TSMC

We dive into the unbelievable and unlikely history behind the quietest technology giant of them all: the Taiwan Semiconductor Manufacturing Company. Founded in 1987 by the then-56 year old Morris Chang, already a legend in the semiconductor industry by virtue of his meteoric rise and fall at Texas Instruments, TSMC today manufactures nearly all the leading-edge chips for Nvidia, Apple, Broadcom, Qualcomm, AMD, and yes — even Intel. Tune in for an incredible story of innovation, perseverance and lasers. Lots and lots of lasers! Note: this is a remastered version of our original 2021 episode. We don’t often re-release old episodes, but in this case we have a very timely reason for doing so. Stay tuned! :) *Links:* - Episode Sources: https://www.acquired.fm/episodes/tsmc#sources *Carve Outs:* - Ted Lasso (Season 1): https://tv.apple.com/us/show/ted-lasso/umc.cmc.vtoh0mn0xn7t3c643xqonfzy - Greek: https://www.imdb.com/title/tt0976014/ - Who is Michael Ovitz?: https://www.amazon.com/dp/B07B2HS77M/ *More Acquired:* - Get email updates https://www.acquired.fm/email and vote on future episodes! - Join the Slack http://acquired.fm/slack - Check out the latest swag in the ACQ Merch Store https://www.acquired.fm/store! _Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions._

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Ben Gilbert?

  Hello, acquired listeners. We regularly get feedback that this episode on TSMC, the Taiwan Semiconductor Manufacturing Company, is one of the best-acquired episodes ever. And interestingly, it predates our Nvidia episodes. We did it way back in 2021, when the acquired audience was about 12% the size of what it is today, which means that the vast majority of you have never heard it. So we definitely wanted to fix that. Since then, semiconductors have become so much more important in our world, and TSMC has essentially become the only manufacturer of the leading-edge chips. They make the primary chip inside every MacBook and iPhone shipped today.

• 0:43Ben Gilbert?

  They're powering the AI wave, manufacturing all of Nvidia's chips. They make the chips for a whole bunch of other fabless companies like Qualcomm, AMD, Broadcom, and hyperscalers like AWS.

• 0:55David Rosenthal?

  And it turns out, they even manufacture a lot of chips for Intel, too.

• 1:00Ben Gilbert?

  Yes.

• 1:00David Rosenthal?

  Little-known fact. Yeah, TSMC rode the smartphone era to crazy heights, as we all know. And here now, in the next AI era here in 2025, it turns out that they are the manufacturing superpower behind all of that, too.

• 1:14Ben Gilbert?

  Yep. Well, listeners, without doing too much foreshadowing, now is a very good time for anyone to listen or re-listen to the TSMC episode. So we decided we should go all the way back to the raw audio tracks and remaster this whole thing from scratch for your listening pleasure.

• 1:32David Rosenthal?

  Ben, in fact, I looked it up since we were going back to 2021 when we initially recorded this. TSMC's market cap has doubled since then, from $550 billion to over $1 trillion. And in fact, you're the one that tipped me off to this as we were re-researching here. They and Saudi Aramco are the only trillion-dollar companies in the world that are not located on the West Coast of the United States. Wild.

• 1:58Ben Gilbert?

  Such a crazy stat. It's crazy that the rest are located on the West Coast of the United States, but it really underscores what an extreme outlier TSMC is. So without further ado, the story is truly unbelievable, and we hope you enjoy this presentation of TSMC remastered.

• 2:31Ben Gilbert?

  Welcome to season nine, episode three of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I am Ben Gilbert.

• 2:40David Rosenthal?

  And I'm David Rosenthal.

• 2:42Ben Gilbert?

  And we are your hosts. Today's episode is on TSMC, or the Taiwan Semiconductor Company. It is your classic, most people have never heard of it, but it's the ninth largest company in the world, episode.

• 2:55David Rosenthal?

  This is wild. Morris Chang founded TSMC at age 56, retired at 74, then came back at age 78, inked the deal to make all of Apple's chips. And yeah, we're going to tell the whole story here. It's wild.

• 3:10Ben Gilbert?

  It's nuts. They make literally every chip in every iPhone sold today and soon to be in every Mac sold. If you're excited at all about Nvidia, AMD, Qualcomm, or even any of the chips that Amazon, Microsoft, Facebook, Apple are making, all of those chips, or nearly all of them, are actually made by TSMC, along with all the chips in your cars and your smart home devices and fighter jets and everything. Unbelievably, this company that the entire world relies on is on an island that some countries feel is a sovereign nation and the People's Republic of China feels is actually theirs. So today's episode has it all, ascending from startup to tech superpower, an underdog

• 3:52Ben Gilbert?

  founder, and of course, a good dose of geopolitics.

• 3:56David Rosenthal?

  Indeed.

• 3:58Ben Gilbert?

  All right, well, listeners, it finally felt like the right time to do this episode amidst this global chip shortage that we've got going on that, David, I think I've heard even Ford has paused the production of F150s because of this. So it is like a massive impact on the world. And we've had TSMC on the agenda to do for like two and a half years now in our little Google Doc.

• 4:18David Rosenthal?

  Totally. Well, I feel like we haven't called it a mini-series, but let's call it a mini-series on semiconductors and like silicon.

• 4:25Ben Gilbert?

  The ARM episode.

• 4:26David Rosenthal?

  Yep. Sequoia, part one, PA Semi.

• 4:29Ben Gilbert?

  Yep. Okay, listeners, it is time to jump into the history and facts, and David's going to lead us in that. But as usual, even though we're going to be probably very excited about some companies, less excited about other companies, this show is not investment advice. We may have investments in the companies we discuss. It's for entertainment and informational purposes only, and you should do all of your own research.

• 4:51David Rosenthal?

  Okay, speaking of, we start in Ningbo, China in July 1931, just about one year after Warren Edward Buffett was born in Omaha, Nebraska. And there are going to be quite a few parallels here as we go through this episode. But in July 1931, in Ningbo, China, our protagonist, Dr. Morris Chang, Order of the Propitious Clouds with Special Grand Cordon, which is the highest civilian honor that anyone in Taiwan can hold.

• 5:24Ben Gilbert?

  Sweet.

• 5:24David Rosenthal?

  So he's like a knight of Taiwan. It's the Order of Propitious Clouds. And then I think there's like nine ranks of it. And the highest is Special Grand Cordon.

• 5:33Ben Gilbert?

  And he's Special Grand?

• 5:34David Rosenthal?

  He's special. Yes, he's very special. So he was born then. For those who are unfamiliar with Chinese geography, Ningbo is a small city, just a bit south of Shanghai. You know, small, it's about eight million people. It's just casual, no big deal.

• 5:49Ben Gilbert?

  China's scale is ridiculous, but certainly wasn't eight million people when Morris was born in 1931.

• 5:53David Rosenthal?

  No, but I bet it was still probably pretty big. But yeah, today, eight million people, crazy. So Morris's father was a county official and later became a bank manager. So the family moved around a good bit within China as his father was transferring for work. This is pre People's Republic of China. This is pre World War II. This is a very different place.

• 6:14Ben Gilbert?

  Right, the leadership is not communist.

• 6:17David Rosenthal?

  No, no, no. So his early childhood years were like middle class, not wealthy, but pretty well to do relative to your average Chinese citizen. Then, when he was six, the Second Sino-Japanese War breaks out, and Morris and his mom flee the main part of China to Hong Kong. And they go to live in Hong Kong for a few years to escape the air raids and the fighting. And then on December 8th, 1941, three hours after Pearl Harbor, the Japanese attack and invade Hong Kong. And Morris talks about this, he's like, yeah, everybody knows Pearl Harbor, December 7th, 1941.

• 7:00David Rosenthal?

  What people don't often talk about is the same thing happened in Hong Kong three hours later on the next day. So they're in Hong Kong, so they flee again back to China. They end up in Shanghai this time and they stay there for a few years until 1948, after World War II is over. But that's when the Chinese Civil War breaks out. That would lead to the Chinese Communist Revolution. And so they flee again back to Hong Kong. So this is crazy. Morris, before he turns 18, he has lived through three major wars. The Second Sino-Japanese War, World War II, and the Chinese Civil War. So the next year in 1949, which is the same year as the establishment of the PRC,

• 7:45David Rosenthal?

  the People's Republic of China, Morris turns 18. And with the help of an uncle that he has in Boston, his life completely changes. He gets accepted to Harvard. So he goes to the US, he goes to college at Harvard. Wow.

• 8:01Ben Gilbert?

  Talk about a change of fate.

• 8:02David Rosenthal?

  Talk about a change of fate, a change of scene, everything. Morris says much later, "My reaction entering Harvard was sheer ecstasy, almost disbelief. What a country. The United States was at its peak in its moral leadership and its political leadership in terms of democracy, and it was the richest country in the world."

• 8:25Ben Gilbert?

  Not to mention stable. I mean, you could say what you want. You could count on the fact that it's likely that 10 years from now, whatever economic structure, political structures exist will continue to exist. If what you want to do and what he ended up doing with his whole life is innovate, having that stability around you and all those structures enable you to do that.

• 8:45David Rosenthal?

  Yeah, like we just take this for granted, but this is a good reminder. At the very least, he's probably not going to have to flee Boston to continue his studies. But he does end up fleeing Harvard, as we'll get into. So Morris loved it. It was like that quote we read. He was so overjoyed to be there. But he realizes he has kind of a new problem in America and at Harvard. His parents aren't coming over. He's on his own. He's got to support himself and make his own way. And at that time, his race is probably going to limit his opportunities. So as he says, quote, "In the early 50s in the United States,

• 9:26David Rosenthal?

  there were Chinese laundromen, Chinese restaurateurs, Chinese engineers and Chinese professors. Those were the only respectable professions for Chinese. No lawyers, no accountants, no politicians." And what does Harvard churn out? Lawyers, sort of accountants, maybe politicians, yes.

• 9:42Ben Gilbert?

  Yeah.

• 9:43David Rosenthal?

  Not a lot of engineers.

• 9:44Ben Gilbert?

  Certainly finance professionals.

• 9:45David Rosenthal?

  Certainly finance professionals. As we will see, as we will go along, Morris is much more than a finance professional. But Harvard actually didn't have an undergrad engineering program at the time.

• 9:56Ben Gilbert?

  Huh. That's crazy to think about.

• 9:59David Rosenthal?

  If you're really, really focused, you're probably going to go down the street in Cambridge from Harvard.

• 10:05Ben Gilbert?

  To MIT.

• 10:06David Rosenthal?

  To MIT, which Morris does. So he only spends his freshman year there. And then for his sophomore year, he transfers to MIT so that he can study mechanical engineering. So Morris, our man, has learned the ways of the world. In the US, he's focused. He starts mechanical engineering a year behind at MIT. He finishes both undergrad and his masters in the remaining three years.

• 10:30Ben Gilbert?

  And what year is this?

• 10:32David Rosenthal?

  This would have been 1951 when he transferred, fall of 1951.

• 10:38Ben Gilbert?

  Okay, so to contextualize what's going on in the tech world right now with quotes around it, because it's not so much a world as a very small continent. I mean, you have all of the post-World War II defense spending that went in, particularly on the West Coast, with the innovations from Stanford. But has Fairchild Semiconductor been started yet?

• 10:57David Rosenthal?

  Nope, nope, nope.

• 10:58Ben Gilbert?

  So maybe Shockley Semiconductor?

• 11:00David Rosenthal?

  Shockley Semiconductor was probably just getting going, but we're probably still in vacuum, too.

• 11:04Ben Gilbert?

  Like Bell Labs land.

• 11:06David Rosenthal?

  To give you a sense. Silicon is years away. Transistors are probably just getting going. We're not in the integrated circuit yet, and it's all being done in germanium, not silicon.

• 11:16Ben Gilbert?

  Wow.

• 11:17David Rosenthal?

  So it's like, this is OG.

• 11:19Ben Gilbert?

  Yep.

• 11:19David Rosenthal?

  So after he gets his masters in the three years, Morris wants to stay and do a PhD, fully complete his technical training, but he ends up failing his qualifying exams twice. They give you two chances to take and he fails twice.

• 11:33Ben Gilbert?

  By the way, this is a good time to say, so David and I watched and listened to every footage that Morris has ever spoken that has been released publicly to prepare for this. He is very funny.

• 11:43David Rosenthal?

  Oh, he's great.

• 11:44Ben Gilbert?

  The way he talks about this, he says that unfortunately, the biggest impediment to him going forward was that he failed the qualifying exam. But fortunately for him, they were kind enough to let him take it a second time, which he also failed.

• 11:55David Rosenthal?

  Yeah.

• 11:55Ben Gilbert?

  And he has this really dry, clever sense of humor.

• 11:58David Rosenthal?

  So in one of the interviews, he talks about, one of the Stanford ones, he gets a question from the audience about how did he kick his smoking habit?

• 12:06Ben Gilbert?

  Oh, yeah.

• 12:07David Rosenthal?

  That like, the questioner is like, I know you used to smoke. How did you finally stop it? And he's like, I never stopped. I still smoke.

• 12:14Ben Gilbert?

  Yeah.

• 12:14David Rosenthal?

  He's like 94 years old.

• 12:16Ben Gilbert?

  And he goes on to make the case for why he's a pipe smoker.

• 12:19David Rosenthal?

  Yep.

• 12:20Ben Gilbert?

  And actually, even though smoking is hurtful to his lungs, it's actually beneficial for his mental life. So he's pretty sure it's prolonged his life.

• 12:28David Rosenthal?

  Well, he says he's delved into the data and pipe smokers live longer than non-smokers.

• 12:33Ben Gilbert?

  Which I'm sure you can find data to support that. I'm also sure you can find plenty of data to refute that. But yes, this gives you a sense of who Morris is.

• 12:42David Rosenthal?

  Okay. So he's failed his qualifying exams. He's got to go out and get a job and, you know, not as a PhD, he's got to go get a job as a super entry level as an engineer. I mean, he has a master's degree, but still. Okay. So legend has it. He has a couple job offers. The one he really wants, remember, he's a mechanical engineer. And this is like super early days of technology. It's not really a thing.

• 13:06Ben Gilbert?

  There was electrical engineering at this time.

• 13:08David Rosenthal?

  Right, right, right. Yes, he could, but he didn't study electrical engineering. In terms of where you would want to work, like, it's not really on anybody's radar screen, especially Morris's, that you're going to go enter the tech industry.

• 13:18Ben Gilbert?

  Right.

• 13:18David Rosenthal?

  So he gets his dream job offer from the Ford Motor Company.

• 13:23Ben Gilbert?

  Oh, no way.

• 13:24David Rosenthal?

  Yes.

• 13:24Ben Gilbert?

  I didn't hear that.

• 13:25David Rosenthal?

  And I'm sure this is apocryphal.

• 13:27Ben Gilbert?

  But let's repeat the apocryphal story and broadcast it out to hundreds of thousands of people here.

• 13:33David Rosenthal?

  So the legend has it that Ford offers him a salary of $479 a month to go take an entry level job. And then he has a competing offer from Sylvania's new semiconductor division.

• 13:48Ben Gilbert?

  And Sylvania, I know of this company only because my vacuum growing up was made by Sylvania.

• 13:53David Rosenthal?

  Yeah. Oh, well, we're going to talk much more about Sylvania in one second. This is the competing job offer he's considering. They offer him a salary of $480 a month, $1 more. And legend has it that Morris asked Ford to beat Sylvania's offer. They didn't, and so he took the Sylvania job offer.

• 14:11Ben Gilbert?

  I'm sure that is a-

• 14:12David Rosenthal?

  This is 100% a part of it.

• 14:13Ben Gilbert?

  Yeah.

• 14:14David Rosenthal?

  But, you know, Morris, he's great. So, speaking of Sylvania, do you remember, I'm sure some portion of our audience remembers, but do you, Ben, remember who else started their career in Sylvania's semiconductor division right around this exact same time? We've talked a lot about this and this person on the show.

• 14:35Ben Gilbert?

  No.

• 14:36David Rosenthal?

  Donald T. Valentine.

• 14:39Ben Gilbert?

  No way.

• 14:40David Rosenthal?

  Yep.

• 14:40Ben Gilbert?

  That's right.

• 14:42David Rosenthal?

  So he started at Sylvania after Fordham, or maybe it was after the military.

• 14:46Ben Gilbert?

  He ended up at Shockley.

• 14:48David Rosenthal?

  Well, no, then he was at Raytheon, and then he joined Fairchild.

• 14:50Ben Gilbert?

  Fairchild, okay.

• 14:51David Rosenthal?

  Right after the traitors, he left Shockley and started Fairchild.

• 14:54Ben Gilbert?

  You're better at remembering these deep details of older episodes than I am.

• 14:58David Rosenthal?

  Well, I do a lot of research for this show. And sometimes research includes past acquired episodes.

• 15:05Ben Gilbert?

  There you go. So they didn't overlap, Don Valentine and-

• 15:09David Rosenthal?

  They were never in the same place. They were in different locations and different job functions, very different job functions. But they were both, I believe, both at Sylvania-

• 15:18Ben Gilbert?

  Amazing.

• 15:18David Rosenthal?

  At the same time. Crazy. So Don is out chilling in California, like we were talking about, and falling in love with California. He's playing water polo. He's like, oh my gosh, I'm never gonna leave this place. Morris, he's on the grind. He gets posted as a junior engineer at Sylvania's Ipswich, Massachusetts plant. Not quite the same glamour as Don out in Southern California. So remember, Morris is a mechanical engineer. He doesn't know anything about electrical engineering, but he's working in this new semiconductor division. So after work, he's living in a hotel, by the way. He doesn't even get an apartment. It's like some company sponsored hotel. He goes home, back to the hotel from work and he studies the best textbook that he can find

• 16:02David Rosenthal?

  about electrical engineering, which is entitled Electrons and Holes in Semiconductors with Applications to Transistor Electronics, written just recently, a couple of years before in 1950 by William Shockley.

• 16:17Ben Gilbert?

  Oh, wow.

• 16:18David Rosenthal?

  Yeah.

• 16:19Ben Gilbert?

  Shockley and two other guys basically invented the, I'm not sure it was the first transistor, but the first transistor of the type that everything else would then be built upon when they were at Bell Labs, not too long before this.

• 16:33David Rosenthal?

  Yeah, not too long at all. I mean, Eniac was vacuum tubes and then Shockley invented the transistor. And then in a sec, we're going to talk about the integrated circuit that Bob Noyce and Jack Kilby, who we're going to talk about, invented, co-invented. But anyway, okay, back to this moment in time. So Morris is just studying the Shockley textbook in his hotel room, but like, he's not a college student, he doesn't have any teachers, he just has the book.

• 16:57Ben Gilbert?

  Wow.

• 16:58David Rosenthal?

  But he's very resourceful. So he figures out that one of the senior engineers at the plant is kind of an alcoholic and hits up the hotel bar almost every night. So what Morris does is he comes home from work in the early evening. He studies in his room for a couple of hours. And then later at night, when the older colleague shows up at the bar, Morris goes down to the bar, not to drink, but he brings the textbook and he asks the guy twice, he's like, I don't understand this, I don't understand that, like grill me. And he's just like buying drinks for his buddy. So great.

• 17:29Ben Gilbert?

  Incredible.

• 17:30David Rosenthal?

  Here's the quote, he says later, "He," being the older colleague, "didn't solve all my problems, but he solved enough so that I could move ahead. He was my main teacher about electrical engineering." So great.

• 17:42Ben Gilbert?

  Wow.

• 17:43David Rosenthal?

