TSMC

Transcript from https://podmenti.com/t/fb9530d75d4760dd

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 pre dates our NVIDIA episodes. We did it way back in twenty twenty one.
When the acquired audience was about twelve percent the size of what it is today.
Which means that the vast majority of you have never heard it.
So uh we definitely wanted to fix that.
Since then, semiconductors have become so much more important in our world, and TSMC has essentially become the only manufacturer of the leading edge chips.
They make the primary chip inside every MacBook and iPhone shipped today. They're powering the AI wave, manufacturing all of NVIDIA's chips. They make the chips for a whole bunch of other fabless companies like Qualcomm, AMD, Broadcom, and hyperscalers like AWS.
And it turns out
They even manufacture a lot of chips for Intel, too. Yes. Little known fact.
Yeah, TSM C rode the smartphone era to crazy heights, as we all know. And here now in the next AI era, here in twenty twenty five, it turns out.
That they are the manufacturing superpower behind all of that too.
Yep.
Well listeners, without doing too much foreshadowing
now is a very good time for anyone to listen or re-listen to the TSM C 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.
been in fact I looked it up since we were going back to twenty twenty one when we initially recorded this.
T SMC's market cap has doubled since then.
From five hundred and fifty billion to over a trillion.
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.
This is such a crazy stat.
It's crazy that
The rest are located on the west coast of the United States, but it really underscores what a extreme outlier TSM C is.
So without further ado, the story is truly unbelievable, and we hope you enjoy this presentation of TSMC Remastered. Who got the truth?
Is it you, is it you, is it you Who got the truth now?
Is it you, is it you, is it you?
Me down, say it straight!
Another story on the way
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 T SM C or the Taiwan Semiconductor Company.
is your classic. Most people have never heard of it, but it's the ninth largest company in the world episode.
This is wild.
Morris Chang founded TSM C at age fifty six, retired at seventy four, then came back
Back.
At age seventy eight.
Ink to the deal to make all of Apple's chips and
Yeah, we're gonna tell the whole story here. It's wild. 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 fights 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 F one fifties.
Because of this. So it is like a
massive impact on the world. And we've had TSM C on the agenda to do for like two and a half years now in our little Google Doc.
Totally.
Well, I feel like we haven't called it a mini series, but let's call it a mini series on
Semiconductors and like
Silicon. The arm episode. Yep. Sequoia part one.
P A semi.
Yeah.
Okay, listeners, it is time to jump into the history and facts, and David's gonna lead us in that, but as usual
Even though we're gonna be probably very excited about some companies, less excited about other companies, this show is not investment advice.
We may have investments in the companies we discuss. It's for entertainment and informational purposes only, and you should do all of your own research.
Okay. Speaking of
We start.
In Ningbo, China.
In July
Nineteen thirty one.
Just about one year.
After Warren Edward Buffett.
Was born in Omaha.
Nebraska.
And there are gonna be quite a few parallels here as we go through this episode.
But in July nineteen thirty one, in Dingbo, China.
Our protagonist.
Doctor Morris Chang.
Order of the propitious clouds with special grand cordon.
which is the highest civilian honor that anyone in Taiwan
Can hold.
Sweet.
So he's like a knight of Taiwan?
The order of
Propitious clouds. And then I think there's like nine ranks of it, and the highest is
Special grand cordon.
And he is special grand 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 eight million people.
Just casual. No big deal. China scale's ridiculous. But certainly wasn't eight million people when Morris was born in nineteen thirty one. No.
But I bet it was still probably.
Pretty big.
But yeah, today eight million people. Crazy.
So Morris's father was a county official and later became a bank manager.
So the family moved around a good bit within China.
as his father was transferring for work.
This is pre people's republic of China.
This is pre World War Two. This is a very different place. Right. The leadership is not communist.
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 eighth.
Nineteen forty one.
Three hours.
After
Pearl Harbor.
The Japanese attack and invade.
Hong Kong.
Morris talks about this. Yeah, everybody knows Pearl Harbor december seventh, nineteen forty one.
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 nineteen forty eight, after World War Two 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 eighteen, he has lived through three
Major wars.
The second Sino Japanese war.
World War Two.
And the Chinese civil war.
So
The next year
In nineteen forty nine.
Which is the same year as the establishment of the PRC, the People's Republic of China.
Morris turns eighteen.
and with the help of an uncle that he has in Boston,
His life completely changes.
He gets accepted.
To Harvard.
So
He goes.
To the US. He goes to college at Harvard.
Wow. Talk about a change of fate. Talk about a change of fate, a change of scene.
Everything.
Morris says much later.
My reaction entering Harvard
Was she
Ecstasy, almost disbelief.
What a country.
The United States was at its peak.
In its moral leadership.
And it's political leadership in terms of democracy.
And it was the richest country in 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 ten years from now, whatever economic structure or political structures exist will continue to exist.
If what you wanna do and what he ended up doing with his whole life is innovate
having that stability around you and all those structures
enable you to do that. Yeah, like we just
Take this for granted.
This is a good reminder.
At the very least he's probably not gonna 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 a
Support himself.
And make his

And
At that time.
His race is
Probably gonna limit his
Yeah.
So as he says quote.
In the early fifties in the United States.
There were Chinese laundrymen, Chin restaurateurs, Chiners, and Chinese professors.
Those were the only respectable professions for Chinese. No lawyers, no accountants, no politicians.
And what does Harvard turn out?
Lawyers.
Sort of accountants, maybe? Politicians, yes. Not a lot of information. Certainly finance professionals. 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.
Huh.
That's crazy to think about.
If you're really, really focused.
You're probably gonna go down the street.
In Cambridge from Harvard. To MIT.
M I T.
Which
Morris does. So he only spends his freshman year there.
And then for his sophomore year.
He transfers to MIT.
So that he can study.
Mechanical engineering.
So
Morris, our man.
He has learned the ways of the world. In the US, he's focused.
He starts mechanical engineering a year behind.
At M I T.
He finishes both undergrad and his master's.
In the remaining.
Three years.
And what year is this?
This would have been nineteen fifty one when he
Transferred fall of nineteen fifty one. 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 Two
defense spending that went in, particularly on the West Coast with the innovations from Stanford.
But has Fairchild semiconductor been started yet? Nope, nope.
So maybe shockly semiconductor.
Shockley semiconductor is probably just getting going, but we're probably still in vacuum too. Like Bell Labs.
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.
Wow.
So it's like this is OG.
Yeah.
So
after he gets his master's in the three years, Morris wants to stay and do a PhD.
fulete his technical training.
But he ends up failing his qualifying exams twice.
They give you two chances to take and he fails twice. 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.
Oh, he's great. 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.
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
Oh yeah.
I never stopped.
I still smoke. Yeah. He's like ninety four years old. And he goes on to make the case for why he's a pipe smoker. Yep. 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. Well he says he's delved into the data.
And pipe smokers live longer than 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, that just gives you a sense of who Morris is.
Okay, so he's failed his qualifying exams. He's gotta go.
out and get a job and you know, not as a
PhD. He's gotta 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. There was electrical engineering at this time. Right, right, right. Yes. He could, but he didn't study electrical engineering.
In terms of where you would want to work. Like 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.
Oh no way. Yes. I didn't hear that.
And I'm sure this is apocryphal. But let's repeat the apocryphal story and broadcast it out to hundreds of thousands of people here.
So
The legend has it.
That
Ford offers him a salary.
of four hundred and seventy nine dollars a month.
to go take an entry level job.
And then he has a competing offer.
From
Sylvania's
New semiconductor division. And Sylvania, I know of this company only because my vacuum growing up was made by Sylvania. 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 four hundred and eighty.
Dollars a month. One dollar 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. Yeah.
But
You know, Morris, he's great.
So speaking of Sylvania.
Do you remember?
Sure, some portion of our audience, 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.
No.
Donald.

