TSMC founder Morris Chang

We flew to Taiwan to interview TSMC Founder Morris Chang in a rare English interview. In fact, the last long-form video interview we could find was 17 years ago at the Computer History Museum… conducted by the one-and-only Jensen Huang! This episode came about after asking ourselves a version of the Jeff Bezos “regret minimization” question: what conversations would we *most* regret not having if the chance passed Acquired by? Dr. Chang was number one on our list, and thanks to a little help from Jensen himself, we’re so happy to make it happen. Dr. Chang shares the stories of a few crucial moments from TSMC’s history which have only been written about in his (currently Chinese-only) memoirs, including how TSMC won Apple’s iPhone and Mac chip business and a 2009 discrepancy with NVIDIA that almost jeopardized their relationship, and the lessons he took from them. We can’t think of a better way to kick off 2025. Please enjoy! *Links:* - Worldly Partners’ Multi-Decade TSMC Study: https://worldlypartners.com/businesshistory - Karina Bao's writing: https://karinabao.substack.com/ *Carve Outs:* - AAA: https://www.aaa.com - Defunctland: https://www.youtube.com/defunctland - Everything Everywhere all at Once: https://www.imdb.com/title/tt6710474/ - Asianometry: https://www.youtube.com/asianometry *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! *Timestamps* 0:00 - Intro 3:22 - TSMC and Nvidia's relationship 9:50 - The 40nm node development problem in 2009 20:55 - The TSMC Laid Off Employee Protest 26:16 - TSMC's Incredible Core Business vs. Expansions 29:08 - Resolving the 2009 NVIDIA dispute 35:59 - TSMC's commitment to 28nm 43:04 - Going all-in on the 28nm node 52:05 - Meeting Apple and Jeff Williams 1:23:09 - Goldman Sachs 1:34:57 - ServiceNow 1:36:01 - Intel's and Apple 1:46:45 - Apple’s and the 20nm node 1:47:58 - Pricing 1:50:24 - Apple and trade-offs 1:55:22 - The IBM-Qualcomm story 2:02:18 - The Learning Curve 2:10:45 - The Flywheel of Returns 2:14:18 - TSMC’s Unexpected(?) Success 2:15:57 - The early days of TSMC 2:21:10 - Ben and David's Reflections 2:27:43 - Taiwanese Science Park 2:47:08 - Carve Outs *Notes:* This episode contains a paid endorsement for Fundrise. All investments can lead to loss. _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?

  The podcast about great technology companies and the stories and playbooks.

• 0:03David Rosenthal?

  Oh, no, you said technology.

• 0:07David Rosenthal?

  Now we definitely have a cold opener.

• 0:09Ben Gilbert?

  All right. I guess I really want us to be about technology companies again.

• 0:14David Rosenthal?

  Well, this is a technology company.

• 0:15Ben Gilbert?

  It's a sign. All right, here we go.

• 0:35Ben Gilbert?

  Welcome to the spring 2025 season of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert.

• 0:43David Rosenthal?

  I'm David Rosenthal.

• 0:45Ben Gilbert?

  And we are your hosts. Today, we have something very special to share with you. After becoming obsessed with semiconductors from our TSMC episode four years ago, David and I wound our way through the rest of the industry, studying fabless companies like Nvidia and Qualcomm, architecture companies like ARM, and chip design software companies like Synopsys. And as we were thinking, what's next in the world of chips on acquired? We threw the Hail Mary. We asked friend of the show Jensen Huang if he would ask Dr. Morris Chang, the 93-year-old founder of TSMC, if he would be open to an interview with us.

• 1:22David Rosenthal?

  Yeah, it is kind of insane and super cool that Jensen made time to help us with this. It's not like he doesn't have a lot of other things going on.

• 1:30Ben Gilbert?

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

• 1:48David Rosenthal?

  Super cool to see.

• 1:49Ben Gilbert?

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

• 2:19David Rosenthal?

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

• 2:34Ben Gilbert?

  Yep. All right, listeners, you can join our email list at acquired.fm/email. You'll get an email every time a new episode drops once a month, and this is also where we announce past episode corrections, plus a fun little game where we give hints at what the next episode will be.

• 2:49David Rosenthal?

  I always have fun writing those.

• 2:51Ben Gilbert?

  You do. That's a clear David job. So with that, this show is not investment advice. David and I may have investments in the companies that we discuss, and this show is for informational and entertainment purposes only. Please enjoy this conversation with Dr. Morris Chang with some of David and my reflections following its conclusion.

• 3:08David Rosenthal?

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

• 3:23Speaker 02

  Yeah, it started, my relationship with Jensen, started with a letter that he sent to me. I think it was 1997. And the letter was sent through the post office, and I received it in Xinjiang. And the letter said that they were Nvidia, the company that Jensen was the CEO of, was a small company,

• 4:02Speaker 02

  but they had developed some really promising chips. But they were looking for a foundry, and they had approached TSMC's San Jose office, but they really got no answer from the San Jose office. Would I please contact Jensen? Because Nvidia really wanted to do business with TSMC. So I was going to the US in the next week anyway.

• 4:48Speaker 02

  So the letter frankly raised my curiosity and also irritated me a little bit. Because, you know, I had always told our salespeople that we should never be negligent in talking to future customers, even if the customer seems to be a very small one.

• 5:25Ben Gilbert?

  And at this point, Nvidia was four years old.

• 5:28Speaker 02

  They were facing bankruptcy, I think, and they had maybe 50 or 60 employees. So TSMC, I think, at that time, already had a few thousand employees. We had exceeded, I remember we had exceeded 1 billion US dollars in revenue in 95, and this was 97. So we were, relatively speaking, we were a pretty big company.

• 5:58Ben Gilbert?

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

• 6:04Speaker 02

  Yeah, right. So the following week, I went to California, and I called him back with advance notice. I called Jensen, I looked up, I think there was telephone number on the stationery that he sent me the letter on. Jensen himself picked up the phone, and there was a lot of background noise. They were, I mean, he was arguing something with his people.

• 6:43Speaker 02

  But as soon as I introduced myself, I said, "This is Morris Chang." He immediately shouted to those people that were making noises. He said, "Quiet, Morris Chang is calling me."

• 7:02Speaker 02

  So I then proceeded to make an appointment with him, to visit him, to visit Nvidia the next day or something like that. And that was our first visit, our first meeting. And he immediately impressed me with his articulateness. And also impressed me with his optimism. Well, he was also very frank.

• 7:44Speaker 02

  He told me that Nvidia was in financial difficulties. But the chip that he wanted now to have foundryed would not only save the company, it would also make Nvidia a major customer of TSMC. I mean, that was, you know, actually quite a bold statement. You know, we were over a billion dollars. And to be a major customer of ours, he would have to produce revenue for us of at least fifty million a year, okay?

• 8:29David Rosenthal?

  Was that chip the REVA one twenty eight?

• 8:32Speaker 02

  I forgot the number, but it was a very successful chip, yeah. I don't think it was REVA or anything. It was a games chip, of course. It was successful. In fact, his prediction came true. Not only did it solve Nvidia's financial problems, it prevented it from being bankrupt, you know. Not only did it do that, it also started to make them a major customer of TSMC. Within two or three years, they were, they did become one of the biggest five.

• 9:14Speaker 02

  Customers. Wow. Yeah, very successful chip, yeah.

• 9:19Ben Gilbert?

  So there was a great partnership forged there. TSMC would fab the chips, would manufacture them. Nvidia would design them. That is true all the way to today at immense scale. But it hasn't always been easy and it hasn't always been perfect. And I want to go to this moment in 2009 on the 40 nanometer node, where development was slower than TSMC had hoped. And it was costing customers like Nvidia time and money. Can you share the story of how this came to be and how it was resolved?

• 9:54Speaker 02

  Well, I decided to give the CEO job to a potential successor of mine. While I was still retaining the chairmanship. In Taiwan, usually the chairman is the top man anyway, even though CEO is another person. So the problem you just mentioned happened during the period when someone else was the CEO.

• 10:37Speaker 02

  Apparently, it was a manufacturing problem. It was also a quality problem. And it was the quality problem that the CEO first reported to me. But the CEO insisted that our people, we had the director of quality insisted that we were not, TSMC was not at fault. And so on that basis, on the basis of our quality managers' arguments, he had not offered Nvidia anything.

• 11:22Speaker 02

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

• 11:41Speaker 02

  Nanometer note.

• 11:43Ben Gilbert?

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

• 11:57Speaker 02

  Something like that, yes. But the problem, apparently, you know, just continued. And I was, even though I was not the CEO, I was getting a little impatient. And then, of course, some other problems popped up, other problems than this 40 nanometer Nvidia problem. So I decided to take the CEO position back. So in 2009, I did that.

• 12:32Speaker 02

  And there were several priority problems that I had to deal with when I took the CEO job back. And one of them was this continuing problem, continuing argument, controversy with Nvidia. Anyway, I remember in the first few days, after I took back the CEOship, I called all the major customers, including Jensen.

• 13:14Ben Gilbert?

  And Qualcomm was, I believe, another one of that?

• 13:16Speaker 02

  Qualcomm was also, yeah. And Qualcomm, the top customers, didn't change very much since, except for maybe one.

• 13:28Ben Gilbert?

  Apple.

• 13:28Speaker 02

  Apple, yeah. Apple came later, yeah. And in my call with Jensen, he was still very friendly with me, but he also.

• 13:46Speaker 02

  Reminded me in a very serious tone that we had the quality, delivery, manufacturing problem on the 40 nanometer. All right, so I said I knew that. And it's one of my priority problems. But give me a couple of weeks and I'll get back with you. And as I said, I did have several problems. Aside from the 40 nanometer manufacturing problem and the problem with the argument

• 14:31Speaker 02

  that we were having with Nvidia. Aside from that, we also had the problem of the pricing was dropping faster than the cost. No, I mean, you don't want to see that, you know. Your gross margin percentage kept dropping, you know.

• 14:56Ben Gilbert?

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

• 15:04Speaker 02

  All right, so that was one problem. Another problem was the immediate one that triggered me to retake the CEOship because the previous CEO had laid off, except he didn't use the term layoff, you know. He used the bad performance review, the worst performance review people, and there were about 600 or 700 of them, you know. And he laid them off on the basis of their poor performance review.

• 15:46Speaker 02

  Well, we never did that, you know. I mean, the worst we would do was to put them on, place them on probation for six months. And quite often, you know, at the end of the six months, everybody would go back to his or her old job.

• 16:14Speaker 02

  And some of them would get transferred because they were in the wrong jobs, you know. So some of them would get transferred. But we almost never really fired people even after the probation period.

• 16:33Ben Gilbert?

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

• 16:44Speaker 02

  That's right, yeah. And I actually, you know, have told the managers that. But, and, well, in 2008, of course, there was a financial crisis. And the semiconductor business, in fact, got affected. And our revenue dropped, our business dropped pretty seriously.

• 17:15Ben Gilbert?

  Yeah.

• 17:16Speaker 02

  I was not a CEO, I was the chairman. But I just knew that anyone, any general manager, any CEO, general manager, without very much experience, what he or she would do in a situation like that. It's a kind of a knee jerk kind of reaction, you know? Oh, he says, oh, this is my test. I got to save, you know, all the money possible. And I got to, you know, lay off people, you know?

• 17:56David Rosenthal?

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

• 18:04Speaker 02

  Well, I know, I know. Well, semiconductor industry, but semiconductor industry people actually think the same way as I described, you know what I mean? They all lay off, they all, they all people too. I had a lot of experience at Texas Instruments. But at Texas Instruments...

• 18:26Speaker 02

  I was not a CEO. I was just one of the top managers under the CEO level. And when the company decided to have a layoff, the CEO conferred with the top managers, who included me. And their first reaction was exactly the same. And I'm talking about the 70s, early 70s. Their first reaction on who to lay off was exactly the same as what our TSMCCO did in 200, late 2008, 2009,

• 19:08Speaker 02

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

• 19:42Ben Gilbert?

  And why is that?

• 19:43Speaker 02

  Because it's very subjective. Performance reviews, the performance ratings are done by everyone's own supervisor. So 700 worst performing people in the company. And who gave the 700 people the bad ratings? 700 supervisors, you know. Very subjective. It's not something that people will respect. If in a year you have to hire people back, you have to hire the laid off people back, then you shouldn't lay off. Because the layoff, the separation expense

• 20:26Speaker 02

  is usually half a year, about half a year. And it takes at least half a year to train a person. So if you need the people back within a year, you shouldn't have, you shouldn't lay off.

• 20:41Ben Gilbert?

  So what did you do when you came back as CEO, both about the employment issue and about the customer issue?

• 20:49Speaker 02

  You mean customer issue being Nvidia? Yeah. Well, to finish the employment issue, they laid off employees. As I said, there were 700 of them, 600 or 700 of them, came to my home to demonstrate and protest. Now, the company, TSMC, was pre-warned that hundreds of people would appear in front of my home. So they notified the police department in my district. So the police department sent 50, 60 police officers

• 21:34Speaker 02

  to try to maintain the order. Now, more than 100 protesters appeared. And the neighbors, my neighbors, you know, they had trouble getting in and out. That was only the first time. A month or so later, the problem was still not solved. I was still not the CEO. So they appeared again. Some protesters, about 25 of them, decided to spend the night, sleep over in the little park that's about a block away from my home.