  So this goes on for three years. Morris is like rolling hard. He's burning the candle at both ends, working and at the bar, but not drinking, learning. But as he like is learning the industry, coming up to speed. It becomes pretty clear to him that if he really wants to go places in this new emerging industry, Sylvania, not really the right bus to be on, so to speak. And obviously, Don Ballantyne figures out the same thing and jumps to Raytheon and then to Fairchild. Morris says the moment when this crystallized for him was there was a talk that a senior manager at Sylvania gave at the plant. And the quote that the senior manager said that stuck with Morris for the rest of his

• 18:24David Rosenthal?

  life was, "We at Sylvania cannot make what we can sell, and we cannot sell what we can make." Real great position to be in. So Morris was like, "Damn, I gotta get the hell out of here."

• 18:37Ben Gilbert?

  That's a signal to move on, if I've ever heard one.

• 18:39David Rosenthal?

  Totally. So like Don, Morris leaves Sylvania for greener pastures. However, not to California.

• 18:48Ben Gilbert?

  Halfway in between.

• 18:48David Rosenthal?

  Or to Silicon Valley. Yep, halfway in between. So we talk a lot about Fairchild and the Trader's Eight, Silicon Valley, blah, blah, blah, you know, the place to be. Here's the secret, Silicon Valley's all marketing. The biggest semiconductor company in all types, digital, analog, everything at that time, was not in California. It was in Dallas, Texas. It was Texas Instruments.

• 19:12Ben Gilbert?

  Which of course, me, you, many people in our generation know of as the people that made our graphing calculators in high school and college. But of course, at this time, I don't even think they had a consumer division yet.

• 19:22David Rosenthal?

  No, no, no, no, and that's going to come up later. No, TI was the juggernaut. Now Silicon Valley is Silicon Valley, but then it was, yeah, okay, California, I don't know, west coast, whatever. Like, TI was the big incumbent. They were the juggernaut. TI actually got its start, I had no idea before doing the research here, in the 30s, you're like, how did a technology company and a semiconductor company end up in Dallas, Texas? They started making instruments, Texas Instruments, for measuring seismic activity for oil exploration.

• 19:53Ben Gilbert?

  Whoa.

• 19:53David Rosenthal?

  So all the oil companies.

• 19:55Ben Gilbert?

  That makes sense about Texas.

• 19:56David Rosenthal?

  They were like the TSO, see, they were like the technology provider to oil companies. And that's what led them into computing and into digital to power that business. They were huge. Not just huge in terms of the company, but they were the technology leader. So Bob Nois, like I was saying a minute ago, is credited, you know, when he was at Fairchild, inventing the integrated circuit and all that. Well, he was the co-inventor. Simultaneously, it was co-invented by Jack Kilby, who was at TI. And Jack was actually the one who got the Nobel Prize for inventing the integrated circuit. Gordon Moore, who was also, you know, at Fairchild and then founder of Intel along with Nois, he would coin Moore's Law.

• 20:37David Rosenthal?

  But Jack has a great quote, too, about the implications of the integrated circuit and semiconductors. He says, "What we didn't realize then," this was a little later, when they were inventing it, "was that the integrated circuit would reduce the cost of electronic functions by a factor of a million to one. Nothing had ever done that for anything before."

• 21:00Ben Gilbert?

  Wow.

• 21:00David Rosenthal?

  It's such a great way to frame it, too. Like, this had never happened in human history. There was this thing that used to be X expensive in terms of resources. And then magically, one day, it's a million times cheaper.

• 21:12Ben Gilbert?

  Yeah, that's crazy. I didn't realize it was on that scale. This is probably a good time to talk about some definitions, because there are some things that we've thrown around already. I think everyone has a general understanding of what these things are, but it's worth understanding more precisely before we move on. The first of which is a transistor. The best way to think about a transistor is not the tiny little transistor that's on a silicon die today, but think about it as a little encased piece of circuitry with three prongs coming out of it. And those three prongs will save the technical names, basically have an input, an output, and something that controls the input and the output. It's a switch. It has two purposes, the first of which is being a switch where you can decide that

• 21:53Ben Gilbert?

  either stuff is going to go through it, stuff being voltage, current, or none, or it rounds to none. And so that way, you can decide, hey, this binary piece of equipment is either off, zero, or on, one. Okay, so that's a transistor. Now, a transistor can be made out of lots of different things. It can take any implementation. Why is everybody talking about silicon? Well, silicon as an element is a semiconductor. It is a metalloid. It has some properties that make it like a metal, like a conductor. It has some properties that make it non-conductive. Imagine trying to move electrical signal through a piece of wood. It's not going to work, but imagine moving it through copper.

• 22:38Ben Gilbert?

  It's going to work really well and you're never going to be able to interrupt it. Well, geez, wouldn't it be great if we had some material, a semiconductor, where we could modify whether current was flowing through it or not?

• 22:48David Rosenthal?

  Make it a switch really easily.

• 22:49Ben Gilbert?

  Exactly, exactly.

• 22:50David Rosenthal?

  Well, and lots of things are semiconductors. Germanium was the main material for a while, but germanium is expensive and rare. Silicon is made of sand.

• 22:59Ben Gilbert?

  I think it's like the second most plentiful, mineable element on earth.

• 23:03David Rosenthal?

  Ah, yeah, I mean, it's sand, right?

• 23:05Ben Gilbert?

  Yeah.

• 23:06David Rosenthal?

  There's one other major thing, though. So we've been talking about transistors.

• 23:08Ben Gilbert?

  The IC?

• 23:09David Rosenthal?

  Yeah, the IC.

• 23:11Ben Gilbert?

  The integrated circuit.

• 23:11David Rosenthal?

  The integrated circuit. A transistor, it's a switch. Before the IC, people were making switches, like you make one switch at a time. You wire it to another switch. You know, if you've seen photos of vaniac and vacuum tubes, literally they're plugging one tube into another, you're still doing that with transistors.

• 23:27Ben Gilbert?

  Yep.

• 23:27David Rosenthal?

  When Nois and Kilby invent the IC, now you can put a lot of switches on one thing. And you know, fast forward today, the latest processor, you know, the five nanometer processors that TSMCM, basically nobody else is churning out. I don't know, billions, trillions of switches are in like a tiny little.

• 23:46Ben Gilbert?

  Integrated circuit.

• 23:47David Rosenthal?

  Without the integrated circuit, that never would have happened. So this invention, this miraculous invention of the integrated circuit, it happened in 1958. When did Morris Chang join Texas Instruments in 1958?

• 24:03Ben Gilbert?

  Ooh, fascinating.

• 24:04David Rosenthal?

  Coincidence? Yes, totally a coincidence.

• 24:07Ben Gilbert?

  Absolutely coincidence.

• 24:07David Rosenthal?

  Absolutely a coincidence.

• 24:08Ben Gilbert?

  And again, to peg us in history here, we're still, I think, 10 years before the founding of Intel.

• 24:13David Rosenthal?

  Yes, exactly 10 years. Yeah, Morris obviously wasn't working directly with Jack on inventing the IC. But this gives you a sense. TI, this is the place, this is like Google plus Facebook. Without the world paying attention to them. Yes, and in Texas. So Morris gets assigned as his first project to a sort of problem child within TI. They have entered into a deal with IBM. IBM is working on their first mainframe computer, major project that's going to use transistor logic instead of vacuum tubes, the IBM 7090. And they anticipate so much demand for this product. Usually IBM

• 24:55David Rosenthal?

  manufactures everything for all their products themselves, but they're like, we need more chips than we're going to be able to make ourselves. So we need a second source for our chips. They turn to TI. And they're like, hey, we can give you all the designs for, you know, how to do this, this chip that we want for our product. We want you to additionally manufacture some of these in addition to our own line. You might even say almost like a contract manufacturer of chips or like a foundry business almost, you know. Hmm, interesting. But it's not going too well. So IBM's own plant is churning out transistors with about a 10% yield, which means that of every 100 chips that they turn out of

• 25:39David Rosenthal?

  the plant, 90% of them fail and only 10% of them work. Yikes. That's the first party line. The TI line has about a 0% yield. Really? They're lucky if they're getting any that work. Almost everything coming off the line fails at TI when Morris shows up. So Morris would say about this later, quote, "The supervisor was concerned. The operators were concerned. Everybody was concerned."

• 26:06David Rosenthal?

  So Morris, remember, he's a mechanical engineer by training.

• 26:08Ben Gilbert?

  Right.

• 26:09David Rosenthal?

  So he starts tinkering. He's like, well, I know this is a mechanical process, chemical and mechanical process, creating this stuff. I'm just going to use my training and optimize it like a good mechanical engineer. So he starts doing some stuff. After about four months, he gets the yields at the TI plant up to 20%. So twice as good as the first party line at IBM. And there's a great profile. There was one of the main sources for this episode in IEEE Spectrum.

• 26:35Ben Gilbert?

  Oh, yeah.

• 26:35David Rosenthal?

  Great industry magazine that we'll quote from here. They write, suddenly even TI President Pat Haggerty knew Morris's name. IBM thought Chang had just gotten lucky, but when the company, IBM, sent engineers down to talk to him, Morris described the theories he'd been testing and explained why his experimental process worked. This achievement propelled him into his first managerial job, creating a germanium transistor development department with 20 plus engineers reporting to him. So this is his first big win here in the foundry business. So on the back of all this, TI is like, all right, we got a rising star here. They offered to sponsor him to go finally get his PhD. They even offered to continue paying his full salary while he's getting his PhD, which they're paying for.

• 27:20Ben Gilbert?

  All right. So they think like very highly of him.

• 27:22David Rosenthal?

  Very, very highly of Morris. I mean, this one probably made the millions doing this in 1958.

• 27:30Ben Gilbert?

  It's funny. I don't know anything about the commercial success of that particular IBM mainframe, but if it's the first one that's transistor based, instead of being vacuum tube based, I have to imagine that it was far more efficient for customers. Customers are probably lining up for it.

• 27:43David Rosenthal?

  I bet there's a lot of demand. And what's Morris making a year? Like $20,000, maybe? You know, how much does it cost to go to Stanford then? Not much. So they're like, sure. So Morris goes to Stanford, but he's now like a pig in mud. He has found his calling. He can't wait to get back to Texas, back to TI. So he finishes his PhD in two and a half years. Wild. One of the Stanford interviews is with John Hennessy, the president of Stanford at the time. John's like, Morris, tell the students, how did you finish your PhD in two and a half years? Morris is like, I don't know. I was focused. I didn't do much else. So by 1964, he's done. He's back at TI. And this is right as people have discovered the silicon is way more cost effective and scales up way better.

• 28:23Ben Gilbert?

  And if I remember right, the initial attempts at using silicon. Were that people didn't know how to work with it yet. And so even though it was more abundant and cheaper, there's some particular manufacturing process that you have to do to silicon in order to make it as viable as it became.

• 28:40David Rosenthal?

  Yes. How to dope silicon to make it function and produce it at scale as a semiconductor.

• 28:47Ben Gilbert?

  And listeners, this is where you should start to get the idea that especially today, manufacturing these products involves the most advanced process in human history, consisting of layers of innovation and chemistry, physics, mathematics. It's breakthrough after breakthrough after breakthrough, all building on top of each other, which need to all happen in the manufacturing process. So even here in, what, 1964, we're starting to get into the level of complexity where it's some of the most advanced science ever done, being applied in an engineering and manufacturing fashion to get even marginal results, you know, at 20% yields off the manufacturing line.

• 29:31David Rosenthal?

  And little preview to fast forward to today. TSMC, they're a contract manufacturer for silicon. That is what they are. TSMC has 40% operating margins as a contract manufacturer. It's not like this is just, there's no technology or, like, they are one of the most advanced technology organizations in the whole world. There is so much IP just in the manufacturing. Take out the design, take out the functions, just making this stuff is so hard. I mean, now it involves like lasers, like it's, we'll get to it later. It's going to blow your mind how this stuff is done. But anyway, so Morris, he's coming up, he's learning, like literally as this whole industry is getting developed, he's right there. So a couple of years after he gets back from Stanford, he's still rising through the ranks.

• 30:16David Rosenthal?

  In 1967, TI makes him a general manager of one of the divisions within the semiconductor business.

• 30:24David Rosenthal?

  And that's where he has his next big breakthrough. And this is on the business side. So Morris notices what they're doing, setting up these new plants for all these successive new methodologies and processes of manufacturing, you know, at this point, integrated circuits in silicon and pumping out these chips. It's super expensive to do this, super cost capital intensive. So what TI and everybody else in the industry did, when they would start a new product line that would use a new fab for chips, they charged a lot of money for it because like, man, they put a lot of money into these things. So right off the gate, you want the latest new hotness in the end products that TI is selling, they're going to charge a lot of money for them.

• 31:09Ben Gilbert?

  Yep.

• 31:10David Rosenthal?

  Morris realizes, he's like, that's not actually optimal to do that. Because as evidenced by his first big win at TI with IBM line, there's a learning curve to getting the yields right and learning how to manufacture a new process. And in the beginning, you're going to have really low yield. And so what you want, ideally from a fabrication perspective, is you want to have a ton of volume from the get go. Like as soon as the plant is online, you want to be running at max capacity so that you can A, learn as fast as possible, get yields up to the profitable levels. And then you want to still be running at max capacity as long as possible because you already spent the fixed cost.

• 31:52Ben Gilbert?

  Right.

• 31:53David Rosenthal?

  To make the plant. Basically, you always want max capacity. So when you started out by pricing so high, you kept demand low and you weren't able to get up to capacity fast enough.

• 32:03Ben Gilbert?

  It's almost like they didn't realize the benefit of the potential operating leverage that they had because they were just passing their exact economics onto their customers and saying, you basically have to pay us for us to do all these fixed costs. And then you'll get all the benefits of

• 32:17David Rosenthal?

  New hotness.

• 32:18Ben Gilbert?

  How cheap it is to stamp it off the press every time. Whereas what they really should have been doing is saying, We will make an investment, you know, we'll eat the cost of having to spin all this up. But boy, are we going to be super profitable on every chip that comes off the line.

• 32:29David Rosenthal?

  Yep, totally. So Morris is thinking about this. He hires BCG and they come up with the idea of actually pricing low to start to drive this volume and speed up the yield curve. And then also the side benefit of that is if they're pricing low and everybody else is pricing high, they're going to grab a ton of market share and probably keep that.

• 32:48Ben Gilbert?

  Paying consultants.

• 32:48David Rosenthal?

  I know. Well, so here's Morris's quote about this. He says, "This was in the late 60s and Boston Consulting Group was a very small outfit when we did this and we used loads of data, a lot of theory and a lot of effort. The result was so-called learning curve pricing. So start low and then continually automatically reduce the price every quarter, even when the market did not demand it. And this was a very successful effort, even though it was somewhat controversial. A lot of people thought we were being foolish. Why would you reduce the price when you didn't have to? But we did it because we believed in it and indeed our market share just kept expanding. That, combined with other strategies, made the TI Integrated Circuits business the biggest

• 33:31David Rosenthal?

  IC business in the world and also the most profitable." This is right when Intel's getting founded. So screw Fairchild, screw National, screw Intel. Like TI is kicking all of their butts and it's thanks to Morris.

• 33:44Ben Gilbert?

  And interestingly enough, the reason I always thought that Fairchild was sort of so successful in those days was out of all the defense spending and research that was being done at Stanford, the government as a customer. But is Texas Instruments playing in that ecosystem at all?

• 34:03David Rosenthal?

  Good question, probably. I mean, I think this is a case of the rising tide is floating all boats. Yeah, Fairchild's killing it, Intel's killing it, National's killing it. TI is just killing it bigger than anybody else.

• 34:15Ben Gilbert?

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• 34:34David Rosenthal?

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• 34:55Ben Gilbert?

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• 35:17David Rosenthal?

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• 35:35Ben Gilbert?

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• 36:03David Rosenthal?

  So, on the back of this, Morris gets promoted to VP at TI, one level below the CEO, running the entire semiconductor business. That happens in 1972, and he becomes the obvious leading candidate to be the next CEO of TI, which he's like, "Yeah, I want to do that. I'm focused. This is what I love. This is my goal."

• 36:25Ben Gilbert?

  This is why I've been going to the bar for three years, reading a textbook.

• 36:28David Rosenthal?

  Exactly.

• 36:31David Rosenthal?

  Might be fair to say history turns on a knife point. Things don't entirely go as planned. Three different viewpoints, as far as I could identify, on what happens next to Morris at TI. He does not become the next CEO, obviously. Viewpoint number one is simply and probably fair that he was just discriminated against because he was ethnically Chinese, although at this point, I'm pretty sure already he was an American citizen, but anyway, and he got passed over for, I have no evidence for it, but not be at all surprised that that was part of what was going on.

• 37:04Ben Gilbert?

  Yep.

• 37:04David Rosenthal?

  So that's one. Two, second point, which Morris totally acknowledges, TI was a really big company. The semiconductor division, he had made it probably the most successful and the most fastest rising division within the company. But you mentioned calculators. They were starting to launch the consumer products division at this time. And so in 1978, so six years, he's running the semiconductor division as VP. They move him over to VP of Consumer Products in 1978 because this was a big new strategic initiative and it wasn't going super well. And they're like, oh, Morris is a great manager. He can fix this and turn it around.

• 37:42Ben Gilbert?

  Different set of competencies, though. I mean, you need like marketing.

• 37:45David Rosenthal?

  Yeah. Here's Morris's quote on this. Mark Shepherd, then chairman and CEO of TI, agreed with the prevailing wisdom at the time that a good manager could manage anything. In this case, I think he was wrong. I found the consumer business to be very different, like you were saying. The customer set, completely different. The market, completely different. And what you need to get ahead in that business is different, too. In the semiconductor business, it's just technology and costs. In consumer, technology helps, but it's also the appeal to consumers, which is a nebulous thing, not Morris's strong suit, or at least not anything he's trained in.

• 38:21Ben Gilbert?

  Yeah, that makes total sense.

• 38:23David Rosenthal?

  So in 1983, five years after he gets moved over to take over the consumer business, he hasn't turned it around. It's still struggling. He gets demoted to, quote, "head of quality and people effectiveness," which is pretty much a slap in the face, like this dude built your semiconductor business.

• 38:40Ben Gilbert?

  Is this when he says he was put out to pasture?

• 38:42David Rosenthal?

  Exactly. So that's number two. Here's number three. I found some evidence on this. It's unclear to me how much of this is Morris's fault versus his successor. But while Morris was definitely responsible for making TI Semiconductor a powerhouse.

• 39:00David Rosenthal?

  At some point towards either at the end of his tenure, running it or under his successor, they totally dropped the ball. And this is when Silicon Valley in California takes over. So in the mid 70s, the semiconductor industry transitioned over to the metal oxide process, the MOS. You ever hear about MOS, MOS semiconductors?

• 39:21Ben Gilbert?

  Yeah, the precursor to CMOS.

• 39:23David Rosenthal?

  Exactly. So that happened in the 70s and TI, again, was well, they had the best engineers. They were well positioned to lead this transition. They didn't. And actually, most of the talent within TI that were the ones that led the industry transition to MOS left, including probably most prominently, a guy named LJ7, who left and founded a company called Moss Tech. And then he later became a semiconductor venture capitalist and founded Seven Rosen Ventures, which was one of the early VC firms. So he was a TI guy and he left. And you know, the culture at TI, as shown by Morris's experience, was not like Trader A8, Silicon Valley, you leave. It was like, you're a company man, you know, you stay at the company.

• 40:07Ben Gilbert?

  Right.

• 40:08David Rosenthal?

  So Motorola poached a whole bunch of MOS engineers from TI and it all kind of fell apart, culminating in the biggest huge loss. Now, this is really history turning on a knife point. In 1980, so Morris has already transitioned to consumer products. IBM puts out a secret RFP, bid proposal for a secret project that they're working on. This is 1980 by New Group, based out of Boca Raton, Florida. Do you know what I'm talking about, Ben?