Valentine? No way! Yep. That's right.
So he started at Sylvania after Fordham.
Or maybe it was after the military.
He and Shockley. Well, uh no, then he was at Raytheon, and then he joined Fairchild. Fairchild, okay. Right after the traitor as he left Shockley and started. Fairchild. You're better at remembering these deep details of older episodes than I am. Well, I do a lot of research for this show. And sometimes research includes
Pass acquired episodes.
There you go.
So they didn't overlap.
Don Valentine 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.
Amazing. 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 gonna 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, Morris 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 of years before, in nineteen fifty.
By William Shockley.
Oh wow. Yeah. 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. Yeah, not too long at all. I mean any acquaint vacuum tubes.
And then Shockley invented the transistor.
And then in a sec we're gonna talk about the integrated circuit.
That
Bob Noyce and Jack Kilby who we're gonna talk about Invented, co invented.
But anyway, okay.
Back to this moment in time.
So
Morris is just studying the Shockley textbook in his hotel room.
But like he's not a college and 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 asked the guy quite
I don't understand this, I don't understand that like girl me and it's just like
Buying drinks for his buddy. So great. Incredible. 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.
Wow.
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. Uh learning.
But as he like 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 Rytheon 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.
Some more is like, damn, I gotta get the hell out of here. That's a signal to move on if you've ever heard one. Totally.
So like Don.
Morris leaves Sylvania for greener pastures.
However.
Not
To California.
Halfway in between.
Halfway.
In between. So we talk
a lot about, you know, Fairchild and the Trader C
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's Texas instruments. Which of course me, you, many people in our generation know of as the people that made our graphing calculators in
high school and college, but of course at this time
I don't even think they had a consumer division yet. They were no and that that's gonna come up later. No, T I was the juggernaut. Like
Now Silicon Valley is Silicon Valley, but then it was
Yeah, okay, California, I don't know, West Coast where like T I was the
Big incumbent. They were the Duganaut.
T I actually got its start, I had no idea before doing the research here.
In the thirties.
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. So all the oil makes sense.
They were like the T S M C the technology provider to oil companies.
And that's what led them.
into computing and into digital to power that's wow.
They were huge.
Not just huge in terms of the company, but they were
the technology leader.
So
Bob noise, like I was saying a minute ago.
Is credited, you know, when he was at Fairchild inventing the integrated circuit and all that.
Well, he was the co inventor.
Simultaneously, it was co invented by Jack Kilby, who was at
T I and Jack was actually the one
Who got the Nobel Prize for inventing.
The integrated circuit.
Gordon Moore, who was also
Yeah, Fairchild and then founder of Intel along with Noise.
He would coin Moore's Law.
But Jack has a great quote.
Two 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.
Wow. It's such a great way to frame it too. Like this had never happened in human history.
There's this thing that used to be
X expensive in terms of resources.
And then magically one day it's a million times cheaper.
Yeah, that's crazy. I didn't realize it was on that scale.
This is probably a good time to talk about some definitions,'cause there are some things that we've thrown around already
I think everyone has a general understanding of what these things are, but it's worth understanding more precisely before we move on.
The first of which is a transistor.
The best way to think about a transistor is not the
tiny little transistor that's on a silicon dye 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 gonna go through it, stuff being voltage, current.
Or none or it rounds to none. And so that way you can decide, hey, this
Binary piece of equipment is either off zero or on one.
Okay, so that's a transistor.
Now
A transistor.
Can be made.
out of lots of different things. It can take any implementation
Why is everybody talking about silicon?
Well, silicon.
As an element.
is a semiconductor.
It is a metalloid. It
Has
some properties that make it like a metal, like a conductor, it has some properties that make it
Non conductive.
Imagine trying to move electrical signal through a piece of wood. It's not gonna work.
But imagine moving it through copper. It's gonna work.
really well and you're never gonna be able to interrupt it. Well, jeez, wouldn't it be great if we had some material, a semiconductor, where we could
modify whether
Exactly.
Exactly. Well, and lots of things are semiconductors.
Geminium.
was the main material for a while, but germanium's expensive and rare.
Silicon I sand. I think it's like the second most plentiful mineable element on earth.
Yeah, I mean it's sand, right?
Yeah.
There's one other major thing though, so we've been talking about transistors. The I C. Yeah, the I C.
The integrated circuit. The integrated circuit.
A transistor. It's a switch.
Before the I C
People were making switches. Like you make one switch at a time, you wire it to another switch.
You know, if you've seen photos of Venia and vacuum tubes, literally they're plugging one tube into another, you're still doing that with transistors. Yep.
When Noyce and Kilby invent the I see
Now you can put a lot of switches on one.
Thing.
And you know, fast forward today the latest.
processors, you know, the five nanometer processors that
T S M C M basically nobody else is churning out.
Billions, trillions of switches are in like a tiny little
Integrated circuit.
Without the integrated circuit, that never would've happened.
So
This invention, this miraculous invention of the integrated circuit.
It happened in nineteen fifty eight.
When did Morris Chang join Texas Instruments?
Nineteen fifty eight. Fascinating. Coincidence? Yes, totally a coincidence. Absolutely coincidence. Absolutely a coincidence. And again to peg us in history here, we're still, I think ten years before the founding of Intel. Yes, exactly ten years.
Yeah, Morris, obviously.
wasn't working directly with Jack on
Inventing the I C.
But this gives you a sense.
T I this is
The place this is like Google plus Facebook.
Without the world paying attention to them. Yes, and in Texas.
So Morris gets assigned as his first project.
to a sort of problem child within TI.
They have entered into a deal with IBM.
IBM is
working on their first mainframe computer major project.
That's gonna use transistor logic instead of vacuum tubes.
The IBM seventy ninety.
And
They anticipate so much demand.
For this product.
Usually IBM manufactures everything for all their products themselves.
But
They're like, We need more chips.
than we're gonna be able to make
ourselves, so we need a second source.
For our tips, they turn to T I.
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. So 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 ten percent yield.
Which means that of every hundred
Chip that they're gonna do.
Turn down to the plant, ninety percent of them fail and only ten percent of them work. Yes. That's the first party line.
The T I line.
has about a zero percent yield. They're lucky if they're getting any that way. Almost everything coming off the line.
Fail.
At T I when Morris shows up.
So
Morris would say about this later.
quote the supervisor was concerned.
The operators were concerned.
Everybody was concerned. So Morris, remember he's 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 gonna use my training and optimize it like a good mechanical engineer.
So he starts doing some stuff. After about four months, he gets the yields at the TI plant.
Up to twenty percent. 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 I Triple E Spectrum. Oh yeah. Great industry magazine that we'll quote from here.
They right.
Suddenly
Even TI president Pat Haggerty knew this 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 twenty plus engineers reporting to him.
So this is his first big win here.
Yeah.
The foundry business.
So on the back of all this, T I 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. Which they're paying for.
Right, so they think like very highly of him. Very, very highly of Morris.
I mean, this one probably made the millions doing this.
In nineteen fifty eight.
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.
I bet there's a lot of demand. And what's more is making a year, like
Twenty thousand dollars, 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?
Where it's like I don't know, I was focused.
I didn't do much else.
So
By nineteen sixty four he's done, he's back at T I
And this is right as
People have discovered the silicon is way more cost effective and scales up way better. 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. Yes.
How to dope silicon to
Make it.
Function.
And produce it at scale as a
Semiconductor.
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, nineteen sixty four, we're starting to get
into the level of complexity where
It's some of the most advanced science ever done being applied in an engineering and manufacturing fashion to get even marginal results, you know, at twenty percent yields off the manufacturing line. And
Little preview to fast forward to today.
T S M C
They're a contract manufacturer for silicon. That is what they are.
T S M C has
Forty percent 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 we'll we'll get to it later.
It's gonna 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 of years after he gets back from Stanford.
He's still rising through the ranks in nineteen sixty seven.
T I 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 and silicon and pumping out these chips.
It's super expensive to do this. Super cost capital intensive.
So what TI and everybody else in the industry did
when they would start a new product line that would use a new fab.
For chips.
They charged a lot of money for it,'cause like
Man, they put a lot of money into these things, so
right off the gate, you want the latest new hotness in the end products that TI selling th they're gonna charge a lot of money for them.
Yeah.
Morris realizes he's like
That's not actually optimal.
To do that.
Because as evidenced by his first big win at T I with the IBM.
Line.
There's a learning curve till getting the yields right and learning how to manufacture a new
Process and in the beginning.
You're gonna have really low
Yield.
And so what you want
Ideally from a
Fabrication perspective.
is you wanna have a ton of volume from the get go. Like as soon as the plan is online.
You wanna be running at max capacity so that
You can A learn
As fast as possible.
Yeah.
yields up to the profitable levels.
And then you wanna still be running at max capacity as long as possible because
You already spent the fixed cost to make the plant. Basically you always want max capacity.
So when you started out
By pricing so high, you kept demand low and you weren't able to get up to capacity fast enough.
It's almost like they didn't realize the benefit of the potential operating leverage that they had,'cause they were just passing their exact economics onto their customers and saying,
You basically have to pay us for us to do all these fixed costs.
And then you'll get all the benefits of
How cheap it is to stamp it off the press every time. Whereas what they really should have been doing is saying
we will make an investment, you know, we'll eat the cost of having to spin all this up, but boy, are we gonna be super profitable on every chip that comes off the line. Yep, totally.
So Morris is thinking about this.
He hires
B C
And they come up with the idea of actually pricing low.
To start.
to drive this volume and speed up the yield curve. And then also the side benefit of that is
If they're pricing low and everybody else is pricing high, they're gonna grab a ton of market share and probably keep that.
Paying consultants. I know. Well, so here's Morris' quote about this. He says this was in the late sixties.
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 into like
T I is kicking all of their butts, and it's thanks to Morris.
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?
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.
T I's just killing it bigger than anybody else.
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So
On the back of this.
Morris gets promoted to
VP at T I one level below the CEO.
Running the entire
semiconductor business.
That happens in nineteen seventy two.
And he becomes the obvious leading candidate to be the next CEO of T I which she's like
Yeah. I wanna do that. Yeah I'm focused. This is what I love. This is my going to the bar for three years reading a textbook. 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 T I.
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. Yep.
So that's one.
Two, second point, which Morris totally acknowledges.
T I 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 nineteen seventy eight
So six years he's running the semiconductor division as VP.
They move him over to VP of Consumer Products in nineteen seventy eight.
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.
Different set of competencies though. I mean you need like marketing. Yeah.
Here's Morris' quote on this.
Mark Shepherd, then chairman and CEO of T I
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're 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
Not Morris' strong suit.
Or at least not anything he's trained in.
Yeah, that makes total sense.
So
In nineteen eighty three, 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. Is this when he says? 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' fault versus his successor.
But
While Morris was definitely responsible for making T I 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 seventies.
The semiconductor industry transitioned over to the metal oxide process. The Moz. You ever heard about MOS Moz semiconductors. The precursor to C Moss. Exactly. So
That happened in the seventies.
And
T I
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 Maze.
left.
including probably most prominently a guy named L J
Seven.
who left and founded a company called Maztech.
And then he later became a semiconductor venture capitalist and founded Seven Rosen Ventures, which was one of the early
So he was a T I guy.
And he left. And you know, the culture at TI
as shown by Morris's experience was not like
Traitor S8, Silicon Valley, you 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 T I
And it all kind of fell apart.
Culminating in
the biggest huge loss. This is really history turning on a knife point.
In nineteen eight.
eighty.
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.
Mm. This is nineteen eighty.
By new group.
Based out of Boca Ratan, Florida.
Do you know what I'm talking about, Ben? I have no idea. So 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. Uh, okay. That was that a book of Ratone? Yeah, it was a secret project, like a Skunkworks division of IBM. Oh, wow. To build the PC, which is a big you know, IBM was the mainframe company and they're like, we're gonna build a

