TSMC Founder Morris Chang

The podcast about great technology companies and the stories and play Go to he said technology. Now we definitely have a cold opening. I guess I really want us to be about technology companies again. Well, this is a technology company. It's a sign. All right. Here we go. Straight another story on the way. Welcome to the spring 2025 season of acquired the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts today. We have something very special to share with you. After becoming obsessed with semiconductors from our TSMC episode four years ago, David and I wound our way through the rest of the industry, studying fabulous companies like Nvidia and Qualcomm architecture companies like arm and chip design software companies like Synopsys. And as we were thinking, what's next in the world of chips on acquired? We threw the Hail Mary. We asked friend of the show, Jensen Huang, if he would ask Dr. Morris Chang, the 93 year old founder of TSMC, if he would be open to an interview with us. It is kind of insane and super cool that Jensen made time to help us with this. It's not like he doesn't have a lot of other things going on. Yes. Well, listeners, it happened. So today's episode is a conversation that we recorded in Taipei last week at Dr. Chang's office. We flew to Taiwan for a 48 hour whirlwind where we spent some time at TSMC's headquarters in Hinshu Science Park, where many of TSMC's fabs are located. Super cool to see. Totally. So conveniently, Dr. Chang just published volume two of his autobiography a couple of months ago after a 26 year hiatus from volume one. But inconveniently, it is written in traditional Chinese and not published in the Western world. We managed to get our hands on an unpublished translation of the book to prepare. And what you are about to hear focuses on a few crucial stories from TSMC's history that Dr. Chang shares in his memoir about Apple and Vidya and the birth of the Fabulous Industry. Yes. And big thank you to Karina Bao, who we were lucky to connect with after we set this up and who has been translating Morris's memoirs with funding from Tyler Cowan and Emergent Ventures. Right now, the memoirs are not published in English and we will let you know if then when that happens. Yep. All right. Listeners, you can join our email list at acquire.fm.slash email. You'll get an email every time a new episode drops once a month. And this is also where we announced past episode corrections plus a fun little game where we give hints at what the next episode will be. I always have fun writing those. You do. That's a clear David job. So with that, this show is not investment advice. David and I may have investments in the companies that we discuss in the show is for informational and entertainment purposes only. Please enjoy this conversation with Dr. Morris Chang with some of David and my reflections following its conclusion. We thought is a fun way to start things off would actually be to talk about the man who introduced us. Could you tell us a little bit in your words about your relationship with Jensen and TSMC's special relationship with Nvidia? You know, it started my relationship with Jensen started with a letter that he sent to me, I think it was 1997. And the letter was sent through the post office and I received it in Sinhu. And the letter said that they were Nvidia, the company that Jensen was the CEO of was a small company, but they had developed some really promising chips. But they were looking for a foundry and they had approached TSMC's San Jose office, but they really got no answer from San Jose office. Would I please contact Jensen because Nvidia really wanted to do business with TSMC. So I was going to the US in the next week anyway. So the letter frankly raised my curiosity and also irritated me a little bit because, you know, I had always told ourselves people that we should never be negligent in talking to future customers, even if the customer seems to be a very small one. And at this point Nvidia was four years old. They were facing bankruptcy, I think. And they had maybe 50 or 60 employees. So TSMC, I think at that time already had a few thousand employees. We had exceeded, I remember we had exceeded the one billion US dollars in revenue in 95. And this was 97. So we were relatively speaking, we were a pretty big company. Which is very impressive. You were yourself only a 10 year old company doing over a billion dollars in revenue. Yeah, right. So the following week I went to California and I called him back with an advance notice. I called Jensen, I looked up, I think there was telephone number on the stationery that he sent me to Jensen himself, picked up the phone and there was a lot of background noise. So they were, I mean, he was arguing something with his people. But as soon as I introduced myself, I said, this is Maristair, he immediately shouted to those people that were making noises. He said, quiet, Maristair is calling me. So I then proceeded to make an appointment with him to visit him, to visit NVIDIA the next day or something like that. And that was our first visit, our first meeting. And he immediately impressed me with his articulateness and also impressed me with his optimism. He was also very frank. He told me that NVIDIA was in financial difficulties, but the chip that he wanted now to have foundryd would not only save the company, it would also make NVIDIA a major customer of TSMC. I mean, that was actually quite a bold statement. We were over a billion dollars and to be a major customer of ours, he would have to produce revenue for us of at least 50 million a year. Was that chip the Reva 128? Forgot the number, but it was a very successful chip. I don't think it was Reva anything. It was a game chip, of course. It was successful. In fact, his prediction came true. Not only did it solve NVIDIA's financial problems, it prevented from being bankrupt. Not only did it do that, it also started to make them a major customer of TSMC. Within 12 or 13 years, they did become one of the biggest five customers of TSMC. Very successful chip. So there was a great partnership forged there. TSMC would fab the chips, would manufacture them, NVIDIA would design them. That is true all the way to today at immense scale, but it hasn't always been easy and it hasn't always been perfect. And I want to go to this moment in 2009 on the 40 nanometer node where development was slower than TSMC had hoped. And it was costing customers like NVIDIA time and money. Can you share the story of how this came to be and how it was resolved? Well, I decided to give the CEO job to a potential successor of mine while I would still retain the chairmanship. In Taiwan, usually the chairman is the top man anyway, even though CEO is another person. So the problem you just mentioned happened during the period when someone else was the CEO. Apparently, it was a manufacturing problem. It was also a quality problem. And it was the quality problem that the CEO first reported to me. But the CEO insisted that our people, we had the director of quality insisted that we were not TSMC, it was not a fault. And so on that basis, on the basis of our quality managers' arguments, he had not offered NVIDIA anything. Now, as far as the manufacturing problem was concerned, it was a new problem and everybody was suffering from it. And of course, NVIDIA at that time was perhaps the biggest customer of that node, the 40 nanometer node. And a yield problem in the context of this industry is when you are trying to make a bunch of very high quality chips, but you just can't get the percentage that actually work up very high. Something like that, yes. But the problem apparently just continued. And I was, even though I was not the CEO, I was getting really impatient. And then, of course, some other problems popped up, other problems than this 40 nanometer NVIDIA problem other. So I decided to take the CEO position back. So in 2009, I did that. And there were several priority problems that I had to deal with when I took the CEO job back. And one of them was this continuing problem, continuing argument controversy with NVIDIA. Anyway, I remember in the first few days, after I took back the CEO ship, I called all the major customers, including Jensen. And Qualcomm was, I believe, a number of times. Qualcomm was also. And Qualcomm, the top customers, didn't change very much since they, except for maybe one. Apple. Apple, yeah. Apple came later. Yeah. And in my call with Jensen, he was still very friendly with me. But he also reminded me in a very serious tone that we had the quality delivery manufacturing problem on the 40 nanometer. All right. So I said, I knew that. And it's one of my priority problems. But give me a couple of weeks and I will get back with you. And as I said, I did have several problems aside from the 40 nanometer manufacturing problem and the problem was the argument that we were having with NVIDIA. Aside from that, we also had the problem of the pricing was dropping faster than the cost. You know, I mean, you don't want to see that. Your gross margin percentage kept dropping, you know. Because you had committed to a schedule of price drops with customers, but you weren't able to drive down your manufacturing costs at the same rate. All right. So that was one problem. Another problem was, was the immediate one that triggered me to retake the CEO ship because the previous CEO had laid off, except he didn't use the term lay off. He used the bad performance review. The worst performance review people and there were about six or seven hundred of them, you know, and he laid them off on the basis of their poor performance review. Well, we never did that. You know, I mean, the worst we would do was to put them on, please them on probation for six months. And quite often, you know, at the end of the six months, everybody will go back to his or his or her old job. And some of them would get transferred because they were in the wrong jobs, you know. So some of them would get transferred, but we almost never really fired people even after the probation period. So under your watch, you never did a lay off and you never looked at performance reviews, which are meant to help coach people as the most. As the means to determine who to lay off. That's right. Yeah. And I actually, you know, have told the managers that, you know, but and while in 2008, of course, there was a financial crisis and the semiconductor business, in fact, got affected. And our revenue dropped, our business dropped pretty seriously. I was not a CEO. I was a chairman, but I just knew that anyone, any general manager, any CEO general manager, without very much experience, what he or she would do in a situation like that. It's a kind of a knee jerk kind of reaction. Oh, he says, oh, this is my test. I got to save, you know, all the money possible. And I got to, you know, lay off people, you know. But this is the semiconductor industry and Moore's law means no matter what happens, you know, you're not going to get the job done. What happens, you will always need people. Well, I know, I know. Well, semiconductor industry, but semiconductor industry, people actually think the same way as I described, you know what I mean? They are lay off. They are lay off people too. I had a lot of experience at Texas Instruments. But at Texas Instruments, I was not a CEO. I was just one of the top managers under the CEO level. And when the company decided to have a layoff, these CEO conferred with the top managers who included me. And their first reaction was exactly the same. And I'm talking about the 70s, early 70s. Their first reaction on who to lay off was exactly the same as what our TSMC CEO did in 2009, which was, you know, go by performance. I mean, well, now I was the only one. At Texas Instruments in the early 70s, they said, no, that would not be a credible way of doing it. People would not respect us if we lay off by performance ratings. And why is that? Because it's very subjective. Performance reviews, the performance ratings are done by everyone's own supervisor. So 700 was performing people in the company. And who gave the 700 people the bad ratings? 