Transcript of TSMC (Remastered)

Hello, Acquired listeners. We regularly get feedback that this episode on TSMC, the Taiwan Semiconductor Manufacturing Company, is one of the best Acquired episodes ever. Interestingly, it predates our NVIDIA episodes. We did it way back in 2021 when the acquired audience was about 12% the size of what it is today, which means that the vast majority of you have never heard it.

So we definitely wanted to fix that.

Since then, semiconductors have become so much more important in our world, and TSMC has essentially become the only manufacturer of the leading edge chips. They make the primary chip inside every MacBook and iPhone shipped today. They're powering the AI wave manufacturing all of NVIDIA's chips. They make the chips for a whole bunch of other fabulous companies like Qualcomm, AMD, Broadcom, and Hyperscalers like AWS.

It turns out they even manufacture a lot of chips for Intel, Yes. Little known fact. Yeah, TSMC rode the smartphone era to crazy heights, as we all know. Here now in the next AI era, here in 2025, it turns out that they are the manufacturing superpower behind all of that, too.

Yeah.

Well, listeners, without doing too much foreshadowing, now is a very good time for anyone to listen or relisten to the TSMC episode.

We decided we should go all the way back to the raw audio tracks and remaster this whole thing from scratch for your listening pleasure.

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

This is such a crazy stat. It's crazy that the rest are located on the West Coast of the United States, but it really underscores what an extreme outlier TSMC is. Without further ado, the story is truly unbelievable, and we hope you enjoy this presentation of TSMC Remastered. Who got the truth?

Is it you? Is it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you?

Sit me down, say it straight.

Another story on the way.

Who Welcome to Season 9, episode 3 of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I am Ben Gilbert.

And I'm David Rosenthal.

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

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

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

Indeed.

All right. Well, listeners, it I finally felt like the right time to do this episode amidst this global chip shortage that we've got going on that, David, I think I've heard even Ford has paused the production of F-150s because of this. It is like a massive impact on the world. We've had TSMC on the agenda to do for two and a half years now in our little Google Doc.

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

The Arm episode. Yep.

Sequoia Part One, PA Semi.

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

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

Sweet.

He's like a night of Taiwan. It's the order of Propitius Clouds. I think there's nine ranks of and the highest is Special Grand Kordun.

And he's Special Grand Kordun? He's special.

Yes, he's very special. So he was born. Then, for those who are unfamiliar with Chinese geography, Ningbo is a small city just a bit south of Shanghai. Small. It's about 8 million people. It's just casual. No big deal.

China scale is ridiculous. But certainly wasn't 8 million people when Morris was born in 1931. No.

But I bet it was still probably pretty big. But yeah, today, 8 million people. Crazy. So Morris His father was a county official and later became a bank manager. The family moved around a good bit within China as his father was transferring for work. This is pre-Peoples Republic of China. This is pre-World War II. This is a very different place.

Right. The leadership is not Communist.

No. His early childhood years were middle class, not wealthy, but pretty well to do relative to your average Chinese citizen. Then when he was six, the second Japanese war breaks out, and Morris and his mom flee the main part of China to Hong Kong, and they go to live in Hong Kong for a few years to escape the air raids and the fighting. Then on December eighth, 1941, three hours after Pearl Harbor, the Japanese attack and invade Hong Kong. Morris talks about this. He's like, Yeah, everybody knows Pearl Harbor, December seventh, 1941. What people don't often talk about is the same thing happened in Hong Kong three hours later on the next day. They're in Hong Kong, so they flee again back to China. They end up in Shanghai this time, and they stay there for a few years until 1948 after World War II is over, but that's when the Chinese Civil War breaks out, that would lead to the Chinese Communist Revolution, and so they flee again back to Hong Kong. This is crazy. Morris, before he turns 18, he has lived through three major wars, the second Sino-Japanese War, World War II, and the Chinese Civil War.

The next year, in 1949, which is the same year as the establishment of the PRC, the People's Republic of China. Morris turns 18, and with the help of an uncle that he has in Boston, his life completely changes. He gets accepted to Harvard. So he goes to the US. He goes to the US, he goes to College at Harvard.

Wow. Talk about a change of fate.

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

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

We just take this for granted, but this is a good reminder. At the very least, he's probably not going to have to flee Boston to continue his studies. But he does end up fleeing Harvard, as we'll get into. Morris loved it. It was like that quote we read He was so overjoyed to be there, but he realizes he has a new problem in America and at Harvard. His parents aren't coming over. He's on his own. He's got to support himself and make his own way. At that time, his race is probably going to limit his opportunities. As he says, In the early '50s in the United States, there were Chinese laundrymen, Chinese restauranteurs, Chinese engineers, and Chinese professors, those were the only respectable professions for Chinese. No lawyers, no accountants, no politicians. What does Harvard churn out? Lawyers, accountants, maybe. Politicians, yes. Not a lot of engineers.

Certainly finance professionals.

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

That's crazy to think about.

If you're really, really focused, you're probably going to go down the street in Cambridge from Harvard- To MIT. To MIT, which Morris does. He only spends his freshman year there. Then for his sophomore year, he transfers to MIT so that he can study mechanical engineering. Morris, our man, has learned the ways of the world in the US. He's focused. He starts mechanical engineering a year behind at MIT. He finishes both undergrad and his master's in the remaining three years.

And what year is this?

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

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

No, no, no.

So maybe Shockly Semiconductor.

Shockly Semiconductor is probably just getting going, but we're probably still in vacuum tube.

Like Bell Labs land.

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

Wow.

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

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

Oh, he's great.

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

In one of the interviews he talks about one of the Stanford ones, he gets a question from the audience about how did he kick his smoking habit. Oh, yeah. The questioner is like, I know you used to smoke. How did you finally stop? And he's like, I never stopped. I still smoke. He's 94 years old.

And he goes on to make the case for why he's a pipe smoker. Actually, even though smoking is hurtful to his lungs, it's actually beneficial for his mental life. So he's pretty sure it's prolonged his life.

Well, he says he's still into the data and pipe smokers live longer than nonsmokers.

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

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

There was electrical engineering at this time. Right, right, right.

Yes, he could, but he didn't study electrical engineering. In terms of where you would want to work, it's not really on anybody's radar screen, especially. Morris is that you're going to go enter the tech industry. He gets his dream job offer from the Ford Motor Company.

Oh, no way. Yes. I didn't hear that.

I'm sure this is apocryphal.

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

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

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

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

I'm sure that is a- This is 100% a pocket.

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

No.

Donald T. Valentine.

No way. Yep. That's right.

He started at Sylvania after Fordham Or maybe it was after the military.

He ended up at Shocly.

Well, no, then he was at Raytheon, and then he joined Fairchild. Fairchild, okay. Right after the Trader's 8 left Shocly and started Fairchild.

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

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

There you go. So they didn't overlap, Don Valentine and- They were never in the same place.

They were in different locations and different job functions, very different job functions. But they were both, I believe, both at Sylvania.

Amazing.

At the same time. Crazy. So Don is out chilling in California, like we were talking about, and falling in love with California. He's playing water polo. He's like, Oh, my gosh, I'm never going to leave this place. Morris, he's on the grind. He gets posted as a junior engineer at Sylvania's Ipswich, Massachusetts plant. Not quite the same glamor as Don out in Southern California. Remember, Morris is a mechanical Electrical engineering. He doesn't know anything about electrical engineering, but he's working in this new semiconductor division. After work, he's living in a hotel, by the way. He doesn't even get an apartment. It's like some company-sponsored hotel. He goes home, back to the hotel from work, and he studies the best textbook that he can find about electrical engineering, which is entitled Electrons and Holes in Semiconductors with applications to Transistor Electronics, written just recently, a couple of years before in '50 by William Shockley.

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

Yeah, not too long at all. I mean, any act was vacuum tubes, and then shockly, invented the transister. Then in a sec, we're going to talk about the integrated circuit that Bob Nois and Jack Kilby, who are going to talk about, co-invented. But anyway, okay, back to this moment in time. Morris is just studying this Shockley textbook in his hotel room. But he's not a college, and he doesn't have any teachers. He just has the book. But he's very resourceful. He figures out that one of the senior engineers at the plant is an alcoholic and hits up the hotel bar almost every night. What Morris does is he comes home from work in the early evening. He studies in his room for a couple of hours. Then later at night, when the older colleague shows up at the bar, Morris goes down to the bar not to drink, but he brings the textbook and he asks the guy. He's like, I don't understand this. I don't understand that. Grill me. He's just buying drinks for his buddy.

Great. Incredible.

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

Wow.

This goes on for three years. Morris is rolling hard. He's burning the candle at both ends, working and at the bar, but not drinking, learning. But as he is learning the industry, coming up to speed, it becomes pretty clear to him that if he really wants places in this new emerging industry, Sylvania, not really the right bus to be on, so to speak. Obviously, Don Ballantyine figures out the same thing and jumps to Raytheon and then to Fairchild. Morris says the moment when this crystallized for him was there was a talk that a senior manager at Sylvania gave at the plant, and the quote that the senior manager said that stuck with Morris for the rest of his life was, We at Sylvania cannot make what we can sell, and we cannot sell what we can make. Real great position to be in. Morris was like, damn, I got to get the hell out of here.

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

Totally. Like Don, Morris leaves Sylvania for greener pastures. However, not to California. Halfway in between. We're to Silicon Valley. Yep, halfway in between. We talk a lot about Fairchild and The Traitor State, Silicon Valley, blah, blah, blah, the place to be. Here's the secret, Silicon Valley is all marketing. The biggest semiconductor company in all types, digital analog, everything at that time was not in California. It was in Dallas, Texas. It was Texas Instruments.

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

No, no, no, no, no, and that's going to come up later. No, TI was the juggernail. Now, Silicon Valley is Silicon Valley. But then it was Yeah, okay. California, I don't know, West Coast, whatever. Ti was the big incumbent. They were the juggernaut. Ti actually got its start. I had no idea before doing the research here. In the '30s, you're like, how did a technology company and a semiconductor company end up in Dallas, Texas? They started making instruments, Texas instruments, for measuring seismic activity for oil exploration. So all the oil companies- That makes sense about Texas. They were like the TSMC, the technology provider to oil companies That's what led them into computing and into digital to power that business.