So Skunk Works project and T I
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.
T I probably should have been the processor chosen. Right. Instead, of course, it was
Intel.
I think it was the eighty eighty eight.
That was chosen for that first one. Wow, and boy did that set things in motion. Well then
The architecture standardizes on X eighty six and
Boom, there goes the whole next
generation of computing away from T I over to Intel. The sort of family of IBM with Intel processors and eventually operating systems. Yeah, but then all the IBM clones all running Introcessors. Okay, so this is really where that is a sort of major loss. In the highway of history, TI accidentally took the off ramp there.
They did. Now okay. Is that Morris' fault? Is that not Morris? I don't know.
Certainly the culture at T I was
We rotate you around, you're gonna 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 at TI is basically over. So
He was the rising star. Everybody thought he was gonna be the next CEO.
And at age fifty two,
In nineteen eighty three, after he stays a couple years being the head of
Whatever. Yeah, he was something staff. Yeah. Yeah. He just resigns.
Uh, and he's like, Wow, well
I guess this is it. My career at TI.
Thirty years.
Done.
He's still regarded super highly in the industry, though, in the semiconductor industry, so people start calling him
With opportunities.
And he wants to be a CEO. I mean that's what's on his mind. He wanted to be CEO of TI. That didn't happen. Like he wants to be CEO.
But he whittles it down to two opportunities he's gonna consider.
One.
is to go to uh
Competitor called general instrument.
Which people may have heard of another one of these old
chip company so it was based in New York and Manhattan in New York City, actually to go be their COO, the number two there.
With a understanding that like hey, if things go well and
couple of years you'll replace the CO, become the CO there.
Or
To become a venture capitalist.
Really? Yeah. So I don't know where or how. I couldn't find that out, but
He was weighing these two opportunities.
The V C idea's gonna come.
Back up in a big way in a second.
But obviously he goes with general instruments DI.
A his dream is to be
See you.
B he's got this chip on his shoulder from the way.
T I ended. So.
Great.
So he goes off to New York, you know, he leaves Texas, lives in Manhattan.
Things are gonna work out at GI.
The thing though is
GI had a very different culture than T. No T I was this research
Build, develop technology, push the ball forward.
G I 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. Try and integrate them.
No, they would acquire them. They would get these business units into good shape and then they'd sell them again.
Oh really? Yeah. They were like literally they were like 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 eighteen months.
He's
had two major setbacks.
Basically, you know, his dream is over. Like here's the quote from him. He says, After these two setbacks at T I and G I
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 fifties.
Former rising star now washed up.
From that to he's in Taiwan, he's
C of T S M C
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 it? T. I.
When he was running the semiconductor business there.
He went over to Taiwan.
A couple times.
to talk about building a manufacturing plant there.
T I would own and build the manufacturing plant, but outsource to Taiwan.
Not like a T S M C style business, like is a T I plant there, anyway.
He had no connection to Taiwan. Members Chinese.
He's not from Taiwan. People are like, Oh, Morris, you went back to Taiwan. He didn't go back to Taiwan. Yeah, he talks about how Taiwan was a strange land to him when he first got there, that it's not going back.
So it's not the land is a strange place to him, but
If he is gonna call someplace home and return there.
Is it the People's Republic of China? Well, I think he would say at this point it's America. He's been in America for US citizen.
Well, I don't know what he would say.
It's complicated.
So anyway, so he had met
a bunch of government officials in Taiwan when he was talking about building this plant over there.
And
That was back in the seventies. Now we're in the eighties.
Mid eighties.
Taiwan at this point.
It's a manufacturing.
Nation.
You know, they have no IP, they have no technology. 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, I see 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.
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 eighties.
Is four to five percent.
Zero four.
To zero five percent gross. Gross before you even have overhead operating costs.
Yeah. I mean it was like um
You know, if you were uh grew up around when Ben and I did, you know, sort of born in the eighties
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
mean Taiwan was super low end physical manufacturing stuff. Yeah, and uh way pull forward the seven power section
As Hamilton Helmer would sort of explain,
if your margins, particularly your gross margins are only four or five percent.
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.
I mean four to five percent gross margins
People used to hammer on Amazon, I guess, for being like a low gross margin business in the like forty percent like you know. Anyways, I can't even imagine running a company.
with that level of gross margins.
So
The Taiwanese government though. They want to come up in the world. They're like this is where we are now.
This is not where we want to be.
Yeah.
So they knew that technology was the way.
And so they had decided back in the seventies that they would establish
An initiative
called the Industrial Technology Research Institute, or ITRE.
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 home grow some real
Technology.
businesses in Taiwan so that you know maybe they can lift uh businesses out of poverty there, at least. And so Morris wasn't going to Taiwan to start TSM C was being recruited to ITRI. So one of the ministers he had met, a guy named K T Lee
Well because of this.
He would also become a
venerated in Taiwanese history. He's known as the father of Taiwan's economic miracle, literally because of this.
Wow.
Morris.
To come over and run E Tree.
Be like the head of Bell Labs Taiwan, essentially.
And this is like a ridiculous thing for Morris to do.
He had been, you know, captain of
American semiconductor industry.
He was put out to pasture at T I, but at least he was still at T I. And then he was COO at General Instrument.
He's gonna go over to Taiwan and take and run like a research park there. Like what? And like 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. This is like all the countries and cities and the like that are like, oh
We're gonna build the next Silicon Valley in Totally XYZ. And we're gonna recruit some former Silicon Valley person to come do that and it's gonna work.
Probably not gonna work. Yeah. 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 experience 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
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 nineteen eighty five.
And he's going to live in Taiwan where you know.
corporate magnets have five percent 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. 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 principle.
So nineteen eighty five, he goes over, he takes over as president of E tree.
It's kind of a culture clash. So this is
Retirement from Morris.
But he's still coming from this hard charging industry.
All of the employees of E Tree.
Are people in government jobs in Taiwan?
And government jobs
Mm, not even, you know, in like a democracy,'cause 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.
I
Two it's a three letter acronym. Oh, yep, yep, yep.
We haven't talked much about it on this show, but this is another
Yeah. Talk about captains of American industry.
R C A. R C A. That's right. Yeah. So R C A semiconductor.
Line.
And the government in the seventies, the Taiwanese government.
Had negotiated a tech transfer.
But this is like ten year old semiconductor technology, right? This is not like the latest generation. No. T I and Intel and everybody like, you know, in Fairchild, they're the national. They're leading the way. They're at the bleeding edge of semiconductor manufacturing process.
R CA 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. So it's like the only thing that you could do with that is
Super low end stuff. Right. There are some category of goods that don't need a fast or the latest processor and
Totally.
Even today when T SM C or Intel or Samsung or whoever built 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 ones. And often that's automotive or now what we think of as IoT, but the stuff in your smartphone, obviously, is the leading edge. Yeah.
So the government E tree does
Actually spin out a company.
Using this.
Old R C A technology.
That would be called
U M C United Micro Electronics Corporation.
Not a technology leader.
It actually
Does it.
Okay, in the long run. They would later spin out.
their own chip design business. So UM C was doing both
fabrication for third party clients and designing some of their own ships with the fab that they created.
They spin out their chip design business later.
That becomes media tech.
Oh no way. Yeah, which is a fifty billion dollar company today. So like
You know.
The government did pretty good. Like this is pretty good. Totally we're doing.
And you know, when Morris arrives because of this, he's not starting from a standing start. Right. Like it's not good, but there's IP, they've created a company, there's a paved path.
So he gets to work at e tree, 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
K T Lee comes back to him.
And it's like hey.
Great, you're running, you know, our bell labs, you're running E tree.
Now I want you to start a company.
Uh
McKitty's like Yeah yeah yeah.
I don't want you to have somebody else that need you do it. I want you.
More's Chang.
To start a new semiconductor company.
Here in Taiwan and I want you to make it into a global leader.
Morris is like, um
Okay.
He doesn't say this directly. Well he's got a great quote I'm gonna 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 kinda the end of the rope for him. If he gets fired
Here at E tree he's legit done. Yeah. Done, done.
Done.
So he kinda 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.
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. Yeah. Lee had no I mean he was the government, he was a minister. Right. He was like
Go start a semiconductor company. Make it a world leader. 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.
So
Lee is like
All right, good. We're Capish, 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?
Like okay, a week. All right. And then like a day later.
Le supposedly is like
I'm gonna need to come in on Friday. So like three days. Uh 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 peer play.
Found.
company to be a contract manufacturer. Sounds genius today in hindsight, as Steve Jobs would say, you know, it's easy to connect it off looking backwards.
But at that time.
Was this a good idea, David?
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 nineteen eighties that, quote, real men have fabs. That's right.
Oh, what a quote. So ironic because in the two thousands AMD would
Spin out its fabs.
And go fabulous. Global foundries. Yeah, I can get to global foundries.
But yeah, like this was not an obvious idea. Like if you wanted to be a real semiconductor
company, you made your own ships. And the idea was like
This isn't like manufacturing Barbie dolls here. Like this is real technology. Like you need to
control it soup to nuts. And already at this point in history. I mean th 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 TSM C and some of it to Foxconn and 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 eighties, we're already at the point where it's manufacturing broadly, but yeah, it's not like, Well, I got a factory. No, no, no, no, no, no.
Far the opposite of that.
Yeah, we said it 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. 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 definitely gonna manufacture like real men have fabs. Yeah. You know, they're not real startup. I mean, there are startups, but all these startups are building their own fabs. Like nobody wants to do this.
So nonetheless, you know, he has to start a company. He's literally got a gun to his head.
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 and General Instrument, I saw a lot of integrated circuit designers wanting to leave and set up their own business. But the one thing or the biggest thing that stopped them from leaving those companies was they couldn't raise enough money to form their own company because at the time, as we were just saying, real men,
It was thought that every company needed manufacturing, needed their wafer manufacturing, and that most capital intensive part of a semiconductor company.
of an IC company does the manufacturing. And so I saw those people wanting to leave, but being stopped by the lack of ability to raise a lot of money and build a wafer fab.
Totally, right?
But
Those
company is this like if you build it they will come. They haven't started. They haven't come yet. So
More s he knows what the long term market is gonna be, but he's gotta
Fine.
The short term.
Market.
He needs some like real politic here. Like so what's that gonna be?
So
He says, Well, maybe I can go around to the big guys.
They've been doing, you know, just like my first thing back at TI, they've been doing some line sharing, you know, for either new products that they need excess capacity for or for older products that they need to transition some fabs, but they still need to make
components.
Maybe I can take some of that.
Off their hands.
And so he goes around and he talks to Intel, he talks to T I
talks to everybody in the industry and they're like, Yeah, he talks to Motorola, like
Sure.
Fine.
And the government had told him
We know it's gonna take a lot of money to set up a fab.
We're good for half of it.
But you gotta go raise the other half of it. And we want you to raise it from like an Intel or a TI, you know, somebody who's gonna be your first customer and that they're gonna be
Bought in.
So he does the rounds, he goes and talks to everybody.
He gets meetings with Intel, he gets meetings with TI. They're both like
You know, Morris.
We like ya.
But no. So he's at the last ditch effort.
And he has a meeting with Phillips, the Dutch company.
They have a semiconductor business.
So Morris. He has a great quote about this. He says he would describe Phillips as
The first rung of the second readers in in semiconductors.
But they were the only interested option. So they put up twenty eight percent of the capital.
Government puts up.
Fifty percent. It ends up being two hundred and twenty million in total. The hundred and ten is probably a lot more than what the Taiwanese government thought they were gonna be buying here.
And then
Literally the premier of Taiwan, like the head of the government.
has to then go around to all the other business leaders in Taiwan and like strong arm them into investing the rest of it. The other what is that?
Twenty two percent.
I guess.
Yeah.
We also should say
Remember that Phillips was a Dutch company, because that's going to come into play later.

