Acquired - TSMC Founder Morris Chang

0:00The podcast about great technology companies and the stories and play. Yo, don't use the technology. Now we definitely have a cold opening. All right, I guess I really want us to be about technology companies again. Well, this is a technology company. It's a sign. All right, here we go.

0:32Welcome to the Spring 2025 season of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts. Today, we have something very special to share with you. After becoming obsessed with semiconductors from our TSMC episode four years ago, David and I wound our way through the rest of the industry, studying fabulous companies like Nvidia and Qualcomm, architecture companies like ARM and chip design software companies like Synopsis. And 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. It is kind of insane.

1:25Super 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. Yes. Well, listeners, it happened. So today's episode is a conversation that we recorded in Taipei last week at Dr. Chang's office. We flew to Taiwan for a 48-hour whirlwind where we spent some time at TSMC's headquarters in Hinshu Science Park where many of TSMC's fabs are located. Super cool to see. Totally.

1:51So conveniently, Dr. Chang just published volume two of his autobiography a couple months ago after a 26-year hiatus from volume one, but inconveniently it is written in traditional Chinese and not published in the Western world. We managed to get our hands on an unpublished translation of the book to prepare, and what you are about to hear focuses on a few crucial stories from TSMC's history that Dr. Chang shares in his memoir about Apple and video and the birth of the fabulous industry.

2:19Yes, and big thank you to Karina Bow, who we were lucky to connect with after we set this up, and who has been translating Morris's memoirs with funding from Tyler Cowan and Emergent Ventures. Right now the memoirs are not published in English, and we will let you know if then when that happens. Yep.

2:35All right, listeners, you can join our email list at acquired.fm slash email. You'll get an email every time a new episode drops once a month. And this is also where we announce past episode corrections plus a fun little game where we give hints at what the next episode will be. I always have fun writing this. You do. That's a clear David job. So with that, this show is not investment advice. David and I may have investments in the companies that we discuss in this show is for informational and entertainment purposes only.

3:02Please enjoy this conversation with Dr. Morris Chang with some of David and my reflections following its conclusion. 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 special relationship with NVIDIA? Yeah, it started my relationship with Jensen.

3:29started with a letter that he sent to me. I think it was 1997, and the letter was sent through the post office, and I received it in Sinjou. And the letter said that they were envied here, the company that Chancellor was, the CEO of was a small company, but they had developed some really promising chips, but they were looking for a foundry, and they had approached the TSMCs, San Jose Office, but they really got no answer.

4:28from the same old office. Would I please contact Jensen because Nvidia really wanted to do business with PSMC. So I was going to the US in the next week anyway. So the letter frankly raised my curiosity and also irritate me a little bit because, you know, I had always told ourselves people that we should never be negligent in talking to future customers even if the customer seems to be a very small one. And at this point, Nvidia was four years old.

5:29They were facing bankruptcy, I think, and they had maybe 50 or 60 employees. So, TSMC, I think, at that time, already had a few thousand employees. We had exceeded, I remember we had exceeded one billion US dollars in revenue in 95, and this was 97. So, we were...

5:56relatively speaking, we were a pretty big company. Which is very impressive. You were yourself only a 10-year-old company doing over a billion dollars in revenue. Yeah, right. So the following week I went to California. And I called him back with our advanced notice. I called Jensen. I looked up. I think there was telephone number on the...

6:25stationery that he sent me to let go. Jensen himself picked up the phone and there was a lot of background noise. I mean, he was arguing something with his people. But as soon as I introduced myself, I said, the smartest charm. He immediately shouted at those people that were making noises.

6:57Quiet, most Chinese calling me. So I then proceeded to make an appointment with him, to visit him, to visit Nvidia the next day or something like that. And that was our first visit, our first meeting.

7:24and he immediately impressed me with his articuliveness and also impressed me with his optimism. While he was also very frank, he told me that Embedier was in financial difficulties, but the chip that he wanted now to have found it.

7:56It would not only save the company, it would also make Envidia a major customer of TSMC. And that was actually quite a bold statement. We were over a billion dollars. And to be a major customer of ours, he would have to produce revenue for us.

8:26at least 50 million a year, okay. Was that chip the Riva 128? For God's number, but it was a very successful chip. Yeah. I don't think it was Riva anything. It was a games chip, of course. It was successful. In fact, his prediction came true. Not only did it solve Nvidia's financial problems, prevented from being bankrupt, you know. Not only did it do that, it also started to make them a major customer of TSMG. Well, I think two or three years, they did become one of the biggest five customers of TSMG. Yeah. Very successful chip. Yeah. So there was a great partnership forage there. TSMC would...

9:25Fab the chips would manufacture them and video 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 and I want to go to this moment in 2009 on the 40 nanometer node where development was slower than TSMC had hoped and it was costing customers like Nvidia time and money. Can you share the story of how this came to be and how it was resolved?

9:55Well, I decided to give the CEO job to a potential successor of mine, while I will still retain the chairman ship. In Taiwan, usually the chairman is the top man anyway, even though CEO is another person. So the problem you just mentioned happened during the period when someone else was the CEO. Apparently it was a manufacturing problem. It was also a quality problem. And it was a quality problem that the CEO first reported to me. But the CEO insisted that Our people, we had the director of quality insist that we were not TSMC, it was not a fault. And so on that basis, on the basis of our quality managers arguments, he had not offered envy to anything.

11:23Now, as far as the manufacturing problem was concerned, it was a EU problem, and everybody was suffering from it. And of course, Nvidia at that time was perhaps the biggest customer of that node, the 40 nanometer node. 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. Something like that, yes. But the problem, apparently, you know, just continued and I was, even though I was not a CEO, I was getting really impatient. And then, of course, some other problems, other problems, then it's 40 nanometer.

12:22and media power mother. So I decided to take the CEO position back. So in 2009, I did that. And there were several priority problems that I had to deal with when I took the CEO job back. And one of them was this continuing problem.

12:52continuing argument controversy with the Amidia. Anyway, I remember in the first few days after I took back the CEO script, I called all the major customers, including Jensen. And Qualcomm was, I believe in all of that. Qualcomm was also. And Qualcomm, the top customers.

13:22It didn't change very much since then, except for maybe one. Apple. 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, so 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. And as I said, I did have several problems, aside from the 40 nanometer manufacturing problem and the problem was the argument that we were having with Nvidia. Aside from that, we also had the problem of the pricing was dropping faster than the cost.

14:51I mean, you don't want to see that, you know. Of course, margin percentage kept dropping, you know. Because you would committed to a schedule of price drops with customers, but you weren't able to drive down your manufacturing costs at the same rate. All right. So that was one problem. Another problem was the immediate one that triggered me to retake the CO ship because the previous CO had...

15:21laid off, except he didn't use the term laid off, you know. He used the bad performance review, the worst performance review people, and there were about six or seven hundred of them, you know. And he laid them off on the basis of their poor performance review. Well, we never did that, you know. I mean, The worst we would do was to put them on, please them on probation for six months. And quite often, at the end of the six months, everybody would go back to his or his or her old job. And some of them would get transferred because they were in the wrong jobs, so some of them would get it.

16:24transferred, but we almost never really fired people even after the probation period. So under your watch, you never did a layoff and you never looked at performance reviews, which are meant to help coach people as the means to determine who to layoff. That's right. Yeah. And I actually, you know, have told the managers that, you know, but, uh, and Well, in 2008, of course, there was a financial crisis. And the semiconductor business impact got affected. And our revenue dropped, our business dropped pretty seriously. I was not a CEO. I was a chairman. But I just knew that anyone, any...

17:27General Manager, and the CEO, General Manager, without very much experience. What he or she would do in a situation like that. It's kind of a knee-jerk kind of reaction. Oh, he says, oh, this is my test. I got to save all the money possible, and I got to lay out people.

17:57But this is the semiconductor industry and Moore's law means no matter what happens, you will always need people Well, I know I know well, so much in Dr. Indy, but so much in Dr. Indy people actually think the same way as I Desquived you know me. They are they are they all people too. I had a lot of experience at Texas Instruments, but at Texas Instruments, I was not a CEO I was just one of the top managers under the CEO level. And when the company decided to have a layoff, the CEO conferred with the top managers who included me. And their first reaction was exactly the same. And I'm talking about the 70s, early 70s. Their first reaction on who to lay off.

18:59was exactly the same as what our TSMCC did in two or late two or away two or nine, which was, you know, go by performance. Well, now I was the only one at Texas Instruments in the early 70s that said, no, that would not be credible.

19:31way of doing it. People would not respect us if we lay off by performance ratings. And why is that? Because it's very subjective. Performance reviews that performance ratings are done by everyone's own supervisor. So 700 worst performing people in the company. And who gave the 700 people?

20:01the bad ratings, 700 supervisors, you know, very subjective. It's not something that people will respect. If in a year you have to hire people back, you have to hire the laid-off people back, then you shouldn't lay off. Because the lay-off, the separation expense is usually a half a year, about half a year. And it takes at least half a year to train a person. So if you need the people back within a year, you shouldn't have, you shouldn't lay off. So what did you do when you came back as CEO, both about the employment issue and about the customer issue? You mean customer issue being Nvidia? Yeah. Yeah. Well, to finish the employment issue, the laid off employees, as I said, there were 700 of them.

21:02six or 700 came to my home to demonstrate and protest. Now, the company, TSMC, was pre-warned that hundreds of people would appear in front of my home. So they notified the police department in my district. So the police department said 50, 60.

21:32police officers to try to maintain the order. Now, more than 100 protesters appeared. And the neighbors, my neighbors, in their trouble getting in and out. That was only the first time. A month or so later, the problem was still not solved. I was still not the CEO.

