TSMC Founder Morris Chang

Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Ben: It’s a sign. All right, here we go. Welcome to the Spring 2025 season of Acquired, the podcast about great companies and the stories and playbooks behind them. I’m Ben Gilbert.

David: I’m David Rosenthal

Ben: And we are your hosts. Today, we have something very special to share with you. After becoming obsessed with semiconductors from our TSMC episode four years ago, David and I wound our way through the rest of the industry, studying fabless companies like NVIDIA and Qualcomm, architecture companies like ARM, and chip design software companies like Synopsys.

As we were thinking, what’s next in the world of chips on Acquired, we threw the Hail Mary. We asked friend of the show, Jensen Huang, if he would ask Dr. Morris Chang, the 93-year-old founder of TSMC, if he would be open to an interview with us.

David: It is insane and super cool that Jensen made time to help us with this. It’s not like he doesn’t have a lot of other things going on.

Ben: Well listeners, it happened. Today’s episode is a conversation that we recorded in Taipei last week at Dr. Chang’s office. We flew to Taiwan for a 48-hour whirlwind, where we spent some time at TSMC’s headquarters in Hsinchu Science Park, where many of TSMC’s fabs are located.

David: Super cool to see.

Ben: Totally. Conveniently, Dr. Chang just published volume two of his autobiography a couple of months ago after a 26-year hiatus from volume one. But inconveniently, it is written in traditional Chinese and not published in the western world.

We managed to get our hands on an unpublished translation of the book to prepare, and what you are about to hear focuses on a few crucial stories from TSMs history that Dr. Chang shares in his memoir about Apple, NVIDIA, and the birth of the fabless industry.

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

Ben: Listeners, you can join our email list at acquired.fm/email. You’ll get an email every time a new episode drops once a month. This is also where we announce past episode corrections, plus a fun little game where we give hints at what the next episode will be.

David: I always have fun writing those.

Ben: You do. That’s a clear David job. This episode is presented by our partners at JP Morgan Payments.

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

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

David: We thought as a fun way to start things off would actually be to talk about the man who introduced us. Could you tell us a little bit in your words about your relationship with Jensen and TSMC’s special relationship with NVIDIA?

Morris: My relationship with Jensen started with a letter that he sent to me, I think it was 1997. The letter was sent to the post office, and I received it in Hsinchu.

The letter said that they were NVIDIA, the company that Jensen was the CEO of, was a small company, but they had developed some really promising chips. They were looking for a foundry. They had approached TSMC’s San Jose office, but they really got no answer from the San Jose office. Would I please contact Jensen, because NVIDIA really wanted to do business with TSMC.

I was going to the US the next week, anyway, so the letter frankly raised my curiosity and also irritated me a little bit because I had always told our salespeople that we should never be negligent in talking to future customers, even if the customer seems to be a very small one.

Ben: And at this point, NVIDIA was four years old.

Morris: They were facing bankruptcy, I think, and they had maybe 50 or 60 employees. TSMC (I think) at that time already had a few thousand employees. I remember we had exceeded $1 billion in revenue in 1995, and this was 1997, so we were, relatively speaking, a pretty big company.

Ben: Which is very impressive. You were yourself only a 10-year-old company doing over $1 billion in revenue.

Morris: Right. The following week, I went to California, and I called him back without advanced notice. I called Jensen. I think there was a telephone number on the stationery that he sent me the letter on.

Jensen himself picked up the phone, and there was a lot of background noise. He was arguing something with his people. As soon as I introduced myself, said this is Morris Chang, he immediately shouted at those people that were making noises. He said, quiet. Morris Chang is calling me.

I then proceeded to make an appointment with him to visit him, to visit NVIDIA the next day or something like that. That was our first visit, our first meeting. He immediately impressed me with his articulateness, and also impressed me with his optimism, while he was also very frank.

He told me that NVIDIA was in financial difficulties, but the chip that he wanted now to have foundried would not only save the company, it will also make NVIDIA a major customer of TSMC. That was actually quite a bold statement. We were over $1 billion, and to be a major customer of ours he would have to produce revenue for us over at least $50 million a year.

David: Was that chip the RIVA 128?

Morris: I forgot the number, but it was a very successful chip. I don’t think it was RIVA anything. It was a games chip. Of course, it was successful. In fact, his prediction came true. Not only did it solve ambiguous financial problems, it prevented from being bankrupt.

Not only did it do that, it also started to make them a major customer of TSMC within two or three years. They did become one of the biggest five customers of TSMC. Very successful chip.

Ben: There was a great partnership forged there. TSMC would fab the chips, would manufacture them, NVIDIA would design them. That is true all the way to today at immense scale. But it hasn’t always been easy, and it hasn’t always been perfect.

I want to go to this moment in 2009 on the 40-nanometer node, where development was slower than TSMC had hoped, and it was costing customers like NVIDIA time and money. Can you share the story of how this came to be and how it was resolved?

Morris: Well, I decided to give the CEO job to a potential successor while I would still retain the chairmanship. In Taiwan, usually the chairman is taught me anyway, even though CEO is another person.

The problem you just mentioned happened during the period when someone else was the CEO. Apparently, it was a manufacturing problem. It was also a quality problem. It was a quality problem that the CEO first reported to me.

The CEO insisted that our people, we had the director of quality insisted that TSMC was not at fault. On that basis, on the basis of our quality manager’s arguments, he had not offered NVIDIA anything.

Now as far as the manufacturing problem was concerned, it was a you problem, and everybody was suffering from it. Of course, NVIDIA at that time was perhaps the biggest customer of that node, the 40-nanometer node.

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

Morris: Something like that, yes. The problem apparently just continued. Even though I was not the CEO, I was getting really impatient. Then of course, some other problems popped up, other problems than this 40-nanometer NVIDIA. I decided to take the CEO position back. In 2009, I did that.

There were several priority problems that I had to deal with when I took the CEO job back. One of them was this continuing problem, continuing argument, controversy with NVIDIA. Anyway, I remember in the first few days, after I took back the CEO-ship, I called all the major customers, including Jensen.

Ben: And Qualcomm was, I believe, [...]?

Morris: Oh, yeah. Qualcomm was also, yeah. Qualcomm, the top customers, didn’t change very much since since then, except for maybe one.

Ben: Apple.

Morris: Apple, yeah. Apple came later. In my call with Jensen, he was still very friendly with me, but he also reminded me in a very serious tone that we had the quality delivery manufacturing problem on the 40-nanometer. All right. I said I knew that, and it’s one of my priority problems. Give me a couple of weeks and I’ll get back with you.

As I said, I did have several problems aside from the 40-nanometer manufacturing problem, and the problem with the argument that we were having with NVIDIA.

Aside from that, we also had the problem of the pricing; was dropping faster than the cost. You don’t want to see that. Your gross margin percentage kept dropping.

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

Morris: All right, so that was one problem. Another problem was the immediate one that trigger me to retake the CEO-ship, because the previous CEO had laid off, except he didn’t use the term layoff. He used bad performance review, the worst performance review, and there were about 600 or 700 of them, and he laid them off on the basis of their poor performance review.

Well, we never did that. The worst we would do was to put them on probation for six months. Quite often at the end of the six months, everybody would go back to his or her old job. Some of them would get transferred because they were in the wrong jobs. So some of them would get transferred, but we almost never really fired people, even after the probation period.

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

Morris: That’s right. I actually have told the managers that. In 2008, of course there was a financial crisis, and the semiconductor business in fact got affected. Our revenue dropped. Our business dropped pretty seriously.

I was not a CEO. I was the chairman, but I just knew that anyone, any general manager, any CEO general manager without very much experience, what he or she would do in a situation like that is a knee-jerk reaction. Oh, he says, this is my test. I got to save all the money possible, and I got to lay off people.

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

Morris: Well, I know. Semiconductor industry people actually think the same way as I described. They all lay off people too. I had a lot of experience at Texas Instruments, but at Texas Instruments I was not a CEO. I was just one of the top managers under the CEO level.

When the company decided to have a layoff, the CEO conferred with the top managers who included me, and their first reaction was exactly the same. I’m talking about the early 70s. Their first reaction on who to lay off was exactly the same as what our TSMC CEO did in late 2008–2009, which was go by performance.

Now, I was the only one at Texas Instruments in the early 70s that said, no, that would not be a credible way of doing it. People would not respect us if we lay off by performance ratings.

David: And why is that?

Morris: Because it’s very subjective. The performance ratings are done by everyone’s own supervisor. Seven hundred worst-performing people in the company. Who gave the 700 people the bad ratings? Seven hundred supervisors. Very subjective.

It’s not something that people will respect. If in a year you have to hire the laid off people back, then you shouldn’t lay off because the layoff, the separation expense is usually about half a year, and it takes at least half a year to train a person. So if you need the people back within a year, you shouldn’t lay off.

Ben: What did you do when you came back as CEO, both about the employment issue and about the customer issue?

Morris: You mean customer issue being NVIDIA?

Ben: Yeah.

Morris: Well, to finish the employment issue, the laid off employees, as I said, there were 600 or 700 of them, came to my home to demonstrate and protest. Now the company, TSMC was pre-warned that hundreds of people would appear in front of my home. They notified the police department in my district. The police department sent 50–60 police officers to try to maintain the order.

Now, more than 100 protestors appeared. My neighbors had trouble getting in out. That was only the first time. A month or so later, the problem was still not solved. I was still not the CEO.

