INTRO: Have you ever heard of a company called TSMC?
While most people have never heard about TSMC, all of us are extremely dependent on the company.
As of July 2020, TSMC controlled 51% of the entire global chip market.
And when you look at consumer electronics, the numbers are just even higher.
In terms of iPhones, supercomputers, and automotive AI chips, TSMC is responsible for 92% of production
while Samsung controls the remaining 8%.
Considering their monopoly on the semiconductor market, I don’t think you’d be surprised
to hear that they’re the 10th largest company in the world coming in at $607 billion.
Yet, the general public has never heard about TSMC.
So, here’s how TSMC became the king of semiconductor manufacturing.
MORRIS CHANG: Taking a look back, the story of TSMC dates
back nearly a hundred years to a man named Morris Chang who was born on July 10, 1931
in Ningbo, Chekiang.
A lot of Morris’ formative years were during the height of World War 2, so his family found
themselves constantly moving around China to avoid areas of conflict.
Initially, they moved from Ningbo to British Hong Kong, and this is where Morris would
attend primary school.
But, by the time he was 11, Japan would invade and overtake Hong Kong which forced the family
to move to Shanghai, then back to Ningbo, and then to Chongqing.
This lasted for a couple of years, but in 1948, the Chinese Civil War would break out,
and the family would move to Hong Kong once again.
Fortunately for Morris though, he was about to turn 18 which meant that he could attend
college in a much more stable area.
Morris initially wanted to be a writer or journalist, but his father convinced him that
engineering was a much more stable path.
And with that, Morris would move to the US and attend Harvard University.
He only stuck around at Harvard for one year though as he would transfer to MIT during
his second year.
Morris would get his bachelors in mechanical engineering in 1952, and he would instantly
turn around and get his masters as well in 1953.
Morris also pursued a doctoral degree from MIT, but he would eventually quit in 1955
after his thesis was rejected multiple times.
Given that Morris already had a bachelors and masters in engineering though, it wasn’t
that hard for him to find a job.
In 1955, Morris joined Sylvania Semiconductor and he would work there for 3 years before
switching over to Texas Instruments, and this is where he would spend the majority of his
working days.
Unlike many entrepreneurs who start a business during college or after a couple of years
of work, Morris held a job till it was basically time to retire.
He slowly worked his way up the corporate ladder and stayed at Texas Instruments for
25 years.
In 1961, Texas Instruments sponsored Morris’ PhD in electrical engineering from Stanford,
and I think this is what really got Morris to stick around.
After receiving his PhD, Morris got promoted to Vice President and eventually President
of TI.
It wasn’t until 1983 that Morris left TI when he got offered a job as COO at General
Instrument Corporation.
He only stuck around for a year though before he quit in 1985.
At this point, Morris was 55 years old, and I’m sure he made plenty of money as an engineer
and executive.
So, he could’ve easily retired, but instead he decided to partner with Taiwan and Philips
and founded TSMC in 1987.
BREAKING IN: By the time TSMC was created though, legacy
players like Intel, TI, and NEC dominated the market.
And given that it took years to develop and manufacture advanced semiconductors, the barrier
to enter the industry was quite high.
But, on the brightside, if you were able to cross that barrier, you had a great shot as
brand value doesn’t mean much in this industry.
After all, consumers don’t know or care about where these chips come from, so electronics
companies just choose the most cost effective supplier.
TSMC’s first chips were 2 process nodes or basically 2 generations behind the competition,
but Morris was able to make this work by pricing their semiconductors ahead of the cost curve.
In other words, Morris took a loss at the beginning in order to attract customers, and
he leveraged economies of scale to turn a profit.
While simple in theory, this idea was extremely controversial in the 1980s as it was extremely
difficult to reach said economies of scale.
So, Morris was making a massive gamble with this strategy, but given that he was backed
by Taiwan and Philips, he had some pretty deep pockets.
Within 4 to 5 years, Morris was able to reduce the gap between TSMC and the legacy players
to just 1 process node.
And around the same time, Morris would take TSMC public in 1993 through the Taiwan Stock
Exchange.
4 years later, TSMC would become the first Taiwanese company to be listed on the New
York Stock Exchange.
With the help of the public markets and the irrational dotcom bubble, Morris was able
to continue his super aggressive strategy throughout the 1990s, and TSMC would catch
up to the legacy players by the end of the century.
GLOBAL GIANT: TSMC had finally broken into the semiconductor
industry, and they could’ve taken it easy by simply keeping up with the competition.
But, Morris had no plans of slowing down.
Thus far, he had dedicated the company’s efforts into catching up to the competition,
and now he was going to pour all of their effort into becoming the global leader.
Given that he was over 70 years old though, Morris would hand over the position of CEO
to Rick Tsai.