• 40:36Ben Gilbert?

  I have no idea.

• 40:37David Rosenthal?

  So some listeners might know what I'm talking about. This is the secret project. This is the RFP to be the microprocessor, the CPU for this secret project, the IBM PC.

• 40:49Ben Gilbert?

  Ah, okay. That was out of Boca Raton?

• 40:52David Rosenthal?

  Yeah, it was a secret project, like a Skunk Works division of IBM.

• 40:55Ben Gilbert?

  Oh, wow.

• 40:55David Rosenthal?

  To build the PC, which is a big, you know, IBM was the mainframe company. They're like, we're going to build a personal computer. So Skunk Works project and TI, you know, a couple of years earlier under Morris, would have been an obvious candidate. Remember, he had the relationship with IBM going all the way back. TI probably should have been the processor chosen.

• 41:14Ben Gilbert?

  Right.

• 41:14David Rosenthal?

  Instead, of course, it was Intel. I think it was the 8088 that was chosen for that first one.

• 41:20Ben Gilbert?

  Wow. And boy, did that set things in motion.

• 41:22David Rosenthal?

  Well, then the architecture standardizes on x86 and boom, there goes the whole next generation of computing away from TI over to Intel.

• 41:31Ben Gilbert?

  The sort of family of IBM with Intel processors and eventually running Microsoft operating systems.

• 41:38David Rosenthal?

  Yeah. And then all the IBM clones, all running, Intel processors.

• 41:42Ben Gilbert?

  Okay. So this is really where.

• 41:43David Rosenthal?

  That is a major loss.

• 41:44Ben Gilbert?

  In the highway of history, TI accidentally took the off ramp there.

• 41:48David Rosenthal?

  They did. Now, okay, is that Morse's fault? Is that not Morse? I don't know. Certainly the culture at TI was we rotate you around. You're going to fix consumer. He didn't fix consumer, but couldn't. And then this, like the semiconductor powerhouse took an off ramp, as you say. All that, like his career at TI is basically over. So he was the rising star. Everybody thought he was going to be the next CEO. And at age 52 in 1983, after he stays a couple of years being the head of whatever.

• 42:18Ben Gilbert?

  Yeah, he was something staff.

• 42:20David Rosenthal?

  Yeah, yeah. He just resigns and he's like, wow, well, I guess this is it. My career at TI, 30 years, done. He's still regarded super highly in the industry, though, in the semiconductor industry. So people start calling him with opportunities.

• 42:36Ben Gilbert?

  And he wants to be a CEO. I mean, that's what's on his mind.

• 42:38David Rosenthal?

  That's the, he wanted to be CEO of TI. That didn't happen. Like, he wants to be CEO. But he whittles it down to two opportunities he's going to consider. One is to go to a competitor called General Instrument, which people may have heard of, another one of these old chip companies. It was based in New York and Manhattan and New York City, actually, to go be their COO, the number two there, with a understanding that like, hey, if things go well in a couple of years, you'll replace the CEO, become the CEO there, or to become a venture capitalist.

• 43:07Ben Gilbert?

  Really?

• 43:08David Rosenthal?

  Yeah. So he was weighing the two. I don't know where or how. I couldn't find that out, but he was weighing these two opportunities. The VC idea is going to come back up in a big way in a second. But obviously he goes with General Instruments, GI. A, his dream is to be CEO. B, he's got this chip on his shoulder from the way TI ended. So.

• 43:28Ben Gilbert?

  Yep.

• 43:29David Rosenthal?

  Great. So he goes off to New York, you know, he leaves Texas, lives in Manhattan. Things are going to work out at GI. Thing though is GI had a very different culture than TI. TI was this research, build, develop technology, push the ball forward. GI is this New York-based, they were almost like at the time, like a proto tech private equity firm. Their strategy was they just acquired lots of

• 43:54Ben Gilbert?

  Oh, yeah.

• 43:55David Rosenthal?

  Different semiconductor businesses, either independent companies or divisions from other companies.

• 43:59Ben Gilbert?

  And try and integrate them.

• 44:00David Rosenthal?

  No, they would acquire them. They would get these business units into good shape and then they'd sell them again.

• 44:04Ben Gilbert?

  Oh, really?

• 44:04David Rosenthal?

  Yeah, they were like, literally, they were like a financial engineering firm, basically. Definitely not Morris's cup of tea. So he only stays there a year. It's clear that's not a good fit. So he resigns again. So within less than 18 months, he's had two major setbacks. Basically, you know, his dream is over. Like, here's the quote from him. He says, "After these two setbacks at TI and GI, I did not think that my aspiration to be the CEO of a major US company was in the cards." Well, turns out he was right. He was not going to be the CEO of a major US company. So how do we go from this dude in his mid 50s,

• 44:46David Rosenthal?

  former rising star, now washed up, from that to he's in Taiwan, he's CEO of TSMC? I don't think you could ever script this out. I think this is probably the most unique, every founding story is unique, but I think this might be the most unique founding story we've had on acquired so far. So back when Morris was at TI, when he was running the semiconductor business there, he went over to Taiwan a couple of times to talk about building a manufacturing plant there. TI would own and build the manufacturing plant, but outsource to Taiwan. Not like a TSMC-style business, like as a TI plant there. Anyway, he had no connection to Taiwan. Remember, he's Chinese. He's not from Taiwan. People are like, "Oh, Morris, you went back to Taiwan. He didn't go back to Taiwan."

• 45:28Ben Gilbert?

  Yeah, he talks about how Taiwan was a strange land to him when he first got there, that it's not going back. So it's not, the land is a strange place to him, but if he is going to call someplace home and return there, is it the People's Republic of China?

• 45:42David Rosenthal?

  Well, I think he would say at this point, it's America. He's been in America for 30. He's a US citizen. Well, I don't know what he would say. It's complicated. So anyway, so he had met a bunch of government officials in Taiwan when he was talking about building this plant over there. And that was back in the 70s. Now we're in the 80s, mid 80s. Taiwan at this point, it's a manufacturing nation. You know, they have no IP, they have no technology.

• 46:07Ben Gilbert?

  Okay, the quote's great. All right, so this is Morris. "We had no strength in research and development, or very little anyway. We had no strength in circuit design, IC product design. We had little strength in sales and marketing." And this is of course referring to Taiwan as a nation. "And we had almost no strength in intellectual property. The only possible strength in Taiwan that we had, and even that was just a potential one, not an obvious one, was semiconductor manufacturing, wafer manufacturing. And so what kind of company would you create to fit that strength and avoid all the other weaknesses? The answer was a pure play foundry."

• 46:40David Rosenthal?

  Yeah, I mean, that was Taiwan at the time. So to give you a sense, the average gross margin of a Taiwanese company at this point in time in the mid 80s is 4% to 5%. 04 to 05% gross.

• 46:51Ben Gilbert?

  Gross before you even have overhead, operating costs.

• 46:55David Rosenthal?

  Yeah, I mean, it was like, um, you know, if you were, uh, grew up around when Ben and I did, you know, sort of born in the 80s in the US, you see made in Taiwan on everything, like, you know, Barbie dolls, toys, clothes, everything was made in Taiwan. You know, now it's made in China or made in Vietnam or elsewhere. But made in Taiwan was super low end, physical manufacturing stuff.

• 47:14Ben Gilbert?

  Yeah, and to way pull forward the seven powers section, as Hamilton Helmer would sort of explain, if your margins, particularly your gross margins, are only 4% or 5%, you're in an industry or a business where all the profits are arbitrage away and everyone's just raced to the bottom on prices and no one's able to build any real enterprise value because everyone's just out competing each other for pure commodity.

• 47:38David Rosenthal?

  I mean, 4% to 5% gross margins? People used to hammer on Amazon, I guess, for being like a low gross margin business in the like 40%. Like, you know, anyways, I can't even imagine running a company with that level of gross margins. So the Taiwanese government, though, they wanted to come up in the world. They're like, this is where we are now. This is not where we want to be.

• 48:00Ben Gilbert?

  Yep.

• 48:00David Rosenthal?

  So they knew that technology was the way. And so they had decided back in the 70s that they would establish an initiative called the Industrial Technology Research Institute. Or Itri. And the goal was for it to become like the Bell Labs of Taiwan to do some tech transfers from the US and elsewhere and home grow some real technology businesses in Taiwan so that, you know, maybe they can lift businesses out of poverty there at least.

• 48:28Ben Gilbert?

  And so Morris wasn't going to Taiwan to start TSMC.

• 48:30David Rosenthal?

  No.

• 48:31Ben Gilbert?

  He was being recruited to Itri.

• 48:32David Rosenthal?

  So one of the ministers he had met, a guy named KT Lee, who because of this, he would also become venerated in Taiwanese history. He's known as the father of Taiwan's economic miracle, literally because of this.

• 48:44Ben Gilbert?

  Wow.

• 48:45David Rosenthal?

  He recruits Morris to come over and run Itri, be like the head of Bell Labs Taiwan, essentially. And this is like a ridiculous thing for Morris to do. He had been, you know, captain of American semiconductor industry. He was put out to pasture at TI, but at least he was still at TI. And then he was COO at General Instrument. He's going to go over to Taiwan.

• 49:05Ben Gilbert?

  And take this like-

• 49:05David Rosenthal?

  And run like a research park there. Like, what?

• 49:08Ben Gilbert?

  And like every time someone starts something like this, it doesn't go well. A government top-down innovation mandate from a country that's not a world power tends not to turn into a gigantic economic success.

• 49:21David Rosenthal?

  This is like all the countries and cities and the like that are like, oh, we're going to build the next Silicon Valley in-

• 49:26Ben Gilbert?

  Totally.

• 49:26David Rosenthal?

  XYZ. And we're going to recruit some former Silicon Valley person to come do that. And it's going to work. Probably not going to work.

• 49:32Ben Gilbert?

  Yeah.

• 49:33David Rosenthal?

  So everybody tells him not to do this. All his former colleagues, his wife at the time, tell him not to do this. His marriage was actually falling apart, maybe in part because of this. And, you know, he's had all these experiences. He's like, you know what? I just, I need to change the scene. I gotta get out of here. So he takes the job and he figures, you know, it's going to be cushy. This is like a soft landing.

• 49:55Ben Gilbert?

  This is like the pseudo-retirement.

• 49:57David Rosenthal?

  Totally.

• 49:57Ben Gilbert?

  He's going into.

• 49:57David Rosenthal?

  So here's his quote, "By then I was financially pretty secure. I was not rich, but you also have to realize that the standards of wealth were much lower back in 1985." And he's going to live in Taiwan where, you know, corporate magnets have 5% gross margins. But says, "But still, in absolute standards, I was financially secure, which meant that I could live according to the way I desire, which was actually pretty modest for the rest of my life without having to earn a living or a salary." This is retirement.

• 50:23Ben Gilbert?

  He also makes a joke, I remember after that about how, by the way, interest rates were higher back then. So that was much more achievable on less principal.

• 50:30David Rosenthal?

  Totally. So 1985, he goes over, he takes over as president of Itri. It's kind of a culture clash.

• 50:39David Rosenthal?

  So this is retirement for Morris, but he's still coming from this hard-charging industry. All of the employees of Etri are people in government jobs in Taiwan. And government jobs, not even, you know, in like a democracy because Taiwan is like, gets under martial law. I think that it just ended. You know, this is not the same, you know, this is like Jobs for Life. You're a government official in a non-democracy type organization. Morris says, "Back then, they considered me a foreigner who suddenly became their boss. They were scared of me and they were right to be scared of him." So there was one thing, though, that the government had done right before Morris showed

• 51:19David Rosenthal?

  up, which was they had successfully negotiated one technology transfer license in the semiconductor industry from, did you find out what company this was? This is probably what they were trying to negotiate with TI for.

• 51:33Ben Gilbert?

  I do. It's a three-letter acronym.

• 51:36David Rosenthal?

  Oh, yep. Yep, yep, yep. We haven't talked much about it on this show, but this is another, yeah, talk about captains of American industry, RCA.

• 51:44Ben Gilbert?

  RCA, that's right.

• 51:46David Rosenthal?

  Yeah. So RCA had a semiconductor line and the government in the seventies, the Taiwanese government, had negotiated a tech transfer.

• 51:55Ben Gilbert?

  But this is like 10-year-old semiconductor technology, right? This is not like the latest generation.

• 52:01David Rosenthal?

  No. TI and Intel and everybody like, you know, at Fairchild, they're international, they're leading the way. They're at the bleeding edge of semiconductor manufacturing process. RCA was already at least a generation behind. By the time it actually gets onto the ground in Taiwan, they're two and a half generations behind the leading producers.

• 52:21Ben Gilbert?

  So it's like the only thing that you could do with that is...

• 52:25David Rosenthal?

  Super low-end stuff.

• 52:26Ben Gilbert?

  Right. There are some category of goods that don't need a fast or the latest processor and...

• 52:31David Rosenthal?

  Totally. Even today, when TSMC or Intel or Samsung or whoever builds a fab, the leading-edge fabs, they produce the leading-edge stuff for a while and then the new generations come on. They don't shut down the old ones.

• 52:44Ben Gilbert?

  Right.

• 52:45David Rosenthal?

  It's just chips that don't need the same bleeding-edge performance.

• 52:48Ben Gilbert?

  Yep.

• 52:49David Rosenthal?

  They keep getting made on the old ones.

• 52:50Ben Gilbert?

  And often that's automotive or now what we think of as IoT, but the stuff in your smartphone, obviously, is the...

• 52:56David Rosenthal?

  The leading edge.

• 52:56Ben Gilbert?

  Yeah.

• 52:57David Rosenthal?

  So the government, E3 does actually spin out a company using this old RCA technology that would be called UMC, United Microelectronics Corporation, not a technology leader. It actually does okay in the long run. They would later spin out their own chip design business. So UMC was doing both fabrication for third-party clients and designing some of their own chips with the fab that they created. They spin out their chip design business later. That becomes media tech.

• 53:30Ben Gilbert?

  Oh, no way.

• 53:31David Rosenthal?

  Yeah, which is a $50 billion company today.

• 53:33Ben Gilbert?

  Huh.

• 53:33David Rosenthal?

  So like, you know, the government did pretty good. Like, this is pretty good.

• 53:37Ben Gilbert?

  Totally.

• 53:37David Rosenthal?

  What they were doing. And, you know, when Morris arrives because of this, he's not starting from a standing start.

• 53:42Ben Gilbert?

  Right.

• 53:42David Rosenthal?

  Like, it's not good, but there's some assets to work with.

• 53:44Ben Gilbert?

  They've acquired IP, they've created a company, there's a paved path.

• 53:47David Rosenthal?

  So he gets to work at E3, he's working on all this, he's transforming the organization into a high-performing organization. And then all of a sudden, out of nowhere, KT Lee comes back to him and is like, hey, great, you're running, you know, our Bell Labs, you're running E3. Now I want you to start a company.

• 54:04David Rosenthal?

  And Morris is like, uh, and KT's like, yeah, yeah, yeah. I don't want you to have somebody else that needs you to do it. I want you, Morris Chang, to start a new semiconductor company here in Taiwan, and I want you to make it into a global leader.

• 54:17David Rosenthal?

  Morris is like, um, okay. He doesn't say this directly. Well, he's got a great quote I'm going to say in a minute, but again, remember, this is not a democracy in Taiwan at this time.

• 54:27Ben Gilbert?

  Right.

• 54:28David Rosenthal?

  Morris has also won his third job in three years. Yeah, he doesn't need a salary to survive, but this is kind of the end of the rope for him. If he gets fired here at E3, he's legit done.

• 54:38Ben Gilbert?

  Yeah.

• 54:38David Rosenthal?

  Done, done, done. So he kind of doesn't have a choice here. The quote, this is so Morris, so great. He says, "It was like in the movie The Godfather. It was an offer I couldn't refuse."

• 54:51Ben Gilbert?

  And I do think the implication was go start an Intel or go start an IBM. It wasn't go start the very first pure play foundry.

• 54:59David Rosenthal?

  Yeah, Lee had no, I mean, he's the government, he's a minister.

• 55:01Ben Gilbert?

  Right.

• 55:01David Rosenthal?

  He was like, go start a semiconductor company, make it a world leader.

• 55:04Ben Gilbert?

  Right. Those semiconductor companies, they do really well. So go do that. And that's of course, when Morris says, okay, I'm being told I should do this. I have some latitude I can take and some liberties I can take on how I do it. And the quote that I read earlier about evaluating exactly what type of semiconductor company should I start? That's how he sort of informs the business plan.

• 55:27David Rosenthal?

  So Lee is like, all right, good. We're capisce, we're clear. Come back to me in a week with a business plan. Tell me what you need and we're gonna make this happen, right? So Morris is like, okay, a week. All right. And then like a day later, Lee supposedly is like, I'm gonna need you come in on Friday. So you guys like three days.

• 55:48David Rosenthal?

  You know, they say necessity is the mother of invention and yet these three days are what creates the, you know, now ninth most valuable company in the world. Morris comes up with this brilliant idea to create a pure play foundry company to be a contract manufacturer.

• 56:05Ben Gilbert?

  Sounds genius today and hindsight, as Steve Jobs would say, you know, it's easy to connect the dots looking backwards. But at that time, was this a good idea, David?

• 56:15David Rosenthal?

  Well, no. The answer is no. You know, like we've said all along, all the chip companies, all the, you know, American and European and, you know, Japanese, all the leading semiconductor companies, they made their own stuff, you know? And there was some sharing of production and some companies were emerging that were borrowing production from the big guys. There's a great quote right around this time from Jerry Sanders, who was the co-founder and CEO of AMD. And he famously said in the mid 1980s that, quote, "Real men have fabs."

• 56:52Ben Gilbert?

  That's right. Oh, what a quote.

• 56:54David Rosenthal?

  So ironic because in the 2000s AMD would spin out its fabs and go fabulous.

• 57:00Ben Gilbert?

  Global foundries.

• 57:01David Rosenthal?

  Yeah, into global foundries. But yeah, like this was not an obvious idea. Like if you wanted to be a real semiconductor company, you made your own chips. And the idea was like, this isn't like manufacturing Barbie dolls here. Like this is real technology. Like you need to control it soup to nuts.

• 57:16Ben Gilbert?

  And already at this point in history, I mean, this is an important point to make because I didn't realize this coming in where I thought, wow, Apple really outsources their manufacturing. They outsource some of it to TSMC and some of it to Foxconn. And maybe some of those people will start to do each other's work. No, this is a completely different thing. Assembling an iPhone is completely, completely different than taking a brand new design for a next generation chip and manufacturing that chip. One is manufacturing and one is alchemy. The alchemy can only be done by alchemists. I think even here in the late 80s, we're already at the point where it's manufacturing broadly. But yeah, it's not like, well, I got a factory.

• 58:00David Rosenthal?

  No, no, no, no, no, no. Far the opposite of that. You know, he said a minute ago, this is a bad idea. So Morris says, now, however, there was one problem with the pure play foundry model, and it was a fatal problem. It could be a fatal problem, which was, where's the market? He sounds like Don Valentine here. Where's the market? Show me the market. This whole idea, it was really a solution looking for a problem.

• 58:24Ben Gilbert?

  And of course, the solution being that all we have is manufacturing capability here. So let's start a company that just manufactures. And it's like, you're looking around like, okay, who's stuff are we going to manufacture?

• 58:35David Rosenthal?

  Real men have fabs.

• 58:36Ben Gilbert?

  Yeah.

• 58:37David Rosenthal?