Oh, wow.

They were huge, not just huge in terms of the company, but they were the technology leader. Bob Noyce, like I was saying a minute ago, is credited when he was at Fairchild, inventing the integrated circuit and all that. While he was the co-inventor, simultaneously, it was co-invented by Jack Kilby, who was at TI. Jack was actually the one who got the Nobel Prize for inventing the integrated circuit. Gordon Moore, who was also at Fairchild and then founder of Intel along with Noyce, he would coin more as law. But Jack has a great quote, too, about the implications of the integrated circuit and semiconductors. He says, What we didn't realize then, this was a little later, when they were inventing it, was that the integrated circuit would reduce the cost of electronic functions by a factor of a million to one. Nothing had ever done that for anything before. It's such a great way to frame it, too. This had never happened in human history. There was this thing that used to be ex-expensive in terms of resources, and then magically, one day, it's a million times cheaper.

Yeah, that's crazy. I didn't realize it was on that scale. This is probably a good time to talk about some definitions because there are some things that we've thrown around already. I think everyone has a general understanding of what these things are, but it's worth understanding more precisely before we move on. The first of which is a transistor. The best way to a transister is not the tiny little transister that's on a silicon die today, but think about it as a little encased piece of circuitry with three prongs coming out of it. Those three prongs will save the technical names, basically have an input, an output, and something that controls the input and the output. It's a switch. It has two purposes, the first of which is being a switch where you can decide that either stuff is going to go through it, stuff being voltage, current, or none, or it rounds to none. That way you can decide, Hey, this binary piece of equipment is either off, zero, or on, one. Okay, so that's a transister. Now, a transister can be made out of lots of different things. It can take any implementation Why is everybody talking about silicon?

Well, silicon, as an element, is a semiconductor. It is a metaloid. It has some properties that make it like a metal, like a conductor. It has some properties that make it non-conductive. Imagine trying to move electrical signal through a piece of wood. It's not going to work. But imagine moving it through copper. It's going to work really well, and you're never going to be able to interrupt it. Well, wouldn't it be great if we had some material, a semiconductor, where we could modify whether current was flowing through it or not?

Make it a switch really easily. Exactly. Well, and lots of things are semiconductors. Germanium was the main material for a while, but Germanium is expensive and rare.

Silicon is made of sand. I think it's the second most plentiful minable element on Earth.

Yeah, it's sand, right?

Yeah.

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

The IC?

Yeah, the IC.

The integrated circuit.

The integrated circuit. A transister, it's a switch. Before the IC, people were making switch. You make one switch at a time, you wire it to another switch. If you've seen photos of Vaniak and vacuum tubes, literally, they're plug in one tube into another. You're still doing that with transistors. When Noyce and Kilby invent the see, now you can put a lot of switches on one thing. Fast forward today, the latest processor, the five nanometer processors that TSMC and basically nobody else is churning out. I don't know, billions, trillions of switches are in a tiny little...

Integrated circuit.

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

Oh, fascinating.

Coincidence? Yes, totally a coincidence.

Absolutely a coincidence.

Absolutely a coincidence.

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

Yes, exactly 10 years. Yeah, Morris obviously wasn't working directly with Jack on inventing the IC. But this gives you a sense. Ti, this is the place. This is like Google plus Facebook.

Without the world paying attention to them.

Yes, and in Texas. Morris assigned as his first project to a problem child within TI, they have entered into a deal with IBM. Ibm is working on their first mainframe computer, major project that's going to use transister logic instead of vacuum tubes, the IBM 7090. They anticipate so much demand for this product. Usually, IBM manufactures everything for all their products themselves, but they They're like, We need more chips than we're going to be able to make ourselves, so we need a second source for our chips. They turn to TI, and they're like, Hey, we can give you all the designs for how to do this, this chip that we want for our product. We want you to We're going to additionally manufacture some of these in addition to our own line. You might even say almost like a contract manufacturer of chips or like a foundry business, almost. Interesting, but it's not going too well. Ibm's own plant is churning out transistors with about a 10% yield, which means that of every 100 chips that they turn out of the plant, 90% of them fail and only 10% of them work. That's the first-party line.

The TI line has about a zero % yield. They're lucky if they're getting any. Almost everything coming off the line fails at TI when Morris shows up. Morris would say about this later, The was concerned, the operators were concerned, everybody was concerned. Morris, remember, he's a mechanical engineer by training. He starts tinkering. He's like, Well, I know this is a mechanical process, chemical and mechanical process, creating this stuff. I'm just going to use my training and optimize it like a good mechanical engineer. He starts doing some stuff. After about four months, he gets the yields at the TI plant up to 20%. So twice as good as the first-party line at IBM. There's a great profile that was one of the main sources for this episode in IEEE Spectrum. Oh, yeah. Great industry magazine that we'll quote from here. They write, Suddenly, even TI President, Pat Hagerty, knew Morris' name. Ibm thought Chang had just gotten lucky, but when the company, IBM, sent engineers down to talk to him, Morris described the theories he'd been testing and explained why his experimental process worked. This achievement propelled him into his first managerial job, creating a Germanium development department with 20 plus engineers reporting to him.

This is his first big win here in the foundry business. On the back of all this, TI is like, All right, we got a rising star here. They offer to sponsor him to go finally get his PhD They even offer to continue paying his full salary while he's getting his PhD, which they're paying for.

All right, so they think very highly of him.

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

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

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

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

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

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

A little preview to fast forward to today, TSMC, they're a contract manufacturer for Silicon. That is what they are. Tsmc has 40% operating margins as a contract manufacturer. It's not I think this is just there's no technology or... They are one of the most advanced technology organizations in the whole world. There is so much IP just in the manufacturing. Take out the design, take out the functions, just making this stuff is so hard. I mean, now it It's all these lasers. We'll get to it later. We'll get there. It's going to blow your mind how this stuff is done. But anyway, so Morris, he's coming up. He's learning. Like, literally, as this whole industry is getting developed, he's right there. A couple of years after he gets back from Stanford, he's still rising through the ranks. In 1967, TI makes him a general manager of one of the divisions within the semiconductor business. That's where he has his next big breakthrough. This is on the business business side. Morris notices what they're doing, setting up these new plants for all these successive new methodologies and processes of manufacturing, at this point, integrated circuits in silicon and pumping out these chips, it's super expensive to do this, super cost-capital-intensive.

What TI and everybody else in the industry did when they would start a new product line that would use a new FAB for chips, they charged a lot of money for it because, man, they put a lot of money into these things. So right off the gate, you want the latest new hotness in the end products that TI is selling, they're going to charge a lot of money for them. Morris realizes, he's like, that's not actually optimal to do that. Because as evidence by his first big win at TI with the IBM line, there's a learning curve to getting the yields right and learning how to manufacture a new process. And in the beginning, you're going to have really low yield. What you want, ideally from a fabrication perspective, is you want to have a ton of volume from the get-go. As soon as the plan is online, you want to be running at max capacity so that you can, A, learn as fast as possible, get yields up to the profitable levels, and then you want to still be running at max capacity as long as possible because you already spent the fixed cost to make the plan.

Basically, you always want max capacity. When you started out by pricing so high, you kept demand low and you weren't able to get up to capacity fast enough.

It's almost like they didn't realize the benefit of the potential operating leverage that they had because they were just passing their exact economics onto their customers and saying, You basically have to pay us for us to do all these fixed costs and then you'll get all the benefits of how cheap it is to stamp it off the press every time. Whereas what they really should have been doing is saying, We will make an investment. We'll eat the cost of having to spend all this up, but boy, are we going to be super profitable on every chip that comes off the line? Yeah, totally.

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

Paying consultants.

I know. Here's Morris' quote about this. He says, This was in the late '60s, and Boston Consulting Group was a very small outfit when we did this, and we used loads of data, a lot of theory, and a lot of group, the result was so-called learning curve pricing. Start low and then continually, automatically reduce the price every quarter, even when the market did not demand it. This was a very successful effort, even though it was somewhat controversial. A lot of people thought we were being foolish. Why would you reduce the price when you didn't have to? But we did it because we believed in it, and indeed, our market share just kept expanding. That, combined with other strategies, made the TI, Integrated Circuits business, the biggest I see business in the world and also the most profitable. This is right when Intel is getting founded. So screw Fairchild, screw National, screw... Ti is kicking all of their butts, and it's thanks to Morris.

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

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

All right, listeners, this is a great time to thank our longtime friend of the show, Vanta, the leading trust management platform. Vanta automates your security reviews and compliance efforts. So frameworks like SOC 2, ISO 27001, One, GDPR and HIPAA compliance and monitoring. Vanta automates all of these for your company and makes them fast and simple. Plus, Vanta is always connecting and monitoring continuously, not just a static point in time.

It's funny. When we first started working with Vanta four years ago, we thought, Oh, this is one of those great acquired universe products that lets you focus on just making your beer taste better. In other words, customers can focus on what differentiates their product and outsource things that don't to free up-time and resources. But over the last few years, their product has advanced so much that it's not just Vanta does that for you. It's now actually Vanta does that better than you could on your own. Without a continuous real-time monitoring system, there's no way you could do this, that you could give your vendors and customers this level of confidence and trust.

There's even data now on this, too. Between the ability to enable new revenue and the time savings, a new IDC white paper found that Vanta customers achieve $535,000 per year in benefits and the platform pays for itself in just three months.

Vanta is the one single software pane of glass that connects to all of your services via APIs and eliminates countless hours of manual work for your organization. They now have AI capabilities to make this even more powerful, and they integrate with hundreds of external tools. Plus, they let customers build private integrations with all of their internal systems.