• 22:17Speaker 02

  My wife literally didn't sleep that night, you know. She would wake up and went over to that window to take a look, to see what was going on. But then, very early the next morning, my wife, 6 o'clock, 6 o'clock the next morning, my wife, you know, got up and... She took one of the bodyguards and went to a neighborhood market and got the Chinese-style breakfast, Chinese bread, you know, fried bread, you know.

• 23:00Speaker 02

  I don't know whether you ever had it or not, probably not. Hmm. Yeah, yeah. And buns, the buns, you know. Yeah, soybean milk, you know. And take enough of that breakfast, enough for twenty-five, thirty people. And back to, to the park, to the park, and distribute them to the protesters. And they were thankful, you know. Hmm. Yeah. And they actually decided to not go to the president's palace,

• 23:45Speaker 02

  president's mansion. And they told my wife that they would not do that that day. And all this kind of precipitated my taking back the CEO job. Well, there's another thing, you know. I told the previous CEO before he laid off the six, seven hundred people. I said, if you, because I knew, as I said, I knew that it would be his knee-jerk reaction

• 24:25Speaker 02

  to confront a crisis such as the crisis we had. It would be his knee-jerk reaction to lay off. So I said to him, if you want to lay off, bring her to the board. I'll call a special board meeting. And I, I knew what I would ask the board to do, which was not to grant the permission. But he decided to circumvent that, the CEO, you know. Because what he did...

• 25:07Speaker 02

  He did not consider it to be a layoff, you know. It was just punishment for the poor performers.

• 25:15Speaker 02

  Well, as far as the CEO is concerned, I did keep him. I had more than one nice talk with him. I intended to, and I told him that he was still a potential successor to me. So I kept him at the same job grade. We have job grades and the same salary and bonus.

• 25:53Speaker 02

  But he was now the president of new businesses. And back then, you know, we had the high hopes for the so-called new businesses, which was solar cells and LED.

• 26:14Ben Gilbert?

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

• 26:25Speaker 02

  Ended up the biggest marketing, biggest market opportunity. Why is it so ironic?

• 26:32Ben Gilbert?

  Well, it's always interesting to me when companies think, oh, we should look at other new businesses. When in reality, semiconductors became a $600 billion a year market. And, you know, solar is a small fraction of that. LEDs are a small fraction of that. You were already in the best market.

• 26:52Speaker 02

  I know, and I knew that. I knew I did. I did not really mean, I did not really think that solar or LED would really replace our integrated circuits business. But I knew the integrated circuits business was going to be great, you know. But at that time, which was 2009, at that time, we also thought that solar and LED was going to be very promising. Yeah, but it didn't work out, of course. The solar business.

• 27:33Speaker 02

  Could have been pretty good. However, China ruined it. It subsidized the hell out of it. And they now controlled that business, solar cells. The prices were extremely low, still low, still low. So it didn't take off. TSMC didn't take off.

• 27:59Speaker 02

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

• 28:42Ben Gilbert?

  And he's now running MediaTek, is that correct?

• 28:45Speaker 02

  He is now the vice chairman and the CEO of MediaTek, yeah.

• 28:54Ben Gilbert?

  So coming back to this moment in 2009, you offered to rehire anyone who was laid off that was interested in coming back. And you're setting the new sort of vision and strategy as CEO, or in many ways, returning to the old one. How did you resolve the Nvidia dispute?

• 29:13Speaker 02

  Yeah, in the first four or five weeks after I retook the CEO job, I probably spent

• 29:25Speaker 02

  Almost half of the time on how to resolve the problem with Nvidia. As far as youths were concerned, we were doing our best because, you know, we had to do it anyway, you know. I mean, Nvidia was just one of the customers.

• 29:45David Rosenthal?

  Yeah, not just Nvidia, but Qualcomm and Intel.

• 29:49Speaker 02

  Yeah. And it was a very important node, forty nanometer was a very important node in the progression of Moore's law, you know.

• 30:01Speaker 02

  Only after forty can we, if we do the forty well, can we do the twenty-eight. Twenty-eight was the next one. And I called the salespeople that were in direct, that had been in direct contact with Nvidia. And of course, I called everybody that was

• 30:27Speaker 02

  somehow involved, somewhat involved in the problem.

• 30:32Speaker 02

  So it was a matter of money, you know. As far as the progress on

• 30:40Speaker 02

  the manufacturing lines, we were already doing what we could. I mean, it was, as I just said, it wasn't just for Nvidia. It's for TSMC, you know. But Nvidia, because they had borne the brunt of the the problem, the damage. So it's a matter of money. Well, I worked out in number. I familiarized myself with all aspects of the problem. And then I worked out in number. And I also knew that.

• 31:20Speaker 02

  Ambidious customers were after them, you know. They had demands on Ambidia too. So I used all the intelligence I could get. And I think it turned out that it was good. So about a month after I retook the CEO job, I sent an email to Jensen. I said, I'm coming to Silicon Valley next week on this date.

• 32:01Speaker 02

  I will be at your home at 6 o'clock. And let's have just salad and pizza, which was something that we had had many times in the past. Now, immediately, he sent back an email. He said, when do we discuss business then?

• 32:33David Rosenthal?

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

• 32:37Speaker 02

  He asked that. So I anticipated that. So I said, 6:30, we'll start having pizza and salad. 8 o'clock sharp, we'll go to your office at your home. And we'll discuss business. So on the point of the date, they showed up. And we followed the schedule exactly, you know. 6:30, you showed up. We had a very pleasant pizza and salad. Thing is that, you know. His wife Lori would make the pizza, the salad.

• 33:22Speaker 02

  And the pizza was delivered from outside. Maybe, maybe they made their own pizza too, I forgot.

• 33:30Ben Gilbert?

  Would not surprise me.

• 33:31Speaker 02

  Yeah. Anyway, I had, I had, I had had it many times at his home. All right. So at Elka's shop, it was I who looked at the watch and said, Jensen, why don't we go to your study? And I gave him the offer.

• 33:51Ben Gilbert?

  It was on the order of a hundred million dollars, right?

• 33:56Speaker 02

  Yes, more than a hundred million, yeah. And I also said, our offer is effective forty-eight hours. If you do not, there, there is not going to be, we are not going to argue, we are not going to bargain. If you don't accept the offer within forty-eight hours, we will have to go to an arbitrator. Which was what he had suggested to the previous CEO anyway, that we will go to the arbitrator, you know? But the previous CEO did not even give him a number, you know? The previous CEO gave him zero.

• 34:39Ben Gilbert?

  You probably don't want to go to arbitration with your best customer.

• 34:42Speaker 02

  No, I didn't want to. But, you know, I had to say that. And because, I mean, that number, the number we offered him was arrived at after, as I said, weeks of work on my part. And I thought it was fair to both sides.

• 35:05Ben Gilbert?

  And did Jensen accept the offer?

• 35:07Speaker 02

  Yeah. He did, within two days.

• 35:14Ben Gilbert?

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

• 35:43Speaker 02

  I know. I liked it, too. That's why I included the story in my auto-hobby.

• 35:54Ben Gilbert?

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• 36:13David Rosenthal?

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• 36:34Ben Gilbert?

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• 36:55David Rosenthal?

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• 37:14Ben Gilbert?

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• 37:41David Rosenthal?

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

• 38:11Speaker 02

  Well, I had a lot of trouble at TI. My peak job at TI was the head of Worldwide Semiconductors. At TI, of course, had many businesses, defense business, materials and controls.

• 38:37Speaker 02

  And also their origin, which was geophysical and so on. But TI's semiconductor business was their biggest and I was the head of that. Worldwide semiconductor business.

• 38:57Speaker 02

  I wanted, at that time, when I was the head of Worldwide Semiconductors, our R and D budget was 4.8% of revenue, of our revenue.

• 39:14Speaker 02

  And I thought it was not enough.

• 39:17Speaker 02

  I just wanted to raise it to 5.5% of the revenue. But my request was denied all the, every time I raised it.

• 39:29Speaker 02

  Now, coming back to TSMC. I wanted to set a, a number. A number, a percentage of revenue number. So we don't have to argue every year how much R and D which is spent. So, at that, at about that time, about the time two oh eight, two oh nine, when I came back, I just, almost like, at that time, we were running, I think, six or seven percent a year, but it was negotiated every year between the R and D director and the CEO, you know.

• 40:15Speaker 02

  So I wanted to stop that. I want to make him at ease, you know, I mean, doesn't have to argue, doesn't have to, to request every year. So I almost just literally picked a number out of head. We've been running six or seven percent already. So I said, oh, let's pick eight percent, okay. Eight percent regardless of whether there's a recession or not. And that's just eight percent of revenue. And that was the best news, if you ask our R and D director,

• 40:59Speaker 02

  who was back then, I think, in, in the second place of R and D.

• 41:08Speaker 02

  He would tell you, I mean, he has told me many times in the last ten, fifteen years, that this was really the best thing that we did for R and D. So they were not concerned, the R and D director was not concerned at all about having his planned budget cut back, his planned, uh, uh, resource, uh, people, uh, allocation, cut back, none of that. So he has been working eight percent and so it has been like that, you know. And, um.

• 41:50Speaker 02

  That is what propelled our R&D effort.

• 41:59Ben Gilbert?

  This period in 2010, it wasn't just ramping the R&D budget. It was also the capital expenditures. You had had almost a decade of 2 to 2.5 billion spent, you know, building the fabs every year. And in 2010, you ramped that to almost 6 billion. What was it about the competitive environment, the 28 nanometer node that caused you to push all your chips in on that?

• 42:23Speaker 02

  Yeah, I think it was a kind of a mutual feeding thing, you know. As I settled the R&D budget at 8% of revenue, I mean, to the satisfaction of the R&D people, they began to have big ideas, you know. They began to be telling me, "Our 28 is going to be..." The term they used, and they have used it several times.

• 43:06Speaker 02

  But the first time I heard them using it is the 28. 28 is going to be the sweet spot. It's just like tennis racket, you know. You hit the ball with a sweet spot of your racket.

• 43:29Ben Gilbert?

  Yeah.

• 43:30Speaker 02

  Yeah. Do you play tennis?

• 43:32Ben Gilbert?

  I have played tennis, not well.

• 43:34Speaker 02

  Good. I was like you, you know. Like 40 years ago, I was like you. I don't play anymore. But, you know, so I know the feeling of hitting a ball in the sweet spot, you know. 28 nanometer is the sweet spot. And so I said, "Why?" And he, you know, gave me a lot of technical reasons, 28 nanometer. So I decided I would believe him.

• 44:05Speaker 02

  And he now had the resources to push it, to do it as fast as he could. So, you know, now the capital spending. Now, of course, back then, we had already built up a pretty good infrastructure, organizational infrastructure. We had a pretty good market forecasting group. And I had set up the business development department, which was like a marketing department.

• 44:48Speaker 02

  Now, we always had a pretty strong sales effort. But to me, sales effort is just the tactical side with the customers. Marketing is the strategic side to the outside world now. Now, from all these inputs, the marketing, the business development department, which, as I said, was our strategic marketing group.

• 45:28Speaker 02

  And from the technical, from the R and D side, that 28 was going to be sweet spot. I decided that, and I quoted Shakespeare in my autobiography, that there's a tide in the affairs of man, which, taken at its thud, leads on to fortune, you know. I decided that this was 28 nanometer was going to be our tide. Yeah. Our next tide, anyway. There will be others, 7 nanometer was another, was the next sweet spot,

• 46:12Speaker 02

  the R and D people told me. And again, you know.

• 46:18Speaker 02

  Reminded myself of Shakespeare, you know.

• 46:22David Rosenthal?

  Taking it the flood.

• 46:24Speaker 02

  Taking it the flood, yeah.

• 46:27Speaker 02

  So, I mean, that talks, that however, you know, I'm setting the R and D at eight percent of

• 46:34Speaker 02

  did not invite any opposition from the board. But suddenly increasing capital spending threefold, I think, did invite a lot of questions from the board. Our practice in the board meetings, because back then, even now,

• 47:02Speaker 02

  most of the directors are from overseas, US and England.

• 47:13Speaker 02

  And we would email the agenda to them two weeks before the board meeting. Then, the night before the board meeting, I would invite the independent directors to dinner. And that dinner, the conversation at that dinner was not on record. So, so the independent directors, actually, more, three quarters of our directors were independent, are independent directors.

• 47:59Speaker 02

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

• 48:26Ben Gilbert?

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

• 48:33Speaker 02

  Yeah, and so they called the chief.

• 48:41Speaker 02

  The General Counsel. The General Counsel is also the Secretary to the Board. They called him, at that time he was an American. The General Counsel was an American. And said, "We want to talk to the Chairman. We don't like this idea at all." Anyway, so I talked to them on the phone about a week or so before the board meeting. And, all right. You know, this is something that, of course, I told them.