22:03So, they appeared again. Some were 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, you know. She would wake up and went over to the window to take a look to see what was going on. But then, very early the next morning, My wife, six or about six o'clock, the next morning. My wife, you know, got up and she took one of the bodyguards and went to a neighborhood market and got the Chinese style breakfast. Chinese bread, you know, fried bread, you know. I don't know whether you ever had it or not.

23:03Probably not. Yeah. Yeah. I'm in a bunch, you know. So I've been milking. And take enough of the breakfast, enough for 25, 30 people, and back to the park, to the park, and distribute them to the protesters. And they were thankful, you know. Yeah.

23:35And they actually decided to not go to the president's palace, president's mansion. And they told my wife that they would not do that day. And all this kind of precipitated my taking back the CEO job. Well, there's another thing, you know, I told them the previous CEO, before he laid off the 600-700 people, I said, if, because I knew, as I said, I knew that it would be his knee-jerk reaction to confront a crisis, such as the crisis we had, it would be his knee-jerk reaction to layoff. So I said to him, if...

24:39you want to lay off, bring it to the ball. Our call is special warm eating. And I knew what I would ask the ball to do, which was not to grant the permission. But he decided to circumvent that. The CEO, because he did not consider it to be lay off. It was just punishment for the...

25:13poor performers. Well, as far as the CEO is concerned, I just keep him. I had more than one nice talk with him. I intended to, and I told him that he was still a potential successor to me. So I kept him at the same job weight we have job weights.

25:47In the same salary and bonus, but he was now the president of new businesses. And back then, we had the high hopes for the so-called new businesses, which was solar cells and LED. It's the great irony that your core business of manufacturing integrated circuits ended up becoming the largest market opportunity of all you don't need any new businesses. And the biggest marketing, biggest market opportunity. Why is it so ironic? Well, it's always interesting to me when companies think, oh, we should look at other new businesses when in reality, semiconductors became a six hundred billion dollar a year market and

26:45you know, solar is a small fraction of that. LED's are a small fraction of that. You were already in the best market. I know. And I knew that. I knew I did not really mean. I did not really think that solar or LED would replace our integrated circuits business. But I knew the integrated circuits business was going to be great, you know. But at that time, which was 209. At that time, we also thought that solar and LED was going to be very promising. But it didn't work out, of course. The solar business could have been pretty good. However, China ruined it. It subsidized the hell out of it. And they now...

27:44control the business, solar cells. The prices were extremely low, still low, still low. So it didn't take off, PSMC servers didn't take off. And LED did not take off either because LED, the market is not as big as solar. However, it's controlled, the patterns are controlled.

28:14buy just a few companies and they wouldn't let the few companies that control the patterns of LED or not that 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.

28:42And he's now running media tech. Is that correct? He's now the vice chairman and the CEO of Media Tech. Yeah. So coming back to this moment in 2009, you offered to rehire anyone who was laid off that was interested in coming back. And you're setting the new sort of vision and strategy as CEO or in many ways returning to the old one.

29:11How did you resolve the Nvidia dispute? Yeah. In the first four or five weeks after I retoken to see your job, I probably spent almost half of the time on how to resolve the problem with Nvidia. As far as youths were concerned, we were doing our best because we had to do it anyway.

29:43And we there was just one of the customers. Yeah, not just in video, but yeah, Qualcomm and Intel and yeah, and it was a very important note for the nanometer was very important note in the progression of more slow, you know. Only after 40 can we if we do the 40 well, can we can we do the 28 28 was the next one. And I called the salespeople that were happening in direct contact with Nvidia. And of course I called everybody that was somehow involved, somewhat involved in the problem. So it was a matter of money. As far as the progress on manufacturing lines, we were already doing what we could.

30:46I mean it was, as I just said, it wasn't just for Nvidia. It's for TSMC, you know. But Nvidia, because they had borne the brunt of the problem, the damage. Well, it's not our money. I worked our own number. I familiarized myself with all aspects of the problem. And then I worked our own number.

31:17And I also knew that embedded customers were after them. They had demands on embedded too. So I used all the intelligence I could get. And I think it turned out that it was good. So about a month after I retook the CEO job, I...

31:49I said, I'm coming to Silicon Valley next week on the state. I will be at your home at 6 o'clock. Let's have just salad and pizza, which was something that we had had many times in the past. Now, immediately, He sent back an email, he said, when do we discuss business then? Did he ask who was going to pay for the pizza and salad? So I anticipated that. So I said, 6.30, we'll start having pizza in the salad. 8 o'clock shop will go to your office at your home.

32:57and would discuss business. So on the point of the day, they showed up and we followed the schedule, exactly, you know, six or a half years. We had a very pleasant peace out in the salad. The thing is that, you know, his wife, Laurie, would make the salad and the peace I was delivered from outside.

33:27Maybe maybe they made their own piece up to I forgot would not surprise me. Yeah Anyway, I had I had had it many times at his home All right, so it will cost you up It was I who looked the watch said Jensen why don't we go to your study and I gave him the offer it was on the order of a hundred million Dollars, right? Yes more than 100 million. And I also said, our offer is effective 48 hours. If you do not, there is not going to be, we're not going to argue, we're not going to bargain. If you don't accept the offer, we'll think 48 hours, we'll have to go to an arbitrator, which was what he had suggested to the previous CEO anyway.

34:29that we will go to the arbitrator. But the previous CEO did not even give him a number, you know. The previous CEO gave him zero. You probably don't want to go to arbitration with your best customer. No, no, I didn't want to. But, you know, I had to say that. And because, I mean, that number, the number we offered him was arrived at after, as I said, weeks of work.

34:59on my part, and I thought it was fair to both sides. And did Jensen accept the offer? Yeah, he did. Within two days. 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.

35:29you were able to then come up with a large sum of money over a hundred million dollars 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 i know i like i like that too that's why i included the story in my all the while you know all right listeners Now is a great time to talk about a new partner of ours here on Acquired. LaGora, the agentic operating system that is redefining how the world's best legal teams work. Yup, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. LaGora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

36:24So the founders did exactly what great founders do. Operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love like tabular review where you.

36:43drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Lagores Bed here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work, and this means that the pie can grow even as each individual task takes less time.

37:03And they recently launched LaGora agent offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And LaGora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early LaGora numbers essentially speak for themselves when they have a head-to-head pilot with their top competitor, they win 70% of the time. Legora now has over a hundred thousand lawyers on the platform from 1200 legal teams in 50 countries. And crazily, they went from one million to a hundred million in ARR in about 18 months. Truly insane numbers. And that is the real test.

37:55Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in house at a company, you can learn more at logora.com slash acquired and just tell them that Ben and David sent you. After the 40 nanometer node, after you fix these problems, as you said, the next node was 28 nanometers.

38:25And 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? Well, I had a lot of trouble at TI, my peak job at TI.

38:56was the head of worldwide semiconductors. The TI of course had many businesses, defense business, materials and controls and also their origin, which was geophysical and so on. But TI's semiconductor business was the biggest and I was the head of that.

39:27Worldwide semiconductor business I wanted at that time when was the head of Worldwide semiconductor business or on the budget was 4.8% of revenue of our revenue and I thought it was not enough I just wanted to raise it to 5.5% of the revenue but My request was denied all the every time I raised it. Now, coming back to CSMC, I wanted to set a number, a percentage of revenue number. So, we don't have to argue every year how much on the wishes span. So, as of that time, about a time to 829, when I came back, almost. At that time, we were running, I think, six or seven percent a year. But it was the goal sheet of every year between the R&D director and the CEO. So I wanted to stop that. I wanted to make him at ease, I don't have to argue. I don't have to request every year.

41:02So I almost just literally picked a number I already had we've been running six or seven percent already So I said, oh, let's pick eight percent okay eight percent Regardless of whether there's a recession or not and that's just eight percent of revenue and that was the best news if you ask our anti-director was the Back then, I think, in the second place of Andean. 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 Andean. So they were not concerned, the Andean director was not concerned at all about having his...

42:04planned budget, cut back his planned resource, people, allocation, cut back, none of that. So he's been working 8% and so it has been like that. And that is what, you know, propelled on the effort.

42:34This period in 2010 it wasn't just ramping the R&D budget was also the capital expenditures. You had had almost a decade of two to two and a half billion spent, you know, building the fabs every year. And in 2010, you ramped that to almost six billion. What was it about the competitive environment, the 28 nanometer node that caused you to push all your chips in on that? Yeah, I think it was the kind of a mutual feeding thing, you know.

43:03As I settled on the budget at 8% of revenue to the satisfaction of the R&D people, they began to have big ideas. They began to be telling me, our 28 is going to be the term they used.

43:38And they have used it several times. But the first term, the first time I heard them using it is the 28. 28 is going to be the sweet spot. It's just like a tennis racket, you know. You hit, you hit the ball with a sweet spot, probably a racket. Yeah. Yeah. Do you play tennis? I have played tennis, not well. Good.

44:11I was like you, you know. Like 40 years ago, I was like you, I don't play anymore. But, you know, so I know the feeling of hitting a ball in the sweet spot, you know. 28 down here is in the sweet spot. And so I said, I said, why, you know, he, you know, gave me a lot of technical reasons. So, I decided I would, I would believe him.

44:40And he now had the resources to push it, to do it as fast as he could. So, you know, now the capital is spending. Now, of course, back then we had already built up pretty good infrastructure, organization, we had a pretty good market forecasting.

45:10and I had set up the business department which was like a marketing department. We always had a pretty strong sales effort but to me sales effort is just the technical side with the customers. Marketing is strategic side to the outside world. Now, for more of these symbols, the marketing, the business development department, which, as I said, was our strategic marketing, and from the technical, from the R&D side, that 28 was going to be small. I decided that.