Whether you're a startup or a large enterprise, if your company is ready to go back to making your beer taste better and automate compliance and streamline security reviews like Vanta's 9,000 customers around the globe, including at Lassian, Cora, and Factory, head on over to vanta. Com/acquired and just tell them that Ben and David sent you to get $1,000 of free credit. That's vanta. Com/acquired.

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

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

Exactly. But it might be fair to say history turns on a knife point. Things don't entirely go as planned. Three different viewpoints, as far as I could identify, on what happens next to Morris at TI. He does not become the next CEO, obviously. Viewpoint number one, It is simply and probably fair that he was just discriminated against because he was ethnically Chinese, although at this point, I'm pretty sure already he was an American citizen. But anyway, and he got passed over for... I have no evidence for it, but not be at all surprised that that was part of what was going on. That's one. Two, second point, which Morris totally acknowledges, TI was a really big company, the semiconductor division. He had made it probably the most successful and the most fastest rising division within the company. But you mentioned calculators. They were starting to launch the consumer products division at this time. In 1978, so six years, he's running the semiconductor division as VP. They move him over to VP of consumer products in 1978 because this was a big new strategic initiative and it wasn't going super well. They're like, Oh, Morris is a great manager.

He can fix this and turn it around.

Different set of competencies, though. You need marketing.

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

Yeah, that makes total sense.

In 1983, five years after he gets moved over to take over the consumer business, he hasn't turned it around. It's still struggling. He gets demoted to, Head of Quality and People Effectiveness, which is pretty much a slap in the face. Like, this dude built your semiconductor business.

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

Exactly. So that's number two. Here's number three. I found some evidence on this. It's unclear to me how much of this is Morris' fault versus his successor. But while Morris was definitely responsible for making TI semiconductor a powerhouse, at some point towards either at the end of his tenure running it or under his successor, they totally dropped the ball. This is when Silicon Valley in California takes over. In the mid '70s, the semiconductor industry transitioned over the metal oxide process, the Maas. You ever hear about M-O-S Maas semiconductors?

The precursor to C-Maus.

Exactly. That happened in the '70s. Ti, again, was while they had the best engineers, they were well positioned to lead this transition. They didn't. Actually, most of the talent within TI that were the ones that led the industry transition to Maas left, including probably most prominently a guy named LJ7, who left and founded a company called MaasTech. Then he later became a semiconductor venture capitalist and founded 7 Rosen Ventures, which was one of the early VC firms. He was a TI guy, and he left. The culture at TI, as shown by Morris' experience, was not like Trader's 8 Silicon Valley, you leave. It was like, you're a company man. You stay at the company. So, Motorola poached a whole bunch of Maas engineers from TI, and it all fell apart. Culminating in the biggest Huge loss. Huge loss. Now, this is really history turning on a knife point. In 1980, so Morris has already transitioned to consumer products, IBM puts out a secret RFP, Bid proposal for a secret project that they're working on. This is 1980 by a new group based out of Boca Rata, Florida. Do you know what I'm talking about, Ben?

I have no idea. Some listeners might know what I'm talking about. This is the secret project. This is the RFP to be the microprocessor, the CPU for for this secret project, the IBM PC. Okay.

That was at a Boca Raton?

Yeah, it was a secret project, like a Skunkworks division of IBM. Oh, wow. To build the PC, which was a big... Ibm was the mainframe company. We're going to build a personal computer. So Skunkworks project. Ti, a couple of years earlier under Morris, would have been an obvious candidate. Remember, he had the relationship with IBM going all the way back. Ti probably should have been the processor chosen. Instead, of course, it was Intel, I think it was the 8088 that was chosen for that first one.

Wow, and boy did that set things in motion.

Well, then the architecture standardizes on X86, and boom, there goes the whole next generation of computing away from TI over to Intel.

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

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

Okay, so this is really where... That is a major loss. In the highway of history, TI I accidentally took the off-ramp there.

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

Yeah, he was something staff.

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

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

He wanted to be CEO of TI. That didn't happen. He wants to be CEO. But he whittles it down to two opportunities he's going to consider. One is to go to a competitor called General Instrument, which people may have heard of another one of these old chip companies. It was based in New York, in Manhattan, in New York City, actually, to go be their COO, the number two there, with an understanding that, Hey, if things go well in a couple of years, you'll replace the CEO, become the CEO there, or to become a venture capitalist. Really? Yeah. No way. I don't know where or how. I couldn't find that out. But he was weighing these two opportunities. The VC idea is going to come back up in a big way in a second. But obviously, he goes with general instruments, GI. A, his dream is to be CEO. B, he's got this chip on his shoulder from the way TI ended. Great. He goes off to New York, he leaves Texas, lives in Manhattan. Things are going to work out at GI. The thing, though, is GI had a very different culture than TI. Ti was this research, build, develop technology, push the ball forward.

Gi is this New York They were almost like at the time, like a proto tech private equity firm. Their strategy was they just acquired lots of different semiconductor businesses, either independent companies or divisions from other companies. Try and integrate them. No, they would acquire them. They would get these business units into good shape, and then they'd sell them again. Oh, really? Yeah, they were like, literally, they were like a financial engineering firm, basically. Definitely not Morris' cup of tea. He only stays there a year. It's clear that's not a good fit. He resigns again. Within less than 18 months, he's had two major setbacks. Basically, his dream is over. Here's the quote from him. He says, After these two setbacks at TI and GI, I did not think that my aspiration to be the CEO of a major US company was in the cards. Well, turns out he was right. He was not going to be the CEO of a major US company. How do we go from this dude in his mid '50s, former rising Star, now washed up, from that to he's in Taiwan, he's CEO of TSMC. I don't think you could ever script this out.

I think this is probably the most unique. Every founding story is unique, but I think this might be the most unique founding story we've had on Acquired so far. Back when Morris was at TI, when he was running the semiconductor business there, he went over to Taiwan a couple of times to talk about building a manufacturing plant there. Ti would own and build the manufacturing plant, had outsourced to Taiwan. Not like a TSMC-style business, like it was a TI plant there. Anyway, he had no connection to Taiwan. Remember, he's Chinese. He's not from Taiwan. People are like, Oh, Morris, you went back to Taiwan. He didn't go back to Taiwan.

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

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

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

Yeah, that was Taiwan at the time. To give you a sense, the average gross margin of a Taiwanese company at this point in time in the mid '80s is 4 to 5 %. 0,4 to 0,5 % gross.

Gross before you even have overhead operating costs.

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

Yeah, and to way pull forward the the 7 Power section, as Hamilton Helmerer would explain, if your margins, particularly your gross margins, are only 4 or 5%, you're in an industry or a business where all the profits are arbitraged away and everyone's just raced to the bottom on prices and no one's able to build any real enterprise value because everyone's just out competing each other for pure commodity.

I mean, 4 to 5% gross margins? People used to hammer on Amazon, I guess, for being a low gross margin business in the 40% Anyway, I can't even imagine running a company with that level of gross margins. The Taiwanese government, though, they wanted to come up in the world. They were like, This is where we are now. This is not where we want to be. They knew that technology was the way. They had decided back in the '70s that they would establish an initiative called the Industrial Technology Research Institute, or Itri. The goal was for it to become the Bell Labs of Taiwan to do some tech from the US and elsewhere and home grow some real technology businesses in Taiwan so that maybe they can lift businesses out of poverty there, at least.

And so Morris wasn't going to Taiwan to start TSMC. No. He was being recruited to Itri.

So one of the ministers he had met, a guy named KT Lee, who because of this, he would also become venerated in Taiwanese history. He's known as the father of Taiwan's economic miracle, literally because of this. He recruits Morris. To come over and run Itri, be like the head of Bell Labs, Taiwan, essentially. This is a ridiculous thing for Morris to do. He had been captain of American semiconductor industry. He was put out to pastor at TI, but at least he was still at TI. Then he was COO at general instrument, he's going to go over to Taiwan and run a research park there.

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

This is like all the countries and cities and the like that are like, Oh, we're going to build the next Silicon Valley in XYZ, and we're going to recruit some former Silicon Valley person to come do that, and it's going to work Probably not going to work. Everybody tells him not to do this. All his former colleagues, his wife at the time, tell him not to do this. His marriage was actually falling apart, maybe in part because of this. He's had all these experiences. He's like, You know what? I just I need to change the scene. I got to get out of here. So he takes the job, and he figures it's going to be cushy. This is like a soft landing.

He thinks about this as the pseudo retirement he's going into. Totally.

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

This is retirement. He also makes a joke, I remember, after that about how, by the way, interest rates were higher back then, so that was much more achievable on last principle. Yeah, totally.

So 1985, he goes over, he takes over as President of ETRI. It's a culture clash. This is retirement for Morris, but he's still coming from this hard-charging industry. All of the employees of Itri are people in government jobs in Taiwan. Government jobs, not even in a democracy, because Taiwan gets under martial law. I think that it just ended. This is not the same. This is like jobs for life. You're a government official in a non-democracy type organization. Morris says, Back then, they considered me a foreigner who suddenly became their boss. They were scared of me, and they were right to be scared of him. There was one thing, though, that the government had done right before Morris showed up, which was they had successfully negotiated one technology transfer license in the semiconductor industry from—did you find out what company this was? This is probably what they were trying to negotiate with TI for.

I do. It's a three-letter acronym. Oh, yeah.

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

Rca, that's right.

Yeah. Rca had a semiconductor line, and the government in the '70s, the Taiwanese government, had negotiated a tech transfer from RCA.

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

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

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

Super low-end stuff. Right.

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

Even today, when TSMC or Intel or Samsung or whoever built a FAB, the leading edge FABs, they produce the leading edge stuff for a while, and then the new generations come on, they don't shut down the old ones. It's just chips that don't need the same leading edge performance, they keep getting made on the old ones.

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

The leading edge. Yeah. The government, ETRI does actually spin out a company using this old RCA technology that would be called UMC, United Microelectronics Corporation, not a technology leader. It actually does okay in the long run. They would later spin out their own chip design business. So UMC was doing both fabrication for third-party clients and designing some of their own chips with the FAB that they created. They spin out their chip design business later. That becomes media tech. Oh, no way. Yeah, which is a $50 billion company today. The government did pretty good. This was pretty good. Totally. They were doing. When Morris arrives because of this, he's not starting from a standing start. It's not good, but there's some assets.