• 49:24Speaker 02

  What I have now just told you. Inputs from our market forecast, inputs from our R and D, inputs from our business development, the new business development department. And of course, you know, they didn't believe it. You really can't convince anybody on something, I guess. So at the end, I had to say, "Well, look. I heard you, but I am still the guy that's responsible for the operation of the company. So you need to let me go ahead with this one." So they were satisfied with that.

• 50:08Ben Gilbert?

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

• 50:15Speaker 02

  Well, I think, you know, the result. That was good.

• 50:20David Rosenthal?

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

• 50:24Speaker 02

  Yeah, yeah.

• 50:26David Rosenthal?

  When the Business Development Group was looking at this, and you were looking at this, did you see how big smartphones were going to become? And the immense opportunity that that would unlock for you?

• 50:38Speaker 02

  No, I didn't. Maybe the business development guy, that was another interesting story. Yeah, maybe he knew. Maybe he, or at least, I now hope, and I, of course, hoped at that time too, that he had a more detailed visibility than I did.

• 51:04Speaker 02

  But I, I, I mean, of course, this was not the only, uh, it was not the only input, you know? I had a few other advisors too, yeah.

• 51:17Ben Gilbert?

  So that takes us to Apple. Could you share with us how you end up meeting Apple?

• 51:26Speaker 02

  Yeah, but before we, before we do that, let me offer how we, uh, made, uh, CC, actually, the Business Development Director.

• 51:41Ben Gilbert?

  Ah, the current CEO.

• 51:43Speaker 02

  The current CEO, the current chairman and CEO.

• 51:47Ben Gilbert?

  Yeah.

• 51:49Speaker 02

  When Rick was, uh, CEO between 2005 and 2009,

• 52:01Speaker 02

  he had split operations into two groups.

• 52:08Speaker 02

  Advanced technology and mainstream technology. And CC was the head of the mainstream. Actually, really, I should say, the lesser one, okay? Yeah. And Mark Liu was the head of the advanced.

• 52:36Speaker 02

  And each group had a small

• 52:42Speaker 02

  business development section. Maybe thirty or forty people each.

• 52:50Speaker 02

  All right, so I came back to be the CEO. And I, I never thought.

• 52:58Speaker 02

  The split up of two groups was a good idea anyway. In fact, back in 1996, the president, he was not a CEO, but he was the president. We didn't have the CEO title back in 1996. But the president, who was American.

• 53:27Ben Gilbert?

  Don Brooks?

• 53:27Speaker 02

  Yeah, right. He wanted to split. He got a little, I think, he got a little tired of running this company. He was going to be here for only a year at first, but he winded up, he ended up staying, spending six, seven years in Taiwan. Towards the end, he was getting a little tired of running this thing. And he thought that he would do it like TI, for instance. When TI had a germanium transistor department, silicon transistor department, industrial

• 54:10Speaker 02

  circuits, bipolar industrial circuits, MOS industrial circuits, you know.

• 54:15Ben Gilbert?

  It's the divisional org structure instead of a functional org structure?

• 54:18Speaker 02

  Right, right, yeah. But I really did not think that the foundry business, TSMC business, was suitable for the divisional structure. Because, you know, we have almost the same group of customers. How do you, how do you divide up the group, divide up the company if you want the so-called divisional structure? Well, you know, you know, Don Brooks was going to divide it by fab, you know.

• 54:58Speaker 02

  My goodness, you know, the customers move from one fab to another, the same customers, you know.

• 55:05Ben Gilbert?

  Not to mention TSMC has 21, 22 fabs now? And so what, are you going to have 22 divisions?

• 55:10Speaker 02

  Well, back then, he only, of course, he only had three or four fabs, you know, back then, yeah. But he, he was not convinced. He kept arguing. And I said, look, why don't we get a consultant?

• 55:25Ben Gilbert?

  McKinsey.

• 55:26Speaker 02

  McKinsey, why don't we get McKinsey? Okay. So we got McKinsey in. And McKinsey, after a month or two, two months, actually, and a couple of million dollars, I guess,

• 55:41Speaker 02

  told us the same answer, you know, that functional is best.

• 55:48Speaker 02

  And then Don Brooks said,

• 55:51Speaker 02

  well, tell me one company, one big company that's functionized. And McKinsey immediately answered Boeing, which is a good answer, you know?

• 56:08Ben Gilbert?

  Yeah.

• 56:09Speaker 02

  Yeah.

• 56:10Ben Gilbert?

  Except it's not true. Boeing has commercial and government.

• 56:15Speaker 02

  Well, they probably have commercial and government, but they don't have 707, 747, 757. You know, they don't have, they don't do that. And if we divide up by fab, it would be like dividing up 707 from 757, 737, you know? Yeah. But anyway, Don Brooks' attempt was in 1996. And well, by 205, Rick Tsai, you know, decided to check the same ground.

• 56:57Speaker 02

  And he did. This time, you know, I didn't, I didn't stop him. My idea, my principle, when I was the chairman and now the CEO, was, well, sometimes you have to let, you have to let the CEO make his own mistakes and learn from them, you know?

• 57:24Speaker 02

  Of course, not if the whole company is going down the drain. So you, you have to interfere then, but only then. Well, anyway.

• 57:37Speaker 02

  So that was the background. Two groups when I came back to be the CEO.

• 57:47Speaker 02

  The advanced group and mainstream group. And each group had a small business development section, thirty or forty people. I think advanced has had more, a bigger group than mainstream. All right. So I wanted to combine the two operation groups. And I also wanted a real marketing. And I didn't call it marketing because I decided to use business development in English because it's a good translation in Chinese.

• 58:32Speaker 02

  All right. Now I've decided to combine the two groups, operation groups.

• 58:40Speaker 02

  Now, back in 2009, when I decided to combine the two groups, I think the advanced group had something like ten thousand employees. And the mainstream group had a little less, but also seven or eight thousand employees.

• 59:09Ben Gilbert?

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

• 59:33Speaker 02

  Yeah, right. But also, quite often, the same customers use both mainstream and advanced technologies now.

• 59:45Speaker 02

  Take Qualcomm, I'm quite sure that they use, you know, the most advanced and or even Apple, I think they use.

• 59:57David Rosenthal?

  Yeah, if you think about all the chips in an iPhone.

• 59:59Speaker 02

  Yeah.

• 59:59David Rosenthal?

  You know, the A16 Pro.

• 1:00:01Speaker 02

  Yeah.

• 1:00:02David Rosenthal?

  Is built on the leading edge.

• 1:00:03Speaker 02

  Yeah.

• 1:00:03David Rosenthal?

  But there are many, many other chips in there.

• 1:00:05Speaker 02

  Yeah, right.

• 1:00:06Ben Gilbert?

  So you combined to one business development organization, 80 ish people.

• 1:00:10Speaker 02

  Yeah, we had Mark Liu in charge of the advanced and CC Way in charge of the the questions, you know, who's could be in charge of what, you know, the combined or you need only one for the combined operations, you need only one person. The truth is that we had a lot of operational talents, you know, operation meaning manufacturing and taking the developed technology from R and D, you know, and converting it into mass production. We had a lot of talents there.

• 1:00:52Speaker 02

  But business development or marketing there. And neither Mark nor CC had any real previous experience in marketing business development.

• 1:01:16Speaker 02

  So that was my, my main worry. You know, we need, we need, we combined the two groups. We needed a combined operations manager. But even more importantly, in my mind, we needed a combined market business development manager.

• 1:01:43Speaker 02

  So I first offered the marketing, business development job to the

• 1:01:55Speaker 02

  the guy who was in the bigger job, events technology, Mark. And I explained to him that I did not think he had had.

• 1:02:12Speaker 02

  Any significant marketing experience in the past. And this would, this new job, if he takes it, would

• 1:02:25Speaker 02

  give him the opportunity of

• 1:02:30Speaker 02

  of being a professioned in that area. But he declined it. He said, "My goodness, I have 10,000 people reporting to me now. You want me to take a job that has only 60, 70 people in it?" That was the end of that conversation.

• 1:02:55Ben Gilbert?

  And your goal was for him to become a well-rounded executive

• 1:02:58Speaker 02

  Yeah.

• 1:02:58Ben Gilbert?

  in hopes of leading the company after he sort of did that tour of duty.

• 1:03:02Speaker 02

  And I explained to him that, yeah.

• 1:03:05Ben Gilbert?

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

• 1:03:11Speaker 02

  I know, I know. Actually, back in my mind, I was thinking of the time when Kissinger was Nixon's National Security Advisor. And somebody else, whose name I have even forgotten, was the Secretary of State.

• 1:03:31Speaker 02

  And Kissinger, you know, probably had a couple hundred people reporting to him. Whereas the Secretary of State, you know, had thousands of people all over the world reporting to him. And who had more power, you know, Kissinger.

• 1:03:49Ben Gilbert?

  Certainly not the name who you've forgotten.

• 1:03:53David Rosenthal?

  Yeah. And before this period, you were doing the business development and marketing for the company, right? You were the one finding the Nvidia's, the Jensen's, the Broadcom's, the next

• 1:04:04Speaker 02

  Yeah.

• 1:04:05David Rosenthal?

  great customers in great markets for you.

• 1:04:07Speaker 02

  That's right. That's right. I was.

• 1:04:08Ben Gilbert?

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

• 1:04:16Speaker 02

  Yeah, except for those four years when I was not the CEO, yeah.

• 1:04:21Ben Gilbert?

  Yeah.

• 1:04:22Speaker 02

  But you were right. I was on the plane most of the time visiting customers. I know. That was my pleasure. Yeah. I really liked it.

• 1:04:36Speaker 02

  Uh, well, anyway.

• 1:04:39Speaker 02

  Uh, so.

• 1:04:41Speaker 02

  I then, of course, offered offered the business department job to C C. And he accepted it. I mean, I I thought he accepted it.

• 1:04:54Speaker 02

  Even delightfully, you know. Yeah.

• 1:04:57David Rosenthal?

  And he's now the chairman and C E O of T S M C.

• 1:05:00Speaker 02

  Yeah.

• 1:05:02David Rosenthal?

  So this had just happened. And you came home from a board meeting, we understand, one evening.

• 1:05:09Speaker 02

  That's right. The board meeting had ended. And it was six o'clock or later. And. Uh, I went home.

• 1:05:24Speaker 02

  This was Taipei. We had our board meetings. Back at that time. In, in fact, here. In the, in the, or you have, you have seen, you have seen my conference room.

• 1:05:41David Rosenthal?

  Yes, right. Yeah. Across the hall.

• 1:05:42Speaker 02

  Yeah, yeah, right. Yeah, we, we had all our board meetings in Taipei in that conference room.

• 1:05:51Speaker 02

  Anyway, it was six thirty or so. When I got home, and I think my wife knew that I would not be home until around six thirty. Because as soon as I, she actually, she met me at the door. Which wasn't very often, you know.

• 1:06:16Speaker 02

  But this time she had something to tell me, that's why she met me at the door.

• 1:06:21Speaker 02

  She says, Terry Gao called in the afternoon.

• 1:06:28Speaker 02

  And said he was coming to dinner.

• 1:06:31Ben Gilbert?

  And who is Terry Gao for listeners?

• 1:06:34Speaker 02

  Terry Gao is a relative, is actually a second cousin of Sophie's. Sophie's my wife.

• 1:06:49Speaker 02

  And they share the same grandparents. That's what makes them second cousins, I think, yeah.

• 1:06:58David Rosenthal?

  And for our Western listeners, who this won't be obvious to, Terry Gao is the founder and CEO of Foxconn?

• 1:07:04Speaker 02

  Right, Terry Gao is a second cousin of Sophie's and he's also, he is also, he was also at that time, the chairman of.

• 1:07:18Ben Gilbert?

  Hanhai, which.

• 1:07:19Speaker 02

  Honghai, Honghai, yeah.

• 1:07:20Ben Gilbert?

  Foxconn to American listeners.

• 1:07:21Speaker 02

  The name slipped my mind for a while, for a second, yeah, Honghai. Which, which is a very important supplier to Apple. And a pretty big company. And in fact, Terry Gao is reputed to be one of the richest men in Taiwan.

• 1:07:45Speaker 02

  And she said, Sophie is lovely.

• 1:07:53Speaker 02

  But she doesn't know too much of my business. I don't think she understood the significance of Terry Gao coming to dinner, bringing a vice president from Apple.

• 1:08:18Speaker 02

  I don't think she quite understood, quite very, she didn't very, she wasn't very interested either in the significance of that.

• 1:08:28Ben Gilbert?

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

• 1:08:38Speaker 02

  Yeah, I've been strategizing, well, strategizing is probably too strong a word. I mean, I've been just thinking.

• 1:08:50Speaker 02

  Thinking also, also knowing that we, we just can't do anything. We can't do anything about it. Apple is a very close-mouthed company. If you try to talk with them, if you offer, you know, your service, I mean, they would just tell you, tell you to go away.

• 1:09:11Speaker 02

  They will come to see you when they are ready. That's what I knew about Apple. Even then, and I knew, I know the same thing now, you know.