  You know, there are no real startups. I mean, there are startups, but all these startups are building their own fabs. Like, nobody wants to do this. So nonetheless, you know, he has to start a company. He's literally got a gun to his head.

• 58:48Ben Gilbert?

  But he does have the core insight here. It's interesting. These companies don't exist yet, but Morris has reason to believe that people will want to start fabulous. Chip companies and that they will need a foundry to fab those chips. And so he says, when I was at TI and general instrument, I saw a lot of integrated circuit designers wanting to leave and set up their own business. But the one thing or the biggest thing that stopped them from leaving those companies was they couldn't raise enough money to form their own company. Because at the time, as we were just saying, real men, it was thought that every company needed manufacturing, needed their way for manufacturing. And that most capital intensive part of a semiconductor company, of an IC company, does the manufacturing.

• 59:30Ben Gilbert?

  And so I saw those people wanting to leave, but being stopped by the lack of ability to raise a lot of money and build a way for fab.

• 59:38David Rosenthal?

  Totally, right? But those companies, this like, if you build it, they will come?

• 59:43Ben Gilbert?

  They haven't started yet.

• 59:44David Rosenthal?

  They haven't come yet. They haven't come yet. So Morris, he knows what the long-term market is going to be, but he's got to find the short-term market. He needs some like real politic here. Like, so what's that going to be? So he says, well, maybe I can go around to the big guys. They've been doing, you know, just like my first thing back at TI, they've been doing some line sharing, you know, for either new products that they need excess capacity for, or for older products that they need to transition some fabs, but they still need to make components. Maybe I can take some of that off their hands. And so he goes around and he talks to Intel, he talks to TI, he talks to everybody in the industry. And they're like, yeah, he talks to Motorola, like, sure, fine.

• 1:00:27David Rosenthal?

  And the government had told him, we know it's going to take a lot of money to set up a fab. We're good for half of it, but you got to go raise the other half of it. And we want you to raise it from like an Intel or a TI, you know, somebody who's going to be your first customer and that they're going to be bought in. So he does the rounds, he goes and talks to everybody. He gets meetings with Intel, he gets meetings with TI, they're both like, you know, Morris, we like you, but no. So he said the last ditch effort and he has a meeting with Philips, the Dutch company. They have a semiconductor business. So Morris, he has a great quote about this. He says he would describe Philips as the first rung of the second Raiders in semiconductors.

• 1:01:09David Rosenthal?

  But they were the only interested option. So they put up 28% of the capital. Government puts up 50%. It ends up being 220 million in total.

• 1:01:19Ben Gilbert?

  110 is probably a lot more than what the Taiwanese government thought they were going to buy here.

• 1:01:23David Rosenthal?

  And then literally the premier of Taiwan, like the head of the government, has to then go around to all the other business leaders in Taiwan and like strong arm them into investing the rest of it. The other, what is that? 22%, I guess.

• 1:01:37Ben Gilbert?

  Yeah. We also should say, remember that Philips was a Dutch company because that's going to come into play later.

• 1:01:44David Rosenthal?

  I don't know how that's going to come into play.

• 1:01:46Ben Gilbert?

  Putting a pin in Dutch.

• 1:01:47David Rosenthal?

  Okay. We got a surprise coming. I'm going to be surprised here. We're doing it real time, doing it live. This may be the craziest part about the whole TSMC founding story. I'm 99.9% sure, Ben, you do not know this. Do you know what the pre-money valuation was on TSMC?

• 1:02:02Ben Gilbert?

  No, I couldn't find that anywhere.

• 1:02:05David Rosenthal?

  It was $0. Morris Chang got no equity in the company. Zero.

• 1:02:11Ben Gilbert?

  So 100% of the company was owned by?

• 1:02:15David Rosenthal?

  The investors. 50% by the government and the other 50% were owned by the investors. Morris got nothing.

• 1:02:23Ben Gilbert?

  And just got to keep his salary.

• 1:02:25David Rosenthal?

  He was a government employee.

• 1:02:27Ben Gilbert?

  Wow.

• 1:02:28David Rosenthal?

  There by the grace of the government.

• 1:02:30Ben Gilbert?

  Oh my God.

• 1:02:31David Rosenthal?

  Isn't that unbelievable? Like this is so the opposite of Silicon Valley in every way.

• 1:02:36Ben Gilbert?

  How is he worth $3 billion today?

• 1:02:38David Rosenthal?

  Well, what he did as TSMC started to work, he basically put all of his money into buying. He bought his own shares in the company. I don't know if it was privately before they went public on the Taiwan Stock Exchange in 1994 and then the New York Stock Exchange in 1997. But yeah, he put basically all of his excess cash flow into buying TSMC shares.

• 1:02:59Ben Gilbert?

  Oh my God.

• 1:03:00David Rosenthal?

  Isn't that wild?

• 1:03:01Ben Gilbert?

  So the government owned 50% of the whole business.

• 1:03:04David Rosenthal?

  And you can see their perspective too. They're like, hey, we hired you to do this and then we told you to do this. You are our foot soldier. We are the mafia.

• 1:03:12Ben Gilbert?

  Wow. Yeah, things had really not gone well in his career that he was willing to take that deal.

• 1:03:18David Rosenthal?

  Yeah, crazy, right? And, okay, before we go on in the TSMC story, we need to have two real quick sidebars.

• 1:03:27Ben Gilbert?

  Yeah.

• 1:03:28David Rosenthal?

  So it was 1987.

• 1:03:29Ben Gilbert?

  Yep.

• 1:03:30David Rosenthal?

  When TSMC gets officially stood up, they raise the money at $0 pre-money valuation. Do you know what other company, other big thing happened in 1987? We have covered it on this show in the chip world.

• 1:03:43Ben Gilbert?

  Is this the founding of ARM?

• 1:03:44David Rosenthal?

  Yes, it is.

• 1:03:45Ben Gilbert?

  Yes.

• 1:03:46David Rosenthal?

  Yes. ARM, JV between Apple, Acorn, and VLSI Logic, which was the sort of manufacturing partner. They were an ASICs company. That's a whole nother sidebar we're not going to get into. But yeah, 1987, what a year.

• 1:03:59Ben Gilbert?

  Brand new unconventional instruction set architecture. It's totally different than the x86 stuff that the whole industry and world seems to have standardized on at this point.

• 1:04:09David Rosenthal?

  The anis mirabilis for the semiconductor industry.

• 1:04:13Ben Gilbert?

  And useless, right? It's in 1987. It's hamstrung. It's very few instructions. PCs are always plugged in. So what do we need a low-power chip for? This thing is pathetic.

• 1:04:22David Rosenthal?

  Real men have fabs and real men use power. Okay, so that's sidebar number one. ARM gets started.

• 1:04:27Ben Gilbert?

  Okay.

• 1:04:27David Rosenthal?

  Now.

• 1:04:28Ben Gilbert?

  I was wondering, I don't actually know the relationship because obviously today, a huge amount of volume of TSMC's manufacturing is making chips for iPhones, which since the outset has used ARM.

• 1:04:42David Rosenthal?

  Chips that are using all mobile devices, iPhones and Android, all of which are ARM, and lots of servers that are ARM.

• 1:04:48Ben Gilbert?

  There's some relationship coming between TSMC and ARM.

• 1:04:52David Rosenthal?

  Um, well, they're really close partners. I mean, the way now this stuff is so integrated.

• 1:04:57Ben Gilbert?

  Yeah.

• 1:04:57David Rosenthal?

  The architecture companies like ARM, the design, the EDA companies like Synopsys, these guys are all deeply, like, the engineering is all deeply embedded with one another.

• 1:05:07Ben Gilbert?

  Okay, so you mentioned EDA. I'm going to take your sidebar and I'm gonna...

• 1:05:11David Rosenthal?

  You're gonna raise me.

• 1:05:11Ben Gilbert?

  Yeah, I'm gonna raise you one more sidebar. So listeners, we're two clicks out here. So this is a pretty good point to talk about how the value chain went from... One company that created transistors and then they designed the chip, they manufactured the chip, they marketed the chip. Here's how the value chain looks today. And I think you've already alluded to, I think in the eighties, it already started to look like this. First, there's EDA, there's electronic design automation. This is the software that professional chip designers use to do their work. So Synopsys, I think Cadence is another big one.

• 1:05:48David Rosenthal?

  Yeah, Cadence, they're the two leaders. So that's like, I don't know, Excel or like Figma for chip designers.

• 1:05:53Ben Gilbert?

  Yeah.

• 1:05:53David Rosenthal?

  That's what they use every day.

• 1:05:54Ben Gilbert?

  Protability tools.

• 1:05:55David Rosenthal?

  Yeah.

• 1:05:55Ben Gilbert?

  So that's category one of four. And of course, as you can imagine, the software to design the chips probably has to be very aware of the manufacturing capability of who's going to be manufacturing the chips. But let's put a pod in that for a second. So then, of course, there's the fabulous chip design companies. So today, I think Apple, Nvidia, Qualcomm.

• 1:06:14David Rosenthal?

  Broadcom.

• 1:06:14Ben Gilbert?

  Eventually AMD after they stopped being real men, apparently.

• 1:06:18David Rosenthal?

  Tons of innovative new startups now, like Cerberus.

• 1:06:20Ben Gilbert?

  PSMI.

• 1:06:21David Rosenthal?

  Tesla.

• 1:06:22Ben Gilbert?

  Before Apple acquired it.

• 1:06:23David Rosenthal?

  Yeah. Oh, PSMI is coming in a sec.

• 1:06:25Ben Gilbert?

  Okay, okay. So you've got the EDA companies that are making the software, the fabulous companies that are designing the chips using the software. Then third, there's one company that we have not talked about yet, one component of the value chain. And these are the people that manufacture the machines.

• 1:06:42David Rosenthal?

  Oh, yeah.

• 1:06:42Ben Gilbert?

  That go into the factories that the foundries operate.

• 1:06:46David Rosenthal?

  There's actually one between, well, no, actually, I think above EDA. There is one more part of the value chain. There's a fifth, which is IP. So that's all like ARM.

• 1:06:55Ben Gilbert?

  Oh, right.

• 1:06:55David Rosenthal?

  Yeah, like architecture, IP. There's actually a ton of companies now that do just straight up IP. And I thought before this episode, these were like, oh, just shell companies that sue one another about IP. It's not that. Systems are on a chip now. It's like everything is on one chip, basically. You need a USB functionality in your chip. You don't need to design it. You just buy some IP off the shelf. So there are companies that do that.

• 1:07:17Ben Gilbert?

  Yep. Okay. So that's a good point. So that's our fifth, sort of like IP. They own the instruction set architecture. They kind of create the general rules that you're playing by when you're designing a chip, such that whoever's writing the compilers knows what assembly language they're targeting that can then operate on the chip that's going to be designed. So. We covered the EDA, we covered the IP, we covered the fabulous companies. There's somebody before we get to the foundries, which is the equipment manufacturers that sell to TSMC. So more historically, you've got Lam Research, you've got Applied Materials in the US, you've got Tokyo Electron in Japan. But today, I just want to give everyone a taste of this and then we'll get more to it later.

• 1:08:00Ben Gilbert?

  There's a company that is also Dutch-based.

• 1:08:03David Rosenthal?

  Ah, there it is, there it is.

• 1:08:05Ben Gilbert?

  ASML, which was originally ASM lithography. And lithography is marginally in scope for this episode. There's a whole thing we could do on the magical process that is lithography.

• 1:08:16David Rosenthal?

  Taking me back to my high school photo lab.

• 1:08:17Ben Gilbert?

  Right?

• 1:08:18David Rosenthal?

  Yeah.

• 1:08:18Ben Gilbert?

  And the L, you know, is lithography. So the company was originally called ASM lithography. They make the most advanced chip manufacturing machines in the world. They're the only company that makes them. They're located still in the Netherlands. Their biggest customer is TSMC. They, and this is where I want to bring it all the way back around. And we, of course, will talk about the magic that is these machines later. It was founded in 1984 as a joint venture between Advanced Semiconductor Materials International, ASM lithography, and Philips.

• 1:08:54David Rosenthal?

  Oh, wow, I did not know that.

• 1:08:56Ben Gilbert?

  So that-

• 1:08:57David Rosenthal?

  That's crazy.

• 1:08:58Ben Gilbert?

  Is the beginning of the relationship between TSMC and their-

• 1:09:03David Rosenthal?

  Oh, wow. And what a strategic point. I mean, because, well, it's TSMC's insane capital, operating cash flow production that enables them to spend capex above anybody else that allows them to buy more ASML equipment than anyone else. But that relationship, wow. I mean, these machines, we'll get into it later.

• 1:09:21Ben Gilbert?

  Yeah.

• 1:09:21David Rosenthal?

  It's going to blow your mind what this stuff does.

• 1:09:24Ben Gilbert?

  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.

• 1:09:38David Rosenthal?

  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.

• 1:09:52Ben Gilbert?

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• 1:10:02David Rosenthal?

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• 1:10:19Ben Gilbert?

  And ServiceNow can do this because they've spent more than 20 years building the operational backbone of the enterprise. The workflows, governance, approvals, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security.

• 1:10:36David Rosenthal?

  ServiceNow already runs more than 100 billion workflows annually and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates.

• 1:10:52Ben Gilbert?

  And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

• 1:11:01David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely, at scale, go check out servicenow.com/acquired and tell them that Ben and David sent you. Okay, back to my second sidebar. Also gonna be worth it. PSMI. We did an episode, Wave is like episode 20 something.

• 1:11:20Ben Gilbert?

  This is like when Acquired was a very different show, when it was actually about small acquisitions that-

• 1:11:24David Rosenthal?

  Totally. Yeah. So I don't know that we actually covered this, but I uncovered in the research for this episode, do you know the origins of PSMI?

• 1:11:33Ben Gilbert?

  No, I don't.

• 1:11:34David Rosenthal?

  Okay, so ARM, my sidebar number one.

• 1:11:36Ben Gilbert?

  Yep.

• 1:11:36David Rosenthal?

  You know, 1987, also created, right? They're just an IP design company, like I was saying in your sidebar.

• 1:11:44Ben Gilbert?

  It's like inception over here.

• 1:11:46David Rosenthal?

  So they just license out the ARM architecture to other companies that then design using the ARM architecture. One of their original licensees was DECK, Digital Equipment Corporation, like OG, way back in the day.

• 1:12:00Ben Gilbert?

  Yep.

• 1:12:00David Rosenthal?

  So they took the ARM architecture and they tuned it for performance. And they called what they did at DECK, their version of ARM that they created, Strong ARM. And that product line within DECK- Would later be acquired by Intel of all places.

• 1:12:19Ben Gilbert?

  Okay.

• 1:12:20David Rosenthal?

  Crazy why Intel acquired an ARM architecture.

• 1:12:23Ben Gilbert?

  Right, they're the x86.

• 1:12:25David Rosenthal?

  Yeah, they remarketed it as xScale. I think they ended up shutting it down.

• 1:12:29Ben Gilbert?

  Huh.

• 1:12:29David Rosenthal?

  So a bunch of the core engineers on the team, like the deck team that had been working with ARM from back in the day, and they're like, we just got acquired by Intel. What the hell? Like, you know, screw this. We don't want to go work for Intel.

• 1:12:41Ben Gilbert?

  There's no interesting flourishing alternative architectures at Intel.

• 1:12:44David Rosenthal?

  Yeah, we're ARM engineers. We're gonna go start our own company.

• 1:12:48Ben Gilbert?

  That's PSMI?

• 1:12:49David Rosenthal?

  That's PSMI.

• 1:12:50Ben Gilbert?

  Ah.

• 1:12:51David Rosenthal?

  So.

• 1:12:52Ben Gilbert?

  And of course, the underpinnings of all of Apple's chips today.

• 1:12:56David Rosenthal?

  Totally. So the lineage of all of Apple silicon, probably the most valuable, defensible part of Apple today in terms of technology was ARM and DEC to Intel to PSMI to Apple.

• 1:13:10Ben Gilbert?

  Whoa, that's wild. I don't think I ever knew that. So you can trace Apple silicon all the way back to Apple?

• 1:13:18David Rosenthal?

  Yeah, because ARM was a JV with Apple.

• 1:13:21Ben Gilbert?

  Crazy.

• 1:13:21David Rosenthal?

  With Intel and DEC in the middle. Wow. Okay, so back to TSMC. The short-term market is Morris basically begs all of his old colleagues in the US and European and Japanese semiconductor industries to just give the dregs to TSMC. And it really was the dregs. So here's Morris on what this was. The IDMs would let us manufacture their wafers only when they didn't have capacity or when they didn't want to manufacture the stuff themselves anymore. Now, when they didn't have the capacity and asked us to do the manufacturing, then as soon as they got the capacity, they would stop giving us orders. So it wasn't a stable market.

• 1:14:03Ben Gilbert?

  So it wasn't actually a thing they wanted to outsource. They were just using them for available.

• 1:14:08David Rosenthal?

  So they needed some extra excess space, but then when they got the capacity online, they took it away.

• 1:14:12Ben Gilbert?

  Right.

• 1:14:13David Rosenthal?

  And then the chips that they gave us that they didn't want to make anymore. Well, the reason they didn't want to make it was it was losing money. So they basically were just transferring their losses on producing these chips to TSMC.

• 1:14:24Ben Gilbert?

  So how do they get out of this?

• 1:14:25David Rosenthal?

  So Morris continues, "The conventional conclusion at the time was that there was no market. That's why the pure play foundry idea was so poorly thought of. What very few people saw, and I can't tell you that I saw, was the rise of the fabless industry. I only hoped for it. And then, as you said, but I had better reasons for hoping for it than the people at Intel, at TI and Motorola, because I was now standing outside." When I was at TI in General Instrument, I saw a lot of these IC designers wanting to leave, start their own businesses and the constraint was setting up their own fabs. So like, yes, he saw that at TI, but remember, he had been considering becoming a VC instead of going over to eTree.

• 1:15:02Ben Gilbert?

  Yep.

• 1:15:03David Rosenthal?

  So this is the ultimate end around. He becomes essentially like the world's best semiconductor VC. He takes an index out on the whole future innovation and entrepreneurship market in semiconductors by becoming the platform that they're going to build on instead of like going and investing in them. Like he enables all of it. He's like the Y Combinator of semiconductors.

• 1:15:25Ben Gilbert?

  Right. Or in many ways, the Tencent. Tencent, of course, also does direct investing, but the idea that you could get distribution through WeChat.

• 1:15:32David Rosenthal?

  Yep.

• 1:15:33Ben Gilbert?

  It's kind of like, it's not distribution, but it is manufacturing. There is a thing that you have to raise 10 to 20% of the capital that you otherwise would have needed to raise if TSMC exists.

• 1:15:43David Rosenthal?

  Yep. And just like Don Valentine, you know, kind of when he left to go join VC a generation earlier, again, it was not VC, it's TSMC, it's building the platform. But Morris is a hero. So all these engineers, they all look up to him and he knows a lot of them personally. The ones he doesn't know, like who's not going to take a meeting with Morris Chang, right?

• 1:16:03Ben Gilbert?

  He almost ran TI.

• 1:16:05David Rosenthal?

  Totally. Like he did all this amazing stuff.

• 1:16:07Ben Gilbert?

  It's interesting because it's like with the incumbents, of course, because they had it in their DNA to be a manufacturer, of course, they wanted to take the most profitable things and manufacture them in-house. But if you actually are betting on all these startups that will never develop DNA to be their own manufacturer, they never want to take that back.

• 1:16:26David Rosenthal?