I don't know how that's gonna come into play. Putting a pin in touch. Okay, we got a surprise coming.
I'm gonna be surprised here. We're doing it real time, doing it live.
This may be the craziest part about the whole T S M C
Founding story.
I'm
Ninety nine point nine percent chair Ben, you do not know this.
Ooh.
Do you know what the pre money
valuation was on TSM C.
No, I couldn't find that anywhere.
It was zero dollars.
Morris?
Chang.
Got no equity.
In the company. Zero.
So one hundred percent of the company was owned by
The investors.
Fifty percent by the government. The other fifty percent.
We're owned by the investors.
More Scott.
Nothing.
And just got to keep his salary.
He was government employee.
Wow. There by the grace of the government.
Oh my god.
Unbelievable. Like this is so the opposite of Silicon Valley and everyone's worth three billion dollars today.
Well, what he did as T S M C started to work.
He basically put all of his money into buying. He bought his own shares. What
The company.
I don't know if it was privately before they went public on the Taiwan Stock Exchange in nineteen ninety four.
And then the New York Stock Exchange in nineteen ninety seven.
But yeah, he put basically all of his excess cash flow into buying TSM C shares.
Oh my God. Isn't that wild?
So the government owned fifty percent of the whole business. 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.
Wow.
Yeah, things had really not gone well in his career that he was willing to take that deal.
Yeah. Crazy, right?
And okay.
Before we go on in the T S M C story.
We need to have
Two real quick sidebars. Yeah.
Summer's nineteen eighty seven. Yep. When TSM C gets officially set up. They raise the money at a zero dollar pre money valuation.
Do you know what other company
Other big thing happened in nineteen eighty seven. We have covered it on this show.
In the chip world.
Is this the founding of ARM? Yes, it is. Yes. Yes.
Arm. J V between Apple, Acorn, and VLSI Logic, which was the sort of manufacturing partner.
They were an A6 company, that's a whole nother sidebar we're not gonna get into.
But yeah, nineteen eighty seven. What a year. Brand new unconventional instruction set architecture. It's totally different than
The X eighty six stuff that the whole industry and world seems to have standardized on at this point.
The Anus Mirabellus.
for the semiconductor industry. And useless, right? It's in nineteen eighty seven. It's hamstrong, it's very few instructions.
PCs are always plugged in, so what do we need a low power chip for? This thing's pathetic. Real men have fabs and real men use power.
Okay, so that's sidebar number one.
Okay. Now. I was wondering I don't actually know the relationship'cause obviously
today a huge amount of volume
Uh
TSMC's manufacturing is making chips for iPhones, which since the outset has used ARM.
Chips that are used in
All mobile devices, iPhones and Android, all of which are ARM.
And lots of servers that are. Presumably there's some relationship coming between TSM C and ARM.
Um well, they're really close partners. I mean the way now this stuff is so integrated. Yeah.
All the company. The design the EDA companies like Synopsis.

all deeply like the engineering is all deeply in bed with one another. Okay. So you mentioned EDA. I'm gonna take your sidebar and I'm gonna You're gonna raise me. Yeah I'm gonna 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 eighties 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 synopsis, I think cadence there's another big one.
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. Yeah.
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 fabulous chip design companies. So today think Apple, Nvidia, Qualcomm, Broadcom. Eventually AMD after they stop being real men, apparently.
Tons of innovative new startups now like Cerberus PA semi Tesla before Apple acquired it. Yeah. Oh PASMI is coming in a sec. Okay, okay. So you've got the EDA companies that are making the software, the fabulous 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 that go into the factories that the foundries operate. 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. It's like everything is on
One chip basically.
You need a USB.
functionality in your chip.
You don't need to design it. You just buy some IP off the shelf. So they're companies that do that. Yeah.
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 fabulous 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 and Japan.
But today
I just wanna give everyone a taste of this and then we'll get more to it later.
There's a company
That is also Dutch based.
Oh there it is. There it is. 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 Lethaga. Right? Yeah.
And the L, you know, 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 T SMC.
They
And this is where I wanna 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 nineteen eighty four as a joint venture between Advanced Semiconductor Materials International ASM lithography and
And
Phillips.
Oh, wow, I did not know that. So that's crazy.
Uh TSMC and their equipment provider. And what a strategic point. I mean because
Well it's T S M C'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. Yeah. It's gonna blow your mind what this stuff does.
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Okay, back to
My second sidebar.
Also gonna be worth it.
PS Mmo.
We did an episode Way it was like episode twenty something. This is like when acquired was a very different show when it was actually about small acquisitions that totally. Yeah. 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?
No, I don't.
Okay, so arm.
My sidebar number one. Yeah. You know, 1987, also created, right? They're just an IP design company, like I was saying in your sidebar.
Um it's like an inception over here. So they just license out the ARM architecture to other companies that then design using the ARM architecture.
One of their original licensees.
was deck.
Digital equipment corporation, like OG.
Way back in the day. Yep.
So they took the arm architecture.
And they tuned it for performance.
And they called what
They did a deck, their version of ARM that they created.
Strong arm.
And that
Product line within deck.
would later be acquired by Intel.
Of all places.
Crazy. Why Intel acquired an ARM architecture?
Right. Yeah, they remarketed it as X scale.
I think they ended up shutting it down.
So a bunch of the core engineers on the team, like the deck team that have been working with ARM from back in the day, and they're like
We've got acquired by Intel.
What the hell? Like, you know, screw this. We don't want to go work for Intel. There's no interesting flourishing alternative architectures at Intel. Yeah, we're ARM engineers.
We can go start our own company.
That's P A Sem I? That's P A S M I. Uh
The legs.
underpinnings of all of Apple's chips today. Totally. So the
Lineage of all of Apple Silicon, probably the most
valuable, defensible part of Apple.
Today in terms of technology.
Was
Armand deck.
Intel.
P A S M I
Oh.
That's wild.
I don't think I ever knew that. So you can trace Apple Silicon all the way back to Apple.
Yeah, because ARM was a J V.
With Apple.
Crazy. With Intel and Dick in the middle.
Wow.
Okay, so back to TSM C.
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 drags.
to TSM C 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.
So it wasn't actually a thing they wanted to outsource. They were just so they needed some extra excess space. But then when they got the capacity online, they took it away.
Right.
And then the tips 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. Uh
So how do they get out of this?
So Morris continues the conventional conclusion at the time was that there was no market. That's why the Pure Play Foundry idea was so poorly thought of.
What very few people saw, and I can't tell you that I saw
was the rise of the fabulous 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 T I in general instrument, I saw a lot of these I C designers wanting to leave.
start their own businesses and the constraint was
Setting up their own fabs.
So like yes, he saw that it's yeah, but
Remember, he had been considering becoming a VC instead of
Going over to E tree. Yep.
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 gonna build on instead of like going and investing in them. Like he enables all of it. He's like the Y combinator of semiconductors. Right. Or in many ways the Tencent.
Tencent of course also does direct investing, but the idea that you could get distribution through WeChat
Yeah. It's kinda like it's not distribution, but it is
manufacturing. There is a thing that
You have to raise
ten to twenty percent of the capital that you otherwise would have needed to raise
If T S M C exists. Yep.
And
Just like
Don Valentine, uh you know, kinda when he left to go join V C a generation earlier. And again, it was not
V C, it's T S M C's building the platform.
But Morris is a hero.
So all these engineers, they all look up to him.
And he knows a lot of them personally. The ones he doesn't know, like who's not gonna take a meeting with Morris Chang, right? He almost ran TI.
Totally. Like he did all this amazing stuff. 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. Yeah. And so Morris is now going out and evandilizing and he's like.
All these great designers, like
We're an option for you now. Like you wanna leave, you wanna start your own company, you don't need a fab.
We'll be your fab.
You know, it takes a couple of years for a couple of years T SMC has to survive on the dregs from the IDMs, the big guys.
But
After a couple years these startups get going. Little companies like
Qualcomm.
Broadcom, Marvell, NVIDIA, these are all started.
With TSM C.
NVIDIA was started in nineteen ninety three.
Only ever raised twenty million dollars. Twenty million dollars. And never opened their own fab.
I believe a hundred percent with TSM C. Wow.
Well, maybe they have other foundries too, but the vast majority of their business
Jensen talked about this, Jensen Huang.
It took him actually a little while to get on Morris' radar. But once he did
The vast majority of
NVIDIA's chips.
T S M C
Make some.
NVIDIA is what like a
Three hundred and fifty, four hundred billion dollar market cap.
Company now?
It's wild.
And only raise twenty million dollars.
It's like the AWS for
Tip companies.
Never would have been possible before.
Oh.
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 fabulous
market to take off.
But
This creates this
insane flywheel for TSM C.
So
The fabulous market starts to grow, which they're like seeding and enabling it.
As that happens, TSMC's revenue
Gross.
And because they have fifty percent gross margins and forty percent operating margins.
They can take that profit and
Buy more advanced machinery build more fabs.
advance the level of their technology. Remember, they were starting from behind in technology.
Within about ten 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
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 Filebus 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 two thousands.
When T SMC finally caught up.
to the bleeding edge level of technology with other
Semiconductor companies.
There were twenty two companies that were at the leading edge.
I think it was like
I don't know, let's call it a hundred and fifty nanometer process or something like that at that point in time.
Twenty two and T S M C finally broke it into the pack. They were one of the twenty two.
By the late two thousands had gone from twenty two down to fourteen that were at the leading edge.
By the mid twenty tens, there are six. It's basically Samsung and T SMC, right?
Today there are two.
Uh five nanometer process is the current
Leading edge.
Only T SMC and Samsung.
Intel has been trying to get there, but they haven't
Been able to.
They've fallen behind.
And the next
Process is gonna be three nanometers.
T S M C's gonna launch that next year.
Samsung by the way just slipped six months. Ah, interesting. Well, Samsung has already slipped to twenty twenty four.
Whoa. So very likely in the next process it's just gonna be T S M C.
Which means that you will see that on an Apple slide somewhere announcing the next iPhone, talking about how it's a three 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.
This
Flywheel. It's just
Unreal. What happens here.
They run the table on the whole industry.
It is interesting. The industry went from vertical to horizontally integrated.
where the very best products in the market became horizontally integrated.
And it's interesting how
I'm trying to figure out what drove that.
Because at some point
I guess there's a couple components to it. One is the speed.
At which
Moore's Law happens.
makes it such that you can't be good at everything. You can't be good at everything from
EDA to making the manufacturing equipment, to running the manufacturing process, to designing the chips. You're not gonna write your own instruction set architecture.
People did need to break into best of class. 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 twenty two down to two down to one.
even when their competitors are only doing the one thing the T S M C has done. Like
If you fall behind by a step, you're toast.
Right. And it's because there's this big part of it that you're talking about that hasn't come up on other episodes 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
Building.
the factories for the next generation.
Yeah. I mean.
Well, there's two things. So yes, that is a hundred percent true.
And the scale of this now, I mean TSMC just announced they're gonna spend a hundred billion dollars in CapEx over the next three years. Thirty billion dollars this year.
Sixty over the next two, and I bet that keeps going up.
So that's a lot of billions.
You might even say, like, this is so strategically important and people are talking about this. Certainly China's talking about this. The US government's now talking about this.
Governments might need to come in with a bazooka of money.
And
Create.
Other than
'Cause
almost all their manufacturing's in Taiwan. It's in this strategically geopolitic 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 gonna spend a trillion dollars this year to do this. They can't do it.
Because
We're gonna get to powers later, but there's this marriage of scale economies and process power.
The T SMC like in this industry.
There is no amount of money you could spend to catch up next year.
You can't.
Because the engineering is so hard and the learning curve.
Takes decades to
Get to this point.
I was listening to a podcast, uh, Bloomberg Odlots podcast about this.
Well they were talking about this and the reporter who covers T S M C is great.
Tiny they're asking the question like the
Well, China could just spend a billion dollars and
do this, create their own fabs, and they're doing this.
What's the company called? S M I C SMC, yep. S. Yep.