They appeared again, some of the protestors. About 25 of them decided to spend the night, sleepover in the little park that’s about a block away from my home. My wife literally didn’t sleep that night. She would wake up and went over to that window to take a look to see what was going on.

Then very early the next morning, six o’clock the next morning, my wife got up. She took one of the bodyguards and went to a neighborhood market, got the Chinese style breakfast or Chinese fried bread—I don’t know whether you ever had it or not; probably not—the buns, soybean milk, and take enough of the breakfast, enough for 25–30 people, back to the park. and distribute them to the protestors.

They were thankful, and they actually decided to not go to the president’s palace, president’s mansion. They told my wife that they would not do that that day. All this precipitated my taking back the CEO job.

Well, there’s another thing. I told the previous CEO before he laid off the 600–700 people, I said, I knew that it would be his knee-jerk reaction to confront a crisis such as the crisis we had. It was his knee-jerk reaction to lay off. So I said to him, if you want to lay off, bring it to the board. I’ll call a special board meeting.

I knew what I will ask the board to do, which was not to grant the permission. But he decided to circumvent that, because what he did he did not consider that to be layoff. It was just punishment for the poor performers.

Well, as far the CEO is concerned, I did keep him. I had more than one nice talk with him. I intended to, and I told him that he was still a potential successor to me. I kept him at the same job rate—we have job rates—and the same salary and bonus, but he was now the president of new businesses. Back then, we had high hopes for the so-called new businesses, which were solar cells and LED.

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

Morris: Ended up the biggest market opportunity. Why is it so ironic?

Ben: Well, it’s always interesting to me when companies think, oh, we should look at other new businesses, when in reality, semiconductors became a $600 billion-a-year market. Solar is a small fraction of that. LEDs are a small fraction of that. You were already in the best market.

Morris: I know. I knew that. I did not really think that solar or LED would really replace our integrated circuits business, but I knew the integrated circuits business was going to be great. But at that time, which was 2009, we also thought that solar and LED was going to be very promising.

But it didn’t work out, of course, the solar business could have been pretty good. However, China ruined it. They subsidized the hell out of it, and they now control that business, solar cells. The prices were extremely low, still low, so it didn’t take off. TSMC solar didn’t take off.

LED did not take off, either, because the market is not as big as solar. However, the patents are controlled by just a few companies, and the few companies that control the patents of LED will not let up at all. So a few years later, the CEO that was put on the new businesses decided that his new assignment wasn’t working out either, so he quit.

Ben: And he’s now running MediaTek, is that correct?

Morris: He’s now the vice-chairman and the CEO of MediaTek, yeah.

Ben: Coming back to this moment in 2009, you offered to rehire anyone who was laid off that was interested in coming back, and you’re setting the new vision and strategy as CEO or in many ways returning to the old one. How did you resolve the NVIDIA dispute?

Morris: In the first four or five weeks after I retook the CEO job, I probably spent almost half of the time on how to resolve the problem with NVIDIA. As far as [...] were concerned, we were doing our best because we had to do it anyway. NVIDIA was just one of the customers.

David: Not just NVIDIA, but Qualcomm and Intel.

Morris: Yeah, and it was a very important note. The 40-nanometer was a very important note in the progression of Moore’s Law. Only after 40, if we do the 40 well, can we do the 28. Twenty-eight was the next one.

I called the salespeople that happened in direct contact with NVIDIA. Of course, I called everybody that was somewhat involved in the problem. It was a matter of money.

As far as the progress on the manufacturing lines, we were already doing what we could. As I just said, it wasn’t just for NVIDIA. It’s for TSMC. But NVIDIA, they had borne the brunt of the problem, the damage. So it’s a matter of money. I worked out a number. I familiarized myself with all aspects of the problem, and then I worked out a number. I also knew that NVIDIA customers were after them. They had demands on NVIDIA too. So I used all the intelligence I could get. It turned out that it was good.

About a month after I retook the CEO job, I sent an email to Jensen. I said, I’m coming to Silicon Valley next week on this date. I will be at your home at six o’clock. Let’s have just salad and pizza, which was something that we have had many times in the past. Immediately, he sent back an email. He said, when do we discuss business then?

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

Morris: He didn’t ask that. I anticipated that. I said, 6:30 we’ll start having pizza and a salad. Eight o’clock sharp we’ll go to your office at your home and we’ll discuss business.

On the appointed date, I showed up and we followed a schedule. Exactly 6:30 I showed up. We had a very pleasant pizza and a salad. The thing is that his wife, Lori, would make the salad and the pizza was delivered from outside. Or maybe they made their own pizza too, I forgot.

Ben: Would not surprise me.

Morris: Anyway, I have had it many times at his home. All right, so [...] shop, it was I who looked at the watch and said, Jensen, why don’t we go to your study? And I gave him the offer.

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

Morris: Yes, more than $100 million. I also said, our offer is effective 48 hours. We’re not going to argue, we’re not going to bargain. If you don’t accept the offer within 48 hours, we’ll have to go to an arbitrator, which was what he had suggested to the previous CEO anyway, that we will go to the arbitrator. But the previous CEO did not even give him a number. The previous CO gave him zero.

David: You probably don’t want to go to arbitration with your best customer.

Morris: No, I didn’t want to. I had to say that because that number we offered him was arrived at after (as I said) weeks of work on my part, and I thought it was fair to both sides.

Ben: Did Jensen accept the offer?

Morris: He did, within two days.

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

Morris: I know. I liked it too. That’s why I included the story in my autobiography.

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

Morris: Well, I had a lot of trouble at TI. My peak job at TI was the head of worldwide semiconductors. TI of course had many businesses, defense business materials and controls. Also their origin, which was geophysical, and so on. But TI’s semiconductor business was their biggest, and I was the head of that worldwide semiconductor business.

At that time, when I was the head of worldwide semiconductors, our R&D budget was 4.8% of our revenue. I thought it was not enough. I just wanted to raise it to 5.5% of the revenue. But my request was denied every time I raised it.

Now, coming back to TSMC, I wanted to set a percentage of revenue number, so we don’t have to argue every year how much on R&D is spent. At about that time, 2008-2009 when I came back, we were running (I think) 6% or 7% a year, but it was negotiated every year between the R&D director and the CEO. I want to stop that. I want to make him at ease. He doesn’t have to argue, doesn’t have to request every year.

I almost just literally picked a number I already had. We’ve been running 6% or 7% already. I said, oh, let’s pick 8%, regardless of whether there’s a recession or not. That’s just 8% of revenue. That was the best news. If you ask our R&D director back then, I think was in second place of R&D. He would tell you, he has told me many times in the last 10–15 years that this was really the best thing that we did for R&D.

They were not concerned. The R&D director was not concerned at all about having his planned budget cut back, his planned resource people allocation cut back, none of that. He has been working 8%. It has been like that, and that is what propelled our R&D effort.

Ben: This period in 2010, it wasn’t just ramping the R&D budget, it was also the capital expenditures. You had had almost a decade of $2–$2½ billion spent building the fabs every year. In 2010, you ramped that to almost 6 billion. What was it about the competitive environment, the 28-nanometer node that caused you to push all your chips in on that?

Morris: I think it was a mutual feeling thing. As I settled the R&D budget at 8% of revenue, to the satisfaction of the R&D people, they began to have big ideas. They began to tell me our 28 is going to be the term they use, and they have used it several times. The first time I heard them using it is the 28. Twenty-eight is going to be the sweet spot. It’s just like a tennis racket—you hit the ball with a sweet spot on your racket.

Ben: Yeah.

Morris: Do you play tennis?

Ben: I have played tennis, not well.

Morris: Good. I was like you 40 years ago, I was like you. I don’t play anymore. So I know the feeling of hitting a ball in the sweet spot. 28-nanometer is in the sweet spot. I said, why? He gave me a lot of technical reasons.

So I decided I would believe him. He now had the resources to push it, to do it as fast as he could. The capital spending now of course. Back then we had already built up a pretty good organizational infrastructure.

We had a pretty good market forecasting group. I had set up the business development department, which was like a marketing department. We always had a pretty strong sales effort. But to me, sales effort is just the tactical side with the customers. Marketing is the strategic side to the outside world.

Now from all these inputs, the marketing, the business development department, which as I said was our strategic marketing group, and from the technical, from the R&D side, that 28 was going to be the sweet spot.

I decided and I quoted Shakespeare in my autobiography, “There is a tide in the affairs of men which, taken at the flood, leads on to fortune.” I decided this 28-nanometer was going to be our tide. Our next tide, anyway. There will be others.

Seven-nanometer was another. The next sweet spot, the R&D people told me. Again, I reminded myself of Shakespeare.

David: Taking at the flood.

Morris: Taking it at the flood, yeah. However, setting the R&D at 8% did not invite any opposition from the board. But suddenly increasing capital spending threefold (I think) did invite a lot of questions from the board.

Our practice in the board meetings back then, well, even now, most of the directors are from overseas—US and England. We would email the agenda to them two weeks before the board meeting. Then the night before the board meeting, I would invite the independent directors to dinner. That dinner, the conversation was not on record. So the independent directors, actually more than three quarters of our directors are independent directors.

Anyway, in the night before and the evening before the meeting, they had the opportunity to ask me questions if they had any. But on this matter of vastly increased capital spending, they didn’t even wait until they got to that dinner.