  Yeah. And so Morris is now going out and vandalizing and he's like, all these great designers, like, we're an option for you now. Like you want to leave, you want to start your own company, you don't need a fab, we'll be your fab. You know, it takes a couple of years. For a couple of years, TSMC has to survive on the dregs from the IDMs, the big guys. But after a couple of years, these startups get going, you know, little companies like Qualcomm, Broadcom, Marvell, Nvidia, these are all started with TSMC.

• 1:16:54Ben Gilbert?

  Nvidia was started in 1993, only ever raised $20 million.

• 1:16:59David Rosenthal?

  $20 million.

• 1:17:00Ben Gilbert?

  And never opened their own fab.

• 1:17:02David Rosenthal?

  I believe 100% with TSMC.

• 1:17:04Ben Gilbert?

  Wow.

• 1:17:05David Rosenthal?

  Well, maybe they have other founders too, but the vast majority of their business, Jensen talks about this, Jensen Huang, it took him actually a little while to get on Morris's radar, but once he did, the vast majority of Nvidia's chips, TSMC makes them. Nvidia is what, like a 350, $400 billion market cap company now?

• 1:17:23Ben Gilbert?

  It's wild.

• 1:17:24David Rosenthal?

  And only raised $20 million. It's like the AWS for chip companies. Never would have been possible before.

• 1:17:31Ben Gilbert?

  Nope.

• 1:17:32David Rosenthal?

  So this is what's super cool. I don't think Morris saw this, like this even exceeds his wildest dreams. He was hoping for this fabulous market to take off, but this creates this insane flywheel for TSMC. So the fabulous market starts to grow, which they're exceeding and enabling it. As that happens, TSMC's revenue grows.

• 1:17:55Ben Gilbert?

  And because they have 50% gross margins and 40% operating margins, they can take that profit and buy more advanced machinery.

• 1:18:03David Rosenthal?

  Back into CapEx.

• 1:18:03Ben Gilbert?

  Build more fabs.

• 1:18:05David Rosenthal?

  Advance the level of their technology. Remember, they were starting from behind in technology. Within about 10 years, they catch up and then they start to exceed everybody else. So as they push manufacturing process technology forward, they're manufacturing better chips with smaller wave, you know, process lengths. They're enabling their customers, which are the fabulous companies, to get better and better performance. As they get better performance, the fabulous companies can address more of the market and more use cases. So their existing customers get bigger and new fabulous customers start. Which gives them more revenue, which repeats the whole cycle. And you know, it goes slowly, like any flywheel. It takes a lot of effort and a lot of time to start turning it. But fast forward to now.

• 1:18:50David Rosenthal?

  So in the early 2000s, when TSMC finally caught up to the bleeding edge level of technology with other semiconductor companies. There were 22 companies that were at the leading edge. I think it was like, I don't know, let's call it 150 nanometer process or something like that at that point in time. 22 and TSMC finally broke into the pack. They were one of the 22. By the late 2000s, it had gone from 22 down to 14 that were at the leading edge. By the mid 2010s, there are six.

• 1:19:19Ben Gilbert?

  It's basically Samsung and TSMC, right?

• 1:19:21David Rosenthal?

  Today, there are two at 5 nanometer process is the current leading edge. Only TSMC and Samsung. Intel has been trying to get there, but they haven't been able to. They've fallen behind. And the next process is going to be three nanometers. TSMC is going to launch that next year.

• 1:19:39Ben Gilbert?

  Which, by the way, just slipped six months.

• 1:19:41David Rosenthal?

  Ah, interesting. Well, Samsung has already slipped to 2024.

• 1:19:44Ben Gilbert?

  Whoa.

• 1:19:45David Rosenthal?

  So very likely in the next process, it's just going to be TSMC.

• 1:19:49Ben Gilbert?

  Which means that you will see that on an Apple slide somewhere announcing the next iPhone, talking about how it's a 3 nanometer process. They'll take all the credit for it. And TSMC is totally fine with that because their job is not to market. It's to empower their customers.

• 1:20:04David Rosenthal?

  This flywheel, it's just unreal what happens here. They run the table on the whole industry.

• 1:20:11Ben Gilbert?

  It is interesting. The industry went from vertical to horizontally integrated, where the very best products in the market became horizontally integrated. And it's interesting how I'm trying to figure out what drove that. Because at some point, I guess there's a couple of components to it. One is the speed at which Moore's law happens, makes it such that you can't be good at everything. You can't be good at everything from EDA to making the manufacturing equipment, to running the manufacturing process, to designing the chips. You're not going to write your own instruction set architecture. People did need to break into best of class.

• 1:20:45David Rosenthal?

  Morris has got this great quote about this that I have in here. So he says, "The semiconductor business is like a treadmill that speeds up all the time. If you can't keep up, you fall off." And that's Moore's law. From 22 down to two, down to one, even when their competitors are only doing the one thing that TSMC has done. Like if you fall behind by a step, you're toast.

• 1:21:04Ben Gilbert?

  Right. And it's because there's this big part of it that you're talking about that hasn't come up on other episodes because we tend not to talk about companies that require a lot of manufacturing prowess. But in order to stay on that treadmill, the number of tens of billions of dollars that you need to be spending into CapEx is going up. So you need to be enormously profitable so you can build the factories for the next generation.

• 1:21:32David Rosenthal?

  Yeah. I mean, well, there's two things. So yes, that is 100% true. And the scale of this now, I mean, TSMC just announced they're going to spend $100 billion in CapEx over the next three years, $30 billion this year, 60 over the next two, and I bet that keeps going up. So that's a lot of billions. You might even say, like, this is so strategically important, and people are talking about this. Certainly China's talking about this. The US government's now talking about this. Governments might need to come in with a bazooka of money and create other options because almost all their manufacturing is in Taiwan. It's in this strategically geopolitically challenged location. We need to re-onshore some of this in the US. China, of course, wants their own. You can't just spend the money and do this. US government could come in and say, we're going to spend a trillion

• 1:22:15David Rosenthal?

  dollars this year to do this. They can't do it because we're going to get to powers later. But there's this marriage of scale economies and process power that TSMC, like, in this industry. There is no amount of money you could spend to catch up next year. You can't because the engineering is so hard and the learning curve takes decades to get to this point. I was listening to a podcast, a Bloomberg Odd Lots podcast about this, where they were talking about this and their reporter who covers TSMC is great. China, they're asking the question like, well, China could just spend a billion dollars and do this, create their own fabs, and they're doing this.

• 1:22:49Ben Gilbert?

  What's the company called? SMIC?

• 1:22:50David Rosenthal?

  SMIC, yeah.

• 1:22:51Ben Gilbert?

  It's the Chinese.

• 1:22:52David Rosenthal?

  Yep.

• 1:22:53Ben Gilbert?

  Because basically, TSMC seems to have picked a side in the US. And so with a little bit of prodding, I'm sure, from various presidential administrations over the last five years.

• 1:23:02David Rosenthal?

  Yeah. The guy who covers TSMC was like, they can do that, and they are doing that, but they wouldn't know what to do with it. And it's not because they're dumb.

• 1:23:09Ben Gilbert?

  It's the hardest thing in the world.

• 1:23:10David Rosenthal?

  It's the hardest thing in the world, yes.

• 1:23:11Ben Gilbert?

  To do this stuff, to make the equipment that ASML does and to... Manufacture the way that TSMC does, it is the hardest thing to do in the world.

• 1:23:19David Rosenthal?

  Yeah. Anybody else could get all the same equipment from ASML.

• 1:23:22Ben Gilbert?

  Actually, that's not true.

• 1:23:23David Rosenthal?

  Oh, no, I'm saying even if you could, you wouldn't know what to do with it.

• 1:23:26Ben Gilbert?

  Right.

• 1:23:27David Rosenthal?

  And it's not because you're dumb. It's there only like a small number of people in the world that can operate this stuff.

• 1:23:31Ben Gilbert?

  All right, I'm jumping out of my seat here, so I'm going to do the ASML thing now. So the reason that some people can't get their hands on the ASML equipment is because the Netherlands did not renew their trade agreement with China. Also, likely, it has been reported that probably that is because of US prodding to say, hey, these pieces of equipment you're making seem pretty specialized. You're the only people in the world who can do it, and it makes the most cutting edge semiconductor manufacturing technology. Uh, maybe let's not sell that to SMIC in China. And so they're not doing that. Now, you might say, oh, come on, how hard can this stuff be? Well, these machines-

• 1:24:12David Rosenthal?

  Tell us then what these machines do.

• 1:24:14Ben Gilbert?

  Well, first of all, they cost $200 million for a machine that makes the chips, and that's going to go up to like $300 million. And by the way, on a lot of this, we have a lot of thank yous for John Bathgate and Britton Johns from the episode of The Knowledge Project that they went on to talk about a lot of this stuff. It takes four 747s to ship one of these machines. So you buy one, your TSMC, you buy one and it arrives in, of course, the 747s. Then there's a crew of ASML employees on site, not only to assemble it, but then to help you run it. So like you mentioned, these companies are deeply integrated with each other to pull this off.

• 1:24:54David Rosenthal?

  Okay, so what does running it mean? What do these machines do?

• 1:24:57Ben Gilbert?

  Okay, so it becomes exponentially harder to manufacture chips the more dense they are. So David, you mentioned that 150 nanometers or so from several years back, and we know now that the M1s are made on this 5 nanometer process. Well, the wavelength of white light, of regular light, is 193 nanometers.

• 1:25:19David Rosenthal?

  Oh, that seems like a problem.

• 1:25:21Ben Gilbert?

  Well, it's certainly wide, but you know, we're humans, we come up with clever solutions, we can solve this. And so you shoot it through a lens, and maybe you shoot it through some water.

• 1:25:30David Rosenthal?

  Like a laser?

• 1:25:31Ben Gilbert?

  Well, not yet, but-

• 1:25:34Ben Gilbert?

  Even that really only gets us to like 11 nanometers. So how the heck are we supposed to make these chips where the transistors are ostensibly only five nanometers apart when what we've done to date, shooting through lenses and shooting through water, gets us to 11 nanometers? Well, okay, so this is crazy. You have to create a plasma. So what they do, and this is called extreme ultraviolet light, or EUV. This is a process that is just wild. On one side of the machine, you drop molten tin. On the other side of the machine, you then hit it with a highly specialized laser. You perfectly pulse them. It explodes into a plasma, which creates extreme ultraviolet light.

• 1:26:19Ben Gilbert?

  Now, of course, this is hard enough to do, as you can imagine how that might work, but you actually have to do that 50,000 times per second.

• 1:26:27David Rosenthal?

  Yeah, and what I read is that the accuracy with which that laser needs to hit the drop of molten tin is more precise than the calculations to send the Apollo missions to the moon. And you gotta do that 50,000 times a second.

• 1:26:40Ben Gilbert?

  Unbelievable. And now, of course, think a little bit more about this. Well, wait a minute. That wavelength is so small, we're going shy of 11 nanometers here, we're going to 5 nanometers, 3 nanometers, that actually it is absorbed by all known mirrors, which we're used to reflecting light, but they don't reflect this light because the wavelength is so small. So part of this process involves reflecting it a bunch of times, like 20 or something, before etching the silicon. So what do we do? Well, ASML actually needed to invent a new type of mirror to do this, and they also needed a contract with a German company to make this special type of laser, which is the only known company in the world capable of making it. This is crazy hard stuff.

• 1:27:25Ben Gilbert?

  They only make 50 of these machines per year or so. They used to have competitors, like Nikon used to compete with ASML on this, but it's too hard. They gave up. That's how hard extreme ultraviolet lithography is.

• 1:27:40Ben Gilbert?

  And of course, we haven't talked a lot about this, and I think it's outside the scope of the show, but just to overly simplify lithography is kind of the process of taking that silicon wafer and etching a design on it. And if we want to do that in smaller and smaller ways, we get to do with more and more specialized equipment. And at the end of the day, if you want to make the M2, the M3, you know, the A18X bionic, whatever it's going to be called.

• 1:28:03David Rosenthal?

  Bionic.

• 1:28:04Ben Gilbert?

  There is no other way to make it than this extreme, cutting-edge alchemy.

• 1:28:10David Rosenthal?

  It truly is alchemy. So, you know, Ben.

• 1:28:13Ben Gilbert?

  So you're a government. You want to throw 100 billion.

• 1:28:15David Rosenthal?

  You know, like acquired is doing really well. Like we're on a tear here. You know, we've got power. We got brand power. We got network, you know, economies. We got our community. Like, we're doing well. We should invest in this. We should, it was an opportunity. We should compete with TSMC. Screw the governments. We'll do it. We've got a couple hundred million dollars. We'll buy this stuff. You know, you have a CS degree. You know, you're the more technical one of it. You can run this stuff, right? When we get the shipments from ASML, you can make this happen.

• 1:28:37Ben Gilbert?

  Wouldn't know the first thing to do. Even if we could invest the cash, even if we could build the facility, even if we could buy the machines, which by the way, that's going to be hard because there's 50 some on backorder. So like, I can't even get it for a couple of years.

• 1:28:50David Rosenthal?

  TSMC has like ordered out all of them for years.

• 1:28:51Ben Gilbert?

  It takes people who have done the most advanced manufacturing in the world ever in history in order to know how to do the next version of it.

• 1:29:01David Rosenthal?

  And this is why TSMC has 40% operating margins.

• 1:29:04Ben Gilbert?

  It's crazy.

• 1:29:06David Rosenthal?

  Totally crazy. I'm just like in awe of this.

• 1:29:10Ben Gilbert?

  Completely.

• 1:29:11David Rosenthal?

  Okay. So a little while back, before we get totally geeked out on that, which was awesome, you said something like, how do we get this flywheel effect? You know, it's great, but like, how do we really get from TSMC started taking the dregs from the IDMs, then the fabless companies came along. How do we get from there to like now? There's another really important chapter here.

• 1:29:31Ben Gilbert?

  And you're going to flash us forward from like 93, 95 to like 2010-ish? Is that what's about to happen?

• 1:29:37David Rosenthal?

  2008. Well, first, we'll stop in 2005. So 2005, you know, things are going well, better than Morris ever imagined. These fabless companies are getting started. Nvidia's killing. I mean, I was making gaming PCs at the time. I wanted those. Nvidia GPUs.

• 1:29:50Ben Gilbert?

  But Nvidia wasn't a top 20 stock in the world.

• 1:29:54David Rosenthal?

  No, I mean, Intel was like, Nvidia, come on.

• 1:29:56Ben Gilbert?

  Right.

• 1:29:57David Rosenthal?

  Real men have fabs. Okay, maybe we're beyond that part, but they were making GPUs like Nvidia's stock tracked whether they won the next Sony contract for the next PlayStation or the Xbox.

• 1:30:10Ben Gilbert?

  That was the market for GPUs.

• 1:30:11David Rosenthal?

  That was the market, right? You know, great market, but it's not what we're talking about.

• 1:30:14Ben Gilbert?

  It's not about machine learning. It's not about crypto. It's like, is the next PlayStation going to include your chip or not?

• 1:30:19David Rosenthal?

  Totally. But still, great for TSMC. It's awesome. 2005, Morris is 74 years old. He's like, all right, I did it. I've been buying TSMC stock with my own money. It's done well enough. I don't really need to work anyway. I'm gonna call it.

• 1:30:36Ben Gilbert?

  I'm gonna retire.

• 1:30:36David Rosenthal?

  Ready, retire, ready, ride off into the sunset. He hands the reins of TSMC over to his longtime Lieutenant Rick Si, and he retires. He spends a couple of years. He's just chill. I don't know what he's doing. He loves literature. He's like reading all sorts of stuff. He's on his second marriage, which he credits his second wife for really reinvigorating him and inspiring him. Then it's summer of 2009.

• 1:30:57Ben Gilbert?

  By the way, that's right around the time that people were starting to speculate that EUV might work. All this had been kind of an idea to this point.

• 1:31:05David Rosenthal?

  There's been science projects before. Oh, cool. I didn't realize that.

• 1:31:08Ben Gilbert?

  Yep.

• 1:31:09David Rosenthal?

  Oh, well, this is gonna make what happens even more sense. The financial crisis had happened in 2008. And, you know, chaos everywhere. We've talked about it lots on this show. Surprise press conference, TSMC, summer 2009. They announce that Morris is returning to lead TSMC as CEO. Rick is out. Morris is coming back for the third act of his career. I don't even know what number he's wearing. He's not 45 because that was, you know, the second act. He's like Jordan. He's beyond Jordan at this point. Coming back, he's gonna be CEO again at age 78. Rick would actually have a second act himself. Do you know what Rick is doing now?

• 1:31:47Ben Gilbert?

  No.

• 1:31:48David Rosenthal?

  Rick is CEO of Mediatek, which spun out of UMC. So like, he's doing fine. Rick's doing great. But Morris comes back. Why does Morris come back?

• 1:31:55Ben Gilbert?

  But this is heralded as like kind of a botched transition, right?

• 1:31:58David Rosenthal?

  Well, there's a lot of stuff going on.

• 1:32:00Ben Gilbert?

  Like from Morris to Rick, people kind of viewed it as like, you didn't really do a great job bringing in the next CEO of the company?

• 1:32:06David Rosenthal?

  Maybe. I don't know enough to say.

• 1:32:09Ben Gilbert?

  Okay.

• 1:32:09David Rosenthal?

  I think maybe, but also like, there's a lot going on at this moment in time. So the financial crisis.

• 1:32:14Ben Gilbert?

  Yep.

• 1:32:14David Rosenthal?

  That's like a crisis that's affecting everybody. So that's one thing. But the other thing, so in the press release, there's a quote from Morris. And he says, one, this move will not affect TSMC's fighting spirit and is likely to spur greater intensity. But two, he says that he sees, quote, golden opportunities ahead. What are these golden opportunities that he's referring to? It's 2009, mobile.

• 1:32:40Ben Gilbert?

  Right.

• 1:32:40David Rosenthal?

  The smartphone.

• 1:32:41Ben Gilbert?

  2007, in July, the iPhone comes out. 2008, the iPhone 3G comes out with the App Store for the first time, the SDK, all these developers building for it. But of course.

• 1:32:53David Rosenthal?

  And Android comes out in 2008?

• 1:32:54Ben Gilbert?

  Yep. Apple had, to this point, while building, you know, this operating system, the scaled down version of OS 10, it's Unix, but they weren't designing their own chips. They just used an off the shelf Samsung chip. They got it right with saying like, hey, we got to use ARM in these things because we need a really low power device. So they've done actual God's work and magic to be able to bring a PC x86 operating system, create a sub operating system.

• 1:33:21David Rosenthal?

  Computer in your hand.

• 1:33:22Ben Gilbert?

  Totally, that runs on ARM.

• 1:33:23David Rosenthal?

  Yep.

• 1:33:24Ben Gilbert?

  Miracle. But of course, it's an off the shelf Samsung processor.

• 1:33:27David Rosenthal?

  Totally. Well, even that's great for TSMC, like, you know, Intel's not making that. Okay, so that's one, we're gonna talk more about that in a sec.

• 1:33:33Ben Gilbert?

  But we should say, and Samsung also fabbed it, because Samsung is both a chip designer and a manufacturer.

• 1:33:40David Rosenthal?

  On mobile, the previous whole paradigm of computing and silicon, everything was PC. It was like stuff plugged into a wall.

• 1:33:47Ben Gilbert?

  Yep.

• 1:33:48David Rosenthal?

  It was Intel, it was x86. And like, yeah, TSMC could now access some of that because AMD went fabulous, but come on. But now, all of the leading companies that are going to make silicon for design, are ARM companies, Qualcomm, Broadcom, MediaTek, Apple.

• 1:34:03Ben Gilbert?

  Who all are fabulous.

• 1:34:04David Rosenthal?

  All are fabulous. Okay, so that's a big opportunity. And guess who knows all of those people? Morris.

