TSMC's Morris Chang Envisions New Business Model in Semiconductor Industry
January 2, 2001 (TOKYO) -- Morris Chang, chairman of Taiwan Semiconductor Manufacturing Corp. of Taiwan, is the man who started a highly profitable new business of consignment production of semiconductors -- the foundry business -- for the first time in the world.
Morris Chang, chairman of TSMC
In 2000, his company's total sales reached 555 billion yen (about US$5 billion), with a net profit of 216.4 billion yen, about twice the amount recorded in the preceding year. The strength of his business is the long-standing partnership built with corporate customers. Chang sees his business as being in the service industry, and aims at becoming someone comparable to an "excellent clerk working for an investment bank."
Nikkei Business: In the semiconductor industry, the declining trend of the once-victorious Japanese makers is becoming increasingly clear. Especially in terms of profitability, they are now far behind the U.S. and European makers, as well as the Korean and Taiwanese manufacturers represented by TSMC .
What would you say are the conditions for becoming the winner in the rapidly changing semiconductor industry?
A: In any age, the winner is the company that can turn out the most innovative products wanted by the market. Until only five years ago, it was considered extremely important for a semiconductor firm to have its own production facilities.
But with the emergence of the foundry industry, having one's own production plant is no longer a requirement. You can leave production to the foundry. What the semiconductor maker should do is to develop new products sought by the market.
Q: One of the winners in the semiconductor industry is Intel Corp., whose microprocessors for PCs have become the world's standard.
But now that the PC market growth is slowing down and with the appearance of rival makers, do you feel that Intel's position is beginning to waver?
A: I think Intel has come to a period of transition. Intel was the most innovative firm as a maker of microprocessors for PCs. But the speed of the growth of PCs has slowed down somewhat, and other Internet-related apparatuses are competing to grab the leading role.
For instance, let's take the case of Qualcomm Inc. of the United States, which has become an exclusive supplier of semiconductors after developing the basic technology for a code division multiple access mobile phone. At present, that company is doing extremely well and is rapidly growing.
I feel that the future belongs to the company that can produce the most innovative product. Intel should be able to become successful again if it can shift from the age of personal computers to that of the Internet.
A: With the growth of the Internet, competition in the semiconductor industry is getting increasingly keener, with old and new makers engaged in a melee. Is there any feeling of uneasiness as far as TSMC is concerned?
A: There will be more makers concerned exclusively with design, and competition should be getting keener. But as far as the foundry business is concerned, I hope and plan to keep the number of rival companies to a minimum.
At present, we have about a 50 percent share of the world's foundry market. In order to maintain this share, we will make an investment of 500 billion yen, far higher than the amount invested in plant and equipment by leading Japanese semiconductor makers.
Even if competition among design houses were to get tougher, we hope to be able to earn a stable profit by maintaining a large share of production.
Q: They say the computer world has changed from the age of hardware to that of services. In other words, you can enjoy higher profitability by using hardware for structuring systems, including software and offering maintenance services, rather than selling hardware. Do you expect to see similar changes in the semiconductor sector?
A: Foundries are generally taken to mean the manufacturing industry. But the policy we have adopted after thinking carefully for the past few years is to change the foundry from a manufacturing business into that of services. To us, technical production knowhow is only a beginning.
Of course, foundries need to have the ability to manufacture semiconductors at low costs. But in order to be successful as a foundry firm, it needs to be an excellent service company at the same time. Service means being extremely flexible in coping with customer needs.
Q: In running TSMC, do you have any company in mind that you like to watch as an example?
A: You may not have expected this, but in a way, we learn a great deal from people working for American investment banks such as Morgan Stanley Dean Witter & Co. and Goldman Sachs.
Investment banks offer services, but at the same time, they enter into partnerships with their clients. When you think over the matter very seriously, there are only about five or six truly excellent investment bank brains in the world. But any of those bank clerks can provide their clients with the services they really need.
If a client enters into a contract with an investment bank, the clerk in charge is seldom changed and the relations continue. Let's think of a case when the client is in some sort of need. For example, if I as a client want the investment bank to do some errands.
The bank clerk I have been dealing with would be willing to spend a lot of time and money to do the job if I only asked him. He may be losing money in doing this job, but can recover the loss in some other big business dealings with me. This is the type of relationship we would like to build up with our customers.
Q: It's very surprising that TSMC aims at doing business like investment banks.
A: To explain it in easier terms, let me cite a good example. In 1998, a semiconductor maker that was following a downward trend wanted to cancel an order. We complied with good grace. This maker had ordered 5,000 wafers to be produced in a month, but the next month they said they didn't need them. If they had a factory of their own, they would have suffered a terrible loss.
But since they were dealing with us, they could just cancel the order. Of course, that was nothing for us to be grateful for, but we complied with smiles. It's only natural that when that company's business began to pick up, they came back to us with an order, not just for 5,000 pieces a month, but for 10,000 pieces.
In this way, the vital point of our competitiveness is our attitude to be business partners of our customers, willing to render services whenever they are in need. Partnership is the foundation of our business.
Profile of Morris Chang
Born in Shanghai in July 1931; 69 years of age. Received a Master of Science from Massachusetts Institute of Technology in 1953. Joined Texas Instruments in 1958. TI dispatched him to Stanford University, where he obtained Ph.D in Electrical Engineering in 1964.
Became vice president in charge of the semiconductor division in 1972. Promoted to senior vice president in 1981. Left TI in 1983. Became president of General Instruments, a leading U.S. electric appliances maker, in 1984. Founded Taiwan Semiconductor Manufacturing Company in 1987, and became its chairman.
(Osamu Kobayashi, Editor-in-Chief, Nikkei Business)
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