Ben: Because this was effectively betting a huge amount of the company’s cash on this node, this process, this generation.

Morris: Yeah. They called the chief of the general council. The general council is also the secretary to the board. They called him. At that time, it was an American. The general council was an American, and said we want to talk to the chairman. We don’t like this idea at all.

Anyway, I talked with them on the phone about a week or so before the board meeting. This is something that, of course, I told them what I have now just told you, inputs from our market forecast, inputs from our R&D, inputs from our new business development department. Of course, they didn’t believe it. You really can’t convince anybody on something like this.

At the end, I had to say, well look. I heard you, but I am still the guy that’s responsible for the operation of the company. You need to let me go ahead with this one. So they were satisfied with that.

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

Morris: The result was, that was good.

David: And that was the smartphone era, coincided with 28-nanometer.

Morris: Yeah.

David: When the business development group was looking at this, and you were looking at this, did you see how big smartphones were going to become and the immense opportunity that that would unlock for you?

Morris: No, I didn’t. Maybe the business development guy, that was another interesting story. Maybe he knew, or at least I hoped at that time too, that he had a more detailed visibility than I did. Of course this was not the only input. I had a few other advisors too.

David: That takes us to Apple.

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

Morris: Before we do that, let me offer how we made C.C. actually the business development director.

Ben: Ah, the current CEO.

Morris: The current chairman and CEO. When Rick was the CEO between 2005 and 2009, he had split operations into two groups—advanced technology and mainstream technology. C.C. was the head of the mainstream, actually. Really, I should say the lesser one. Mark Liu was the head of the advanced. Each group had a small business development section, maybe 30 or 40 people each.

So I came back to be the CEO, and I never thought the split up of two groups was a good idea anyway. In fact back in 1996, the president—he was not a CEO, but he was the president; we didn’t have the CEO title back in 1996—who was an American…

Ben: Don Brooks?

Morris: Right. He wanted it to split. I think he got a little tired of running this company. He was going to be here for only a year at first, but he ended up staying, spending 6–7 years in Taiwan. Towards the end, he was getting a little tired of running this thing.

He thought that he would do it, like TI for instance, when TI had a germanium transistor department, silicon transistor department, and bipolar individual circuit, MOS individual circuit.

Ben: It’s the divisional org structure instead of a functional org structure.

Morris: Right. I really did not think that the foundry business, TSMC business was suitable for the divisional structure, because we have almost the same group of customers. How do you divide up the company if you want the so-called divisional structure? Well Don Brooks was going to divide the fab. My goodness. customers move from one fab to another, the same customers.

Ben: Not to mention, TSMC has 21–22 fabs now?

Morris: Back then, we only had three or four fabs. But he was not convinced. He kept arguing. I said, look. Why don’t we get a consultant?

Ben: McKinsey.

Morris: McKinsey. Why don’t we get McKinsey? Okay. So we got McKinsey in, and after a month or two, two months actually, and a couple of million dollars, I guess, told us the same answer that functional is best. Then Don Brooks said, well, tell me one company, one big company that’s functionalized, and McKinsey immediately answered Boeing, which is a good answer.

Ben: Yeah, except it’s not true. Boeing has commercial and government.

Morris: Well, they probably have commercial and government, but they don’t have 707, 747, 757. They don’t divide. If we divide up by fab, it would be like dividing up 707 from 757, 737.

Anyway, Don Brooks’ attempt was in 1996. By 2005, Rick Tsai decided to check the same ground. Well, he did. This time, I didn’t stop him. My idea, my principal, I was the chairman and not the CEO, was sometimes you have to let the CEO make his own mistakes and learn from them. Of course, not if the whole company is going down the drain. You have to interfere then, but only then.

Anyway, that was the background. Two groups when I came back to be the CEO—the advanced group and mainstream group. And each group had a small business development section, 30 or 40 people. I think advance had more, a bigger group than mainstream.

All right. I wanted to combine the two operation groups. I also wanted a real marketing. I didn’t call it marketing. I decide to use business development in English because it has a good translation in Chinese. Now I’ve decided to combine the two operation groups.

Now back in 2009, when I decided to combine the two groups, I think the advanced group had something like 10,000 employees. The mainstream group had little less, but also 7000 or 8000 employees.

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

Morris: Right, but also quite often the same customers use both mainstream and advanced technologies. Take Qualcomm. I’m quite sure that they use the most advanced. Or even Apple, I think they use.

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

Morris: Right.

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

Morris: Yeah. We had Mark Liu in charge of the advanced, and C.C. Wei in charge of the question of who’s going to be in charge of what. Well, you need only one for the combined operations. You only need one person.

The truth is that we had a lot of operational talents. Operation meaning manufacturing, taking developed technology from R&D and converting into mass production. We had a lot of talents there, business development or marketing there, and neither Mark nor C.C. had any real previous experience in marketing business development.

That was my main worry now. We combine the two groups. We need a combined operations manager. Even more importantly, in my mind, we needed a combined market business development manager.

I first offered the marketing business development job to the guy who was in the bigger job events technology, Mark. I explained to him that I did not think he had had any significant marketing experience in the past. This new job, if he takes it, would give him the op opportunity of being professioned in the area.

He declined it. He said, my goodness. I have 10,000 people reporting to me now. You want me to take a job that has only 60 or 70 people in it? That was the end of that conversation.

Ben: And your goal was for him to become a well-rounded executive, in hopes of leading the company after he did that tour of duty.

Morris: Yeah, and I explained to him that.

Ben: Not to mention it’s a very important 60 or 70 people. They’re responsible for finding all the next business.

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

Ben: Certainly not the name who’ve you’ve forgotten.

David: Before this period, you were doing the business development and marketing for the company, right? You were the one finding the NVIDIAs, the Jensens, the Broadcoms, the next great customers in great markets for you.

Morris: That’s right.

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

Morris: Yeah, except for those four years when I was not the CEO. But you were right. I was on the plane most of the time, building customers. That was my pleasure. I really liked it.

Anyway, I then of course offered the business development job to C.C. and he accepted. I thought he accepted it even delightfully.

David: And he’s now the chairman and CEO of TSMC.

Morris: Yeah.

David: So this had just happened. You came home from a board meeting we understand one evening.

Morris: That’s right. The board meeting had ended, and it was six o’clock or later. I went home. This was Taipei. We had our board meetings back at that time, in fact here in the, have you seen my conference room?

David: Yeah, across the hall.

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

Ben: And who is Terry Gou for listeners?

Morris: Terry Gao is a relative, is actually a second cousin of Sophie’s, Sophie’s my wife. They share the same grandparents. That’s what makes them second cousins, I think.

David: And for our western listeners who this won’t be obvious to, Terry Gou is the founder and CEO of Foxconn.

Morris: Right. Terry Gou is a second cousin of Sophie’s, and he was also at that time the chairman of…

Ben: Hon Hai, which is Foxconn to American listeners.

Morris: The name slipped my mind for a second. Yeah, Hon Hai, which is a very important supplier to Apple, and a pretty big company. In fact, Terry Gou is reputed to be one of the richest men in Taiwan.

Sophie is lovely, but she doesn’t know too much of my business. I don’t think she understood the significance of Terry Gou coming to dinner, bringing a vice-president from Apple. I don’t think she quite understood, really. She wasn’t really interested either in the significance of that.

Ben: And you had been trying for months strategizing with the business development team, how do we go win Apple’s business? The iPhone seems to be working.

Morris: Yeah, I’ve been strategizing; it’s probably too strong a word. I mean just thinking, also knowing that we just can’t do anything about it. Apple is a very close mouth company. If you try to offer your services, they would just tell you to go away. They will come to see you when they are ready. That’s what I knew about Apple even then. I knew I know the same thing now.

All right. so eight o’clock. Now, Sophie did know that I would not be home until after six o’clock. So she told Terry, and Terry had set the time of their arrival at eight o’clock.

Eight o’clock was a bit late for my dinner. But I said, what the heck, will wait. They showed up. I didn’t ask her. Sophie just said a vice-president. I just thought to myself, it wouldn’t be just an ordinary vice-president because there was no reason for Terry to just bring any Apple vice-president to my home. It must be something special. It must be someone special for TSMC.

So Jeff Williams came. He was not just a vice-president. He was the Chief Operating Officer of Apple. Jeff was a pretty straightforward person. He didn’t spend much time in ordinary chitchats.

David: It wasn’t the same pizza and salad period before.

Morris: But it wasn’t formal either. My wife, Sophie, just added and we had a pretty good cook. Sophie just told the cook to add a few dishes. She’s a Chinese cook who doesn’t do any Western food. Terry obviously grew up on Chinese food. I would imagine that the Apple guy that he bought would also like Chinese food.

Anyway, she just asked the cook to cook a few more dishes. It wasn’t important. The food was not important. Either the quantity or the quality was not important because Jeff almost immediately started his pitch, almost soon as he sat down to dinner.

Ben: And what is the pitch from someone like Jeff Williams like?

Morris: We like you to foundry our wafers, something like that. Pretty straightforward. I listened that night. I think Jeff talked to maybe 80%, and I talked 20%. If you don’t count the relative to relative talk between Sophie and Terry which was not very much either.

