TSMC Founder Morris Chang
In this episode of the Acquired podcast, the founders discuss TSMC's rise to becoming the world's leading semiconductor foundry. Morris Chang, TSMC's founder, details the company's pure-play foundry model, which focused on building trust with customers by avoiding competing with them. Chang shares TSMC's strategies for leveraging economies of scale through high-volume manufacturing and using "learning curve" pricing models.
The hosts explore how TSMC achieved technological leadership by heavily investing in R&D rivaling Intel's capabilities. Chang highlights TSMC's exceptional manufacturing execution, enabling the company to resolve critical yield issues and advance process nodes for clients like Nvidia. The discussion also covers the benefits of TSMC's location within Taiwan's vibrant semiconductor ecosystem, facilitating collaboration with partners and major customers.
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1-Page Summary
TSMC's Foundry Model and Strategy
Morris Chang Chose Pure-Play Foundry Model to Build Trust With Fabless Customers
Chang strategically positioned TSMC as a pure-play foundry to avoid competing with customers like Apple. As Chang notes, this non-competing stance let TSMC build trust while serving all customers' demands without overextending capacity.
TSMC Used "Learning Curve" Pricing and Scaling for Economies of Scale
Chang implemented the learning curve strategy he refined at TI: as production volume increases, costs decrease. TSMC took orders en masse and spread costs through high volume, allowing investment into new process nodes. This flywheel effect drove TSMC's pricing and scaling strategies.
TSMC Balanced Large Orders Like Apple's With Maintaining Capacity
Chang describes balancing Apple's massive orders with avoiding overextension by only partially fulfilling them. TSMC navigated financial decisions carefully to maintain capacity and stability.
TSMC's Technological Leadership and Manufacturing Capabilities
TSMC Has Robust R&D Rivaling Intel
Chang felt TSMC was nearly on par with Intel technologically due to TSMC's R&D investment enabled by high volume manufacturing. TSMC advanced process nodes like 20nm to meet demanding customers like Apple and Nvidia.
TSMC Provides Superior World-Class Manufacturing Execution
Chang indicates TSMC surpasses Intel in manufacturing quality, noting TSMC resolved yield issues for Nvidia on the 40nm node, enabling further advancement to benefit clients.
TSMC Benefits From Taiwan's Semiconductor Ecosystem
TSMC's operations are concentrated in government-sponsored science parks in Taiwan, facilitating collaboration with partners like Cadence, ARM, and customers like Qualcomm. This vibrant ecosystem and local talent from universities reinforce TSMC's leadership.
1-Page Summary
Additional Materials
Clarifications
- The pure-play foundry model in the semiconductor industry involves companies that solely focus on manufacturing integrated circuits for other companies, without engaging in the design process. This model allows fabless semiconductor companies to outsource manufacturing, reducing the need for costly production facilities. Examples of pure-play foundries include TSMC and GlobalFoundries.
- The learning curve pricing strategy involves reducing costs as production volume increases. This approach allows companies to spread costs over a larger number of units, enabling economies of scale. By leveraging this strategy, companies like TSMC can offer competitive pricing while scaling their operations efficiently. This strategy is based on the concept that as workers and processes become more familiar with a task, they become more efficient, leading to cost savings over time.
- Process nodes like 20nm and 40nm in semiconductor manufacturing represent the size of the smallest features that can be created on a chip. A smaller process node allows for more transistors to be packed into a smaller area, improving performance and efficiency. Advancing to smaller nodes, like moving from 40nm to 20nm, signifies technological progress and enables the production of more powerful and energy-efficient semiconductor chips. These advancements are crucial for meeting the demands of high-performance devices like smartphones, computers, and other electronics.
- Yield issues for Nvidia on the 40nm node:
Nvidia faced challenges with the production yield of their chips manufactured using the 40nm semiconductor manufacturing process at TSMC. Yield issues in this context typically refer to the percentage of working chips produced per wafer, impacting production costs and efficiency. Resolving these yield issues was crucial for Nvidia to ensure a higher number of functional chips per manufacturing run, optimizing their production output and profitability. TSMC's ability to address and improve yield rates on the 40nm node was essential for Nvidia to continue advancing their product offerings and meeting market demands.
Counterarguments
- While TSMC's pure-play foundry model has built trust, it could limit diversification and expose the company to market volatility in the semiconductor industry.
- The learning curve pricing strategy assumes continuous demand and scaling, which may not account for rapid technological changes or economic downturns that affect order volumes.