700 supervisors, you know, very subjective. It's not something that people will respect. If in a year you have to hire people back, you have to hire the laid off people back, then you shouldn't lay off. Because the layoff, the separation expense is usually half a year, about half a year. And it takes at least half a year to train a person. So if you need the people back within a year, you shouldn't lay off. So what did you do when you came back as CEO, both about the employment issue and about the customer issue? You mean customer issue being a video? Yeah. Well, to finish the employment issue, the laid off employees, as I said, there were 700 of them. As I said, there were 700 of them, six or 700 of them. Came to my home to demonstrate and protest. Now, the company, TSMC, was pre-warned that hundreds of people would appear in front of my home. So they notified the police department in my district. So the police department sent 50, 60 police officers to try to maintain the order. Now, more than 100 protesters appeared. And the neighbors, my neighbors, they had trouble getting in and out. That was only the first time. A month or so later, the problem was still not solved. I was still not the CEO. So they appeared again. Some protesters, about 25 of them, decided to spend the night to sleep over in the little park. That's about a block away from my home. My wife literally didn't sleep that night. She would wake up and went over to the window to take a look to see what was going on. But then very early the next morning, my wife, six o'clock, the next morning, my wife got up and she took one of the bodyguards and went to a neighborhood market and got the Chinese style breakfast. Chinese bread, fried bread, I don't know whether you ever had it or not. Probably not. Yeah, yeah. Bunch, you know. So I've been milking and taking enough of the breakfast, enough for 25, 30 people, and back to the park, to the park and distribute them to the protesters. And they were thankful, you know. And they actually decided to not go to the president's palace, president's mansion. And they told my wife that they would not do that that day. And all this kind of precipitated my taking back the CEO job. Well, there's another thing, you know, I told the previous CEO before he laid off the 6, 700 people. I said, if you, because I knew, as I said, I knew that it would be his knee jerk reaction to confront a crisis such as the crisis we had. It would be his knee jerk reaction to lay off. So I said to him, if you want to lay off, bring it to the board. I'll call a special board meeting. And I knew what I would ask the board to do, which was not to grant the permission. But he decided to circumvent that, the CEO, because what he did, he did not consider it to be layoff, you know. It was just punishment for the poor performers. Well, as far as the CEO is concerned, I did keep him. I had more than one nice talk with him. I intended to, and I told him that he was still a potential successor to me. So I kept him at the same job place. We have job place and the same salary and bonus. But he was now the president of new businesses. And back then, you know, we had high hopes for the so-called new businesses, which was solar cells and LED. It's the great irony that your core business of manufacturing integrated circuits ended up becoming the largest market opportunity of all. You didn't need any new businesses. Ended up with the biggest marketing opportunity. Why is it so ironic? Well, it's always interesting to me when companies think, oh, we should look at other new businesses, when in reality, semiconductors became a $600 billion a year market. And, you know, solar is a small fraction of that. LEDs are a small fraction of that. You were already in the best market. I know. And I knew that. I did not really mean. I did not really think that solar or LED would really replace our integrated circuits business. But I knew the integrated circuits business was going to be great, you know. But at that time, which was 2009, at that time, we also thought that solar and LED was going to be very promising. It didn't work out, of course. The solar business could have been pretty good. However, China ruined it. They subsidized the hell out of it. And they now control the business solar cells. The prices were extremely low, still low, still low. So it didn't take off. TSMC servers didn't take off. And LED did not take off either, because LED is not the market. It's not as big as solar. However, it's controlled. The patents are controlled by just a few companies. And they wouldn't let the few companies that control the patents of LED will not let up at all. So a few years later, the CEO that was put on the new businesses decided that his new assignment wasn't working out either. So he quit. And he's now running MediaTek, is that correct? He is now the vice chairman and the CEO of MediaTek. So coming back to this moment in 2009, you offered to rehire anyone who was laid off that was interested in coming back. And you're setting the new vision and strategy as CEO, or in many ways returning to the old one. How did you resolve the NVIDIA dispute? Yeah, in the first four or five weeks after I retook the CEO job, I probably spent almost half of the time on how to resolve the problem with NVIDIA. As far as youths were concerned, we were doing our best because we had to do it anyway. NVIDIA was just one of the customers. Yeah, not just NVIDIA, but Qualcomm and Intel. And it was a very important node, 40 nanometer, was very important node in the progression of Moore's law. Only after 40, can we do the 40 well, can we do the 28, 28 was the next one. And I called the salespeople that were having direct contact with NVIDIA. And of course I called everybody that was somehow involved, somewhat involved in the problem. So it was a matter of money. As far as the progress on the manufacturing lines, we were already doing what we could. I mean, as I just said, it wasn't just for NVIDIA, it's for TSMC. But NVIDIA, because they had borne the brunt of the problem, the damage. So it's a matter of money. I worked on a number. I familiarized myself with all aspects of the problem. And then I worked on a number. And I also knew that NVIDIA's customers were after them, you know, they had demands on NVIDIA too. So I used all the intelligence I could get. And I think it turned out that it was good. So about a month after I retook the CEO job, I sent an email to Jensen. I said, I'm coming to Silicon Valley next week on the state. I will be at your home at 6 o'clock. Let's have just salad and pizza, which was something that we had had many times in the past. Now, immediately, you sent back an email. He said, when do we discuss business then? Did he ask who was going to pay for the pizza and salad? He didn't ask that. So I anticipated that. So I said, 6.30 we'll start having pizza and salad. 8 o'clock shop will go to your office at your home and we'll do discuss business. So on the point of the date, I showed up and we followed a schedule. Exactly, you know, 6.30 I showed up. We had a very present pizza and salad. The thing is that his wife, Lori, would make the salad and the pizza was delivered from outside. Maybe they made their own pizza too, I forgot. Would not surprise me. Anyway, I had had it many times at his home. All right. So at Eau Carte Shop, it was I who looked at the watch and said, Jensen, why don't we go to your study? And I gave him the offer. It was on the order of $100 million, right? Yes, more than 100 million, yeah. And I also said our offer is effective, 48 hours. If you do not, there is not going to be, we are not going to argue, we are not going to bargain. If you don't accept the offer within 48 hours, we will have to go to an arbitrator, which was what he had suggested to the previous CEO anyway, that we will go to the arbitrator. But the previous CEO did not even give him a number, you know. The previous CEO gave him zero. You probably don't want to go to arbitration with your best customer. No, I didn't want to. But I had to say that. And because I mean that number, the number we offered him was arrived at after, as I said, weeks of work on my part. And I thought it was fair to both sides. And did Jensen accept the offer? Yeah, he did within two days. I think it's an amazing example of a situation where you had strong partnership together for many years. You built this close personal relationship such that you could have an hour and a half family dinner and not talk business. You were able to then come up with a large sum of money, over a hundred million dollars, settle. And then since then, there have been many, many, many billions of dollars of business done together. It's a great success of working out your differences. I know. I like that too. That's why I included a story in my all the while. All right, listeners. This is a great time to thank one of our favorite companies here at Acquired. That's S-E-N-T-R-Y, like someone standing guard. Yes, Sentry helps developers debug errors and latency issues, pretty much any software problem and fix them before users get mad. As their homepage puts it, they are considered not bad by over four million software developers. Today we are talking about the way Sentry works with another company in the Acquired universe, Anthropic. Anthropic used to have some older infrastructure monitoring in place, but at their massive scale and complexity, they instead adopted Sentry to help them fix issues faster. Yep, crashes can be a massive problem in AI. If you're running a huge compute job like training a model and one node fails, it can affect hundreds or thousands of servers. Sentry helped them detect bad hardware so they could quickly reject it before causing a cascading problem. Sentry also enabled them to debug massive issues in hours instead of days so they could get back to their training runs. And today, Anthropic relies on Sentry to track exceptions, assign errors, and analyze failures in real time across all of the primary languages used by Anthropic's research teams, including Python, Rust, and C++. According to the Anthropic team, Sentry gives our developers one place that will have all the information they need to debug an issue. And, speaking of AI, Sentry now has an AI debugger called CIR. CIR is an AI agent that taps into all the issue context from Sentry and your codebase to not just guess, but root cause gnarly issues and propose merge ready fixes specific to your application. We're pumped to be working with Sentry. They have an incredible customer list, including not only Anthropic, but CUR server, Cell, Linear, and more. If you want to fix your broken code fast, like over 150,000 other organizations that use Sentry from IndieHobbyus to some of the biggest companies in the world, you can check out sentry.io.acquired. That's sentry.io.acquired and just tell them that Ben and David sent you. Yes, and they are offering two months free to all acquired listeners. Yes. Thank you, Sentry. After the 40 nanometer node, after you fix these problems, as you said, the next node was 28 nanometers. And as we understand your story and the company's story, 28 nanometers is when TSMC really started to take the leadership role at the leading edge in the industry. How did you decide to go commit so hard to 28 nanometers after having had all the problems at 40 nanometers? Well, I had a lot of trouble at TI. My peak job at TI was the head of worldwide semiconductors. TI, of course, had many businesses, defense business, materials and controls, and also their origin, which was geophysical and so on. But TI's semiconductor business was the biggest and I was the head of that worldwide semiconductor business. I wanted, at that time, when I was the head of worldwide semiconductors, our R&D budget was 4.8% of revenue, of our revenue. And I thought it was not enough. I just wanted to raise it to 5.5% of the revenue, but my request was denied, every time I raised it. Now, coming back to TSMC, I wanted to set a number, a percentage of revenue number. So we don't have to argue every year how much R&D we should spend. So at that time, about a time, 2008, 2009, when I came back, I just almost, at that time we were running, I think, 6 or 7% a year. But it was negotiated every year between the R&D director and the CEO. So I wanted to stop that. I wanted to make him an e-synom. He didn't have to argue, he didn't have to request every year. So I almost just literally picked a number out of the head. We've been running 6 or 7% already. So I said, oh, let's pick 8%, okay. 8% regardless of whether there's a recession or not. And that's just 8% of revenue. And that was the best news if you ask our R&D director. Back then, I think, in the second place of R&D, he would tell you, he has told me many times in the last 10, 15 years, that this was really the best thing that we did for R&D. So they were not concerned. The R&D director was not concerned at all about having his planned budget cut back, his planned resource, people allocation cut back, none of that. So he's been working 8% and so has been like that. And that is what propelled our R&D efforts. In this period in 2010, it wasn't just ramping the R&D budget. It was also the capital expenditures. You had had almost a decade of 2 to 2.5 billion spent building the fabs every year. And in 2010, you ramped that to almost 6 billion. What was it about the competitive environment, the 28 nanometer node that caused you to push all your chips in on that? Yeah, I think it was a kind of a mutual feeling thing. As I settled the R&D budget at 8% of revenue to the satisfaction of the R&D people, they began to have big ideas. They began to be telling me, our 28 is going to be the term they used and they have used it several times. But the first term, the first time I heard them using it is the 28. The 28 is going to be the sweet spot. It's just like tennis racket, you know. You hit the ball with a sweet spot of your racket. I have played tennis, not well. Good. I was like you, you know. Like 40 years ago, I was like you. I don't play anymore. But I know the feeling of hitting the ball in the sweet spot. 28 nanometer is the sweet spot. And so I said, why? He gave me a lot of technical reasons. 