46:14And I put to the Shakespeare in my autobiography that there's a tide in the affairs of man, which taken at its front, leads on to fortune. I decided that this was 28 nanometer, was going to be a tide. Our next tide, anyway, there will be others, 7 nanometer. It was another was the the next sweet spot, the Andy people told me. And again, you know, reminded myself of Shakespeare, you know, taking it to the flood. Taking it to the flood, yeah. So, I mean, that talks a lot, however, you know, I'm setting the Andy at 8% of, did not invite any opposition from the board. But Suddenly, increasing capital spending, threefold, I think, did invite a lot of questions from the board. Our practice in the board meetings, because back then, even now, most of the directors are from overseas, US and England.

47:48And we would email the agenda to them two weeks before the board meeting. Then the night before the board meeting, I would invite the independent directors to dinner. And that dinner, the conversation at that dinner, was not on record.

48:22So the independent directors, actually, three quarters of our directors, were independent, are independent directors. Anyway, so in the night before and the evening before the meeting, they had the opportunity to ask me questions if they had any. But on this matter of vastly increased capital spending, They didn't even wait until they get to that they got to that dinner because this was effectively betting a huge amount of the company's cash on this node this process this generation yeah, and so they called the Chief General Counsel General Counsel is also the secretary to the board. Yeah They called him that time he 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, so I talked to them on the phone about a week or so before the board meeting. And all right.

49:55You know, this is something that, of course, I told them, but I have now just told you, inputs from market forecasts, inputs from ARD, inputs from our business department, a new business department department. And of course, you know, they didn't believe it. You really can't convince anybody on something else. So at the end, I had to say, well, look.

50:25I heard you, but I am still the guy that's responsible for the operation of the company. So you need to let me go ahead with this one. So they were sent to fly with that. And what was the result? What happened around this era of 28 nanometer that created so much demand? I think you know, that was good. And that was The smartphone era coincided with 20 million anime. Yeah. Yeah. 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? No, I didn't. Maybe the business of all my time. That was another interesting story. Yeah, maybe he knew. Maybe he, at least I now hope.

51:26And I, of course, hoped at that time too, that he had a more detailed visibility than I did. But I mean, of course, this was not the only, it was not the only input you know. I had a few other advisors too. So that takes us to Apple. Could you share with us?

51:57how you end up meeting Apple. Yeah. But before we do that, let me offer how we made the CC, actually, the business development director. Ah, the current CEO. The current CEO. The current chairman and CEO. When Rick was the CEO between 205 and 209 he had spilt operations into two groups advanced technology and mainstream technology and CC was the head of the mainstream actually really I should say the lesser one okay Mark Blue was the head of the advanced. And each group had a small business development section, maybe 30 or 40 people each. All right, so I came back to be the CEO, and I never thought the split-up of two groups was a good idea anyway. In fact,

53:40Back in 1996, the president, he was not a CEO, but he was a president. We didn't have the CEO title back in 1996. But the president who was there, American. Don Brooks? Yeah, right. He wanted to split. I think he got tired of...

54:12running this company. He was going to be here for only a year at first, but he winded up. He ended up spending six, seven years in Taiwan. Towards the end, he was getting tired of running this thing. And he thought that he would do it like TI, for instance, when TI had a germanium transistor department.

54:43So I can change the department in the way circus bipolar in the way circus MOS in the way circus You know, it's the divisional org structure instead of a functional or structure, right? Yeah, but I Really did not think that the Foundry business of TSM systems Was suitable for the divisional structure because you know we have almost the same group of customers. How do you divide up the company if you want the so-called divisional structure? Well, you know, Dom Brooks was going to divide it by a fab. My goodness, you know, the customers moved from one fab to another, the same customers, you know. Not to mention TSMC has 20

55:42122 fabs now, and so what are you gonna have? Well, back then he only had three or four fabs, you know, back then, yeah. But he was not convinced. He kept arguing, and I said, look, why don't we get a consultant? McKinsey. McKinsey, why don't we get McKinsey, okay. So we got McKinsey and McKinsey after a month or two months actually, yeah.

56:12And a couple of million dollars, I guess. Well, it told us the same answer, you know, that functional is best. And then Don Brooks said, well, tell me one company, one big company that's functionalized. And McKinsey immediately answered, Boeing. Which is a good answer, you know. Yeah.

56:45Except it's not true Boeing has commercial and government Well, they probably have a commercial in government, but they don't have a 777 4777 57 57 you know, they don't have they don't buy And if we divide up by fab it would be like dividing up 777 from 75077 37 you know, yeah, but anyway Donbuk's attempt was in 1996. And well, my 205 Rick Tsai decided to check the same ground. But he did. This time, I didn't stop him. My idea, my principal was the chairman and not a CEO.

57:46was sometimes you have to let the CEO make his own mistakes and learn from them. Of course, if the whole company is going down the drain, you have to interfere then, but only then. Well, anyway, so that was the background. Two groups.

58:18when 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 advances had more, a bigger group than mainstream. All right, so I wanted to combine the two operations.

58:49And I also wanted a real marketing. And I didn't call a marketing because I decided to use business development in English because it's a good translation in Chinese. All right. Now I've decided to combine the two groups, Operation Groups. Now, back to in 2009.

59:19When I decided to combine the two groups, I think the Vans Group had something like 10,000 employees. And the mainstream group had a little less, but also 78,000 employees. And the mainstream group, just because we haven't explained this concept yet, is...

59:49taking those older fabs that have the higher nanometer nodes and they're finding customers that don't necessarily need the leading edge to automotive parts or its CMOS sensors for cameras and finding customers to keep the utilization high on those older fabs from previous generations. Yeah, right, but also quite often the same customers use both mainstream.

1:00:18and advanced technologies now. Take core core, I'm quite sure that they use, you know, the most advanced, and you're an Apple, I think they use. Yeah, if you think about all the chips in an iPhone, you know, the A16 Pro is built on the leading edge, but there are many, many other chips in there. Yeah, right. So you combined to one business development organization, 80-ish people. Yeah. We had the...

1:00:48Mark, Lou, in charge of the events, and the CC way in charge of the, yeah. The questions, you know, who's could be in charge of what, you know, the commander, or you need only one for the combined operations, you need only one person. The truth is that we had a lot of operational talents, you know, operation meaning manufacturing and taking the developed technology for modern D, you know.

1:01:18and converting it into mass production where the law tells there. But business development or marketing there and neither Mark nor CC had any real previous experience in marketing business development. So that was my My main worry, we need, we combine the two groups, we need a combined operations manager, but even more importantly, in my mind, we needed a combined market business development manager. So I first offered the marketing.

1:02:25a business development job, truly the guy who was in the bigger job, advanced technology, Mark. And I explained to him that I did not think he had any significant marketing experience in the past. And this new job, if he takes it, would give him the opportunity of being professing in the area. But he became it. He said, my goodness, I have 10,000 people reporting to me now. You want me to take a job that has only 67 people in it. As long as the end of that conversation. And your goal was for him to become a well-rounded executive.

1:03:33Yeah. In hopes of leading the company after he sort of did that tour of duty. And I explained to him that, yeah. Not to mention, it's a very important 60 or 70 people. They're responsible for finding all the next business. I know. Actually, back in my mind, I was thinking of the time when Kissinger was Nixon's national security adviser. And somebody else, whose name I haven't even forgotten, was the Secretary of State.

1:04:06and Kissinger, you know, probably had a couple hundred people reporting to him, whereas the second state, you know, had thousands of people all over the world reporting to him. And who had more power, you know, Kissinger? Certainly not the name who you've forgotten. And before this period, you were doing the business development and marketing for the company, right? You were the one finding the Nvidia's, the Jensen's, the Broadcom's, the next. Great customers and great markets for you. That's right. That's right. You were always on a plane meeting with the current top 15 customers and trying to find the next top 15. Yeah, except for those four years when I was not to see you. Yeah. Yeah. But you were right. I was on the plane most of the time, visiting customers. I know. That was.

1:05:06My pleasure. Yeah. I really liked it. Well, anyway. So, I then, of course, offered the business department job to CC. And he accepted the role. I mean, I thought he accepted it. Even delightfully, you know. Yeah. And he's now a chairman and CEO of TSMC. Yeah.

1:05:38So this had just happened and you came home from a board meeting we understand one evening That's right the board meeting had ended and there was six o'clock or later and I went home This was Taipei We had our board meetings back at that time in In fact here, you have seen my conference from yesterday, across the hall. Yeah, yeah, right. We had all of our meetings in Taipei and that conference room. Anyway, it was 6.30 also. I got home and I think my wife knew that I would not be home until around 6.30.

1:06:41because as soon as I actually met me at the door, which wasn't very often. But this time she had something to tell me, that's why she met me at the door. She said, uh, Terry Gow called in the afternoon and said he was coming to dinner. And who is Terry Gow, for listeners? Terry Gow.

1:07:11is a relative, is actually a second cousin of Sophie's, Sophie's my wife. And they share the same grandparents. That's what makes them second cousins, I think, yeah. And for our Western listeners who this won't be obvious to Terry Gow is the founder and CEO of Foxconn. Right, Terry Gow.

1:07:41is a second cousin of Sophie's, and he's also, he was also, at that time, a chairman of Hanhai, which is a very important supplier to Apple. And it's a pretty big company. In fact, Terry Gao, is reputed to be one of the richest men in Taiwan. And she said, Sophie is lovely, but she doesn't know too much of my business. I don't think she understood the significance of Terry Gao.

1:08:45I mean, to then bringing a wise president from Apple. I don't think she quite understood quite very, she didn't really, she wasn't very interested either in the significance of that. And you had been trying for months, strategizing with the business development team, how do we go when Apple's business? The smart, the iPhone seems to be working.

