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The recent visit of US politician Nancy Pelosi to Taiwan generated a lot of news about the dependence the world has on Taiwan, given its dominance of the semiconductor market.

But I couldn't find information on what makes Taiwan so unique. Wikipedia has a Semiconductor industry in Taiwan article that has some historical information, but falls short of providing what sets Taiwan apart.

How did this tiny little island end up leading this strategical market so profoundly and why cannot much bigger nations compete?

Richard Hardy
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sourcream
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    Another related question could be Why is ASML the only EUV company?. Taiwan is powered by machines made by ASML, a Dutch company, and the only company in the world making EUV (Extreme Ultra-violet Lithography) machines, necessary for 3nm and 5nm transistors. – Matthieu M. Nov 27 '22 at 13:05
  • It’s not Taiwan, it’s TSMC. TSMC dominates the foundry business, and has made all of the industry profits over the first thirty years or so. And TSMC has some foundries outside of Taiwan, including a new one opening in Arizona next year. – SafeFastExpressive Nov 29 '22 at 18:34
  • @SafeFastExpressive According to this recent article, the vast majority of their factories are located in Taiwan, and they are struggling to open new ones in other countries, in particular the one in Arizona you mentioned. Founder Morris Chang himself is quoted as saying "the advantages in Taiwan underlying TSMC’s success could not be replicated in the United States". So I would say Taiwan is a major factor for their success. – sourcream Feb 22 '23 at 20:43
  • @sourcream Yep. they've struggled to make their model work outside Taiwan (though they have an operating fab in Camas, Washington, and several in China). Only time will tell how successful the Arizona plant will be, but the problems described in the article suffer from an inconvenient fact, after two years TSMC tripled their investment in Arizona even knowing that costs were higher than anticipated and all the issues they had encountered. TSMC management is clearly bullish on its potential. Either way, I stand by my statement, the vast majority of fabs in Taiwan are owned and run by TSMC. – SafeFastExpressive Feb 23 '23 at 17:50

2 Answers2

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This is because semiconductors have economies of scale over extremely large number of units produced.

Economies of scale mean that the more you produce the cheaper production gets. Many firms will have economies of scale over some range of production, but it is very rare to have economies of scale over very large quantities. In such cases you will typically observe very heavily concentrated industry or natural monopolies. This is usually due to high fixed cost.

Semiconductors are one of the industries with economies of scale over very large numbers of units. This is because a modern semiconductor fab/foundry costs around 20 billion dollars (as reported by the Economist). A typical chip manufacturer will have several foundries not just one. Hence, chip making is not something you can simply do in your garage like, let's say, building computers. You need to produce an extremely large volume of chips just to break even and the more you produce the more profitable you get. Of course, at some point there would be diminishing returns but when it comes to semiconductors that level of production is hard to reach.

As to why it is Taiwan and not some other place there are several reasons. Some important ones:

  • Taiwan had a relatively highly educated, but at the same time cheap workforce in the past when the industry started.
  • Taiwan had good institutions (e.g. rule of law). Having good institutions is a general precondition for development (e.g. see Acemoglu and Robinson 2012).
  • Taiwan managed to strike a good balance between providing support to tech industries via grants and building infrastructure yet did not protect the industry from competition or try to nationalize it or over-regulate it or micromanage it too much (see Tung 2002).
  • Open economy: trade and foreign investment was promoted and encouraged.
  • Luck. There were multiple places where this could have occurred as well. Life is not completely deterministic; random chance plays a great role. If we were to reset the clock things might turn out differently even keeping all the policies the same as before.
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1muflon1
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The semiconductor industry is unusual in that it is driven by a few individuals who innovate the technology. If you read up on the early history of the industry and William Shockley, you get an understanding of how much influence a few individuals had. Many people believe that Silicon Valley won over as the tech center over many competing locations because Shockley and a small group of his engineers decided to locate there. To understand why a particular location dominates in a field, it may be useful to understand why Silicon Valley won over places like Boston and the Research Triangle, places that invested heavily in computer technology but lost out to SV.

To understand why Taiwan has the lead in semiconductors today, you have to read up on Morris Chang. I'm going to give a controversial answer to your question but even if one does not agree with it, you can't hope to get any clarity without reading up on MC. His wikipedia page doesn't really give insight so I would look at other sources.