29 nanometer. So I decided I would believe him. And he now had the resources to push it, to do it as fast as he could. So, you know, now the capital spending. Now, of course, back then we had already built up pretty good infrastructure, organizational infrastructure. We had a pretty good market forecasting group. And I had set up the business development department, which was like a marketing department. You know, we always had a pretty strong sales effort. But to me, sales effort is just the tactical side with the customers. Marketing is the strategic side to the outside world. Now, from all these inputs, the marketing, the business development department, which, as I said, was our strategic marketing group. And from the technical, from the R&D side, that 28 was going to be the sweet spot. I decided that, and I polled to Shakespeare in my autobiography, that there's a tide in the affairs of man, which taken at its foot, leads on to fortune. I decided that this was 28 nanometer was going to be our tide. Our next tide anyway. There will be others, seven nanometer. Another was the next sweet spot the R&D people told me. And again, you know, reminded myself of Shakespeare, you know. Taking at the flood. Taking at the flood, yeah. So, I mean, that talks about however, you know, I'm setting the R&D at 8% of, did not invite any R&D. I'm setting the R&D at 8% of our position from the board. But suddenly, increasing capital spending threefold, I think, did invite a lot of questions from the board. Our practice in the board meetings, because back then, even now, most of the directors are from overseas, US and England. And we would email the agenda to them two weeks before the board meeting. Then the night before the board meeting, I would invite the independent directors to dinner. And that dinner, the conversation at that dinner was not on record. So, the independent directors actually, more than three quarters of our directors were independent directors. Anyway, so in the night before and the evening before the meeting, they had the opportunity to ask me questions if they had any. But on this matter of vastly increased capital spending, they didn't even wait until they got to that dinner. Because this was effectively betting a huge amount of the company's cash on this node, this process, this generation. Yeah. And so they called the general counsel. The general counsel is also the secretary to the board. They called him at that time, he was an American, the general counsel, was an American. And so we want to talk to the chairman. We don't like this idea at all. Anyway, so I talked with them on the phone about a week or so before the board meeting. And all right, you know, this is something that, of course, I told them what I have now just told you. Impulse from market forecast, inputs from our R&D, inputs from our business development, the new business development department. And of course, you know, they didn't believe it. You really can't convince anybody on something like this. So at the end, I had to say, well, look, I heard you, but I am still the guy that's responsible for the operation of the company. So you need to let me go ahead with this one. So they were satisfied with that. And what was the result? What happened around this era of 28 nanometer that created so much demand? I think that was good. And that was the smartphone era coincided with 28 nanometer. When the business development group was looking at this and you were looking at this, did you see how big smartphones were going to become and the immense opportunity that that would unlock for you? No, I didn't. Maybe the business development department, that was another interesting story. Yeah, maybe he knew. Maybe he, or at least I now hope. And I, of course, hoped at that time, too, that he had a more detailed visibility than I did. But I, I mean, of course, this was not the only, it was not the only input. I had a few other advisors, too. So that takes us to Apple. Could you share with us how you end up meeting Apple? Yeah. Yeah. But before we, before we do that, let me offer how we made CC, actually, the business development director. The current CEO? The current CEO, the current chairman and CEO. Yeah. When Rick was the CEO between 2005 and 2009, he had split operations into two groups, advanced technology and mainstream technology. And CC was the head of the mainstream. Actually, really, I should say the lesser one. Mark Liu was the head of the advanced. And each group had a small business development section, maybe 30 or 40 people each. All right. So I came back to be the CEO. And I, I never thought the spread of two groups was a good idea anyway. In fact, back in 1996, the president, he was not a CEO, but he was a president. We didn't have the CEO title back in 1996. But the president, who was that American? Don Brooks. Right. He wanted to split. I think he got a little tired of running this company. He was going to be here for only a year at first, but he winded up, he ended up spending six, seven years in Taiwan. Towards the end, he was getting a little tired of running this thing. And he thought that he would do it like TI, for instance. When TI had a Germanium transition department, silicon transition department, and individual circuits, bipolar individual circuits, MOS individual circuits. It's the divisional org structure instead of a functional org structure. Right. Right. Yeah. But I really did not think that the foundry business, TSM systems, was suitable for the divisional structure. Because you know, we have almost the same group of customers. How do you divide up the company if you want the so-called divisional structure? Well, you know, Don Brooks was going to divide it by fab. My goodness, the customers move from one fab to another, the same customers. Not to mention TSMC has 21, 22 fabs now. And so what are you going to have 22 divisions? Of course, you only have three or four fabs back then. But he was not convinced. He kept arguing. And I said, look, why don't we get a consultant? McKinsey. McKinsey. So we got McKinsey and McKinsey after a month or two, two months actually. And a couple of million dollars, I guess. Well, told us the same answer. You know, that functional is best. And then Don Brooks said, well, tell me one company, one big company that's functionalized. And McKinsey immediately answered Boeing, which is a good answer, you know. Except it's not true. Boeing has commercial and government. Well, they probably have commercial and government, but they don't have 707, 747, 757, you know, they don't have, they don't divide. And if we divide up by fab, it would be like dividing up 707 from 757, 737, you know. Well, anyway, Don Brooks attempt was in 1996. And well, by 2005, Rick Tsai, you know, decided to check the same ground. And he did. This time, you know, I didn't, I didn't stop him. My idea, my principle, when I was the chairman and not the CEO was, well, sometimes you have to let the CEO make his own mistakes and learn from them, you know. Of course, not if the whole company is going down the drain. So you, you have to interfere then, but only then. Well, anyway, so that was the background. Now, two groups, when I came back to be the CEO, the advanced group and mainstream group. And each group had a small business development section, 30 or 40 people. I think advanced has had more, a bigger group than mainstream. All right. So I wanted to combine the two operation groups and also wanted a real marketing. And I didn't call it marketing because I decided to use business development in English because it has a good translation in Chinese. All right. Now I've decided to combine the two groups, operation groups. Now, back in 2009, when I decided to combine the two groups, I think the advanced group had something like 10,000 employees. And the mainstream group had a little less, but also 7,000, 8,000 employees. And the mainstream group, just because we haven't explained this concept yet, is taking those older fabs that have the higher nanometer nodes and they're finding customers that don't necessarily need the leading edge to automotive parts or its CMOS sensors for cameras. And finding customers to keep the utilization high on those older fabs from previous generations. Yeah, right. But also, quite often the same customers use both mainstream and advanced technologies. Take Qualcomm, I'm quite sure that they use the most advanced or even Apple, I think they use. Yeah, if you think about all the chips in an iPhone, the A16 Pro is built on the leading edge, but there are many, many other chips in there. Yeah, right. So you combine to one business development organization, AD-ish people. Yeah, we had Mark Liu in charge of the advanced and C.C. Wei in charge of the advanced. The question is, who's could be in charge of what? The combined. Or you need only one for the combined operations. You need only one person. The truth is that we had a lot of operational talents. Operational talent means manufacturing and developing technology from R&D and converting it into mass production. We had a lot of talents there. But business development or marketing there, and neither Mark nor C.C. had any real previous experience in marketing business development. So that was my main worry. We need, we combine the two groups, we need a combined operations manager. But even more importantly in my mind, we needed a combined market business development manager. So I first offered the marketing business development job to the guy who was in the bigger job, advanced technology, Mark. And I explained to him that I did not think he had had any significant marketing experience in the past. And this would, this new job, if he takes it, would give him the opportunity of being a profession in that area. But he declined it. He declined it. He said, my goodness, I have 10,000 people reporting to me now. You want me to take a job that has only 60, 70 people in it? That was the end of that conversation. And your goal was for him to become a well-rounded executive in hopes of leading the company after he sort of did that tour of duty. And I explained to him that. Not to mention it's a very important 60 or 70 people. They're responsible for finding all the next business. I know. Actually, back in my mind, I was thinking of the time when Kissinger was Nixon's national security advisor and somebody else whose name I have even forgotten was the Secretary of State. And Kissinger probably had a couple hundred people reporting to him, whereas the Secretary of State had thousands of people all over the world reporting to him and who had more power, Kissinger. Certainly not the name you've forgotten. And before this period, you were doing the business development and marketing for the company, right? You were the one finding the NVIDIAs, the Jensons, the Broadcoms, the next great customers and great markets for you. I was. You were always on a plane meeting with the current top 15 customers and trying to find the next top 15. Yeah, except for those four years when I was not the CEO. Yeah, but you were right. I was on the plane most of the time visiting customers. That was my pleasure. I really liked it. Well, anyway. So I then of course offered the business development job to CC. And he accepted it. I mean, I thought he accepted it even delightfully, you know. Yeah. And he's now the chairman and CEO of TSMC. Yeah. So this had just happened and you came home from a board meeting. We understand one evening. That's right. The board meeting had ended and it was six o'clock or later and I went home. This was Taipei. We had our board meetings back at that time in fact here. You have seen my conference room. Yes, across the hall. Yeah, right. Yeah, we had all our board meetings in Taipei in that conference room. Anyway, it was 6.30 also when I got home and I think my wife knew that I would not be home until around 6.30. Because as soon as I actually she met me at the door, which wasn't very often, you know. But this time she has something to tell me. That's why she met me at the door. She said, Terrigau calling the afternoon and said he was coming to dinner. And who is Terrigau for listeners? Terrigau is a relative, is actually a second cousin of Sophie's. Sophie's is my wife. And they share the same grandparents. That's what makes them second cousins, I think. And for our Western listeners who this won't be obvious to Terrigau is the founder and CEO of Foxconn. Right, Terrigau is a second cousin of Sophie's and he was also at that time the chairman of... Honhai, which... Honhai, Honhai. Foxconn to American listeners. The name slipped my mind for a second. Honhai, which is a very important supplier to Apple. And a pretty big company. And in fact, Terrigau is reputed to be one of the richest men in Taiwan. And she said, Sophie is lovely. But she doesn't know too much of my business. I don't think she understood the significance of Terrigau coming to dinner, bringing a vice president from Apple. I don't think she quite understood, quite really. She wasn't really interested either in the significance of that. And you had been trying for months strategizing with the business development team, how do we go win Apple's business? The smart... The iPhone seems to be working. Yeah, I mean, strategizing... Well, strategizing is probably too strong a word. I mean, just thinking. Thinking of also knowing that we just can't do anything about it. Apple is a very close-mouthed company. If you try to talk to them, if you offer your service, they will just tell you to go away. They will come to see you when they are ready. That's what I knew about Apple, even then. And I know the same thing now. Alright, so it was at 8 o'clock. Now Sophie did know that I would not be home until after 6 o'clock. So she had told Terry that and Terry had set the time of arrival, of their arrival at 8 o'clock. So 8 o'clock was a bit late for my dinner, but I said, what the heck, we're waiting. So they showed up. I didn't ask her. Sophie just said, a vice president. And I just thought to myself, it wouldn't be just an ordinary vice president. Because there was no reason for Terry to just bring any Apple vice president to my home. But then there must be something special. There must be someone special for TSMC. Alright, so Jeff Williams came. He was not just a vice president, he was the chief operating officer of Apple. And Jeff was a pretty straightforward person. He didn't spend much time in ordinary chit chats. There wasn't the same pizza and salad period before? It wasn't formal either. My wife Sophie just added, we had a cook. And pretty good cook. Sophie just told the cook to add a few dishes. She's a Chinese cook. She doesn't do any Western food. And Terry obviously, she grew up on Chinese food. And I would imagine that the Apple guy that he brought would also like Chinese food. Anyway, so she just asked the cook to cook a few more dishes. But it wasn't important. The food