1:09:13And yeah, I mean, strategizing is probably too strongly worth. I mean, just thinking, also knowing that we just can't do anything, we can't do anything about it. Apple is a very close model company. If you try to talk about it, if you offer your service, I mean, they will just tell you to go away.

1:09:44They will come to see you when they are ready. That's what I knew about Apple. Even then, and I knew I know the same thing now, you know. All right, so it was hard. Now Sophie did know that I would not be home until after 6 o'clock. So she had told the...

1:10:18Terry that and Terry had set the time of arrival of their arrival at Irochalk. So, Irochalk was a bit late for my dinner, but I said, what the heck? Wait, you know. So, he showed up. I didn't ask. Sophie just said, a vice president, and I just thought to myself, it wouldn't be just an ordinary vice-president. Yeah. So, because you know, there was no reason for Terry to just bring any Apple vice president to my home. Well, it must be something special. It must be someone special for TSMC, you know.

1:11:19All right, so Jeff Williams came. He was not just a vice president, he was chief operating officer of Apple. And, you know, Jeff was a pretty straightforward person. He didn't spend much time in ordinary kid chats.

1:11:49There wasn't the same pizza and salad period before. It wasn't, but it wasn't formal either. You know, my wife Sophie just added. We have a cook, you know, we had a cook and pretty good cook. So Sophie just told a cook to add a few dishes. She's a Chinese cook. She doesn't do any western.

1:12:20food and you know Terry obviously she grew up on Chinese food and I would imagine that the apple guy that he brought would also like Chinese food anyway so she just asked the cook to cook a few more dishes but you know it wasn't important the food was not important either the Khandai or the Khandai was not important because almost Jeff almost immediately started his pitch, you know, almost as soon as he sat down to dinner. And what is the pitch from someone like Jeff Williams like? We would like you to boundary our waivers.

1:13:20Something like that. Pretty straightforward. I mean, so I was I was I listened That night, I think Jeff talked maybe 80% and I talked 20% If you don't count the the relative to relative talk between Sophie and the Terry, you know, which was very which was not very much either And Jeff had proposed economic terms at this first dinner, right? No, not nothing so concrete. Okay. You just say that we would let you have 40% towards margin. And I think, well, I didn't say anything. I didn't answer him. I didn't respond to that. But our margin at that time was already 45%.

1:14:24And I was trying to push it up to 50%. It was a announced effort in the company to push the world's model. And I had that effort for many years after I came back to be the CEO. And I really didn't even...

1:14:56didn't succeed even at my retirement. Now of course, what happened later was that there was COVID and so on. And also, we began to have leadership, technology leadership. So, our margin, you know, jumped up to over 50 percent. But when retired, it was still short of 50 percent, slightly shorter.

1:15:26I was almost there quite a time. In technology leadership, you're saying that around this time, the 28 nanometer node, you were talking about two or 10? 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. Well, you're distracting. I think when you said that, you were distracting Intel.

1:15:55Okay. Yeah. At 28 nanometers, we were very different the leader among founders. Yeah. And maybe among a few other companies such as Texas insurance or one, but not Intel. Okay. And what Apple was considering Intel? No, Apple was not actively considering Intel.

1:16:29That came later later, but I'm quite sure we'll have time to cover that. We'll take us there now. So after November of 2010, you had the initial conversation with Jeff Williams. Yeah. He said that he would let us at 40% and my thought was my goodness. Well, already at 45%. But I also thought that he was trying to be generous when he said that he will let us have 40% and I also thought to myself well now it's not this dinner it's not the time to go into a pricing discussion we have a lot of other things to discuss now anyway so I said no we were about to go into production we were almost in production

1:17:27was 28 nanometer at that time. The initial stage, anyway, 28. So I said, I thought it was going to be 28, is it 28? Nope. What node do you want? 20, he said. Now, that was a surprise to me. And frankly, it was also a disappointment because The more slow progression after 28 was going to be 16 Now Apple Jeff Williams wanted the 20 a half step a half step, but a half step a half step is a detour, you know You we had to we would have to my thought at the dinner there was that we 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, you know. From 28, if we could go directly to, if on D, we could directly go to 16, it would be less time than, you know, first do 20 and then.

1:19:06No. The point is that back then, on D, they're not enough resources to do two notes at the same time. Later, we did. Later, we did. 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, right? And you hear back, no, we want you to go do something that you're not planning on spending any money on and have this huge distraction. And you're, of course, left with this question, is it worth it to land Apple as a customer? It wasn't that serious. It wasn't that serious. Because when we figured a big market for 28 and therefore when we planned to increase

1:20:08Lastly, our capital spending, we didn't have Apple in mind. We didn't include Apple. Apple came strictly as the president's surprise. Anyway, for the company in total, but not for 28, you know, 28. We didn't include Apple in our 28 planning. But it's still the question of, are you?

1:20:36Are 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? That's right. That is where connection with Goldman Sachs came in. Now, remember, I printed a lot of seats in when I ran TSMC.

1:21:06I knew that one of these things 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? Yes, yeah. We did the...

1:21:36ADR with Goldman Sachs, which opened up a good relationship with Goldman Sachs. It was New York public listing of the stock. Yeah, ADR is American deposit receipts. It's New York. It's a separate market. In fact, when all the TSMC price, ADR price has a 20% premium over. Really? Wow. However, you need TSMC board permission to convert your shares to ADR. Otherwise, you'd be able to arbitrage. Yeah. We don't want that. So as I said, I was saying that the board has to approve any conversion of ordinary Taiwan TSMG stock to ADRs and the board does not give such permission easily anyway. Okay. Yeah. So you had planted this seed with Goldman Sachs when you knew you would need them. Right. This was very early in our history. Now.

1:23:07We 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...

1:23:39the cash is going to come. So, you know, there were several possibilities, of course. We're paying a different, not a big dividend back then, but a modest dividend. We could cut that dividend, and then we could, we also could sell stock, you know, new stock offering, either in Taiwan.

1:24:10or in the US, we have the ADRs. All we can borrow money. Copper bonds. Or you could only fill part of Apple's order. Right. And in fact, we did that. We first did financial planning. And we decided not to cut ever then. We decided not to sell new stock. We decided to just borrow. And this was also with consultation with Goldman Sachs. We chose borrowing. How much? I looked at numbers. And just as you said, I decided to take care of what Apple said. What Apple said.

1:25:17they needed. 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 way first, because they have no skin in the game of you spending all the money. I know. I know. Well, back in the 90s, in the first, let's say, 15 years, 10, 12, 15 years of our existence.

1:25:47We were short of capacity almost all the time. And what you just said happened all the time, you know. And so we figured out that we require a deposit from the customer. And we will even confiscate the deposit if the time comes for him to take away first and he doesn't, you know.

1:26:18and everybody belies in the world confiscated. It was first used by me. I told the salespeople in San Jose, I said, tell the customer that we need a deposit from them because, you know, just as you said, you know, it's our money and it's only their worth, you know. They may not want the way first when the time comes.

1:26:49and I told the salesman tell the customer they will confiscate the deposit and the salesman never heard anything like that before and so they were they were uproar happiness you know I mean now you know they could they could actually stand up and tell the customer that we might even counter confiscate your money. But of course, really, we never confiscated any money. Now, it did happen quite often, particularly in the 2000, 2000, we had, I think it was called an internet recession, I think, because it internet was...

1:27:49You know, people were starting companies called pets.com was something, you know? Yeah. Anyway, so we had the recession. Which trickled all the way back to semiconductors. TSMC's revenues, it was four years after the dot-com bubble before they were back at the dot-com. Yeah, dot-com, dot-com. Those rates. Yeah. Yeah.

1:28:18It was almost four years. I remember recovered only in 2003. It started in 2001. The first quarter of 2001 and recovered in the third quarter of 2003. So it was three years. Three years. Or one or two, the third or fourth quarter of 2003.

1:28:49Three years. Anyway, quite a few customers had placed deposits to anticipate normal good times during those years. And we did build the plant. In fact, we bought. We purchased, or I should say, yeah, we bought a couple of other companies.

1:29:20And so their plants, their fats became ours. And the customer didn't need the wafers anymore. They didn't need the outputs of those fats anymore. And we didn't confiscate their deposits. But we let them delay demand. Eventually, every one of them, they all used their...

1:29:54You swap the deposits, but you know that will come in on and so then back to at this point early 2011 with Apple you go to them and say We are prepared to serve half yeah the number that you told us first of course the new All right, we knew business the woman director CC he had the perverse of first telling the lower level purchasing people at Apple and He got he got he got the response back. You must be crazy, you know So CC did not comment on that at least he said he didn't comment that he brought it back to me and then I went to Apple myself and talked to Jeff Williams. So I said to him, we have to issue copper bonds. I think I used to be prudent after all the prudent financial planning. We decided that we would take care of what you asked for. Now he was very quiet about it. He only made one suggestion. He said, wow, I think you can.

1:31:32eliminate your dividend. You know, your shareholders will understand that. I said, well, no, I don't think so. Well, the fact is, I looked into that. I mean, that's also a reason for, you know, having high level consulting advice. About one-third of our investors shareholders are very seriously.

1:32:04interest in the dividends. So, if we do what the Jeff Williams said, our stock is going to drop like hell, you know, trigger a sell-off. Right. Anyway, but when I talked to Jeff Williams, and I went to see him in what's the place? Cupertino. Yeah, Cupertino. I mean, he was...

1:32:35He took it fairly willingly. No big problem at all. The only suggestion that he made was the elimination of dividend. And I said no. And he then let it just lie there. OK. But then Then the issue was settled. I mean, how much demand do we take and how we will get we still have to borrow billions of dollars even with the half of the demand. All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture.