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

Morris: No, nothing so concrete. He did say that we will let you have 40% gross margin. I think, well, I didn’t say anything. I didn’t answer him. I didn’t respond to that. Our margin at that time was already 45%, and I was trying to push it up to 50%. It was announced effort in the company to push the gross margin. I had that effort for many years after I came back to be the CEO. I really didn’t even succeed even at my retirement.

Now, of course what happened later was that there was COVID and so on. And also we began to have leadership technology. So our margin jumped up to over 50%. When I retired, I was still short of 50%, slightly short of 50%. I was almost there when I retired.

Ben: In technology leadership, you’re saying that around this time, the 28-nanometer node, you were…

Morris: You’re talking about 2010?

Ben: Yes. You were still among a select few at the leading edge, but there was fierce competition. Whereas once you got to seven nanometers or so, that’s when you really—

Morris: I think when you said that, you were neglecting Intel. At 28 nanometers, we were very definitely the leader among foundries, and maybe among a few other companies such as Texas Instruments and so on, but not Intel.

David: And Apple was considering Intel.

Morris: No. Apple was not actively considering Intel. That came later. I’m quite sure we’ll have time to cover that.

Ben: Well take us there now. After November of 2010, you had the initial conversation with Jeff Williams.

Morris: Yeah. He said that he would let us at 40%. My thought was, my goodness we’re already at 45%. But I also thought that he was trying to be generous when he said that he would let us at 40%. I also thought to myself, well this dinner is not the time to go into a pricing discussion. We have a lot of other things to discuss.

Anyway, I said we were about to go into production. We were almost in production with 28-nanometer at that time. The initial stage, anyway. I thought it was going to be 28. I said, 28. Nope. What node do you want? Twenty, he said. Now, that was a surprise to me. Frankly, it was also a disappointment because the slower progression after 28 was going to be 16. Now Apple, Jeff Williams wanted 20.

Ben: A half step.

Morris: A half step, but a half step is a detour. My thought at the dinner there was we would have to spend effort on the 20, which of course would help us on the natural next node, which was 16, but still, it was a detour from 28. From 28, if R&D would directly go to 16, it would be less time than the first 20. The point is that back then, R&D did not have enough resources to do two nodes at the same time. Later we did.

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

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

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

Morris: That’s right. That is where our connection with Goldman Sachs came in. Remember, I planted a lot of seeds when I ran TSMC. I knew that one of these days we will probably need top-level investment bank advice. So we established a good relationship with Goldman Sachs very early in our existence. I was in fact a board director of Goldman Sachs. Did you know that?

David: Yes, I did.

Ben: Yeah.

Morris: We did the ADR with Goldman Sachs, which opened up a good relationship with Goldman Sachs.

David: It was your New York public listing of the stock.

Morris: Yeah. ADR is American Deposit Receipts. It’s New York. It’s a separate market. In fact, right now the TSMC ADR price has a 20% premium over.

Ben: Really.

David: Wow.

Morris: However, you need TSMC board permission to convert your shares to ADR.

Ben: Otherwise you’d be able to arbitrage.

Morris: We don’t want that. As I was saying, the board has to approve any conversion of ordinary Taiwan TSMC stock to ADR stock, and the board does not give such permission, easily anyway.

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

Morris: Right. This was very early in our history. Now we need funds. This Apple thing came after we had already decided to increase capital spending. Now Apple requires even more capital spending, and we have to figure out where the cash is going to come from.

There were several possibilities, of course. We’re paying a dividend, not a big dividend back then but a modest dividend. We could cut that dividend, then also could sell new stock offering either in Taiwan or in the US; we have the ADRs. Or we can borrow money, corporate bonds.

Ben: Or you could only fill part of Apple’s order.

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

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

Morris: I know. Well, back in the 90s, in the first (let’s say) 10, 12, 15 years of our existence, we were short of capacity almost all the time. What you just said happened all the time. We figure out that we will require a deposit from the customer, and we will even confiscate the deposit if the time comes for him to take the waivers and he doesn’t.

Everybody belies in the word ‘confiscate.’ It was first used by me. I told the salespeople in San Jose, tell the customer that we need a deposit from them, because, just as you said, it’s our money and it’s only their words. They may not want the wafers when the time comes.

And I told the salesman, tell the customer we will confiscate the deposit. Ah, the salesman never heard anything like that before. They were in an uproar [...] happiness and all. Now they could actually stand up and tell the customer that we might even confiscate your money. But of course, really we never confiscated any money.

Now, it did happen quite often particularly in the 2000. We had (I think) it was called the Internet recession. Because on the Internet, people were starting companies called pets.com or something. Anyway, we had the recession.

Ben: Which trickled all the way back to semiconductors. TSMC’s revenues was four years after the dot-com bubble before they were back at the—

Morris: Dot-com, yeah. Dot-com.

Ben: At those rates.

Morris: Yeah. Well, was it five? It was almost four years. Two I remember recovered only in 2003. It started in 2000. No, started in 2001. The first quarter of 2001, and recovered in the third quarter of 2003. So it was three years. 2001, 2002, the third and fourth quarter of 2003. Three years.

Anyway, quite a few customers had placed deposits to anticipate normal, good times during those years. We did build a plant. In fact, we bought a couple of other companies. Their plants, their fabs became ours. The customer didn’t need the wafers anymore, didn’t need the outputs of those fabs anymore. We didn’t confiscate their deposit, but we let them delay demand. Eventually every one of them used up their deposits. But that would come.

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

Morris: First, of course, the relatively new business development director, C.C., had the privilege of first telling the lower-level purchasing people at Apple. He got a response back, you must be crazy. C.C. did not comment on that. At least he said he didn’t comment on that he brought it back to me.

Then I went to Apple myself and talked to Jeff Williams. I said to him, we have to issue corporate bonds. I think I used the word ‘prudent.’ After all the prudent financial planning, we decided that we would take half of what you asked for.

Now, he was very very quiet about it. He only made one suggestion. He said, well, I think you can eliminate your dividend. Your shareholders will understand that. I said, well, no. The fact is, I had looked into that. That’s also a reason for having a high-level consulting advice. About one-third of our investors, shareholders are very seriously interested in the dividends. If we do what the Jeff Williams said, our stock is going to drop like hell

Ben: Trigger a sell-off.

Morris: Right. Anyway, when I talked to Jeff Williams and I went to see him in, what’s the place?

Ben: Cupertino.

Morris: Yeah, Cupertino, he took it fairly willingly. No big problem at all. The only suggestion that he made was the elimination of dividend and I said, no. He then let it just lie that there. Okay. But then the issue was settled. How much demand do we take, and we still had to borrow billions of dollars even with half of the demand.

Ben: All right, listeners, this is a great time to reintroduce a good friend of the show, ServiceNow. Last year, we shared their incredible story from founding through becoming one of the best-performing public software companies in history.

Well, today we want to share a more recent story. In November of 2022, ChatGPT was released. We all lived through that moment, and it totally changed everything. Predictably, what happened next is that there was an explosion of one-off B2B tools that let people do some specific department or function thing with AI to get more done faster.

David: But then again, predictably, all of this just created what Bill McDermott, the CEO of ServiceNow, calls the hornet’s nest of complexity. Businesses already had too much software in different departments doing different things, and now all of a sudden they had too many different AI tools, which just compounded the problem.

Ultimately, AI is powerful, but it’s only as powerful as the platform and data that it’s built on.

Ben: Fortunately, not only is ServiceNow a powerful platform, Bill had foreseen the coming importance of AI. As some of his very first moves as CEO in 2020, he took all the R&D work that ServiceNow had been doing for years in AI and elevated it within the company.

They also bought a company called Element AI, founded by a Turing Award winner. Over the next several years, they were heads down integrating AI into the entire ServiceNow platform, which meant that when this new era of large language models arrived, ServiceNow was deeply prepared.

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

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

David: It’s incredible. If you want to bypass the hornet’s nest of complexity caused by disparate software vendors, and put AI to work on one platform and in every corner of your business, go to servicenow.com/acquired. When you get in touch, just tell them that Ben and David sent you.

Ben: So this really was, especially after the investment in 28 nanometers that depleted your reserves, a bet the company move. You’re taking on a bunch of debt to go build the fabs to make this happen.

Morris: Yeah, I know, bet the company. But I didn’t think I would lose.

Ben: You sound like Jensen.

David: That’s exactly what Jensen said.

Morris: I think that the financial discussion with Apple had already happened when when Jeff Williams called me in February of 2011. It was a very short conversation where said we need to pause our discussions for two months because the highest level of Intel has approached Tim Cook and has asked Tim Cook to consider Intel.

Ben: And at this time, Intel was the major supplier for all Macs. Apple’s Mac line was all Intel.

Morris: That wasn’t an issue, of course. In February of 2011, Jeff Williams was talking about the iPhone.

David: But they had a close existing relationship.

Morris: Yeah. I don’t know what relationship they really have. Well, anyway, it must be close. So that was all he said. I wasn’t all that worried because in 2011 Intel was no longer a name that, when you hear it, you would stand up and bow.

Ben: Interesting.

Morris: I mean, heck in the 90s, in the late 20th century, they were a name in semiconductors, that when you hear it—of course, I’m exaggerating the situation—

David: Moore’s Law. They’re Intel.

Morris: Yeah. If we hear the name, if you hear that they’re in competition with you, my goodness, you’ll be trembling with fear.

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

Morris: I didn’t say that we’ll never catch Intel.