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

So he gets to work at ETRI, he's working on all this, he's transforming the organization into a high-performing organization. Then all of a sudden, out of nowhere, KT Lee comes back to him and is like, Hey, great. You're running our Bell Labs, you're running ETRI. Now I want you to start a company. Moris is like, KT is like, Yeah, I don't want you to have somebody else in need to do it. I want you, Morris Chang, to start a new semiconductor company here in Taiwan, and I want you to make it into a global leader. Morris is like, Um, okay? He doesn't say this directly. Well, he's got a great quote I'm going to say in a minute. But again, remember, this is not a democracy in Taiwan at this time. Morris has also on his third job in three years. Yeah, he doesn't need a salary to survive, but this is the end of the rope for him. If he gets fired here at E3, he's legit done, done, done, done. So he doesn't have a choice here. The quote, this is so Morris, so great. He says, It was like in the movie The Godfather.

It was an offer I couldn't refuse.

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

Yeah, Lee had no... He was a government, he was a minister. He was like, go start a semiconductor company, make it a world leader.

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

Lee is like, All right, good. We're capish, we're clear. Come back to me in a week with a business plan. Tell me what you need, and we're going to make this happen, right? So we're just like, Okay, a week. All right. Then a day later, Lee supposedly is like, I'm going to need you to come in on Friday. You got three days. They say necessity is the mother of invention, and yet these three days are what creates the now ninth most valuable company in the world. Morris comes up with this brilliant idea to create a pure play founder country company to be a contract manufacturer.

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

Well, No.

The answer is no.

Like we've said all along, all the chip companies, all the American and European and Japanese, all the leading semiconductor companies, they made their own stuff. When there was some sharing of production and some companies were emerging that were borrowing production from the big guys. There's a great quote right around this time from Jerry Sanders, who was the co founder and CEO of AMD, He famously said in the mid-1980s that, quote, real men have fabs.

That's right.

What a quote. So ironic because in the 2000s, AMD would spin out its fabs and go fabless. Global foundries. Yeah, I went to global boundaries. But yeah, this was not an obvious idea. If you wanted to be a real semiconductor company, you made your own chips. The idea was like, this isn't manufacturing Barbie dolls here. This is real technology. You need to control it soup to nuts.

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

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

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

You got Jerry over in AMD is like, real men have fabs. Yeah. They're not a real startup. I mean, there are startups, but all these startups are building their own fabs. Nobody wants to do this. So nonetheless, he has to start a company who's He literally got a gun to his head.

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

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

They haven't started yet.

They haven't come yet. They haven't come yet. More He knows what the long term market is going to be, but he's got to find the short term market. He needs some real politic here. So what's that going to be? He says, Well, maybe I can go around to the big guys. They've been doing just like my first thing back at TI, they've been doing some line sharing for either new products that they need excess capacity for or for older products that they need to transition some fabs, but they still need to make components. Maybe I can take some of that off their hands. He goes around and he talks to Intel, he talks to TI, he talks to everybody in the industry, and they're like, Yeah, he talks to Motorola. Sure, fine. The government had told him, We know it's going to take a lot of money to set up a FAB. We're good for half of it, but you got to go raise the other half of it. We want you to raise it from an Intel or a TI, somebody who's going to be your first customer and that they're going to be bought in.

He does the rounds, he goes and talks to everybody. He gets meetings with Intel, he gets meetings with TI. They're both like, You know, Morris, we like you. But no. He said, The last-ditch effort. He has a meeting with Philips, the Dutch company. They have a semiconductor business. So, Morris, he has a great quote about this. He says he would describe Philips as the first rung of the second raiders in semiconductors, but they were the only interested option. They put up 28% of the capital. Government puts up 50%. It ends being 220 million in total.

The 110 is probably a lot more than what the Taiwanese government thought they were going to be buying here. Yeah, I think they were.

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

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

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

Putting a pin Dutch.

Okay, we got a surprise coming. I'm going to be surprised here. We're doing a real-time, doing it live. This may be the craziest part about the whole TSMC founding story. I'm 99. 9% sure, Ben, you do not know this. Do you know what the pre-money valuation was on TSMC?

No, I couldn't find that anywhere.

It was zero dollars. Morris Chang got no equity in the company. No. Zero.

So 100% of the company was owned by...

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

And just got to keep his salary.

He was a government employee. Wow. There by the grace of the government.

Oh, my God.

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

How is he worth $3 billion today?

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

Oh, my God.

Isn't that wild?

So the government owned 50% of the whole business.

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

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

Yeah. Crazy, right? Okay, before we go on in the TSMC story, we need to have two real quick sidebars. It was 1987 when TSMC gets officially stood up. They raised the money at a zero dollar pre-money valuation. Do you know what other company, other big thing, happened in 1987? We have covered it on this show in the chip world.

Is this the founding of Arm? Yes, it is.

Yes. Yes. Arm. Jv between Apple, Acorn, and VLSI Logic, which was the manufacturing partner. They were an A6 company. That's a whole 'nother' sidebar we're not going to get into. But yeah, 1987, what a year.

Brand new, unconventional instruction set architecture that's totally different than the X86 stuff that the whole industry and world seems to have standardized on at this point.

The Anis Mirabelis for the semiconductor industry.

And useless, right? In 1987, it's hamstrung. It's very few instructions. Pcs are always plugged in, so what do we need a low power chip for? This thing's pathetic.

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

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

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

Presumably, there's some relationship coming between TSMC and Arm.

Well, they're really close partners. I mean, the way now this stuff is so integrated. Yeah. All the companies have to like. The architecture companies like Arm, the EDA companies like Synopsys, thesis. These guys are all deeply, like the engineering is all deeply in bed with one another.

Okay, so you mentioned EDA. I'm going to take your sidebar and I'm going to- You're going to raise me. I'm going to raise you one more sidebar. Listeners, we're two clicks out here. This is a pretty good point to talk about how the value chain went from one company that created transistors, and then they designed the chip, they manufactured the chip, they marketed the chip. Here's how the value chain looks today. I think you've already alluded to, I think in the '80s, it already started to look like this. First, there's EDA, there's electronic design automation. This is the software that professional chip designers use to do their work. So synopsis, I think, cadence Yeah, Cadence. That's another big one.

Yeah, they're the two leaders. They're the two leaders. That's like, I don't know, Excel or Figma for chip designers. That's what they use every day.

Pertuitivity tools. Yeah. That's category one of four. Of course, as you can imagine, the software to design the chips probably has to be very aware of the manufacturing capability of who's going to be manufacturing the chips. But let's put a pause in that for a second. Then, of course, there's the fabulous chip design companies. Today, I think Apple, NVIDIA, Qualcomm, eventually, AMD, after they stop being real men, apparently.

Tons of innovative new startups now, like Cerberus.

Pa Semi. Tesla. Before Apple acquired it. Yeah.

Pa Semi is coming in a sec. Okay.

You've got the EDA companies that are making the software, the Fablus companies that are designing the chips using the software. Then third, there's one company that we have not talked about yet, one component of the value chain. These are the people that manufacture the machines that go into the factories that the foundries operate.

There's actually one between... Well, no, actually, I think above EDA. There is one more part of the value chain. There's a fifth, which is IP. That's all like arm. Oh, right. Yeah, like architecture, IP. There's actually a ton of companies now that do just straight up IP. I thought before this episode, these were like, Oh, just shell companies that sue one another about IP. It's not that. Systems are on a chip now. It's like everything is on one chip, basically. You need a USB functionality in your chip. You don't need to design it. You just buy some IP off the shelf. There are companies to do that. Yeah.

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

There it is.

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

Take me back to my high school PhotoLive. Right? Yeah.

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

Wow, I did not know that.

That's crazy. That is the beginning of the relationship between TSMC and their equipment provider.

Oh, wow. What a strategic point. I mean, because, well, it's TSMC's insane capital operating cash flow production that enables them to spend CapEx above anybody else that allows them to buy more ASML equipment anyone else. But that relationship, wow. I mean, these machines, we'll get into it later. It's going to blow your mind what this stuff does.

All right, listeners, this is a great time to thank our big partner here at Acquired, J. P. Morgan Payments. When we told the team over at JPM, that we were remastering our TSMC episode, they smiled and said, Oh, we have the perfect thing for this episode that most listeners won't know about, but is super important to how international companies accomplish global trade.

Which, of course, that is like catnip for us. We were like, Well, tell us more.

Yes.

J. P. Morgan has a whole Trade and Working Capital Group that helps companies manage risk and access liquidity for global trade, in addition to, of course, facilitating the actual payments to drive growth.

Yeah. Imagine this scenario. Now, you're a global auto parts manufacturer, and you build up inventory of a key car engine component because it requires a super complicated production process. But then you have to wait for the final demand forecast from the actual car company your customer before you can ship units to them. But in the meantime, you have to secure credit lines and manage your own supply chain.

Sounds complicated. Enter J. P. Morgan's Trade and Working Capital Group. Not only is J. P. Morgan Payments the leader in all the payments products we've shared over the last year that drive growth for your business, they also have 150 years of global expertise to help businesses navigate issues like this. This legacy dates back to 1799. They literally have centuries of leading the industry through times of both economic growth but also instability.

As you all know, you can't time the market. But if you intend to be in business for decades, you know you're going to exist through all sorts of different geopolitical, macroeconomic, and supply chain climates, just like TS SMC has. So make sure you've got a great payments partner that's also prepared for anything as your business grows. J. P. Morgan really is a behind-the-scenes powerhouse that helps all types of businesses and industries facilitate payments, mitigate risks, access liquidity to accelerate cash flow, and so much more.

Our huge thanks to JPMorgan Payments. You can learn more at jpmorgan. Com/acquired, or click the link in the show notes and just tell them that Ben and David sent you.