• 1:34:11Ben Gilbert?

  And we should say too, 2009 was an interesting tipping point, because if you'll remember back to the 2007 introduction of the iPhone, Steve Jobs has a slide where he says their hope, their goal is to get 1% of the existing smartphone market.

• 1:34:25David Rosenthal?

  Right.

• 1:34:25Ben Gilbert?

  So Apple had no notion, I mean, Google had no notion of how big smartphones were about to become. In 2009, we're starting to see, I think the iPhone 4 came out. We're starting to see a ton of different OEMs making Android phones. You're moving into this era where everyone's looking at each other going, oh, this might actually be the next computing paradigm.

• 1:34:43David Rosenthal?

  Yeah, yeah, yeah. Well, that was half of the next computing paradigm. Remember back, I mean, this is when I started in VC. There were two waves that everybody was talking about.

• 1:34:51Ben Gilbert?

  Mobile and social?

• 1:34:53David Rosenthal?

  Mobile and on the consumer side, everything's shifting to mobile. That was what happened.

• 1:34:57Ben Gilbert?

  Bring your own device?

• 1:34:59David Rosenthal?

  Well, sort of. You're on the right track. What happened in the enterprise? The cloud.

• 1:35:03Ben Gilbert?

  The cloud.

• 1:35:03David Rosenthal?

  Right. So you got mobile and you got cloud. And it's so simplistic, but those are the two things that drove trillions of dollars of market cap over the next decade. Well, what's the cloud? So at first, the cloud is good for Intel, right? X86, you're putting CPUs in the cloud, Amazon's buying lots of.

• 1:35:20Ben Gilbert?

  Dude, the cloud's the best thing that ever happened for Intel. Those are incredible server architecture.

• 1:35:25David Rosenthal?

  It was the best thing that ever happened to Intel. But as the cloud progressed and computing workloads progressed, the CPU became a lot less important. Like AI started becoming a thing. CPU, like, yeah, maybe, maybe you need some of that. Maybe you'll use Intel, maybe you'll use ARM, like whatever. But what really matters?

• 1:35:47Ben Gilbert?

  Well, the majority of cloud workloads are still on CPUs today.

• 1:35:50David Rosenthal?

  Okay, fine, fine.

• 1:35:51Ben Gilbert?

  But you're right, future looking.

• 1:35:53David Rosenthal?

  Why is Nvidia now a 400, 300, 4 billion dollar market cap company? It's not because of the PlayStation.

• 1:35:58Ben Gilbert?

  And it's bigger than Intel, right? And Nvidia's 2X Intel's market cap, something like that? Yeah.

• 1:36:04David Rosenthal?

  It's the cloud.

• 1:36:05Ben Gilbert?

  The notion of chips that are really good at parallelized processing, which is GPUs and matrix multiplication effectively, vector math versus the CPU, which are sort of these general purpose workforces built for the operating system that runs on your computer, super good for serial. Of course, there's like multi corporate, you know, there's 64 cores on a CPU now, so they're good at parallelization too. But all this stuff, especially machine learning is GPU.

• 1:36:32David Rosenthal?

  It's GPUs and specialized, like the Tesla Dojo stuff. That's not x86.

• 1:36:38Ben Gilbert?

  Oh, yeah, we're in this. I mean, the other thing that foundries enabled, the fabulous era enabled is the custom chip. Like, everybody's building custom chips for all sorts of things.

• 1:36:47David Rosenthal?

  Yep. So you got these two big golden opportunities that are coming online. And Morris is like, I got this.

• 1:36:56Ben Gilbert?

  And we should say, we should clarify, too. I think Tesla uses Samsung.

• 1:37:02David Rosenthal?

  Oh, interesting.

• 1:37:02Ben Gilbert?

  Not TSMC, or at least for part of it. And I think they actually even fabbed their chips in Austin in the US.

• 1:37:09David Rosenthal?

  Really?

• 1:37:09Ben Gilbert?

  Yeah.

• 1:37:10David Rosenthal?

  So I can't imagine that's gonna last.

• 1:37:11Ben Gilbert?

  This is like the beginning of the like, what everyone's sort of hoping for in the US is this like return to American manufacturing of chips.

• 1:37:19David Rosenthal?

  They're gonna have to go to TSMC, though, in the next generation, because you want 3 nanometer.

• 1:37:24Ben Gilbert?

  It depends. I mean, it depends what the workloads are.

• 1:37:26David Rosenthal?

  Yeah, I guess so. It depends what you need. Well, anyway, point is, Intel's dominance is over. And the index on all that's gonna take over is TSMC.

• 1:37:37Ben Gilbert?

  Yep.

• 1:37:38David Rosenthal?

  And Morris, riding back in, he comes in, he gets these deals done. And so like, the Apple deal, 2012, Morris Chang, 78, 80 years old.

• 1:37:50Ben Gilbert?

  And I think the Apple rep on that was Jeff Williams, the classic Tim Cook's Tim Cook.

• 1:37:55David Rosenthal?

  That's right.

• 1:37:56Ben Gilbert?

  I think there was something where it was even like a, one went over to the other's house for dinner or something. And it was like a living room conversation to ink the deal for, hey, we bought this company, PA Semi, we've been designing our own chip architecture in-house. We're gonna launch, I think it was the A4.

• 1:38:14David Rosenthal?

  Yeah, I think that was the first one.

• 1:38:15Ben Gilbert?

  Was the first one. And it was Apple basically saying, we think a lot of people are gonna buy a lot of iPhones in the future. And we are competing head to head with Samsung because they're a company that is not clear on strategy. They have a consumer angle here with the Galaxy phones. They think they're also kind of a foundry.

• 1:38:34David Rosenthal?

  And Jobs hated Samsung famously. What did he call them? He called them some derogatory term.

• 1:38:39Ben Gilbert?

  Uh, well, there's been a few interesting things. There was Steve Jobs saying he was gonna wage thermonuclear war.

• 1:38:46David Rosenthal?

  That was on Google, right?

• 1:38:48Ben Gilbert?

  I think that was Google.

• 1:38:49David Rosenthal?

  But he had some like, oh, Samsung, they're just like coffee, like something that like really put them in.

• 1:38:53Ben Gilbert?

  It was about the lawsuits. It was like when they kept stealing Apple's designs.

• 1:38:58David Rosenthal?

  Yeah.

• 1:38:59Ben Gilbert?

  And then there was something else where someone, this is later, but Tim Cook. Read the quote on stage about it being a toxic hell stew.

• 1:39:08David Rosenthal?

  Well, it doesn't get any better than that.

• 1:39:10Ben Gilbert?

  No, but Bloomberg reported that it was a really big risk for both companies, both Apple and TSMC. Apple was relying on a company that was then seen as an also ran. And the quote is, I think this actually Jeff Williams, if we were to bet heavily on TSMC, there would be no backup plan. And for TSMC, it meant an initial investment of $9 billion, fabs are expensive to build, and devoting 6,000 employees to building a dedicated plant for Apple in just 11 months. It took several years before it even began producing the chips. So that was in 2010. And then I think 2012 was the launch of the A4.

• 1:39:49David Rosenthal?

  A4.

• 1:39:50Ben Gilbert?

  Designed by Apple, built on the PA Semi acquisition, and of course, fabbed by TSMC.

• 1:39:56David Rosenthal?

  And I think it wasn't until the iPhone 6, which was what, 2014, 2013, something like that?

• 1:40:01Ben Gilbert?

  That they were solely TSMC?

• 1:40:03David Rosenthal?

  I think so. And that was like the huge hit product. Cause remember the 6 was when they first increased the screen size and those things flew off the shelves.

• 1:40:11Ben Gilbert?

  I'm pretty sure some iPhones had Samsung fabbed.

• 1:40:15David Rosenthal?

  Yeah.

• 1:40:15Ben Gilbert?

  A4s and 5s in them, and some had TSMC fabbed ones.

• 1:40:19David Rosenthal?

  But I think by the 6, all iPhones were huge winners, but I think the 6 was like mega, mega winner. And I think that was all TSMC.

• 1:40:27Ben Gilbert?

  Huh. 9 billion of manufacturing capacity just for a deal with one company paid off.

• 1:40:32David Rosenthal?

  That was a bet the farm deal. And kind of like something only Morris could do.

• 1:40:36Ben Gilbert?

  Totally. I mean, it really speaks to founder gravitas.

• 1:40:39David Rosenthal?

  Yeah. Even if he had no equity as a founder, no equity that he didn't buy. So after getting that deal done in 2013, Morris steps down as CEO again, but he stays on as chairman. And then finally, once it all plays out and TSMC is on top in June of 2018, Morris retires presumably for real.

• 1:41:02Ben Gilbert?

  He even stepped down from the chairman.

• 1:41:03David Rosenthal?

  Yeah, fully retires from chairman at age 86. Oh my God.

• 1:41:08Ben Gilbert?

  Crazy.

• 1:41:09David Rosenthal?

  Wow. So that was 2018. So. I mean, let's talk about now. So 2020, TSMC, we alluded to this, operating profit of $20 billion on $48 billion of revenue. They took 17 of the $20 billion in operating profit and plowed it all back into CapEx last year in 2020. Beginning of this year, January 2021, they give guidance that they will raise CapEx from 17 last year in 2020 to 25 to 28 billion in 2021. In April of this year, 2021, they raised it again to 30 billion forecast for the year and 100 billion over the next three years. That's like the real shot across the

• 1:41:52David Rosenthal?

  bow that everybody wakes up, the financial markets wake up and they're like, holy crap, TSMC has cornered the market. Even Samsung's not going to be able to keep up with this. It's wild.

• 1:42:02Ben Gilbert?

  All right, listeners. Now is a great time to talk about a new partner of ours here on acquired Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 1:42:15David Rosenthal?

  Yep. 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. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 1:42:32Ben Gilbert?

  So 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.

• 1:42:47David Rosenthal?

  And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Logora's bet 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.

• 1:43:11Ben Gilbert?

  And they recently launched Logora 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.

• 1:43:30David Rosenthal?

  And Legora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Legora 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 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 1:44:00Ben Gilbert?

  Truly insane numbers. And that is the real test. Plenty 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 legora.com/acquired and just tell them that Ben and David sent you. So more on today, David.

• 1:44:27David Rosenthal?

  Yeah.

• 1:44:27Ben Gilbert?

  TSMC today.

• 1:44:29David Rosenthal?

  Well, okay, so speaking of data, I think this is the data point that really kind of says everything. So since the first IPO in Taiwan in 1994, TSMC has had compound annual revenue growth of 17.4% for 27 years. Revenue growth. 17.4% compounded for 27 years. Now, the ARR, the equivalent on valuation, on market cap. So it was 4 billion market cap at the Taiwan IPO in 1994. Today it is 550 billion. So that is a 19.9% ARR, starting from a $4 billion base over the last 27 years. So 20% ARR over 27 years.

• 1:45:15David Rosenthal?

  Incredible by any means, starting from a $4 billion base. It is now currently, as we record, the ninth most valuable company in the world.

• 1:45:24Ben Gilbert?

  And I think other than Saudi Aramco, it is the only company in the top 10 that we haven't done on acquired.

• 1:45:32David Rosenthal?

  Oh, interesting. Yeah, the US oil companies are no longer

• 1:45:36Ben Gilbert?

  Correct.

• 1:45:36David Rosenthal?

  in the top 10.

• 1:45:37Ben Gilbert?

  But Berkshire is

• 1:45:38David Rosenthal?

  Foreshadowing some future episodes this season.

• 1:45:42Ben Gilbert?

  I mean, they're in hallowed grounds at this point. The other thing that, just talking about financials today, so crazy that they grew 31% in revenue from 2019 to 2020.

• 1:45:52David Rosenthal?

  They doubled their CAGR from 2019 to 2020.

• 1:45:57Ben Gilbert?

  Yeah, it's nuts.

• 1:45:59David Rosenthal?

  Talk about accelerating growth.

• 1:46:01Ben Gilbert?

  Okay, so in 2020, their adjusted net income was $17 billion. How are they going to go spend $100 billion over three years? Is that going to be out of profits of each of those years? Or do you think they're doing some kind of financing?

• 1:46:16David Rosenthal?

  I don't know. I don't actually don't know if they've done any financing. I'm quite confident they'll make enough profit to fund it organically because big news just in the past week. They started this a little earlier in the year, but now they're really doing it. They're getting away from Morris's second big innovation of reducing prices.

• 1:46:33Ben Gilbert?

  In fact, I think they're going to raise prices this year by 20%.

• 1:46:37David Rosenthal?

  So the first announcement a couple of months ago was they're not going to cut prices. And then they just announced they're going to raise prices. Nobody's ever done this since the pre-Morris days.

• 1:46:46Ben Gilbert?

  Pricing power in action.

• 1:46:47David Rosenthal?

  Totally. I mean, what a clearer picture of how they have taken a commodity business and turned it into, I mean, this has got to be one of the biggest moats of all time.

• 1:46:59Ben Gilbert?

  Totally. I mean, they've got 28 billion of cash and cash equivalents on the balance sheet. And they're going to use that and all the cash that they generate from their operations to plow directly back into making sure that everybody else is five plus years behind.

• 1:47:13David Rosenthal?

  Unbelievable.

• 1:47:15Ben Gilbert?

  The other thing is that they already are the largest. They have over 50% of the market for foundries, for all contract manufacturing of chips.

• 1:47:26David Rosenthal?

  And like 95% plus of the profit.

• 1:47:28Ben Gilbert?

  Correct. I thought where you were going with that, it is also true that they have 90% market share on the current generation, like the leading edge chips.

• 1:47:36David Rosenthal?

  Yeah. In the 5 nanometer, Samsung has like 5, 10% market share and TSMC has 90% plus.

• 1:47:44Ben Gilbert?

  In many ways.

• 1:47:45David Rosenthal?

  Going to 100.

• 1:47:46Ben Gilbert?

  They're the Apple of semiconductors. They don't have all the market share, but they have all the most profitable market share.

• 1:47:53David Rosenthal?

  Yeah, exactly. They are the iPhone of semiconductors. Like you can still buy previous generation, you know, worse technology from other and for plenty of, you know, on the Odd Lots podcast, this was actually, they talked about sort of like the bear case going forward for TSMC and. One potential one is that, oh, well, the processing power is so good that you're not going to need the leading edge anymore. I find that a really weak argument. Like, you always need the leading edge. You think Tesla doesn't want the leading edge?

• 1:48:20Ben Gilbert?

  Totally.

• 1:48:20David Rosenthal?

  You think Apple doesn't want the leading edge?

• 1:48:22Ben Gilbert?

  Software will always match the complexity on the most advanced hardware it can run on.

• 1:48:25David Rosenthal?

  Totally.

• 1:48:26Ben Gilbert?

  Which is why, like, I love when people are like, "Apple's slowing down my computer." I'm like, "Yes, I'm sure that's what's happening. They wrote special code that they're putting on there to make the consumer..." No, it's because every piece of software just always assumes that it has the most advanced processor on earth, and it always gets to developers. Sure, they test on two- and three-year-old equipment, but no one's making sure that the six- and seven-year-old laptops are as performant. Software designed for the current generation is hardware.

• 1:48:51David Rosenthal?

  You think that Google and Amazon are gonna be like, "Now we're good."

• 1:48:55Ben Gilbert?

  Right.

• 1:48:56David Rosenthal?

  Hell, no.

• 1:48:57Ben Gilbert?

  It actually is worth touching on. There's one other interesting bit about this 5-nanometer process, which, first of all, is a marketing name at this point. What it used or originally referred to was the length on the gate on the transistor. At this point, it's not exactly 5 nanometers, and the additional performance is not going to come from, you know, making smaller gates. Here's the interesting thing, though. You actually can't put these transistors much closer to each other. So if you think about silicon atoms that are between the transistors, you can only fit five of them in a nanometer. So in a 3-nanometer process, sure, it's marketing speak, but...

• 1:49:35David Rosenthal?

  You've got 15 to work with.

• 1:49:35Ben Gilbert?

  Right. Like, at some point, you cannot subdivide silicon anymore. So either we need to change the substrate, or the innovations are sort of gonna come from elsewhere.

• 1:49:45David Rosenthal?

  Which has always been the case. Like, Moore's Law was technically the doubling of the number of transistors on an integrated circuit.

• 1:49:52Ben Gilbert?

  Now it comes from multi-core. It comes from all the other advancements of figuring out how to make chips do more stuff faster.

• 1:50:00David Rosenthal?

  Yep. That I think is going to keep going and I think it's going to keep being expensive and getting more expensive. And I think TSMC is the only company that's going to be able to keep up at the leading edge.

• 1:50:12Ben Gilbert?

  Yeah. Do you know, David, about Moore's second law?

• 1:50:16David Rosenthal?

  Ooh, no, I don't.

• 1:50:17Ben Gilbert?

  So everyone knows about Moore's law, but there's this second one, which is also known as Rock's law after Arthur.

• 1:50:23David Rosenthal?

  Arthur Rock. Yeah. Oh gee.

• 1:50:25Ben Gilbert?

  It states that the cost of a semiconductor chip fabrication plant doubles every four years. So with fabs today costing 15, 20 billion dollars, I don't know that that's proven exactly true, but it's certainly.

• 1:50:39David Rosenthal?

  Well, shoot, if we just look at TSMC's CapEx forecasting, they're going from 17 to 30.

• 1:50:46Ben Gilbert?

  Yeah.

• 1:50:46David Rosenthal?

  To 60 over two years. So that's way faster than four years.

• 1:50:50Ben Gilbert?

  So the interesting thing is when you combine these two things, the Moore's law and Moore's second law, it implies that the leading company, that most profitable company will become a monopoly.

• 1:51:02David Rosenthal?

  Winner take all. There you go.

• 1:51:04Ben Gilbert?

  And it's fascinating that both of these things, these laws, aren't actually in conflict because Moore's law is about, effectively, when you really look at it from a financial perspective, operating expenses when producing at scale. And Rock's law is about the upfront capital expenditures to enable all that production. So it's everything we talk about on the show. It's being able to pile investment into fixed costs as much as possible at huge scale in order to realize the benefits of making as many of the thing as humanly possible at global scale. And TSMC, interestingly, is the most perfect example of this. And I say interestingly because we almost always talk about operating leverage and scale in the context of software.

• 1:51:47David Rosenthal?

  Software, yeah.

• 1:51:47Ben Gilbert?

  On the internet. This is how venture capital started because actually manufacturing chips, the operating leverage that comes from huge amount of fixed costs into foundries to make chips and then hopefully be very profitable, 50% gross margin on those chips. Venture capital financing was built for that, for semiconductors. And it just so happened to work just as well or even better with software on the internet. Even better in the notion that gross margins of software could be 80 to 90%, not 50%. But I would back that down because it doesn't have the sort of moat defensibility characteristics that being able to plow your CapEx into manufacturing capability does.

• 1:52:31David Rosenthal?

  Yeah. Should we do power?

• 1:52:33Ben Gilbert?

  Absolutely. Let's do it.

• 1:52:34David Rosenthal?

  Let's do it. So for folks new to the show, this is one of the discussion topics we do for every episode is we go through Hamilton Helmer's excellent seven powers.

• 1:52:45Ben Gilbert?

  The best business theory book.

• 1:52:47David Rosenthal?

  Totally. We've had Hamilton on the show. He's amazing. Go read the book if you haven't. He identifies seven powers, essentially sources of defensibility, which he defines as long-term differential profit margins versus your competitors, as we've been talking about on the whole show.

• 1:53:02Ben Gilbert?

  Yep.

• 1:53:03David Rosenthal?