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1:35:12So this really was especially after the investment in 28 nanometers that depleted your reserves. This is a bet the company move. You're taking on a bunch of debt to go build the fabs to make this happen. But yeah, I don't know, bet the company, but I didn't think I would lose. You sound like Jensen. We sound that's exactly what Jensen said. All right, but I think that The financial discussion with Apple had already happened when Apple, when Jeff Williams, called me in February of two, we're talking about two, 11 now. And he said, it was a very short conversation. Well, we said, we need to pause.

1:36:21our discussions for two months because the highest level of Intel has approached Tim Cook and has asked Tim Cook to consider Intel. And at this time, Intel was the major supplier for all max. Apple's Mac line was all Intel. Yeah. Yeah.

1:36:57Yeah, that wasn't an issue, of course. I mean, in February of 2011, Jeff Williams was talking about the iPhone, yeah. But they had a close existing relationship. Yeah. I don't know what relationship they really have, you know. Well, it must be closer to me. So, that was all he said. I wasn't...

1:37:29all that worried. Because in 2.11, Intel was no longer a name that you would, when you're here, you would stand up in bow. Interesting. I mean, in the 90s, in the late, in the late 20s, century. I mean, they were a name in a semiconductor. When you're here, of course, I'm exaggerating. More live, they're in tell. Yeah, in tell. If you hear the name, if you hear that they're in competition with you, you know, my goodness, you'll be trampling with fear, you know.

1:38:26I mean, this is why you started TSMC as a pure play foundry business, because you didn't want to compete head to head. You said we should not be an integrated design manufacturer of the design of the chips and the manufacturing. We have to compete on a different vector, because we'll never catch intel. I didn't say that we never catch it. We are in 2025. Okay. Anyway, so.

1:38:56So I of course had to accept Jeff Williams' request. But again, as I just told you, I wasn't all that worried because my way of reviewing my mind or the characteristics that Apple is looking for being a Supplier, you know, technology, at that time we thought we were almost apart with Intel, almost. In fact, I thought we were, I think I thought we were apart with Intel. Manufacturing, I thought we were better than Intel. And customer, customer, we thought that our customers, customers are small. They're Intel's customers.

1:40:01Just Intel. So, I will do it. But then indeed, and I also thought that when Jeff Williams told me the highest level of Intel, I thought he was talking about somebody like Andy Guo, who was tired of course, but you know, but it turned out that he was only talking about the CEO of Intel at that time.

1:40:34Yeah, well, I knew that only later. Would that have been Bob swan or Paul Adelini? No, it was the Italian guy. Oh, to Lini. Paul Adelini got out. Yeah. So today Intel doesn't make the chips in the iPhone. What happened? And in fact, TSMC makes all of Apple's chips. Yeah. All right. I wasn't too worried, but you know, I still was.

1:41:05in my mind. So a month passed, I think, was about the middle of February when Jeff called to tell me to pause for two months. So almost exactly a month later, March, middle of March, sometimes. I decided that I would pay them a visit and ask them what's going on, you know.

1:41:37and the progress. So I emailed Jeff and asked for an appointment. I said, I was coming to this Silicon Valley, anyway, which was pretty normal. And I will stop in at your place on such and such a day is okay. And Jeff replied by saying that, yeah, come here, but I won't be here.

1:42:08I have asked him to cook to see you. I mean, this freedom, Jeff's freedom of delegating his boss to see a bit of it was a privilege that I seldom had in my career, you know. Yeah, normally someone says someone on my team will see you, not my boss will see you. I know, I know it was usually that way. It was usually the other way. But in this case, it was Jeff S.

1:42:39Well, anyway, so I showed up and Tim was very nice to me and took me to lunch to the cafeteria, I guess. Where there was a lot of food, we each picked our food and carried our tray back to his office. And anyway, he told me there's nothing to worry about because Intel just does not know.

1:43:10how to be a foundry. That's a very short but a very satisfactory answer to me. What is your interpretation of the meaning behind that statement? I was explaining to you and now we had on technology or manufacturing. Subconsciously, I think I interpreted Jeff's explanation to me to be the third one.

1:43:41customer trust, you know. I mean, they were always very superior, you know, Intel. Before this Apple thing, Apple and we, before Apple became our customer, I knew a lot of Intel's customers in Taiwan, you know, all the PC makers are Intel's customer.

1:44:14I mean, none of them live Intel. I don't know. Yeah. Intel and I always act alike. They were the only guy. But they were the only guy, you know, for the microprocessors. Yeah. And that's for their microprocessor business. But here we're talking about the Foundry business where TSMC at their extreme core does not compete with customers. And even if Intel is trying to do business in good faith. They do have the conflict where they also design chips, which is competing with Apple's chip designers or Nvidia's chip designers or any other. Yeah, but I really don't think Tim meant that. I think Tim meant that the customer asks a lot of things. We have learned to respond to every request. Some of them.

1:45:14Well, crazy. Some of them were irrational. We had to respond to each request courteously, which we do, you know. The Internet has never done that. I mean, I said I knew a lot of customers of the Internet here in Taiwan. None of them, they all wished that there were another supplier. None of them either trusted the Intel or liked Intel. So to finish the Apple story, the short answer is it worked on 20 nanometer. Were there any trade-offs where did pursuing 20 nanometer and spending the billions of dollars cost to TSMC in any way? Well, it might have cost, but I mean, yeah, the story certainly does not end.

1:46:19Here all right, so I mean they was pricing you know every everything was not easy pricing and Jeff came himself and We talked about pricing and we of course we had done our homework also on the cost and What what kind of price we will accept But Jeff came and he told us, just a number, you know. He gave us his reasoning. He had to make his component costs, meet the certain goal also. But anyway, that was settled, and Jeff said, ah, and when the pricing was settled, I said, let's go out to dinner and go to eat.

1:47:23Taipei pre-star restaurant, but dinner. And Jeff jokingly said, ah, if he didn't like the pricing, we will probably be going to McDonald's. Which was never in my mind, but he said that. 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.

1:47:53hugely impacts that. Sure. The cost, yeah. The main thing that goes into pricing, of course, is the cost. And then the second thing is, of course, whether your desired price will be accepted by the customer, you know. One thing that has occurred to me is, TSMC now gets...

1:48:22mid 50% gross margins called 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 of sort out who gets to capture the value? Well, I don't get the privilege of sorting it out. I don't know. CC way, I think, has the pressure and the duty of sorting that out.

1:48:51Yeah. Well, I mean, as a general principle, you know, you try to find a kind of a middle ground which is different for every CEO. Even though every CEO who wants to protect his reputation, every CEO says, ah, I worry about a long range. But in truth, Not everyone does. So, it's a very personal how to solve these things out. I think it's a very personal issue. Now, for a lot of CEOs, there's really no choice. You have to, you have to, as a supplier, you have to accept a certain price. If it's a commodity particularly, you know, we have nothing to do with Apple yet. Please. Let's finish Apple. Now, I think you were asking.

1:49:53whether there was any trade-offs. Trade-offs. Well, the trade-off, there was a pretty significant serious trade-off. And that was the detour, I said, you know. We talked at that time back in the 2011-2012 time. Our Andy was not strong enough to do two nodes at the same time. Now we are. But back then we weren't. So the tradeoff of accepting the 20 node technology was that we delayed our 16 node development. And then Samsung came up with the 16. They had lost the 20 business, you know, so they They were ahead of us in the 16 nanometer development. Because they got to skip 20? Yeah, because they didn't get it, probably. Okay, they need to develop funding. So I got a shock. I mean, it was a real shock when I heard that Apple had placed their first orders of 16 with Samsung. Now, that was the real shock.

1:51:29We invested so much, even though we took only half of their original demand. It was still tens of billions of dollars, I think. And we were counting on it being at least 80-90% of the equipment being converted to 16. And now, if Apple went to Samsung for the 16, where did that leave us?

1:52:00Do you understand what I'm? Oh, yes, yeah, sounds horrible. Yeah, so I would feel like I got tricked Well, I wouldn't say that okay, but I was I was I was I was really shocked that was so I emailed Jeff Williams right away And I said, you know We we invest all these equipment And we were counting on you to take the 16 from us. But now, you know, we found out you were buying the first 16s anyway from Central. So Jeff repried immediately. Don't worry. I'll be here. I'll be there. I'll be in St. Jude next week and explain to you.

1:53:06made me, that relieved me a little, but certainly not completely. But next week, he did show up, and he explained to us, he said, well, you know, as soon as you, as soon as you're ready, with your 16, you'll buy from you, you'll buy all the needs from you when you're ready. Now, of course.

1:53:38that completely relieves me, you know, because that's what we're supposed to do anyway, you know. So indeed, what he said was true. Now, we developed, we had our own 16 about a half a year later, and most of apples, 16 nanometer requirements still belonged to us.

1:54:10Yeah, most. Yeah. I can imagine the shock that you must have had. At the same time, this also, again, just illustrates the brilliance of TSMC and the pure play foundry business model. Samsung is Apple's cheap competitor. Yeah. I know. I know. It was, I said in the autobiography, you know, I mean, sitting in St. Jude.

1:54:41being in the Foundry business, I actually see a lot of things before they actually happen. So let me tell you the IBM Qualcomm story. Please. Now, Qualcomm, we consider the Qualcomm to be a prime candidate.

1:55:14to be our customer. We really wanted Qualcomm because we knew they were a technology house. What year was this? This was way back when we started in the 90s anyway. And they were part of that initial wave of fabulous companies. Yes. They started the Irwin Jacobs, started Qualcomm actually before I started the TSMC. The TSMC started in 1987. Qualcomm, I think, was a few years before that. So in the 90s, early 90s, all the way up to 97, maybe 96, 97, all the way up to the latter part of the 90s. We wanted Qualcomm.