Okay, back to my second sidebar. Also going to be worth it, PA Semi. We did an episode way of this, episode 20 something.

This is like when Acquired was a very different show when it was actually about small acquisitions. Totally.

I don't know that we actually covered this, but I uncovered in the research for this episode, Do you know the origins of PSMI?

No, I don't.

Okay, so Arm, my sidebar number one. 1987, also created. They're just an IP design company, like I was saying in your sidebar.

It's like inception over here.

They just license out the Arm architecture to other companies that then design using the Arm architecture. One of their original licensees was Deck, Digital Equipment Corporation, like O-G, way back in the day. They took the Arm architecture and they tuned it for performance. They called what they did at Deck, their version of Arm, that they created Strong Arm. That product line within Deck would later be acquired by Intel, of all places.

Okay.

Crazy why Intel acquired an arm architecture?

Right. They're the X86.

Yeah, they remarketed it as X scale. I think they ended up shutting it down. A bunch of the core engineers on the team, like the deck team that have been working with Arm from back in the day, and they're like, We just got acquired by Intel. What the hell? Like, you know, screw this. We don't want to go work for Intel.

There's no interesting flourishing alternative architectures at Intel.

Yeah, we're Arm engineers. We can go start our own company.

That's PA Semi?

That's PA Semi. And, of course, the underpinnings of all of Apple's chips today. Totally. The lineage of all of Apple Silicon, probably the most valuable, defensible part of Apple today in terms of technology was Arm and deck to Intel to PA Semi to Apple.

That's wild. I don't think I ever knew that. You can trace Apple Silicon all the way back to Apple.

Yeah, because Arm was a JV with Apple.

Crazy.

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

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

No, it was just like they didn't have the capacity, so they needed some extra excess space. But then when they got the capacity online, they took it away. And then the chips that they gave us that they didn't want to make anymore. Well, the reason they didn't want to make it was it was losing money. They basically were just transferring their losses on producing these chips to TSS.

How did they get out of this?

So Mars continues. The conventional conclusion at the time was that there was no market. That's why the pure play foundry idea was so poorly thought of. What very few people saw, and I can't tell you that I saw, was the rise of the fabless industry. I only hoped for it. Then, as you said, but I had better reasons for hoping for it than the people at Intel, at TI, and Motorola, because I was now standing outside. When I was at TI and General Instrument, I saw a lot of these IC designers wanting to leave, start their own businesses, and the constraint was setting up their own fabs. Yes, he saw that at TI, but remember, he had been considering becoming a VC instead of going over to ETRI. This is the ultimate end around. He becomes essentially the world's best semiconductor VC. He takes an index out on the whole future innovation and entrepreneurship market in semiconductors by becoming the platform that they're going to build on instead of going and investing in them. He enables all of it. He's like the Y-commonator of semiconductors.

Right. Or in many ways, the Tencent. Tencent, of course, also does direct investing. But the idea that you could get distribution through WeChat, it's not distribution, but it is manufacturing. There is a thing that you have to raise 10 to 20% of the capital that you otherwise would have needed to raise if TSMC exists.

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

He almost ran TI.

Totally. He did all this amazing stuff.

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

Yeah. And so Morris is now going out and evangelizing, and he's like, all these great designers, he's like, We're an option for you now. You want to leave, you want to start your own company, you don't need a FAB. We'll be your FAB. It takes a couple of years. For a couple of years, TSMC has to survive on the dregs from the IDMs, the big guys. But after a couple of years, these startups get going. Little companies like Qualcomm, Broadcom, Marvel, NVIDIA, these are all started with TSMC.

Nvidia was started in 1993, only ever raised $20 million. $20 million. And ever opened their own FAB.

I believe 100% with TSMC.

Wow.

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

It's wild.

And only raised $20 million. It's like the AWS for chip companies. Never would have been possible before. So this is what's super cool. I don't think Morris saw this. This even exceeds his wildest dreams. He was hoping for this fabulous market to take off, but this creates this insane flywheel for TSMC. Tsmc. The FABless market starts to grow, which they're seeding and enabling it. As that happens, TSMC's revenue grows.

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

Plow it back into CapEx and advance the level of their technology. Remember, they were starting from behind on technology. Within about 10 years, they catch up, and then they start to exceed everybody else. As they push manufacturing process technology forward, they're manufacturing better chips with smaller wave process lengths, they're enabling their customers, which are the fabulous companies, to get better and better performance. As they get better performance, the fabulous companies can address more of market and more use cases. Their existing customers get bigger and new fileless customers start, which gives them more revenue, which repeats the whole cycle. It goes slowly like any flywheel. It takes a lot of effort and a lot of time to start turning it. But fast forward to now, in the early 2000s, when TSMC finally caught up to the bleeding edge level of technology with other semiconductor companies, there were 22 companies that were at the leading edge. I think it was, I don't know, let's call it 150 nanometer process or something like that at that point in time. 22, and TSMC finally broke into the pack. They were one of the 22. By the late 2000s, it had gone from 22 down to 14 that were at the leading edge.

By the mid-2010s, there are six.

It's basically Samsung and TSMC, right?

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

Which, by the way, just slipped six months.

Interesting. Well, Samsung has already slipped to 2024. So Very likely in the next process, it's just going to be TSMC.

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

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

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

Morris has got It's a great quote about this that I have in here. He says, The semiconductor business is like a treadmill that speeds up all the time. If you can't keep up, you fall off. And that's Morris law. From 22 down to 2 down to 1, even when their competitors are only doing the one thing that TSA SMC has done. If you fall behind by a step, you're toast.

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

Yeah. I mean, well, there's two things. Yes, that is 100% true. The scale of this now, I mean, TSMC just announced they're going to spend $100 billion in CapEx over the next three years. $30 billion this year, $60 over the next two. And I bet that keeps going up. So that's a lot of billions. You might even say, this is so strategically important and people are talking about this. Certainly China is talking about this. The US government is now talking about this. Governments might need to come in with a bazooka of money and create other options because almost all their manufacturing is in Taiwan. It's in this strategically, geopolitically challenged location. We need to re-onshore some of this in the US. China, of course, wants their own. You can't just spend the money and do this. Us government could come in and say, We're going to spend a trillion dollars this year to do this. They can't do it because we're going to get to powers later. But there's this marriage of scale economies and process power, the TSMC, in this industry. There is no amount of money you could spend to catch up next year.

You can't because the engineering is so hard and the learning curve takes decades to get to this point. I was listening to a podcast, a Bloomberg Outlots podcast about this, where they were talking about this and their reporter who covers TSMC, who's great. China, they asked them a question like, Well, China could just spend a billion dollars and do this, create their own fabs, and they're doing this.

What's the company called SMIC? Smic.

Smic, yeah. Smic. Smic, yeah. Smic, SMIC, yeah.

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

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

It's the hardest thing in the world- It's the hardest thing in the world, yes. To do this stuff. To make the equipment that ASML does and to manufacture the way that TSMC does, it is the hardest thing to do in the world.

Anybody else could get all the same equipment from ASML.

Actually, that's not true.

No, I'm saying even if you could, you wouldn't know what to do with it. It's not because you're dumb. They're only a small number of people in the world that can to incorporate this stuff.

All right, I'm jumping out of my seat here, so I'm going to do the ASML thing now. The reason that some people can't get their hands on the ASML equipment is because the Netherlands did not renew their trade agreement with China. Also, likely it has been reported that probably that is because of US prodding to say, Hey, these pieces of equipment you're making seem pretty specialized. You're the only people in the world who can do it, and it makes the most cutting-edge semiconductor manufacturing technology. Maybe let's not sell that to SMIC in China. And so they're not doing that. Now, you might say, oh, come on, how hard can this stuff be? Well, these machines- Tell us, Ben, what these machines do. Well, first of all, they cost $200 million for a machine that makes the chips, and that's going to go up to $300 million. And by the way, on a lot of this, we have a lot of thank yous for John Bathgate and Britain John's from the episode of the Knowledge project that they went on to talk about a lot of this stuff. It takes four 747s to ship one of these machines.

You buy one, your TSMC, you buy one and it arrives in, of course, the 747s. Then there's a crew of SML employees on site, not only to assemble it, but then to help you run it. Like you mentioned, these companies are deeply integrated with each other to pull this off.

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

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

That seems like a problem.

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

Like a laser.

Well, not yet. But even that really only gets us to 11 nanometres. How the heck are we supposed to make these chips where the transistors are ostensibly only five nanometres apart when what we've done to date, shooting through lenses and shooting through water, gets us to 11 nanometres? Well, okay, so this is crazy. You have to create a plasma. What they do, and this is called extreme ultra ultraviolet light or EUV. This is a process that is just wild. On one side of the machine, you drop molten tin. On the other side of the machine, you then hit it with a highly specialized laser. You perfectly pulse them. It explodes into a plasma, which creates extreme ultraviolet light. Now, of course, this is hard enough to do, as you can imagine how that might work, but you actually have to do that 50,000 times per second.

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

Unbelievable. Now, of course, think a little bit more about this. Well, wait a minute. That wavelength is so small. We're going shy of 11 nanometres here, we're going to have 5 nanometres, 3 nanometres, that actually it is absorbed by all known mirrors, which we're used to reflecting light, but they don't reflect this light because the wavelength is so small. So part of this process involves reflecting it a bunch of times, like 20 or something, before etching the silicon. So what do we do? Well, ASML actually needed to invent a new type of mirror to do this, and they also needed a contract with a German company to make this special type of laser, which is the only known company in the world capable of making it. This is crazy hard stuff. They only make 50 of these machines per year or so. They used to have competitors, It's like, Nikon used to compete with ASML on this, but it's too hard. They gave up. That's how hard extreme ultraviolet lithography is. And of course, we haven't talked a lot about this, and I think it's outside the scope of the show. But just to overly simplify, lithography is the process of taking that silicon wafer and etching a design on it.

If we want to do that in smaller and smaller ways, we got to do with more and more specialized equipment. At the end of the day, if you want to make the M2, the M3, the A 18 ex-bionic, whatever it's going to be called. Bionic. There is no other way to make it than this extreme cutting-edge alchemy.