  The seven that he identifies are counter positioning, scale economies, switching costs, network economies, process power, branding, and cornered resources. And we almost always talk about network economies. We talk about counter positioning on this show.

• 1:53:18Ben Gilbert?

  Sometimes we talk about branding.

• 1:53:19David Rosenthal?

  Sometimes we talk about branding.

• 1:53:20Ben Gilbert?

  We're talking about none of those this time.

• 1:53:22David Rosenthal?

  Yeah, we sometimes talk about scale economies, which we're going to definitely talk about here, but I think we're going to have our first process power if I'm going to forecast. But let's start. Let's go down the list. Counter positioning. I mean, like, maybe you could.

• 1:53:35Ben Gilbert?

  When they were starting, and in particular, would the incumbents have started with the exact business model? No, because their profit center was the integration, that all the margin you get of integrating design and manufacturing. And by saying, nope, we're going to be a pure play manufacturer, TSMC theoretically was saying, no, we're going to take less gross margin and we're just going to make it up in volume. I'm actually not sure it played out that way. I think they have more. Do you know what Intel's gross margins are?

• 1:54:04David Rosenthal?

  I actually don't know. I would suspect they're higher, but I don't know.

• 1:54:08Ben Gilbert?

  Right.

• 1:54:08David Rosenthal?

  Yeah, there was counter positioning here. I don't think I said this when we were going through it, but. Before TSMC and the pure play foundry model, if you were either a fabless company, one of the very, very few, or you were another IDM and you were trying to get some excess capacity, you rent it from another IDM. Most of the IDMs, they'll be like, okay, you strong-iron them, you got a great strategic relationship, they'll give you some capacity. But they also demanded the right to market your products under their brand, too. So like, which obviously TSMC wasn't going to. So yeah, there was counter positioning, like the IDMs, no way they were going to do what TSMC was going to do.

• 1:54:45Ben Gilbert?

  Right. Huh, okay. Scale economies, absolutely. That is the biggest, if it's one of the top two with process power, in my opinion.

• 1:54:54David Rosenthal?

  Switching costs. Well, it's funny, now there are huge switching. You can't switch off TSMC.

• 1:54:59Ben Gilbert?

  No, unless you're going to stop being on the leading edge. If you're going to change from being a phone company to an automotive company, you can switch off of them.

• 1:55:07David Rosenthal?

  Well, I think it's even deeper than that. Again, we haven't gone, listeners probably think we've gone deep technically on this episode. We haven't even scratched the surface. But yes, if you want the leading edge, now you got to be TSMC. But you got to be so integrated with TSMC to do this. Say you want to switch to Global Foundries, or you know, one of the other competitors out there, of which there are a few. You can't just call up Global Foundries and be like, hey, I'm portin' over. Expect my business on Monday. It takes years because you're so deeply integrated with the process.

• 1:55:39Ben Gilbert?

  Yeah.

• 1:55:40David Rosenthal?

  So yeah, big switching costs.

• 1:55:42Ben Gilbert?

  Network economies, it's not really worth talking about.

• 1:55:45David Rosenthal?

  Not in the traditional sense. You know, this is not Facebook here.

• 1:55:49Ben Gilbert?

  And certainly, none of TSMC's customers really benefit from other customers being on it.

• 1:55:57David Rosenthal?

  No, I do think there actually is. I don't think Hamilton captures this in his seven powers. And I don't know if he would consider this one, but there is like an ecosystem aspect here. Because the EDM companies and the IP companies are so deeply integrated with TSMC. If you want to be using ARM, for instance, or you know, they're kind of the best integrated with. Now, I don't think that's network economies. That is kind of like this ecosystem thing. TSMC actually has a name for this. They call it like the open. Innovation, something or other, you know, it's some corporate name, but it means this.

• 1:56:29Ben Gilbert?

  I do wonder if it's actually worse for a lot of people that Apple is a TSMC customer, because who else has access to the 5 nanometer

• 1:56:36David Rosenthal?

  Right.

• 1:56:36Ben Gilbert?

  process right now?

• 1:56:37David Rosenthal?

  They're going to take as much as they can. Yeah. Good point.

• 1:56:42Ben Gilbert?

  Process power.

• 1:56:43David Rosenthal?

  Yes.

• 1:56:43Ben Gilbert?

  I think other than Pixar, this is the first time we've really, although we weren't doing seven powers during.

• 1:56:49David Rosenthal?

  Yeah. To me, this is the clearest example I could ever imagine of process power.

• 1:56:54Ben Gilbert?

  It takes all 40 years of TSMC's history to have arrived at where they are today. And even if 10 people left and tried to start the next TSMC, to be able to create what they've created at this point from scratch, virtually impossible.

• 1:57:10David Rosenthal?

  All of their IP, all of their, you know, people, all of their know-how, all of their relationships with ASML and the like. Yeah. No amount of money can replicate it.

• 1:57:21Ben Gilbert?

  I think the only thing that will unseat TSMC is a complete paradigm shift.

• 1:57:27David Rosenthal?

  Yeah.

• 1:57:28Ben Gilbert?

  Something where, like what mobile did to desktop. If there's something where the compute required in the future is unable to be provided by anything that TSMC is good at today.

• 1:57:39David Rosenthal?

  If all the crazy laser molten tin ASML stuff we were talking about, if all of a sudden there's discovered a new, either different or way cheaper. Quantum computing, yeah. Way to do this, then that kind of could reset the playing field. Yeah. Yeah, yeah, totally.

• 1:57:54Ben Gilbert?

  But even little shifts, I bet they'd be fine. If everyone figured out that like, hey, silicon's not the best substrate and we can figure out a better substrate.

• 1:58:01David Rosenthal?

  If they were like an AWS moment, oh, which is funny because TSMC is the AWS equivalent, but where something happened that just made it way cheaper than it used to be. You could now get access to the technology and the know-how. Orders a magnet too cheaper than it is now, that would take away a big part of

• 1:58:18Ben Gilbert?

  Yep.

• 1:58:19David Rosenthal?

  their power. But I don't see that happening.

• 1:58:22Ben Gilbert?

  No, absent a paradigm shift, this is TSMCs to lose. They're pretty much, they're in the groove. So I think we should skip branding and cornered resource for now. It's not really worth talking about.

• 1:58:34David Rosenthal?

  I mean, Lily, they're antithetical to branding. Like, it's Apple's brand. It's not TSMC.

• 1:58:39Ben Gilbert?

  So this is, I think, a good time to enter our geopolitics discussion because I was thinking about the other way that TSMC could fail would be that China decides the moment is right to go and assert our force and take over Taiwan.

• 1:58:54David Rosenthal?

  Depending on how you see it, either annex Taiwan or assert its, as always claimed sovereignty in Taiwan.

• 1:59:00Ben Gilbert?

  Yes, actually start enforcing what has been right the whole time. I think as they would sort of say.

• 1:59:05David Rosenthal?

  Yeah.

• 1:59:06Ben Gilbert?

  If they're speaking in my casual tone in English from America, then doing all this business with the West, I have to imagine that assuming that it didn't start a full war, like an actual world war, which it may, then of course they would start using all the TSMC manufacturing capacity for all the Chinese customers.

• 1:59:25David Rosenthal?

  Huawei and.

• 1:59:26Ben Gilbert?

  And Huawei's been a TSMC customer for a long time.

• 1:59:27David Rosenthal?

  And is currently cut off.

• 1:59:29Ben Gilbert?

  Yeah. So how do you capture that in power? What is the power? Or maybe like, let's not.

• 1:59:35David Rosenthal?

  I mean, that's a risk. That's like a bear case.

• 1:59:37Ben Gilbert?

  Right. Let's not get too specific on this, but maybe in a general sense, how do you capture the power that a company has that comes from regulatory environment? Where would that get classified under? That like they have a lot of room to be operating safely.

• 1:59:56David Rosenthal?

  Maybe cornered resource, I guess. So you're saying this is like an anti-power for this. This is a weakness.

• 2:00:00Ben Gilbert?

  Exactly. Exactly.

• 2:00:02David Rosenthal?

  Yeah.

• 2:00:03Ben Gilbert?

  I suppose that all that matters is things that you have that your direct competitors don't. So I, in this strange straw man that I'm putting together, it would really be about what if you were located in a country that none of your competitors were also domiciled in and being there gave you some special ability to be more profitable than others.

• 2:00:22David Rosenthal?

  Which they had in the beginning with the government of Taiwan. Basically, the mafia boss was like, this is happening. We're going to strong arm all the business leaders in the country to investing in this. We're going to make sure that this happens.

• 2:00:34Ben Gilbert?

  Yeah. Okay. Well, let's put a pin in that because you're right. It turns out that it's actually not a perfect power discussion, but the geopolitics thing is interesting.

• 2:00:43David Rosenthal?

  Well, I think it's the bear case.

• 2:00:44Ben Gilbert?

  Right. That to me, absent an enormous computing paradigm shift is the way that TSMC has an enormous risk in the business.

• 2:00:52David Rosenthal?

  Yeah, totally. Which does make it kind of surprising that, you know, they haven't diversified their geographical operations very much.

• 2:01:00Ben Gilbert?

  So this is interesting. So they're facing a lot of pressure for this. They are spending, I think, $12 billion this year to start a plant in Arizona, which will not be the three nanometer. I don't even think it'll be the five nanometer. It's not their most advanced manufacturing. I think the US is subsidizing in a big way. I think it's part of the Biden administration's most recent bill to try and bring some semiconductor manufacturing here. But they're also starting a fab in Japan that came out on their last earnings call. So they're doing some.

• 2:01:33David Rosenthal?

  And they have operations in China, I believe, too.

• 2:01:35Ben Gilbert?

  Yep, they're doing some diversification, but I don't think it's for this reason. I think it's because they're basically getting free money to open fabs in other places. And Morris has even made comments like, I don't think it makes any business sense for us to have the leading edge in those countries, even though those countries want us to have them there. I think it makes sense based on the ecosystem that we've created in Taiwan to keep operating it here. So the question is if it directly helps, let's take the US for example. The US's prowess as a semiconductor manufacturing force in the world

• 2:02:14Ben Gilbert?

  to have TSMC's Arizona plant, or if it's really just indirect and the idea is like, let's try this as a first stab. We'll get more people in the US familiar with doing this again in case we need to.

• 2:02:28David Rosenthal?

  Restore this?

• 2:02:28Ben Gilbert?

  Yes.

• 2:02:29David Rosenthal?

  Yeah. I mean, this is a scary, scary future to contemplate and I hope to God it doesn't happen. But really, the thought exercise here is what would happen if China annexes

• 2:02:40Ben Gilbert?

  Yes.

• 2:02:41David Rosenthal?

  Taiwan tomorrow?

• 2:02:42Ben Gilbert?

  Which is scary for a number of reasons, the smallest of which is this corporate takeover. It's scary for a lot of people, their lives.

• 2:02:48David Rosenthal?

  Yeah, scary, but I wouldn't say it's the smallest, like, everything. Imagine if we didn't have access to leading edge semiconductors.

• 2:02:54Ben Gilbert?

  Yeah.

• 2:02:55David Rosenthal?

  That's everything. What part of our lives do not run on?

• 2:02:59Ben Gilbert?

  Right.

• 2:03:00David Rosenthal?

  Semiconductors.

• 2:03:00Ben Gilbert?

  Ford can't make F-150s right now.

• 2:03:02David Rosenthal?

  Basically, all of our technological progress would stop.

• 2:03:05Ben Gilbert?

  Yeah, you're right.

• 2:03:07David Rosenthal?

  So I think the question is, and I don't know enough to answer this, what would happen? Would it be possible to airlift the process power that TSMC has physically out of Taiwan to somewhere else? You get all the people, ASML now sends the stuff somewhere else, you airlift everybody out, there's an evacuation. Does the process power come with it or not? I don't know.

• 2:03:28Ben Gilbert?

  That's a good question. I mean, if the Toyota production system is an example, where Toyota tried to, there was that factory that joined venture with, was it GM?

• 2:03:37David Rosenthal?

  Yeah, the Nume plant that's now the Tesla plant in Fremont.

• 2:03:40Ben Gilbert?

  With Toyota trying to replicate their process somewhere else, didn't work.

• 2:03:46David Rosenthal?

  Now, it wasn't under threat of war.

• 2:03:48Ben Gilbert?

  Right, this one would need to. It's actually a good question. If you think about the US's strategic defensive weaknesses, what's more important? Having onshore semiconductor capability to continue to advance technology in the nation or Boeing, our ability to build, which we've always held up as this example of the US needs that to stay US-owned, to stay operating, stay profitable, to stay prosperous, because it is a matter of the US way of life that we're able to protect.

• 2:04:18David Rosenthal?

  Boeing needs semiconductors.

• 2:04:20Ben Gilbert?

  That's a great point. So we're now outside our depth, but is it actually more important to have cutting-edge semiconductor capability here than airplanes or any of the other sort of defense supply chain?

• 2:04:32David Rosenthal?

  And you know, maybe the answer here is like Korea. Same situation exists in Korea with Samsung, right? Like, North Korea is right there. I've been there. I've been to North Korea. Like, I went to the DMZ. Like, it's so weird. It's like an amusement park.

• 2:04:43Ben Gilbert?

  Weird.

• 2:04:43David Rosenthal?

  It's super, super weird and bizarre. But yeah, North Korea is right there. You know, maybe it's the same, like China's right there, but this isn't actually going to happen. But I don't know, it feels in the last year, like, the risk of it actually happening. Has ratcheted up quite a bit.

• 2:04:57Ben Gilbert?

  I think so. I mean, it's like globalization as a whole. It is in the best interest of everyone to continue to share resources, to continue to entangle everything until somebody decides that it's not and that we have a big problem. And hopefully for lots of reasons, it just continues to be okay that TSMC is located on an island that is of disputed claim.

• 2:05:18David Rosenthal?

  Yeah. Maybe the best thing that could happen is my carve out a while back was the book by the Harvard chair, the Harvard astrophysics department about umumua that he postulates was an alien spaceship. Maybe if we discover that aliens are real, that's going to be the uniting force, you know, like all these conflicts seem pretty petty.

• 2:05:37Ben Gilbert?

  Yeah.

• 2:05:38David Rosenthal?

  I wouldn't use that as an investment thesis, though.

• 2:05:41Ben Gilbert?

  No. Okay, before we get into playbook and just hit some things that I think we missed during the narrative, or at least didn't put a fine enough point on in the narrative, I have a what would have happened otherwise that I want to hit.

• 2:05:53David Rosenthal?

  We haven't done this in a while.

• 2:05:54Ben Gilbert?

  No, we haven't. And I'll just read this as a direct quote from Bloomberg, and there were some awesome sources for this episode, all of which are linked in the show notes. "In the mid 2000s, as Apple Inc. was preparing for the release of its new smartphone, Steve Jobs approached then CEO of Intel, Adalini, about providing the chips for the iPhone. Intel already sold iPhone, the processors that ran on its Macs, but Jobs made..."

• 2:06:18David Rosenthal?

  We need to add video to acquired so that everybody can see the look on my face right now. I'm just like, literally, I got like fists in the air. I'm so happy.

• 2:06:24Ben Gilbert?

  And remember, Adalini was the guy that Jobs brought out on stage during the Intel transition and they were burying the power PC to say, this is the future, this is the partnership. So, okay, but Jobs made what Adalini considered a lowball offer and Apple awarded the contract to Samsung. It later began designing the chips itself, eventually outsourced production to TSMC, a contract manufacturer in Taiwan, that had been found, blah, blah, blah, blah, blah. So what could have been? Apple went to Intel and said, do you want this contract?

• 2:06:54David Rosenthal?

  Because they were partners on the back.

• 2:06:56Ben Gilbert?

  Totally. And apparently, it was less about the fact that, I'm sorry, you want to use ARM? What? No, we're the x86 company. And it was more about, we felt it was a lowball offer.

• 2:07:07David Rosenthal?

  Biggest strategic error of all time. All right, I'm going to postulate a playbook theme and I'm put forward as a postulate. More than a playbook theme, what's the, you know, like in geometry, there's like laws, right, that are proved, but then there's like postulates that are like, you can't prove them, but our fundamental understanding of the universe doesn't work if they don't work. Whatever that is, axioms, I don't know, whatever it is, I'm going to put one of those out there.

• 2:07:25Ben Gilbert?

  Please.

• 2:07:26David Rosenthal?

  Never make strategic decisions based on economics.

• 2:07:31Ben Gilbert?

  Hmm.

• 2:07:32David Rosenthal?

  This is prime example, like the number of, and we talk about this all the time on this show, VCs passing over valuation on something, Andreessen getting cold feet about a $300 million valuation on Uber.

• 2:07:44Ben Gilbert?

  Yep.

• 2:07:45David Rosenthal?

  Right? This Intel move passing on being partnering with Apple.

• 2:07:49Ben Gilbert?

  And maybe more specifically than economics, because like you could imagine that you would want to pass on this if Intel didn't get any of the upside from the deal. Assuming that the structure is right, then passing because a number is too low in the structure.

• 2:08:04David Rosenthal?

  Or Ford Motor Company not hiring Morris Chang over $1, you know, like whatever. Like, it's just, humans are so prone to cutting off their noses despite their faces.

• 2:08:15Ben Gilbert?

  So we already have the Rosenthal doctrine of never bet against the internet, but now we have the Rosenthal postulate, which is never make strategic decisions.

• 2:08:22David Rosenthal?

  Based on pricing.

• 2:08:23Ben Gilbert?

  Based on pricing.

• 2:08:24David Rosenthal?

  Based on, not economics, but pricing.

• 2:08:26Ben Gilbert?

  Hmm. I like it. I need to add a new section to the acquired website.

• 2:08:30David Rosenthal?

  All right.

• 2:08:33Ben Gilbert?

  All right, next on playbook is another one on Intel fading. So it takes a very long time to become irrelevant. So despite Intel's stock price being, I think TSMC is like 2.5x Intel's stock price. As a matter of fact, ASML is actually larger than Intel by market cap now. They are the sole source provider of one thing in the value chain to mostly one company, and they're bigger than Intel now.

• 2:08:59David Rosenthal?

  I'd be fascinated, okay, so public markets investors who are listening, shoot us a DM in Slack or post in general.

• 2:09:06Ben Gilbert?

  [email protected].

• 2:09:07David Rosenthal?

  Or AcquiredFM, whatever channel works for you, or Twitter, whatever. Be super curious, if you are along this thesis that we're sort of laying out on the show, how are you playing it between TSMC and ASML?

• 2:09:19Ben Gilbert?

  Which is now Europe's most valuable company.

• 2:09:21David Rosenthal?

  Right. I mean, probably you just invest in both, but how do you think about that?

• 2:09:25Ben Gilbert?

  Right. And what's the up and comer that's kind of speculative at this point, but could be another puzzle piece here?

• 2:09:31David Rosenthal?

  Are you also shorting Intel through all the, like, what do you, what do you do here?

• 2:09:35Ben Gilbert?

  All right. So my point on Intel is it takes a long time to become irrelevant. They still control 80% of the computer processor market and they have an even bigger share in servers. So despite everything we're saying.

• 2:09:48David Rosenthal?

  It's still huge.

• 2:09:49Ben Gilbert?

  Workloads running on CPUs that are in computers and on the cloud, pretty big business.

• 2:09:54David Rosenthal?

  Yeah. The majority of workloads that are happening in the cloud is not Tesla Dojo. It's, I don't know, some company that's not a tech company somewhere in the world running their Outlook server on Office 365.

• 2:10:07Ben Gilbert?

  Yep.

• 2:10:08David Rosenthal?

  Doesn't need 5 nanometer process.

• 2:10:11Ben Gilbert?