was not important. Either the quantity or the quality was not important. Because Jeff almost immediately started his pitch. Almost as soon as he sat down to dinner. And what is the pitch from someone like Jeff Williams like? We would like you to found your own way. Something like that. I mean, so I listened. That night, I think Jeff talked maybe 80%. And I talked 20%. And I was like, I'm not going to talk about it. I'm not going to talk about it. I'm not going to talk about it. I thought 20%. If you don't count the relative to relative talk between Sophie and Terry, you know, which was not very much, either. And Jeff had proposed economic terms at this first dinner, right? No, nothing so concrete. and Crete. He just said that we would let you have 40% of those margin. I didn't say anything. I didn't answer him. I didn't respond to that. But our margin at that time was already 45%. And I was trying to put it up to 50%. It was an announced effort in the company to push the growth margin. And I had that effort for many years after I came back to be the CEO. And I really didn't even succeed even at my retirement. Now, of course, what happened later was that there was COVID and so on. And also, we began to have leadership, technology leadership. So our margin jumped up to over 50%. But when I retired, it was still short of 50%. Slightly short of 50%. I was almost there when I retired. And in technology leadership, you're saying that around this time, the 28 nanometer node, talking about 2010. Yes, you were still among a select few at the leading edge, but there was fierce competition. Whereas once you got to seven nanometers or so, that's when you really are neglecting. I think when you said that, you were neglecting Intel. Okay. Yeah. At 28 nanometers, we were very definitely the leader among boundaries. Yeah. And maybe among a few other companies such as Texas Instruments and so on, but not Intel. Okay. And Apple was considering Intel? No, Apple was not actively considering Intel. That came later. Later. But I'm quite sure we'll have time to cover that. We'll take us there now. So after November of 2010, you had the initial conversation with Jeff Williams. Yeah. He said that he would let us 40%. And my thought was, my goodness, we're already at 45%. But I also thought that he was trying to be generous when he said that he would let us have 40%. And I also thought to myself, well, now it's not this dinner. It's not the time to go into a pricing discussion. We have a lot of other things to discuss. Anyway, so I said, no, we were about to go into production. We were almost in production with 28 nanometers at that time. The initial stage anyway, 28. So I said, I thought it was going to be 28. 28. No. What node do you want? 20, he said. Now, that was a surprise to me. And frankly, it was also a disappointment because the most law of progression after 28 was going to be 16. Now, Apple, Jeff Williams wanted a 20. A half step. A half step. But a half step is a detour. You know, you, we had to, we would have to, my thought at the dinner there was that we would have to spend effort on the 20, which of course would help us on the natural next node, which was 16. But still, it was a detour from 28. From 28, if we could go directly to, if R&D would directly go to 16, it would be less time than the first new 20. And the point is that back then, R&D did not have enough resources to do two nodes at the same time. Later, we did. Later, we did. So you have this conundrum where this is right after you had just spent $6 billion in CapEx the previous year going all in on 28 nanometers. You're asking Apple, which could be your biggest customer ever. This is for 28, right? And you hear back, no, we want you to go do something that you're not planning on spending any money on and have this huge distraction. And you're, of course, left with this question, is it worth it to land Apple as a customer? It wasn't that serious. It wasn't that serious. Because when we figured a very big market for 28, and therefore, when we planned to increase vastly our capital spending, we didn't have Apple in mind. We didn't include Apple. Apple came strictly as a present surprise. Anyway, for the company in total, but not for 28. We didn't include Apple in our 28 planning. But it's still the question of, are you willing to go do this huge distraction and spend on the order of $10 billion over the next few years doing 20 nanometer for Apple when you weren't planning on doing 20 nanometer at all? That's right. That is where our connection with Goldman Sachs came in. Remember, I printed a lot of seeds in when I ran TSMC. I knew that one of these days, we'll probably need top level investment bank advice. So we established a good relationship with Goldman Sachs very early in our existence. I was in fact a board director of Goldman Sachs. Did you know that? Yeah. We did the ADR with Goldman Sachs, which opened up a good relationship with Goldman Sachs. It was your New York public listing of the stock? Yeah, ADR is American deposit receipts. It's New York. It's a separate market. In fact, when now the TSMC price, ADR price, has a 20% premium over... Really? Yeah. However, you need TSMC board permission to convert your shares to ADR. Otherwise, you'd be able to arbitrage? Yeah. We don't want that. So as I said, as I was saying, the board has to approve any conversion of ordinary Taiwan TSMC stock to ADR. And the board does not give such permission easily anyway. Yeah. So you had planted this seed with Goldman Sachs when you knew you would need them? Right. This was very early in our history. Now we need funds. This Apple thing came after we had already decided to increase capital spending. Now Apple requires even more capital spending. We have to figure out where the cash is going to come from. Yeah. So there were several possibilities, of course. We're paying a dividend, not a big dividend back then, but a modest dividend. We could cut that dividend. And then we also could sell stock, new stock offering, either in Taiwan or in the US. We have the ADRs. Or we can borrow money, corporate bonds. Or you could only fill part of Apple's order. Right. And in fact, we did that. We first did our financial planning. And we decided not to cut dividend. We decided not to sell new stock. We decided to just borrow. And this was also with consultation with Goldman Sachs. We chose borrowing. How much? I looked at the numbers. And just as you said, I decided to take half of what Apple said. What Apple said they needed. Is this common, by the way? It seems like it would be in a customer's interest to come to you and say, I need to buy zillions of chips from you. I need all your wafers because they have no skin in the game of you spending all the money. I know. Well, back in the 90s, in the first, let's say, 15 years, 12, 15 years of our existence, we were short of capacity almost all the time. And what you just said happened all the time. And so we figured out that we'll require a deposit from the customer and we'll even confiscate the deposit. If the time comes for him to take the wafers and he doesn't. And everybody delights in the word confiscate. It was first used by me. I told the salespeople in San Jose, I said, tell the customer that we need a deposit from them because, you know, just as you said, it's our money and it's only their words, you know, they may not want the wafers when the time comes. And I told the salesman, tell the customer they will confiscate the deposit. And the salesman never heard anything like that before. And so they were uproar in happiness. Now, you know, they could actually stand up and tell the customer that we might even confiscate your money. But of course, it really, we never confiscated any money. Now, it did happen quite often, particularly in the 2000s. 2000, we had, I think it was called an internet recession, I think, yeah, because in internet was, you know, people were starting companies called pets.com or something, you know. Anyway, so we had the recession. Which trickled all the way back to semiconductors. TSMC's revenues, it was four years after the dotcom bubble before they were back at the dotcom. Yeah, dotcom. At those rates. Yeah. It was almost four years. I remember it recovered only in 2003. It started in 2000, no, starting 2001, the first quarter of 2001, and it recovered in the third quarter of 2003. So it was three years. Yeah, three years. 01, 02, the third, fourth quarter of 2003. Three years. Anyway, the customer, quite a few customers had placed deposits to anticipate normal, good times during those years. And we did build the plant. In fact, we bought, we purchased, or I should say, yeah, we bought a couple of other companies. And so their plants, their faps became ours. And the customer didn't need the wafers anymore, didn't need the outputs of those faps anymore. And we didn't confiscate their deposits, but we let them delay, you know, demand. Yeah, right. And eventually, every one of them, they all used their, used up their deposits. But, you know, that would come, you know. And so then back to, at this point, early 2011 with Apple, you go to them and say, we are prepared to serve half the number that you told us. First, of course, the new, or rather the new Business Development Director, C.C., he had the privilege of first telling the lower level purchasing people at Apple. And he got, he got a response back, you must be crazy, you know. So C.C. did not comment on that. C.C. said he didn't comment, that he brought it back to me. And then I went to Apple, myself, and talked to Jeff Williams. So I said to him, we have to issue corporate bonds. I think I used the word prudent. After all the prudent financial planning, we decided that we would take half of what you asked for. Now, he was very, very quiet about it. He only made one suggestion. He said, well, I think you can eliminate your dividend, you know, your shareholders who understand that. I said, well, no, I don't think, well, the fact is I looked into that. I mean, that's also a reason for, you know, having high level consulting advice. About one-third of our investors, shareholders, are very seriously interested in the dividends. So if we do what Jeff Williams said, our stock is going to drop like hell, you know. Trigger a sell-off. Right. Anyway, but when I talked to Jeff Williams, and I went to see him in what's the place? Cupertino. Yeah, Cupertino. I mean, he was talking fairly willingly, you know. No big problem at all. The only suggestion that he made was the elimination of dividend, you know, and I said, no. And he then let it just lie there, you know. Okay. But then the issue will settle. I mean, how much demand do we take and how we will get. We still had to borrow billions of dollars, even with the half of the demand. All right, listeners. Now is a great time to thank a new friend of the show that we are very excited about, Sierra. Yes, we are thrilled to be working with Brett, Clay, and the entire team over there. 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So this really was, especially after the investment in 28 nanometers that depleted your reserves, this is a bet the company move. You're taking on a bunch of debt to go build the fabs to make this happen. But yeah, I know, better company, but I didn't think I would lose. You sound like Jensen. We sound like exactly what Jensen said. And so, all right, but I think that the financial discussion with Apple had already happened when Apple, when Jeff Williams called me in February of two, we're talking about two, 11 now and then. And he said, it was a very short conversation. He said, we need to pause our discussions for two months because the highest level of Intel has approached Tim Cook and has asked Tim Cook to consider Intel. And at this time, Intel was the major supplier for all Macs. Apple's Mac line was all Intel. Yeah. That wasn't an issue, of course. In February of two, 11, Jeff Williams was talking about the iPhone. But they had a close existing relationship. Yeah. I don't know what relationship they really have. Well, it must be close. So, that was all he said. And I wasn't all that worried because in 2011, Intel was no longer a name that you would, when you hear it, you would stand up and bow. Interesting. I mean, heck, in the 90s, in the late 20th century, they were a name in semiconductors. When you hear it, of course, I'm exaggerating the situation. Moore's Law, I mean, they're Intel. Yeah, Intel. If you hear the name, if you hear the name, you would be trembling with fear. I mean, this is why you started TSMC as a pure play foundry business, because you didn't want to compete head to head. You said we should not be an integrated design manufacturer of the design of the chips and the manufacturing. We have to compete on a different vector because we'll never catch Intel. I didn't probably say that we never catch Intel. Fair enough. Look where we are in 2025. Okay. Yeah. Anyway, so I, of course, had to accept Jeff Williams' request. All right. But again, as I just told you, I wasn't all that worried because by reviewing my mind or the characteristics that Apple is looking for in a supplier technology, at that time, we thought we were almost a part with Intel, almost. In fact, I thought we were, I think I thought we were a part with Intel at that time. Manufacturing, I thought we were better than Intel. And customer trust, we thought that our customers trusted us more than Intel's customers trusted Intel. So I will do it. But then indeed, and I also thought that when Jeff Williams told me the highest level of Intel, I thought he was talking about somebody like Andy Grove, who was retired, of course, but it turned out that he was only talking about the CEO of Intel at that time. Yeah. But I knew that only