Why Apple, Nvidia and AMD use TSMC to make their chips : The Indicator from Planet Money One Taiwanese company, TSMC, makes 90% of the most advanced semiconductors — the chips for your phone or car. From Hong Kong to Boston to Texas to Taipei: This is TSMC founder Morris Chang's story.

The semiconductor founding father

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SYLVIE DOUGLIS, BYLINE: NPR.

(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")

DARIAN WOODS, HOST:

If you have the latest iPhone, you'll find inside it a computer chip with parts so fine-grained that you can measure them in atoms. That processing chip contains 15 billion transistors. The iPhone chip and most cutting-edge chips for computers and cars are made in a handful of factories on a small island in the Pacific in Taiwan.

ADRIAN MA, HOST:

And the story of how Taiwan came to make the most advanced chips in the world can basically be told through the story of one man - Morris Chang. He's like a founding father of the chip/semiconductor industry.

WOODS: It's not an exaggeration to say that Morris' personal career choices and his obstacles shaped the balance of power between the U.S. and the world.

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MA: This is THE INDICATOR FROM PLANET MONEY. I'm Adrian Ma.

WOODS: And I'm Darian Woods. Today on the show - how Morris Chang built up America's chipmaking industry and why he took it to Taiwan.

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WOODS: When Morris Chang grew up in China and Hong Kong, he fled three wars and saw a lot of poverty around him. So when he got into Harvard at age 18, he had one goal - to make money. And he looked around at what a middle-class kid from China could do to make a lot of money back in 1950.

MA: Engineering - so he left Harvard for MIT, which actually had an engineering program.

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MORRIS CHANG: I really wasn't all that interested in mechanical engineering or in engineering at all.

MA: (Laughter) But he's in it for the bucks, right?

WOODS: That's right.

MA: That is Morris Chang speaking in an interview with Stanford's president in 2014.

WOODS: And Morris eventually gets a job at electronics company Texas Instruments, and Morris is promoted really quickly. By the early 1970s, he's vice president. But pretty soon, he finds his career stalling, and he can't get promoted further. Chang-Tai Hsieh is an economist at the University of Chicago who grew up in Taiwan. And at one point, he even worked at the same organization that Morris once led.

MA: Chang-Tai says in the early 1970s, all chip design, manufacturing, testing and packaging was done in the U.S., and the U.S. was so dominant because semiconductors were invented here.

CHANG-TAI HSIEH: It was prohibitively expensive to get into this industry. You had to come up not only with the expertise to put together the design, but then you also had to spend several billion dollars putting up the manufacturing capacity. Then you also...

WOODS: Just a couple of details about how hard it is to manufacture semiconductors - your building has to be constructed so that it doesn't vibrate, down to just nanometers. You cannot build a facility where there's any dust that can fall on your chips. It has to be a thousand times cleaner than a hospital operating theater.

MA: But there were a few things other companies could do. In the 1970s, Morris Chang realized he could save his company a lot of money by outsourcing simple tasks, like packaging and testing, to Taiwan. In Taiwan, incomes were only about a tenth of American incomes. And Morris supercharged the company's growth by pioneering new ways of pricing the computer chips that would, you know, result in a loss now but capture the market share as the cost of making chips got cheaper and cheaper. Oh, and he also ran the division that invented the Speak & Spell.

WOODS: Chang-Tai Hsieh says that, despite Morris Chang's achievements, for the next decade, his career kind of hit a wall.

HSIEH: He wanted to be chief executive, and then - and this is something that he has said publicly. He had felt that, given the nature of the culture at Texas Instruments, he would never become the CEO, that...

WOODS: Why not?

HSIEH: Because he's Asian - I mean that's what he has said, that it was a very white company. There was a culture there in which people like him don't get promoted.

MA: Then in 1983, after a couple of years of agonizing and after 25 years with Texas Instruments, Morris Chang decided to leave the company. And before long, the premier of Taiwan recruits Morris to run this thing called the Industrial Technology Research Institute. Basically, the goal is to turn Taiwan into a tech powerhouse. Think of it as an organization that's part research, part government investing in new companies.

