeah. The guy who covers TSMC was like, they can do that and they are doing that, but they wouldn't know what to do with it. And it's not because they're dumb.

[Ben Gilbert]

It's the hardest thing in the world.

[David Rosenthal]

It's the hardest thing in the world. Yes.

[Ben Gilbert]

To do this stuff, to make the equipment that ASML does and to manufacture the way that TSMC does it is the hardest thing to do in the world.

[David Rosenthal]

Yeah. Anybody else could get all the same equipment from asml.

[Ben Gilbert]

Actually, that's not true.

[David Rosenthal]

Oh no. I'm saying even if you could, you wouldn't know what to do with it, Right? And it's not because you're dumb. It's there are only like a small number of people in the world that can operate this stuff.

[Ben Gilbert]

All right, I'm jumping out of my seat here, so I'm going to do the ASML thing now. So the reason that some people can't get their hands on the ASML equipment is because the Netherlands did not renew their trade agreement with China. Also likely, it has been reported that probably that is because of us prodding to say, hey, these pieces of equipment you're making seem pretty specialized. You're the only people in the world who can do it. And it makes the most cutting edge semiconductor manufacturing technology. Maybe let's not sell that to SMIC in China. And so they're not doing that. Now you might say, oh, come on, how hard can this stuff be?

[David Rosenthal]

Well, these machines tell us then what these machines do.

[Ben Gilbert]

Well, first of all, they cost $200 million for a machine that makes the chips, and that's going to go up to like $300 million. And by the way, on a lot of this, we have a lot of thank yous for John Bathgate and Britain Johns from the episode of the Knowledge Project that they went on to talk about A lot of this stuff. It takes four 747s to ship one of these machines. So you buy one, your tsmc, you buy one and it arrives in of course, the 747s. Then there's a crew of ASML employees on site, not only to assemble it, but then to help you run it. So like you mentioned, these companies are deeply integrated with each other to pull this off.

[David Rosenthal]

Okay, so what does running it mean? What do these machines do?

[Ben Gilbert]

Okay, so it becomes exponentially harder to manufacture chips the more dense they are. So David, you mentioned that 150 nanometers or so from several years back. And we know now that the M1s are made on this 5 nanometer process. Well, the wavelength of white light, of regular light is 193nm.

[David Rosenthal]

Oh, that seems like a problem.

[Ben Gilbert]

Well, it's certainly wide. But you know, we're humans, we come up with clever solutions. We can solve this. And so you shoot it through a lens and maybe you shoot it through.

[David Rosenthal]

Some water like a laser.

[Ben Gilbert]

Well, not yet, but even that really only gets us to like 11nm. So how the heck are we supposed to make these chips where the transistors are ostensibly only 5nm apart when what we've done to date, shooting through lenses and shooting through water gets us to 11 nanometers. Well, okay, so this is crazy. You have to create a plasma. So what they do, and this is called extreme ultraviolet light, or euv. This is a process that is just wild. On one side of the machine, you drop molten tin. On the other side of the machine, you then hit it with a highly specialized laser. You perfectly pulse them, it explodes into a plasma, which creates extreme ultraviolet light. Now, of course, this is hard enough to do, as you can imagine how that might work, but you actually have to do that 50,000 times per second.

[David Rosenthal]

Yeah. And what I read is that the accuracy with which that laser needs to hit the drop of molten tin is more precise than the calculations to send the Apollo missions to the moon. And you gotta do that 50,000 times a second.

[Ben Gilbert]

Unbelievable. Now, of course, think a little bit more about this. Well, wait a minute. That wavelength is so small, we're going, you know, shy of 11nm here, we're going to 5nm, 3nm that actually it is absorbed by all known mirrors, which we're used to reflecting light, but they don't reflect this light because the wavelength is so small. So part of this process involves reflecting it a bunch of times, like 20 or something before etching the silicon. So what do we do? Well, ASML actually needed to invent a new type of mirror to do this. And they also needed a contract with a German company to make this special type of laser, which is the only known company in the world capable of making it. This is crazy hard stuff. They only make 50 of these machines per year or so. They used to have competitors like Nikon used to compete with ASML on this, but it's too hard. They gave up. That's how hard extreme ultraviolet lithography is. And of course, we haven't talked a lot about this, and I think it's outside the scope of the show. But just to overly simplify, lithography is kind of the process of taking that silicon wafer and etching a design on it. And if we want to do that in smaller and smaller ways, we got to do with more and more specialized equipment. And at the end of the day, if you want to make the M2, the M3, you know, the A18X bionic, whatever it's going to be called, bionic. There is no other way to make it than this extreme cutting edge alchemy.

[David Rosenthal]

It truly is alchemy.

[Ben Gilbert]

So, you know, Ben, so you're a government. You want to throw $100 billion, I.

[David Rosenthal]

Was going to say, you know, like, acquired is doing really well. Like we're on a tear here. You know, we've got power, we got brand, we got network, you know, economies, we got our community. Like we're doing well. We should invest in that. We should. Opportunity, we should compete with tsmc. Screw the governments, we'll do it. We've got a couple hundred million dollars. We'll buy this stuff. You know, you have a CS degree, you know, you're the more technical one of it. You can run this stuff right. When we get the shipments from asml, you can make this happen.

[Ben Gilbert]

Wouldn't know the first thing to do. Even if we could invest the cash, even if we could build the facility, even if we could buy the machines, which, by the way, that's going to be hard because there's 50 some on backorder. So like I can't even get it for years.

[David Rosenthal]

SMC has ordered out all of them for years.

[Ben Gilbert]

It takes people who have done the most advanced manufacturing in the world ever in history in order to know how to do the next version of it.

[David Rosenthal]

And this is why TSMC has 40% operating margins.

[Ben Gilbert]

It's crazy.

[David Rosenthal]

Totally crazy. I'm just like in awe of this completely. Okay, so a little while back, before we get totally geeked out on that, which was awesome, you said something like, how do we get this flywheel effect? It's great, but how do we really get from. TSMC started taking the dregs from the idms. Then the Fabless companies came along. How do we get from there to now? There's another really important chapter here.

[Ben Gilbert]

And you're going to flash us forward from 93, 95 to 2010ish. Is that what's about to happen 2008?

[David Rosenthal]

Well, first we'll stop in 2005. So 2005, you know, things are going well. Better than Morris ever imagined. These Fabless companies are getting started. Nvidia's killing. I mean, I was making gaming PCs at the time. I wanted those Nvidia GPUs.

[Ben Gilbert]

But Nvidia wasn't a top 20 stock in the world.

[David Rosenthal]

No, I mean, intel was like, Nvidia, come on, right? Real men have fabs. Okay, maybe we're beyond that part, but they were making GPUs. Like Nvidia's stock tracked whether they won the next Sony contract for the next PlayStation or the Xbox.

[Ben Gilbert]

That was the market for the market.

[David Rosenthal]

Right. You know, great market, but it's not what we're talking about.

[Ben Gilbert]

It's not about machine Learning it's not about crypto. It's like, is the next PlayStation going to include your chip or not totally.

[David Rosenthal]

But still great for TSMC. It's awesome. 2005, Morris is 74 years old. He's like, all right, I did it. I've been buying TSMC stock with my own money. It's done well enough. I don't really need to work anyway. I'm going to call it Ready to retire. Ready to ride off into the sunset. He hands the reins of TSMC over to his longtime lieutenant, Rick Sy, and he retires. He spends a couple years. He's just chill. I don't know what he's doing. He loves literature, he's reading all sorts of stuff. He's on his second marriage, which he credits his second wife for really reinvigorating him and inspiring him. Then it's summer of 2009.

[Ben Gilbert]

By the way, that's right around the time that people were starting to speculate that EUV might work. All this had been kind of an eye drop to this point.