Ben: Fair enough. Look where we are in 2025.

Morris:. Anyway, I (of course) had to accept Jeff Williams’ request. But again, as I just told you, I wasn’t all that worried because what reviewed in my mind, all the characteristics that Apple is looking for in a supplier, technology at that time, we thought we were almost at par with Intel. Almost. In fact, I thought we were at par with Intel at that time. Manufacturing, I thought we were better than Intel. And customer trust, we thought that our customers trusted us more than Intel’s customers trusted Intel.

I wasn’t too worried. I also thought that when Jeff Williams told me the highest level of intel, I thought he was talking about somebody like Andy Grove who was retired, of course, but it turned out that he was only talking about the CEO of Intel at that time. I knew that only later.

Ben: Would that have been Bob Swan or Paul Otellini?

Morris: It was the Italian guy, Otellini.

Ben: Oh, Otellini. Got it. So today, Intel doesn’t make the chips in the iPhone. What happened?

David: And in fact, TSMC makes all of Apple’s chips.

Morris: I wasn’t too worried, but it still was in my mind. A month passed, I think was about the middle of February when Jeff called to tell me to pause for two months.

Almost exactly a month later, middle of March sometime, I decided that I would pay them a visit and ask them what’s going on? Any progress. I emailed Jeff and asked for an appointment. I said I was coming to Silicon Valley anyway, which was pretty normal, and stop at your place on such and such a day. Is that okay? Jeff replied by saying yeah, come here, but I won’t be here. I have asked Tim Cook to see you. This freedom of delegating his boss to see a visitor, was a privilege that I seldom had in my career.

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

Morris: I know. It was usually the other way. But in this case it was Jeff’s. Anyway, I showed up. Tim was very nice to me and took me to lunch, or to the cafeteria, I guess, where there was a lot of food. We each picked our food and carried our tray back to his office. He told me there’s nothing to worry about because Intel just does not know how to be a foundry. That’s a very short, but a very satisfactory answer to me.

Ben: What is your interpretation of the meaning behind that statement?

Morris: I was explaining, we had technology on manufacturing. Subconsciously, I think I interpreted Jeff’s explanation to me to be the third one. Customer trust. They were always very superior (Intel) before this Apple thing.

Before Apple became our customer, I knew a lot of Intel’s customers in Taiwan. All the PC makers are Intel’s customers. None of them liked Intel. None of them. Intel always acted like they were the only guys. They were the only guy for the microprocesses.

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

Morris: But I really don’t think Tim meant that. I think Tim meant that the customer asked a lot of things. We have learned to respond to every request. Some of them were crazy, some of them were irrational. We had to respond to each request courteously, which we do. Intel has never done that. I said I knew a lot of Intel’s customers here in Taiwan. They all wished that there was another supplier. None of them either trusted or liked Intel.

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

Morris: Well, it might have cost, but yeah, the story certainly does not end here. There was pricing. Everything was not easy pricing. Jeff came himself and we talked about pricing. Of course, we had done our homework also on the cost and what price we would accept.

Jeff came and he told us just a number. He gave us his reason. He had to make his component costs meet this certain goal also. Anyway, that was settled. Jeff said ah, and when the pricing was settled, I said, let’s go out to dinner. We go to a Taipei three-star restaurant for dinner. Jeff jokingly said, ah, if you didn’t like the pricing, we’ll probably be going to a McDonald’s. Which was never in my mind, but he said that.

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

Morris: Sure. The main thing that goes into pricing, of course, is the cost. Then the second thing is, of course, where your desired price will be accepted by the customer.

Ben: One thing that has occurred to me is TSMC now gets mid-50% gross margins, call it 55%–57%, higher than your time. But many of your customers have 70%–80% gross margins. TSMC is creating a lot of value. The designer is creating a lot of value. How do you sort out who gets to capture the value?

Morris: I don’t get the privilege of sorting it out. C.C. Wei (I think) has the pleasure and the duty of sorting that out. As a general principal, you try to find a middle ground, which is different for every CEO. Even though every CEO who wants to protect his reputation, every CEO says, ah, I worry about the long range. But in truth not everyone does. It’s very personal how to sort these things out. I think it’s a very personal issue.

Now, for a lot of CEOs there’s really no choice. As a supplier, you have to accept a certain price. If it’s a commodity, particularly. We have not finished with Apple yet.

Ben: Please.

David: Let’s finish Apple.

Morris: Now I think you were asking whether there was any…

Ben: Trade-offs.

Morris: Well, there was a pretty significant serious trade-off. That was a detour that I said we took. At that time, back in the 2011–2012 time, our R&D was not strong enough to do two nodes at the same time. Now we are, but back then we weren’t.

The trade-off of accepting the 20-node technology was that we delayed our 16 node development. Then Samsung came up with the 16. They had lost the 20 business so they went ahead of us in the 16-nanometer department.

Ben: Because they got to skip 20.

Morris: Yeah, because they didn’t get the 20. They don’t need to develop 20. I got a shock. It was a real shock when I heard that Apple had placed their first orders of 16 worth Samsung.

Now, that was the real shock. We invested so much, even though we took only half of their original demand. It was still tens of billions of dollars, I think. We were counting on it being at least 80%–90% of the equipment being converted to 16. And now if Apple went to Samsung for the 16, where did that leave us? Do you understand what I’m saying?

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

Morris: Well I wouldn’t say that. I was really shocked. So I emailed Jeff Williams right away. I said, we invested in all this equipment and we were counting on you to take the 16 from us. But now we found out you were buying the first 16 anyway, from Samsung. Jeff replied immediately, don’t worry, I’ll be there. I’ll be in Hsinchu next week and explain to you. That relieved me a little, but certainly not completely.

Next week, he did show up. He explained to us, as soon as you’re ready with you’re 16, we’ll buy from you. We’ll buy all of our needs from you when you’re ready. Now, of course, that completely relieves me because that’s what we’re supposed to do anyway.

Indeed what he said was true. We developed our own 16 about half a year later. Most of Apple’s 16-nanometer requirements still belonged to us. Most.

David: I can imagine the shock that you must have had. At the same time, this also again just illustrates the brilliance of TSMC in the pure play foundry business model. Samsung is Apple’s chief competitor.

Morris: I know. I said in the autobiography, sitting in Hsinchu, being in the foundry business, I actually see a lot of things before they actually happen.

Let me tell you the IBM-Qualcomm story.

David: Yeah, please.

Morris: We consider Qualcomm to be a prime candidate to be our customer. We really wanted Qualcomm because we knew they were a technology house.

Ben: What year was this?

Morris: This was way back when we started in the 90s anyway.

Ben: And they were part of that initial wave of fabless companies.

Morris: Yes. Irwin Jacobs started at Qualcomm actually before I started TSMC. TSMC started in 1987. Qualcomm (I think) was a few years before that. In the early 90s all the way up to 1997, maybe 1996–1997, all the way up to the latter part of the 90s, we wanted Qualcomm to be a customer.

I saw their operations VP—that’s what our customers call their purchasing people now, operations VP, operations senior VP—I saw him often, and he was always pretty polite, but he gave us very little business. I also knew that his foundry, his main foundry was IBM.

Now, sometime in the later 90s, I forgot whether it was 1997 or 1998, suddenly he started to tell me that he would use us now. He didn’t even tell me who our competitor was, who our competitor had been. I knew that it was IBM from other sources of intelligence.

Our business with Qualcomm, the business that Qualcomm gave us pretty rapidly increased after that 1997–1998 period. I immediately knew that IBM Semiconductor was in trouble. They had their own fabs and so on, but their main business was really supplying to Qualcomm and a few other very small fabless company. I immediately knew IBM was in trouble because they were losing Qualcomm.

All right. So the next step that IBM took was not a surprise to me. The next step they took was to ask us, TSMC, to co-develop the next generation of technology, which is 0.13 micron, 130-nanometer in 1999. Since I anticipated that, it was no problem at all for us to refuse. In fact, even if I didn’t anticipate that, we would never, never have accepted that kind of co-develop.

IBM still consider themselves to be the senior partner in any partnership they established. The senior partner. The company that co-developed something with them was sending its engineers to IBM. When we do that, we’ll lose our ability to develop our own process. We’ll have to depend on this code development thing.

The code development thing is going to have a lot of difficulties? Oh heck. Our people will be in a different culture. So we declined without having to think about it at all. We declined the IBM offer.

IBM in fact was quite angry. They thought we we’re still a small Taiwan backward place, Taiwan company, and they are big IBM. So they immediately went to UMC. UMC accepted them only to regret seriously their acceptance a few years later.

Ben: UMC at that point in time was, was it fair to call it a peer of TSMC here in Taiwan in terms of volume and size?

Morris: Not by 1999.

Ben: They were already smaller.

Morris: They were smaller already. That was what I meant when I said that sitting here as a foundry, I can see some things like this IBM thing.

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

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

Ben: How would you explain it to a novice?

Morris: Explaining the learning curve theory is simple. But one will be foolish if one just takes the simple explanation and thinks that that’s all it is. The simple explanation of learning curve is that as you make more of one thing, anything—actually started with refrigerators and cars—if a company makes more cars, then its cost per unit car goes down.

That’s why it’s also called experience curve. You gain more experience, you become more efficient. That’s a simple explanation. But if one just takes that simple explanation and thinks that’s all it is about, that you really haven’t learned anything.