later. Would that have been Bob Swan or Paul Adelini? No, it was the Italian guy. Otellini. Paul Adelini. Got it. So today Intel doesn't make the chips in the iPhone. What happened? And in fact, TSMC makes all of Apple's chips. All right. I wasn't too worried, but I still was in my mind. So a month passed. I think it was about the middle of February when Jeff called to tell me to pause for two months. So almost exactly a month later, March, middle of March sometime, I decided that I would pay them a visit and ask them what's going on, you know, any progress. So I emailed Jeff and asked for an appointment. I said I was coming to these Silicon Valley anyway, which was pretty normal. And I would stop in at your place on such and such a day. Is that okay? And Jeff replied by saying that, yeah, come here, but I won't be here. I have asked Tim Cook to see you. I mean, this freedom, Jeff's freedom of delegating his boss to see a visitor, it was a privilege that I seldom had in my career, you know. Yeah, normally someone says someone on my team will see you, not my boss will see you. I know, I know it was usually that way. It was usually the other way. But in this case, it was Jeff's. Well, anyway, so I showed up and Tim was very nice to me and took me to lunch to the cafeteria, I guess, where there was a lot of food. We each picked our food and carried our tray back to his office, you know. And anyway, he told me there's nothing to worry about, because Intel just does not know how to be a foundry. That's very short, but a very satisfactory answer to me. Yeah. What is your interpretation of the meaning behind that statement? I was explaining to you, you know, we had on technology or manufacturing. Subconsciously, I think I interpreted Jeff's explanation to me to be the third one, customer trust, you know. I mean, they were always very superior, you know, Intel. Before this Apple thing, Apple and we, before Apple became our customer, I knew a lot of Intel's customers in Taiwan. You know, all the PC makers are Intel's customers. They, none of them liked Intel. No, no, no. Intel always acted like they were the only guy. I mean, they were the only guy, you know, for the microprocessors. And that's for their microprocessor business, but here we're talking about the foundry business, where TSMC at their extreme core does not compete with customers. And even if Intel is trying to do business in good faith, they do have the conflict where they also design ships, which is competing with Apple's chip designers or Nvidia's chip designers or any other. Yeah, but I really don't think Tim meant that. I think Tim meant that the customer asked a lot of things. We have learned to respond to every request. Some of them were crazy. Some of them were irrational. We had to respond to each request courteously, which we do, you know. Intel has never done that. Intel, I mean, I said I knew a lot of customers of Intel's here in Taiwan. And none of them, they all wished that there were another supplier. Yeah, none of them either trusted Intel or liked Intel. So to finish the Apple story, the short answer is it worked on 20 nanometer. Were there any trade-offs where did pursuing 20 nanometer and spending the billions of dollars cost TSMC in any way? Well, it might have cost, but yeah, the story certainly does not end here. All right, so I mean, there was pricing. Everything was not easy. Pricing and Jeff came himself. And we talked about pricing. And we, of course, we had done our homework also on the cost and what kind of price we would accept. But Jeff came and he told us just a number, you know. Well, he gave us his reasoning. He had to make his component costs meet the certain goal also. But anyway, that was settled. And Jeff said, ah, and when the pricing was settled, I said, let's go out to dinner. Go to a Taipei three star restaurant for dinner. And Jeff jokingly said, ah, if you didn't like the pricing, we will probably be going to McDonald's. Which was never in my mind, but he said that. Could you tell us a little more about what goes into considerations around pricing? I imagine things like the yields you think you'll be able to get hugely impacts that. Sure. The cost, yeah. But the main thing that goes into pricing, of course, is the cost. And then the second thing is, of course, whether your desired price will be accepted by the customer. One thing that has occurred to me is TSMC now gets mid 50% gross margins called 55, 57, higher than your time. But many of your customers have 70, 80% gross margins. Yeah. TSMC is creating a lot of value. The designer is creating a lot of value. How do you sort of sort out who gets to capture the value? Well, I don't get the privilege of sorting it out now. CC way, I think, has the pressure and the duty of sorting that out. Well, I mean, as a general principle, you know, you try to find a kind of middle ground, which is different for every CEO. Even though every CEO who wants to protect his reputation, every CEO says, ah, I worry about a long range, but in truth, not everyone does. So it's a very personal how to sort these things out. I think it's a very personal issue. Now, for a lot of CEOs, there's really no choice. You have to, as a supplier, you have to accept a certain price. If it's a commodity, particularly, you know, we have not finished with Apple yet. Please. Let's finish Apple. Yeah. Now, I think you were asking whether there was any trade-offs. Trade-offs. Well, the trade-off, there was a pretty significant, serious trade-off. And that was the detour that I said, you know, we took. At that time, back in the 2011, 2012 time, our R&D was not strong enough to do two notes at the same time. Now we are, but back then we weren't. So the trade-off of accepting the 20-note technology was that we delayed our 16-note development. And then Samsung came up with the 16. They had lost 20 business, you know. So they were ahead of us in the 16-nanometer development. Because they got to skip 20. Yeah, they didn't get 20. Okay. They need to develop 20. So I got a shock. I mean, it was a real shock when I heard that Apple had placed their first orders of 16 with Samsung. Now that was a real shock. We invested so much, even though we took only half of their original demand, it was still tens of billions of dollars, I think. And we were counting on it being at least 80, 90% of the equipment being converted to 16. And now, if Apple went to Samsung for the 16, where did that leave us? Do you understand what I'm saying? Sounds horrible. I would feel like I got tricked. Well, I wouldn't say that, okay. But I was really shocked. So I emailed Jeff Williams right away. And I said, you know, we invested in all these equipment and we were counting on you to take the 16 from us. But now, you know, we found out you were buying 16 at the first six years anyway from Samsung. So Jeff replied immediately, don't worry. I'll be here. I'll be there. I'll be in Sincere next week and explain to you. So that made me, that relieved me a little, but certainly not completely. But next week, he did show up and he explained to us, he said, well, you know, as soon as you're ready with your 16, we'll buy from you. We'll buy all the needs from you when you're ready. Now, of course, that completely relieves me because that's what we're supposed to do anyway, you know. So indeed, what he said was true. We developed, we had our own 16 about a half a year later. And most of Apple's 16 nanometer requirements still belong to us. Most, yeah. I can imagine the shock that you must have had. At the same time, this also again, just illustrates the brilliance of TSMC and the pure play foundry business model. Samsung is Apple's chief competitor. Yeah. I know. I know it was, I said in the autobiography, you know, me sitting in Sintu, being in the foundry business, I actually see a lot of things before they actually happen. So let me tell you the IBM Qualcomm story. Yeah, please. Now, Qualcomm, we consider Qualcomm to be a prime candidate to be our customer. We really wanted Qualcomm because we knew the way, the technology house. What year was this? This was way back, you know, when we started in the 90s anyway. Yeah. And they were part of that initial wave of fabulous companies? Yes. They started, Erwin Jacobs started Qualcomm actually before I started TSMC. TSMC started in 87. Qualcomm, I think, was a few years before that. Yeah. So we, in the 90s, early 90s, all the way up to 97, maybe, 96, 97, all the way up to the latter part of the 90s. We wanted Qualcomm to be a customer. And, you know, I saw their operations VP. That's what they call, that's what our customers call their purchasing people. Operations VP, operations senior VP. And I saw, I saw him often and he was always pretty polite. He gave us very little business. And I also knew that his foundry, his main foundry was IBM. And now, sometime in the later 90s, I forgot whether it was 97 or 98, suddenly, he started, he first, he started to tell me that he would use us now. He didn't even tell me who our competitor was, who our competitor had been. But I kind of knew that it was IBM from other sources of intelligence. And our business with Qualcomm, the business that Qualcomm gave us, pretty rapidly increased after that, after 97, 98 period. So, I immediately knew that IBM semiconductor was in trouble. Because, I mean, they had their own fabs and so on. But their main business was really supplying to Qualcomm and a few other very small companies, very small, fabulous companies. So, I immediately knew IBM was in trouble because they were losing Qualcomm. All right. So, the next step that IBM took was not a surprise to me. The next step they took was to ask us, TSMC, to co-develop the next generation of technology, which is 0.13 micron, 130 nanometer in 1999. And since I anticipated that, it was no problem at all for us to refuse the, and in fact, even if I didn't anticipate that, we would never, never have accepted that kind of a co-develop. I mean, IBM was still, they still consider themselves to be the senior partner in any partnership they established, the senior partner. So, we were, the company that co-developed something with them, was sent its engineers to IBM, you know. And when we do that, we lose our ability to develop our own process. We'll have to depend on this co-development thing. And the co-development thing is going to have a lot of difficulties, you know. Heck, you know. Our people, you know, we're being a different culture. So, we declined without having to think about it at all. We declined to the IBM. And IBM, in fact, was quite angry, you know. I mean, they thought we were still a small Taiwan, backward place, you know, Taiwan company, and they are big IBM. So, they immediately went to UMC. And UMC accepted them, only to regret seriously their acceptance a few years later. And UMC, at that point in time, was it fair to call it a peer of TSMC here in Taiwan, in terms of volume and size? Not by 1999. They were already smaller? Smaller. They were smaller already, yeah. That's what I meant when I said that sitting here at Foundry, I mean, I can see some things that, like this IBM thing. This might be a good time to go back to the learning curve, speaking about the importance of owning your own technology and process at the leading edge and controlling your own destiny. You developed the learning curve. I really did not develop. I certainly did not initiate it. I think I had a role at TI. I had a role in refining it to the point where a semiconductor company can use it effectively. That's my role. Yeah. So, how would you explain it to a novice? Well, explaining the learning curve theory is simple, but one will be foolish if one just takes the simple explanation and thinks that that's all it is. The simple explanation of learning curve is that as you make more of one thing, anything, actually started with refrigerators and cars, you know. If a company makes more cars, then its cost per car, unit cost, goes down. That's why it's also called experience curve. You gain more experience, you become more efficient. That's a simple explanation. But if one just takes that simple explanation and thinks that's all it is about, then you really haven't learned anything. All right. Anyway, the learning curve. Well, Bruce Anderson, who is now considered the father of strategies. Founded Boston Consulting Group. Yeah. He was the founder of Boston Consulting Group. Now, there's a branch in business economics that's called competitive strategy or something. Competitive strategy, I guess. And Michael Porter was at one time considered a big figure in this competitive strategy. I mean, he wrote three or four books, big books, 700 pages. I have all of them. His original competitive strategy memo, I think it's like 20 pages, is still some of the best business writing ever. Just Michael Porter. Who was a director of TSC at one point, right? Yeah. I had a story about him in my autobiography, which because of time, we probably won't go into not Michael Porter. But Bruce Anderson, we will talk about him. He is now considered to be the father of the competitive strategy. He came to Texas Influence one day in, I think, around 1970. I should say he first called the TI CEO, Mark Shepard, and told him that he had founded a Boston Consulting Group. And we have a B, C, G, has an experience curve theory that would benefit semiconductor industry. And TI was the largest company in the semiconductor industry then. And with Mark Shepard, like a presentation of this theory, the Mark Shepard said, yes. So, Bruce Anderson brought Bill Bain. You probably know that name. And with him, and came to Dallas and made a presentation. And Mark Shepard invited the CEO, the COO, and me to attend the presentation. And it was a very eloquent presentation, because