Basically T S M C 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. Yeah.
The guy who covers T S M C was like
They can do that and they are doing that.
They wouldn't know what to do with it. And it's not'cause they're dumb.
It's the hardest thing in the world. Yes. To do this stuff.
to make the equipment that ASML does and to
manufacture the way that T SMC does, it is the hardest thing to do in the world.
Yeah.
Anybody else could get all the same equipment from ASML.
Actually that's not true. 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. All right, I'm jumping out of my seat here, so I'm gonna 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.
Uh
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?
Well
These machines Tell us then what these machines do. Well, first of all, they cost two hundred million dollars.
For a machine.
That makes the chips.
And that's gonna go up to like three hundred million dollars. And by the way, on a lot of this, we have a lot of thank yous for John Bathgate and Britton John's.
from the episode of the Knowledge Project that they went on to talk about a lot of this stuff.
It takes four seven forty sevens.
to ship one of these machines.
So you buy one, your T S M C
You buy one and it arrives and 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.
Okay, so what does running it mean? What do these machines do? Okay. So
It becomes exponentially harder to manufacture chips the more dense they are.
So David, you mentioned that hundred and fifty nanometers or so from several years back, and we know now that the M1s are made on this five nanometer process.
Well
The wavelength of
white light of regular light is a hundred and ninety three nanometers. That seems like a problem. 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 some water.
Like a laser.
Well not yet.
Even that
really only gets us to like eleven nanometers.
So how the heck are we supposed to make these chips where the transistors are
ostensibly only of five nanometers apart.
When what we've done to date
shooting through lenses and shooting through water.
gets us to eleven 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 fifty thousand times per second. 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 land. And you got to do that fifty thousand times a second.
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 eleven nanometers here. We're going to five nanometers, three nanometers.
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 twenty 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 fifty 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 wanna do that in smaller and smaller ways, we gotta do with more and more specialized equipment.
And at the end of the day.
If you want to make
The M two, the M three.
You know that a
eighteen X Bionic, whatever it's gonna be called. There is no other way to make it than this
Extreme cutting edge alchemy.
It truly is alchemy.
So, you know, Ben.
So like you're a government, you want to throw a hundred. I was gonna you know, like acquired's doing really well. Like we're we're we're on a tear here. You know, we've got power, we got brand power, we got network, you know, economies, we got our community, like we're doing well. We should invest in that. We should give the opportunity, we should compete with TSM C.
Yeah, 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. 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 gonna be hard because there's
fifty some on back order. So like I can't even get it for years. Ordered out all of them for years. 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.
And this is why TSM C has forty percent operating margins.
It's crazy.
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, you know, is great, but like how do we really get from
TSMC started taking the dregs from the IDMs, then the Fablist companies came along. How do we get from there to like
Now.
There's another really important chapter here.
And you're gonna flash us forward from like ninety three, ninety five to like
twenty tenish.
Is that what's called? Two thousand eight.
Well, first we'll stop in two thousand five.
So two thousand five, you know, things are going well.
Better than Morris ever imagined. These fabulous companies are getting started, Nvidia's
Killing I mean I was making gaming PCs at the time. I wanted those NVIDIA GPUs. But NVIDIA wasn't a top
twenty stock in the world. I mean ca Intel was like pff NVIDIA, come on. Right. Real men have fabs. Okay, maybe we're beyond that part, but
They were making
GPUs like
NVIDIA stock tracked whether they won the next Sony contract for the next PlayStation or the Xbox. That was the market for the market. Right. You know.
Great market, but it's not what we're talking about.
crypto, it's like is the next PlayStation gonna include your chip or not? Totally.
But still great for T S M C. It's awesome.
Thousand five, Morris is seventy four years old.
He's like
All right, I did it.
Yeah, been buying T S M C stock with my own money. It's done well enough. I don't really need to work anyway.
I'm gonna call it.
And retire. Ready to retire, ready to ride off into the sunset.
He hands the reins of T SMC.
Over to his longtime Lieutenant Rick Sai.
And he retires.
Spends a couple of years, he's just chill. I don't know what he's do he's he's loves literature, he's like reading
All sorts of stuff he's on his second marriage, which is he
credits his second wife for
really reinvigorating him and inspiring him.
Then it's summer of two thousand nine.
By the way, that's right around the time that people were starting to speculate that EUV might work.
Uh this had been kind of an IT to this point. They've been science projects before. Oh, cool. I didn't realize that. Yep.
Oh well this is gonna make what happens.
Even more sense.
The financial crisis had happened in two thousand eight.
Mm-hmm.
Um
You know, chaos everywhere. We've talked about it lots on this show.
Surprise press conference.
S summer two thousand nine.
They announce
That Morris
Returning.
To lead T SMC as CEO.
Rick is out.
Morris coming back for the third act of his career.
I don't even know what number he's wearing. He's not forty five,'cause that was, you know, the second act. He's like Jordan. He's beyond Jordan at this point.
Coming back, he's gonna be CEO again at age seventy eight.
Rick
would actually have a second act himself.
Do you know what Rick is doing now? No. Rick is CO of Media Tech.
Which spend out of UM C. So like he's doing fine. Rick's doing great.
But Morris comes back. Why does Morris come back? But this is heralded as like kind of a botched transition, right?
Well, there's a lot of stuff going on. Like from Morris to Rick, people kinda viewed it as like you didn't
Really?
Do a great job bringing in the next CEO of the company.
Maybe.
I don't know enough to say. Okay. I think maybe
But also like there's a lot going on at this moment in time. So the financial crisis. Yep. 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 quote from Morris, and he says
One.
This move will not affect TSM C's fighting spirit and is likely to spur greater intensity.
But two.
He says that he sees quote golden opportunities ahead.
What are these golden opportunities that he's referring to?
It's two thousand nine.
Mobile.
Right. The smartphone. Two thousand seven, in July, the iPhone comes out.
Two thousand eight, the iPhone three G comes out with
The
App store for the first time, the SDK, all these developers building for it. But of course
And Android comes out in two thousand eight?
Yep.
Apple had to this point, well.
building, you know, this operating system, this scale down version of OS ten, it's 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 got to use ARM in these things because we need a really low power.
Device so they've done
Actual
God's work and magic to be able to bring a PC X eighty six operating system, create a sub operating system from it. Totally that runs on ARM.
Yeah.
Miracle.
But of course it's an off the shelf Samsung processor totally. Well, even that's great for TSM C. Like you know, Intel's not making that.
Okay, so that's one and we're gonna talk more about that in a sec.
But we should say and Samsung also fabbed it.
Samsung is
Both.
uh ship designer and a uh manufacturer.
On mobile.
The previous
whole paradigm of computing and Silicon Everything was P C it was like
Stuff plugged into a wall.
It was Intel. It was X eighty six.
And like yeah, T SM C could now access some of that'cause AMD went fabulous, but
Come on.
But now
All of the leading
companies that are gonna make silicon for
Design cell are arm companies, you know, Qualcomm, Broadcom, Media Tech, Apple. Who all are fabulous. All are fabulous. Okay, so that's a big opportunity. And guess who knows all of those people?
Boris.
And we should say too two thousand nine was an interesting tipping point because if you'll remember back to the two thousand and seven introduction of the iPhone, Steve Jobs has a slide
Where he says their hope, their goal is to get one percent of the existing smartphone market. Right. So an Apple had no notion. I mean the Google had no notion of how big smartphones were about to become.
In two thousand and nine, we're starting to see I think the iPhone four 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. Yeah, yeah, yeah.
Well, that was half of the next computing paradigm. Remember back I mean this is when I started in B C.
There were two waves that everybody was talking about.
Mobile and
On the consumer side, everything's shifting to mobile. Mm-hmm.
That was what happened. Bring your own device.
Well, sort of, you're on the right track. What happened in the enterprise?
The cloud.
The cloud. The cloud. Right. 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? X eighty six, you're putting CPUs in the cloud, Amazon's buying lots of Dude, the cloud's the best thing that ever happened for Intel.
Those are incredible server architecture.
It was the best thing that ever happened to Intel.
But as the cloud
Progressed.
And
Computing workloads progress, the CPO
Became a lot.
Less.
Important. Like AI started becoming a thing.
CPU, like yeah, maybe maybe you need some of that.
Maybe you'll use Intel, maybe you'll use Arm, like whatever, but
What really matters. Well, the majority of cloud workloads are still on CPS. Okay, fine, fine. But you're right, future looking. Why is NVIDIA now a four hundred, three hundred, four billion dollar market cap company? It's not because of the PlayStation. And it's bigger than Intel, right? And NVIDIA's two X 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 core pr you know, there's sixty four cores on a CPU now, so they're good at parallelization too, but
All this stuff.
And machine learning is GPUs. It's GPUs and it's specialized, like the Tesla Dojo stuff.
That's not X eighty six. 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.
Yeah.
So you got these two big golden opportunities.
That are coming online.
And Morris is like
I got this. And we should say we should clarify too. I think Tesla
Uses Samsung.
Oh, interesting. Not T SM C, or at least for part of it. And I think they actually even fab their chips in Austin in the US.
Really? Yeah. So this can't imagine that's gonna last. This is like the beginning of the like what everyone's sort of hoping for in the US is this like return to American manufacturing of chips.
They're gonna have to go to T SMC though in the next generation'cause
You want three nanometer.
It depends. I mean it depends what the workloads are and if you're Yeah, I guess so. It depends what you need.
Well.
Anyway, point is
Intel's dominance is
Over.
And