[David Rosenthal]

There had been science projects before. Oh, cool. I didn't realize that, oh, well, this is going to make what happens even more sense. The financial crisis had happened in 2008 and, you know, chaos everywhere. We've talked about it lots on this show. Surprise press conference, TSMC, summer 2009. They announced that Morris is returning to lead TSMC as CEO. Rick is out. Morris is coming back for the third act of his career. I don't even know what number he's wearing. He's not 45, because that was, you know, the second act. He's like, Jordan. He's beyond Jordan at this point. Coming back. He's gonna be CEO again. At age 78, Rick would actually have a second act himself. Do you know what Rick is doing now?

[Ben Gilbert]

No.

[David Rosenthal]

Rick is CEO of MediaTek, which spun out of UMC. So, like, he's doing fine. Rick's doing great. But Morris comes back. Why does Morris come back?

[Ben Gilbert]

But this is heralded as like kind of a botched transition, right?

[David Rosenthal]

Yeah, well, there's a lot of stuff.

[Ben Gilbert]

Going on, like from Morris to Rick, people kind of viewed it as like, you didn't really do a great job bringing in the next CEO of the company.

[David Rosenthal]

Maybe. I don't know enough to say, okay, I think maybe. But also there's a lot going on at this moment in time. So the financial crisis, that's like a crisis that's affecting everybody. So that's one thing, but the other thing. So in the press release, there's a quote from Morris and he says, one, this move will not affect TSMC's fighting spirit and is likely to spur greater intensity. But two, he says that he sees golden opportunities ahead. What are these golden opportunities that he's referring to? It's 2009 mobile, right? The smartphone.

[Ben Gilbert]

2007 In July, the iPhone comes out. 2008, the iPhone 3G comes out with the app store for the first time, the SDK, all these developers building for it.

[David Rosenthal]

But of course, an Android comes out in 2008.

[Ben Gilbert]

Yep. Apple had to this point while building, you know, this operating system, this scaled down version of OS X, its Unix, but they weren't designing their own chips. They just used an off the shelf Samsung chip. They got it right with saying like, hey, we gotta use ARM in these things because you need a really low power device. So they've done actual God's work and magic to be able to bring a PC x86 operating system, create a sub operating system, a computer in your hand. Totally. That runs on arm.

[David Rosenthal]

Yep.

[Ben Gilbert]

Miracle. But of course, it's an off the shelf Samsung processor.

[David Rosenthal]

Totally. Well, even that's great for tsmc. Like, you know, Intel's not making that. Okay, so that's one. We'll talk more about that in a sec.

[Ben Gilbert]

But we should say. And Samsung also fabbed it because Samsung is both a chip designer and a manufacturer.

[David Rosenthal]

But the point is, on mobile, the previous whole paradigm of computing and silicon, everything was PC. It was like stuff plugged into a wall. It was intel, it was x86 and like, yeah, TSMC could now access some of that because AMD went fabless. But come on. But now all of the leading companies that are going to make silicon for design silicon are ARM companies. You know, Qualcomm, Broadcom, Mediatek, Apple.

[Ben Gilbert]

Who all are fabless.

[David Rosenthal]

All are fabless. Okay. So that's a big opportunity. And guess who knows all of those people, Morris.

[Ben Gilbert]

And we should say too, 2009 was an interesting tipping point because if you'll remember Back to the 2007 introduction of the iPhone, Steve Jobs has a slide where he says their hope, their goal is to get 1% of the existing smartphone market. Right. So Apple had no notion, I mean, Google had no notion of how big smartphones were about to become in 2009. We're starting to see, I think the iPhone 4 came out. We're starting to see a ton of different OEMs making Android phones. You're moving into this era where everyone's looking at each other going, oh, this might Actually be the next computing paradigm.

[David Rosenthal]

Yeah, yeah, yeah. Well that was half of the next computing paradigm. Remember back. I mean this is when I started in vc, there were two waves that.

[Ben Gilbert]

Everybody was talking, mobile and social.

[David Rosenthal]

Mobile. And on the consumer side, everything shifting to mobile. That was what happened.

[Ben Gilbert]

Bring your own device.

[David Rosenthal]

Well, sort of. You're on the right track. What happened in the enterprise? The cloud.

[Ben Gilbert]

The cloud, Right.

[David Rosenthal]

So you got mobile and you got cloud and it's so simplistic. But those are the two things that drove trillions of dollars of market cap over the next decade. Well, what's the cloud? So at first the cloud is good for Intel. Right. X86, you're putting CPUs in the cloud. Amazon's buying lots of.

[Ben Gilbert]

Dude, the cloud's the best thing that ever happened for Intel. That is an incredible server architecture.

[David Rosenthal]

It was the best thing that ever happened to Intel. But as the cloud progressed and computing workloads progressed, the CPU became a lot less important. Like AI started becoming a thing. Cpu. Like yeah, maybe you need some of that. Maybe you'll use intel, maybe you'll use arm, like whatever. But what really matters?

[Ben Gilbert]

Well, the majority of cloud workloads are still on cpu.

[David Rosenthal]

Yeah, okay, fine, fine.

[Ben Gilbert]

But you're right, future looking.

[David Rosenthal]

Why is Nvidia now a 400, $304 billion market cap company? It's not because of the PlayStation and.

[Ben Gilbert]

It'S bigger than Intel. Right. And Nvidia's 2X, Intel's market cap, something like that, yeah. The notion of chips that are really good at parallelized processing, which is GPUs and matrix multiplication, effectively vector math versus the CPU, which are sort of these general purpose workhorses built for the operating system that runs on your computer. Super good for serial. Of course there's like multi corporate. There's 64 cores on a CPU now, so they're good at parallelization too. But all this stuff, especially machine learning, is GPUs.

[David Rosenthal]

It's GPUs and it's specialized. Like the Tesla Dojo stuff. That's not x86.

[Ben Gilbert]

Oh yeah, we're in this. I mean the other thing that Foundries enabled, the Fabless era enabled is the custom chip. Like everybody's building custom chips for all sorts of things.

[David Rosenthal]

Yep. So you got these two big golden opportunities that are coming online. And Morris is like, I got this.

[Ben Gilbert]

And we should say, we should clarify too. I think Tesla uses Samsung.

[David Rosenthal]

Oh, interesting.

[Ben Gilbert]

I didn't know. Not tsmc or at least for part of it. And I think they actually even fab their chips in Austin in the U.S. really? Yeah.

[David Rosenthal]

So this is, I can't imagine that's gonna last.

[Ben Gilbert]

This is like the beginning of the like what everyone's sort of hoping for in the U.S. is this like return to American manufacturing of chips.

[David Rosenthal]

They're gonna have to go to TSMC though in the next generation because you want 3 nanometer.

[Ben Gilbert]

It depends. I mean it depends what the workloads are and if you need.

[David Rosenthal]

Yeah, I guess so. It depends what you need. Well, anyway, point is Intel's dominance is over and the index on all that's going to take over is TSMC and Morris riding back in. He comes in, he gets these deals done. So like the Apple deal 2012, Morris Chang, 78, 80 years old.

[Ben Gilbert]

And I think the Apple rep on that was Jeff Williams. The classic Tim Cook's. Tim Cook, that's right. I think there was something where it was even like one went over to the other's house for dinner or something and it was like a living room conversation to ink the deal for, hey, we bought this company PA semi. We've been designing our own chip architecture in house. We're going to launch. I think it was the A4.

[David Rosenthal]

Yeah, I think that was the first one.

[Ben Gilbert]

And it was Apple basically saying we think a lot of people are going to buy a lot of iPhones in the future. And we are competing head to head with Samsung because they're a company that is not clear on strategy. They have a consumer angle here with the Galaxy phones. They think they're also kind of a foundry.

[David Rosenthal]

And Jobs hated Samsung, famously. What did he call them? He called them some derogatory term.

