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Morris Chang's Grand Alliance

TSMC Takes On Samsung

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TSMC Takes On Samsung

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Its stock price soaring and profits at an all-time high, TSMC has mobilized a "Grand Alliance" to battle vertically integrated Samsung and Intel. In an exclusive interview, Chairman Morris Chang explains how.

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TSMC Takes On Samsung

By Hsiao-Wen Wang
web only

At Taiwan Semiconductor Manufacturing Co.'s investor conference on April 18, TSMC chairman Morris Chang gave such an upbeat view of the company's prospects for the second quarter that it took analysts by surprise.

But maybe it shouldn't have. TSMC set company records for sales and profits in 2012, getting a positive start in achieving the ambitious goals Chang set for 2012 to 2017: 10 percent annual growth in pre-tax profit and keeping shareholder rate of return above 20 percent.

The company's share price has risen 25 percent over the past year, and its earnings last year accounted for 20 percent of the combined profits of the more than 1,300 companies listed on Taiwan's main stock exchange and its over-the-counter and emerging markets. The company's growth has injected a timely elixir into Taiwan's otherwise sluggish economy.

On the world's most technologically advanced semiconductor battlefield, the TSMC model has also demonstrated itself capable of fending off Samsung and Intel and plotting its own course, highly resistant to paradigm shifts in the industry.

Twenty-six years ago, nobody gave TSMC much of a chance when it was founded in the windy town of Hsinchu. Now, 26 years later, TSMC's market value is closing in on that of semiconductor sector king Intel.

For the first time in history, Taiwan has a company challenging the global leader in such an advanced technological arena. It is also the first time for a Taiwanese company to mobilize global technology players into a "Grand Alliance," directing a powerful force from a commanding height in the industry as it wages a war of "big capital."

"In the global PC ecosystem of the past, Taiwan occupied the link that had the lowest value. It simply followed Wintel (Windows and Intel). But in the semiconductor ecosystem, TSMC is the leader, standing on the front lines of technology," says Ji-ren Lee, associate dean of National Taiwan University's College of Management.

When the global high-tech sector was turned upside down as mobile devices supplanted personal computers, Samsung's vertical integration model was nearly accepted as the new paradigm.

But Taiwan is not South Korea. No single Taiwanese high-tech company can act like Samsung, which has bent its entire country's strength to its advantage, using cheap bank financing and export-stimulating depreciations of the Korean won to build itself up into a Goliath that accounts for 17 percent of South Korea's GDP.

Taiwan has embraced its own choice – allowing industries to flourish in diversity. And Morris Chang has made his choice as well – TSMC never competes with a customer.

Creating Value Together

Talking to CommonWealth Magazine in his office, the 82-year-old Chang was in high spirits as he outlined his "Grand Alliance" strategy for nearly two hours without the least sign of fatigue.

He worked his way around a chart of the Grand Alliance on his desk, pointing to TSMC in the middle, customers in one direction and equipment manufacturers in another, seemingly in total command and capable of vanquishing his rivals without much difficulty.

In creating an alliance with customers, equipment manufacturers, and intellectual property companies, TSMC is using "cooperation" instead of "coercion" and "creating value together" instead of "monopolizing profits."

The strategy devised by the semiconductor industry godfather is already yielding impressive results in the US$300 billion global semiconductor market, and the alliance's prospects have been enhanced further by the rare opportunity presented by the explosion of mobile device applications.

Every smartphone sold around the world contributes US$7 to TSMC's revenues. The company's biggest customer – fabless chip maker Qualcomm – also receives US$5-7 per unit in royalties. Because of TSMC, Qualcomm is able to concentrate on developing mobile phone chips, a relationship that has paid off.

Of every 10 mobile phones sold in the world, three use Qualcomm chips, giving it a market share 10 percentage points higher than Samsung's. Its market value exceeded that of Intel last year, and its net income rose 36 percent in the company's first quarter of fiscal 2013 ended on Dec. 30, 2012.

This alliance based on division of labor is increasingly forming a clear-cut challenge to vertically integrated conglomerates.

"The world is an oyster, and it's ours. Let us grab the opportunity together," Chang said at the end of last year at TSMC's annual Supply Chain Management forum, exuding confidence that the Grand Alliance will continue to emerge victorious.

He had a similar message at a TSMC technology conference in the United States on April 10.

"TSMC knows it is important to use everyone's innovation – ours, that of the equipment makers, of our customers, and of the IP providers. That's the power of the Grand Alliance. It defines the Grand Alliance as we relentlessly pursue our mission," Chang said.

"We want to win your trust, to build your technology, to support you!"

With Chang's words of encouragement to rally the troops, it was clear that the battle between the two competing models – TSMC's Grand Alliance and Samsung and Intel's vertical integration – was heating up, after years of preparation.

TSMC's capital expenditure has risen nearly five-fold in just five years and will likely exceed US$10 billion this year. Its R&D spending has more than doubled over the same period to US$1.6 billion. Engaged in a tug-of-war with the market, TSMC is constantly exploring manufacturing processes, materials, and equipment development that can set it apart.

"In this Grand Alliance, the combined R&D spending of TSMC and its 10 biggest customers exceeds that of Samsung and Intel together. The Grand Alliance has more innovation," Chang boasts proudly.

