Acquired Podcast Episode Summary: TSMC (Remastered)

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

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).

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."

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.