[Ben Gilbert]

Well, there's been a few interesting things. There was Steve Jobs saying he was gonna wage thermonuclear war.

[David Rosenthal]

That was on Google, right?

[Ben Gilbert]

I think that was Google.

[David Rosenthal]

But he had some like oh, Samsung, they're just like copy like something that like really put them in.

[Ben Gilbert]

It was about the lawsuits. It was like when they kept stealing Apple's designs.

[David Rosenthal]

Yeah.

[Ben Gilbert]

And then there was something else where someone. This is later, but Tim Cook read the quote on stage about it being a toxic hell stew.

[David Rosenthal]

Well, it doesn't get any better than that.

[Ben Gilbert]

No. But Bloomberg reported that it was a really big risk for both companies, both Apple and tsmc. Apple was relying on a company that was then seen as an also ran. And the quote is, I think this is actually Jeff Williams. If we were to bet heavily on tsmc, there would be no backup plan. And for TSMC it meant an initial investment of $9 billion fabs are expensive to build. And devoting 6,000 employees to building a dedicated plant for Apple in just 11 months. It took several years before it even began producing the chips. So that was in 2010. And then I think 2012 was the launch of the A4 designed by Apple, built on the PA Semi acquisition and of course fabbed by TSMC.

[David Rosenthal]

And I think it wasn't until the iPhone 6, which was what, 2014, 2013.

[Ben Gilbert]

Something like that, that they were solely TSMC.

[David Rosenthal]

I think so. And that was like the huge hit product. Cause remember the six was when they first increased the screen size and those things flew off the shelves.

[Ben Gilbert]

I'm pretty sure some iPhones had Samsung fabbed A4s and 5s in them and some had TSMC fabbed ones.

[David Rosenthal]

But I think by the 6 all iPhones were huge winners. But I think the 6 was like mega, mega winner. And I think that was all TSMC.

[Ben Gilbert]

Huh? 9 billion of manufacturing capacity just for a deal with one company paid off.

[David Rosenthal]

That was a bet. The farm deal. And kind of like something only Morris could do.

[Ben Gilbert]

Totally. I mean it really speaks to founder Gravitas.

[David Rosenthal]

Yeah. Even if he had no equity as a founder, no equity that he didn't buy. So after getting that deal done in 2013, Morris steps down as CEO again, but he stays on as chairman. And then finally once it all plays out and TSMC is on top, In June of 2018, Morris retires, presumably for real.

[Ben Gilbert]

He even stepped down from the chairman role.

[David Rosenthal]

Fully retires from chairman at age 86. Oh my God.

[Ben Gilbert]

Crazy.

[David Rosenthal]

Wow. So that was 2018. So I mean, let's talk about now. So 2020 TSMC, we alluded to this operating profit of $20 billion on $48 billion of revenue. They took 17 of the $20 billion in operating profit and plowed it all back into CapEx last year, in 2020. Beginning of this year, January 2021, they give guidance that they will raise CapEx from 17 last year in 2020 to 25 to 28 billion in 2021. In April of this year, 2021 they raise it again to 30 billion forecast for the year and a hundred billion over the next three years. That's like the real shot across the battle that everybody wakes up, the financial markets wake up and they're like holy crap, TSMC has cornered the market. Even Samsung's not going to be able to keep up with this. It's wild.

[Ben Gilbert]

All right listeners, it is time to talk about one of our favorite companies. Statsig. It's funny, David statsig has gone from this little startup when we first started working with them a couple years ago to this total powerhouse now.

[David Rosenthal]

I know it's wild. I was looking it up and they have added all these customers since we started working together. OpenAI, Figma, Atlassian, Vercel notion, tons more. At this point, if there's a growth stage tech company out there, there's pretty good chance they're using statsig.

[Ben Gilbert]

Yup. So listeners, if you are unfamiliar with statsig, they basically took what was the standard product infrastructure at every big tech company and they built it as a standalone company. This includes advanced experimentation tools, A, B, testing feature flags, product analytics, session replays, and more. So if you're building the next great software company, this sort of infrastructure is essential because it allows your product and engineering teams to release things quickly, measure the impact of them and track progress over time.

[David Rosenthal]

Totally. So, I mean, as we've talked about on the show forever, at companies like Facebook or Netflix, data was just a part of how everything was built, which contributed to all the crazy bottoms up organic growth that they had. Now with statsig, you can get that from day one at your startup. And today they're not only trusted by startups, but also by more mature enterprises like Bloomberg and Microsoft and Electronic Arts. Turns out that a single system for data driven product decisions is useful at any scale.

[Ben Gilbert]

Yeah, and by the way, the scale they're operating at is completely insane. They process over 2 trillion events per day. Now, by the way, David, this is updated. The last I checked it was 1 trillion, and then this morning I pulled it up 2 trillion. And they handle releases to billions of end users. If you're listening to this podcast and you've used software in the last few years, there is a very good chance you've been a part of many experiments orchestrated by statsafe.

[David Rosenthal]

Yeah, it's just awesome. And as they've gone up market, they've also started to offer some interesting deployment models, like being able to run the whole thing natively inside your existing data warehouse, or just using statsig's fully hosted solution.

[Ben Gilbert]

If you want to leverage statsig to grow your business, there are a bunch of great ways to get started. Statsig has a very generous free tier for small companies. A startup program with a billion free events. That's $50,000 in value and significant discounts for enterprise customers. To get started, go to statsig.com acquired and just tell them that Ben and David sent you.

[David Rosenthal]

Thank you, statsig.

[Ben Gilbert]

So more on today. David TSMC today.

[David Rosenthal]

Well, okay, so speaking of Data. I think this is the data point that really kind of says everything. So since the first IPO in Taiwan in 1994, TSMC has had compound annual revenue growth of 17.4% for 27 years. Revenue growth 17.4% compounded for 27 years. Now, the IRR, the equivalent of valuation on market cap. So it was 4 billion market cap at the Taiwan IPO in 1994. Today it is 550 billion. So that is a 19.9% IRR starting from a $4 billion base over the last 27 years. So 20% IRR over 27 years. Incredible. By any means, starting from a $4 billion base, it is now currently, as we record, the ninth most valuable company in the world.

[Ben Gilbert]

And I think other than Saudi Aramco, it is the only company in the top 10 that we haven't done on acquired.

[David Rosenthal]

Ooh, interesting. Yeah. The U.S. oil companies are no longer in the top 10. But Berkshire might be foreshadowing some future episodes this season. Ooh.

[Ben Gilbert]

I mean, they're in hallowed grounds at this point. The other thing that just talking about financials today, so crazy that they grew 31% in revenue from 2019 to 2020.

[David Rosenthal]

They doubled their CAGR from 2019 to 2020.

[Ben Gilbert]

Yeah, it's nuts.

[David Rosenthal]

Talk about accelerating growth.

[Ben Gilbert]

Okay, so in 2020, their adjusted net income was $17 billion. How are they going to go spend 100 billion over three years? Is that going to be out of profits of each of those years or do you think they're doing some kind of financing?

[David Rosenthal]

I don't know. I don't actually don't know if they've done any financing. I'm quite confident they'll make enough profit to fund it organically. Because big news just in the past week. They started this a little earlier in the year, but now they're really doing it. They're getting away from Morris's second big innovation of reducing prices.

[Ben Gilbert]

In fact, I think they're going to raise prices. They're going to raise prices this year by 20%.

[David Rosenthal]

So the first announcement a couple months ago was they're not going to cut prices. And then they just announced they're going to raise prices. Nobody's ever done this since the pre Morris days.

[Ben Gilbert]

Pricing power in action.

[David Rosenthal]

Totally. I mean, what a clearer picture of how they have taken a commodity business and turned it into. I mean, this has got to be one of the biggest moats of all time.

