The Sentinel #10: TSMC Story

Middle Age, Morris Chang and Michelle Yeoh

This week has been a tough week in Silicon Valley with a run on the Silicon Valley Bank. I will focus on the supply chain hardware silicon — something that the valley needs more of. Also, on finding inspiration and success in the ‘late’ stage of life.

Photo by Laura Ockel on Unsplash

The global chip shortage has had everyone on the edge for a while. I think over the last two years, more people have gotten interested in Supply Chains and have heard a lot about a specific company in Taiwan at the back-end of Supply Chains, called TSMC (Taiwan Semiconductor Manufacturing Company). 

I don’t want to get into the messy geopolitics in this post, but a quick snapshot summary is of order. Since the Nixon administration, the United States has adhered to the “One China” policy, while maintaining ties with Taiwan and continuing to provide tacit military support.  Given its stupendous growth in the last few years, TSMC has also become a massive strategic asset as its biggest buyers are in China and the US.

In addition, the US-China relationship is currently at its nadir, with the Biden government very much following the Trump administration on tough-on-China policy. In fact, recently, The Netherlands, the home country to ASML, one of the biggest suppliers to TSMC, has been caught up in the tensions. ASML manufactures machines that companies like TSMC use to manufacture semiconductors. (I will write more about ASML later on in this newsletter). Now, under pressure from the US government, the Netherlands is going ahead with export restrictions on China which prevents China from building strong competitors to TSMC.

Growth of TSMC in recent years (source: WSJ)

Looking at the figure above, you can see the accelerating capital expenditure of TSMC, which has also accompanied explosive growth in market share. TSMC has also overtaken Intel in many significant ways, but most importantly, in capability. 

TSMC has for many long years, exclusively manufactured only in Taiwan. Now in the geopolitical spotlight, in 2022, it is expanding its production to Japan and the United States. In recent years, Arizona had been encouraging TSMC to set up a fab plant. TSMC initially pledged $12 billion toward the Arizona project. Now, it has increased that outlay to $40 billion. The Arizona plant will be making 5-nanometer tech chips, while the industry is increasingly moving to 3-nanometer chips. One can see the echoes of the Foxconn project in Wisconsin, trying to manufacture a phasing-out technology like LCD televisions.

Edit (thanks to reader MG):  TSMC does indeed plan to make 3nm chips in phase 2 of the production (my guess is 2026). This plan makes me hopeful: Build scale by making the “easier” 5nm node and then move production quickly to the 3nm node.

Humble Beginnings

The founding of TSMC itself is an interesting story. I always love the story of engineers and businesses. So here it goes.

The founder of TSMC, Morris Chang, was an executive at Texas Instruments (TI) for twenty-plus years.  Mr. Chang earned an undergrad and a master’s degree in Mechanical engineering at MIT — a fellow mechanical engineer!  TI even sponsored his Ph.D. in engineering at Stanford paying him his full salary. After six years of heading their fledgling semiconductor line of business, he was expected to be promoted to the C-suite.  But, of course, at this point, strange things happened. Actually, not very strange, as CEOs then tended to be cut from the same cloth. Mr. Chang was, in his own words, “put out to pasture”, by being made junior staff in another losing consumer business line.

So far, I find this story very much like the backstory of Vyomesh “VJ” Joshi, who ran Hewlett Packard’s most successful division - the printer division, but repeatedly passed over for other characters (see Carly Fiorina, Mark Hurd, and Meg Whitman) that have led HP as its CEO.

Anyway, at the age of 52 — when many would retire and take up golfing — Mr. Chang founded TSMC.

Value Chain: Moving from Cost to Capability.

TSMC’s proposition to vertically integrated companies was simple.

Please let us take care of the production and manufacturing, and you can focus on the design. People (still) think of fab production as “low end” and design as “high end”.  AMD was one of the earliest companies to sell its fab plants and outsource the fab production to TSMC. The primary reason to do such outsourcing is, of course, low cost.

Many US companies increasingly premised their competence on design and outsourced manufacturing now with the emergence of Apple and Qualcomm, this idea is quite old. In fact, Apple proudly proclaims “designed in California”, but their phone processor chips are exclusively manufactured by TSMC.  Happy to be corrected, but TSMC is their biggest supplier after Foxconn, and Apple is TSMC’s biggest buyer.

Many view manufacturing as “low-end” work, but knowledge flows upstream.

A lot of engineering and process knowledge critical to middle management is accrued through “learning by doing”. There was certainly a lot of “doing” at TSMC. All the while, no one paid attention to all the learning that was happening at TSMC.

During all these production runs and increasing manufacturing scale, their capability was getting better. In the midst of all this Mr. Chang, now 90, made an early bet on extreme ultraviolet lithography. Along with Samsung (see chart above again), TSMC is now a world leader in the segment of ultraviolet lithography. (See my previous post on how technology affects Art in my post on Toulouse-Laurtrec).

Now, with the CHIPS act, the United States is actively investing in manufacturing locally. There are some roadblocks. The cost of manufacturing and building capacity is ten times higher. The most important problem is not costs, or supply of parts but labor supply and talent. It has been hard to train workers and engineers. (The CHIPS act requires companies seeking awards of $150 million or more to guarantee affordable, high-quality child care for plant construction workers and operators).

Bullwhip in Auto Supply Chains

The extreme shortage of auto supply chains during the pandemic has a simple connection to all of the above factors. The “low quality” auto chips are less than 5% of TSMC’s revenues. When covid hit, automakers dialed back their production, and probably canceled orders. While running at full capacity due to the post-covid explosion in the home computers and phones, TSMC had its capacity reallocated to more profitable lines of business.

Film Notes:

This newsletter goes out a few hours before the Oscars this year. It is expected that the Indian movie RRR will win the award for Best Song at the Academy Awards, giving me an excuse to write a future post on Indian films.

For now, I want to recognize the fabulous Michelle Yeoh — ever amazing since her Hong Kong days. Yeoh likely wins an award for Best Performance by an Actress in a Leading Role in (I must admit) a lackluster film. She should have been nominated for Crouching Tiger, Hidden Dragon. Instead, Julia Roberts won the award that year for Erin Brockovich over absolutely more deserving acting performances by Laura Linney (You can Count on Me) and Ellen Burstyn (Requiem for a Dream).

I leave you with a trailer of Michelle Yeoh’s early movie, one of my guilty pleasures, a soapy, sappy, wall-to-wall action film called Royal Warriors in which she wears 80s-style boyfriend shirts while taking out bad guys.