Telltales Founder Stories: Taiwan Semiconductor
Morris Chang's unlikely path to revolutionizing the semiconductor industry and securing Taiwan's future
This is the first article in a series we are calling Telltales Founder Stories. Each article contains a brief history of the founding and rise of some of the most interesting companies in the world.
This document is Gwendolyn Lawrence’s private work and should not be disseminated without her permission. It is prepared for research purposes only and does not constitute investment advice.
The Taiwanese Semiconductor Manufacturing Company Limited, or TSMC, dominates our current-day chip industry. Its success is reliant upon a number of factors, but the most crucial include the political environment in Taiwan at the time of the company’s founding and the character and skill set of its founder, Dr. Morris Chang.
Chang was born in 1931 in Ningbo, China, to a relatively comfortable middle-class family. His father was a county official but eventually became a bank manager. Due to his father’s career as well as the outbreak of several conflicts in China, Chang’s family moved around the country often. They were forced to flee to different cities three separate times after the outbreak of World War II, the Sino-Japanese war, the Japanese occupation of Hong Kong (where the Changs lived at the time), and the Chinese Civil War.
In 1949, Chang immigrated to the U.S. in order to attend Harvard University. The move brought him increased stability, and he characterized his first impression of Harvard as “sheer ecstasy.” However, his parents remained overseas and Chang faced difficulties with the cultural changes, his separation from his family, and racial discrimination. While Chang sought a PhD in mechanical engineering, he failed the qualifying exams twice and was forced to abandon his goal.
Chang transferred to MIT in 1950 in order to pursue mechanical engineering, which was not offered at Harvard at the time. He received his bachelor’s and master’s degrees by 1953 and joined Sylvania after turning down a job offer from the Ford Motor Company. However, Chang eventually realized Sylvania could not fulfill his ambitions and he moved on to work for Texas Instruments1.
In 1958, the same year that Chang joined the company, Texas Instruments was making its biggest technological advancements in years. Texas Instruments was the technological leader of the time, predating Silicon Valley’s dominance over the industry, and their innovations in introducing the integrated circuit were enormous scientific achievements. Chang was assigned to a difficult project- finalizing a contract manufacturing deal for the chips Texas Instruments needed2.
Chang’s experience with mechanical engineering allowed him to revolutionize the processes Texas Instruments employed while making their circuits and chips, resulting in a huge gain for the company and TI’s sponsoring of Chang officially studying electrical engineering. Chang pushed the controversial innovation of pricing semiconductors at a lower amount, sacrificing short term gains to maximize long term rewards and increased market share3. Previously, Chang studied the subject on his own by reading textbooks and asking coworkers questions about the field. After his innovation, Texas Instruments funded his education and paid him a salary while he studied, allowing him to finally complete his long-awaited PhD. Chang was quickly promoted to a managerial position and helped Texas Instruments heavily expand their market share, eventually being promoted to Vice President of the company, second in line to become CEO. However, he was soon assigned to manage consumer products, a field he had little experience in. With no marketing training, Chang was unable to accomplish the goals Texas Instruments expected of him and was eventually demoted. Facing a negative culture of rotation, racial discrimination, and finally being passed over for CEO, Chang left TI.
While working at TI, Chang made a valuable observation: TI’s factory in Japan was achieving double the chip production yield of TI’s Texas-based factory. Chang noticed the superior qualifications and lower turnover rates of Japanese employees and, after failing to match that productivity in the United States, Chang hypothesized that the future of tech manufacturing was in Asia, rather than America.
After leaving Texas Instruments in 1983, Chang saw two possible branches for his career: become a venture capitalist, or take the position of COO offered to him by General Instrument Corporation. He accepted the offer, choosing GIC, but stayed with the company only briefly before moving on to the Taiwan semiconductor industry4.