Bruce Anderson was a very eloquent man. And Bill Bain was on the side, apparently, Bruce Anderson's potency. Anyway, Mark Shepard was impressed. And he decided that TI would work with B, C, G on this learning curve theory. And Bruce Anderson then assigned Bill Bain to work, most of the time, at TI. Most of my, like, three days a week. And Mark Shepard assigned me as TI's guy. So Bill Bain and I became partners. And I assigned Bill Bain a small office very close to my office at TI in the same building and small office, because he needed a lot of things from me. He needed permission to get our costs, our prices, with a lot of families in the great circuits and transistors. I mean, he had a lot of requests. So it was easier if he was nearby. And every time when he arrived at some interesting, useful conclusions, she would also discuss them with me. So we had a very present association for, I would think, two years, maybe even more. And he would, you know, fly to Dallas every Monday and go back to Boston either Wednesday night or Thursday night. And of course, every time he went back to Boston, it would be to tell Bruce Anderson what he had done that week. So this happened. This went on for, I think, two years. And then finally, Bill Bain came to see me one day. And it was in those two years that I absorbed a lot of learning curve stuff, which I used up to now. I found that highly fruitful, just as they're thinking too. Yeah. It seems so fundamental to the industry that you want to get through the low volume period as fast as you can. Ideally, you spend no time in the low volume period. And it seems like over time, all the returns in the industry, the winner is the one with all the volume because they'll just have the lowest prices. And there's a flywheel where once you have the lowest prices, you get all the business, then you can reinvest that in the next node. I couldn't have told you that TSMC was going to be the winner. But once you internalize the learning curve and globalization, you can sort of into it that in the future, there will be one winner in semiconductor manufacturing. But one day after a couple of years, Bill Bain came to me in Dallas and said, you are the first one I tell this to outside the Boston Consulting Group. I am leaving Boston Consulting Group to start my own consulting company. So I said, why? I said, you know, obviously Bruce Henderson thinks very highly of you. And Bill Bain said, yes, but there is the world's imperative. That's the first time I heard that term, you know, world's imperative. He meant for him personally? Yeah, for him personally. Oh, anyway, that was that. Okay, listeners, now is a great time to tell you about a new friend of the show. We are very excited about WorkOS. Yes, WorkOS is the enterprise-ready platform used by OpenAI, Cursor, Perplexity, Vercel, Plaid, and literally hundreds of other winning companies. So what are all these companies using WorkOS for? Imagine you're a fast-growing startup, you've got product market fit, and you're getting inbound interest from big enterprise customers. Very exciting. But then they send you their security questionnaire. Yep. And it's like 47 pages long with requirements that kind of sound like alphabet soup. Do you support SAML2.0? Can you integrate with our Okta? Do you have skim provisioning SCIM? What about RBAC? And you're thinking, I have no idea what these acronyms even mean, let alone how to implement them. So here's the thing, these are not nice to haves. These are deal blockers. Without SSO, without skim, without RBAC, without audit logs, you simply cannot close enterprise deals, period. But none of these features make your core product better. They don't make your beer taste better to use our favorite analogy here on acquired. So if you're building like a design tool, spending six months building SAML authentication doesn't make your design tool more powerful. So this is where WorkOS comes in. They've built Stripe 4 Enterprise features. WorkOS turns enterprise authentication requirements into drop-in APIs, abstracting away as much unnecessary complexity as possible. So instead of your team spending months reading SAML specs, you can implement Enterprise SSO in minutes. WorkOS handles user provisioning, permissions, audit logs, all the checkbox items that Enterprise IT requires. So whether you are a seed stage company trying to land your first enterprise customer or already big and expanding globally, WorkOS is the fastest path to becoming enterprise ready. Just visit workos.com or just message their Slack support. They have real engineers in there who answer questions fast. And when you get in touch, just tell them Ben and David sent you. As our time comes toward a close, one question David and I wanted to ask you is TSMC is essentially the only trillion dollar company in the world, not on the West Coast of the United States. It is this incredibly important thing in the world. It's this unlikely success of grand scale. Unlikely in your opinion. I mean you started it when you were 56. Yeah. There are many things. I'm not going to argue with you. I merely asked as a point of curiosity. I didn't realize, I didn't think it was that unlikely. Well, it did exceed my expectations. TSMC's size and importance exceeded my expectations, but not by an order of magnitude. But wasn't the original plan to stop building after Fab 2? That was never. That was only the very initial plan. Okay. Yeah. We were never going to stop there. I mean, we were just talking about learning. Do you know that? How could we plan to, if I didn't know anything about learning, I would say, yeah, maybe we'll stop after two perhaps, but I was a serious student of learning. I would never stop at just two perhaps. Here's why I say unlikely success. There were so many reasons why the original incarnation of TSMC was kind of a bad business. Fabless was not a thing yet. And so all of your initial customers were the integrated device manufacturers, the intels of the world, and you were taking their worst excess, you were their second source supplier for manufacturing on the stuff that they didn't want to make on their own. Did you see Fabless coming or was that a very lucky thing? No, I saw it coming. And in fact, I just said dinner, or two months ago, at dinner with the first guy, Gordon Campbell, Gordy Campbell. Have you heard his name? Anyway, Gordy Campbell came to see me in general instrument in my final months as general instruments. He came to see me. He did not know that I was leaving. Frankly, I did not know when I saw him that I was leaving yet. But the reason he came to see me at general instrument was that he wanted the funding, he wanted investment from general instrument. $50 million, he said. He wanted to start a new company. $50 million. So I said, do you have a business plan? No, it's all in my head. So I said, well, I need a lease a business plan. I mean, I have to go to the board of general instrument. So he said, all right, I'll send it to you within three weeks. Three weeks later, there was no business plan. And I was interested because I knew that he had a good reputation of starting companies. So I called him and he said, I'm sorry, I didn't send you anything because I don't need you anymore. I said, how come? He said, I don't need $50 million more anymore. I need only $5 million. And $5 million, I can gather up very easily. I said, why do you need only $5 million? He said, I'm not going to build a fab. See, that was the start for me that there will be fabulous companies. Another guy came to general instrument and said he had always started a company which was called etmel, A-T-M-E-L. And they did not have any fabs. And this guy wanted the general instrument to make the way for them. And back then, general instrument had empty fabs. So I said, I told the semiconductor manager of general instrument, I said, go ahead and work with him. Don Valentine, who I'm sure you knew. I knew him. He had a great, great quote when asked about starting Sequoia. And he said, well, I had an advantage. I knew the future. And it sounds like you knew the future too. Well, at least I had the glimpse of it. So etmel, and they were still fighting. I mean, etmel, he wanted the fab to be run his way. Now, of course, the general instrument semiconductor manager wanted to run the fab his way. I mean, general instrument owned the fab anyway for heaven's sake. So that was just a very early situation in which the difficulty and the advantage of running a foundry business already appeared. The difficulty was, you know, you're just satisfied a lot of customers, you know, and everyone wanted the fab to be run his way, but you can only run fab one way, which will satisfy more or less all the customers. And the advantage, of course, is you have a lot of customers. Well, we can't thank you enough, Dr. Cheng. Dr. Cheng, thank you. All right, very good. It was my pleasure. Even though it's the first time in a long, long time that I have talked so long. We appreciate it. Thank you for doing it with us. All right, listeners. Well, David and I are coming at you now from our home studios back in Seattle and San Francisco. And we wanted to do a little post game on that interview, a little bit of analysis, kind of our conclusions, the things that are still sitting with us a few days later after we've crossed the ocean. And David, this felt essential to me because it felt like we were just recording history there with Morris. I didn't want to interrupt him to try to like make a business model point or it just kind of felt like we should let him talk and then we could do our part after. Yeah, totally. And fortunately, we have a model for doing analysis at the end of story, which is our playbook. So let's do it. Okay, so the first thing that I can't shake that just keeps sitting with me is this idea that is genius in hindsight of not competing with your customers being the dedicated pure play foundry, which we actually saw in the TSMC Museum of Innovation. They have Morris' original pitch, like his original slide deck. His original business plan that he pitched to the Taiwanese government. The government and then to investors. There's like two different versions of this extremely simple pitch deck. And one of the bullet points, it's right in there of BA dedicated pure play foundry. At the time, I get the sense it was actually much more about what can we win at versus what will be the most important and valuable semiconductor company in the world in the future. Right. At the time, they didn't have the capabilities, certainly not TSMC and didn't exist in Taiwan to be able to design chips and products. So it was impossible for them to compete with customers. This was all they could do. Right. It crossed Morris' mind for sure. Hey, we could compete with Intel, but then he scrapped that. I get the sense because the thing that they were good at was this manufacturing angle. And it's almost like an accident of history. The pure play foundry ended up being the best way to do this. I guess best as evaluated on MarketCat versus other foundries and integrated device manufacturers such as Intel. Well, and best that this is the path that has led them to being essentially alone operating at the leading edge. They have surpassed technology-wise all of the other integrated, integrated and quasi-integrated chip foundries out there. Yeah, I guess that's my first thing is this. You can connect the dots looking backwards, as Steve Jobs said, and that famous quote, but forwards is difficult. This primarily, I think, was the main reason why TSMC has worked so well. That they don't compete with customers. They are truly the only foundry at the leading edge that does not in any way compete with their customers. They don't have their own end product division. They don't design their own chips. It is truly they only serve their customers and they do not compete at any other part of the value chain with them. Right. Okay, so if you're asking yourself, how did the world arrange itself in this way such that you could have a trillion-dollar company that doesn't do any design, that doesn't do any architecture, that doesn't do any EDA tools like cadence or synopsis. So they're not Nvidia. They're not ARM. They're not cadence synopsis. They're not ASML. They're not their own equipment vendor. So what enabled this? One of the things that I think is under-appreciated, and we didn't talk that much about with Morris, but the rise of ARM. If you try to play forward a world where Intel and the x86 architecture had maintained its dominance, you wouldn't have had this window, this opportunity for the value chain to rearrange itself. But the fact that there was an architecture, as we talked about on our ACQ2 episode with Renee, from ARM, this architecture that became dominant in phones and then computers and then servers and now is coupled with all these AI chips, you open the door to have a dedicated foundry for ARM chips in a way where if it had stayed x86, it's not like you could start a new foundry for all the fabulous x86 companies. For the longest time, Intel was the only x86 company, and then AMD, of course, is the second source, and AMD is a TSMC customer. So that's the one-edge case. It's like, well, there is AMD that designs x86 chips that TSMC manufactures, but that's not the common case of the way it would have gone for in an x86-dominated world. It would have been fully integrated Intel. Yeah. I mean, one super straightforward and enormous example of this just is Apple. If ARM hadn't become such a viable CPU architecture platform and Apple hadn't standardized their Apple Silicon on ARM, probably Intel would be making all of the chips that go into your iPhone, all the leading-edge chips that go into your iPhone. They already had the