1:56:19to be a customer and now I saw their operations VP that's what they call that's what our customers call their purchasing people operations VP operations senior VP and I saw I saw him often and he was always pretty polite but he gave us very little business And I also knew that his foundry, his main foundry was IBM. Now, sometime in the later 90s, I forgot whether it was 97 or 98. Suddenly, he started, he first started to tell me that he was useless now. He didn't even tell me who...

1:57:26our competitor was, our competitor had been, but I kind of knew that it was IBM from other sources of intelligence. And our business with Qualcomm, the business, the Qualcomm gave us pretty rapidly increased after that, after 97, 98 period. So I immediately knew that IBM semiconductor was in trouble because, I mean, they had their own fabs and so on. But their main business was really supplying to Qualcomm and a few other very small companies, very small, fabulous companies. So, I immediately knew IBM was in trouble because they were losing Qualcomm. All right. So the next step that IBM took was not a surprise for me. The next step they took was to ask us TSMC to co-develop the next generation of technology, which is 0.13 microns, 130 nanometers. In 19...

1:59:1199. And since I anticipated that, it was no problem at all for us to refuse the. And in fact, even if I didn't anticipate that, we would never have accepted that kind of a code developed. I mean, IBM was still, you know, they still considered themselves to be the senior partner in any partnership.

1:59:41They established the senior panel. So we were the company that co-developed something with them was sent its engineers to IBM. And when we do that, we lose our ability to develop our own process. We'll have to depend on this co-development thing. And the co-development thing is going to have a lot of difficulties.

2:00:12I can't know. Our people know we're being a different culture. So we declined without having to think about it at all. We declined to the IBM. IBM, in fact, was quite angry. I mean, they thought we were still a small Taiwan backward place. Taiwan company.

2:00:42And they picked IBM. So, they immediately went to UMC. And UMC accepted only to regret seriously their acceptance a few years later. And UMC, at that point in time, was it fair to call it a peer of TSMC here in Taiwan in terms of volume and size? Not by 1999. They were already smaller.

2:01:14Smaller. They were smaller already. Yeah. That's what I meant when I said that sitting here at the front, really, I mean, I can see some things like the side VM thing. 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.

2:01:44I really did not develop. I certainly did not initiate it. I think I had a role at TI. I had a role in refining it to the point where a semiconductor company can use it effectively. That's my role. How would you explain it to Anavis? Well, explaining learning theory is simple.

2:02:14One will be foolish if one just takes a simple explanation, you know, 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 starts with refrigerators and the cars, you know, if a company makes more cars, then is cost per car, unit cost goes down. That's why it's also called experience curve. You came more experienced, you become more efficient. That's a simple explanation. But if one just takes that simple explanation and thinks that's all it is about, you know, you're really heaven.

2:03:13learn anything. All right. Anyway, learning. Well, Bruce Henderson, who is now considered the father of strategies founded Boston Consulting Group. Yeah, he was the founder of Boston Consulting Group.

2:03:46And now, I mean, they actually branched in business economics. That's called competitive strategy or something, competitive strategy, I guess. And Michael Porter was at one time considered a big figure in...

2:04:18This competitor is better. I mean, he wrote three or four books, you know, big books, you know, seven hundred pages, you know, I have all of them. His original competitive strategy, memo, I think it's like 20 pages, is still some of the best business writing ever. Just who's Michael Porter? Oh, well, who was a director of TSC at one point, right? Yeah, yeah, I had a story about him in my autobiography, too.

2:04:47which because of time, we probably won't go into, not Michael Potter. But Bruce Anderson, we would 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.

2:05:18CEO Mark Sheppard, and told him that Boston Consulting Group, he had founded a Boston Consulting Group, and we have a B-C-G has an experienced theory that would benefit semiconductor industry.

2:05:50And TI was the largest company in the semiconductor industry then. And with Mark Shepard, like a presentation of this theory, the Mark Shepard said, yes. So Bruce Henderson brought Bill Bain. You probably know that name. With him, and came to Dallas.

2:06:20and made a presentation, and Mark Shepard invited the COO and me to attend the presentation. And it was a very eloquent presentation, because Bruce Henderson was a very eloquent man. And Bill Bain was on the side apparently Bruce Henderson's potency.

2:06:51Anyway, Mark Shepherd was impressed and he decided that TI would work with BCG on this learning curve theory. And Bruce Henderson then assigned Bill Beng to work most of the time at TI, you know.

2:07:23most of my like three days a week, and Marchiva assigned me as TI's guy. So Bill Bain and I became partners. And I assigned Bill Bain. A small office where I close to my office at TI in the same building.

2:07:56small office because he needed a lot of things from me. He needed permission to get our costs, our prices. We had a lot of families in the grey circuits and transistors, you know. I mean, he had a lot of requests. So it was easier if he was nearby. And every time when he arrived at some interesting useful conclusions, you will also discuss them with me. So we had a very present association for our thing two years, maybe even more. And he would, you know, apply to Dallas every Monday and go back to Boston either Wednesday night or Thursday night.

2:09:00And of course every time he went back to Boston, it would be to tell Bruce Henderson what he had done that week. So this happened. This went off for I think two years. And then finally Bill Ben came to see me one day. And it was in those two years that I absorbed a lot of learning stuff, which I used up to now. Highly fruitful, just as a thinking tool. 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.

2:10:07And 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. Or once you have the lowest prices, you get all the business, then you can reinvest that in the next node. I couldn't have told you that TSMC was going to be the winner, but once you internalize the learning curve and globalization, you can sort of into it. Then in the future, there will be one winner in semiconductor manufacturing.

2:10:36But one day after a couple of years, Bill Ben came to me in Dallas and said, you are the first one I tell this to outside the Boston Consulting Group. I am leaving Boston Consulting Group to start my own consulting company. So I said, why? I said, you know, obviously Bruce Henderson.

2:11:09Things very highly of you and the bill being said yes, but there is the world's imperative As the first time I heard that term in world imperative. He meant for him personally. Yeah for him personally. Oh, anyway, that was that all right listeners Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team, and deploying them is no longer the hard part. Yeah. The hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like the risks are real.

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2:13:47I mean, you started it when you were 56. There are many things. 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. It did exceed my expectations. TSMCs, size and importance exceed my...

2:14:17Expectation, but not by an order of magnitude. But wasn't the original plan to stop building after fab two? That was never that was only the very initial plan. Okay. Yeah. We were never going to stop there. You know, I mean, we'll just talk about learning. You know that, you know, I mean, how could we plan to if I didn't know anything about learning?

2:14:47I would say, yeah, maybe we'll stop after two passes. But I was a serious student of learning. And I would never, I would never stop at just two maps. Here's why I say unlikely success. There were so many reasons why the original incarnation of TSMC was kind of a bad business. Fabulous.

2:15:10was not a thing yet, and so all of your initial customers were the integrated device manufacturers, the Intel's of the world, and you were taking their worst, you know, 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? No, I saw it coming. And the, in fact, I just said dinner.

2:15:40or two months ago. At dinner with the first guy, Gordon Campbell, Gordy Campbell, didn't have you heard of this thing? Anyway, Gordy Campbell came to see me in general instrument 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.

2:16:14But 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. So I said, do you have a business plan? No, it's all in my head. So I said, well, I need a leisure business plan. I mean, I have to go to the board of General Instrument.

2:16:46So he said, all right, I'll send it to you within three weeks. Three weeks later, there was no business plan. And I was interested because I knew that he had the good reputation of starting companies. So I called him and he said, I'm sorry, I didn't send you anything because I don't need you anymore. I said, how come? He said, I don't need $50 million more. And the more, I need only $5 million. And $5 million, I can cash up very easily. I said, why do you need only $5 million? He said, I'm not going to build a fab. That was the start for me, that there will be fabulous companies. Another guy.

2:17:54came to General Instrument and said he had already started a company which was called AppMell, ATMEL. And they did not have any facts. And this guy wanted the General Instrument to make the way first for them. And back then, General Instrument had empty facts. So I said, I told you.

2:18:25So my conductor manager of General Instrument, I said, go ahead and work with him. Don Valentine, who I'm sure you knew. I knew him. 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. Well, at least I had a glimpse of it, you know.

2:18:55at Mao, you know, and they were still fighting. I mean, at Mao, he wanted the fab to be run his way. Now, of course, the Chinese from the semiconductor manager wanted to run the fab his way, you know, I mean, the Chinese from the fab anyway for having to say, you know, so that was just a very early situation in which the difficulty and the advantage of running a founded business already appeared. The difficulty was, you know, you're just satisfied a lot of customers, you know. And everyone, you know, wanted the fact to rerun his way, you know. But you can only run for one way, you know, which will satisfy more or less all the customers. And the advantage, of course,

2:19:54is you have a lot of customers. Well, we can't thank you enough, Dr. Chang. Dr. Chang, thank you. All right, very good. It's my pleasure. Even though it's the first time in a long, long time that I have talked so long. We appreciate it. 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.

2:20:23We wanted to do a little post game on that interview a little bit of Analysis kind of our conclusions the things that are still sitting with us a few days later after we've crossed the ocean and David this felt essential to me because It felt like we were just recording history there with Morris. I didn't want to interrupt him to try to like make a business model point or it just kind of felt like We should let him talk and then we could do our part after Yeah, totally. And fortunately, we have a model for doing analysis at the end of story, which is our playbook. So let's do it. Okay. So the first thing that I can't shake that just keeps sitting with me is this idea that is genius in hindsight of not competing with your customers being the dedicated pure play foundry, which we actually saw in the TSMC Museum of Innovation. They have more as original.