- Balancing large orders with maintaining capacity is a delicate act, and prioritizing large customers like Apple could potentially alienate smaller clients or lead to dependency on a few major clients.
- Although TSMC's R&D investment is substantial, it's important to recognize that Intel and other competitors also invest heavily in R&D, which could lead to technological leapfrogging and shifts in industry leadership.
- TSMC's manufacturing quality is high, but manufacturing execution can always be subject to unforeseen challenges, such as material shortages, natural disasters, or political tensions that could disrupt operations.
- The concentration of operations in Taiwan's semiconductor ecosystem offers many advantages, but it also presents geopolitical risks and could be seen as a lack of geographic diversification, which may affect stability and supply chain resilience.
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TSMC's Foundry Model and Strategy
TSMC's Foundry Model and Strategy have transformed the semiconductor industry, highlighting the vision and strategic decisions made by its founder, Morris Chang.
TSMC Choosing Pure-Play Foundry Over IDM
Morris Chang's strategic decision to position TSMC as a pure-play foundry rather than an integrated device manufacturer (IDM) has been a critical aspect of its success.
Morris Chang Made This Choice, Recognizing the Advantage Of Not Competing With TSMC's Customers
Chang's realization that not competing directly with TSMC's customers would be advantageous led him to reject the IDM route. Chang reflected on TSMC's role in securing most of Apple's 16-nanometer manufacturing requirements, which was possible due to TSMC's lack of direct competition with customers like Apple. This approach built trust with fabless customers, as TSMC focused solely on manufacturing without entering into IDM conflicts that Texas Instruments divided by product types. He believed it was key that the company serve a collective group of customers without segmenting operations that could lead to internal conflicts or compete with customers.
TSMC Built Trust With Fabless Customers, Focusing On Manufacturing and Avoiding IDM Conflicts
Chang highlighted that TSMC's success was due to not competing with customers since TSMC does not have its own end product division or chip designs. This non-competing stance allowed TSMC to build trust with customers such as Nvidia, which was small at the time they approached TSMC, and Apple, ensuring their demands were met without overextending capacity. Chang emphasized treating all potential and current customers with respect, regardless of their size, to avoid damaging relationships that could limit TSMC's market reach.
TSMC's Pricing and Capacity Management For Economies of Scale
TSMC has utilized the "learning curve" to optimally price services and scale production, expanding its dominance in the semiconductor market.
TSMC Used "Learning Curve" To Price Services and Scale Production Early In a Process Node
Morris Chang implemented the learning curve strategy he refined during his tenure at TI, understanding that as production volume increases, costs go down, making the company more efficient. Despite other companies structurally dividing themselves, TSMC remained focused on acting as a unified foundry to serve its diverse customer base. Chang's deep understanding of the learning curve influenced the pricing and scaling strategies that allowed TSMC to grow into the largest volume player in the industry.
TSMC's Dominance Grew, Spreading Costs With High Volume Output
By taking orders en masse and managing them strategically, TSMC ensured high volume outputs that allowed for cost spread, making it possible to invest the savings into further process node development. This flywheel effect of ...
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TSMC's Foundry Model and Strategy
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Counterarguments
- The pure-play foundry model may limit TSMC's ability to innovate in design, potentially missing out on the vertical integration benefits that IDMs enjoy.
- By not competing with customers, TSMC might be overly dependent on the success of its customers' products and market strategies.
- The focus on manufacturing could lead to vulnerabilities if market demand shifts rapidly or if there are significant technological disruptions that require more agile business models.
- The "learning curve" strategy, while effective, assumes consistent demand and may not account for the volatility of the semiconductor market or unexpected downturns.
- High volume output ...
Actionables
- You can identify a niche market where you can offer specialized services without competing with potential clients. For example, if you're a graphic designer, focus on creating branding packages for startups, which often lack in-house design teams, rather than trying to serve large corporations that might have their own design departments.
- Consider partnering with other businesses to share resources and reduce costs. If you run a small online store, team up with similar-sized businesses to bulk-buy packaging materials or negotiate better shipping rates, spreading the costs and benefiting from economies of scale.
- Balance your workload by setting clear boundaries and prioritizing ...
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Tsmc's Technological Leadership and Manufacturing Capabilities
TSMC’s technological leadership and manufacturing capabilities have made it a dominant force in the semiconductor industry, serving demanding clients like Apple and Nvidia.