Intel relationship. Macs were running on x86 Intel chips. Yeah. You have to keep peeling the onion because this, of course, supposes that Intel actually could have gotten their act together and made a chip for mobile phones that was performant, but maybe all the baggage from x86 actually prevented them from structurally doing that. It wasn't like a competency thing. It was like it never could have happened that x86 could run on phones. Yeah. I think all this is true, but if ARM hadn't existed, there would have been nowhere else for this vector of innovation to go. Right. The point that we're driving at here is this world where there's a standalone architecture company. There's a standalone big manufacturing company. There are standalone EDA companies. There are standalone designers, Apple, Nvidia. In a large part, that's due to ARM. Yes. And ARM and TSMC are coupled at the hip of history of how this came to be. In fact, didn't you find that a bunch of these were started within 12 months of each other? Yes, totally. The mid to late 80s were like an absolute golden period for all these companies getting started. Not only TSMC, ARM, Synopsys, Cadence, and ASML all founded right within a couple of years of each other, which brings us to Hinchew Science Park, going there in person. We talked about this on our original TSMC episode that even if you wanted to, you couldn't airlift TSMC and this capability out of Taiwan and recreate it somewhere else. We talked about that as if we knew it in an abstract way. This was very different driving around the science park, feeling it in a physical way. The entire ecosystem, it's like if Silicon Valley, we're all in one government-sponsored industrial park, which it was. It was Silicon Valley, as we talked about in our Lockheed Martin episode. Oh, the early Lockheed, yeah. Yeah, the early Lockheed years. But that's what it's like today. It's all right there. It's not just TSMC that's there. It's all of their partners. It's all of their customers. We're driving by and this is a Cadence building there and that's a Synopsys building there and that's an ARM building there. There's Qualcomm. There's MediaTek right there, Headquartered right there. Right across the street, the craziest thing to me, we saw there are two universities that are just there. In the science park. Yes, that are cranking out PhDs every year that are just getting absorbed right there in the ecosystem. This would be like if there were two universities on the Nvidia campus. The thing that really jumped out to me is you always hear people talk about how integrated this ecosystem is with each other, that Synopsys has to be closely tied with TSMC to understand what the next node will look like so that they can make it easy for people who are using Synopsys' tools to design ships to actually manufacture using TSMC's process. You get the sense of, oh, I see, because they all are walking across the street to each other and having this extremely close communication. Not to mention, David, both of our flight experiences felt like, oh, these are a bunch of chip design, fabulous companies that are making the pilgrimage over to Taiwan to meet with people in this ecosystem. My plane felt like the semiconductor version of the tech buses that go from San Francisco down to Silicon Valley every day, the backpacks that I saw on the plane, like there's a Google backpack, there's an Amazon backpack, there's an ARM backpack, there's a Marvell backpack. Yeah, which does raise the point of this Arizona fab and the outside of Taiwan fabs. Why is TSMC doing it? Because it's not their leading edge, it's not big volumes, it's not leveraging this really close geographic ecosystem that they have in, I believe there's three science parks in Taiwan. We saw the original, but there's one that's even bigger, I think it's the Tainan one in the south, but it just becomes clear that there are customers and government reasons to build fabs in other countries. But you're not going to be able to recreate the magic of that ecosystem physically instantiated right there. Yeah, it would take decades to recreate the ecosystem that they have in the science parks. Which is funny on that front, you and I were saying as we were driving around there, this has got to be the single most successful government funded industry initiative of all time, like anywhere in the world. At least to spur innovation with this particular of a mandate. Totally, the land grant universities here in America, but this was like a rifle shot. We are going to spur semiconductor industry innovation in this industrial park, in this location and it worked. And there you have one of the 10 most valuable companies in the world and I guess one of two trillion dollar companies that are not on the west coast of the United States. I would say it worked. Yeah, it worked. It worked. And the scale too, we drove by a construction site where it looked like a quarter of the building was done. This is where they're making the two nanometer process, which presumably will be in the next iPhone. It's not like anyone said anything about that, but jeez, I wonder after five nanometer and then three N3E and N3P when they have this two nanometer process, I wonder what they're going to make on that. Lots of NVIDIA GPUs and lots of iPhone chips. Massive building, phase one was open, which I think is a quarter of the building, but then there's three other phases for this two nanometer facility that are not even ready for prime time yet. But I think they're actually doing the small production runs, getting ready to ramp in the second half of this year on the two nanometer process. Like you said, the scale of the physical buildings of these fabs smacked me in the face. I felt like I was looking at Sphinx in Egypt. I mean, it's huge. It's like many football fields of size, just per phase of the fab. These are enormous buildings. Yep. Okay, so back to things I've been noodling on since the conversation with Dr. Cheng. I felt a little bit bad for saying, hey, your original business plan was kind of a bad one that basically taking the excess capacity from Intel and other IDMs and giving them a place to manufacture their least critical, least leading edge, least interesting chips. But that is true. I mean, he believed that Fabless was going to be a thing, but for the first, I don't know, at least five years, the only real business that they had was IDMs who were willing to say, how cheap can you give me some of your manufacturing capacity? And it's not strategic at all, but here you go. Here's some revenue. This is a major difference in Intel's fab strategy versus TSMC. Intel is constantly taking their existing fab footprint and repurposing it and upgrading it for the leading edge, which on the one hand is great. It's utilizing their assets for the most valuable, highest valuable products. On the other hand, though, they then lose the manufacturing capabilities for older process node generations. And it's not like demand goes away for those chips and those products. It does. It just does slowly. It does slowly. Yeah. I mean, like replacement parts is a great example. Like, there are technology systems and products, manufacturing things, even automobiles built 10, 20, 30 years ago that have specific chips that were made with old process technology that when they break and they need replacing, you need those exact same chips. So this is the business that TSMC started in. Right. So that is the fundamental philosophical difference is, I think fab, so fab one belonged to Itry, the government where Morris was president of that organization before taking the helmet TSMC. Fab's two and three were the first TSMC specific fabs that they built, and they're still running from the late 80s. And in addition to the old replacement parts, there are still applications for older nodes. If you're in this world of 40 nanometers and up and one micron and I don't know all the names of the previous generations, but the less high resolution etching on silicon, CMOS sensors are a great examples of that. The cameras that we're talking into right now that have these great Sony sensors, those don't require a two nanometer process, but they do require etching the same way that you would etch a chip. And so that's a specialty use case of TSMC's older fabs, which by the way, on an accounting basis, are fully depreciated. So they're almost like free to run. Right. All the capital expenditure, now there's maintenance capex that needs to go into it, of course, but the initial capex, yes, fully depreciated, you're just getting essentially very, very high margin dollars out of those old fabs. Right. And it's not that it's a better or worse decision than what Intel has historically decided to do, but it is a different one. Intel is going to keep closing the old stuff so they can own a smaller footprint and keep all the equipment and everything focused on making the latest and greatest, just not what TSMC does. Totally. Totally. But that point of I'm obsessed with this idea that it is funny that Morris went on the record and said, no, I knew, I knew Fabulous was coming, and he had a couple of great anecdotes about that, which is funny because in older interviews, sometimes he goes, well, the timing was a little lucky on when Fabulous happened. But I think he even said to Jensen, in the first few years of TSMC, growth wasn't very high because we were waiting for the customers to emerge. But it really is this idea that he saw the future, he made a bet, and he did kind of a crappy business to build up competency, capability, volume. Capacity. Yeah, exactly. To build up literal fabs. Right. To be there when the Fabulous Revolution happened. And I don't know, I think he was within 12 months of when he thought it would happen, but it is crazy that when, especially in his memoir, you're reading the story about the early customers, year five, year six, year seven, the majority of the business is still not Fabulous. It's someone else's worst orders. Which that actually gets to the heart of learning curve pricing that we spoke about with Morris. We brought it up sort of tangentially with him, but it's probably worth dwelling on what is the learning curve. Yeah. The core insight of the learning curve from BCG, Bill Bain, and Bain, and Morris that they all developed together. Which by the way, how crazy is it that the founders of BCG and Bain are the ones who sort of co-developed this, or at least named it and formalized it with Morris when he was at TI? Totally. The insight is that the goal that you are playing for is to be the largest volume player at the end of the game. So if you take that as a given of if we get to be the largest volume player, this is a fixed cost business, this is a scale economies business, we can spread that fixed cost over the maximum number of customers, how do we get to the maximum number of customers in the early stages of the game where it's more competitive, we accelerate the pricing to where we think it will get to at the end of the game. So that's why doing these price cuts and also starting low with your prices. Like you can even start unprofitable with your prices in the early days in a given no generation because the goal is to crowd out the competition, become the industry dominant number one player, get all the customers once you aggregate that demand. Then you get the scale and then you can get the economies of scale pricing. But just get to that as fast as possible is the name of the game. Yeah, it works backwards from it actually involves a lot of market sizing. At maturity on this node, what do we think demand will be for, call it 40 nanometer, how many orders of individual chips will there be in 40 nanometer? Okay, well to have the cheapest price for customers, we need to do the biggest ordering. And so then it's just a matter of like how fast can we get into volume production? Everyone sort of intuitively grasps this, oh, economies of scale, but the implications across your whole business, your pricing strategy, the way like strategic finance, when do you decide to take on debt? When do you not? When do you decide to take on more shareholders? It's this incredible orchestration to make it happen. It's almost Costco like in the ballet that has to go into this. Right. I mean, the example from Apple, we are about to go get the absolute whale customer and we have to balance taking on all of their order, which the learning curve would tell you, you want to get the deepest down the learning curve possible, we should go take all their order, but you all that kind of exposes you to existential risk in your business when you're not within spitting distance of doing that volume on your own. So is it really worth betting the entire company? You got to be so precise and accurate in your forecasting of the ultimate market demand, which means the ultimate demand for your customers products, which in the Apple case means ultimately forecasting accurately how many customers are going to buy the next generation iPhone in order to run your business. Right. Or in NVIDIA's case, how big is AI going to be? This is kind of a crazy thing for a manufacturer to have to do, to have that crystal ball into the end market markets, the end their customers markets, but they really do need to make bets on how big those markets are going to be. Because if you're off by 5%, 10%, that's going to tank your entire profitability for that node generation, which is going to tank your free cash flow, which is going to mean you can't play the game in the next turn. To this point though, if you actually are good at all of this and you are good at forecasting and the execution is flawless, once you internalize the learning curve, the story of TSMC goes from one where it's surprising and