2:21:21Pitch like is a little original slide as original business plan that he pitched to the Taiwanese government the government and then to investors there's like two different versions of this extremely simple pitch deck and one of the bullet points it's right in there of BA 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 Right. At the time, they didn't have the capabilities, certainly not TSMC and didn't exist in Taiwan to be able to design chips and products. So it was impossible for them to compete with customers. This was all they could do. Right. It crossed Morris's mind for sure. Hey, we could compete with Intel, but then he scrapped that. I get the sense because the thing that they were good at was this manufacturing angle. And it's almost like an accident of history. The pure play foundry ended up being

2:22:19the best way to do this. I guess best as evaluated on market cap versus other foundries and integrated device manufacturers such as Intel. Well, and best that like this is the path that has led them to being essentially alone operating at the leading edge like they have surpassed technology wise all of the other integrated integrated and quasi integrated chip foundries out there. Yeah, I guess that's my first thing is this.

2:22:48You can connect the dots looking backwards, as Steve Jobs said, and that famous quote, but forwards is difficult. This primarily, I think, was the main reason why TSMC has worked so well. That they don't compete with customers. 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.

2:23:17at any other part of the value chain with them. Right. Okay. So if you're asking yourself, how did the world arrange itself in this way such that you could have a trillion dollar company that doesn't do any design, that doesn't do any architecture, that doesn't do any EDA tools like cadence or synopsis. So they're, you know, they're not in video, they're not armed, they're not cadence synopsis.

2:23:44They're not ASMR, like they're not their own equipment vendor. So what enabled this, one of the things that I think is under appreciated, and I, we didn't talk that much about with Morris, but the rise of arm, if you try to play forward a world where Intel and the X86 architecture had maintained its dominance, you wouldn't have had this window, this opportunity for the value chain to sort of rearrange itself. But the fact that there was an architecture As we talked about on our ACQ to episode with Renee from arm. This architecture that became dominant in phones and then computers and then servers and you know 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 like you could start a new foundry for all the fabulous x86 companies.

2:24:40For the longest time, Intel was the only X86 company and then AMD of course is the second source that AMD is a TSMC customer. So that's sort of the one edge case is like, well, there is AMD that designs X86 chips that TSMC manufacturers, but that's not like the common case of the way it would have gone for in an X86 dominated world. It would have been fully integrated Intel. Yeah, I mean, one super straightforward and enormous example of this just is Apple.

2:25:09If 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 chips that go into your iPhone, all the leading chips that go into your iPhone. Like, they already had the Intel relationship. Max, we're running on X86 Intel chips. Yeah, you have to keep peeling the onion because this of course, of course, supposes that that Intel actually could have gotten their act together and made a chip for mobile phones that was performant. But maybe all the baggage from X86 actually prevented them from structurally doing that. It wasn't like a competency thing. It was like a, it never could have happened that X86 could run on phones. Yeah. I think all this is true. But if ARM hadn't existed, like there would have been nowhere else for this vector of innovation to go.

2:26:06Right. 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, you know, Apple and video in a large part that's due to ARM. Yes. And ARM and TSMC are sort of like couple that the hip of history of when this how this came to be. In fact, didn't you find that a bunch of these were started within 12 months of each other?

2:26:33Yes, totally. The mid to late eighties were like an absolute golden period for all these companies getting started. Not only TSMC, ARMS, ENOPS, KADEN, and ASML all found it right within a couple of years of each other. Which brings us to Henshu Science Park, going there in person. We talked about this on our original TSMC episode that, you know, even if you wanted to, you couldn't airlift TSMC in this capability.

2:27:02out of Taiwan and recreate it somewhere else. We talked about that as if we knew it in sort of an abstract way. This was very different driving around the science park, feeling it in a physical way. The entire ecosystem. It's like if Silicon Valley, we're all in one, you know, kind of government-sponsored, you know, industrial park, which it sort of was. It was Silicon Valley, you know, as we talked about in our Lockheed Martin episode. Oh, the early Lockheed, yeah. Yeah, the early Lockheed years.

2:27:29That's what it's like today. It's all right there. It's not just TSMC that's there. It's all of their partners. It's all of their customers. You know, we're driving by and this is a cadence building there and that's a synopsis building there and that's an arm building there. There's Qualcomm. There's media tech right there, headquartered right there and right across the street, the craziest thing to me, we saw there are two universities that are just like there in the science park.

2:27:55Yes, like that are cranking out PhDs every year that are just getting absorbed right there in the ecosystem. I mean, this would be like if there were two universities on the NVIDIA campus. The thing that really jumped out to me is you always hear people talk about how integrated this ecosystem is with each other that synopsis 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 synopsis tools to design ships to actually manufacture using TSMC's process. You kind of get the sense of, oh, I see, because they all are walking across the street to each other and having this extremely close communication.

2:28:44Not to mention, David, both of our flight experiences kind of felt like, oh, this is a bunch of chip design fabulous companies that are making the pilgrimage over to Taiwan to meet with people in this ecosystem. My plane felt like the semiconductor version of the tech buses that go from, you know, San Francisco down to Silicon Valley every day. I would, 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 Marvel backpack. Yeah.

2:29:12which does raise the point of this Arizona fab and the sort of outside of Taiwan fabs. You know, why is TSMC doing it? Because it's not their leading edge, it's not big volumes, it's not leveraging this really close geographic ecosystem that they have in, I believe there's three science parks in Taiwan. We saw the original, but there's one that's even bigger. I think it's the Tainan one in the south.

2:29:42But it just kind of becomes clear that there are customers and government reasons to build fabs in other countries. But you're not going to be able to recreate the magic of that ecosystem, like physically instantiated right there. Yeah. It would take decades to recreate the ecosystem that they have in the science parks, 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, like anywhere in the world. At least to spur innovation with this particular of a mandate. Totally. The Land Grant University is here in America, but this was like a rifle shot. We are going to spur semiconductor industry innovation in this industrial park in this location, and it worked.

2:30:40And 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. It worked. It worked. 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 then three N3E and N3P, when they have this two-denonator process, I wonder what they're going to make on that. Lots of NVIDIA GPUs and lots of iPhone chips. Massive building.

2:31:24Phase one was open, which I think is a quarter of the building, but then there's three other phases for this two nanometer facility that are not even, you know, ready for prime time yet. But I think they're actually doing the small production runs, getting ready to ramp in the second half of this year on the two nanometer process. Like you said, the scale of the physical buildings of these paths smacked me in the face. I felt like I was looking at...

2:31:50Sphinx in Egypt. I mean, like it's huge. It's like many football fields of size, like, you know, just per phase of the fab. These are enormous buildings. Yep. Okay. So back to things I've been noodling on since the conversation with Dr. Chang. I felt a little bit bad for saying, Hey, your original business plan was kind of a bad one that basically taking the excess capacity from Intel and other IDMs and giving them a place to manufacture their least critical, least leading edge, least interesting chips. But that is true. I mean, he believed that Fabulous 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 are willing to say, how cheap can you give me some of your manufacturing capacity?

2:32:45not strategic at all, but here you go, here's some revenue. 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, and it's not like demand goes away for those chips and those products. It does. It just does slowly. It does slowly. Yeah. I mean, like replacement parts is a great example. Like, you know, there are technology systems and products and 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 did replacing, like, you need those exact same chips. So this is the business that.

2:33:44TSMC started in right so that is the fundamental philosophical difference is I think fab So fab one belonged to itry the the government where Morris was president of that organization before taking the helmet TSMC fabs two and three were the first TSMC specific fabs that they built and they're still running from the late eighties and In addition to the old replacement parts, there are still applications for older nodes. If you're in this world of 40 nanometers and up and one micron, and I don't know all the names of the previous generations, but the less high resolution etching on silicon, CMOS sensors are a great example of that. The cameras that we're talking into right now that have these great Sony sensors,

2:34:38those don't require a two nanometer process, but they do require etching the same way that you would etch a chip. And so that's a specialty use case of TSMC's older fabs, which by the way, on an accounting basis are fully depreciated. So they're almost like free to run. Right. Right. All the capital expenditure. Now there's maintenance catbacks that should go into it. Of course, but like the initial catbacks, yes, fully depreciated. You're just getting like Essentially very, very high margin dollars out of those old fabs. Right. 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. Totally, totally. But that point of, I'm obsessed with this idea that it is funny.

2:35:33that Morris went on the record and said, no, I knew. I knew Fabulous was coming and he had a couple great anecdotes about that, which is funny because in older interviews, sometimes he goes, oh, the timing was a little lucky on when Fabulous 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.

2:36:05to build up competency, capability, volume, capacity. Yeah, exactly. To build up literal fabs. Right. To be there when the fabulous revolution happened. And I don't know, you know, I think he, yeah, I think he was within 12 months of when he thought it would happen. But it is crazy that when, especially in his memoir, you're reading the story about the early customers year five, year six, year seven, the majority of the business is still not fabulous. It's someone else's, you know, worst orders, which that actually gets to the heart of learning curve pricing that we spoke about with Morris. We brought it up sort of like tangentially with him, but it's probably worth dwelling on what is the learning curve? Yeah, the core insight of the learning curve from BCG, Bill Bain and Bain and Morris that they all developed together, which by the way, how crazy is it that the founders of BCG and Bain are the ones who sort of co-develop this or at least

2:37:03Name dead and formalized it with Morris when he was at TI totally the insight is that like The goal that you are playing for is to be the largest volume player kind of at the end of the game So if you take that as a given of like if we get to be the largest volume player This is a fixed cost business. This is a scale economy's business We can spread that fixed costs over the maximum number of customers. How do we get?

