I recently met with a product executive from Taiwan Semiconductor Manufacturing Company Limited (“TSMC”) - the world’s leader in advanced semiconductor fabrication who can call companies like Apple and Nvidia (amongst many others) as its partners. TSMC has grown into nearly a $1 Trillion dollar company that has achieved revenue growth CAGR of over 15% for nearly 30 consecutive years.
TSMC is a ‘pure-play’ fabricator - they do not design chips; the company is strictly focused on fabricating the designs of others. Simply put, without TSMC, companies like Apple and Nvidia would have nothing more than silicon designs on paper. It is the first fabricator to successfully produce process nodes of 3 nanometers (NM’s). I am not an engineer, but it is my understanding that the smaller the node of the processor, the more efficient the chip is (speed, power efficiency, etc.).
In 2020, TSMC committed over $10 billion of investment to build fabrication facilities outside of Phoenix, AZ - the actual investment is estimated to be nearly triple the original amount as it seeks geographical diversification due to geopolitical tensions in the Asia-Pacific region.
The TSMC Arizona project has not come without controversy. The company’s executive leaders have made a number of incendiary comments about the American workforce lacking both the skills and work-ethic needed to successfully achieve the promise of its investment.
As a shareholder of TSMC, I simply wanted to understand what enabled TSMC to achieve its current market leadership position and hold the keys to the advanced semiconductor gates of possibility.
Our customers are our partners and we rely on their input - we don’t know everything
TSMC was built on a sense of humility - it took a lot of time, investment and trust to build relationships that remain the core of its financial success today. It works hand-in-hand with its partners on setting and managing expectations on such cutting edge technology that it must advance every year to maintain its market position. For example, Apple was multi-sourcing its own silicon fabrication for a number of years to companies like Samsung, but the Samsung relationship was riddled with a number of issues (including tons of litigation around other issues) that prevented it from ever earning the trust it needed to really capture Apple’s commitment. TSMC brought a level of focus and expertise to the table that Apple wanted:
“We come to the table with a very simple message - semiconductor fabrication is all that we do - we are the best at what we do because of our focus. But make no mistake, winning Apple’s trust was all about proving [not just saying] we could deliver the best product at-scale and meet their deadlines.”
“Additionally, TSMC is very proud of working hand-in-hand with the executive leadership teams of its partners - we do not just take their designs and run with them; we always engage with our partners to understand and manage expectations - we work in an industry where production yield is significantly low at the beginning of a new process and those yields scale with production volume to drive cost-per-unit down. We need to know their product timelines so we can scale yields to a level that sufficiently meets their product rollouts and unit forecasts. It is a dynamic and day-to-day relationship that requires honesty and at-times, humility. We are best off by building trust with our partners - there is so much media in the world today, we are best off when we maintain direct communication so our partners hear from us.”
We understand our value in the value-chain
“We are the best in the world at advanced semiconductor fabrication. We do not try to be everything to everybody. We are not designers of semiconductors. The best thing that TSMC ever did was recognize that fabrication was a strategic differentiator when most of our competitors believed that the chip design was where you would win. Many viewed fabrication as a commoditized process; we viewed fabrication as an equal part in commercializing the best chips in the world. But, it took a vision many years ago to understand that and people even within the company did not always see it. There was a time when fabrication was not seen as a strategic piece of the value chain. Our leadership had the foresight into what chips would become in the future and the expertise required to translate designs into efficient and powerful silicon,”
We try to focus solely on product, not process
“TSMC is the company it is today because of an unrelenting commitment to our product. “We try to remain lean and we strive for a collaborative culture. However, we are not obsessed with committees, endless meetings about meetings, and we don’;t bring people into discussions that they do not need to be a part of. We want our people to focus on what they are great at and that requires organizational discipline. Our partners want the best product possible and we must align around that goal to be successful. We do not have the benefit of wasting time on worrying about internal processes - we have a formula that works and we see no reason to make it more complex than it needs to be.”
The comments about the American workforce were not taken well - we understand that cultural differences exist. We are in the business of making the best product possible and that requires a level of skill and commitment that we will not compromise on. We said what needed to be said.
“We made the investment in Arizona knowing there would be challenges of building fabrication facilities in the middle of a desert thousands of miles from our roots. Yes, we were caught off-guard by some of the deficiencies in personnel, but we always view these relationships at partnerships that require dedication to make them work. We are seeing progress and we have become much better with merging both corporate and geographic cultural differences. When we invest, it is not simply about deploying capital It is also about deploying our people to be on-the-ground. That is what true partners do - they demonstrate mutual interest with both financial and human capital. We are not there yet, but we have made significant progress in bridging the divides that we saw early on. We need this to work and are committed to making it work.”
If we do right by our partners, we will continue to be successful
“We report our earnings just like every other publicly-traded company. However, we don’t manage our business by quarter - if we did that, we would not be where we are today. We invest where we think strategic advantage exists and we are willing to give up short-term gains for long-term results. We see companies that are managing to each 90-day period and it shows - there is a lack of strategy when every decision is made on short-term gain - it is very tactical and you cannot be the best by simply managing with tactics.”