All that's gonna take over is T S M Cep.
And Morris.
Riding back in. He comes in. He gets these deals done. So like the Apple deal.
twenty twelve.
Morris Chang.
Seventy, eight, eighty years old. 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 a
one went over to the other's house for dinner or something and it was like a living room conversation to the deal for
Uh hey
We bought this company PA semi. We've been designing our own chip architecture in house. We're gonna launch, I think it was the A4.
Yeah, I think that was the first one.
And it was Apple basically saying we think a lot of people are gonna 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 phone.
They think they're also kind of a foundry
And Jobs hated Samsung famously, right? What did he call them? He call them some derogatory term. Uh well, there's been a few interesting things. There was Steve Jobs saying he was gonna wage thermonuclear war.
That was on Google, right? I think that was Google. But he had some like
Oh, Samsung, they're just like coffee. Like something that like really put them in. It was about the lawsuits. It was like when they kept stealing apples.
Designs.
Yeah. 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.
Well doesn't get any better than that.
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 actually Jeff Williams. If we were to bet heavily on TSM C, there would be no backup plan.
And for T S M C
It meant an initial investment of nine billion dollars.
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 twenty ten. And then I think twenty twelve was the launch of the A4. Designed by Apple, built on the PA semi.
acquisition and of course fabbed by TSM C. And I think it wasn't until the iPhone six, which was what, twenty
Fourteen, twenty thirteen, something like that. That they were solely T S M C 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. I'm pretty sure some iPhones had Samsung fabbed A fours and fives in them, and some had DSM C fabb ones. But I think by the six all iPhones were huge winners, but I think the six was like
mega, mega winner. And I think that was all TSM Chah.
Nine billion of manufacturing capacity just for a deal with one company.
Paid off.
That was a Bet the Farm deal, huh?
And kinda like something only Morris could do. Totally. Right. I mean it really speaks to founder Gravitas. Yeah.
Even if he had no equity as a founder.
No equity that he didn't buy.
So
After getting that deal done.
In twenty thirteen.
Morris steps down as CEO again, but he
Stays on as chairman.
And then finally once it all plays out and TSM C is
on top in June of twenty eighteen.
Morris retires.
Presumably for real. He even stepped down from the chairman. Step fully retired from chairman at age eighty six.
Oh my God. Crazy. Wow.
That was twenty eighteen, so
I mean let's talk about now. So twenty
Twenty.
T S M C
We all leaded to this.
operating profit of twenty billion dollars on forty eight billion dollars of revenue.
They took seventeen of the twenty billion dollars in operating profit and plowed it all back into CapEx.
Last year in twenty twenty.
beginning of this year, January twenty twenty one.
They give guidance that they will raise CapEx from seventeen last year in twenty twenty.
to twenty five to twenty eight billion.
In twenty twenty one.
in April of this year, twenty twenty one, they raise it again.
To thirty billion forecast for the year and a hundred billion.
Over the next.
Three years.
That's like the real shot across the bow that everybody wakes up, the financial markets wake up and they're like, Holy crap.
T S M C has cornered the market.
Even Samsung's not gonna be able to keep up with this.
It's wild.
All right listeners.
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So
More on today, David. T S M C Today.
Well, okay, so speaking of

