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Movers & Shakers by Jonathan Moore April 7, 1999


At 67, Morris Chang Is Starting Yet Another Industry
His work has already spawned the contract chip "foundry" and "fabless" chipmaker. Now, he wants to launch the "virtual fab"

Morris Chang, chairman of Taiwan Semiconductor Manufacturing Co., could be called the father of two industries. Twelve years ago, he founded TSMC, a chip "foundry" that manufactures semiconductors under contract for chip designers. That success attracted copycats such as United Microelectronics Corp. in Taiwan and Chartered Semiconductor in Singapore.

The rise of these companies spawned yet another new business: chipmakers that design new products but leave the manufacturing to outfits like TSMC. By providing chip designers with an affordable source of stable manufacturing, TSMC and its brethren spurred the growth of "fabless" chipmakers, or companies without fabrication plants of their own. Suddenly, designers no longer need expensive factories to be in the chip business. "TSMC really lowered the entry barriers," Chang says. "Now, there are more than 400 fabless companies because it doesn't take much capital. We changed the paradigm."

It's an impressive accomplishment. But even at 67, Chang isn't staying still. His goal now is to lure business from so-called integrated device manufacturers -- companies like Intel, Motorola, and Texas Instruments -- that design and make their own chips. To do that, Chang is reshaping his company from a straight contract manufacturer into a provider of specialized services.

 

"The essence of a virtual fab is that the customer can treat it as if it is his own"
 

The goal is what Chang calls a "virtual fab." That involves not just chip fabrication but also services -- such as libraries of chip designs that customers can license and tools for testing designs before they're manufactured. "The essence of a virtual fab is that the customer can treat it as if it is his own," says Chang. The need for that kind of cooperation is growing as designers move toward increasingly complex chip designs. "Everything we can do to make this smoother and easier increases the service content of our business," Chang says.

Big chipmakers are beginning to factor outside foundry capacity into their expansion plans. That's come about particularly in the past three years as they've slowed the pace of building their own new factories because of a chip glut, says Chitung Liu, head of Asian technology research at Warburg Dillon Read Securities in Taiwan. "I think it's going to happen in force within the next two to three years, for the simple reason that [companies] didn't build a lot of fabs," Chang says. "So now, the need is there, and they will use us more."

DEMAND REBOUND. Increasing competition in the foundry business from rivals such as IBM hurt the industry last year. TSMC reluctantly had to lower prices by 20%. But chip prices are firming up now as the outlook for the semiconductor industry improves, say analysts. While demand for PCs still isn't strong, chipmakers say demand is coming from growth in the communications and consumer products industries, as well as hot areas like graphics chips for PCs.

Foundries will benefit because fabless chipmakers will grow more rapidly than the big integrated manufacturers, Chang says. Also, integrated manufacturers will continue to shift production to foundries to save costs. "Average growth has been 15% a year," he says. "If it continues at that rate, the foundry industry will grow at 20% to 25% a year," in dollars. TSMC is running at near 100% capacity, and analysts expect revenues to grow from $1.5 billion to $1.9 billion, while net profits should grow 27%, from $464 million to $590 million.

 

Chang credits the hardships of World War II for instilling him with his competitive drive
 

Chang has seen his ups and down. His life began dramatically as a witness to the turbulent events of World War II in China. His family traveled extensively to escape the war with Japan, living in Chongqing, Guangzhou, and Hong Kong. He moved to the U.S. after graduating from high school in Shanghai after the war and earned a bachelors and masters degree in mechanical engineering from Massachusetts Institute of Technology in 1952 and 1953. He went to work for Texas Instruments in 1958, during the earliest days of the semiconductor industry. Chang credits the hardships of the war for instilling him with his competitive drive.

He stayed at TI for 25 years, eventually becoming head of its global chip operations -- at that time the largest in the world. In 1964, he earned his PhD in electrical engineering while on a paid sabbatical from TI. The patrician, pipe-smoking Chang runs TSMC with the American-style Western management techniques he learned during his long career in the U.S. Chang says the best companies value employee welfare, openness, innovation, and strong partnerships with customers.

TAIWAN CONNECTION. He hit on the idea of creating a chip foundry while president of General Instruments in the early 1980s. A friend who was starting a new company decided to build a fabless design house instead of an integrated design and manufacturing company. Chang began to realize there was a market for a wafer fab, without proprietary chip designs, that would make semiconductors only under contract for others.

He knew Taiwan was the place to build it. Chang moved there and became director of Taiwan's top research lab, the Industrial Technology & Research Institute, where he founded TSMC. The company was spun off from ITRI as a private outfit in 1986. In 1997, Chang was named one of Business Week's Top 25 Managers and one of 1998's "Stars of Asia" in Business Week's Asian Edition.

Companies that don't keep moving can't stay competitive for long in the fast-paced chip industry, Chang says. That's what he finds exciting about the business. Says Chang: "A company can lose its leadership position at any time. The pecking order is never secure." He should know. He has been watching companies come and go for 40 years.

Jonathan Moore is a special correspondent for Business Week in Taiwan


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