Under Rick’s leadership, TSMC continued to rapidly innovate their chips.
In fact, between 2006 and 2008, Rick oversaw the company’s biggest leap in manufacturing
from 65 nanometer chips to 40 nanometer chips.
But, despite this fast progress, TSMC didn’t grow all that much during this time period
as the global chip industry was experiencing a massive recession following the dotcom bubble.
And it didn’t take long for the 2008 financial recession to roll around, but Morris actually
saw great opportunity through this recession.
He witnessed the emergence of mobile technology like smartphones and tablets, and he was extremely
excited to be part of this revolution.
In fact, Morris was so excited and he saw so much opportunity that he would return as
CEO in 2009 at age 78.
It looks like Morris' primary goal with returning to TSMC was to make a deal with Apple.
And in 2011, this would become a reality as Apple agreed to begin trial production of
the A5 and A6 chips with TSMC.
From there, it didn’t take long for Apple to commit to working with TSMC for the long
term.
And today, Apple accounts for 25% of TSMC’s entire revenue.
Anyway, after the Apple partnership was solidified, Morris announced that he was going to retire
in 2013 and make Rick CEO again.
But, when 2013 actually came around, Morris decided to stick around even longer.
Not only was the mobile space exploding, but Nvidia and AMD were about to go on their own
exponential runs.
Nvidia started embracing the machine learning and AI industries in the mid 2010s as the
PC market started to stagnate.
In the meantime, AMD was basically employing Morris’ strategy of pricing chips ahead
of the cost curve with Ryzen, and this turned out to be a massive success.
To make things even better, Bitcoin exploded in 2017 which resulted in crazy high demand
for Nvidia and AMD GPUs for crypto mining rigs.
And given that TSMC is the supplier for Nvidia, AMD, Apple, and everyone else you can think
of, this boom directly carried over to TSMC.
TSMC managed to break their dotcom highs in late 2016, and profits started to grow exponentially
once again.
And with that, Morris would finally retire in June of 2018 at age 86.
SUPPLY SHORTAGE: After Morris left, Mark Liu who served as
co CEO became CEO and Chairman.
Over the next few years, TSMC started to stagnate once again.
And though this makes Mark look bad, it’s really not his fault.
Morris is just really good at leaving at the peak.
Anyway, though the company stagnated for a few years, once the pandemic and supply shortage
hit, TSMC would go parabolic once again.
However, the supply shortage has not been all good for TSMC.
Sure, their profits and stock price have gone to the moon, but the shortage has also drawn
a lot of attention towards TSMC’s monopoly.
Basically all of the chip shortages circle back to TSMC, and it’s not particularly
a good thing that one company has so much influence.
So, many governments around the world have been trying to diversify chip production.
For example, former president Donald Trump pressured TSMC into building a $12 billion
manufacturing plant in Phoenix.
Similarly, TSMC agreed to open a research and development facility in Japan.
In the meantime, the European Union is trying to beat TSMC to 2 nm production.
But, this is going to be extremely difficult.
TSMC themselves are only on 3 nm production, and they’ve never slowed their innovation
momentum.
According to Peter Hanbury, if you want to compete against TSMC on 3 nm, you’re going
to have to spend $15 billion this year, then $18 billion next year, and then $20 billion
the year after.
And that’s just 3 nms, the European Union wants to beat TSMC to 2 nms.
The problem is that as technology continues to improve, it becomes exponentially harder
and more expensive to take the next step.
So, it’s basically impossible to just step in and compete against TSMC.
You would likely need a budget of $100 billion to beat TSMC to 2 nm in a short period of
time, and though the EU can technically afford that, it’s unlikely that they’ll actually
make such a large investment.
As more time goes by though, it’ll just become even harder to challenge TSMC though,
so maybe the EU will bite the bullet, but we’ll just have to wait and see.
ETHICAL MONOPOLY: While TSMC is no doubt a monopoly, it could
be argued that TSMC has thus far been an ethical monopoly.
They haven’t voluntarily jacked up prices or slowed down innovation or been involved
in any sort of corruption even though all of these would’ve been super easy given
their influence and control.
TSMC is actually extremely strict about ethics and integrity.
Just a few months ago, they fired seven employees for leaking information about Apple’s upcoming
chips.
Since Morris founded TSMC, the company has centered around 4 core values which include
integrity, commitment, innovation, and customer trust.
While these sound super cliche, TSMC’s history over the past 34 years has shown that TSMC
has indeed upheld these values.
I mean just take a look at how Nvidia’s CEO Jensen Huang talks about TSMC.
Hearing that, I think it’s pretty clear that the world’s biggest companies don’t
work with TSMC because they have to, but because they want to.
And as long as that’s the case, maybe the TSMC monopoly isn’t all that bad.
Do you guys think that something has to be done about TSMC?
Comment that down below.
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