It truly is alchemy. Ben.

You're a government.

You want to throw $100 billion- I was because a Acquired is doing really well. We're on a tear here. We've got power, we got brand power, we got network economies, we got our community. We're doing well. We should invest in this. It was an opportunity. We should compete with TSMC. Yeah, screw the governments. We'll do it. We've got a couple of $100 million. We'll buy this stuff. You have a CS degree. You're the more tactical one of it. You can run this stuff, right? When we get the shipments from ASML, you can make this happen.

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

Tsmc has ordered out all of them for years.

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

This is why TSMC has 40% operating margins.

It's crazy.

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

Completely.

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

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

2008. Well, first, we'll stop in 2005. So 2005, things are going well. Better than more as ever imagined. These fabulous companies are getting started in NVIDIA is killing. I mean, I was making gaming PCs at the time. I wanted those NVIDIA GPUs.

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

No. I mean, Intel was like, NVIDIA, come on. Right. Real men have fabs. Okay, maybe we're beyond that part, but they were making GPUs. Nvidia's stock tracked whether they won the next Sony contract for the next PlayStation or the Xbox.

That was the market for GPUs. That was the market, right.

Great market, but it's not what we're talking about here.

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

Totally. But still, great for TSMC. It's awesome. 2005, Morris is 74 years old. He's like, All right, I did it. I've been buying TSMC stock with my It's done well enough. I don't really need to work anyway. I'm going to call it. Ready to retire. Ready to retire. Ready to ride off into the sunset. He hands the reins of TSMC over to his longtime Lieutenant, Rick Seye, and he retires. He spends a couple of years. He's just chilling. I don't know what he's doing. He loves literature. He's reading all sorts of stuff. He's on his second marriage, which credits his second wife for really reinvigorating him and inspiring him. Then it's summer of 2009.

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

There's been science projects before. Yes. Oh, cool. I didn't realize that. Yeah. Oh, well, this is going to make what happens even more sense. The financial crisis had happened in 2008. And chaos everywhere. We've talked about it lots on this show. Surprise press conference, TSMC, summer 2009. They announced that Morris is returning to lead TSMC as CEO. Rick is out. Morris is coming back for the third act of his career. I don't even know what number he's wearing. He's not 45 because that was the second act. He's like, Jordan. He's beyond Jordan at this point. Coming back, he's going to be CEO again at age 78. Rick would actually have a second act himself. Do you know what Rick is doing now? No. Rick is CEO of MediaTec, which is been out of UMC. So he's doing fine. Rick is doing great. But Morris comes back. Why does Morris come back?

But this is, Harold, it as a botched transition, right? Yeah.

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

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

Maybe. I don't know enough to say. I think maybe. But also, there's a lot going on at this moment in time. The financial crisis, that's like a crisis that's affecting everybody. So that's one thing. But the other thing, in the press release, there's a quote from Morris. He says, One, this move will not affect TSMC's fighting spirit and is likely to spur greater intensity. But two, he that he sees golden opportunities ahead. What are these golden opportunities that he's referring to? It's 2009. Mobile.

Right. The smartphone. 2007, in July, the iPhone comes out. 2008, the iPhone 3G comes out with the App Store for the first time, the SDK, all these developers building for it. But of course- And Android comes out in 2008?

Yeah.

Apple had to this point, while building this operating system, this down version of OS 10, it's Unix, but they weren't designing their own chips. They just used an off-the-shelf Samsung chip. They got it right with saying, Hey, we got to use Arm in these things because we need a really low power device. So they've done actual God's work and magic to be able to bring a PC, X86 operating system, create a sub-operating system from it. Computer in your hand. Totally, that runs on arm. Yeah. Miracle. But of course, it's an off-the-shelf Samsung processor. Totally.

Well, even that's great for TSMC. Intel is not making Okay, so that's one. We're going to talk more about that in a sec.

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

But the point is on mobile, the previous whole paradigm of computing, Silicon, everything was PC It was like stuff plugged into a wall. It was Intel. It was X86. Yeah, TSMC could now access some of that because AMD went fabulous. But come on. But now, all of the leading companies that are going to make Silicon for design are Firm companies, Qualcomm, Broadcom, Mediatec, Apple.

Who all are fabulous.

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

We should say, too, 2009 was an interesting tipping point because if you'll remember back to the 2016 2007, introduction of the iPhone, Steve Jobs has a slide where he says their hope, their goal, is to get 1% of the existing smartphone market. So Apple had no notion. I mean, Google had no notion of how big smartphones were about to become. In 2009, we're starting to see, I think the iPhone 4 came out. We're starting to see a ton of different OEMs making Android phones. You're moving into this era where everyone's looking at each other going, Oh, this might actually be the next computing paradigm.

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

Mobile and social?

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

Bring your own device?

Well, you're on the right track. What in the enterprise? The cloud. The cloud. The cloud. You got mobile and you got cloud. It's so simplistic, but those are the two things that drove trillions of dollars of market cap over the next decade. Well, what's the cloud? At first, the cloud is good for Intel. X86, you're putting CPUs in the cloud. Amazon's buying lots of...

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

It was the best thing that ever happened to Intel. But as the cloud progressed, and computing workloads progressed, the CPU became a lot less important. Ai started becoming a thing. Cpu, yeah, maybe you need some of that. Maybe you'll use Intel, maybe you'll use Arm, whatever. But what really matters- Well, the majority of cloud workloads are still on CPUs today. Yeah, okay, fine.

But you're right, future-looking.

Why is Nvidia now a $300, $304 billion market cap company? It's not because of the PlayStation.

It's bigger than Intel, right? And Nvidia is 2X Intel's market cap, something like that? Yeah, to your point- It's the cloud. The notion of chips that are really good at parallelized processing, which is GPUs, and matrix multiplication effectively, vector math, versus the CPU, which are these general purpose workhorses built for the operating system that runs on your computer, super good for serial. Of course, there's like multi-core, there's 64 cores on a CPU now, so they're good at parallelization, too. But all this stuff, especially The machine learning is GPU.

It's GPUs and it's specialized. The Tesla Dojo stuff, that's not X86.

Oh, yeah. We're in this. I mean, the other thing that Foundries enabled, the Fabless era enabled, is the custom chip. Everybody's building custom chips for all sorts of things.

Yeah. You got these two big golden opportunities that are coming online, and Morris is like, I got this.

We should say, we should clarify, too. I think Tesla uses Samsung. Oh, interesting. I didn't know that. Not TSMC, or at least for part of it. I think they actually even fab their chips in Austin in the US. Really? Yeah. I can't imagine that's going to last. This is like the beginning of what everyone's hoping for in the US. Is this like return to American manufacturing of chips.

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

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

Yeah, I guess so. It depends what you need. Well, anyway, point is, Intel's dominance is over, and the index on all that's going to take over is TSMC. Morris, riding back in. He comes in, he gets these deals done. The Apple deal, 2012. Morris Chang, 78, 80 years old.

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

That's right.

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

Yeah, I think that was the first one.

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

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

Well, there's been a few interesting things. There was Steve Jobs saying he was going to wage thermonucléaire War.

That was on Google, right?

I think that was Google.

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

It was about the lawsuits. It was like when they kept stealing Apple's designs. And then there was something else where someone This is later, but Tim Cook read the quote on stage about it being a toxic hell stew.

It doesn't get any better than that.

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

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

That they were solely TSMC?

I think so. That was the huge hit product. Because remember, the six was when they first increased the screen size, and those things flew off the shelves.

I'm pretty sure some iPhones had Samsung fabbed a fours and fives in them, and some had TSMC-fabbed ones.

But I think by the six, all iPhone were huge winners, but I think the six was mega winner, and I think that was all TSMC.

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

That was a bet the farm deal and something only Morris could do. Totally.

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

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

He even stepped down from the chairman role.

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

Crazy. Wow.

That was 2018. I mean, let's talk about now. So, 2020, TSMC, we alluded to this, operating profit of $20 billion on $48 billion of revenue. They took 17 of the $20 billion in operating profit and plowed it all back into CapEx last year in 2020. Beginning of this year, January 2021, they give guidance that they will raise CapEx from $17 last year in 2020 to $25 to $28 billion in 2021. In April of this year, 2021, they raise it again to 30 billion forecast for the year and 100 billion over the next three years. That's like the real shot across the bow that everybody wakes up, the financial markets wake up and they're like, Holy crap, TSMC has cornered the market. Even Samsung is not going to be able to keep up with this. It's wild.

All right, listeners, it is time to talk about one of our favorite companies, Statsig. It's funny, David, Statsig has gone from this little startup when we first started working with them a couple of years ago to this total powerhouse now.

I know. It's wild. I was looking it up and they have added all these customers since we started working together. Openai, Figma, Atlassian, Vercel, Notion, tons more. At this point, if there's a growth stage tech company out there, there's a pretty good chance they're using Statsig. Yeah.

Listeners, if you are unfamiliar with Statsig, they basically took what was the standard product infrastructure at every big tech company, and they built it as a standalone company. This includes advanced experimentation tools, A/B testing, feature flags, product analytics, session replays, and more. If you're building the next great software company, this infrastructure is essential because it allows your product and engineering teams to release things quickly, measure the impact of them, and track progress over time.

Totally. I mean, as we've talked about on the show forever, at companies like Facebook or Netflix, data was just a part of how everything was built, which contributed to all the crazy bottoms up organic growth that they had. Now with Statsig, you can get that from day one at your startup. Today, they're not only trusted by startups, but also by more mature enterprises like Bloomberg and Microsoft and Electronic Arts. Turns out that a single system for data-driven product decisions is useful at any scale.

Yeah. By the way, the scale they're operating at is completely insane. They process over 2 trillion events per day now. By the way, David, this is updated. The last I checked it was 1 trillion, and then this morning I pulled it up, 2 trillion. And they handle releases to billions of end users. If you're listening to this podcast and you've used software in the last few years, there is a very good chance you've been a part of many experiments orchestrated by Statsig.