• 1:09:26Speaker 02

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

• 1:09:55Speaker 02

  So eight o'clock was a bit late for my dinner, but I, I said, what the heck, we'll wait. All right, so they showed up. I didn't ask her, Sophie just said, a vice president. And I just thought to myself, it wouldn't be just an ordinary vice president. Yeah, so.

• 1:10:20Speaker 02

  Because, you know, there was no reason for Terry to just bring any Apple vice president to my home. But then I, it must be something special. There must be someone special for TSMC, you know.

• 1:10:44Speaker 02

  All right, so Jeff Williams came. He was not just a vice president. He was the chief operating officer of Apple.

• 1:10:55Speaker 02

  And, you know, Jeff was a pretty straightforward person. He didn't spend much time in, in ordinary.

• 1:11:11Speaker 02

  Uh, chit chats.

• 1:11:14David Rosenthal?

  There wasn't the same pizza and salad, uh, period before.

• 1:11:18Speaker 02

  It wasn't, but it wasn't formal either, you know, uh, my, my wife Sophie just added, we, we, we have a cook, you know, we, we had a cook. And, uh, pretty good cook, uh, uh, so, uh, Sophie just told the cook to add a few dishes. She's a Chinese cook. He doesn't do any Western food. And, you know, uh, Terry obviously, he grew up on Chinese food. And I would imagine that, that the apple guy that he bought, uh, would also like, uh, Chinese food.

• 1:12:02Speaker 02

  Anyway, so she just asked the cook to cook a few more dishes. But, uh, you know, it wasn't important. The food was not important. Either the quantity or the quality was not important because, uh, almost, uh, Jeff, uh, almost, uh, immediately started, uh, his pitch, you know?

• 1:12:30Speaker 02

  Almost as soon as, uh, he sat down to dinner.

• 1:12:34Ben Gilbert?

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

• 1:12:38Speaker 02

  We would like you to foundry our waivers. Something like that, pretty straightforward. I mean, so I was, I was, I, I listened. That, that night, I think Jeff talked, uh, maybe eighty percent and I talked twenty percent.

• 1:13:06Speaker 02

  If, if you don't count the, uh, the relative to relative talk between Sophie and Terry, you know? Which was very, which was not very much either, yeah.

• 1:13:19Ben Gilbert?

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

• 1:13:24Speaker 02

  No, uh, not, not, nothing so concrete.

• 1:13:29Ben Gilbert?

  Okay.

• 1:13:30Speaker 02

  He just said that we will let you have forty percent gross margin.

• 1:13:38Speaker 02

  And I, I think, well, I didn't say anything. I didn't answer him. I didn't respond to that. But our margin at that time was already forty five percent. And I was trying to push it up to fifty percent. It was a announced effort in the company to push the gross margin. And I had that effort for many years after I came back to be the CEO.

• 1:14:17Speaker 02

  And I really didn't even, didn't succeed even at my retirement.

• 1:14:25Speaker 02

  Now, of course, what happened later was that there was COVID and so on. And also, we began to have leadership, technology leadership.

• 1:14:37Speaker 02

  So our margin, you know, jumped up to over fifty percent. But when I retired, it was still short of fifty percent, slightly short of fifty percent. I was almost there when I retired.

• 1:14:54Ben Gilbert?

  In, in technology leadership, you're saying that around this time, the twenty eight nanometer node, you were...

• 1:15:00Speaker 02

  You're talking about two, two oh ten?

• 1:15:03Ben Gilbert?

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

• 1:15:13Speaker 02

  You are, you are neglecting, I think, when you said that, you were neglecting Intel, okay?

• 1:15:20Ben Gilbert?

  Hmm.

• 1:15:21Speaker 02

  Yeah. At twenty eight nanometers, we were very definitely the leader among foundries. Yeah. And maybe among a few other companies, such as Texas Instruments and so on, but not Intel, okay?

• 1:15:41Ben Gilbert?

  And Apple was considering Intel?

• 1:15:45Speaker 02

  No, Apple was not actively considering Intel. That came later.

• 1:15:55Ben Gilbert?

  Later.

• 1:15:55Speaker 02

  Yeah. But our...

• 1:15:59Speaker 02

  But you know, I'm I'm quite sure we'll we'll have time to cover that, yeah.

• 1:16:04Ben Gilbert?

  Well, take us there now. So after November of 2010, you had the initial conversation with Jeff Williams.

• 1:16:09Speaker 02

  Yeah, he said that he would let us at forty percent. And my thought was, my goodness, you know, we're already at forty five percent, you know.

• 1:16:20Speaker 02

  But I also thought that he was trying to be generous when he said that he would let us have forty percent. And I also thought to myself, well, now it's not this dinner. It's not the time to go into a pricing discussion. We have a lot of other things to discuss. Anyway, so I said, no, we were about to go into production. We were almost in production with twenty eight nanometer at that time. The initial stage, anyway. Twenty eight. So I said, I thought it was going to be twenty eight. Twenty eight? Nope.

• 1:17:08Speaker 02

  What what node do you want?

• 1:17:15Speaker 02

  Twenty, he said.

• 1:17:18Speaker 02

  Now, that was a surprise to me. And frankly, it was also a disappointment. Because the most slow progression after twenty eight was going to be sixteen.

• 1:17:37Speaker 02

  Now, Apple, Jeff Williams, wanted the twenty.

• 1:17:42Ben Gilbert?

  A half step.

• 1:17:44Speaker 02

  A half step. But a half step, a half step is a detour, you know.

• 1:17:52Speaker 02

  You you we had to, we would have to, my thought at the dinner there was that we would have to spend effort on the twenty.

• 1:18:02Speaker 02

  Which of course would help us on the natural next node, which was 16. But still, it was a detour from 28, you know. From 28, if we had, if we could go directly to, if RD would directly go to 16, it would be less time than, you know, first do 20 and then, no. The point is that back then, RD did not have enough resources to do two nodes at the same time. Later, we did. Later, we did.

• 1:18:47Ben Gilbert?

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

• 1:19:14Speaker 02

  It wasn't that serious. It wasn't that serious. Because when we figured a very big market for 28, and therefore when we planned to increase vastly our capital spending, we didn't have Apple in mind. We didn't include Apple. Apple came strictly as a present surprise. Yeah. Anyway, for the company in total, but not for 28, you know.

• 1:19:52Ben Gilbert?

  I see.

• 1:19:53Speaker 02

  28, 28, yeah. We didn't have, we didn't include Apple in our 28 planning.

• 1:19:59Ben Gilbert?

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

• 1:20:11Speaker 02

  That's right. That is where our connection with Goldman Sachs came in, you know. You know, remember, I planted a lot of seeds.

• 1:20:25Speaker 02

  When I ran TSMC.

• 1:20:31Speaker 02

  I knew that one of these days we will probably need

• 1:20:37Speaker 02

  top level investment bank advice. So we established a good relationship with Goldman Sachs very early in our existence. I was in fact a board director of Goldman Sachs. Did you know that? Yes.

• 1:20:56David Rosenthal?

  Yeah.

• 1:20:59Speaker 02

  We did the ADR with Goldman Sachs.

• 1:21:06Speaker 02

  Which opened up a good relationship with Goldman Sachs.

• 1:21:12David Rosenthal?

  It was your New York, New York public listing of, of the stock?

• 1:21:16Speaker 02

  Yeah, ADR is American Deposit Receipts. It's New York.

• 1:21:26Speaker 02

  It's a separate market, you know. In fact, right now, the TSMC price, ADR price

• 1:21:36Speaker 02

  is, has a 20% premium over. Really?

• 1:21:40David Rosenthal?

  Wow.

• 1:21:41Speaker 02

  However, you know, you need TSMC board permission to convert your shares to ADR. Otherwise, you'd be able to arbitrage? Yeah. We don't want that. So as I said, as I was saying, the board has to approve any conversion of

• 1:22:07Speaker 02

  ordinary Taiwan TSMC stock to ADR.

• 1:22:14Speaker 02

  And the board does not give such permission. Easily, anyway. Okay.

• 1:22:22David Rosenthal?

  So you had planted this seed with Goldman Sachs when you knew you would need them?

• 1:22:25Speaker 02

  Right. This, this was very early in our history. Now, we, we need funds. I mean, this Apple thing came after we had already decided to increase capital spending.

• 1:22:49Speaker 02

  And now, you know, Apple requires even more capital spending. And we have to figure out where the cash is going to come from. So, you know, there were several possibilities, of course. We're paying a dividend, not a big dividend back then, but a modest dividend. We could cut the dividend. And then we also could sell stock, you know,

• 1:23:31Speaker 02

  new stock offering, either in Taiwan or in the US. We have the ADRs, you know. Or we can borrow money, you know, corporate bonds, you know.

• 1:23:48Ben Gilbert?

  Or you could only fill part of Apple's order.

• 1:23:51Speaker 02

  Right. And in fact, we did that. I, you know, when we first, we first did our financial planning. And we decided not to cut dividend. We decided not to sell new stock. We decided to just borrow. And this was also with consultation with Goldman Sachs. We chose borrowing. How much? I looked at the numbers.

• 1:24:33Speaker 02

  And just as you said, I decided to take half of what Apple said, what Apple said they needed.

• 1:24:43Ben Gilbert?

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

• 1:24:57Speaker 02

  I know, I know. Well, back in the 90s, in the first, let's say, 15 years, first 10, 12, 15 years of our existence, we were short of capacity almost all the time.

• 1:25:17Speaker 02

  And what you just said happened all the time, you know. And so we figure out that we'll require a deposit from the customer. And we'll even confiscate the deposit. If the time comes him, comes for him to to take the wafers and he doesn't, you know. Hmm. And everybody lies in the word confiscate. So it was first used by me, okay. I told the salespeople in San Jose, I said, tell the customer that they need, we need a deposit from them.

• 1:26:01Speaker 02

  Because, you know, just as you said, you know, it's our money and it's only their words, you know. They may not want the wafers when the time comes. And I told the salesman, tell the customer they will confiscate the deposit. And ah, the salesman never heard anything like that before, you know. And so they were, they were, they were, you know, uproar. In in happiness, you know, I mean, now, you know, they could, they could actually stand up and tell the customer that we might even counter confiscate your money.

• 1:26:46Speaker 02

  But of course, it really, we never confiscated any money. Now, it, it, it did happen quite often, particularly in the two thousand, two thousand. We had, I think it was called an internet. Yeah. Recession, I think, yeah. Because in in internet was, you know, people were.

• 1:27:16Speaker 02

  Starting companies called pets.com or something, you know. Yeah.

• 1:27:25Speaker 02

  It was. Anyway, so we had the recession.

• 1:27:29Ben Gilbert?

  Which trickled all the way back to semiconductors. TSMC's revenues, it was four years after the dot com bubble before they were back at the.

• 1:27:38Speaker 02

  Dot com, yeah, dot com.

• 1:27:40Ben Gilbert?

  At those rates.

• 1:27:41Speaker 02

  Yeah. Yeah. Was it? It was almost four years, yeah. Two, I remember recovered only in two oh three. It started in two thousand, no, started in two thousand one, the first quarter of two thousand one, and recovered in the third quarter of two thousand three. So it was three years.

• 1:28:05Ben Gilbert?

  Wow.

• 1:28:06Speaker 02

  Three years. Oh, one, oh, two.

• 1:28:12Speaker 02

  Third, fourth quarter of oh three, three years.

• 1:28:17Speaker 02

  Anyway, the customer, quite a few customers had placed deposits to anticipate normal, good times during those years. And we did build the plant. In fact, we bought, we purchased, or I should say, yeah, we bought a couple of other companies. And so their plants, their fabs became ours.

• 1:28:52Speaker 02

  And the customer didn't need the wafers anymore, didn't need the outputs of those fabs anymore.

• 1:29:02Speaker 02

  And we didn't confiscate their deposit, but we let them delay, you know, demand.

• 1:29:12Ben Gilbert?

  Right.

• 1:29:12Speaker 02

  Eventually, every one of them, they all used their, used up their deposits.

• 1:29:21Speaker 02

  But, you know, that would come, you know.

• 1:29:24Ben Gilbert?

  And so then back to, at this point, early 2011 with Apple, you go to them and say, "We are prepared to serve half"

• 1:29:35Speaker 02

  Yeah.

• 1:29:35Ben Gilbert?

  the number that you told us.

• 1:29:36Speaker 02

  Well, first, of course, the new, or rather, the new Business Development Director, C C, he had the privilege of first telling the lower-level

• 1:29:55Speaker 02

  purchasing people at Apple. And he got, he got, he got a response back. "You must be crazy," you know. So C C did not comment on that. At least, he said he didn't comment, that he brought it back to me.

• 1:30:16Speaker 02

  And then I went to

• 1:30:22Speaker 02

  Apple, myself, and talked to Jeff Williams.

• 1:30:28Speaker 02

  So I said to him, "We have to issue corporate bonds." I think I used the word prudent. After all the prudent financial planning, we decided we would take half of what you asked for. Now, he, he was very, uh, very quiet about it. He only made one suggestion. He said, "Well, I think you can eliminate your dividend." You know, your shareholders will understand that. I said, "Well, no, I don't think so." Well, the fact is, I had looked into that. I mean, that's, that's also a reason for, you know, having a high-level consulting advice.