[Ben Gilbert]

Totally. I mean, they've got 28 billion of cash and cash equivalents on the balance sheet and they are going to use that and all the cash that they generate from their operations to plow directly back into making sure that everybody else is five plus years behind.

[David Rosenthal]

Unbelievable.

[Ben Gilbert]

The other thing is that they already are the largest. They have over 50% of the market for foundries, for all contract manufacturing of.

[David Rosenthal]

Chips and like 95 plus percent of the profit.

[Ben Gilbert]

Correct. I thought where you were going with that. It is also true that they have 90% market share on the current generation. Like the leading edge chips.

[David Rosenthal]

Yeah. In the 5 nanometer Samsung has like 5, 10% market share and TSMC has.

[Ben Gilbert]

90 plus percent in many ways going to 100. They're the Apple of semiconductors. They don't have all the market share, but they have all the most profitable market share.

[David Rosenthal]

Yeah, exactly. They are the iPhone of semiconductors. Like you could still buy previous generation, you know, worse technology from other and for plenty of, you know, on the odd lots podcast this was actually they talked about sort of like the bear case going forward for tsmc and one potential one is that oh well, the processing power is so good that you're not going to need the leading edge anymore. I find that a really weak argument. Like you always need the leading edge. You think Tesla doesn't want the leading edge?

[Ben Gilbert]

Totally.

[David Rosenthal]

You think Apple doesn't want the leading edge?

[Ben Gilbert]

Software will always match the complexity on the most advanced hardware it can run. Which is why I love when people are like Apple's slowing down my computer. I'm like yes, I'm sure that's what's happening. They wrote special code that they're putting on there to make the consumer. No, it's because every piece of software just always assumes that it has the most advanced processor on earth. And it always gets to developers. Sure they test on two and three year old equipment, but no one's making sure that the six and seven year old laptops are as performant software designed for the current generation is harder.

[David Rosenthal]

I think that Google and Amazon are going to be like, now we're good, right? Hell no.

[Ben Gilbert]

It actually is worth touching on. There's one other interesting bit about this 5 nanometer process which first of all is a marketing name at this point. What it used to originally referred to was the length on the gate on the transistor. At this point it's not exactly 5nm and the additional performance is not going to come from, you know, making smaller gates. Here's the interesting thing though. You actually can't put these transistors much closer to each other. So if you Think about silicon atoms that are between the transistors. You can only fit five of them in a nanometer. So in a three nanometer process. Sure. It's more efficient.

[David Rosenthal]

Yeah. 15 norm.

[Ben Gilbert]

Right. Like at some point you cannot subdivide silicon anymore. So either we need to change the substrate or the innovations are sort of going to come from elsewhere, which has.

[David Rosenthal]

Always been the case. Like Moore's Law was technically the doubling of the number of transistors on an integrated circuit.

[Ben Gilbert]

Now it comes from multicore. It comes from all the other advancements of figuring out how to make chips do more stuff faster.

[David Rosenthal]

Yep. That I think is going to keep going, and I think it's going to keep being expensive and getting more expensive. And I think TSMC is the only company that's going to be able to keep up at the leading edge.

[Ben Gilbert]

Yeah. Do you know, David, about Moore's Second Law?

[David Rosenthal]

Ooh, no, I don't.

[Ben Gilbert]

So everyone knows about Moore's Law, but there's this second one which is also known as Rock's Law, after Arthur Rock.

[David Rosenthal]

Arthur Rock, yeah. Yeah. Oh, gee.

[Ben Gilbert]

It states that the cost of a semiconductor chip fabrication plant doubles every four years. So with Fabs today costing 15, 20 billion dollars. I don't know that that's proven exactly true, but it's certainly.

[David Rosenthal]

Well, shoot. If we just look at TSMC's CapEx forecasting, they're going from 17 to 30 to 60 over two years. So that's way faster than four years.

[Ben Gilbert]

So the interesting thing is when you combine these two things, the Moore's Law and Moore's Second Law, it implies that the leading company, the most profitable company, will become a monopoly.

[David Rosenthal]

Winner take all. There you go.

[Ben Gilbert]

And it's fascinating that both of these things, these laws, aren't actually in conflict because Moore's Law is about, effectively, when you really look at it from a financial perspective, operating expenses when producing at scale. And Rock's Law is about the upfront capital expenditures to enable all that production. So it's everything we talk about on the show. It's being able to pile investment into fixed cost as much as possible at huge scale in order to realize the benefits of making as many of the thing as humanly possible at global scale. And tsmc, interestingly, is the most perfect example of this. And I say interestingly because we almost always talk about operating leverage and scale in the context of software.

[David Rosenthal]

Yeah.

[Ben Gilbert]

On the Internet, this is how venture capital started. Because actually manufacturing chips, the operating leverage that comes from huge amount of fixed costs into foundries to make chips and then hopefully be very profitable. 50% gross margin on those chips. Venture capital financing was built for that for semiconductors. And it just so happened to work just as well or even better with software on the Internet. Even better in the notion that gross margins of software could be 80 to 90%, not 50%. But I would back that down because it doesn't have the sort of moat defensibility characteristics that being able to plow your capex into manufacturing capability does.

[David Rosenthal]

Yeah. Should we do power now?

[Ben Gilbert]

Absolutely, let's do it.

[David Rosenthal]

Let's do it. So for folks new to the show, this is one of the discussion topics we do for every episode as we go through Hamilton Helmer's excellent seven Powers.

[Ben Gilbert]

The best business theory book.

[David Rosenthal]

Totally. We've had Hamilton on the show. He's amazing. Go read the book if you haven't. He identifies seven powers, essentially sources of defensibility, which he defines as long term differential profit margins versus your competitors. As we've been talking about on the whole show. The seven that he identifies are counter positioning, scale economies, switching costs, network economies, process power, branding, and cornered resources. And we almost always talk about network economies. We talk about counter positioning on this show.

[Ben Gilbert]

Sometimes we talk about branding, sometimes we talk about branding. We're talking about none of those this time.

[David Rosenthal]

Yeah, we sometimes talk about scale economies which we're going to definitely talk about here. But I think we're going to have our first process power if I'm going to forecast. But let's start. Let's go down the list. Counter positioning. I mean like maybe you could when.

[Ben Gilbert]

They were starting and in particular, would the incumbents have started with the exact business model? No, because their profit center was the integration that all the margin you get of integrating design and manufacturing. And by saying, nope, we're going to be a pure play manufacturer, TSMC theoretically was saying, no, we're going to take less gross margin and we're just going to make it up in volume. I'm actually not sure it played out that way. I think they have more. Do you know what Intel's gross margins are?

[David Rosenthal]

I actually don't know. I would suspect they're higher, but I don't know.

[Ben Gilbert]

Right.

[David Rosenthal]

Yeah, there was counter positioning here. I don't think I said this when we were going through it, but before TSMC and the pure play Foundry model, if you were either a fabless company, one of the very, very few, or you were another IDM and you were trying to get some excess capacity, rent it from another IDM, most of the IDMs they'll be like, okay, you strong arm them, you got a great strategic relationship, they'll give you some capacity. But they also demanded the right to market your products under their brand too. So, like, which obviously TSMC wasn't going to. So, yeah, there was counter positioning like the idms. There's no way they were going to do what TSMC was going to do.

[Ben Gilbert]

Right? Huh. Okay. Scale economies. Absolutely. That is the biggest. If it's one of the top two with process power, in my opinion.

[David Rosenthal]

Switching costs. Well, it's funny, now there are huge switching. You can't switch off tsmc.

[Ben Gilbert]

No. Unless you're going to stop being on the leading edge. If you're going to change from being a phone company to an automotive company, you can switch off of them.