Yeah, it's just awesome. As they've gone up market, they've also started to offer some interesting deployment models, like being able to run the whole thing natively inside your existing data warehouse or just using Statsig's fully hosted solution.

If you want to leverage Statsig to grow your business, there are a bunch of great ways to get started. Statsig has a very generous free tier for small companies, a startup program with a billion free events that's $50,000 in value, and significant discounts for enterprise customers. To get started, go to statsig. Com/acquired, and just tell them that Ben and David sent you.

Thank you, Statsig.

So more on today, David, TSMC Today.

Well, okay. So speaking of I think this is the data point that really says everything. Since the first IPO in Taiwan in 1994, TSMC has had compound annual revenue growth of 17. 4% for 27 years. Revenue? Revenue growth. 17. 4% compounded for 27 years. Now, the IRR, the equivalent on valuation on market cap, so it was 4 billion market cap at the Taiwan IPO in 1994. Today, it is 550 billion. That is a 19. 9% IRR starting from a $4 billion base over the last 27 years. So 20% IRR over 27 years, incredible by any means, starting from a $4 billion base, it is now currently, as we record, the ninth most valuable company in the world.

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

Oh, interesting. Yeah, the US oil companies are no longer in the top 10. Correct. But Berkshire is- That might be foreshadowing some future episodes this season.

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

They doubled their CAGR from 2019 to 2020.

Yeah, it's nuts.

Talk about accelerating growth.

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

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

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

The first announcement a couple of months ago was they're not going to cut prices. Then they just announced they're going to raise prices. Nobody's ever done this since the pre For us days.

Pricing power in action.

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

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

Unbelievable.

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

And like 95 plus % of the profit.

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

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

In many ways, Going to 100. They're the Apple of semiconductors. They don't have all the market share, but they have all the most profitable market share.

Yeah, exactly. They are the iPhone of semiconductors. You could still buy previous generation, worst technology from on. For plenty of... On the oddlots podcast, this was actually they talked about the bear case going forward for TSMC. One potential one is that, Oh, well, the processing power is so good that you're not going to need the leading edge anymore. I find that a really weak argument. You always need the leading edge. You think Tesla doesn't want the leading edge? Totally.

You think Apple doesn't want the leading edge? Software will always match the complexity on the most advanced hardware it can run on. Totally. Which is why I love when people are like, Apple's slowing down my computer. I'm like, Yes, I'm sure that's what's happening. They wrote special code that they're putting on there to make the consumer... No, it's because every piece of software just always assumes that it has the most advanced processor on Earth, and it always gets to developers. Sure, they test on two and three-year-old equipment, but no one's making sure that the six and seven-year-old laptops are as performant. Software is designed for the current generation as hardware.

You think that Google and Amazon are going to be like, Now we're good?

Right.

Hell no.

It actually is worth touching on. There's one other interesting bit about this five nanometer process, which, first of all, is a marketing name at this point. What it used to or originally referred to was the length on the gate on the transister. At this point, it's not exactly five nanometers, and the additional performance is not going to come from making smaller gates. Here's the interesting thing, though. You actually can't put these transistors much closer to each other. If you think about silicon atoms that are between the transistors, you can only fit five of them in a nanometer. In a three nanometer process, sure as marketing speak- We got 50 in the work with. Right. At some point, you cannot subdivid silicon anymore. So either we need to change the substrate or the innovations are going to come from elsewhere.

Which has always been the case. More's law was technically the doubling of the number of transistors on an integrated circuit.

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

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

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

No, I don't.

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

Arthur Rock? Yeah. Yeah. Oh, gee.

It states that the cost of a semiconductor chip fabrication plant doubles every four years. With Fabs today costing 15, $20 billion, I don't know that that's proven exactly true, but it's certainly- Well, shoot.

If we just look at TSMC's CapEx forecasting, they're going from 17 to 30. To 60 over two years. That's way faster than four years.

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

Win or take all. There you go.

It's fascinating that both of these things, these laws, aren't actually in conflict because Mohr's law is about, effectively, when you really look at it from a financial perspective, operating expenses when producing at scale, Rocks law is about the upfront capital expenditures to enable all that production. It's everything we talk about on the show. It's being able to pile investment into fixed cost as much as possible at huge scale in order to realize the benefits of making as many of the thing as humanly possible at global scale. Tsmc, interestingly, is the most perfect example of this. I say interestingly because we almost always talk about operating leverage and scale in the context of software on the internet. This is how venture capital started, because actually, manufacturing chips, the operating leverage that comes from huge amount of fixed costs into foundries to make chips and then hopefully be very profitable, 50% gross margin on those chips. Venture capital financing was built for that, for semiconductors. It just so happened to work just as well or even better with software on the internet. Even better in the notion that gross margins of software could be 80 to 90%, not 50%, but I would back that down because it doesn't have the moat defensibility characteristics that being able to plow your cop ex into manufacturing capability does.

Yeah.

Should we do power now?

Absolutely. Let's do it.

Let's do it. For folks new to the show, this is one of the discussion topics we do for every episode as we go through Hamilton Helmer's Excellent Seven Power's The Best business theory book. Totally. We've had Hamilton on the show. He's amazing. Go read the book if you haven't. He identifies seven powers, essentially sources of defensibility, which he defines as long term differential profit margins versus your competitors as we've been talking about on the whole show. The seven that he identifies are counter positioning, scale economies, switching costs, network economies, process power, branding, and cornered resources. We almost always talk about network economies. We talk We're going to talk about counter positioning on this show.

Sometimes we talk about branding. Sometimes we talk about branding. I think we're talking about none of those this time.

We sometimes talk about scale economies, which we're going to definitely talk about here, but I think we're going to have our first process power if I'm going to forecast. But let's start Let's go down the list. Counter positioning. I mean, maybe you could- When they were starting, and in particular, would the incumbents have started with the exact business model?

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

I actually don't know. I would suspect they're higher, but I don't know. Yeah, there was counterpositioning here. I don't think I said this when we were going through it. But before TSMC and the pure-play boundary model, if you were either a fabulous company, one of the very, very few, or you were another IDM and you were trying to get some excess capacity, you rent it from another IDM, most of the IDMs are like, Okay, you strong-arm them, you got a a strategic relationship, they'll give you some capacity. But they also demanded the right to market your products under their brand, too. Which obviously TSMC wasn't going to do. So yeah, there was counter positioning. The IDMs, no way they were going to do what TSMC was going to do.

Right. Okay. Scale economies, absolutely. That is the biggest... It's one of the top two with process power, in my opinion.

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

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

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

Yeah.

So yeah, big switching costs.

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

Not in the traditional sense. This is not Facebook here.

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

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

I do wonder if it's It's actually worse for a lot of people that Apple is a TSMC customer because who else has access to the five nanometer process right now?

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

Process power.

Yes.

I think other than- We finally got one. Pixar, this is the first time we've really... Although we weren't doing seven powers during.

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

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

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

I think the only thing that will unseat TSMC is a complete paradigm shift. Something like what mobile to desktop. If there's something where the computer required in the future is unable to be provided by anything that TSMC is good at today.

If all the crazy laser, Moulton 10 ASML stuff we were talking about, if all of a sudden there's discovery a new, either different or way cheaper- Quantum computing. Quantum computing, yeah, way to do this, then that could reset the playing field. Yeah, totally.

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

If there were an AWS moment, which is funny because TSMC is the AWS equivalent, but where something happened that just made it way cheaper than it used to be, you could now get access to the technology and the know-how orders a magnet too cheaper than it is now, that would take away a big part of their power. But I don't see that happening.

No. Absent a paradigm shift, this is TSMC's lose. They're pretty much in the groove. I think we should skip branding and corner of resource for now. It's not really worth talking about.

I mean, literally, they're antithetical to branding. It's Apple's brand. It's not TSMC. Right.

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

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

Yes. Actually start enforcing what has been right the whole time, I think, as they would say. If they were speaking in my casual tone in English from America, then doing all this business with the West, I have to imagine that assuming that it didn't start a full war, like an actual world war, which it may, then, of course, they would start using all the TSMC manufacturing capacity for all the Chinese customers.

Huawei and...

And Huawei has been a TSMC customer for a long time.

And it's currently cut off.

Yeah. So How do you capture that in power? What is the power? Or maybe like, let's not- That's a risk.

That's like a bear case.

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

Maybe cornered resource, I guess. You're saying this is like an anti-power for this?

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

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

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

Well, I think it's the bear case.

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

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

So this is interesting. They're facing a lot of pressure for this. They are spending, I think, $12 billion this year to start a plant in Arizona, which will not be the three nanometer, I don't even think it'll be the five nanometer. It's not their most advanced manufacturing. I think the US is subsidizing in a big way. I think that's part of the Biden administration's most recent bill to try and bring some semiconductor manufacturing here. But they're also starting a FAB in Japan that came out on their last earnings call. So they're doing some- And they have operations in China, I believe, too. Yeah, they're doing some diversification. But I don't think it's for this reason. I think it's because they're basically getting free money to open Fabs in other places. And Morris has even made comments like, I don't think it makes any business sense for us to have the leading edge in those countries, even though those countries want us to have them there. I think it makes sense based on the ecosystem that we've created in Taiwan to keep operating it here. The question is if it directly helps, let's take the US, for example, the US's prowess as a semiconductor manufacturing force in the world to have TSMC's Arizona plant, or if it's really just indirect and the idea is like, let's try this as a first stab, we'll get more people in the US familiar with doing this again in case we need to...

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

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

Yeah, scary. But I wouldn't say it's the small, everything. Imagine if we didn't have access to leading edge semiconductors. That's everything. What part of our lives do not run on semiconductors?

Ford can't make F150s right now.

Basically, all of our technological progress would stop.

Yeah, you're right.

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

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

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

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

Now, it wasn't under threat of war. Right.

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

Well, Boeing needs semiconductors.