K. T. Li, a powerful Taiwanese politician, set in motion the process that would lead Morris Chang to head TSMC. For decades Taiwan had been determined to break into the semiconductor industry. Vulnerable to the whims of its powerful neighbor, China, Taiwan looked to the chip industry in order to make jobs, advance technology, and improve its security relationship with the U.S.. K. T. Li, who had connections to Texas Instruments, was attempting to convince foreign electronic firms to build factories in Taiwan. He visited Chang during trips to the U.S. and, in 1985, recruited Chang to head the expansion of Taiwan’s chip industry.
Taiwan was already one of the leading Asian countries in assembling semiconductors, but relied on foreign firms to manufacture parts. This dependence held back Taiwan from reaching the forefront of the industry; the market for designing and fabricating chips was much larger and more lucrative than simple assembly. Taiwan had been in economic competition with China, South Korea, Singapore, and Malaysia for decades, a struggle that now extended to the semiconductor sector. China represented by far the largest threat. China’s enormous workforce of impoverished farmers eager for factory jobs meant Taiwan could not meet their low prices. Chang sought to eliminate the need to compete with China on prices by producing advanced technology in Taiwan itself5.
The Taiwanese government successfully recruited Morris Chang by promising essentially unlimited funding for the development of the semiconductor industry. After being passed over for CEO at Texas Instruments, the position was exactly what the 54 year-old Chang was looking for. The official position offered to him was director of the Taiwanese government’s Industrial Technology Research Institute.
TSMC was always a political entity. The Taiwanese government supplied 48% of the startup capital. Chang was unable to convince his former colleagues to invest in the endeavor, but secured the backing of a Dutch semiconductor company, Philips, which agreed to put up $58 million in return for a 27.5% stake. The Taiwanese government indirectly provided the remaining capital by insisting that wealthy Taiwanese families invest in the company. In addition to financial commitment, Taiwan’s government allowed generous tax breaks and leeway for the company. Chris Miller writes in Chip War, “From day one, TSMC wasn’t really a private business: it was a project of the Taiwanese state.” In 1987, TSMC was officially founded and would soon become one of the leading chip manufacturers in the world.
TSMC experienced a slow but successful start, largely dependent on its relationships with the U.S. chip industry. The majority of its early consumer base was made up of U.S. chip designers, and many high-ranking employees had experience working in Silicon Valley. Don Brooks, the former TI executive who Chang hired as TSMC’s president in the 90s, reported that most of the higher level employees who reported to him had some experience in the U.S., working for companies like Motorola, Intel, or TI. The majority of TSMC executives were trained in top programs at American universities. During the 90s, half of TSMC’s sales were to U.S. companies. These ties were beneficial to both sides. “Fabless” firms, hoping to avoid the cost of manufacturing their own fabs through outsourcing the process to bigger chipmakers with spare capacity, encountered difficulties in trying to work with competitors. Not only did bigger chipmakers prioritize their own production plans, but fabless firms risked their ideas being stolen. Lowered startup costs from outsourcing fab manufacturing came with downsides. TSMC eliminated these issues. Since Chang pledged to only build and never design chips, many of the problems fabless firms were facing could be solved by working with TSMC. Instead of competing with its customers, as larger chipmakers had done before, TSMC formed a symbiotic relationship with them. TSMC’s model was so beneficial for these firms that dozens of new ones began popping up, transforming the tech industry as computing power was implemented in more and more devices and providing TSMC with more customers.
TSMC’s dominance snowballed through the 90s and beyond, propelled by the growth of their customers. By taking advantage of the hyper-competitive, quick-changing nature of the tech sector and specializing in a specific invaluable industry, TSMC has remained at the forefront of its industry. While China, Taiwan’s most intimidating competitor, had an enormous workforce, China was technologically backwards and cripplingly impoverished. In addition, China’s strained relationship with the U.S., American embargos, and leftover Maoist stigma around the electronics industry contrasted heavily with Taiwan’s open, advantageous connections with the U.S. and a widespread cultural enthusiasm for technological and intellectual advancement. TSMC, ultimately a product of Taiwan’s government, would take advantage of these factors and grow to dominate the tech sector6.
Chris Miller, Chip War
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