Anyway, the learning curve. Bruce Henderson who is now considered the father of strategies…

David: Founded Boston Consulting Group.

Morris: Yeah, he was the founder of Boston Consulting Group. There’s a branch in business economics that’s that’s called competitive strategy or something. Competitive strategy, I guess. Michael Porter was at one time considered a big figure in this competitive strategy. He wrote three or four big books, 700 pages each. I have all of them.

Ben: His original competitive strategy memo—I think it’s 20 pages—is still some of the best business writing ever.

Morris: Who’s?

Ben: Michael Porter?

Morris: Oh, well, good.

Ben: Was a director at TSMC at one point, right?

Morris: Yeah. I had his story about him in my autobiography too, which because of time, we probably won’t go into. Not Michael Porter. But Bruce Henderson, we will talk about him.

He is now considered to be father of the competitive strategy. He came to Texas Instruments one day in (I think) around 1970. Or I should say he first called the TI CEO, Mark Shepherd, and told him that he had founded Boston Consulting Group, and BCG has experience curve theory that would benefit the semiconductor industry.

TI was the largest company in the semiconductor industry then, and Mark Shepherd liked a presentation of this theory. Mark Sheppard said yes. Bruce Henderson brought Bill Bain—you probably know that name—with him, came to Dallas, and made the presentation, and Mark Shepherd invited the COO and me to attend the presentation.

It was a very eloquent presentation because Bruce Henderson was a very eloquent man. Bill Bain was on the side, apparently, Bruce Henderson’s [...]. Anyway, Mark Shepherd was impressed, and he decided that TI would work with BCG on this learning curve theory.

Bruce Henderson then assigned Bill Bain to work most of the time at TI, like three days a week. And Mark assigned me as TIs guy. Bill Bain and I became partners, and I assigned Bill Bain a small office very close to my office at TI in the same building because he needed a lot of things from me. He needed permission to get our costs, our prices.

We had a lot of families of integrated circuits and transistors. He had a lot of requests, so it was easier if he was nearby. Every time when he arrived at some interesting, useful conclusions, he would also discuss them with me.

We had a very pleasant association for, oh, I would think two years, maybe even more. He would fly to Dallas every Monday and go back to Boston either Wednesday night or Thursday night. Of course, every time he went back to Boston, it would be to tell Bruce Henderson what he had done that week.

This went on for (I think) two years. Then finally Bill Bain came to see me one day. it was in those two years that I absorbed a lot of learning curve stuff, which I used up to now. I found that highly fruitful as a thinking tool.

Ben: It seems so fundamental to the industry that you want to get through the low volume period as fast as you can. Ideally, you spend no time in the low volume period. It seems like over time, all the returns in the industry, the winner is the one with all the volume, because they’ll just have the lowest prices. And there’s a flywheel where once you have the lowest prices, you get all the business, then you can reinvest that in the next node.

It’s almost, I couldn’t have told you that TSMC was going to be the winner, but once you internalize the learning curve and globalization, you can into it. Then in the future there will be one winner in semiconductor manufacturing.

Morris: But one day after a couple of years, Bill Bain came to me in Dallas, said, you are the first one I tell this to outside the Boston Consulting Group. I am leaving Boston Consulting Group to start my own consulting company. I said, why? I said obviously Bruce Henderson thinks very highly of you. Bill Bain said, yes, but there is the [...] imperative. That’s the first time I heard that term [...] imperative.

Ben: He meant for him personally.

Morris: Yeah, for him personally. Anyway, that was that.

Ben: All right, listeners, now is a great time to thank friend of the show, Fundrise. We’ve gotten to know Fundrise’ CEO, Ben Miller, and the folks there quite well over the last several years, and they’re huge Acquired listeners just like all of you.

David: And since we first worked together three years ago, Fundrise itself has gone through quite a transformation. Longtime listeners may remember that they have a growth stage venture that they actually first launched here via an Acquired sponsorship back in 2022.

At the time, Fundrise was primarily known as the US’ largest real estate investment platform for retail investors. It wasn’t necessarily obvious that his crazy idea to bring their model to venture capital would work.

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

David: It’s genuinely awesome what Fundrise has done here, which is something that many have tried over the years, but no one else has actually been able to accomplish in Venture.

They’ve taken a retail platform that any American can invest in, and gotten pre-IPO access to some of the best private companies in the world. It’s democratized access to all the value creation that otherwise has been locked in these private companies over the last decade-plus as these growth companies are delaying IPOs and staying private longer.

Ben: When the ServiceTitan IPO happened, thanks to Fundrise, tens of thousands of regular investors got to celebrate alongside the VCs, LPs, and employees.

David: We’ll be talking about Fundrise all season long, and you can go check out the full portfolio that Ben and the Fundrise team are building at fundrise.com/venture, and if you’re a growth stage founder looking for a great Series C or later investor, just get in touch and tell them that Ben and David sent you.

Ben: As our time comes toward a close. One question, David and I wanted to ask you is TSMC is essentially the only trillion-dollar company in the world not on the West Coast of the United States. It is this incredibly important thing in the world. It’s this unlikely success of grand scale.

Morris: Unlikely, in your opinion.

Ben: I mean you started it when you were 56. There are many things—

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

Ben: But wasn’t the original plan to stop building after Fab 2?

Morris: No. That was only the very initial plan. We were never going to stop there. We were just talking about learning curve. How could we plan to? If I didn’t know anything about learning curve, I would say, yeah, maybe we’ll stop after two. But I was a serious student of learning curve and I would never stop at just two, perhaps.

Ben: Here’s why I say unlikely success. There were so many reasons why the original incarnation of TSMC was a bad business. Fabless was not a thing yet, until all of your initial customers were the integrated device manufacturers, the Intels of the world, and you were taking their worst excess. You were their second source supplier for manufacturing on the stuff that they didn’t want to make on their own. Did you see fabless coming, or was that a very lucky thing?

Morris: No, I saw it coming. In fact, I just had dinner two months ago with the first guy, Gordie Campbell. Have you heard his name? Anyway, Gordie Campbell came to see me in my final months at General Instrument. He came to see me. He did not know that I was leaving. Frankly, I did not know when I saw him that I was leaving yet.

The reason he came to see me at General Instrument was that he wanted the funding. He wanted investment from General Instrument. $50 million he said. He wanted to start a new company. $50 million. I said, do you have a business plan? No, it’s all in my head. I said, well, I need at least a business plan. I have to go to the board of General Instrument.

He said, all right, I’ll send it to you within three weeks. Three weeks later, there was no business plan. I was interested because I knew that he had a good reputation of starting companies. I called him and he said, ah, Morris, I’m sorry I didn’t send you anything because I don’t need you anymore. I said, how come? He said, I don’t need $50 million anymore. I need only $5 million and the $5 million I can gather up for very easily. I said, why do you need only $5 million? He said, I’m not going to build a fab. See? That was the start for me that there will be fabless companies.

Another guy came to General Instrument and said he had already started a company which was called Atmel, and they did not have any fabs. This guy wanted General Instrument to make the wafers for them. Back then, General Instrument had empty fabs. I told the semiconductor manager of General Instrument, well go ahead and work with him.

David: Don Valentine. Who I’m sure you knew.

Morris: Yeah, I knew him.

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

Morris: Well, at least I had a glimpse of it. Atmel, they were still fighting. I mean Atmel wanted the fab to be run his way. Now, of course, the General Instrument semiconductor manager wanted to run the fab his way. General Instrument owned the fab anyway, for heaven’s sake.

That was just a very early situation in which the difficulty and the advantage of running a foundry business already appeared. The difficulty was you have to satisfy a lot of customers, and everyone wanted the fab to be run his way. But you can only run fab one way, which will satisfy more or less all the customers. The advantage of course is you have a lot of customers.

Ben: Well, we can’t thank you enough, Dr. Chang.

David: Dr. Chang, thank you.

Morris: All right, very good. It was my pleasure. Even though it’s the first time in a long, long time that I have talked so long.

David: We appreciate it.

Ben: Thank you for doing it with us.

All right, listeners. Well, David and I are coming at you now from our home studios back in Seattle and San Francisco. We wanted to do a little post game on that interview, a little bit of analysis, our conclusions, the things that are still sitting with us a few days later after we’ve crossed the ocean.

David, this felt essential to me because it felt like we were just recording history there with Morris. I didn’t want to interrupt him to try to make a business model point. It just felt like we should let him talk and then we could do our part after.

David: Totally. Fortunately, we have a model for doing analysis at the end of story which is our Playbook, so let’s do it.

Ben: Okay. The first thing that I can’t shake that just keeps sitting with me is this idea that is genius in hindsight of not competing with your customers, being the dedicated pure play foundry, which we actually saw in the TSMC Museum of Innovation. They have Morris’ original pitch, his little original slide deck.

David: His original business plan that he pitched to the Taiwanese government.

Ben: The government, and then to investors. There are two different versions of this extremely simple pitch deck, and one of the bullet points is right in there, of being a dedicated pure play foundry.

At the time, I get the sense it was actually much more about what can we win at versus what will be the most important and valuable semiconductor company in the world in the future.

David: At the time, they didn’t have the capabilities, certainly not TSMC, and it didn’t exist in Taiwan to be able to design chips and products. It was impossible for them to compete with customers. This was all they could do.