'Strong' Better than 'More'

The "Grand Alliance" model also naturally promotes survival of the fittest, and this is TSMC's key to success, Chang explained in his interview with CommonWealth Magazine.

Following are highlights from that interview:


Q: What are the differences between the mobile device and personal computer eras?

A: The emergence of the personal computer improved our productivity. Mobile devices have changed everybody's lifestyles and leave you connected at all times.

This change is good for TSMC's business, but is it good for society? Not necessarily. After the introduction of the smartphone, high-level executives simply have no time off. They never get any peace.

TSMC

2012 Sales: NT$506.2 billion, up 21%

2012 Profit: NT$166.2 billion, up 23%

Q: Is that how it is for you?

A: Of course. I never have a moment of peace. Even if I'm overseas on business and I've appointed a representative in my absence, people will still contact me if something important comes up because I have a smartphone.

Q: Why has TSMC now formed a "Grand Alliance"?

A: The alliance actually began the day TSMC was founded. It's just that its scale was very small at the time. Only after evolving for more than 20 years has it developed into today's "Grand Alliance." Simply put, it is an unofficial union of many different companies created to take on big vertically integrated companies.

In recent years, all technologies have become extremely complicated. It doesn't matter whether it's semiconductor technology or applications for smartphones, they all are more advanced and more complex than in the past.

Aside from a very few large-scale vertically integrated conglomerates, none of the companies that are part of our alliance are capable of coping with the war in this market on their own. The Grand Alliance is a natural association within a freely competitive market.

Q: What new capabilities are needed to manage this Grand Alliance?

A: The Grand Alliance is not being "managed" by any single company. For the alliance to exist, it depends fundamentally on the spirit of partnership. If one company wants to take control, the other partners will resist.

There has to be a spirit of partnership within the alliance, and at the same time each company must possess very strong capabilities in its field of expertise. Companies that don't have those capabilities will naturally fall by the wayside.

This is why a Grand Alliance is better than vertical integration. In a big vertically integrated conglomerate, you cannot eliminate any link.

In our Grand Alliance, you have upstream equipment manufacturers and raw material suppliers, us in the middle doing contract chip manufacturing, and many customers designing their own ICs downstream.

Within this supply chain, we have promoted an OIP (open innovation platform) and built an ecosystem with EDA (electronic design automation) and IP (intellectual property) companies.

These are all links in a chain, with several companies participating in each link. The capabilities of every company are of critical importance, and those without the necessary capabilities are eliminated.

The Grand Alliance has the function of naturally weeding out weaker players, with stronger players taking their place. All you have to do is take a look at our client base. Our big customers today are quite different from our big customers 10 years ago. Some of our biggest customers 10 years ago have already been knocked out.

Samsung Doing Very Well 'At This Time'

Vertically integrated organizations, like Samsung, make their own chips, design their own ICs and have their own intellectual property, and in the end their ICs are installed in their own series of products sold directly to consumers. All of that happens within the same company.

If its foundry doesn't do a good enough job, can it get rid of it? Of course, it can. It can contract parts to us. If it eliminates its wafer manufacturing and comes to us for chips, that would mean that Samsung is abandoning its vertical integration. I would welcome that.

I believe that in the end, vertical integration is not the right road because no one company, no matter how strong, can invent every technology and be the best in every link.

The success of a vertically integrated organization depends on each link being very good, and you can't deny that this year at this time, Samsung is doing very well.

I'll give you another example, this time of the reverse. Thirty years ago, Texas Instruments wanted to make itself vertically integrated and produce consumer electronics, calculators, watches and computers. It wanted to use its upstream strength in semiconductors to cultivate downstream businesses. But TI got too ambitious in the downstream area, and nearly destroyed the entire company.

Q: Because technology is getting more complex, does that mean the Grand Alliance needs even more members?

A: The main thing is not more members but stronger members. You say "more." I don't want "more." I want "strong." In the chip making business you need "strong." "More" is of no use.

Q: Within the Grand Alliance, how does TSMC allocate resources and capacity?

A: Capacity allocation has certain guidelines, but there are in fact conflicts and a lot of coordination is needed. The coordination does not have a fixed model; the key is our good business relationships with our customers. These relationships are open and positive cooperative business relationships. An important part of this is having similar values.

It's hard to form a partnership with somebody who doesn't have the same values as you. I always say "same will, unified path." Values are the path. If the paths are different, there can be no coalition.

In fact, for many years, we have not had to spend a lot of time thinking about capacity allocation. Most of the time, we are not completely satisfied. We want more orders. There is a lot of give and take.

Q: You returned as TSMC CEO in June 2009 and doubled capital expenditure in 2010. For the past three years, you have raised capital expenditure and R&D considerably. How were you able to see the opportunity and take the risk?

A: I saw mobile devices as a once-in-15-year opportunity for the semiconductor sector, at least in the last 30 years.

There was the personal computer wave in the 1980s and simple mobile phones in the 1990s. Smartphones took off in 2010. The telecommunications sector had long been talking about the evolution of technology from 2G to 3G to 4G. That parallels the evolution of semiconductor manufacturing.

I absolutely wasn't the only one to see the opportunity. We saw it and acted on it.

(Interview by Sara Wu and Hsiao-Wen Wang)

Translated from the Chinese by Luke Sabatier

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