Early in his career, Morris Chang worked at Texas Instruments. He was considered brilliant and almost solely drove leaps in the success of TI. Due to space, I won't get into it but you should read up separately on his achievements there. MC ended up becoming a VP at TI and was considered a shoo in for CEO. When the opportunity came up, the company unexpectedly chose another person for CEO. Chang quickly left TI after that and ended up forming TSMC in Taiwan. TSMC is largely the reason Taiwan is leading in semi production.

Presumably, he was denied the CEO position due to his race. It can't be proven but there isn't any other compelling reason. He wasn't born in Taiwan and had never been there prior to taking an offer to start TSMC there. So he didn't have any special affinity for the island. TSMC should have been a US company. MC studied in the US and had been there since the age of 18.

So the controversial answer to why Taiwan leads in semis is racism. Sergei Brin's family left Russia due to anti-semitism. He ended up founding Google. To believe that one individual could have such influence may be difficult to believe but with enough research and understanding of the field, it becomes the most plausible.

robotcookies
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    Answers on this site are supposed to be backed by evidence. Have a look at the site rules. Can you please provide sources for your claim that it was racism that started the Taiwan semiconductor industry? – csilvia Nov 28 '22 at 11:05
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    This does not answer the question why Taiwan dominates the semiconductor production. Even if everything you say is completely correct reading of the events, and even if this was the only person on earth that could start Taiwanese semiconductor industry, it does not explain why Taiwan completely dominates semiconductor industry today. For example, someone can argue touchscreen phones would not happen without Steve Jobs, but there are lot of companies making smart phones and Apple does not control almost whole market. – WilliamT Nov 28 '22 at 11:33
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    This completely ignores the roles of Philips and the Taiwanese government in forming TSMC. Of course they needed to hire a CEO, and Morris Chang did have the right background. But if they hadn't hired him, they would have found somebody else. – MSalters Nov 28 '22 at 12:01
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    The answer is a good answer, not claiming to explain all, but introducing a variable, a dimension, the importance of some very gifted individuals in the history of an industry. Economists speak of human capital, but when this human capital has a name and surname we cannot reject the idea! – BakerStreet Nov 28 '22 at 12:29
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    Hi, welcome to Economics:Stack Exchange. Please consider improving the answer by adding references from reputable and scholarly sources. As many other science stacks do, we require formal proofs, statistical evidence or links to external sources for answers making claims which are not common knowledge. Unsourced material can be edited or deleted. For more details see our help center and FAQ on community standards for answers – 1muflon1 Nov 28 '22 at 12:30
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    William T - You are asking a different question which is why the semi industry isn't a duopoly or more distributed. I am trying to answer a different question which is why the semi industry mostly located in Taiwan. Perhaps I misunderstood the question but it appeared to be asking "why Taiwan" and not "Why such a strong consolidation in Taiwan". Different questions. – robotcookies Nov 28 '22 at 20:33
  • Msalters - What about the other countries and regions that made similar attempts to cultivate a semiconductor industry? Other places, including the US spent billions to do this, right? They hired somebody else and failed to be competitive. Do you think Taiwan would have been successful if they didn't hire Morris but hired the people Intel or Globalfoundries hired? – robotcookies Nov 28 '22 at 20:38
  • csilvia - I don't think I can provide proof that it was racism. I don't have a smoking gun like emails from the board saying they didn't want to promote him because of race. I don't claim to have proven this, just that it's the most plausible explanation until someone finds a more plausible one. – robotcookies Nov 28 '22 at 20:41
  • @robotcookies the problem is that your current answer does not even make it plausible. I understand that it is impossible to prove 100% he was passed over promotion due to racism but you do not provide even any evidence making it plausible. For example: Why don't you link to source saying he was up for promotion but denied? Also your answer contradicts his wikipedia page. According to his wikipedia after leaving TI he stayed in states and became president and COO of General Instrument Corporation. So he did not even left right after TI but after serving as president of GIC in Pennsylvania – csilvia Nov 28 '22 at 21:31