I think this is the data point that really kinda says everything.
So since
The first IPO in Taiwan in nineteen ninety four.
T S M C
Has had
Compound.
Annual revenue growth.
Of seventeen point four percent.
For twenty seven years. Revenue growth.
Seventeen point four percent.
compounded for twenty seven years.
Now the IR, the equivalent on valuation on market cap.
So it was four billion market cap.
at the Taiwan IPO in nineteen ninety four. Today it is five hundred and fifty billion.
So that is a nineteen point nine percent
I R R
Starting from a four billion dollar base.
Over the last twenty seven years. So
twenty percent IRR over twenty seven years.
Incredible by any means.
Starting from a four billion dollar base.
It is now currently as we record the ninth most valuable.
company in the world. And I think other than Saudi Aramco
It is the only company in the top ten
that we haven't done on acquired.
Oh, interesting.
Yeah, the US oil companies are no longer in the top ten. But Berkshire.
I mean they're in
Hallowed grounds at this point.
The other thing that just talking about financials today.
So
Crazy that they grew thirty one percent in revenue from twenty nineteen to twenty twenty.
They doubled their
Kager.
From twenty nineteen to twenty twenty.
Yeah, it's nuts.
Talk about accelerating growth.
Okay, so in twenty twenty their adjusted net income was seventeen billion dollars.
How are they gonna go spend a hundred billion over three years?
Is that gonna be out of profits of
each of those years, or do you think they're doing some kind of financing?
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. In fact, I think they're gonna raise prices this year by twenty percent. So the first announcement a couple of months ago was they're not gonna cut prices.
And then they just announced they're gonna raise prices. Nobody's ever done this since the pre Morris days. Pricing power in action. Totally. I mean, what a clearer picture of how
They have taken a
Commodity business.
And turned it into
I mean this has gotta be one of the biggest motes.
Of all time.
Totally.
I mean, they've got twenty eight 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.
Unbelievable.
The other thing is that they already are the largest. They have over fifty percent of
The
market for foundries.
For all contract manufacturing of
Chips.
And like ninety five plus percent of the profit.
Correct.
I thought where you were going with that. It is also true that they have ninety percent
market share on the
current generation, like the leading edge chips.
In the five nanometer.
Samsung has like
Five, ten percent market share. And
T S M C has
Ninety plus percent. In many ways. Going to a hundred. They're the apple.
of semiconductors.
They don't have all the market share, but they have all the most profitable market share.
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 Oddlots 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 gonna 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? Totally. You think Apple doesn't want the leading edge? Software will always match the complexity on the most advanced hardware it can run on. Totally. Which is why like 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 as hardware. Right.
Hell no. It actually is worth touching on. There's one other interesting bit about this five nanometer process.
Which first of all is a marketing name at this point.
what it used to or originally referred to was the length on the gate on the transistor.
At this point.
It's not exactly five nanometers 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 marketing speed, but right. Like at some point
you cannot subdivide silicon anymore. So either we need to change the substrate.
Or
the innovations are sort of gonna come from elsewhere.
Which has always been the case. Like Moore's Law.
was technically the doubling of the number of transistors on an integrated circuit.
Now it comes from multi core. It comes from all the other advancements of
figuring out how to make chips do more stuff faster.
Yeah.
That I think is gonna keep
Going?
And I think it's gonna keep being expensive and getting more expensive.
And I think T S M C is the only company that's gonna be able to
Keep up at the leading edge.
Yeah.
Do you know, David, about Moore's second law?
Ooh, no I don't.
So everyone knows about Moore's Law, but there's this second one, which is also known as Rock's Law.
After Arthur Rock. Arthur Rock. Yeah. Yeah. OG.
It states that the cost of a semiconductor chip fabrication plant doubles every four years.
So with fabs today costing fifteen, twenty billion dollars.
I don't know that that's proven exactly true, but it's certainly shoot if we just look at T S M C's
CapEx forecasting.
They're going from seventeen to thirty.
Yeah.
Sixty over two years. So that's way faster than four years.
So the interesting thing is when you combine these two things, the Moore's Law and Moore's second law.
Yeah.
Implies
That the leading company
that most profitable company.
will become a monopoly.
Winner take all. There you go.
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 T S M C
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 on the internet.
This is how
Venture capital started because actually manufacturing chips, the operating that comes from huge amount of fixed costs into foundries.
To make chips.
And then
hopefully be very profitable, fifty percent 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 eighty to ninety percent, not fifty percent.
But
I would back that down because it doesn't have the sort of moat defensibility characteristics that being able to plow your copex into manufacturing capability does. Yeah.
Should we do power? Absolutely. Let's do it.
Let's do it.
So for folks new to the show.
This is one of the
Discussion topic we do for every episode as we go through Hamilton Helmer's
Excellent.
Seven powers.
the best business theory book.
Totally. We've had Hamilton on the show. He's amazing. Go read the book if you haven't.
He identifies seven
Power is the 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. Yep. 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.
Sometimes we talk about branding. Sometimes we talk about branding. We're talking about none of those this time. Yeah. We sometimes talk about scale economies, which we're gonna definitely talk about here, but I think we're gonna have our first process power if uh
I'm a forecast, but let's start. Let's go down the list.
Counter positioning.
Yeah, I mean like maybe you could
And in particular
Would
the incumbents have started with the exact business model.
No.
Because their profit center was the integration, the all the margin you get of integrating design and manufacturing.
And by saying, Nope, we're gonna be a pure play manufacturer.
T S M C
theoretically was saying, no, we're gonna take less gross margin and we're just gonna make it up in volume. I'm actually not sure it played out that way. I think they have more do you know what Intel's gross margins are?
I actually don't know.
I would suspect they're higher, but I don't know. Right.
Yeah, there was counter positioning here.
I don't think I said this when we were going through it.
But
Before TSM C and the Pure Play Foundry model.
If you were either a fabulous
company, one of the very, very few.
Or you were another
IDM and you are trying to get some excess capacity, you rent it from another IDM.
Most of the IDMs that be like, Okay.
You strong arm them, you got a great w 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 T S M C wasn't gonna do. So yeah, there was counter positioning, like the IDMs there's no way they were gonna do what T S M C was gonna do. Right.
Huh.
Okay.
Scale economies, absolutely. That is the biggest if it's one of the top two with process power, in my opinion.
Switchs.
Well, it's funny, now they're huge switching you can't switch off TSM C.
No, unless you're gonna stop being on the leading edge. If you're gonna change from being a phone company to an automotive company, you can switch off of them.
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've got to be TSM C.
But
You gotta be so integrated with TSM C to do this.
Say you want to switch to Global Foundries or, you know, one of the other competitors out there, of which there are a few.
You can't just call up
Global foundries and be like
Hey, I'm portin over.
Expect my business on Monday.
Right. It takes years.
Yeah.
With the process.
Yeah.
So yeah, big switching costs.
Network economies.
It's not really worth talking about.
Not in the traditional sense. You know, this is not Facebook here. And certainly
None of T SMC's customers
really benefit from other customers being on it.
No, I do think there actually is.
I don't think Hamilton captures this in his
Seven powers. And I don't know if you would consider this one, but there is like a ecosystem aspect here because the EDM companies and the IP companies are so deeply integrated with TSM C.
If you wanna be using
Arm, for instance, or you know
They're kind of the best integrated with.
No, I don't think that's network economies. That is kinda like this ecosystem thing.
T SMC 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.
I do wonder if it's actually worse for a lot of people that Apple is a T S M C customer because who else has access to the five nanometer process right now? They're gonna take as much as they can.
Yeah.
Good point.
Process power.
Yes.
I think Pixar, this is the first time we've really although we weren't doing seven powers during Yeah.
To me, this is the clearest example I could ever imagine of process power.
It takes all forty years of
T SMC's history to have arrived at where they are today.
And even if ten people left.
And tried to start the next C S M C

create what they've created at this point from scratch.
Virtually impossible. All of their IP, all of their
you know, people, all of their know how, all of their relationships with
SML and the like.
Yeah. No amount of money can replicate it. I think the only thing that will
Unseat TSM C is a complete paradigm shift.
Yeah.
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 TSM C is good at today.
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 or way cheaper way at quantum computing. Yeah.

Then that kinda could reset the playing field. Yeah.
Yeah, yeah, totally.
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.
If they were like an AWS moment.
Oh, which is funny'cause T S M C is the AWS equivalent, but where uh 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.
No.
Absent a paradigm shift.
This is T S M C's to lose.
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. It's Apple's brand, it's not T S M C.
So this is I think a good time to enter our
geopolitic discussion.
'Cause I was thinking about the other way that T SM C could fail would be that China decides
The moment is right.
to go and assert our force and
Take over Taiwan. Depending on how you see it, either annex Taiwan or
assert its as always claimed sovereignty in Taiwan. Yes. Actually start enforcing what has been right the whole time, I think as they would sort of say. Yeah.
If they're 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 T SMC manufacturing capacity for all the Chinese.
And Huawei's been a TSS customer for a long time.
Yeah.
So
How do you capture that in power?
What is the power or maybe like let's not risk. That's like a bear case. 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 like they have a lot of room to be.
Operating safely.
Um, maybe cornered resource, I guess.
So you're saying this is like an anti power for the weakness. Exactly. Yeah. Exactly.
Yeah. I suppose all that matters is things that you have that your direct competitors don't. So I in this strange straw man 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 the beginning with the government of Taiwan.
Basically the mafia boss was like
This is happening and we're gonna strong arm all the business leaders in the country to investing in this.

Happens.
Yeah.
Okay, well let's put a pin in that.
'Cause you're right, it turns out that it's actually not a perfect power discussion. But the geopolitics thing is interesting.
Well, I think it's the bear case. Right. That to me absent an enormous
computing paradigm.
is the way that T SM C has an enormous risk in the business. Yeah.
Totally. Which does make it kinda surprising that
You know, they haven't diversified their geographical operations very much.
So this is interesting. So they're facing a lot of pressure for this. They are spending I think
twelve billion dollars
This year to start
A plant in Arizona.
Which will not be the three nanometer. I don't even think it'll be the five nanometer.
It's not their most advanced manufacturing. I think the US is subsidizing in a big way. I think that'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 And they have operations in China, I believe, too. 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
T S M C'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
Resore this. Yes. Yeah.
I mean this is a scary, scary
future to contemplate and uh hope to God it doesn't happen. But
Really the thought exercise here is what would happen.
If China annexes Taiwan tomorrow.
Which is scary for a number of reasons, the smallest of which is this corporate takeover. It's scary for a lot of people, their lives.
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.
Everything. What part of our lives do not run on.
Right. Semi Ford can't make F one fifty's right now. Basically all of our technological progress would stop.
Yeah.
You're right.
So I think the question isn't I don't know enough to answer this.
What would happen?
Would it be possible to airlift
The process power.
that T SMC has physically out of Taiwan.
To somewhere else.
You get all the people
ASML now sends the stu somewhere else. You airlift everybody out. There's an evacuation.
Does the process power come with it or not? I don't know. That's a good question.
I mean if the Toyota production system is an example where a Toyota tried
to there was that factory that joined the venture with was it GM? Yeah the Numi plant that's now the Tesla plant in with Toyota trying to replicate
their process somewhere else.
Didn't work.
No, it wasn't under threat of war. 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
Oh wait.
our ability to build, which we've always held up as this example of
The U S
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 protect. Well, Boeing needs semiconductors. 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.
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, you know, maybe it's the same like China's right there, but this isn't actually gonna happen. But
Oh no, it feels in the last
Yeah, like
The risk of it actually happening.
has ratted it up quite a bit.
I think 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
T SMC is located on an island that is of disputed claim.
Yeah.
Maybe the best thing that could happen.
Is
My carve out a while back was the book by the Harvard chair the Harvard Astrophysics Department about

That he postulates was an alien spaceship.
Maybe if we discover that aliens are real, that's gonna be the uniting force, you know, like
All these conflicts seem pretty petty.
Yeah.
I wouldn't use that as an investment thesis, though. 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.
We haven't done this in a while. 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 two thousands, as Apple Inc. was preparing for the release of its new smartphone, Steve Jobs approached
then CEO of Intel, Adelini
about providing the chips for the iPhone.
Intel already sold iPhone, the processors that ran on its Macs.
But
Jobs 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. And remember Adelini was the guy that
jobs brought out on stage during the Intel transition. They were burying the power PC to say this is the future. This is the partnership.
So
Okay.
But Jobs made what Adelini considered a lowball offer, and Apple awarded the contract to Samsung.
It later began designing the chips itself, eventually outsourced production at TSM C, 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?'Cause they were partners on the back. Totally. And apparently it was less about the fact that
I'm sorry, you want to use arm? What?
No, we're the X eighty six company and it was more about we felt it was a lowball offer.
Biggest strategic error of all time.
Alright, I'm gonna postulate a playbook theme and I'm gonna put forward as a post more than a playbook theme. The what's the
You know, like in geometry there's like laws right that are proved, but then there's like postulates that are like you can't prove them but
our fundamental understanding of the universe if they don't work. Whatever that is. Axioms. I don't know whatever it is. I'm gonna put one of those out there. Please.
Never.
Make strategic decisions based on economics.
Mm. This is prime example. Like the number of
We talk about this all the time on this show.
VC's passing over valuation on
You know, uh
Andreessen getting cold feet about a three hundred million dollar evaluation on Uber.
Yeah. Right.
This Intel move.
Passing on being partnering with Apple. And maybe more specifically than economics.
'Cause like you could imagine that you would want to pass on this if Intel didn't get it to the upside from the deal.
Assuming that the structure is right.
than passing because a number is too low in the structure.
Or Ford Motor Company.
Not hiring Morris Chang over one dollar. You know, like whatever. Like it's just
Uh, humans are so
prone to cutting off their noses despite their faces. So we already have the Rosenthal doctrine of never bet against the Internet, but now we have the Rosenthal postulate.
Which is never make strategic decisions based on pricing. Based on pricing.
I like it.
I need to add a new section of the acquired website.
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 T SMC is like two and a half X.
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. I'd be fascinated
Okay, so
Public markets investors who are listening.
Shoot us a DM in Slack.
Or post in general. Acquired FM at gmail.com. Or acquired FM at G whatever channel works for you or Twitter, whatever.
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 TSM C and
Which is now Europe's most valuable company. Right.
I mean, probably you just invest in both, but how do you think about that? Right. And what's the up and comer that's kinda speculative at this point, but
could be another puzzle piece here. Are you also shorting Intel through all the like what yeah, what do you what do you do here?
All right, so my point on Intel is it takes a long time to become irrelevant. They still control eighty percent of the computer processor market.
And they have an even bigger share in

