Lessons from Taiwan's rise to dominate the computer chip industry
Steve Kelman notes that an assertive industrial policy can yield big wins for governments willing to invest and manage their investments.
I am spending two weeks in Taiwan, to meet with different groups of Taiwanese civil servants who have been students in an executive education program for Taiwan that I long chaired, and to give some academic lectures. This is my first trip to the country in 10 years.
Taiwan is a tiny nation of 24 million people, an island off the coast of China, with a neighbor that wants to eat it up and does everything it can to isolate it in the world. When I was growing up, Taiwan had an authoritarian government headed by Generalissimo Chiang Kai-shek, who fled to Taiwan in 1949 after losing a civil war to the Communists, and was a hero mostly to conservative Republicans in the U.S. But in the 1990s it peacefully evolved into a vibrant democracy, supported in the U.S. pretty much across the political spectrum. (Nancy Pelosi visited a few months ago, arousing China's ire, and her visit prominently included a stop in the nation's Museum of Human Rights, which I have also visited during my stay.) The country also is the site of the largest LBGTQ rights organizations in Asia and of Asia's main annual gay pride parade.
But perhaps more relevant to readers of this blog, this tiny country is also a tech powerhouse. With its Acer and Asus brands, it is a big producer of PC's, though well behind China's Lenovo. But more importantly, the country now produces 65% of all the semiconductors in the world and 90% of the most-advanced semiconductors. And recently their leading producer, Taiwan Semiconductor Manufacturing Corporation, announced a $40 billion investment to build a manufacturing plant in Arizona to supply Apple and others with advanced computer chips. The move represents one of the largest single foreign investments in America in our history. This coming from a country of only 24 million people!
The founder and former CEO of TSMC, Morris Chang, was born in Shanghai, but lived for decades in the U.S., rising to senior executive positions at Texas Instruments and then General Instruments. He decided in the late 1970s to come to Taiwan (where he had never lived) to retire. It has been suggested he was upset about anti-Asian sentiment in the U.S., but China, at that time in the closing years of the chaotic Cultural Revolution, was, unlike Taiwan, not an attractive alternative place for those of Chinese ethnicity who wanted to leave the U.S.
What is fascinating is that he came to Taiwan not to be involved with a company (as he had done for decades in the U.S.) but rather to head a government-affiliated organization, the Taiwan Industrial Research Institute, that sought to promote development of the high-tech industry in Taiwan. The Taiwan minister of economics made a personal appeal to Chang to come to Taiwan to do this, and he accepted. He was thus taking a very dramatic step to do what we often call in the U.S. "giving back" to his people – a step we can admire and recommend for U.S. tech executives.
After several years running the Industrial Technology Research Institute, Chang went back to his industry roots to found TSMC. As an interesting sidebar, he gave the company a name starting with "Taiwan." Few Americans would appreciate this, but at that time many established Taiwanese would have used the word "Chinese" to describe a company they were starting (the legacy Taiwan telecom company is called "China Telecom"). The word "Taiwanese" was more associated with the pro-democracy movement in Taiwan and people proud of Taiwan's own culture.
The success of TSMC has two lessons for U.S. tech, one involving the role of government help, and the other involving the value of focus. TSMC was originally established at a government-run industrial park near Taipei that now includes about a hundred startups that are right next to each other, providing what some call "cluster effects" – advantages from having companies close to each other where they can cross-pollinate. The Taiwanese government also believes in the kind of industrial policy of trying to support "winners" that is controversial in the U.S. In its early years, the government made very significant financial investments in TSMC, and for some time was the company's major shareholder. (Now most of the shares are owned by international institutional investors, and the percentage still owned by the government is small.) By contrast, the Taiwanese PC makers Acer and Asus, which have much-smaller capital requirements, were established and grew without government help.
What distinguishes TSMC is that it has focused on being good at just one thing -- manufacturing semiconductors -- different from the strategy of other industry leaders such as Intel that mix design and manufacturing skills. So, for example, TSMC is better than anyone at improving the yield of usable chips in manufacturing. They grew because companies such as Apple decided to specialize in design and outsource manufacturing to vendors such as TSMC.
Semiconductor manufacturing is also a capital-intensive industry, because the equipment used to manufacture semiconductors is very expensive. So success goes to the biggest. Thus another key to TSMC's success was its emphasis on raising capital that allowed it to get very big.
Chang is now 91 years old and still living in Taiwan. To me, he is a tech hero, a role model (because of his involvement in public service), and yet another immigrant success story for our country. Warren Buffett recently announced a $4.1 billion investment in the company. Chang deserves to be better known in the U.S.
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