Morris Chang, Global Semiconductor Competition, Make “Making Stuff” Cool

(The audio version of this post can be found on the Interconnected YouTube channel):

Morris Chang, the founder and two-time CEO of the Taiwan Semiconductor Manufacturing Corporation (TSMC), gave an hour-long speech to a room of Taiwanese government and business leaders a couple of weeks ago.

The speech received some light reporting from Chinese media and hardly any coverage at all in Western media, even though the 90-year-old industry veteran shared valuable insights on the global semiconductor competitive landscape.

I did a summary Twitter thread of Chang’s assessment, but there is a lot more to learn from what he said, especially as we look ahead to the technology competition between the US and China, where semiconductor plays a major role.

Let’s dig into why, in Chang’s eyes, TSMC succeeded, who he thinks will be a fierce competitor (spoiler alert: Samsung of South Korea), and why both the US and China will have their work cut out for them, if they try to replicate TSMC in their own backyard. (Pictures are screenshots of Chang’s slides during his speech.)

Taiwan’s Non-Obvious Advantages

Chang laid out three major advantages that led to Taiwan’s success -- all of which are rather non-obvious to me and require some dissecting.

1. Technical Talent: Taiwan boasts a large number of dedicated engineers, technicians and other technical workers, who want to devote themselves to the advanced manufacturing industry (emphasis reflects the slide’s red highlight).

This is perhaps the most obvious of the non-obvious advantages. Obvious because strong talent is a prerequisite to any successful venture. Non-obvious because in 1985 when Chang went to Taiwan to start TSMC, Taiwan was not known for being a technical powerhouse -- those distinctions belonged to the US, Japan and parts of Europe. Chang had to attract a group of senior level talent from the US, most of whom of Taiwanese descent, to return to Taiwan to get TSMC going.

Chang attributed the dedication of these engineers to the Taiwanese people’s hard working spirit, which he does not see in America. This observation is true to a large extent. The 24-hour R&D operation, dubbed the “Nightingale program”, that TSMC was running in the mid-2010s during Chang’s second stint as CEO, would be unthinkable in the US. But this assessment also obscures some structural differences. Being a small, not-so-diverse economy, working for TSMC carried both lucrative rewards and social prestige in Taiwan. Without nearly as much competition from other high-paying industries, like finance, consulting, software tech, etc., TSMC is the place to be! Thus, the company has an envious 3-4% employee turnover rate.

2. Local Professional Management: Taiwan developed a strong corp of local, competent managers, though these managers will not perform well in other countries.

This advantage has a lot of subtleties. While having good managers is key to any company’s success, it’s particularly important for the operations-heavy, efficiency-driven chip foundry business. The localization of quality managers is what Chang believes made TSMC successful in Taiwan, but by the same token, will make it less successful abroad in places like Arizona.

In other words, managerial talent does not transfer well across borders, certainly compared to technical talent. Chang, as a seasoned American executive, admitted feeling this challenge and requisite cultural shock firsthand when he was starting TSMC. Up until that point, he has spent his entire adult and professional life in the US.

3. Highspeed Railways and Highways: Convenient, high speed transportation enables quick deployment of thousands of technical and manufacturing workers between TSMC’s three hubs -- Hsinchu, Tainan, Taichung -- without these employees needing to relocate their families.

This is the most non-obvious of the three advantages in my opinion. The fact that you can have close to a one-day commute between these three locations gives TSMC maximal flexibility to optimize its human resources to achieve both manufacturing and R&D output. According to Chang, these workforce redeployments can often last up to a year. If workers are forced to move their families every year due to reassignments, turnover rate will inevitably go up.

This advantage underscores an important point: the quality and convenience of basic infrastructure, like highways and highspeed railways, are crucial to not just the supply chain side of advanced manufacturing, but also the human management side. It is also why Chang is bearish on any attempt to replicate what TSMC has in Taiwan in a place like Arizona, where the geography is a massive sprawl with no railways to speak of.

Morris’s Own Ambition

One other non-obvious and under-emphasized advantage is Morris Chang himself -- a highly intelligent, driven, and ambitious individual who happens to be of Taiwanese descent.

Chang had wanted to become CEO of Texas Instruments, but he was passed over for the job. So he promptly left for General Instrument as its No. 2 executive at the time, no doubt in preparation to become CEO. That is until Chang realized General Instrument was not the company he wanted to take over, so he promptly left for Taiwan. (General Instrument became defunct 12 years after Chang left; he made the right call.)