HSIEH: The culture very much was that of a startup.

MA: Chang-Tai worked here in 1990.

HSIEH: It wasn't a typical government bureaucracy. They were working 12-hour days in shoebox apartments. People get paid nothing. But there's this dream that - it's a combination of getting rich and that you're going to change the world.

WOODS: And before long, the government of Taiwan realizes, wait, we have the semiconductor superstar right in front of us - someone who could have been CEO at one of the very few companies in the world who can make cutting-edge chips. So they say, how about instead of helping out other companies, you run your own - a semiconductor company? And I want to pause here for a second because this is a pretty bold decision. It's a possibly foolish idea because history books are full of cases where a government says, we want to make whatever - cars, spaceships, cell phones - and then it just fails spectacularly. It costs an immense amount of money. It doesn't turn a profit most of those times. But Taiwan decides to do it with one of the absolute hardest types of businesses to start, both then and now.

MA: So Morris looks around, and he realizes there just are not enough scientists who know how to design chips to build, you know, essentially the Taiwanese version of Texas Instruments. So Morris says let's try something different. He thinks, what do we have? Well, we've got cheap labor that's getting more and more skilled at advanced manufacturing. We've got solid supply lines for factories.

WOODS: And then he thinks about how America almost has the reverse problem. It's got too many people who can design chips - so many people who would start their own semiconductor company. But building the factory in the U.S. is too expensive.

HSIEH: His basic idea was to say, you know, why don't we develop a company that would only serve other customers, in which we completely get out of the design business? We only do the manufacturing part of the business. And this would allow us to serve lots of customers that, at the time, their needs weren't being met.

WOODS: And this simple decision, this decision to separate manufacturing from design, completely changed the chip industry. In 1987, Morris Chang founded Taiwan Semiconductor Manufacturing Company, TSMC.

MA: And over the years, more and more companies started to use TSMC. Some big chipmakers even sold off the manufacturing parts of their businesses, knowing that, you know, they could design the chips, and TSMC could make them.

WOODS: And with the advent of TSMC and its Taiwanese competitor, UMC, some startup founder could have a great idea for a new chip, like a new graphics card for gaming, but they didn't need hundreds of millions of dollars. This is exactly what happened with Nvidia, which is now one of the world's biggest companies. It designs semiconductors in America, but TSMC makes them.

HSIEH: A company like Nvidia would not have existed without TSMC.

MA: So on the one hand, yes, TSMC took a lot of the chip manufacturing business away from America, but it also allowed entrepreneurial dreams from Silicon Valley to come true. Now, TSMC is the most important semiconductor company and the 11th largest company in the world. It makes 90% of the most advanced chips.

WOODS: It's so critical for global supply chains that U.S. lawmakers are nervous. In June, the U.S. Senate passed a bill called the CHIPS Act, which, if passed by the House and signed by the president, would mean $52 billion for companies making computer chips in America.

MA: Which is so much money, right?

HSIEH: It's not that much money relative to how much is needed to build it because each semiconductor plant is about $20 billion.

WOODS: OK, so you might be able to build two plants, maybe?

HSIEH: I guess my prediction is that this is going to be another boondoggle. It's that...

MA: And so this money is supposed to light a fire under the collective butts of the chip manufacturing industry, right? Like, what the U.S. is trying is something that the Taiwanese government tried about 35 years ago, and it worked for Taiwan because Morris had the skills and saw a slice of the market he could take at just the right time. And the government funded it like a business investment - right? - not a handout to a company.

WOODS: It's not clear that that's how the U.S. government will approach this. Chang-Tai says the money will almost certainly go to big companies.

HSIEH: I would say that the only plausible case for something like the CHIPS Act is if, at some point in the future, there's war between Taiwan and China, and TSMC is either destroyed or TSMC is taken over by the Chinese Communist Party.

WOODS: And the irony is, in another world where Morris Chang found more open doors in the U.S., a company like TSMC could have been American to begin with.

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MA: This show was produced by Viet Le with help from Nicky Oullet and James Willetts. Alex Goldmark edited this episode. And THE INDICATOR is a production of NPR.

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