[David Rosenthal]

Well, I think it's even deeper than that. Again, we haven't gone. Listeners probably think we've gone deep technically on this episode. We haven't even scratched the surface totally. But yes, if you want the leading edge now, you gotta be tsmc, but you gotta be so integrated with TSMC to do this. Say you want to switch to globalfoundries or, you know, one of the other competitors out there, of which there are a few. You can't just call up GlobalFoundries and be like, hey, I'm Portnova, expect my business on Monday. It takes years. Because you're so deeply integrated with the process.

[Ben Gilbert]

Yeah.

[David Rosenthal]

So yeah, big switching costs, network economies.

[Ben Gilbert]

It's not really worth talking about, not.

[David Rosenthal]

In the traditional sense. You know, this is not Facebook here.

[Ben Gilbert]

And Certainly none of TSMC's customers really benefit from other customers being on it.

[David Rosenthal]

No, I do think there actually is. I don't think Hamilton captures this in his seven powers and I don't know if he would consider this one, but there is like an ecosystem aspect here because the EDM companies and the IP companies are so deeply integrated with tsmc. If you want to be using arm, for instance, or, you know, they're kind of the best integrated with. Now, I don't think that's network economies. That is kind of like this ecosystem thing. TSMC actually has a name for this. They call it like the Open Innovation something or other. You know, it's some corporate name, but it means this.

[Ben Gilbert]

I do wonder if it's actually worse for a lot of people that Apple is a TSMC customer, because who else has access to the 5 nanometer process right now?

[David Rosenthal]

They're going to take as much as they did. Yeah, good point.

[Ben Gilbert]

Process power, yes. I think Pixar, this is the first time we've really. Although we weren't doing seven powers during.

[David Rosenthal]

Yeah. To me, this is the clearest example I could ever imagine of process power.

[Ben Gilbert]

It takes all 40 years of TSMC's history to have arrived at where they are today. And even if 10 people left and tried to start the next TSMC, to be able to create what they've created at this point from scratch, virtually impossible.

[David Rosenthal]

All of their ip, all of their people, all of their know how, all of their relationships with ASML and the like. Yeah. No amount of money can replicate it.

[Ben Gilbert]

I think the only thing that will unseat TSMC is a complete paradigm shift.

[David Rosenthal]

Yeah.

[Ben Gilbert]

Something where, like what mobile did to desktop. If there's something where the compute required in the future is unable to be provided by anything that TSMC is good at today.

[David Rosenthal]

If all the crazy laser molten tin, ASML stuff we were talking about, if all of a sudden there's discovered a new either different way, cheaper way of quantum computing. Yeah. Way to do this, then that kind of could reset the playing field. Yeah, yeah, yeah, totally.

[Ben Gilbert]

But even little shifts, I bet they'd be fine if everyone figured out that like, hey, silicon's not the best substrate and we can figure out a better substrate.

[David Rosenthal]

If there were like an AWS moment, which is funny because TSMC is the AWS equivalent, but where something happened that just made it way cheaper than it used to be, you could now get access to the technology and the know how orders of magnitude cheaper than it is now. That would take away a big part of their power. But I don't see that happening.

[Ben Gilbert]

No. Absent a paradigm shift, this is TSMC's Toulouse. They're pretty much, they're in the groove. So I think we should skip branding and corner Resource for now. It's not really worth talking about.

[David Rosenthal]

I mean, literally, they're antithetical to branding. Like it's Apple's brand, it's not tsmc.

[Ben Gilbert]

So this is, I think, a good time to enter our geopolitics discussion because I was thinking about the other way that TSMC could fail would be that China decides the moment is right to go and assert our force and take over Taiwan.

[David Rosenthal]

Depending on how you see it, either annex Taiwan or assert its, as always claimed sovereignty in Taiwan.

[Ben Gilbert]

Yes. Actually start enforcing what has been right the whole time. I think as they would sort of say. Yeah, that's the sense of speaking in my casual tone in English from America, then doing all this business with the West. I have to imagine that assuming that it didn't start a Full war, like an actual world war, which it may. Then of course, they would start using all the TSMC manufacturing capacity for all the Chinese horses, Huawei. And Huawei's been a TSMC Huawei and.

[David Rosenthal]

Is currently cut off.

[Ben Gilbert]

Yeah. So how do you capture that in power? What is the power? Or maybe like, let's not.

[David Rosenthal]

I mean, that's a risk. That's like a bear case.

[Ben Gilbert]

Right? Let's not get too specific on this. But maybe in a general sense, how do you capture the power that a company has that comes from regulatory environment? Where would that get classified under that? They have a lot of room to.

[David Rosenthal]

Be operating safely, maybe cornered resource, I guess. So you're saying this is like an anti power for them? This is a weakness?

[Ben Gilbert]

Exactly, exactly. I suppose all that matters is things that you have that your direct competitors don't. So in this strange strawman that I'm putting together, it would really be about what if you were located in a country that none of your competitors were also domiciled in and being there gave you some special ability to be more profitable than others, which they had in.

[David Rosenthal]

The beginning with the government of Taiwan. Basically, the mafia boss was like, this is happening. We are going to strong arm all the business leaders in the country to investing in this. We're going to make sure that this happens.

[Ben Gilbert]

Yeah. Okay, well, let's put a pin in that because you're right. It turns out that it's actually not a perfect power discussion. But the geopolitics thing is interesting.

[David Rosenthal]

Well, I think it's the bear case.

[Ben Gilbert]

Right. That to me, absent an enormous computing paradigm shift, is the way that TSMC has an enormous risk in the business.

[David Rosenthal]

Yeah, totally. Which does make it kind of surprising that they haven't diversified their geographical operations very much.

[Ben Gilbert]

So this is interesting. So they're facing a lot of pressure for this. They are spending I, I think $12 billion this year to start a plant in Arizona, which will not be the 3 nanometer. I don't even think it'll be the 5 nanometer. It's not their most advanced manufacturing. I think the US is subsidizing in a big way. I think it's part of the Biden administration's most recent bill to try and bring some semiconductor manufacturing here. But they're also starting a fab in Japan that came out on their last earnings call. So they're doing some.

[David Rosenthal]

And they have operations in China, I believe too.

[Ben Gilbert]

Yep. They're doing some diversification, but I don't think it's for this reason. I Think it's because they're basically getting free money to open fabs and other places. And Morris has even made comments like, I don't think it makes any business sense for us to have the leading edge in those countries, even though those countries want us to have them there. I think it makes sense based on the ecosystem that we've created in Taiwan to keep operating it here. So the question is if it directly helps. Let's take the US, for example. The US's prowess as a semiconductor manufacturing force in the world to have TSMC's Arizona plant. Or if it's really just indirect and the idea is like, let's try this as a first stab. We'll get more people in the US familiar with doing this again in case we need to restore this. Yes.

[David Rosenthal]

Yeah. I mean, this is a scary, scary future to contemplate and I hope to God it doesn't happen. But really the thought exercise here is what would happen if China annexes Taiwan tomorrow?

[Ben Gilbert]

Which is scary for a number of reasons, the smallest of which is this corporate takeover. It's scary for a lot of people in their lives.

[David Rosenthal]

Yeah, scary. But I wouldn't say it's the smallest, like everything. Imagine if we didn't have access to leaving edge. Semiconductors. Yeah, that's everything. What part of our lives do not run on semiconductors?

[Ben Gilbert]

Right. Ford can't make F150s right now.

[David Rosenthal]

Basically all of our technological progress would stop.

[Ben Gilbert]

Yeah, you're right.

[David Rosenthal]

So I think the question is, and I don't know enough to answer this, what would happen? Would it be possible to airlift the process power that TSMC has physically out of Taiwan to somewhere else? You get all the people. ASML now sends the stuff somewhere else. You airlift everybody out, there's an evacuation. Does the process power come with it or not? I don't know.

[Ben Gilbert]

That's a good question. I mean, if the Toyota production system is an example, where Toyota tried to. There was that factory, that joint venture with. Was it gm?