So
Despite everything we're saying.
Still huge. Workloads running on CPUs that are in computers and on the cloud.
Pretty big business. Yeah.
The majority of workloads they're 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 three sixty five. Yep.
Doesn't need five nanometer process.
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 design chips.
Two T S M C I think even like two years ago this was the plan. They finally decided
thrown in the towel, you know, until it's the greatest ship manufacturing company in the world. Real men are sensitive and they talk about their feelings.
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 fabulous 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.
Yeah, I mean, well
A
Let's look at AMD here, right? They did this. They spun out
They're manufacturing into global foundries. Which has been good for global foundries and AMD. Like Global Foundri is getting ready to IPO.
Yep. Yeah, that's probably the right strategic decision, but
It's not going so well. I mean, like it's going fine. T S M C R It's going better probably than if they had not done that, but they're not a winner here. Like T S M C is the winner.
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.
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. They became the CO of VMware.
Yeah and
he was the outside candidate to replace Bomber as
Microsoft CA. Yeah, yeah, yeah.
Huh.
You know, I hear he's really revered in the organization that people think he's really gonna
Gonna 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.
U V first.
So
Intel was the biggest early investor in EUV, committing more than four billion to it in twenty twelve.
Whoa.
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 until 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 enable the next generation of chips to be built that it couldn't. 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 were like
They put four billion in and I think
Even to this day there is not a shipping intel chip that was
Manufactured by Intel using UV.
Wow.
That's crazy. You're right. It is the most
Perfect pure example.
of the innovator's dilemma in action.
That's why you need startups.
Yeah.
Alright, my next one is 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.
Right. 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. 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 gonna be true
Ten percent of the time and fail.
Ninety percent of the time.
one out of ten times it's gonna 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. I mean, this is the thing about startups, right?
There are all these rules, but they can all be broken.
There is no formula.
Yep, totally.
All right, other playbook themes?
I just have one more that again we talked about a bunch in the episode, but I wanna
Highland, and I actually had one spin on here.
You know, the Def 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. Outsource things that aren't your core competency. 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, outsource et cetera.
Double underscore that.
But you know, like this is obvious.
So obvious.
But obviously Bezos didn't
Say it directly.
And thus I think we don't.
Highlighted 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.
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Greeting.
All right, so we were thinking for grading.
Look, we could grade like
I don't know. Taiwans.
Decision to do this. Yeah, whatever, like you know
Uh A plus. You know, not interesting.
So we had the we thought experiment. We'll try this.
For um
This episode rather than like letter grading this.
We'll ask a question.
Where does TSM C
Belong.
in the pantheon of great technology companies of all time.
Is it
Fang level? Is it like top five?
Is it top ten? Is it like top twenty? Like where is this? What is the right context?
In which
we should be placing T S M C this whole story, the company, the power, all of it.
So interesting because it really does raise this question of value chain.
We talked about the
five 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 two thousand.
Or you could say
Well
The set of products that TSMC manufactures
Have a hundred X 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 five G
And anything they tell you.
Is something TSMC makes that enables it all. When Mark 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 it's the cost of compute asymptotically approaches zero because TSM C T SM C T SM C.
So
How much do we ascribe to them versus ASML?
How much do we ascribe to them versus the
Entire
landscape of talented chip designers out there, including the like six hundred 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
an important
B to B.
hardware company of all time.
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.
But in compounding
All the value shows up at the end. So it is true that the value that TSM C will create in the world over the next year, two years, three years, is probably more
Then
the entire silicon industry leading up to this point combined.
I mean, hell, they grew thirty percent last year.
at like an already unimaginable scale. Like Intel's not doing that.
Right.
Okay, I think we can say it's above Intel.
I probably wouldn't say it is above
Facebook, Amazon, Apple, Microsoft, Google.
In terms of
your value creation in the world.
I mean devil's advocate, you could argue that
None of the innovative things those companies are doing now.
Happens without T S M C.
Yeah. Unless
the foundry model and the fabulous model was inevitable.
Yeah, maybe somebody else would have done it. Yeah.
Maybe.
But they didn't.
Yeah, mm-hmm.
Uh horse did.
I mean guys, the thing that is really dis
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 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 T S M C.
Compare it to all the Fang companies in 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.
T S M C is impenetrable.
Yeah, their business model and the costs required to compete are such that they have
It's like bulletproof.
It's everything but bulletproof. Yeah.
Totally.
Sadly.
Sadly. Yeah. So
You know, I don't know, maybe we're exaggerat'cause we're like so deep in it. Like we always go native on these episodes. Right. The only way it could be more valuable is if the company had an army.
It's like if people talk about the the US dollar
is backed up by the full faith of the US government, which implies
Guns.
Yep. 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.
Alright, so I think we can safely say
Top ten.
I think the question is, is it top five?
Well, defensible is an interesting question. So in thirty years
Will T SMC be a huge company?
Well, they've got this dynamic going right now with this flywheel where like
Structurally nobody can catch them.
Unforeseen has to change.
But something unforeseen will change'cause it always changes. Right, right, right. Yes, yes.
True.
Who's had the most similar dynamic in the past?
Standard oil. Either been successful or unsuccessful. Standard oil's a good one.
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 they kind of still exist. That's the best That is the best part. They kinda still exist, yeah.
Alright.
I'm with you. I'll go top ten, but probably not top five.
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 T S M C
Rides under the radar. They intentionally have no brand.
Right. 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 fan companies.
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 than I previously didn't know about.
Kinda like we did when we were like, We should do this episode. It's finally time. Yeah. Yeah.
All right. Well that's where I want to leave it.
Well I'll put a stick in the ground. I'm gonna say
I think I'm with you. Top ten, not top five yet, but
You know, maybe we need to revisit this. I will definitely say it's the most successful B to B hardware company.
Ever and the question is is that the most
successful B to B company ever.
I'd say it's probably just competing with Microsoft there.
Yeah, I mean and again, maybe even like across all industries, right? Like look at
I mean shoot, semiconductors run everything.
Yeah. And they run semiconductors.
Semiconductors are the new oil, David. Uh okay, okay, enough, enough, enough. We gotta bring this one home.
Carve outs.
Carmouth, 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. Yes. Escape the
freezing San Francisco summers.
Um the uh so while we're down we don't we don't watch a lot of
T V.
Usually, but you know, 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 like
For the percentage of you out there who are living under a rock like me with T V.
We've watched now most of Ted Lasso season one. Ah'cause we heard season two was terrible, but that made me think, well it was terrible. It is terrible. But season one's 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.
Yeah, welcome to the club.
So good.
Love it.
And then the other TV show we watched, this was Jenny's suggestion.
Old school throwback, uh show called Greek.
which aired in the mid two thousands.
And is about uh Greek like sorority and fraternity life, uh fixing all the university. And like it's just so good. It's like one of those heartwarming period pieces, but
It was right from like when we were in college. So like yeah, it's fun.
Nice. All right. David watching TV. Who knows what could change in the world.
Yeah.
Maybe T S M C's mode isn't as uh deep as we thought.

Alright, 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.
called Who is Michael Ovit?
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 built in America, I think. Yes. Yeah.
This one needs to be on your list, especially if you've enjoyed
Any movies.
or T V shows that were put together in the last
Well let's be specific. Or from
Two part injuries in Horwood series.
Totally.
from like nineteen seventy five to two thousand.
Michael's
put everything together.
And
It is just
wonderfully written book about an unbelievable business story, the strategy behind it.
The way that
with Creative Artist Agency, they just completely upended the entire
industry in Hollywood.
And did it really without ever talking to the press.
And we're 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 Plus 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. Yeah. I was gonna say, yeah, what a great connection with you know, acquired and
Disney and Totally. I agree. And what kicked it off was doing the Andrecent episodes and, you know, 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 my Gloves was just an awesome read. So cool. Well, and you know, like all the media that we grew up on.
Probably even more so'cause we were kids but it was the adult movies and the kids' movies too, but
You know when you're a kid, like the adult movie that you really want to see but too young to see
And just all these such classics like Goodfellas, like that was just my previous carve out, or Jurassic Park, or just everything that they packaged.
It's cool to hear how it came to be.
Super cool.
I don't think we told you at the beginning, but you can join our Slack, acquire.fm slash 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 helltops.
Yeah.
You always say yeah, sometimes you say, but uh
I'll chime in here too. Like seriously you know it's funny, podcasting is this weird
thing, right? There's no viral loop. It's not like, you know, you can share please, you know, 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. So Share a thing you liked, share a thing you disagree with us on, whatever it is. If you feel that way.
Please do that. If you don't feel that way, get in touch with us and tell us why.
Alright, listeners, we will see you next time. We'll see you next time.
Who got the truth?
Is it you, is it you, is it you who got the truth now