• 1:31:20Speaker 02

  About one third of our investors, shareholders, are very seriously interested in the dividends. So if, if we do what Jeff Williams said, our stock is going to drop like hell, you know?

• 1:31:40Ben Gilbert?

  Trigger a sell-off.

• 1:31:41Speaker 02

  Right. Anyway, but, but, uh, when I talked to Jeff Williams, and I, I went to see him in, uh, what's the place?

• 1:31:56Ben Gilbert?

  Cupertino.

• 1:31:57Speaker 02

  Yeah, Cupertino. Uh, I mean, he was, he took it fairly willingly, you know? I mean, no, no, no, no big problem at all. The only suggestion that he made was the elimination of dividend, you know? And I said, no. And he, he then let it just, uh, lie there, you know? Okay. But then, uh, then the issue was settled. I mean, how much demand do we, we would take?

• 1:32:37Speaker 02

  And how we will get, we still had to borrow billions of dollars, even with the, with half of the demand.

• 1:32:49Ben Gilbert?

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• 1:34:37Ben Gilbert?

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

• 1:34:49Speaker 02

  But yeah, I know, better company, but I didn't, I didn't think I would lose, you know?

• 1:34:56Ben Gilbert?

  You sound like Jensen.

• 1:34:56David Rosenthal?

  We sound like exactly what Jensen said.

• 1:35:01Speaker 02

  And so, all right, but I think that the financial discussion with Apple had already happened when Apple, when Jeff Williams called me in February of 20, we're talking about 2011, and he said, it was a very short conversation.

• 1:35:38Speaker 02

  Sad.

• 1:35:40Speaker 02

  We need to pause our discussions for two months.

• 1:35:53Speaker 02

  Because the highest level of Intel has approached Tim Cook

• 1:36:07Speaker 02

  and has asked Tim Cook to consider Intel.

• 1:36:15Ben Gilbert?

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

• 1:36:21Speaker 02

  Yeah, yeah, yeah, that wasn't an issue, of course. I mean, in February of 2011, Jeff Williams was talking about the iPhone.

• 1:36:35David Rosenthal?

  Yeah. But they had a close existing relationship.

• 1:36:39Speaker 02

  Yeah, yeah, I don't know what relationship they really have, you know. Well, anyway, it must be close. So that was all he said. And I wasn't all that worried.

• 1:36:57Speaker 02

  Because in 2011,

• 1:37:04Speaker 02

  Intel was no longer a name that you would, when you hear it, you would stand up and bow, you know.

• 1:37:18Ben Gilbert?

  Interesting.

• 1:37:18Speaker 02

  I mean, heck, you know, in the 90s, in the late, in the late 20th century, I mean, they were a name in semiconductors. That when you hear it, of course, I'm exaggerating the situation.

• 1:37:38David Rosenthal?

  Moore's law, I mean, it's they're Intel.

• 1:37:41Speaker 02

  Yeah, Intel, you know, if you hear the name, if you hear that they are in competition with you, you know, my goodness, you'll be. Champing with fear, you know.

• 1:37:51Ben Gilbert?

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

• 1:38:07Speaker 02

  Well, I didn't say that we never catch.

• 1:38:11Speaker 02

  Because, fair enough.

• 1:38:12Ben Gilbert?

  Look where we are in 2025.

• 1:38:16Speaker 02

  Okay, yeah. Anyway, so, so I, I, I, I, I of course had to accept Jeff Williams' request.

• 1:38:30Speaker 02

  All right. But again, you know, as I just told you, I wasn't all that worried because, I, I reviewed in my mind all the characteristics that Apple is looking for in a supplier,

• 1:38:54Speaker 02

  technology. At that time, we thought we were almost at par with Intel, almost.

• 1:39:03Speaker 02

  In fact, I thought we were, I think I thought we were at par with Intel at that time. Manufacturing, I thought we were better than Intel. And customer trust.

• 1:39:18Speaker 02

  We thought that our customers trusted us more than Intel's customers trusted Intel.

• 1:39:29Speaker 02

  So I wasn't too worried.

• 1:39:34Speaker 02

  But then indeed, and I also thought that when, when Jeff Williams told me the highest level of Intel, I thought he was talking about.

• 1:39:47Speaker 02

  Somebody like Andy Grove, who was retired, of course. But it turned out that he was only talking about the CEO of Intel at that time.

• 1:40:01Speaker 02

  Yeah, but I knew that only later.

• 1:40:04Ben Gilbert?

  Would that have been Bob Swan or Paul Adelini?

• 1:40:07Speaker 02

  No, it was the Italian guy, Ottolini.

• 1:40:11Ben Gilbert?

  Paul Adelini, got it.

• 1:40:14Speaker 02

  Yeah.

• 1:40:15Ben Gilbert?

  So today, Intel doesn't make the chips in the iPhone. What happened?

• 1:40:20David Rosenthal?

  And in fact, TSMC makes all of Apple's chips.

• 1:40:23Speaker 02

  Yeah. All right. I wasn't too worried, but you know, it still was in my mind. So a month passed, I think it was about the middle of February, when Jeff called to tell me to pause for two months. So almost exactly a month later, March, middle of March sometime, I decided that I would pay them a visit and ask them what's going on, any progress. So I emailed Jeff and asked for an appointment.

• 1:41:08Speaker 02

  I said I was coming to Silicon Valley anyway, which was pretty normal. And stop in at your place on such and such a day. Is that okay? And Jeff replied by saying that, yeah, come here, but I won't be here. I have asked Tim Cook to see you.

• 1:41:38Speaker 02

  I mean, this freedom, Jeff's freedom of dedicating his boss to see a visitor, it was a privilege that I seldom had in my career, you know.

• 1:41:53Ben Gilbert?

  Yeah, normally someone says someone on my team will see you, not my boss will see you.

• 1:41:56Speaker 02

  I know, I know. It was usually that way. It was usually the other way. But, but in this case, it was Jeff's.

• 1:42:05Speaker 02

  Well, anyway, so I showed up and Tim was very nice to me and took me to lunch, to the cafeteria, I guess, where there was a lot of food. We each picked our food and carried our tray back to his office, you know.

• 1:42:26Speaker 02

  And anyway, he told me, there's nothing to worry about because Intel just does not know how to be a founder.

• 1:42:39Speaker 02

  That's a very short, but a very satisfactory answer to me.

• 1:42:45Ben Gilbert?

  Yeah. What is your interpretation of the meaning behind that statement?

• 1:42:51Speaker 02

  I was explaining to you, you know, we had on technology, on manufacturing. Subconsciously, I think, I interpreted Jeff's explanation to me to be the third one, customer trust, you know. I mean, they were always very superior, you know, Intel.

• 1:43:15Speaker 02

  Before this Apple thing, Apple and we, before Apple became our customer, I knew a lot of Intel's customers in Taiwan. You know, all the PC makers.

• 1:43:36Speaker 02

  Our Intel's customer.

• 1:43:40Speaker 02

  They, none of them liked Intel. None of them.

• 1:43:47Speaker 02

  Intel always acted like they were the only guy. They were the only guy, you know, for the microprocessors.

• 1:43:56Ben Gilbert?

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

• 1:44:21Speaker 02

  Yeah, but I really don't think Tim meant that. I think Tim meant that the customer asks a lot of things. We have learned to respond to every request.

• 1:44:38Speaker 02

  Some of them were crazy. Some of them were irrational. We had to respond to each request courteously, which we do.

• 1:44:51Speaker 02

  Intel has never done that.

• 1:44:57Speaker 02

  Intel, I mean, I said I knew a lot of customers of Intel's here in Taiwan. And none of them, they all wished that there were another supplier.

• 1:45:17Speaker 02

  None of them either trusted Intel or liked Intel.

• 1:45:22Ben Gilbert?

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

• 1:45:38Speaker 02

  Well, it might have cost, but yeah, the story certainly does not end here. All right, so there was pricing, you know, everything was not easy. Pricing and Jeff came himself and we talked about pricing. And we, of course, we had done our homework also on the cost and what kind of price we would accept.

• 1:46:17Speaker 02

  But Jeff came and he told us just a number, you know. Well, he gave us his reasoning. He had to make his component costs meet a certain goal also, yeah. But anyway, that was settled and Jeff said, ah. And when the pricing was settled, I said, let's go out to dinner. We'd go to a Taipei three-star restaurant for dinner. And Jeff jokingly said, ah, if you didn't like the pricing,

• 1:47:00Speaker 02

  we will be, we'll probably could be going to a McDonald's.

• 1:47:07Speaker 02

  Which was never in my mind, but he said that.

• 1:47:10David Rosenthal?

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

• 1:47:20Speaker 02

  Sure, the cost, yeah. But the main thing that goes into pricing, of course, is the cost. And then the second thing is, of course.

• 1:47:35Speaker 02

  Whether your desired price will be accepted by the customer, you know.

• 1:47:42Ben Gilbert?

  One thing that has occurred to me is TSMC now gets mid 50% gross margins, call it 55, 57, higher than your time. But many of your customers have 70, 80% gross margins.

• 1:47:57Speaker 02

  Yeah.

• 1:47:58Ben Gilbert?

  TSMC is creating a lot of value. The designer is creating a lot of value. How do you sort of sort out who gets to capture the value?

• 1:48:04Speaker 02

  Well, I don't get the privilege of sorting it out now. CC, CC Way, I think, has the pleasure and the duty of sorting that out. Yeah. Well, I mean, as a general principle, you know, you try to find a kind of a middle ground, which is different for every CEO.

• 1:48:32Speaker 02

  Even though every CEO who wants to protect his reputation, every CEO says, ah, I worry about the long range. But in truth, not everyone does. So it's a very personal, how to sort these things out. I think it's a very personal issue. Now, for a lot of CEOs, there's really no choice. You have to, you have to, as a supplier, you have to accept a certain price. If it's a commodity particularly, you know.

• 1:49:11Speaker 02

  We have not finished with Apple yet.

• 1:49:13Ben Gilbert?

  Please.

• 1:49:14David Rosenthal?

  Let's finish Apple.

• 1:49:14Speaker 02

  Yeah. Now, I think you were asking whether there was any.

• 1:49:20Ben Gilbert?

  Trade offs.

• 1:49:22Speaker 02

  Trade offs. Well, the trade off, there was a pretty significant, serious trade off. And that was a detour that I set, you know, we took. We, at that time, back in the.

• 1:49:40Speaker 02

  Twenty eleven, twenty twelve time. We, our R and D was, was not strong enough to do two nodes at the same time. Now we are, but back then we weren't. So the trade off of accepting the twenty node technology was that we delayed our sixteen node development.

• 1:50:11Speaker 02

  And then Samsung came up with the sixteen. They had lost the twenty business, you know. So they, they, they were ahead of us in the sixteen nanometer development.

• 1:50:27Ben Gilbert?

  Because they got to skip twenty.

• 1:50:29Speaker 02

  Yeah, because they didn't get the twenty, okay. They, they, they need to develop twenty. So I got a shock. I mean, it was a real shock when I heard that Apple had placed their first orders of sixteen with Samsung. Now, that was a real shock. We invested so much, even though we took only half of their original demand. It was still tens of billions of dollars, I think. And we were counting on it being at least eighty, ninety percent of the equipment

• 1:51:11Speaker 02

  being converted, converted to sixteen. And now if Apple went to Samsung for the sixteen, what did that leave us?

• 1:51:26Speaker 02

  Do you understand what I'm saying?

• 1:51:27Ben Gilbert?

  Oh, yes. It sounds horrible.

• 1:51:29Speaker 02

  So.

• 1:51:30Ben Gilbert?

  I would feel like I got tricked.

• 1:51:32Speaker 02

  Well, I wouldn't say that, okay. But I was, I was, I was. I was really shocked. That was... So I emailed Jeff Williams right away. And I said, you know, we invested in all this equipment and we were counting on you to take the 16 from us. But now, you know, we found out you were buying 16, the first 16s anyway, from Samsung.

• 1:52:14Speaker 02

  So Jeff replied immediately, "Don't worry. I'll be here. I'll be there. I'll be in Sichuan next week and explain to you." So that relieved me a little, but certainly not completely. But next week, he did show up and he explained to us. He said, "Well, you know, as soon as you're ready with your 16, we'll buy from you.

• 1:52:56Speaker 02

  We'll buy all of the needs from you when you're ready." Now, of course, that completely relieves me, because that's what we're supposed to do anyway, you know. So indeed, what he said was true. We developed, we had our own 16 about half a year later. And most of Apple's 16-nanometer requirements still belonged to us. Yeah, most, yeah.

• 1:53:38David Rosenthal?

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

• 1:53:55Speaker 02

  Yeah, I know. I know. It was... I said in the autobiography, you know, me sitting in Sichuan...

• 1:54:06Speaker 02

  Being in the foundry business, I actually see a lot of things before they actually happen.

• 1:54:19Speaker 02

  So let me tell you the IBM Qualcomm story.