  Two other Intel things. One is that indecision has been very tough on the company. Bob Swan, who was the former CEO, started to prepare to outsource manufacturing of Intel-designed chips to TSMC.

• 2:10:25David Rosenthal?

  Whoa.

• 2:10:26Ben Gilbert?

  Like that, I think even like two years ago, this was the plan. They finally decided, thrown in the towel, you know.

• 2:10:31David Rosenthal?

  Real men don't need fabs.

• 2:10:32Ben Gilbert?

  Intel is the greatest ship manufacturing company in the world.

• 2:10:34David Rosenthal?

  Real men are sensitive. They talk about their feelings.

• 2:10:38Ben Gilbert?

  Bob Swan is no longer the CEO of Intel. And now, in a complete reversal, their new CEO, Pat Gelsinger, wants to turn Intel into a foundry themselves by which other fabless companies can contract with Intel to build. Maybe that's right, but if so, they got to figure out, and I think they're thinking about this the right way, because they said it's going to be a fully separate autonomous division. They got to run that like a completely separate, independent company of the rest of Intel. And if so, I don't actually know why Intel owns it.

• 2:11:10David Rosenthal?

  Yeah. I mean, well, A, let's look at AMD here, right? They did this. They spun out their manufacturing into global foundries.

• 2:11:19Ben Gilbert?

  Which has been good for global foundries and AMD. Like global foundries is getting ready to IPO.

• 2:11:24David Rosenthal?

  Yep. Yeah, that's probably the right strategic decision, but it's not going so well. I mean, like, it's going fuck.

• 2:11:29Ben Gilbert?

  It's not TSMC.

• 2:11:30David Rosenthal?

  Right. It's going better probably than if they had not done that, but they're not a winner here. Like, TSMC is the winner.

• 2:11:35Ben Gilbert?

  Yeah. I guess the playbook theme there is indecision is paralyzing. I mean, this company has spun its wheels one direction or the other, and all it's done is make itself deeper in the mud.

• 2:11:45David Rosenthal?

  Oh, I just looked up, I was trying to remember this. Gelsinger was the VMware CEO. He started his career at Intel and then EMC. And then EMC owned the majority of VMware and then became the CEO of VMware. Yeah, and he was the outside candidate to replace Bommer as Microsoft's CEO. Yeah, yeah, yeah.

• 2:12:08Ben Gilbert?

  Huh. You know, I hear he's really revered in the organization that people think he's really gonna, gonna make some good change there. We'll see. The last thing on Intel, and it's funny, this is not the Intel episode, but there's a thing that happened here that is very similar to the fact that Kodak developed the digital camera first in their lab. They knew it. They knew this was the future and they didn't commercialize it because it's impossible to counter position yourself because of the innovator's dilemma. Intel actually saw extreme UV lithography, EUV, first. So Intel was the biggest early investor in EUV, committing more than $4 billion to it in 2012.

• 2:12:52David Rosenthal?

  Whoa.

• 2:12:53Ben Gilbert?

  It was slower than its main rivals, and this is from the Wall Street Journal, in adopting the technology and skeptical about whether it would work. Eventually, Intel calculated that it was a sure bet to try and improve existing ways of handling lithography. And of course, where we are today, EUV completely enabled the next generation of chips to be built that existing ways couldn't.

• 2:13:14David Rosenthal?

  What a great argument and example for why you need startups.

• 2:13:17Ben Gilbert?

  Right?

• 2:13:17David Rosenthal?

  Right? Like, totally like, yeah, Intel was there. They invested in it. They saw it and they were like.

• 2:13:23Ben Gilbert?

  They put $4 billion in. And I think even to this day, there is not a shipping Intel chip that was manufactured by Intel using UV.

• 2:13:32David Rosenthal?

  Wow. That's crazy.

• 2:13:34Ben Gilbert?

  You're right. It is the most perfect, pure example of the innovator's dilemma in action.

• 2:13:40David Rosenthal?

  It's why you need startups.

• 2:13:41Ben Gilbert?

  Yep. All right. My next one is that if you're only looking at the outcomes that happened, you cannot reverse engineer what the probability that it would happen is. And this is a very abstract way of me saying, the strategy of if you build it, they will come, that Morris implemented. Is a bad strategy and it also worked.

• 2:14:05David Rosenthal?

  Right.

• 2:14:05Ben Gilbert?

  Like if something's low probability.

• 2:14:07David Rosenthal?

  Valentine hated, they would never invest in developing a market. That was like rule number one, we invest when the market already exists, not when we need to develop it.

• 2:14:16Ben Gilbert?

  And this is like the classic problem. This is the knock up here in Seattle. There's a lot of people spinning out of Microsoft, starting companies. Classically, people coming out of Microsoft would always want to build platforms because Microsoft was the platform company. And they would always have a small, too small of an understanding of the market of people that wanted that platform today. And they assumed if you build it, they would come. Morris was that exact problem. And yet, if something is going to be true 10% of the time and fail 90% of the time, one out of 10 times it's going to work. And it may have been the case. I guess what I'm saying here is if you're starting a startup, it's impossible to know if this was actually a good strategy or if it was a bad strategy that probabilistically just happened to work.

• 2:14:58David Rosenthal?

  I mean, this is the thing about startups, right? Is there are all these rules, but they can all be broken. There is no formula.

• 2:15:04Ben Gilbert?

  Yep, totally. All right, other playbook themes?

• 2:15:06David Rosenthal?

  I just have one more that again, we talked about a bunch in the episode, but I want to highlight and actually add one spin on here. You know, the Jeff Bezos quote about AWS, as a startup, anything that doesn't make your beer taste better. The analogy back to German beer factories and outsourcing electricity generation.

• 2:15:22Ben Gilbert?

  Outsource things that aren't your core competency.

• 2:15:24David Rosenthal?

  Right, focus on what makes the beer, your beer, whatever that is proverbially taste better. And everything that is not that, like finance and accounting, outsourced, et cetera. Double underscore that. But you know, like this is obvious, so obvious, but obviously Bezos didn't say it directly. And thus I think we don't highlight it enough. The counterpoint to that is anytime you see something that lots of people, lots of companies are doing, that is not making their beer taste better, that is a massive opportunity to go build a platform company.

• 2:15:57Ben Gilbert?

  Yeah.

• 2:15:58David Rosenthal?

  That is how you build a platform company. All right, listeners, now is a great time to talk about one of our favorite companies, Statsig.

• 2:16:07Ben Gilbert?

  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.

• 2:16:18David Rosenthal?

  Yep. In the crazy 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 ship next.

• 2:16:38Ben Gilbert?

  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.

• 2:16:51David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 2:17:02Ben Gilbert?

  Grading?

• 2:17:03David Rosenthal?

  All right, so we were thinking for grading. Look, we could grade like, I don't know, Taiwan's decision to do this.

• 2:17:09Ben Gilbert?

  To own 50% of the company at the outset.

• 2:17:12David Rosenthal?

  Whatever, like, you know, A+. You know, not interesting. So we had the thought, experiment, we'll try this for this episode. Rather than like letter grading this, we'll ask a question. Where does TSMC belong in the pantheon of great technology companies of all time? Is it FAANG level? Is it like top 5? Is it top 10? Is it like top 20? Like, where is this? What is the right context in which we should be placing TSMC, this whole story, the company, the power, all of it?

• 2:17:47Ben Gilbert?

  So interesting, because it really does raise this question of value chain. We talked about the five-part value chain that exists today for making chips. And so it's interesting because you could say, well, it belongs wherever Intel belonged circa 2000. Or you could say, well, the set of products that TSMC manufactures have 100x the scale that Intel in 2000 had. Like, if you think about it, all this stuff that everyone's all excited about, every time someone talks about the next wave of computing and they're like machine learning, or they're like crypto, or they're like 5G, and anything they tell you is something TSMC makes that enables it all. When Marc Andreessen says software

• 2:18:30Ben Gilbert?

  is eating the world, it's only eating the world because TSMC has made it so freaking cheap to manufacture silicon. And then you can run whatever you want on that silicon, and it's the cost of compute asymptotically approaches zero because TSMC, TSMC, TSMC. So how much do we ascribe to them versus ASML? How much do we ascribe to them versus the entire landscape of talented chip designers out there, including the like 600 chip designers at Apple working on the Apple silicon? It's hard to disambiguate that. So where does it belong? I mean, it's probably the most successful and important B2B hardware company

• 2:19:15Ben Gilbert?

  of all time.

• 2:19:17David Rosenthal?

  I think we can safely say, at this point, it surpasses Intel. I mean, gosh, right? Like, that's a big statement to say, right? Like, Intel, Silicon Valley, the traders say, like, all of it. Moore's Law.

• 2:19:29Ben Gilbert?

  But in compounding, all the value shows up at the end. So it is true that the value that TSMC will create in the world over the next year, two years, three years, is probably more than the entire silicon industry leading up to this point combined.

• 2:19:43David Rosenthal?

  I mean, hell, they grew 30% last year at like, an already unimaginable scale. Like, Intel's not doing that.

• 2:19:50Ben Gilbert?

  Right.

• 2:19:51David Rosenthal?

  Okay, I think we can say it's above Intel.

• 2:19:53Ben Gilbert?

  I probably wouldn't say it is above Facebook, Amazon, Apple, Microsoft, Google, in terms of pure value creation in the world.

• 2:20:04David Rosenthal?

  I mean, devil's advocate, you could argue that none of the innovative things those companies are doing now happens without TSMC.

• 2:20:12Ben Gilbert?

  Yeah, unless the foundry model and the fabulous model was inevitable.

• 2:20:17David Rosenthal?

  Yeah, maybe somebody else would have done it. Yeah, maybe.

• 2:20:21Ben Gilbert?

  But they didn't.

• 2:20:22David Rosenthal?

  They didn't.

• 2:20:23Ben Gilbert?

  They're worsted.

• 2:20:24David Rosenthal?

  I mean, gosh, the thing that's really just beaten me over the head in this episode, we've probably beaten all of you over the head with, or at least I have, is, you know, look, there's the geopolitical risk with being in Taiwan. Other than that, I don't know that there is a stronger moat that any company has in the entire world than TSMC. Compare it to all the Feng companies and Microsoft. Those are very, very strong moats. But we've seen all of those, you know, they've seen their new companies, they've emerged, they've, you know, Microsoft fell and then now it came back with new strategy and Facebook's not that old and Google's not that old. TSMC is impenetrable.

• 2:21:01Ben Gilbert?

  Yeah, their business model and the costs required to compete are such that they have.

• 2:21:06David Rosenthal?

  It's like bulletproof.

• 2:21:08Ben Gilbert?

  It's everything but bulletproof.

• 2:21:09David Rosenthal?

  Yeah, totally.

• 2:21:11Ben Gilbert?

  Sadly.

• 2:21:12David Rosenthal?

  Sadly, yeah. So, you know, I don't know, maybe we're exaggerating because we're like so deep in it. Like, we always go native on these episodes.

• 2:21:17Ben Gilbert?

  Right. The only way it could be more valuable is if the company had an army. It's like if people talk about the US dollar is backed up by the full faith of the US government, which implies guns.

• 2:21:29David Rosenthal?

  Yep.

• 2:21:29Ben Gilbert?

  And so it's only because everybody's currently playing by the rules that any business gets to stay in business. And so this one just happens to be a little bit more at risk than other ones.

• 2:21:40David Rosenthal?

  All right. So I think we can safely say top 10. I think the question is, is it top 5?

• 2:21:45Ben Gilbert?

  Well, defensible is an interesting question. So in 30 years, will TSMC be a huge company?

• 2:21:53David Rosenthal?

  Well, they've got this dynamic going right now with this flywheel where like structurally, nobody can catch them. Something unforeseen has to change.

• 2:22:02Ben Gilbert?

  But something unforeseen will change because it always changes.

• 2:22:05David Rosenthal?

  Right, right, right. Yes, yes. True.

• 2:22:08Ben Gilbert?

  Who's had the most similar dynamic in the past?

• 2:22:11David Rosenthal?

  Standard Oil.

• 2:22:12Ben Gilbert?

  Either been successful or unsuccessful. Standard Oil is a good one.

• 2:22:14David Rosenthal?

  I mean, that's very different style, but same sort of dynamic with Standard Oil, right? Was they crowded out structurally, how they were set up. Nobody else could compete. And the rich kept getting richer.

• 2:22:27Ben Gilbert?

  And they kind of still exist. That's the best.

• 2:22:29David Rosenthal?

  That is the best part. They kind of still exist. Yeah.

• 2:22:31Ben Gilbert?

  All right. I'm with you. I'll go top 10, but probably not top 5.

• 2:22:36David Rosenthal?

  What I'm wrestling with is how much of it is just marketing? And I don't mean marketing in a bad way, but intentionally TSMC rides under the radar. They intentionally have no brand.

• 2:22:45Ben Gilbert?

  Right.

• 2:22:45David Rosenthal?

  The brand is the customers. They want the customers to succeed. So we don't hear all the time about them like we do the Fang companies.

• 2:22:52Ben Gilbert?

  Yeah, we will start to. I think anybody who tunes into this episode probably saw the name of the episode and then thought, hmm, I should tune into that because I've seen more about this thing recently that I previously didn't know about.

• 2:23:03David Rosenthal?

  Kind of like we did when we were like, we should do this episode.

• 2:23:06Ben Gilbert?

  It's finally time.

• 2:23:07David Rosenthal?

  Yeah.

• 2:23:07Ben Gilbert?

  Yeah. All right. Well, that's where I want to leave it.

• 2:23:10David Rosenthal?

  All right. Well, I'll put a stake in the ground. I'm going to say, I think I'm with you. Top 10, not top 5 yet, but you know, maybe we need to revisit this.

• 2:23:17Ben Gilbert?

  I will definitely say it's the most successful B2B hardware company ever. And the question is, is it the most successful B2B company ever? I'd say it's probably just competing with Microsoft there.

• 2:23:29David Rosenthal?

  Yeah. I mean, and again, maybe even like across all industries, right? Like look at, I mean, shoot, semiconductors run everything.

• 2:23:34Ben Gilbert?

  Yeah.

• 2:23:35David Rosenthal?

  And they run semiconductors.

• 2:23:37Ben Gilbert?

  Semiconductors are the new oil, David.

• 2:23:40David Rosenthal?

  Okay, okay. Enough, enough, enough. We got to bring this one home.

• 2:23:43Ben Gilbert?

  Carvouts?

• 2:23:44David Rosenthal?

  Carvouts, let's do it. I've got two. Jenny and I were just down in Santa Barbara for a couple of weeks, rented an Airbnb down there. It was so great. We did that last year. Hopefully this becomes an annual thing in the summer.

• 2:23:55Ben Gilbert?

  Yeah.

• 2:23:55David Rosenthal?

  Escape the freezing San Francisco summers. The, so while we were down, we don't, we don't watch a lot of TV usually, but you know, it was like change a scene, summertime in a new place. We're like, all right, we'll watch some TV together at night. So this is like, for the percentage of you out there who are living under a rock like me with TV, we've watched now most of Ted Lasso, season one.

• 2:24:17Ben Gilbert?

  Ah.

• 2:24:18David Rosenthal?

  Because we heard season two was terrible, but that made me think, well.

• 2:24:20Ben Gilbert?

  It was terrible. It is terrible, but season one's great.

• 2:24:22David Rosenthal?

  That made me think, oh, if people are this upset about season two, that means season one was really good. It's so good. If you haven't watched it, we're on episode eight now.

• 2:24:29Ben Gilbert?

  Ah, welcome to the club.

• 2:24:31David Rosenthal?

  So good. Love it. And then the other TV show we watched, this was Jenny's suggestion, old school throwback, a show called Greek, which aired in the mid 2000s and is about

• 2:24:42Ben Gilbert?

  Oh, yeah.

• 2:24:43David Rosenthal?

  Greek like sorority and fraternity life.

• 2:24:45Ben Gilbert?

  Yeah, yeah.

• 2:24:45David Rosenthal?

  Fictional university. And like, it's just so good. It's like one of those heartwarming period pieces, but it was right from like when we were in college. So like, yeah, it's fun.

• 2:24:54Ben Gilbert?

  Nice. All right. David watching TV. Who knows what could change in the world?

• 2:24:57David Rosenthal?

  Right. Maybe TSMC's mode isn't as deep as we thought.

• 2:25:02Ben Gilbert?

  All right. Well, mine is a book that has been recommended to me for two or three years now, and I finally got around to reading and it was awesome. It's called Who Is Michael Ovitz? And if you've read Shoe Dog and you've read The Ride of a Lifetime and you've read, what's the Ford one, An American Icon, these iconoclastic

• 2:25:21David Rosenthal?

  Yeah, what's, uh, there's a Sam Walton one, um, Built in America, I think.

• 2:25:24Ben Gilbert?

  Yes. This one needs to be on your list, especially if you've enjoyed any movies or TV shows that were put together in the last, well, let's be specific.

• 2:25:33David Rosenthal?

  Or our Two Part Injuries in Horowitz series.

• 2:25:36Ben Gilbert?

  Totally. From like 1975 to 2000, Michael Ovitz put everything together. And it is this wonderfully written book about an unbelievable business story, the strategy behind it, the way that with Creative Artists Agency, they just completely upended the entire industry in Hollywood and did it really without ever talking to the press and were very tight lipped about it. For some Hollywood outsider, I found the book really wonderful, really compelling. I also think I previously had only read The Ride of a Lifetime and watched the Disney Plus special about sort of the history of Disney and Disneyland. I had a one-sided view of Michael based on just his short tenure at Disney.

• 2:26:21David Rosenthal?

  Yeah. I was gonna say, yeah, what a great connection with, you know, acquired and Disney and

• 2:26:26Ben Gilbert?

  Totally. And what kicked it off was doing the Andreessen episodes and, you know, hearing about how they based it on CAA. So especially if you like those episodes or if you like the Disney episodes, or if you're a movie fan, or if you like these classic CEO business stories, Who Is Michael Ovitz was just an awesome read.

• 2:26:42David Rosenthal?

  So cool. Well, I mean, like all the media that we grew up on, probably even more so because we were kids, but it was the adult movies and the kids movies too. But, you know, when you're a kid and like the adult movie that you really want to see,

• 2:26:52Ben Gilbert?

  Totally.

• 2:26:52David Rosenthal?

  but you're too young to see.

• 2:26:54Ben Gilbert?

  And just all these such classics like Goodfellas, like that was just my previous carve out or Jurassic Park or just everything that they packaged. It's cool to hear how it came to be.

• 2:27:04David Rosenthal?

  Super cool.

• 2:27:05Ben Gilbert?

  I don't think we told you at the beginning, but you can join our Slack, acquired.fm/slash Slack. Come hang out with other talented, smart, good-looking people like yourselves. And with that, listeners, feel free to share the show with a friend. Shout it from the social media hilltops.

• 2:27:22David Rosenthal?

  Yeah. You always, sometimes you say, but I'll chime in here too. Like, seriously, you know, it's funny, podcasting is this weird thing, right? There's no viral loop. It's not like, you know, you can share, please, you know, share it from social media. We love that. That's great. If you love this episode, you think it's interesting, you think what we do is cool here. But really, the way this goes is word of mouth. That is it. People tell their friends. They listen to this episode. They thought it was cool. They think that their friends would really enjoy, learn from listening to this too, so.

• 2:27:49Ben Gilbert?

  Share a thing you liked, share a thing you disagree with us on, whatever it is.

• 2:27:52David Rosenthal?

  If you feel that way, please do that. If you don't feel that way, get in touch with us and tell us why.

• 2:27:58Ben Gilbert?

  All right, listeners, we will see you next time.

• 2:28:01David Rosenthal?

  We'll see you next time.