[David Rosenthal]

Yeah, the Nummi plant, that's now the Tesla plant in Fremont.

[Ben Gilbert]

With Toyota trying to replicate their process somewhere else. Didn't work.

[David Rosenthal]

Now it wasn't under threat of war.

[Ben Gilbert]

Right. This one would need to. It's actually a good question. If you think about the US's strategic defensive weaknesses, what's more important? Having onshore semiconductor capability to continue to advance technology in the nation, or Boeing, our ability to build, which we've always held up as this example of the US needs that to stay US owned, to stay operating, stay profitable, to Stay prosperous. Because it is a matter of the US way of life that we're able to.

[David Rosenthal]

Well, Boeing needs semiconductors.

[Ben Gilbert]

That's a great point. So we're now outside our depth, but is it actually more important to have cutting edge semiconductor capability here than airplanes or any of the other sort of defense supply chain?

[David Rosenthal]

And you know, maybe the answer here is like, Korea. Same situation exists in Korea with Samsung. Right? Like North Korea is right there. I've been there. I've been to North Korea. Like I went to the DMZ like you. It's so weird. It's like an amusement park weird. It's super, super weird and bizarre. But yeah, North Korea's right there. Maybe it's the same like China's right there. But this isn't actually going to happen. But I don't know, it feels in the last year the risk of it actually happening has ratcheted up quite a bit, I think.

[Ben Gilbert]

So. I mean, it's like globalization as a whole. It is in the best interest of everyone to continue to share resources, to continue to entangle everything until somebody decides that it's not. And then we have a big problem. And hopefully for lots of reasons, it just continues to be okay that TSMC is located on an island that is of disputed claim.

[David Rosenthal]

Yeah, maybe the best thing that could happen is my carve out a while back was the book by the Harvard chair of the Harvard Astrophysics Department about Oumuamua that he postulates was an alien spaceship. Maybe if we discover that aliens are real, that's going to be the uniting force. You know, all these conflicts seem pretty petty. Yeah, I wouldn't use that as an investment thesis though.

[Ben Gilbert]

No. Okay. Before we get into Playbook and just hit some things that I think we missed during the narrative or at least didn't put a fine enough point on in the narrative. I have a what would have happened otherwise that I would have hit.

[David Rosenthal]

We haven't done this in a while.

[Ben Gilbert]

No, we haven't. And I'll just read this as a direct quote from Bloomberg. And there were some awesome sources for this episode, all of which are linked in the show notes. In the mid-2000s, as Apple Inc. Was preparing for the release of its new smartphone, Steve Jobs approached then CEO of Intel Adolini about providing the chips for the iPhone. Intel already sold iPhone the processors that ran on its Macs.

[David Rosenthal]

But Jobs made what video to acquired so that everybody can see the look on my face right now. I'm just like literally I got like fists in the air. I'm so happy.

[Ben Gilbert]

And remember, Adolini was the guy that Jobs brought out on stage during the intel transition. And they were burying the PowerPC to say, this is the future, this is the partnership. So, okay. But Jobs made what Adolini considered a lowball offer, and Apple awarded the contract to Samsung. It later began designing the chips itself, eventually outsourced production at tsmc, a contract manufacturer in Taiwan that had been found. Blah, blah, blah, blah. So what could have been. Apple went to intel and said, do you want this contract?

[David Rosenthal]

Because they were partners on the Mac.

[Ben Gilbert]

Totally. And apparently it was less about the fact that. I'm sorry, you want to use arm? What? No, it's more about the money. And it was more about. We felt it was a lowball offer.

[David Rosenthal]

Biggest strategic error of all time. All right, I'm going to postulate a Playbook theme and I'm put forward as a postulate more than a Playbook theme. What's the. In geometry, there's laws that are proved, but then there's postulates that are like, you can't prove them, but our fundamental understanding of the universe doesn't work if they don't work. Whatever that is. Axioms, I don't know. Whatever it is, I'm going to put one of those out there. Please never make strategic decisions based on economics. This is prime example. Like the number of. We talk about this all the time on this show. VCs passing over valuation on something. Andreessen getting cold feet about a $300 million valuation on Uber.

[Ben Gilbert]

Yep.

[David Rosenthal]

Right. This intel move, passing on being partnering.

[Ben Gilbert]

With Apple and maybe more specifically than economics, because like you could imagine that you would want to pass on this if intel didn't get any of the upside from the deal. Assuming that the structure is right, then passing because a number is too low.

[David Rosenthal]

In the structure or Ford Motor Company not hiring Morris Chang over $1. You know, like whatever. Like it's just. Ugh, humans are so prone to cutting off their noses despite their faces.

[Ben Gilbert]

So we already have the Rosenthal doctrine of never bet against the Internet, but now we have the Rosenthal postulate. It which is never make strategic decisions based on.

[David Rosenthal]

Based on pricing.

[Ben Gilbert]

Based on pricing.

[David Rosenthal]

Based on. Not economics, but pricing.

[Ben Gilbert]

I like it. I need to add a new section of the acquired website.

[David Rosenthal]

All right.

[Ben Gilbert]

All right, next on Playbook is another one on intel fading. So it takes a very long time to become irrelevant. So despite Intel's stock price being. I think TSMC is like 2 1/2x intel stock price. As a matter of fact, ASML is actually Larger than Intel by market cap. Now they are the sole source provider of one thing in the value chain to mostly one company. And they're bigger than intel now.

[David Rosenthal]

I'd be fascinated. Okay, so public markets, investors who are listening, shoot us a DM in Slack or post in general.

[Ben Gilbert]

Acquired FML.com, or acquired FM whatever channel.

[David Rosenthal]

Works for you or Twitter, whatever. I'd be super curious if you are along this thesis that we're sort of laying out on the show. How are you playing it between TSMC.

[Ben Gilbert]

And asml, which is now Europe's most valuable company?

[David Rosenthal]

Right. I mean probably you just invest in both, but how do you think about that?

[Ben Gilbert]

Right. And what's the up and comer? That's kind of speculative at this point, but could be another puzzle piece here.

[David Rosenthal]

Are you also shorting intel through all that? Like, what do you, what do you do here?

[Ben Gilbert]

All right, so my point on intel is it takes a long time to become irrelevant. They still control 80% of the computer processor market and they have an even bigger share in servers. So despite everything we're saying, still huge workloads running on CPUs that are in computers and on the cloud. Pretty big business.

[David Rosenthal]

Yeah, the majority of workloads that are happening in the cloud is not Tesla Dojo. It's, I don't know, some company that's not a tech company somewhere in the world running their outlook server on Office 365.

[Ben Gilbert]

Yep.

[David Rosenthal]

Absolutely doesn't need 5 nanometer process.

[Ben Gilbert]

Two other intel things. One is that indecision has been very tough on the company. Bob Swan, who was the former CEO, started to prepare to outsource manufacturing of intel designed chips to tsmc.

[David Rosenthal]

Whoa.

[Ben Gilbert]

Like that. I think even like two years ago, this was the plan they finally decided throw it in the towel. You know intel, real men don't do fabs. Chip manufacturing company in the world.

[David Rosenthal]

Real men are sensitive. Talk about their feelings.

[Ben Gilbert]

Bob Swan is no longer the CEO of Intel. And now in a complete reversal, their new CEO, Pat Gelsinger wants to turn intel into a foundry themselves by which other fabless companies can contract with intel to build. Maybe that's right. But if so, they gotta figure out, and I think they're thinking about this the right way because they said it's gonna be a fully separate autonomous division. They gotta run that like a completely separate independent company of the rest of Intel. And if so, I don't actually know why intel owns it.

[David Rosenthal]

Yeah, I mean, well, a. Let's look at AMD here, right? They did this they spun out their manufacturing into GlobalFoundries, which has been good for GlobalFoundries.