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

Maybe the answer here is Korea. Same as situation exists in Korea with Samsung, right? North Korea is right there. I've been there. I've been to North Korea. I went to the DMZ. It's so weird. It's like an amusement park. It's super, super weird and bizarre. But, yeah, North Korea is right there. Maybe it's the same. China is right there, but this isn't actually going to happen. But I don't know, it feels in the last year, the risk of it actually happening has ratcheted up quite a bit.

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

Yeah. Maybe the best thing that could happen is, my carve out a while back was the book by the Harvard, chair of the Harvard Astrophysics Department about Umuamua, that he postulates was an alien spaceship. Maybe if we discover that aliens are real, that's going to be the uniting force. All these conflicts seem pretty petty. I wouldn't use that as an investment thesis, though.

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

We haven't done this in a while.

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

But jobs made- We need to add video to acquire it so that everybody can see the look on my face right now. I'm just literally got fist in the air. I'm so happy.

And remember, Ottalini was the guy that Jobs brought out on stage during the Intel transition. They were burying the Power PC to say, This is the future, this is the partnership. But jobs made what Ottolini considered a low-ball offer, and Apple awarded the contract to Samsung. It later began designing the chips itself, eventually outsourced production of TSMC, a contract manufacturer in Taiwan that had been found blah, blah, blah, blah, You want to use arm? What? No, we're the X86 company. It was more about we felt it was a low-ball offer.

Biggest strategic error of all time. I'm going to postulate a playbook theme, and I'm going to put forward as a postulate. More than a playbook theme, what's the... In geometry, there's laws that are proved, but then there's postulates that you can't prove them, but our fundamental understanding of the universe doesn't work if they don't work. Whatever that is, axioms, I don't know whatever it is. I'm going to put one of those out there. Please. Never make strategic decisions based on economics. Economics.

This is a prime example.

We talk about this all the time on this show, VC's passing over valuation on something. Andreessen getting cold feet about a $300 million valuation on Uber. This Intel move passing on being partnering with Apple.

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

Or Ford Motor Company not hiring Morris Chang over $1. Whatever. It's just humans are so prone to cutting off their noses despite their faces.

We already have the Rosenthal doctrine of never bet against the internet, but now we have the Rosenthal postulate, which is never make strategic decisions based on pricing. Based on pricing.

Not economics, but pricing.

I like it. I need to add a new section of the acquired website. All right. All right, next on playbook is another one on Intel fading. It takes a very long time to become irrelevant. Despite Intel's stock price being, I think TSMC is like two and a half X Intel stock price. As a matter of fact, ASML is actually larger than Intel by market cap now. They are the sole source provider of one thing in the value chain to mostly one company, and they're bigger than Intel now.

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

Acquiredfm@gmail. Com.

Or acquiredfm. Gmail. Whatever channel works for you or Twitter, whatever. I'd be super curious, if you are along this thesis that we're laying out on the show, how are you playing it between TSMC and ASML?

Asml, which is now Europe's most valuable company. Right.

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

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

Are you also shorting Intel through all that? What do you do here?

All right. My point on Intel is it takes a long time to become irrelevant. They still control 80% of the computer processor market, and they have an even bigger share in servers. So despite everything we're saying- It's still huge. Workloads running on CPUs that are in computers and on the cloud, pretty big business.

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

Two other Intel things. One is that indecision has been very tough on the company. Bob Swann, who was the former CEO, started to prepare to outsource manufacturing of Intel-designed chips to TSMC. I think even two years ago, this was the plan. They finally decided, thrown the towel, Intel is the greatest ship manufacturing company in the world. Real men don't need fab.

Real men are sensitive. They talk about their feelings.

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

Yeah, I mean, well, A, let's look at AMD here. They did this. They spun out their manufacturing into Global Foundries.

Which has been good for Global Foundries and AMD. Like, Global Foundries is getting ready to IPO.

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

It's not a TSMC.

Right. It's better, probably than if they had not done that. But they're not a winner here. Tsmc is the winner.

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

I just looked up, I was trying to remember this. Gelsinger was the VMware CEO. He started his career at Intel and then EMC, and then EMC owned the majority of VMware. They became the CEO of VMware. Yeah, and he was the outside candidate to replace Spommer as Microsoft CEO. Oh, no way. Yeah.

I hear he's really revered in the organization that people think he's really going to make some good change there. We'll see. The last thing on Intel, and it's funny this is not the Intel episode, but there's a thing that happened here that is very similar to the fact that Kodak developed the digital camera first in their lab. They knew it. They knew this was the future, and they didn't commercialize it because it's impossible to counter position yourself because of the innovator's dilemma. Intel actually saw extreme UV lithography, UV first. So Intel was the biggest early investor in EUV, committing more than 4 billion to it in 2012. It was slower than its main rivals, and this is from the Wall Street Journal, in adopting the technology and skeptical about whether it would work. Eventually, Intel calculated that it was a sure bet to try and improve existing ways of handling lithography. Of course, where we are today, EUV completely enabled the next generation of chips to be built that existing ways couldn't- What a great argument and for why you need startups.

Right? Totally. Yeah, Intel was there. They invested in it, they saw it and they were like...

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

Wow. That's crazy.

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

That's why you need startups.

Yeah.

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

If something's low probability- This is what Sequoia and Don Valentine hated. They would never invest in developing a market. That was rule number one. We invest when the market already exists, not when we need to develop it.

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

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

Yeah, totally. All right. Other playbook themes?

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

Outsource things that aren't your core competency. Right.

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

For grading? All right.

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

To own 50% of the company at the outside.

Whatever, A plus. Not interesting. We had thought experiment, we'll try this for this episode. Rather than letter grading this, we'll ask a question, where does TSMC belong in the pantheon of great technology companies of all time? Is it Fang level? Is it top five? Is it top 10? Is it top 20? Where is this? What is the right context in which we should be placing TSMC, this whole story, the company, the power, all It's so interesting because it really does raise this question of value chain.

We talked about the five-part value chain that exists today for making chips. It's interesting because you could say, well, it belongs wherever Intel belonged circa 2000. Or you could say, well, the set of products that TSMC manufactures have 100X the scale that Intel in 2000 had. If you think about it, all this stuff that everyone's all excited about. Every time someone talks about the next wave of computing and they're like machine learning or they're like crypto or they're like 5G, and anything they tell you is something TSMC makes that enables it all. When Mark Andreessen says software is eating the world, it's only eating the world because TSMC has made it so freaking cheap to manufacture silicon. Then you can run whatever you want on that silicon, and the cost of compute asymptotically approaches zero because TSMC, TSMC, TSMC. How much do we ascribe to them versus ASML? How much do we ascribe to them versus the entire landscape of talented chip designers out there, including the 600 chip designers at Apple working on the Apple silicon It's hard to disambiguate that. Where does it belong? I mean, it's probably the most successful and important B2B hardware company of all time.

I think we can safely say at this point it surpasses Intel. I mean, gosh, right? That's a big statement to say, right? Intel, Silicon Valley, the traders say all of it. More is law.

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

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

Right.

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

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

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

Yeah. Unless the foundry model and the Fabulous model was inevitable.

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

But they didn't. They didn't. Horace did.

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

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

It's like bulletproof.

It's everything but bulletproof.

Yeah, totally.

Sadly.

Sadly, yeah. I don't know, maybe we're exaggerated because we're so deep in it. We always go native on these episodes.

The only way it could be more valuable is if the company had an army. It's like people talk about the US dollar is backed up by the full faith of the US government, which implies guns. It's only because everybody he's currently playing by the rules that any business gets to stay in business. And so this one just happens to be a little bit more at risk than other ones.

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

Well, Defensible is It's an interesting question. In 30 years, will TSMC be a huge company?

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

But something unforeseen will change because it always changes. Right, right, right, right.

Yes, yes, true.

Who's had the most similar dynamic in the past? Standard Oil. Either been successful or unsuccessful. Standard Oil is a good one.

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

And they still exist. That's the best- That is the best part.

They still exist, yeah.

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

What I'm wrestling with is how much of it is just marketing. I don't mean marketing in a bad way, but intentionally, TSMC rides under the radar. They intentionally have no brand. The brand is the customer's. What the customer is to succeed. We don't hear all the time about them like we do the fan companies.

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

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

It's finally time.

Yeah.

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

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

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

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

Semiconductors are the new oil, David.

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

Carvouts?

Carvouts, let's do it. I've got two Two. Jenny and I were just down in Santa Barbara for a couple of weeks, rented an Airbnb down there. It was so great. We did that last year. Hopefully, this becomes an annual thing in the summer. Yeah. Escape the freezing San Francisco summers. While we were down, we don't a lot of TV, usually, but it was like, change a scene, summertime in a new place. We're like, We'll watch some TV together at night. For the percentage of you out there who are living under a rock like me with TV, we've watched now most of Ted Lasso's Season 1. Because we heard Season 2 was terrible, but that made me think, well-It was terrible.

It is terrible. But Season 1 is great.

That made me think, oh, if people are this upset about Season 2, that means season one was really good. It's so good. If you haven't watched it, we're on episode 8 now.

So we're not quite done. Welcome to the club.

So Good. Love it. Then the other TV show we watched, this was Jenny's suggestion, Old School Throwback, a show called Greek, which aired in the mid 2000s and is about... Oh, yeah. Greek sorority and fraternity life on a fiction all the university. It's just so good. It's one of those heartwarming period pieces, but it was right from when we were in college. So yeah, it's fun.

Nice. All right. David watching TV, who knows what could change in the world? Right.

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

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

There's a Sam Walton one, Built in America, I think. Yes.

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

Or our two-part Injuries in Horowitz series.

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

I was going to say, yeah, what a great connection with Acquired and Disney andiger.

Totally. What kicked it off was doing the Andreessen episodes and hearing about how they based it on CAA. So especially if you like those episodes or if you like the Disney episodes or if you are a movie fan or if you like these classic CEO business stories, Who is Michael Ovitz? Was just an awesome read.

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

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

Super cool.

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

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

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

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

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

We'll see you next time. Who got the truth? Is it you? Is it you? Is it you? Who got the truth now?