• 1:54:24Ben Gilbert?

  Please.

• 1:54:26Speaker 02

  Now Qualcomm,

• 1:54:30Speaker 02

  we consider the Qualcomm to be a prime

• 1:54:38Speaker 02

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

• 1:54:48Ben Gilbert?

  What year was this?

• 1:54:50Speaker 02

  This was way back, you know, when we started in the 90s anyway, yeah.

• 1:54:56Ben Gilbert?

  And they were part of that initial wave of fabulous companies?

• 1:55:00Speaker 02

  Yes, they started the, Erwin Jacobs started the Qualcomm, actually before I started the TSMC. TSMC started in 87. Qualcomm, I think, was a few years before that, yeah.

• 1:55:22Speaker 02

  So we, in the 90s, early 90s, all the way up to 97, maybe,

• 1:55:33Speaker 02

  96, 97, all the way up to the latter part of the 90s. We wanted Qualcomm to be a customer. And now I saw their operations VP, that's what they call, that's what our customers call their purchasing people now, operations VP, operations senior VP. And I saw, I saw him often. And he was always pretty polite. He gave us very little business.

• 1:56:16Speaker 02

  And I also knew that his foundry, his main foundry was IBM. Now sometime in the later 90s, I forgot whether it was 97 or 98.

• 1:56:34Speaker 02

  Suddenly, he started, first he started to tell me that he would use us now.

• 1:56:47Speaker 02

  He didn't even tell me who our competitor was, who our competitor had been. But I, I kind of knew that it was IBM from other sources of intelligence. And our business with Qualcomm, the business that Qualcomm gave us, pretty rapidly increased after that, after ninety-seven, ninety-eight period.

• 1:57:19Speaker 02

  So, I immediately knew that IBM Semiconductor was in trouble. Because, I mean, they had their own fabs and so on.

• 1:57:34Speaker 02

  But their main business was really supplying to Qualcomm and a few other very small companies, very small fabulous companies.

• 1:57:53Speaker 02

  So, I immediately knew IBM was in trouble because they were losing Qualcomm.

• 1:58:04Speaker 02

  All right, so the next step that IBM took was not a surprise for me. The next step they took was to ask us, TSMC, to co-develop the next generation.

• 1:58:26Speaker 02

  Of technology, which is point one three micron, hundred thirty nanometer. In nineteen ninety nine. And since I anticipated that, it was no problem at all for us to refuse the. And in fact, even even if I didn't anticipate that, we would never, never have accepted that kind of code developer. I mean, IBM was still, you know, they they still consider themselves to be the senior. Yeah. Partner in any partnership they establish, the senior partner.

• 1:59:09Speaker 02

  So we were, the the the company that code developed something with them was send its engineers to IBM, you know.

• 1:59:19Speaker 02

  And when we do that, we lose our ability to to develop our own process. We'll have to depend on this code development thing. And the code development thing is going to have a lot of difficulties, you know. Oh, heck, you know, our people, you know, we're being a different culture. So we declined, without having to think about it at all, we declined to the IBM offer. And IBM, in fact, was quite angry, you know.

• 1:59:57Speaker 02

  I mean, they thought we were still a small Taiwan backward place, you know. Taiwan company, and they are big IBM.

• 2:00:12Speaker 02

  So they immediately went to U M C. And U M C accepted.

• 2:00:23Speaker 02

  Only to regret seriously their acceptance a few years later.

• 2:00:29Ben Gilbert?

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

• 2:00:37Speaker 02

  Not by 1999.

• 2:00:38Ben Gilbert?

  They were already smaller?

• 2:00:40Speaker 02

  Smaller, they were smaller already, yeah. That's what I meant when I said that sitting here at the factory, I can see some things that like this IBM thing.

• 2:00:55David Rosenthal?

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

• 2:01:09Speaker 02

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

• 2:01:29Ben Gilbert?

  So how would you explain it to a novice?

• 2:01:33Speaker 02

  Well, explaining the learning curve theory is simple, but one would be foolish if one just takes the simple explanation and thinks that that's all it is. The simple explanation of learning curve is that as you make more of one thing, anything,

• 2:02:02Speaker 02

  actually it started with refrigerators and the cars. If a company makes more cars, then its cost per car, unit cost goes down. That's why it's also called experience curve. You gain more experience, you become more efficient. That's the simple explanation. But if one just takes that simple explanation and thinks that's all it is about, then you really haven't learned anything.

• 2:02:41Speaker 02

  All right. Anyway, the learning curve, well, Bruce Henderson, who is now...

• 2:02:52Speaker 02

  Considered the father of strategies.

• 2:03:04Ben Gilbert?

  Founded Boston Consulting Group.

• 2:03:06Speaker 02

  Yeah, he was the founder of Boston Consulting Group. And now, you know, I mean, there's a branch in

• 2:03:18Speaker 02

  in business economics.

• 2:03:23Speaker 02

  That's that's called competitive strategy or something. Yeah, competitive strategy, I guess.

• 2:03:35Speaker 02

  And Michael Porter was at one time considered a big figure in this competitive strategy. I mean, he wrote three or four books, you know, big books, you know, 700 pages, you know, I have all of them.

• 2:03:53Ben Gilbert?

  His original competitive strategy memo, I think it's like 20 pages, is still some of the best business writing ever.

• 2:03:59Speaker 02

  Who's?

• 2:04:00Ben Gilbert?

  Michael Porter.

• 2:04:01Speaker 02

  Oh, well.

• 2:04:03Ben Gilbert?

  Who was a director of TSMC at one point, right?

• 2:04:06Speaker 02

  Yeah, yeah, I had a story about him in my autobiography, too, which because of time, we probably won't go into, not Michael Porter. But Bruce Anderson, we will talk about him. He was, he is now considered to be father of the competitive strategy. He came to Texas Instruments one day in, I think, around 1970.

• 2:04:39Speaker 02

  I should say, he first called the TIC CEO, Mark Shepherd, and told him that.

• 2:04:54Speaker 02

  Boston Consulting Group. He had founded the Boston Consulting Group. And we have a BCG has a experience curve theory that would benefit semiconductor industry. And TI was the largest company in the semiconductor industry then. And with Mark Shepherd, like a presentation of this theory. So Mark Shepherd said, yes.

• 2:05:34Speaker 02

  So Bruce Henderson brought Bill Bain, you probably know that name, with him and came to Dallas and made a presentation. And Mark Shepherd invited the COO and me to attend the presentation. And it was a very eloquent presentation. Because Bruce Henderson was a very eloquent man. And Bill Bain was on the side, apparently Bruce Henderson's protege.

• 2:06:16Speaker 02

  Anyway, Mark Shepherd was impressed. And he decided that TI would work with BCG on this learning curve theory. And Bruce Henderson then assigned Bill Bain to work most of the time at TI. You know, most of my, like, three days a week. And Mark Shepherd assigned me as TI's guy.

• 2:06:59Speaker 02

  So Bill Bain and I became partners. And I

• 2:07:09Speaker 02

  As I, Bill Bang, a small office, uh, very close to my office, uh, at TI, in the same building, and a small office, because he needed a lot of things from me. He needed permission to get our costs, our prices. We had, we had a lot of families of integrated circuits, uh, and transistors, you know. I mean, he had a lot of requests, so it was, uh, easier if he was nearby. Hmm. And, uh, every time when he arrived at some interesting, useful conclusions,

• 2:07:54Speaker 02

  he would also discuss them with me. So we had a very pleasant association for, oh, I would think, two years, maybe even more.

• 2:08:08Speaker 02

  And, uh, he would, you know, uh, fly, uh, to, uh, Dallas

• 2:08:17Speaker 02

  every Monday and, uh, go back to Boston either Wednesday night or Thursday night. And, uh, of course, every time he, uh, went back to Boston, it would be to tell, uh, Bruce Henderson, uh, what he, what he had done that week.

• 2:08:39Speaker 02

  So this happened, this went on for, I think, two years.

• 2:08:46Speaker 02

  And then finally, uh, Bill Bang came to see me one day. Uh, and it was in those two years that I absorbed, uh, a lot of, uh, learning curve stuff, which, uh, I used up to now, you know. I mean, I, I, I found that so.

• 2:09:12Speaker 02

  Highly fruitful, just as a thinking tool.

• 2:09:20Ben Gilbert?

  Yeah.

• 2:09:21Speaker 02

  Yeah.

• 2:09:22Ben Gilbert?

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

• 2:09:46Speaker 02

  Right.

• 2:09:47Ben Gilbert?

  It's almost...

• 2:09:47Speaker 02

  Yeah, right.

• 2:09:48Ben Gilbert?

  I couldn't have told you that TSMC was going to be the winner, but, once you internalize the learning curve and globalization, you can sort of intuit that, then, in the future, there will be one winner in semiconductor manufacturing.

• 2:10:02Speaker 02

  But, one day, after a couple of years, Bill Bain came to me in Dallas, said, "You are the first one I tell this to outside the Boston Consulting Group. I am leaving Boston Consulting Group to start my own consulting company." So, I said, "Why?" I said, "You know, Bruce Henderson thinks very highly of you." And Bill Bain said, "Yes, but there is the words imperative."

• 2:10:47Speaker 02

  That's the first time I heard that term, you know, words imperative.

• 2:10:52Ben Gilbert?

  He meant for him personally.

• 2:10:53Speaker 02

  Yeah, for him personally.

• 2:10:58Speaker 02

  Well, anyway, that was that.

• 2:11:00Ben 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.

• 2:11:13David 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. Legora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 2:11:30Ben 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.

• 2:11:45David 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. Legora'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.

• 2:12:09Ben Gilbert?

  And they recently launched Legora 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.

• 2:12:28David 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.

• 2:12:58Ben 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.

• 2:13:23Ben Gilbert?

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

• 2:13:44Speaker 02

  Unlikely in your opinion?

• 2:13:49Ben Gilbert?

  I mean, you started it when you were 56.

• 2:13:51Speaker 02

  Yeah.

• 2:13:53Ben Gilbert?

  There are many things.

• 2:13:54Speaker 02

  I'm not going to argue with you, okay? I merely ask as a point of curiosity. I didn't realize, I didn't think it was that unlikely, you know? Yeah, well, it did exceed my expectations. TSMC's size and importance exceeded my expectations, but not by an order of magnitude.

• 2:14:22Ben Gilbert?

  But wasn't the original plan to stop building after Fab 2?

• 2:14:26Speaker 02

  No, that was never, that was only the very initial plan.

• 2:14:32Ben Gilbert?

  Okay.

• 2:14:33Speaker 02

  Yeah, we were never going to stop there, you know? I mean, we were just talking about learning curve, you know that, you know? How could we plan to? If I didn't know anything about learning curve, I would say, yeah, maybe we'll stop after two Fab's, you know? But I was a serious student of learning curve, and I would never, I would never stop at just two Fab's.

• 2:14:59Ben Gilbert?

  Here's why I say unlikely success. There were so many reasons why the original incarnation of TSMC

• 2:15:07Ben Gilbert?

  was kind of a bad business. Fabulous was not a thing yet. And so all of your initial customers were the integrated device manufacturers, the Intels of the world, and you were taking their worst, you know, excess. You were their second source supplier for manufacturing on the stuff that they didn't want to make on their own. Did you see Fabulous coming? Or was that a very lucky thing?

• 2:15:33Speaker 02

  No, I saw it coming.

• 2:15:36Speaker 02

  And in fact, I just had dinner, oh, two months ago, at dinner with the first guy, Gordon Kemble, Gordy Campbell. Have you heard his name?

• 2:15:51Speaker 02

  Anyway, Gordy Campbell.

• 2:15:55Speaker 02

  Came to see me in General Instrument. In my final months at General Instrument. He came to see me. He did not know that I was leaving. Frankly, I did not know when I saw him that I was leaving yet. But the reason he came to see me at General Instrument was that he wanted the funding. He wanted investment from General Instrument. Fifty million dollars, he said. He wanted to start a new company. Fifty million dollars. So I said, "Do you have a business plan?" "No, it's all in my head."

• 2:16:37Speaker 02

  So I said, "Well, I need at least a business plan." "I mean, I have to go to the board of General Instrument." So he said, "All right, I'll send it to you within three weeks." Three weeks later, there was no business plan. And I was interested because I knew that he had a good reputation of starting companies. So I called him. And he said, "Ah, Morris, I'm sorry. I didn't send you anything because I don't need you anymore." I said, "How come?" He said, "I don't need fifty million dollars more anymore.

• 2:17:22Speaker 02

  I need only five million dollars. And the five million dollars I can gather up very easily." I said, "Why do you need only five million dollars?" He said, "I'm not going to build a fab."

• 2:17:39Speaker 02

  See?

• 2:17:41Speaker 02

  That was the start for me.

• 2:17:46Speaker 02

  That there will be fabulous companies. Another guy came to General Instrument.

• 2:17:57Speaker 02

  And said he had already started a company, which was called Atmel, A-T-M-E-L. And they did not have any fabs. And this guy wanted the General Instruments to make the wave first for them. And back then, General Instruments, you know, had empty fabs. So I said, I told the semiconductor manager of General Instruments, I said, "Well, go ahead and work with him."