[Ben Gilbert]

And AMD, like GlobalFoundries is getting ready to IPO.

[David Rosenthal]

Yep. Yeah, that's probably the right strategic decision, but it's not going so well. I mean, like, it's going fine.

[Ben Gilbert]

It's not tsmc.

[David Rosenthal]

Right. It's going better probably than if they had not done that. But they're not a winner here. Like TSMC is the winner.

[Ben Gilbert]

Yeah. I guess the playbook theme there is indecision is paralyzing. I mean, this company has spun its wheels one direction or the other and all it's done is make itself deeper in the mud.

[David Rosenthal]

Oh, I just looked up, I was trying to remember this. Gelsinger was the VMware CEO. He started his career at intel and then EMC, and then EMC owned the majority of VMware and then he became the CEO of Vware. Yeah. And he was the outside candidate to replace Bomber as Microsoft CEO. Oh, no way. Yep, yep, yep.

[Ben Gilbert]

Huh. You know, I hear he's really revered in the organization that people think he's really going to make some good change there. We'll see. The last thing on intel, and it's funny, this is not the intel episode, but there's a thing that happened here that is very similar to the fact that Kodak developed the digital camera first in their lab. They knew it. They knew this was the future and they didn't commercialize it because it's impossible to counter position yourself. Because of the innovator's dilemma, intel actually saw extreme UV lithography EUV first. So intel was the biggest early investor in EUV, committing more than 4 billion to it in 2012.

[David Rosenthal]

Whoa.

[Ben Gilbert]

It was slower than its main rivals. And this is from the Wall Street Journal. In adopting the technology and skeptical about whether it would work eventually, intel calculated that it was a sure bet to try and improve existing ways of handling lithography. And of course, where we are today, EUV completely enabled the next generation of chips to be built that existing ways couldn't.

[David Rosenthal]

What a great argument. An example for why you need startups. Right, Right. Totally. Like, yeah, intel was there, they invested in it, they saw it and they.

[Ben Gilbert]

Were like, they put 4 billion in. And I think even to this day there is not a shipping intel chip that was manufactured by intel using euv.

[David Rosenthal]

Wow, that's crazy.

[Ben Gilbert]

You're right. It is the most perfect, pure example of the innovator's dilemma in action.

[David Rosenthal]

That's why you need startups.

[Ben Gilbert]

Yep. All Right. My next one is that, that if you're only looking at the outcomes that happened, you cannot reverse engineer what the probability that it would happen is. And this is a very abstract way of me saying the strategy of if you build it, they will come, that Morris implemented is a bad strategy. And it also worked.

[David Rosenthal]

Right. If Lilqua and Don Valentine hated, they would never invest in developing a market that was like rule number one, we invest when the market already exists, not when we need to develop it.

[Ben Gilbert]

And this is like the classic problem. This is the knock up here in Seattle. There's a lot of people spinning out of Microsoft starting companies. Classically, people coming out of Microsoft would always want to build platforms because Microsoft was the platform company and they would always have a small, too small of an understanding of the market of people that wanted that platform today. And they assumed if you build it, they would come. Morris was that exact problem. And yet if something is going to be true 10% of the time and fail 90% of the time, 1 out of 10 times, it's going to work. And it may have been the case. I guess what I'm saying here is if you're starting a startup, it's impossible to know if this was actually a good strategy or if it was a bad strategy that probabilistically just happened to work.

[David Rosenthal]

I mean, this is the thing about startups, right? There are all these rules, but they can all be broken. There is no formula.

[Ben Gilbert]

Yep, totally. All right, other playbook themes.

[David Rosenthal]

I just have one more that again, we talked about a bunch in the episode, but I want to highlight and actually add one spin on here. You know the Jeff Bezos quote about AWS as a startup, anything that doesn't make your beer taste better. The analogy back to German beer factories and outsourcing electricity generation.

[Ben Gilbert]

Outsource things that aren't your core competency.

[David Rosenthal]

Right? Focus on what makes the beer your beer, whatever that is, proverbially tastes better. And everything that is not that, like finance and accounting, outsourcing, et cetera. Double underscore that. But this is obvious. So obvious. But obviously Bezos didn't say it directly and thus I think we don't highlight it enough. The counterpoint to that is anytime you see something that lots of people, lots of companies are doing that is not making their beer taste better. That is a massive opportunity to go build a platform company. That is how you build a platform company.

[Ben Gilbert]

Grading.

[David Rosenthal]

All right, so we were thinking for grading, look, we could grade like, I don't know, Taiwan's decision to do this.

[Ben Gilbert]

To own 50% of the company at the ICU, whatever.

[David Rosenthal]

Like, you know, a, you know, not interesting. So we had thought experiment. We'll try this for this episode. Rather than like letter grading this, we'll ask a question. Where does TSMC belong in the pantheon of great technology companies of all time? Is it Fang level? Is it like top 5? Is it top 10? Is it like top 20? Where is this? What is the right context in which we should be placing tsmc? This whole story, the company, the power, all of it.

[Ben Gilbert]

So interesting because it really does raise this question of value chain. We Talked about the 5 part value chain that exists today for making chips. And so it's interesting because you could say, well, it belongs wherever intel belonged circa 2000. Or you could say, well, the set of products that TSMC manufactures have 100x the scale that intel in 2000 had. Like, if you think about it, all this stuff that everyone's all excited about, every time someone talks about the next wave of computing and they're like machine learning, or they're like crypto, or they're like 5G and anything they tell you is something TSMC makes that enables it all. When Marc Andreessen says software is eating the world, it's only eating the world because TSMC has made it so freaking cheap to manufacture silicon. And then you can run whatever you want on that silicon. And the cost of compute asymptotically approaches zero because TSMC, TSMC, TSMC. So how much do we ascribe to them versus ASML? How much do we ascribe to them vs the entire landscape of talented chip designers out there, including the like 600 chip designers at Apple working on the Apple silicon. It's hard to disambiguate that. So where does it belong? I mean, it's probably the most successful and important B2B hardware company of all time.

[David Rosenthal]

I think we can safely say at this point it surpasses Intel. I mean, gosh, right, like that's a big statement to say, right? Like Intel, Silicon Valley, the traders say, like all of it, Moore's Law.

[Ben Gilbert]

But in compounding, all the value shows up at the end. So it is true that the value that TSMC will create in the world over the next year, two years, three years, is probably more than the entire silicon industry leading up to this point combined.

[David Rosenthal]

I mean, hell, they grew 30% last year at like an already unimaginable scale. Like, Intel's not doing that.

[Ben Gilbert]

Right.

[David Rosenthal]

Okay, I think we can say it's above Intel.

[Ben Gilbert]

I probably wouldn't say it is above Facebook, Amazon, Apple, Microsoft, Google in terms of pure value creation in the world.

[David Rosenthal]

I mean, devil's advocate, you could argue that none of the innovative things those companies are doing now happens without tsmc.

[Ben Gilbert]

Yeah. Unless the Foundry model and the Fabless model was inevitable.

[David Rosenthal]

Yeah. Maybe somebody else would have done it. Yeah, maybe.

[Ben Gilbert]

But they didn't.

[David Rosenthal]

They didn't.

[Ben Gilbert]

And Morris did.

[David Rosenthal]

I mean, guys, the thing that has really just beaten me over the head in this episode. We've probably beaten all of you over the head with. Or at least I have, is, you know, look, there's the geopolitical risk with. With being in Taiwan. Other than that, I don't know that there is a stronger moat that any company has in the entire world than tsmc. Compare it to all the faang companies and Microsoft. Those are very, very strong moats. But we've seen all of those. You know, they've changed. They're new companies. They've emerged, They've. You know, Microsoft fell, and then now it came back with new strategy. And Facebook's not that old and Google's not that old. TSMC is impenetrable.