2:37:31to the maximum number of customers in the early stages of the game where it's more competitive, we accelerate the pricing to where we think it will get to at the end of the game. So that's why doing these price cuts and also starting low with your prices. You can even start unprofitable with your prices in the early days in a given no-generation because the goal is to create out the competition.

2:37:57become the industry dominant number one player get all the customers once you aggregate that demand. Yeah. Then you get the scale and then you can get the economies of scale pricing. But just like get to that as fast as possible as the name of the game. Yeah. It works backwards from it actually involves a lot of market sizing at maturity on this node. What do we think demand will be for, you know, call it 40 nanometer. How many orders of individual chips will there be in 40 nanometer? Okay. Well, to have the cheapest price for customers, we need to do the biggest ordering. And so then it's just a matter of like, how fast can we get into volume production? Everyone sort of intuitively grasps this, oh, economies of scale, but the implications across your whole business, your pricing strategy, the way like strategic finance, how do you

2:38:53When do you decide to take on debt? When do you not? When do you decide to take on more shareholders? It's this incredible orchestration to make it happen. It's almost Costco-like in the ballet that has to go into this. 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.

2:39:15which the learning curve would tell you, you want to get the deepest down the learning curve possible. We should go take all their order, but that kind of exposes you to existential risk in your business when you're not, you know, within spitting distance of doing that volume on your own. So is it really worth betting the entire company? 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.

2:39:42which in the Apple case means ultimately forecasting accurately how many customers are going to buy the next generation iPhone in order to run your business. Right, or in video case, how big is AI going to be? These are kind of a crazy thing for a manufacturer to have to do to have that crystal ball into the end market markets. The end, their customers markets, but they really do need to.

2:40:11make bets on how big those markets are going to be. Yep. Because if you're off by 5-10%, that's going to tank your entire profitability for that node generation, which is going to tank your free cash flow, which is going to mean you can't play the game in the next turn. To this point, though, if you actually are good at all of this and you are good at forecasting and the execution is flawless, what's 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. Of course, this will be the end state of this industry is to have a dominant player.

2:41:00Like 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. Yep. Yep. And that's just the capex side of the equation. As we talked about with Dr. Chang, like, 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. Yeah, it is crazy that if you just look at every year, the CapEx versus the net income of this company, they basically spend all the money, not all the money, but their CapEx grows in a very similar way if you look at the bar graph to their net income from the year.

2:41:55That is even before R&D, David to your point, if they're looking around at competitors at other foundries and saying, okay, how much can we invest? They can invest more than anyone else because they have the most volume. And then on top of that, they are also spending in a separate bucket of R&D on the technology for their manufacturing processes. And that's how you get COAS, which is the technology that they use for packaging for AI chips.

2:42:23that'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 COOS, but it seems like this is a market where those in the lead are only going to get further in the lead over time, absent some big strategic mishaps or some big execution mistakes.

2:42:52Totally. And then I think the last playbook theme here for me and for us is just that Moore's Law is undefeated. I mean, at the end of the day, back from starting all the way back, Morris' career at TI and being a contemporary of Jack Kilby and Bob Noise, the invention of the integrated circuit. Once the integrated circuit was invented, the compounding growth of that industry is all that mattered everything else is just downstream of the fact that the world is going to demand more computing at this monotonic exponentially increasing pace every 18 to 24 months you know and of course like the technical definition of Moore's law expired a long time ago but like spiritually the world demands roughly 2x

2:43:49the computing power that it had two years ago every two years, and that has continued for 50, 60 years at this point and shows no signs of slowing down and as a result. Well, no signs of slowing down, except that they keep hitting theoretical physics limits. Well, I said the demand side of the equation says no, shows no signs of slowing down. Well, sure, but the demand side is far more than 2x. Moore's law has always been about how much can happen on the innovation side of getting better at design and manufacturing. And that is getting harder than ever because we're having to like call more things more as law, you know, packaging was never a part of the original more as law and software improvements and proprietary interconnects. 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, they're going to be, you know,

2:44:46Market incentives to drive the supply side, and that is why people work so hard to make it happen. All right, here's the stat. Since TSMC was founded in 1987, the world's semiconductor market has grown from 26 billion to 527 billion last year. So they wrote a ridiculous tailwind. Ridiculous tailwind, yep. 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 go spend 20 billion dollars to build a building and the stuff that they spit out is so valuable that that 20 billion was a profitable investment.

2:45:36in a matter of, I don't know how many years if it's three, five, seven, 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. Well, Ben, what an amazing experience. I'm so glad we did this. Went to Taiwan, got to see this in person.

2:46:06got to spend this special time with Dr. Chang. We're a great way to start the year. All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig. Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale. Yep. In the...

2:46:30crazy speed of today's AI world. Shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers, and how fast you can use that signal to guide what you shipped next. This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved. So if you want to make learning your competitive advantage, whether you're building new AI experiences, or just evolving your existing core product,

2:47:09go to statsig.com slash acquired to get started. She do carve outs. Carv outs. All right. I have two. One is a kind of a whole area. I can't believe it's 2025. And this is my recommendation for anyone who's not a AAA member. I highly recommend it. Oh, I had a spectacular AAA experience where I went to fill up the air in my tires before road trip. And, uh, I went to the gas station and there was something wrong at my local gas station with their pump, and I ended up draining the air in my tires to an unsafe level. And so the car was actually not drivable away from this gas station. I was like, crap, I can't even go get the other car to, and I, my baby in the backseat and my wife and I were trying to figure out what to do. And really, do we have to call a tow truck to like tow us to, and so I, um,

2:48:06Signed 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 my the air in my tire so we could be quickly on our way not ruined the weekend Amazing and it was like a hundred bucks or something. It's really not a bad price and you get This was so you 100 bucks to become a member whatever is 150 and 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 it was a phenomenal experience All right triple A here we go my second one is a YouTube channel called defunct land You and I were talking about this. Oh, yes. This is so good. You turn me on to this

2:48:56Yeah, it is an entire YouTube channel that I actually haven't watched in a while, but I only remembered it from our conversation and now I need to go back and watch older ones that talks about defunct theme parks. So if you like acquired and you wish you had something, you know, acquired like that's kind of visual, that's about history and intellectual property and people trying crazy stuff, some of the most crazy entrepreneurs and executives within companies decided to build theme parks.

2:49:23And it is very fun to see the weird old Nickelodeon hotels or action park in, I think it's New Jersey, the like wildly unsafe park from the 60s, 70s and 80s. Man those were the days. Yes. You could get lost for hours and hours and hours watching defunct land. So I highly recommend the YouTube channel. I'm really glad that even 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. Yes. My car about speaking of, you know, it being 2025, how are we talking about this? On the plane, on the way over to Taipei, I finally watched everything everywhere all at once for the first time. So I can't believe I hadn't seen it before. But, you know,

2:50:14two kids under three and a half. A lot of time for movies. It's so good. It's so good. I think this was your car about it when it came out a couple of years ago. Just so, so, so good. Truly enjoyed it. Lived up to the hype. We're deserves every award that it won. All right. Well, we've got some thank yous to folks who helped us prepare for this episode. So first, to Art DeGias, the co-founder and executive chair of Synopsis, had a great conversation with us. Well, first publicly with CeCine Gazi, the current CEO of synopsis on an ACQ-2 episode a little while back. And 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 Renee Haz, 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.

2:51:09Also to Wally Rines, the former CEO of Mentor Graphics, Wally is a legend in the semiconductor industry almost on par with Dr. Cheng. They were contemporaries at TI back in the day and to John Bathgate and Britain Johns from NCS Capital are go to...

2:51:28folks on anything semiconductors. They were, I think they were more excited, even more excited than we were, that we were doing. We got stuck to them about it. Yes, also past acquired guests. I think that episode holds up really well where we did semiconductor and complexity theory with them. Totally. And actually, John is the one originally who explained to me how EUV lasers work, which is still one of the most impressive accomplishments in human history.

2:51:54Uh, to John from the Asian Nometry YouTube channel. This is just an incredible channel all about semiconductors and about. How all of this stuff works. I mean, I learned so much about CMOS sensors about how they make the actual, um, silicon wafers themselves. That's a sophisticated process before the etching even starts. Uh, he's just got some.

2:52:17Awesome, awesome videos on the Asianometry YouTube channel and very kindly bought David and I dinner and hung out with us the night before the interview, which was very fun to do in Taipei. Very fun. Also to Tim Culpin, a former Bloomberg journalist who now has a sub-stack called Culpium, also gave us some great topics to chat about. And lastly, as always, to Arvind Navaratnam at Worldly Partners. He did a great, great write-up on TSMC that he'll be posting publicly.

2:52:46Right before we post this episode, so you all can see it. It was great last minute prep for me after reading the memoir to get someone else's take on what makes this company so special and actually some of the stats that we threw out in our playbook came straight out of his write-up. So if you want more and kind of a more analytical view of how did TSMC become TSMC, he's got a great study on that that we'll link to in the show notes.

2:53:12If you like this episode, go check out other semiconductor episodes and video. 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. That's right. That's right. Total sleeper pick, amazing story. Erwin Jacobs, one of the greatest entrepreneurs in American history.

2:53:37Yes, 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.

2:54:00After this episode, check out ACQ2. We've been talking about this episode with synopsis. There's one with Renee Haas from ARM Holdings that we did. It's our most recent episode. So it's spectacular, and if you're interested in semis, go check that out. Come talk about this episode with us in the Slack, acquire.fm-slack, and if you want to know when future episode drops, you can find out, sign up at acquire.fm-slash-email, and you'll also get episode corrections and hints at what the next episode will be.

2:54:29So without listeners, we'll see you next time. We'll see you next time.