• 2:18:30David Rosenthal?

  Don Valentine?

• 2:18:31Speaker 02

  Yeah.

• 2:18:31David Rosenthal?

  Who I'm sure you knew.

• 2:18:33Speaker 02

  I, I, yeah, I knew him, yeah.

• 2:18:34David Rosenthal?

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

• 2:18:46Speaker 02

  Well, at least I, I had a glimpse of it, you know. And, yeah. So, Atmel, you know, and they were still fighting. I mean, Atmel, he wanted the fab to be run his way. Now, of course, the General Instruments semiconductor manager wanted to run the fab his way. You know, I mean, and General Instruments owned the fab anyway, for heaven's sake, you know. So that was just a very early situation in which the difficulty and the advantage

• 2:19:26Speaker 02

  of running a foundry business already appeared. The difficulty was, you know, you, you have to satisfy a lot of customers, you know. And everyone, you know, wanted the fab to be run his way, you know. But you can only run fab one way, you know, which will satisfy more or less all the customers. And the advantage, of course, is you have a lot of customers, you know. Well, we can't thank you enough, Dr. Cheng.

• 2:19:59David Rosenthal?

  Dr. Cheng, thank you.

• 2:20:01Speaker 02

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

• 2:20:12David Rosenthal?

  We appreciate it.

• 2:20:12Ben Gilbert?

  Thank you for doing it with us.

• 2:20:15Ben Gilbert?

  All right, listeners. Well, David and I are coming at you now from our home studios back in Seattle and San Francisco. And we wanted to do a little post-game on that interview, a little bit of analysis, kind of our conclusions, the things that are still sitting with us a few days later after we've crossed the ocean. And David, this felt essential to me because it felt like we were just recording history there with Morris. I didn't want to interrupt him to try to like, make a business model point, or it just kind of felt like we should let him talk and then we could do our part after.

• 2:20:52David Rosenthal?

  Yeah, totally. And fortunately, we have a model for doing analysis at the end of story.

• 2:20:57Ben Gilbert?

  Ah, playbook.

• 2:20:58David Rosenthal?

  Our playbook. So let's do it.

• 2:21:00Ben Gilbert?

  Okay, so the first thing that I can't shake that just keeps sitting with me is this idea that is genius in hindsight of not competing with your customers being the dedicated pure play foundry, which we actually saw in the TSMC Museum of Innovation. They have

• 2:21:19David Rosenthal?

  Yeah.

• 2:21:19Ben Gilbert?

  Morris's original pitch, like his little original slide deck.

• 2:21:22David Rosenthal?

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

• 2:21:25Ben Gilbert?

  The government and then to investors. There's like two different versions of this extremely simple pitch deck. And one of the bullet points, it's right in there of be a dedicated pure play foundry. At the time, I get the sense it was actually much more about what can we win at versus what will be the most important and valuable semiconductor company in the world in the future?

• 2:21:51David Rosenthal?

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

• 2:22:04Ben Gilbert?

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

• 2:22:28David Rosenthal?

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

• 2:22:44Ben Gilbert?

  Yeah, I guess that's my first thing is that this, you can connect the dots looking backwards, as Steve Jobs said in that famous quote, "But forwards is difficult."

• 2:22:54David Rosenthal?

  This primarily, I think, was the main reason why TSMC has worked so well.

• 2:23:01Ben Gilbert?

  Hmm, that they don't compete with customers.

• 2:23:02David Rosenthal?

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

• 2:23:19Ben Gilbert?

  Right. Okay, so if you're asking yourself, how did the world arrange itself in this way, such that you could have a trillion-dollar company that doesn't do any design, that doesn't do any architecture, that doesn't do any EDA tools, like Cadence or Synopsys, so they're, you know, they're not Nvidia, they're not ARM, they're not Cadence/Synopsys, they're not ASML, like, they're not their own equipment vendor. So what enabled this? One of the things that I think is underappreciated, and I, we didn't talk that much about with Morris, but the rise of ARM. If you try to play forward a world where Intel and the x86

• 2:24:02Ben Gilbert?

  architecture had maintained its dominance, you wouldn't have had this window, this opportunity for the value chain to sort of rearrange itself. But the fact that there was an architecture, as we talked about on our ACQ2 episode with Renee from ARM... This architecture that became dominant in phones and then computers and then servers and now is coupled with all these AI chips. You open the door to have a dedicated foundry for ARM chips in a way where if it had stayed x86, it's not like you could start a new foundry for all the fabulous x86 companies. For the longest time, Intel was the only x86 company and then AMD, of course, is the second source and AMD is a TSMC customer.

• 2:24:47Ben Gilbert?

  So that's sort of the one edge case. It's like, well, there is AMD that designs x86 chips that TSMC manufactures, but that's not like the common case of the way it would have gone for in an x86 dominated world. It would have been fully integrated Intel.

• 2:25:02David Rosenthal?

  Yeah, I mean, one super straightforward and enormous example of this just is Apple. Like if ARM hadn't become such a viable CPU architecture platform and Apple hadn't standardized their Apple silicon on ARM, probably Intel would be making all of the chips that go into your iPhone, all the leading edge chips that go into your iPhone. Like they already had the Intel relationship. Macs were running on x86 Intel chips.

• 2:25:34Ben Gilbert?

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

• 2:25:57David Rosenthal?

  Yeah, I think all this is true, but if ARM hadn't existed, like there would have been nowhere else for this vector of innovation to go.

• 2:26:05Ben Gilbert?

  Right. The point that we're driving at here is this world where there's a standalone architecture company, there's a standalone big manufacturing company, there are standalone EDA companies, there are standalone designers, you know, Apple, Nvidia.

• 2:26:20David Rosenthal?

  In a large part, that's due to ARM.

• 2:26:22Ben Gilbert?

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

• 2:26:33David Rosenthal?

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

• 2:27:03Ben Gilbert?

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

• 2:27:11David Rosenthal?

  The entire ecosystem, it's like if Silicon Valley were all in one, you know, kind of government sponsored, you know, industrial park, uh, which it sort of was. It was Silicon Valley, you know, as we talked about in our Lockheed Martin episode.

• 2:27:25Ben Gilbert?

  Oh, the early Lockheed, yeah.

• 2:27:26David Rosenthal?

  Yeah, the early Lockheed years, but that's what it's like today. It's all right there. It's not just TSMC that's there. It's all of their partners. It's all of their customers, you know, we're driving by and this is a Cadence building there and that's a Synopsys building there and that's an ARM building there.

• 2:27:41Ben Gilbert?

  There's Qualcomm.

• 2:27:43David Rosenthal?

  There's MediaTek right there headquartered right there. And right across the street, the craziest thing to me, we saw there are two universities that are just like there.

• 2:27:53Ben Gilbert?

  In the science park.

• 2:27:54David Rosenthal?

  Yes, like that are cranking out PhDs every year that are just getting absorbed right there in the ecosystem. I mean, this would be like if there were two universities on the Nvidia campus.

• 2:28:06Ben Gilbert?

  The thing that really jumped out to me is, uh, you always hear people talk about how integrated this ecosystem is with each other, that, you know, Synopsys has to be closely, uh, tied with TSMC to understand what the next node will look like so that they can make it easy for people who are using Synopsys' tools to design ships to, you know, actually manufacture using TSMC's process. Uh, you kind of get the sense of, oh, I see, because they all are walking across the street to each other and having this extremely close communication. Uh, not to mention, David, both of our flight experiences kind of felt like, oh, there's

• 2:28:48Ben Gilbert?

  a, this are a bunch of chip design, uh, fabulous companies that are making the pilgrimage over to, uh, Taiwan to meet with people in this ecosystem.

• 2:28:57David Rosenthal?

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

• 2:29:11Ben Gilbert?

  Yeah, which does raise the point of this Arizona fab and the sort of outside of Taiwan fabs. You know, why is TSMC doing it? Because it's not their leading edge, it's not big volumes, it's not leveraging this really close geographic ecosystem that they have in, I believe there's three science parks in.

• 2:29:35David Rosenthal?

  Yes.

• 2:29:35Ben Gilbert?

  Taiwan, we saw the original, but there's one that's even bigger. I think it's the Tainan one in the south. But it just kind of becomes clear that it's, there are customers and government reasons to build fabs in other countries, but.

• 2:29:52David Rosenthal?

  You're not going to be able to recreate the magic of that ecosystem, like physically instantiated right there.

• 2:29:59Ben Gilbert?

  Yeah, it would take decades to recreate the ecosystem that they have in the science parks.

• 2:30:05David Rosenthal?

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

• 2:30:19Ben Gilbert?

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

• 2:30:24David Rosenthal?

  Totally, the land-grant universities here in America, but like this was like a, like a rifle shot, like, you know, we are going to spur semiconductor industry innovation in this industrial park in this location. And it worked.

• 2:30:40Ben Gilbert?

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

• 2:30:50David Rosenthal?

  Yeah, it, it worked, it worked.

• 2:30:52Ben Gilbert?

  And the scale too, we drove by a construction site where it looked like a quarter of the building was done. This is where they're making the 2 nanometer process, which presumably will be in the, the next iPhone. It's not like anyone said anything about that, but geez, I wonder after 5 nanometer and then 3, N3E and N3P, when they have this 2 nanometer process, I wonder what they're going to make on that. Lots of Nvidia GPUs and lots of iPhone chips. Massive building, phase one was open, which I think is a quarter of the building. But then there's three other phases for this two nanometer facility that are not even ready for prime time yet. But I think they're actually doing the small production runs, getting ready to ramp in

• 2:31:37Ben Gilbert?

  the second half of this year on the two nanometer process.

• 2:31:40David Rosenthal?

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

• 2:32:01Ben Gilbert?

  Yep. Okay, so back to things I've been noodling on since the conversation with Dr. Chang. I felt a little bit bad for saying, hey, your original business plan was kind of a bad one, that basically you're taking the excess capacity from Intel and other IDMs and giving them a place to manufacture their least critical, least leading edge, least interesting chips.

• 2:32:27Ben Gilbert?

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

• 2:32:48David Rosenthal?

  This is a major difference in Intel's fab strategy versus TSMC. Intel is constantly taking their existing fab footprint and repurposing it and upgrading it for the leading edge, which, you know, on the one hand is great. It's utilizing their assets, you know, for the most valuable, highest valuable products. On the other hand, though, they then lose the manufacturing capabilities for older process node generations. And it's not like demand goes away for those chips and those products.

• 2:33:20Ben Gilbert?

  It does, it just does slowly.

• 2:33:22David Rosenthal?

  It does slowly, yeah. And I mean, like, replacement parts is a great example. Like, you know, there are technology systems and products, you know, manufacturing things, even automobiles built 10, 20, 30 years ago that have specific chips that were made with old process technology that when they break and they need replacing, like, you need those exact same chips. So this is the business that TSMC started in.

• 2:33:45Ben Gilbert?

  Right. So that is the fundamental philosophical difference is, I think, fab...

• 2:33:51Ben Gilbert?

  So Fab 1 belonged to Itri, the government where Morris was president of that organization before taking the helmet TSMC. Fab's 2 and 3 were the first TSMC-specific fabs that they built, and they're still running from the late 80s. And in addition to the old replacement parts, there are still applications for older nodes. If you're in this world of 40 nanometers and up, and 1 micron, and I don't know all the names of the previous generations, but the less-high-resolution etching on silicon. CMOS sensors are great examples of that. The cameras that we're talking into right now that have these great

• 2:34:35Ben Gilbert?

  Sony sensors, those don't require a 2-nanometer process, but they do require etching the same way that you would etch a chip. And so that's a specialty use case of TSMC's older fabs, which by the way, on an accounting basis, are fully depreciated. So they're almost like free to run.

• 2:34:56David Rosenthal?

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

• 2:35:10Ben Gilbert?

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

• 2:35:26David Rosenthal?

  Totally, totally.

• 2:35:28Ben Gilbert?

  But that point of, I'm obsessed with this idea that, it is funny that Morris went on the record and said, "No, I knew. I knew Fabulous was coming." And he had a couple of great anecdotes about that, which is funny because in older interviews, sometimes he goes, "Oh, the timing was a little lucky on when Fabulous happened." But I think he even said to Jensen, "In the first few years of TSMC, growth wasn't very high because we were waiting for the customers to emerge."

• 2:35:55Ben Gilbert?

  But it really is this idea that he saw the future.

• 2:35:59Ben Gilbert?

  He made a bet and he did kind of a crappy business to build up competency, capability, volume.

• 2:36:09David Rosenthal?

  Capacity.

• 2:36:10Ben Gilbert?

  Yeah, exactly.

• 2:36:11David Rosenthal?

  To build up literal fabs.

• 2:36:13Ben Gilbert?

  Right. To be there when the fabulous revolution happened. And I don't know, you know, I think he, yeah, I think he was within 12 months of when he thought it would happen. But it is crazy that when, especially in his memoir, you're reading the story about the early customers, year five, year six, year seven, the majority of the business is still not fabulous. It's someone else's, you know, worst orders.