[Ben Gilbert]

Yeah. Their business model and the costs required to compete are such that they have.

[David Rosenthal]

It's like bulletproof.

[Ben Gilbert]

It's everything but bulletproof.

[David Rosenthal]

Yeah, totally.

[Ben Gilbert]

Sadly.

[David Rosenthal]

Sadly. Yeah. So I don't know. Maybe we're exaggerating because we're so deep in it. We always go native on these episodes.

[Ben Gilbert]

Right. The only way it could be more valuable is if the company had an army. It's like if people talk about the US dollar is backed up by the full faith of the US government, which implies guns.

[David Rosenthal]

Yep.

[Ben Gilbert]

And so it's only because everybody's currently playing by the rules that any business gets to stay in business. And so this one just happens to be a little bit more at risk than other ones.

[David Rosenthal]

All right, so I think we can safely say top 10. I think the question is, is it top five?

[Ben Gilbert]

Well, defensible is an interesting question. So in 30 years, will TSMC be a huge company?

[David Rosenthal]

Well, they've got this dynamic going right now with this flywheel where like, like, structurally, nobody can catch them. Something unforeseen has to change, but something.

[Ben Gilbert]

Unforeseen will change because it always changes.

[David Rosenthal]

Right, right, right. Yes, yes, true.

[Ben Gilbert]

Who's had the most similar dynamic in the past? Standard Oil either been successful or unsuccessful. Standard Oil is a good one.

[David Rosenthal]

I mean, that's very different style, but same sort of dynamic with Standard Oil. Right. Was they crowded out structurally, how they were Set up, nobody else could compete. And the rich kept getting richer and.

[Ben Gilbert]

They kind of still exist. That's the best.

[David Rosenthal]

That is the best part. They kind of still exist. Yeah.

[Ben Gilbert]

All right, I'm with you. I'll go top 10, but probably not top five.

[David Rosenthal]

What I'm wrestling with is how much of it is just marketing. And I don't mean marketing in a bad way, but intentionally. TSMC rides under the radar. They intentionally have no brand. The brand is the customers. They want the customers to succeed. So we don't hear all the time about them like we do the faang companies.

[Ben Gilbert]

Yeah, we will start to. I think anybody who tunes into this episode probably saw the name of the episode and then thought, hmm, I should tune into that because I've seen more about this thing recently.

[David Rosenthal]

Yeah, I should learn about this.

[Ben Gilbert]

They didn't know about kind of like.

[David Rosenthal]

We did when we were like, we should do this episode.

[Ben Gilbert]

It's finally time.

[David Rosenthal]

Yeah.

[Ben Gilbert]

Yeah. All right, well, that's where I want to leave it.

[David Rosenthal]

Alright, well, I'll put a stake in the ground. I'm going to say, I think I'm with you. Top 10. Not top five yet, but, you know, maybe we need to revisit this.

[Ben Gilbert]

I will definitely say it's the most successful B2B hardware company ever. And the question is, is it the most successful B2B company ever? I'd say it's probably just competing with Microsoft there.

[David Rosenthal]

Yeah. I mean, and again, maybe even like across all industries. Right. Like, look at. I mean, shoot. Semiconductors run everything.

[Ben Gilbert]

Yeah.

[David Rosenthal]

And they run semiconductors.

[Ben Gilbert]

Semiconductors are the new oil, David.

[David Rosenthal]

Okay, okay. Enough, enough, enough. We got to bring this one home. Carve outs, carve outs. Let's do it. I've got two. Jenny and I were just down in Santa Barbara for a couple of weeks. Rented an Airbnb down there. It was so great. We did that last year. Hopefully this becomes an annual thing in the summer. Escape the freezing San Francisco summers. So while we were down, we don't watch a lot of TV usually, but it was like change of scene, summertime in a new place. We're like, all right, we'll watch some TV together at night. So this is for the percentage of you out there who are living under a rock like me with tv. We've watched now most of Ted Lasso season one, because we heard season two was terrible, but that made me think.

[Ben Gilbert]

Well, it was terrible. It is terrible, but season one's good.

[David Rosenthal]

That made me think, oh, if people are this upset about season two, that means Season one was really good. It's so good. If you haven't watched it, we're on episode eight now, so we're not done. So good. Love it. And then the other TV show we watched, this was Jenny's suggestion, Old school Throwback, a show called Greek, which aired in the mid 2000s and is about Greek sorority and fraternity life at a fictional university. And it's just so good. It's one of those heartwarming period pieces, but it was right from when we were in college. So yeah, it's fun.

[Ben Gilbert]

Nice. All right, David, watching tv. Who knows what could change in the world, right?

[David Rosenthal]

Maybe TSMC's mode isn't as deep as we thought.

[Ben Gilbert]

All right. Well, mine is a book that has been recommended to me for two or three years now and I finally got around to reading and it was awesome. It's called who is Michael Ovitz? And if you've read Shoe Dog and you've read the Ride of the Lifetime and you've read what's the Ford one? An American icon. These iconoclastic.

[David Rosenthal]

Yeah, what's. There's a Sam Waldron founder built in America. I think.

[Ben Gilbert]

Yes. This one needs to be on your list, especially if you've enjoyed any movies or TV shows that were put together in the last. Well, let's be specific or two part.

[David Rosenthal]

Injuries in the Horowitz series.

[Ben Gilbert]

Totally. From like 1975 to 2000, Michael Ovitz put everything together and it is this wonderfully written book about an unbelievable business story. The strategy behind it, the way that with Creative Artists Agency they just completely upended the entire industry in Hollywood and did it really without ever talking to the press and were very tight lipped about it. For some Hollywood outsider, I found the book really wonderful, really compelling. I also think I previously had only read the Ride of a Lifetime and watched the Disney special about sort of the history of Disney and Disneyland. I had a one sided view of Michael based on just his short tenure at Disney.

[David Rosenthal]

What a great connection.

[Ben Gilbert]

Yeah, yeah.

[David Rosenthal]

I was gonna say, yeah, what a great connection with Acquired and Disney and Tiger.

[Ben Gilbert]

And what kicked it off was doing the Andreessen episodes and hearing about how they base it on caa. So especially if you like those episodes or if you like the Disney episodes or if you're a movie fan or if you like these classic CEO business stories. Who is Michael Ovitz was just an awesome read.

[David Rosenthal]

So cool. Well, and you know, like all the media that we grew up on, probably even more so because we were kids, but it was the adult movies and the kids movies too. But you know when you're a kid and like the adult movie that you really want to see but you're too.

[Ben Gilbert]

Young to see and just all these such classics like Goodfellas, that was just my previous carve out or Jurassic park or just everything that they packaged. It's cool to hear how it came.

[David Rosenthal]

To be super cool.

[Ben Gilbert]

I don't think we told you at the beginning, but you can join our Slack Acquire FM Slack. Come hang out with other talented, smart, good looking people like yourselves. And with that, listeners, feel free to share the show with a friend. Shout it from the social media hilltops.

[David Rosenthal]

Yeah, you always say. Sometimes you say, but I'll chime in here too. Seriously. It's funny. Podcasting is this weird thing, right? There's no viral loop. It's not like, you know, you can share. Please share it from social media. We love that. That's great. If you love this episode, you think it's interesting, you think what we do is cool here, but really the way this goes is word of mouth. That is it. People tell their friends they listen to this episode, they thought it was cool. They think that their friends would really enjoy learn from listening to this too.

[Ben Gilbert]

So share a thing you liked. Share a thing you disagree with us on, whatever it is.

[David Rosenthal]

If you feel that way, please do that. If you don't feel that way, get in touch with us and tell us why.

[Ben Gilbert]

All right, listeners, we will see you next time.

[David Rosenthal]

We'll see you next time. Who got the truth? Is it you? Is it you? Is it you? Who got the truth now, huh?