Ben: It crossed Morris’ mind for sure. Hey, we could compete with Intel, but then he scrapped that. I get the sense because the thing that they were good at was this manufacturing angle. And it’s almost like an accident of history, the pure play foundry ended up being the best way to do this. I guess best as evaluated on market cap versus other foundries and integrated device manufacturers such as Intel.

David: Well and best that this is the path that has led them to being essentially alone operating at the leading edge. They have surpassed technology-wise, all of the other integrated and quasi-integrated chip foundries out there.

Ben: I guess that’s my first thing, is you can connect the dots looking backwards as Steve Jobs said in that famous quote. But forward is difficult.

David: This primarily (I think) was the main reason why TSMC has worked so well.

Ben: That they don’t compete with customers.

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

Ben: If you’re asking yourself, how did the world arrange itself in this way, such that you could have a trillion-dollar company that doesn’t do any design, that doesn’t do any architecture, that doesn’t do any EDA tools like Cadence or Synopsys? They’re they’re not NVIDIA, they’re not ARM, they’re not Cadence Synopsys, they’re not ASML, like they’re not their own equipment vendor. What enabled this?

One of the things that I think is underappreciated and we didn’t talk that much about with Morris, but the rise of ARM. If you try to play forward a world where Intel and the x86 architecture had maintained its dominance, you wouldn’t have had this window, this opportunity for the value chain to rearrange itself.

But the fact that there was an architecture, as we talked about on our ACQ2 episode with Rene from ARM, this architecture that became dominant in phones and then computers and then servers and now is coupled on with all these AI chips, you open the door to have a dedicated foundry for ARM chips in a way where if it had stayed x86, it’s not like you could start a new foundry for all the fabless x86 companies.

For the longest time, Intel was the only x86 company. And then AMD of course is the second source, that AMD is a TSMC customer. That’s the one edge case is like, well there is AMD that designs x86 chips that TSMC manufactures, but that’s not the common case of the way it would’ve gone for in an x86-dominated world. It would’ve been fully integrated Intel.

David: One super straightforward and enormous example of this is Apple. If ARM hadn’t become such a viable CPU architecture platform and Apple hadn’t standardized their Apple silicon on ARM, probably Intel would be making all of the leading edge chips that go into your iPhone. They already had the Intel relationship. Macs were running on x86 Intel chips.

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

David: I think all this is true, but if ARM hadn’t existed, there would’ve been nowhere else for this vector of innovation to go.

Ben: The point that we’re driving at here is this world where there’s a standalone architecture company, there’s a standalone big manufacturing company. There are standalone EDA companies, there are standalone designers—Apple, NVIDIA.

David: In large part, that’s due to ARM.

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

David: Totally. The mid- to late-80s were an absolute golden period for all these companies getting started. Not only TSMC, ARM, Synopsys, Cadence, and ASML all founded right within a couple of years of each other. Which brings us to Hsinchu Science Park. Going there in person, we talked about this on our original TSMC episode that even if you wanted to, you couldn’t airlift TSMC and this capability out of Taiwan and recreate it somewhere else.

Ben: We talked about that as if we knew it in an abstract way. This was very different driving around the science park, feeling it in a physical way.

David: The entire ecosystem. It’s like if Silicon Valley were all in one government-sponsored industrial park, which it was and was Silicon Valley as we talked about in our Lockheed Martin episode.

Ben: Oh, the early Lockheed, yeah.

David: Yeah, the early Lockheed years. But that’s what it’s like today. It’s all right there. It’s not just TSMC that’s there, it’s all of their partners, it’s all of their customers. We’re driving by and this is a Cadence building there, and that’s a Synopsys building there, and that’s an ARM building there.

Ben: There’s Qualcomm.

David: There’s MediaTek right there, headquartered right there and right across the street. The craziest thing to me, we saw there are two universities that are just there.

Ben: In the science park.

David: Yes, that are cranking out PhDs every year that are just getting absorbed right there in the ecosystem. This would be like if there were two universities on the NVIDIA campus,

Ben: The thing that really jumped out to me is you always hear people talk about how integrated this ecosystem is with each other. That Synopsys has to be closely tied with TSMC to understand what the next node will look like so that they can make it easy for people who are using Synopsys’ tools to design ships to actually manufacture using TSMC’s process.

You get the sense of, oh, I see. Because they all are walking across the street to each other and having this extremely close communication. Not to mention David, both of our flight experiences felt like, oh, these are a bunch of chip design fabless companies that are making the pilgrimage over to Taiwan to meet with people in this ecosystem.

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

Ben: Which does raise the point of this Arizona fab and the outside of Taiwan fabs. Why is TSMC doing it? Because it’s not their leading edge. It’s not big volumes. It’s not leveraging this really close geographic ecosystem that they have in.

I believe there are three science parks in Taiwan. We saw the original, but there’s one that’s even bigger. I think it’s the Tainan one in the south, but it just becomes clear that there are customers and government reasons to build fabs in other countries, but—

David: You’re not going to be able to recreate the magic of that ecosystem, physically instantiated right there.

Ben: Yeah. It would take decades to recreate the ecosystem that they have in the science parks.

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

Ben: At least to spur innovation with this particular of a mandate.

David: Totally. The land-grant universities here in America. This was like a rifle shot. We are going to spur semiconductor industry innovation in this industrial park in this location, and it worked.

Ben: And there you have one of the 10 most valuable companies in the world, and the only I guess one of two trillion-dollar companies that are not on the West Coast of the United States. I would say it worked.

David: Yeah. It worked.

Ben: And the scale too. We drove by a construction site where it looked like a quarter of the building was done. This is where they’re making the two-nanometer process, which presumably will be in the next iPhone. It’s not like anyone said anything about that, but geez.

I wonder after five-nanometer and N3E and N3P, when they have this two-nanometer process, I wonder what they’re going to make on that? Lots of NVIDIA GPUs and lots of iPhone chips.

Massive building. Phase one was open, which I think is a quarter of the building, but then there are three other phases for this two-nanometer facility that are not even ready for primetime yet. I think they’re actually doing the small production runs, getting ready to ramp in the second half of this year on the two-nanometer process.

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

Ben: Yup. Okay, back to things I’ve been noodling on since the conversation with Dr. Chang. I felt a little bit bad for saying, hey, your original business plan was a bad one. That basically taking the excess capacity from Intel and other IDMs and giving them a place to manufacture their least critical, least leading edge, least interesting chips.

But that is true. He believed that fabless was going to be a thing, but for the first (I don’t know) at least five years, the only real business that they had was IDMs who were willing to say, how cheap can you give me some of your manufacturing capacity? And it’s not strategic at all, but here you go. Here’s some revenue.

David: This is a major difference in Intel’s fab strategy versus TSMC. Intel is constantly taking their existing fab footprint and repurposing it and upgrading it for the leading edge, which on the one hand is great. It’s utilizing their assets for the most valuable, highest valuable products.

On the other hand though, they then lose the manufacturing capabilities for older process node generations. It’s not like demand goes away for those chips and those products.

Ben: It does. It just does slowly.

David: It does slowly. Replacement parts are a great example. There are technology systems and products, manufacturing things, even automobiles built 10, 20, 30 years ago that have specific chips that were made with old process technology, that when they break and they need replacing. You need those exact same chips. This is the business that TSMC started in.

Ben: That is the fundamental philosophical difference is I think Fab 1 belonged to ITRI, the government where Morris was president of that organization before taking the helm TSMC. Fabs 2 and 3 were the first TSMC-specific fabs that they built, and they’re still running from the late 80s.

In addition to the old replacement parts, there are still applications for older nodes. If you’re in this world of 40-nanometers and up, one micron, and I don’t know all the names of the previous generations, but the less high resolution etching on silicon.

CMOS sensors are great examples of that. The cameras that we’re talking into right now that have these great Sony sensors, those don’t require a two-nanometer process, but they do require etching the same way that you would etch a chip. So that’s a specialty use case of TSMC’s older fabs, which by the way on an accounting basis are fully depreciated. They’re almost like free to run.

David: Right, all the capital expenditure. Now there’s maintenance CapEx that needs to go into it, of course, but the initial CapEx, yes fully depreciated. You’re just getting essentially very, very high margin dollars out of those old fabs.

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

David: Totally.

Ben: But that point of, I’m obsessed with this idea that it was funny that Morris went on the record and said, no, I knew. I knew fabless was coming. He had a couple of great anecdotes about that. Which is funny because in older interviews sometimes he goes, well, the timing was a little lucky on when fabless happened.

But I think he even said to Jensen in the first few years of TSMC, growth wasn’t very high because we were waiting for the customers to emerge. But it really is this idea that he saw the future, he made a bet, and he did kind of a crappy business to build up competency, capability, volume…

David: Capacity.

Ben: Yeah, exactly.

David: To build up literal fabs.

Ben: To be there when the fabless revolution happened. I think he was within 12 months of when he thought it would happen, but it is crazy that, especially in his venir, you’re reading the story about the early customers. Year five, year six, year seven, the majority of the business is still not fabless. It’s someone else’s worst orders.

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

Ben: We brought it up tangentially with him, but it’s probably worth dwelling on what is the learning curve.

David: The core insight of the learning curve from BCG, Bill Bain, Morris that they all developed together.

Ben: Which, by the way, how crazy is it? The founders of BCG and Bain are the ones who co-developed this, or at least named it and formalized it with Morris when he was at TI.