Chang went to Taiwan in 1985 to become an entrepreneur and call the shots as CEO, at the ripe age of 54. Even today, when entrepreneurship is much more socially accepted and capital to invest in startups is as plentiful as ever, if you start a company in your 40s, you’d be considered “old”. Even though he has already had a successful career as a corporate executive, “Old Man Chang” was still ambitious and had more he wanted to do and prove.

Chang was also not a “nerd” from the beginning per se, like Gordon Moore (of Moore’s Law), who was doing chemistry experiments and making explosives in his garage during high school. Chang had many non-technical interests. As he shared with then Stanford president, John Hennessy, in 2014 in a Stanford Engineering Hero Lecture (video below), when he enrolled at Harvard as a freshman in 1949, he was very interested in politics, economics, and other social sciences -- not engineering. But there were no Chinese American politicians or notable businessmen, just laundromat, restaurant, and store owners. The way Chang saw it, the only way to get a middle class job was engineering or academic research, and Harvard didn’t have an engineering program at the time. Chang transferred to MIT and studied mechanical engineering out of pragmatism and lack of Chinese American role models!

Even though the rest is, as they say, history, had there been an Asian American governor, like Gary Locke, or senator, like Daniel Inouye, at the time, Chang might’ve been running for public office, not running semiconductor companies. And had he gotten the No. 1 job at Texas Instruments or decided to take over General Instrument, he would have never returned to Taiwan. TSMC would’ve never existed, and we may be living in a totally different world.

Our times shape our heroes. Our heroes shape our times.

Global Competitive Landscape

With Taiwan’s advantages and his own lived experience in mind, let’s look at what Chang thinks of the global semiconductor competitive landscape, namely the US, China, and South Korea (screenshots of his slides below).

The US: Strong Competitor with Structural Weaknesses

The US is still a strong competitor given its vast resources in land, water, and affordable electricity. These are attributes Taiwan, a small island, will never have. However, America does not have the three ingredients that made Taiwan the right place to enable TSMC’s success.

In his speech, Chang was gentle but firm in criticizing Americans as simply not as dedicated and hardworking as the Taiwanese. Along the same vein, he does not think America has the needed management talent nor does he believe Taiwanese managers will do well to fill the void in America. (It’s an assessment TSMC certainly hopes to prove wrong with its $12 billion investment to build a 5nm foundry in Arizona.) He was also dismissive of Arizona as the right location to concentrate America’s semiconductor manufacturing development, for reasons I’ve already outlined.

Why is Arizona getting so much investment and attention? Its recent status as a hotly contested swing state may have at least a little to do with it.

Thus, what America has Taiwan does not. What Taiwan has America does not. And it's more than a little ironic that Intel is trying to replicate TSMC, after arrogantly turning down the opportunity to invest in TSMC 35 years ago when Chang was trying to raise money for it.

Because America’s weaknesses are more structural, federal and state level subsidies are temporary bandages at best. Even putting the timeline issue aside, TSMC’s raw investment commitment of $100 billion in the next three years dwarfs that of Intel’s $20 billion investment in the next four years and the Biden administration’s proposed subsidy of $50 billion combined.

China: Weak Competitor

China’s semiconductor ambition and eye-popping investment amount from the central government grabs a lot of headlines, but Chang dismissed it as a weak competitor and spent less than a minute talking about it.

In his eyes, China is one to two years behind both the US and Taiwan in the logical chip design sector, and more than five years behind TSMC in manufacturing. China is not a threat. This dismissal is also implicitly aimed at some of his former TSMC top lieutenants, like Liang Mong-Song and Chiang Shang-Yi. Chang recruited them as part of the founding team of TSMC. Liang is now the co-CEO of China’s national chip foundry, SMIC. Chiang re-joined SMIC as a Deputy Chairman after being CEO of another Chinese foundry, HSMC, recently exposed as a fraud (for more, see “China's ‘Semiconductor Theranos’: HSMC”).