• 2:36:35David Rosenthal?

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

• 2:36:41Ben Gilbert?

  We brought it up sort of like tangentially with him, but it's probably worth dwelling on what is the learning curve?

• 2:36:47David Rosenthal?

  Yeah, the, I mean, the core insight of the learning curve from BCG, Bill Bain and Bain and Morris that they all developed together.

• 2:36:56Ben Gilbert?

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

• 2:37:06David Rosenthal?

  Totally. The insight is that like, the goal that you are playing for is to be the largest volume player, kind of at the end of the game. So if you take that as a given of like, if we get to be the largest volume player, this is a fixed cost business, this is a scale economies business. We can spread that fixed cost over the maximum number of customers. How do we get to the maximum number of customers in the early stages of the game where it's more competitive? We accelerate the pricing to where we think it will get to at the end of the game. So that's why doing these price cuts and also starting low with your prices.

• 2:37:48David Rosenthal?

  Like you can even start unprofitable with your prices in the early days in a given node generation. Because the goal is crowd out the competition, become the industry dominant number one player, get all the customers. Once you aggregate that demand.

• 2:38:02Ben Gilbert?

  Yeah.

• 2:38:02David Rosenthal?

  Then you get the scale and then you can get the economies of scale pricing. But just like, get to that as fast as possible is the name of the game.

• 2:38:10Ben Gilbert?

  Yeah, it works backwards from, it actually involves a lot of market sizing. At maturity on this node, what do we think demand will be for?

• 2:38:21Ben Gilbert?

  You know, call it 40 nanometer. How many orders of individual chips will there be in 40 nanometer? Okay, well, to have the cheapest price for customers, we need to do the biggest ordering. And so then it's just a matter of like, how fast can we get into volume production?

• 2:38:41David Rosenthal?

  Yep.

• 2:38:42Ben Gilbert?

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

• 2:38:57David Rosenthal?

  It's this incredible orchestration to make it happen. You know, it's almost Costco like in the ballet that has to go into this.

• 2:39:03Ben Gilbert?

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

• 2:39:32David Rosenthal?

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

• 2:39:53Ben Gilbert?

  Right. Or in Nvidia's case, how big is AI going to be? You know, I, these are, this is kind of a crazy thing for a manufacturer to have to do, to have that crystal ball into the end market, markets, you know, the end, their customers' markets. But they really do need to make bets on how big those markets are going to be.

• 2:40:13David Rosenthal?

  Yep. Cause if you're off by five, 10%, that's going to tank your entire profitability for that node generation, which is going to tank your free cash flow, which is going to mean you can't play the game in the next turn.

• 2:40:24Ben Gilbert?

  To this point though, if you actually are good at all of this and you are good at forecasting and the execution is flawless, once you internalize the learning curve, the story of TSMC goes from one where it's surprising and unlikely and.

• 2:40:45Ben Gilbert?

  It becomes an inevitability. Of course, the company that is taking on all the orders to have the lowest prices.

• 2:40:54David Rosenthal?

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

• 2:41:00Ben Gilbert?

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

• 2:41:19David Rosenthal?

  Yep, yep. And that's just the capex side of the equation, as we talked about with Dr. Chang. Like, there's also the R and D side of the equation that needs to go into creating the next process node that can, you know, be built on that capex.

• 2:41:34Ben Gilbert?

  Yeah, it is crazy that if you just look at every year, the capex versus the net income of this company, they basically spend all the money, not all the money, but their capex grows in a very similar way, if you look at the bar graph, to their net income from the year. And so that is even before R and D. David, to your point, if they're looking around at competitors, at other foundries, and saying, okay, how much can we invest? They can invest more than anyone else because they have the most volume. And then on top of that, they are also spending in a separate bucket of R and D on the technology

• 2:42:14Ben Gilbert?

  for their manufacturing processes. And that's how you get COAS, which is the technology that they use for packaging for AI chips. That's their proprietary thing, which, by the way, once you have proprietary packaging, then it's even harder for customers to go and, you know, double source, double manufacture elsewhere. They have a similar technology for packaging of mobile chips that doesn't use COAS. But it seems like this is a market where those in the lead are only going to get further in the lead over time, absent some big strategic mishaps or some big execution mistakes.

• 2:42:51David Rosenthal?

  Yep, totally. And then I think the last playbook theme here for me and for us is just that Moore's Law is undefeated. I mean, at the end of the day, back from starting all the way back Morris's career at TI and being a contemporary of Jack Kilby and Bob Noyce, the invention of the integrated circuit. Once the integrated circuit was invented, the compounding growth of that industry is all that mattered. Everything else is just downstream of the fact that the world is going to demand more computing at this monotonic,

• 2:43:32David Rosenthal?

  exponentially increasing pace every 18 to 24 months. And of course, like, the technical definition of Moore's Law expired a long time ago. But like spiritually, the world demands roughly 2X, the computing power that it had two years ago, every two years. And that has continued for 50, 60 years at this point and shows no signs of slowing down. And as a result...

• 2:44:00Ben Gilbert?

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

• 2:44:05David Rosenthal?

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

• 2:44:10Ben Gilbert?

  Well, sure, but the demand side is far more than 2X. Moore's Law has always been about how much can happen on the innovation side of getting better at design and manufacturing. And that is getting harder than ever because we're having to like, call more things Moore's Law. You know, packaging was never a part of the original Moore's Law, and software improvements, and proprietary interconnects.

• 2:44:36David Rosenthal?

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

• 2:44:52Ben Gilbert?

  All right, here's the stat. Since TSMC was founded in 1987, the world's semiconductor market has grown from 26 billion to 527 billion last year. So they rode a ridiculous tailwind.

• 2:45:06David Rosenthal?

  Ridiculous tailwind, yep.

• 2:45:08Ben Gilbert?

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

• 2:45:20David Rosenthal?

  Yep.

• 2:45:21Ben Gilbert?

  The scale of the numbers are so staggering. I keep thinking about the fact that they can go spend $20 billion to build a building. And the stuff that they spit out is so valuable that that 20 billion was a profitable investment in a matter of, I don't know how many years, if it's three, five, seven, whatever the payback period is, like, they know for sure that it's a worthwhile investment to do that.

• 2:45:46David Rosenthal?

  Yeah.

• 2:45:47Ben Gilbert?

  The whole thing comes down to, oh, my God, silicon has become really valuable. Integrated circuits are the fabric of our world today.

• 2:45:58David Rosenthal?

  Ha, well, Ben, what an amazing experience. So glad we did this, went to Taiwan, got to see this in person, got to spend this special time with Dr. Chang. What a great way to start the year. All right, listeners, now is a great time to talk about one of our favorite companies, Statsig.

• 2:46:18Ben 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.

• 2:46:28David 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.

• 2:46:48Ben 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.

• 2:47:01David 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. Should we do carve-outs?

• 2:47:13Ben Gilbert?

  Carve-outs.

• 2:47:16Ben Gilbert?

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

• 2:47:28David Rosenthal?

  Ooh.

• 2:47:29Ben Gilbert?

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

• 2:47:48Ben Gilbert?

  And so the car was actually not drivable away from this gas station. I was like, crap, I can't even go get the other car to, and I had my baby in the backseat and my wife and I were trying to figure out what to do. And we're like, do we have to call a tow truck to like tow us to? And so I signed up for AAA while I'm just sitting there in the gas station parking lot. And within, I think, an hour, hour and a half, they had a mobile tire inflator on a long weekend, like a holiday weekend when other people aren't working, drive out and fill up my, the air in my tire. So we could be quickly on our way, not ruin the weekend.

• 2:48:27David Rosenthal?

  Amazing.

• 2:48:28Ben Gilbert?

  And it was like a hundred bucks or something. It's really not a bad price and you get, this was, see a hundred bucks to become a member or whatever is 150. And then the service is actually free for something as trivial as this and you get three of them a year.

• 2:48:41David Rosenthal?

  Wow.

• 2:48:41Ben Gilbert?

  So I'll take it. It was, it was a phenomenal experience.

• 2:48:45David Rosenthal?

  All right. AAA, here we go.

• 2:48:47Ben Gilbert?

  My second one is a YouTube channel called defunct land. You and I were talking about this.

• 2:48:53David Rosenthal?

  Oh, yes, this is so good. You turned me on to this.

• 2:48:56Ben Gilbert?

  Yeah, it is an entire YouTube channel that I actually haven't watched in a while, but I only remembered it from our conversation. And now I need to go back and watch older ones that talks about defunct theme parks. So if you like acquired and you wish you had something, you know, acquired like that's kind of visual, that's about history and intellectual property and people trying crazy stuff. Some of the most crazy entrepreneurs and executives within companies decided to build theme parks. And it is very fun to see the weird old Nickelodeon hotels or action park in, I think it's New Jersey. They're like wildly unsafe park from the 60s, 70s and 80s.

• 2:49:34David Rosenthal?

  Ah, man, those were the days.

• 2:49:37Ben Gilbert?

  Yes, you could get lost for hours and hours and hours watching defunct land. So I highly recommend the YouTube channel.

• 2:49:43David Rosenthal?

  I'm really glad that you and I grew up as kids in the era where

• 2:49:48David Rosenthal?

  we could still take unreasonable amounts of risk and nobody thought that that was, there was anything wrong with that.

• 2:49:53Ben Gilbert?

  Yes.

• 2:49:54David Rosenthal?

  Oh, good. My carve out, speaking of, you know. It being 2025, how are we talking about this? On the plane on the way over to Taipei, I finally watched Everything Everywhere All at Once for the first time.

• 2:50:11Ben Gilbert?

  So good.

• 2:50:11David Rosenthal?

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

• 2:50:29Ben Gilbert?

  All right. Well, we've got some thank yous to folks who helped us prepare for this episode. So first to Art De Geas, the co-founder and executive chair of Synopsys. Had a great conversation with us, well, first publicly with Saseen Ghazi, the current CEO of Synopsys on an ACQ 2 episode a little while back. And then we chatted to prep for this episode and basically asked the question, what should we be asking Dr. Cheng about? We got some similar notes from Renee Haas, who is the CEO of ARM. Great conversation with Sir Peter Bonfield, a current TSMC board member and former CEO of British Telecom. David, I know you've got a few also.

• 2:51:09David Rosenthal?

  Also to Wally Reins, the former CEO of Mentor Graphics. Wally is a legend in the semiconductor industry, almost on par with Dr. Cheng. They were contemporaries at TI back in the day. And to John Bathgate and Britton Johns from NZS Capital, our go-to folks on anything semiconductors. They were, I think they were more excited, even more excited than we were that we were doing this. So that we got to talk to them about it.

• 2:51:36Ben Gilbert?

  Yes. Also past acquired guests. I think that episode holds up really well. Where we did semiconductor and complexity theory with them.

• 2:51:43David Rosenthal?

  Totally.

• 2:51:44Ben Gilbert?

  And actually, John is the one originally who explained to me how EUV lasers work, which is still one of the most impressive accomplishments in human history. To John from the Asianometry YouTube channel. This is just an incredible channel all about semiconductors and about. How all of this stuff works. I mean, I learned so much about CMOS sensors, about how they make the actual silicon wafers themselves. That's a sophisticated process before the etching even starts. He's just got some awesome, awesome videos on the Asianometry YouTube channel and very kindly bought David and I dinner and hung out with us the night before the interview, which was very fun to do in Taipei.

• 2:52:26David Rosenthal?

  Very fun.

• 2:52:27Ben Gilbert?

  Also to Tim Culpen, a former Bloomberg journalist who now has a Substack called Culpium, also gave us some great topics to chat about. And lastly, as always, to Arvind Navarathnam at Worldly Partners. He did a great, great write-up on TSMC that he'll be posting publicly right before we post this episode. So you all can see it. It was great last-minute prep for me after reading the memoir to get someone else's take on what makes this company so special. And actually, some of the stats that we threw out in our playbook came straight out of his write-up. So if you want a more and kind of a more analytical view of how did TSMC become TSMC, he's got a great study on that that we'll link to in the show notes.

• 2:53:11Ben Gilbert?

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

• 2:53:28David Rosenthal?

  That's right. That's right. Total sleeper pick. Amazing story. Erwin Jacobs, one of the greatest entrepreneurs in American history.

• 2:53:36Ben Gilbert?

  Yes. And our diving into how CDMA works was one of the most fun technical explanations I've ever done on an acquired episode. So if you want to understand how all of our cellphones work, go check out the Qualcomm episode. Or of course, if you did not last week, listen to the TSMC remastered episode. I don't know how you got this far without listening to that, but you should go listen to that. After this episode, check out ACQ 2. We've been talking about this episode with synopsis. There's one with Rene Haas from Arm Holdings that we did. It's our most recent episode, so it's spectacular. And if you're interested in semis, go check that out. Come talk about this episode with us in the Slack, acquired.fm/slash Slack. And if you want to know when a future episode drops, you can find out,

• 2:54:21Ben Gilbert?

  sign up at acquired.fm/email. And you'll also get episode corrections and hints at what the next episode will be. So, with our listeners, we'll see you next time. We'll see you next time.