David: Totally. The insight is that the goal that you are playing for is to be the largest volume player at the end of the game. If you take that as a given of, if we get to be the largest volume player, this is a fixed cost business, this is a scale economy’s business, we can spread that fixed cost over the maximum number of customers, how do we get to the maximum number of customers in the early stages of the game where it’s more competitive?

We accelerate the pricing to where we think it will get to at the end of the game. That’s why doing these price cuts, and also starting low with your prices. You can even start unprofitable with your prices in the early days in a given node generation, because the goal is to crowd out the competition, become the industry dominant number one player, get all the customers. Once you aggregate that demand, then you get the scale, and then you can get the economies of scale pricing. Just get to that as fast as possible is the name of the game.

Ben: It works backwards. It actually involves a lot of market sizing. At maturity on this node, what do we think demand will be for, call it 40-nanometer? How many orders of individual chips will there be in 40-nanometer? Well, to have the cheapest price for customers, we need to do the biggest ordering. Then it’s just a matter of how fast can we get into volume production?

Everyone intuitively grasps this, oh, economies of scale, but the implications across your whole business, your pricing strategy, strategic finance, when do you decide to take on debt? When do you not? When do you decide to take on more shareholders?

David: It’s this incredible orchestration to make it happen. It’s almost Costco-like in the ballet that has to go into this.

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

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

Ben: Or in NVIDIA’s case, how big is AI going to be? This is a crazy thing for a manufacturer to have to do, to have that crystal ball into the end of their customers’ markets, but they really do need to make bets on how big those markets are going to be.

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

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

David: Of course this will be the end state of this industry, is to have a dominant player.

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

David: And that’s just the CapEx side of the equation as we talked about with Dr. Chang. There’s also the R&D side of the equation that needs to go into creating the next process node that can be built on that CapEx.

Ben: It is crazy that if you just look at every year, the CapEx versus the net income of this company, they basically spend all the money, not all the money, but their CapEx grows in a very similar way if you look at the bar graph to their net income from the year.

That is even before R&D, David, to your point. If they were looking around at competitors at other foundries and saying okay, how much can we invest? They can invest more than anyone else because they have the most volume.

Then on top of that, they are also spending on a separate bucket of R&D on the technology for their manufacturing processes. That’s how you get CoWoS, which is the technology that they use for packaging for AI chips. That’s their proprietary thing, which by the way once you have proprietary packaging, then it’s even harder for customers to go and double source, double manufacturer elsewhere.

They have a similar technology for packaging of mobile chips that doesn’t use CoWoS. It seems like this is a market where those in the lead are only going to get further in the lead over time, absent some big strategic mishaps or some big execution mistakes.

David: Totally. Then I think the last playbook theme here for me and for us is just that Moore's Law is undefeated. At the end of the day, back from starting all the way back Morris’ career at TI, and being a contemporary of Jack Kilby and Bob Noyce and the invention of the integrated circuit, once the integrated circuit was invented, the compounding growth of that industry is all that mattered.

Everything else is just downstream of the fact that the world is going to demand more computing at this monotonic, exponentially increasing pace every 18–24 months. Of course, the technical definition of Moore's Law expired a long time ago, but spiritually, the world demands roughly 2x the computing power that it had two years ago, every two years. That has continued for 50–60 years at this point and shows no signs of slowing down, and as a result…

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

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

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

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

Ben: All right, here’s the stat. Since TSMC was founded in 1987, the world’s semiconductor market has grown from $26 billion to $527 billion last year. They rode a ridiculous tailwind.

David: Ridiculous tailwind.

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

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

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

Ben: Carve outs. All right. I have two. One is kind of hilarious. I can’t believe it’s 2025, this is my recommendation. For anyone who’s not a AAA member, I highly recommend it.

David: Ooh.

Ben: I had a spectacular AAA experience where I went to fill up the air in my tires before a road trip. I went to the gas station and there was something wrong at my local gas station with their pump, and I ended up draining the air in my tires to an unsafe level.

The car was actually not drivable away from this gas station. I was like, crap, I can’t even go get the other car, I had my baby in the backseat, and my wife and I were trying to figure out what to do. We’re like, do we have to call a tow truck to tow us?

I signed up for AAA while I’m just sitting there in the gas station parking lot, and within, I think an hour, hour-and-a-half, they had a mobile tire inflator on a long weekend, like a holiday weekend when other people aren’t working, drive out and fill up the air in my tire so we could be quickly on our way, not ruin the weekend.

David: Amazing.

Ben: And it was a $100 or something. It’s really not a bad price. This was $100 to become a member, whatever it was, $150. Then the service is actually free for something as trivial as this, and you get three of them a year. So I’ll take it. It was a phenomenal experience.

David: All right, AAA. Here we go.

Ben: My second one is a YouTube channel called Defunct Land. You and I were talking about this.

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

Ben: It is an entire YouTube channel that I actually haven’t watched in a while, but I only remembered it from our conversation, and now I need to go back and watch older ones, that talks about defunct theme parks.

If you like Acquired and you wish you had something Acquired-like that’s visual, that’s about history, intellectual property, and people trying crazy stuff, some of the most crazy entrepreneurs and executives within companies decided to build theme parks. It is very fun to see the weird old Nickelodeon hotels or action park in (I think) New Jersey, the wildly unsafe park from the 60s, 70s and 80s.

David: Oh man, those were the days.

Ben: Yes. You could get lost for hours and hours and hours watching defunct land. I highly recommend that YouTube channel.

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

Ben: Yes.

David: Oh God. My carve out speaking of, it being 2025, how are we talking about this, on the plane on the way over to Taipei, I finally watched Everything Everywhere All at Once for the first time.

Ben: So good.

David: I can’t believe I hadn’t seen it before, but two kids under 3½, not a lot of time for movies. It’s so good. I think this was your carve out when it came out a couple of years ago. Just so, so, so good. Truly enjoyed it. Lived up to the hype. Deserves every award that it won.

Ben: All right, well we’ve got some thank yous to folks who helped us prepare for this episode. First to our sponsors, JP Morgan Payments, our presenting partner, ServiceNow, and Fundrise. You can click the links in the show to learn more.

Some special shout outs to Aart de Geus, the co-founder and executive chair of Synopsys. Had a great conversation with us, well first publicly with Sassine Ghazi, the current CEO of Synopsys on an ACQ2 episode a little while back. Then we chatted to prep for this episode and basically asked the question, what should we be asking Dr. Chang about?

We got some similar notes from Rene Haas, who is the CEO of ARM.

Great conversation with Sir Peter Bonfield, a current TSMC board member, and former CEO of British Telecom.

David, I know you’ve got a few also.

David: Also to Wally Rhines, the former CEO of Mentor Graphics. Wally is a legend in the semiconductor industry, almost on par with Dr. Chang. They were contemporaries at TI back in the day.

To Jon Bathgate and Brinton Johns from NZS Capital, our go-to folks on anything semiconductors. I think they were more excited, even more excited than we were that we were doing this, that we got to talk to them about it.

Ben: Also past Acquired guests. I think that episode holds up really well, where we did semiconductor and complexity theory with them.

David: Totally.

Ben: And actually Jon is the one originally who explained to me how EUV lasers work, which is still one of the most impressive accomplishments in human history.

To Jon from the Asianometry YouTube channel. This is just an incredible channel all about semiconductors and about how all of this stuff works. I learned so much about CMOS sensors, about how they make the actual silicon wafers themselves. That’s a sophisticated process before the etching even starts. He’s just got some awesome, awesome videos on the Asianometry YouTube channel. Very kindly bought David and I dinner and hung out with us the night before the interview, which was very fun to do in Taipei.

David: Very fun.

Ben: Also to Tim Culpan, a former Bloomberg journalist, who now has a Substack called Culpium, also gave us some great topics to chat about.

Lastly, as always, to Arvind Navaratnam at Worldly Partners. He did a great, great write-up on TSMC that he’ll be posting publicly right before we post this episode so you all can see it. It was great last minute prep for me after reading the memoir to get someone else’s take on what makes this company so special.

Actually, some of the stats that we threw out in our playbook came straight out of his writeup. If you want a more analytical view of how did TSMC become TSMC, he’s got a great study on that that we’ll link to in the show notes.

If you like this episode, go check out other semiconductor episodes. NVIDIA, we’ve got four of them at this point. One of them is an interview with Jensen, and then we’ve got the whole history of the company across three different episodes. We did a great live episode several years ago on Qualcomm, which I think is a sleeper pick.

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

Ben: Yes, and our diving into how CDMA works was one of the most fun technical explanations I’ve ever done on an Acquired episode. So if you want to understand how all of our cell phones work, go check out the Qualcomm episode.

Or of course, if you did not last week, listen to the TSMC remastered episode. I don’t know how you got this far without listening to that, but you should go listen to that after this episode.

Check out ACQ2. We’ve been talking about this episode with Synopsys. There’s one with Rene Haas from Arm Holdings that we did. It’s our most recent episode, so it’s spectacular. If you’re interested in semis, go check that out.

Come talk about this episode with us in the Slack, acquired.fm/slack. If you want to know when future episodes drop, you can sign up at acquired.fm/email. You’ll also get episode corrections and hints at what the next episode will be.

With that listeners, we’ll see you next time.

David: We’ll see you next time.