South Korea: Very Strong Competitor

The only competition that seems to keep Chang up at night is South Korea’s Samsung. The reasoning is quite straightforward now that we know what Chang thinks are TSMC’s “secret sauce”. Both South Korea, the country, and Samsung, the company, display similar attributes as Taiwan and TSMC, respectively. Of course, the same lens would also suggest that Samsung’s ventures in the US are doomed to fail, because top-notch Korean managers don’t necessarily perform well in America or elsewhere. For what it’s worth, Samsung’s Texas foundry is manufacturing Tesla’s most important component, its custom-designed Full Self-Driving chips. Is Samsung proving Chang wrong?

TSMC and Samsung have had a complicated and dramatic history. Back in 1989, Samsung tried (and failed) to recruit Chang himself, just two years after he started TSMC. The poaching has not stopped since and eventually people like Liang joined Samsung, which caused huge public uproars and high-profile lawsuits in Taiwan; the defection was akin to treason. When those top executives left for Samsung, Chang admitted it was the most challenging moment of his TSMC career.

South Korea and Samsung have always kept Chang up at night. That hasn’t stopped.

No Japan or Europe

Chang barely mentioned Japan and Europe during his speech, clearly not seeing either as a legitimate threat to TSMC.

Chang’s attitude towards Europe is not so clear, and I don’t know enough about him to make educated guesses. Looking at the industry as a whole, it does appear that the major European players have been playing a more complementary role to TSMC, not a competitive one. Leading chip companies like NXP are mostly fabless customers to TSMC, just like Qualcomm. Meanwhile, leading equipment makers like ASML treat TSMC as their most important customers. In 2020, TSMC accounted for 31% of ASML’s revenue -- the single largest source. That number will only grow given the global chip shortage and TSMC’s massive investment to fill it.

Chang’s attitude towards Japan is clear and has been expressed many years ago. In the same conversation with Hennessey I mentioned above, Chang shared his view that Japan’s refusal to embrace the fabless evolution hampered its ability to innovate and stay ahead. That evolution was in large part catalyzed by TSMC’s existence; self-interestedly, embracing fabless would also give TSMC more customers in Japan. In the end, Japan never did, but America did. Thus, much of the new chip design innovation accrued to American companies, but so began the hollowing out of America’s manufacturing capabilities.

Lessons to Learn?

Every runaway successful story is built on a mystical alignment of timing, resources, and an almost un-human level of hard work, patience, and dedication by extraordinary humans. TSMC is one of these stories. These stories are impossible to replicate, but are there lessons to be learned, especially for the US and China?

In this regard, there are more similarities than differences between the two superpowers. Both countries have a surprisingly short-term perspective when it comes to building their own semiconductor manufacturing, even though the TSMC experience clearly shows that it’s a multi-decade process. China has its “Made in China 2025” plan. The Biden administration’s proposed $50 billion program will surely not go beyond 2024, just given the American presidential electoral calendar. Despite governing via two different political systems, short-termism has infected both, because both leaderships are under pressure to “deliver”.

Multi-decade time horizon would be the first lesson I would draw.

There’s a second lesson I would draw: innovate to motivate.

As Chang poignantly pointed out, manufacturing is no longer a “cool place to work” that attracts the best and brightest in America; if you are young and smart, there are many industries to join with more money and prestige. You can say the same about China too, an increasingly diverse economy with plenty of ways to make money quicker than working in a chip foundry. And you can’t blame everyday citizens for making these choices; they are simply responding to the incentives available to them.

The nice thing about a smaller economy, like Taiwan and South Korea, is that while there are less resources, there are also less options, less distractions, and consequently a more singular focus when it comes to industrial policy. That context simply can’t be replicated in a large country.

The nice thing about a large economy, like the US and China, is their vast resources in terms of land, people, money, and the capacity to push boundaries of innovation that small countries would never dare to try. So to make “making stuff” cool again by only recreating the wheels of semiconductor manufacturing won’t work well, when Taiwan and South Korea already did that in the 80s and 90s, and especially when Moore’s Law is approaching its limit. Instead, a national call to action that motivates the best and brightest to make stuff to tackle climate change, quantum computing, space travel, or biotech -- all of which will need more semiconductors anyways -- is what big countries can uniquely deliver.

When Morris Chang started TSMC, I’m sure he never thought his creation would not only disrupt the most consequential sector of technology, but also give the world’s two superpowers plenty of heartburns and insecurities.

Heartburns and insecurities may just be what the doctor ordered for big countries to wake up to their senses and compete in a positive-sum way.

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