unlikely and it becomes an inevitability. Of course, the company that is taking on all the orders to have the lowest prices. Of course, this will be the end state of this industry is to have a dominant player. Like right now it costs, I don't know, on the order of $20 billion to build a new fab, eventually it will cost $40 billion, $80 billion, $100 billion. How many players are really going to be left standing with the ability to deploy $100 billion to build a building with some machines in it? This market has natural monopoly characteristics. Yep. That's just the CAPEX side of the equation, as we talked about with Dr. Chang. There's also the R&D side of the equation that needs to go into creating the next process node that can be built on that CAPEX. It is crazy that if you just look at every year, the CAPEX versus the net income of this company, they basically spend all the money, not all the money, but their CAPEX grows in a very similar way if you look at the bar graph to their net income from the year. That is even before R&D, David, to your point. If they're looking around at competitors at other foundries and saying, okay, how much can we invest? They can invest more than anyone else because they have the most volume. Then on top of that, they are also spending in a separate bucket of R&D on the technology for their manufacturing processes. That's how you get COOS, which is the technology that they use for packaging for AI chips. That's their proprietary thing, which by the way, once you have proprietary packaging, then it's even harder for customers to go and double source, double manufacturer elsewhere. They have a similar technology for packaging of mobile chips that doesn't use COOS, but it seems like this is a market where those in the lead are only going to get further in the lead over time, absent some big strategic mishaps or some big execution mistakes. Yep, totally. Then I think the last playbook theme here for me and for us is just that Moore's Law is undefeated. At the end of the day, back from starting all the way back, Morris's career at TI and being a contemporary of Jack Gilby and Bob Noyce, the invention of the integrated circuit. Once the integrated circuit was invented, the compounding growth of that industry is all that mattered. Everything else is just downstream of the fact that the world is going to demand more computing at this monotonic, exponentially increasing pace every 18 to 24 months. Of course, the technical definition of Moore's Law expired a long time ago, but spiritually, the world demands roughly 2x the computing power that it had two years ago every two years. That has continued for 50, 60 years at this point and shows no signs of slowing down and as a result. Well, no signs of slowing down except that they keep hitting theoretical physics limits. Well, I said the demand side of the equation shows no signs of slowing down. Well, sure, but the demand side is far more than 2x. Moore's Law has always been about how much can happen on the innovation side of getting better at design and manufacturing and that is getting harder than ever because we're having to call more things Moore's Law. Packaging was never a part of the original Moore's Law and software improvements and proprietary interconnects. My point is that it's a self-reinforcing system. As long as the demand is there, that the world wants twice as much compute as it had yesterday, there are going to be market incentives to drive the supply side and that is why people work so hard to make it happen. Here's the stat. Since TSMC was founded in 1987, the world's semiconductor market has grown from 26 billion to 527 billion last year. They wrote a ridiculous tailwind. Ridiculous tailwind, yep. A ridiculous tailwind where as the industry reorganized away from the vertical integration of the Intel world, you could build a trillion-dollar value foundry. The scale of the numbers are so staggering. I keep thinking about the fact that they can go spend 20 billion dollars to build a building and the stuff that they spit out is so valuable that that 20 billion was a profitable investment in a matter of, I don't know how many years if it's 3, 5, 7, whatever the payback period is. They know for sure that it's a worthwhile investment to do that. Yeah. The whole thing comes down to, oh my god, silicon has become really valuable. Integrated circuits are the fabric of our world today. Well, Ben, what an amazing experience. So glad we did this, went to Taiwan, got to see this in person, got to spend this special time with Dr. Cheng. What a great way to start the year. All right, listeners. Now is a great time to thank one of our favorite companies and one that has become essential to how we make acquired Anthropic and their newest flagship model, Claude Opus 4.6. Which we have been making heavy use of here at Acquired HQ. I actually just leased some space for the new Acquired Studio here in Seattle. And when the landlord sent over a pretty simple lease, I thought, oh, this is totally something I can review myself. I looked at it, but then I also thought, okay, I could use a sanity check. So I uploaded it to Claude and asked if there was anything that I should be mindful of or inconsistencies or anything I should push back on. And Claude actually found three things that I totally missed on my own review. It's amazing. You told me about that. I've actually been using a lot here for writing show notes. I end up with so much detail in my like 50, 60, 70 page script documents that I'm like way too close to the material. And I need a fresh set of eyes for what the big points are as I write up the show notes for each episode. And I used it for something similar too. When we were preparing for our Super Bowl Innovation Summit, I had Claude go back through our old NFL episode and search the web for what numbers had actually changed since then, then go through it with me and figure out if that changed any of our older conclusions. Yep. As Anthropic puts it, Claude is the AI for minds that don't stop at good enough. It's the collaborator that actually understands your entire workflow and thinks with you. Whether you're debugging code at midnight or strategizing your next business move, Claude extends your thinking to tackle the problems that matter to you. So whether you are shipping the next great product or tackling problems that need deep thinking, Claude Opus 4.6 thinks through complexity with you, not for you. It's your intelligent thinking partner. So if you're ready to tackle bigger problems, get started with Claude today at claude.ai.acquired to try Claude with 50% off pro for three months. And if you want to explore their enterprise offerings, just tell them that Ben and David sent you. Should do carveouts. Carveouts. All right, I have two. One is a kind of a hilarious, I can't believe it's 2025 and this is my recommendation. For anyone who's not a AAA member, I highly recommend it. I had a spectacular AAA experience where I went to fill up the air in my tires before a road trip. And I went to the gas station and there was something wrong at my local gas station with their pump and I ended up draining the air in my tires to an unsafe level. And so the car was actually not drivable away from this gas station. I was like, crap, I can't even go get the other car and I had my baby in the backseat and my wife and I were trying to figure out what to do. And we're like, do we have to call a tow truck to like tow us too? And so I signed up for AAA while I'm just sitting there in the gas station parking lot. And within I think an hour, hour and a half, they had a mobile tire inflator on a long weekend, like a holiday weekend when other people aren't working, drive out and fill up the air in my tire so we could be quickly on our way, not ruin the weekend. Amazing. And it was like a hundred bucks or something. It's really not a bad price and you get, this was, so you, a hundred bucks to become a member or whatever is 150. And then the service is actually free for something as trivial as this. And you get three of them a year. So I'll take it. It was a phenomenal experience. All right, AAA, here we go. My second one is a YouTube channel called Defunct Land. You and I were talking about this. Oh yes, this is so good. You turned me on to this. Yeah, it is an entire YouTube channel that I actually even watched in a while, but I only remembered it from our conversation. And now I need to go back and watch older ones that talks about defunct theme parks. So if you like acquired and you wish you had something, you know, acquired like that's kind of visual, that's about history and intellectual property and people trying crazy stuff, some of the most crazy entrepreneurs and executives within companies decided to build theme parks. And it is very fun to see the weird old Nickelodeon hotels or action park in, I think it's New Jersey, the like wildly unsafe park from the 60s, 70s and 80s. Man, those were the days. Yes. You could get lost for hours and hours and hours watching Defunct Land. So I highly recommend the YouTube channel. I'm really glad that you and I grew up as kids in the era where we could still take unreasonable amounts of risk and nobody thought that that was, there was anything wrong with that. Yes. My carve out, speaking of, you know, being 2025, how are we talking about this on the plane, on the way over to Taipei, I finally watched everything everywhere all at once for the first time. I can't believe I hadn't seen it before, but you know, two kids under three and a half, not a lot of time for movies. It's so good. It's so good. I think this was your carve out when it came out a couple years ago. Just so, so, so good. Truly enjoyed it, lived up to the hype, deserves every award that it won. All right. Well, we've got some thank yous to folks who helped us prepare for this episode. So first, to Art DeGias, the co-founder and executive chair of Synopsys had a great conversation with us. Well, first publicly with Cecien Ghazi, the current CEO of Synopsys on an ACQ2 episode a little while back. And then we chatted to Prep for this episode and basically asked the question, what should we be asking Dr. Chang about? We got some similar notes from Renee Haas, who is the CEO of ARM. Great conversation with Sir Peter Bonfield, a current TSMC board member and former CEO of British Telecom. David, I know you've got a few also. Also to Wally Rines, the former CEO of Mentor Graphics. Wally is a legend in the semiconductor industry, almost on par with Dr. Chang. They were contemporaries at TI back in the day. And to John Bathgate and Britton Johns from NDS Capital, our go-to folks on anything semiconductors. They were, I think they were more excited, even more excited than we were, that we were doing this. We got to talk to them about it. Yes. Also past acquired guests. I think that episode holds up really well, where we did semiconductor and complexity theory with them. Totally. And actually John is the one originally who explained to me how EUV lasers work, which is still one of the most impressive accomplishments in human history. To John from the Asianometry YouTube channel, this is just an incredible channel all about semiconductors and about how all of this stuff works. I mean, I learned so much about CMOS sensors, about how they make the actual silicon wafers themselves. That's a sophisticated process before the etching even starts. He's just got some awesome, awesome videos on the Asianometry YouTube channel. And very kindly bought David and I dinner and hung out with us the night before the interview, which was very fun to do in Taipei. Very fun. Also to Tim Culpin, a former Bloomberg journalist who now has a sub-stack called Culpium, also gave us some great topics to chat about. And lastly, as always, to Arvind Navaratnam at Worldly Partners. He did a great, great write up on TSMC that he'll be posting publicly right before we post this episode. So you all can see it. It was great last minute prep for me after reading the memoir to get someone else's take on what makes this company so special. And actually some of the stats that we threw out in our playbook came straight out of his write up. So if you want more and kind of a more analytical view of how did TSMC become TSMC, he's got a great study on that that we'll link to in the show notes. So if you like this episode, go check out other semiconductor episodes. Nvidia, we've got four of them at this point. One of them is an interview with Jensen. And then we've got the whole history of the company across three different episodes. We did a great live episode several years ago on Qualcomm, which I think is a sleeper pick. That's right. That's right. Total sleeper pick. Amazing story. Irwin Jacobs, one of the greatest entrepreneurs in American history. Yes. And our diving into how CDMA works was one of the most fun technical explanations I've ever done on an acquired episode. So if you want to understand how all of our cell phones work, go check out the Qualcomm episode. Or of course, if you did not last week, listen to the TSMC remastered episode. I don't know how you got this far without listening to that, but you should go listen to that. After this episode, check out ACQ 2. We've been talking about this episode with Synopsis. There's one with Rene Haas from Arm Holdings that we did. It's our most recent episode. So it's spectacular. And if you're interested in semis, go check that out. Come talk about this episode with us in the Slack, acquired.fm slash Slack. And if you want to know when a future episode drops, you can find out, sign up at acquired.fm slash email. And you'll also get episode corrections and hints at what the next episode will be. So without listeners, we'll see you next time. We'll see you next time.