Taiwan’s rise in semiconductors and birth of TSMC

One afternoon in 1985, Taiwan’s influential minister K.T. Li invited Morris Chang to his office. Nearly two decades earlier, it was Li who had persuaded Texas Instruments to set up the first chip factory in Taiwan. But this time, he wanted something much bigger. Looking directly at Chang, he said, “We want to build a semiconductor industry in Taiwan. Tell me, how much money will it take?”

The word globalization was not yet widely used then. But Taiwan had been planning its entry into the industry since the 1960s. Its goals were to create employment opportunities for its people, master advanced technology, and strengthen ties with the United States.

At that time, Taiwan’s semiconductor sector was mostly focused on importing foreign chips for testing and packaging. Although there was plenty of work, the real profits went into the pockets of foreign companies, as the most lucrative part of the business lay in chip design and manufacturing. Li realized that Taiwan’s economy could no longer advance significantly through assembly work alone.

Competition in Asia’s semiconductor industry was fierce. When Chang first visited Taiwan in 1968, the country was competing shoulder-to-shoulder with Hong Kong, South Korea, Singapore, and Malaysia. By the 1980s, Samsung and other major South Korean companies had started making massive investments in advanced memory chips. Singapore and Malaysia also wanted to move ahead but were struggling to succeed. To survive, Taiwan had to accelerate its technological development.

Then came China’s challenge. After Mao Zedong’s death in 1976, China opened up its economy. With cheap labor and a massive workforce, it quickly became Taiwan’s main competitor in electronics assembly. Competing with China on cost was impossible. For Taiwan, moving into advanced technology was the only path forward.

In this critical moment, Li once again turned to Morris Chang. Chang, meanwhile, had spent over two decades at Texas Instruments. But frustrated at not being promoted to CEO, he left to become the head of General Instrument in New York — a position he was not happy with either. At 54, he was seeking a new challenge. When Taiwan offered him the responsibility to build an entire industry — along with a blank check — he accepted.

Chang’s plan was radically different. He envisioned a company that would focus solely on manufacturing chips — without designing any itself. At the time, giants like Texas Instruments, Intel, and Motorola did both design and manufacturing under one roof. Chang had proposed this “foundry model” to Texas Instruments back in 1976, but the company had rejected it. By the 1980s, new design methodologies made it easier to separate design from manufacturing. So when the opportunity came, Chang revived his dream.

Minister Li kept his promise. The government invested 48% of the capital for the new company — on the condition that a foreign partner had to be brought in. Chang approached Texas Instruments and Intel, but both declined. Intel’s Gordon Moore bluntly told him, “Morris, you’ve had some great ideas in the past. But this isn’t one of them.” In the end, the Netherlands-based Philips stepped forward — investing $58 million, providing technology, and taking a 27.5% stake. The rest of the funding came from Taiwan’s wealthy families, whom the government encouraged to invest with tax incentives. Thus, TSMC was born — a company that was, from the beginning, a state-backed project rather than a fully private enterprise.

From the outset, TSMC’s deep relationship with the United States made it stronger. Its main customers were American chip designers. Many of its top executives came from Silicon Valley or held PhDs from American universities. By the 1990s, half of TSMC’s sales came from U.S. companies.

Before TSMC, small fabless companies — those without their own manufacturing facilities — struggled with production. Large manufacturers didn’t prioritize them and sometimes even stole their ideas. Moreover, manufacturing processes varied from one factory to another.

TSMC’s foundry model solved these problems. Chang promised that TSMC would never design its own chips — it would manufacture only for clients. This made TSMC a partner, not a competitor. The model transformed the entire industry. New design companies emerged, and technology spread more widely.

By the 1990s, TSMC was growing rapidly. Few realized it at the time, but Morris Chang, TSMC, and Taiwan were marching toward becoming the world’s leading powerhouse in advanced chip manufacturing.

[Adapted and condensed from Chapter 29, “We Want a Semiconductor Industry in Taiwan,” of Chris Miller’s acclaimed book Chip War.]

Author: Mahmud Hossain, a graduate of BUET, has over three decades of leadership experience in Bangladesh’s telecom and ICT sectors. He played a key role during the introduction of mobile technology in the country. Currently serving as a Commissioner at BTRC, he has previously held senior positions in several leading local and international organizations.