Tsmc's R&d Focus and Leadership in Semiconductor Technology
Morris Chang discussed TSMC's position and capabilities in technology and manufacturing and felt that they were almost at par with Intel in technology, indicating strong R&D capabilities. TSMC can invest more in both [restricted term] and R&D than other companies due to their high volume, which puts them in a superior position relative to their competition. Chang also talked about a significant decision made regarding Apple's orders that impacted TSMC's R&D focus and advancement in semiconductor technology. They had to choose between advancing to the 20 or 16 nanometer node and ended up delaying the 16 nanometer development to fulfill Apple's needs for the 20 nanometer technology.
Chang mentions TSMC's ability to meet the needs of a demanding client in the high-performance chip market while discussing TSMC's relationship with Nvidia, who became one of their top five customers within a few years due to a specific chip's success.
The hosts discuss TSMC's proprietary packaging technology, CO-OS, hinting at their ability to deliver high-performance manufacturing and yield optimization. Chang talked about Apple's surprise request for a 20-nanometer process node instead of the expected 28-nanometer node, which showcases TSMC's capability to serve high-profile clients like Apple.
Tsmc's World-Class Manufacturing Execution and Yield Optimization
Chang indicates that TSMC is superior to Intel in manufacturing quality. A yield problem occurred when trying to manufacture high-quality chips on the 40-nanometer node, particularly for Nvidia. Chang returned as CEO to directly address these priority problems, and resolving the manufacturing issue with the 40-nanometer node became one of his main focuses. This resolution was critical for advancing to the next process node (28 nanometers), which would have significant implications for demanding clients.
TSMC's customer trust is highlighted by Chang, suggesting their reliability and quality service as a significant factor why demanding clients like Apple chose TSMC for their chips.
The Role of Tsmc's Expansive Ecosystem in Taiwan
Ben Gilbert and David Rosenthal discuss the geographic ecosystem within the science parks in Taiwan, focusing on TSMC's success due to these parks. David Rosenthal compares the Hsinchu Science Park to Silicon Valley, suggesting it's like if Silicon Valley were all contained within a government-sponsored industria ...
Here’s what you’ll find in our full summary
Tsmc's Technological Leadership and Manufacturing Capabilities
Additional Materials
Clarifications
- TSMC's R&D capabilities are highlighted by their ability to invest significantly in research and development, allowing them to compete with industry giants like Intel in semiconductor technology advancements. Morris Chang emphasized TSMC's strong R&D focus, indicating that they are nearly on par with Intel in terms of technological innovation and capabilities. This comparison underscores TSMC's position as a key player in the semiconductor industry, known for its cutting-edge research and development efforts.
- The decision between advancing to the 20 or 16 nanometer node at TSMC was influenced by Apple's orders. TSMC had to prioritize either developing the 20 or 16 nanometer technology. They ultimately delayed the 16 nanometer node to fulfill Apple's needs for the 20 nanometer technology. This decision showcased TSMC's flexibility and ability to meet the specific requirements of their high-profile clients.
- The geographic ecosystem within science parks in Taiwan, like the Hsinchu Science Park, plays a crucial role in fostering innovation and collaboration among tech companies. These parks provide a physical space where companies like TSMC can co-locate with partners and suppliers, enabling close communication and knowledge sharing. The proximity to universities within these science parks ensures a steady supply of highly educated talent that can contribute to the technological advancements and competitiveness of companies like TSMC. Overall, the integrated ecosystem in these science parks creates a conducive environment for techn ...
Counterarguments
- TSMC's decision to prioritize Apple's 20-nanometer node over the 16-nanometer development could be seen as putting too much emphasis on one client's needs, potentially limiting innovation or opportunities with other clients.
- While TSMC is praised for its R&D capabilities, it's important to note that other companies are also making significant investments in R&D, which could challenge TSMC's leadership position.
- The claim that TSMC is superior to Intel in manufacturing quality is subjective and could be contested by pointing out areas where Intel or other competitors may excel.
- Customer trust and reliability, while important, are not the only factors that determine a company's success; innovation, pricing, and market conditions also play critical roles.
- The comparison of the Hsinchu Science Park to Silicon Valley might overlook the unique challenges and dynamics of operating within a government-sponsored industrial park versus a more organically developed tech hub.
- The proximity of companies and universities to TSMC is beneficial, but it could also lead to over-reliance on a single ecosystem, which might limit diversity of ...
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