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    Only after he finished his service as president and COO of CGI he moved to Taiwan. So this already makes your story less plausible. He was affected by racism with a lag long enough to become president of another US company? Next his wikipedia page says he was head hunted by the prime minister of Taiwan. So he did not left back to Taiwan, he was president of US corporation head hunted by PM of Taiwan which he probably considered great honor and maybe he was also home sick but could not return to China due to communism – csilvia Nov 28 '22 at 21:36
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    next let us suppose you are 100% correct and this guy got the job because of the racism in US. Let's take that as a given premise. That still does not explain why Taiwan managed to build all that infrastructure, develop all the necessary supply chains and trading relations, and be competitive. For example, US at that time had one of the most expensive labor forces. If anything that puts US at disadvantage and perhaps Morris would never be able to build the same industry in the US because Taiwan or other Asian market had too great of a cost advantage and would build the industry – csilvia Nov 28 '22 at 21:39
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    with or without him. Also to reiterate. I do not think you need to support every single proposition you make. However, you should provide enough sources for it to be at least plausible. You might think the answer is plausible as it is but as I showed above it simply isn't. There are too many variables you left unaccounted. And by the way I do believe that racism/sexism plays role in economy and life. However, racism is not everywhere and not everything can be explained by racism. Here you do not even seem to have plausible story, unless you provide some more evidence – csilvia Nov 28 '22 at 21:44
  • In addition, even if you would add the evidence, I do not believe anyone in their right mind can claim this was the sole reason. At best it can be additional significant variable as BakerStreet said, and certainly not only and doubtfully even main reason but in your answer you state that as the sole reason for Taiwan becoming semiconductor manufacturing hub. – csilvia Nov 28 '22 at 21:47
  • csilvia - sahilbloom.substack.com/p/the-amazing-story-of-morris-chang. Here is a quote: "After 6 years running the semiconductor business, and seemingly on the fast track to the C-suite, Morris Chang's career took an unexpected turn... There is a lot of speculation about why - some believe he was passed over due to being of Chinese origin - but Morris Chang had clearly been snubbed." This is widely speculated by those in the field and, I thought, common knowledge. There are many accounts of the tremendous impact he had at TI. – robotcookies Nov 28 '22 at 22:28
  • okay that makes it plausible he was snubbed over racism. Fine, again as I said lets take that even as a given. Yet your answer is still widely implausible. You need to also argue that this was the reason why he went back to Taiwan (and you should correct your answer saying it was right away since wikipedia says he was president of another US company in mean time). Next you need to make an argument that he was the crucial factor that kick-started the industry, if he would stay in US industry would start there. Again the problem is that even if this story (of him being snubbed over racism) – csilvia Nov 28 '22 at 22:28
  • is 100% accurate you answer is still widely implausible. Also he did not even formed the company in taiwan, that was done by government and he was asked to be the CEO – csilvia Nov 28 '22 at 22:29
  • Yes, I missed the part about him staying in the US a couple years after leaving TI. I don't think it really affects my case. I didn't actually say he started TSMC immediately after. TI was a much larger, significant company than where he went. He knew TI and wanted to stay there. He probably would have stayed in the US had he gotten that position. So what then IS the most plausible explanation to you? Saying that Taiwan had the resources, gov commitment, educated people, etc is NOT a good explanation when other Asian countries and the US had similar support for the industry. – robotcookies Nov 28 '22 at 22:58
  • So why did Silicon Valley become the center of tech in the US? I have heard "because they had the talent from Stanford and Berkley". Sure, but Boston had Harvard and MIT. The NC triangle had Duke and UNC. So why did SV win? "Because they had government support". So did Boston, Texas, NC. So again, why SV? "Because investors". Once again so did the others. Those are not adequate answers. So what is? Same story with Taiwan and semis. What is YOUR explanation? – robotcookies Nov 28 '22 at 23:04
  • And I'm absolutely open to a better, more likely explanation. Like I said, this is not proof. But like most economics, it's observation leading to a theory, often with a lot of speculation thrown in. – robotcookies Nov 28 '22 at 23:09
  • Part 1: So Bob gets his degree in country A. Bob also gets his PHD in country A. Bob then spends 30 years straight working in country A. Bob is then denied a rare job he really wanted due to discrimination in country A. In two years, he leaves to work in country B where this particular discrimination does not exist. It is very plausible to say he would have stayed in country A had this discrimination not existed in Country A. – robotcookies Nov 28 '22 at 23:25
  • "He knew TI and wanted to stay there. He probably would have stayed in the US had he gotten that position." <- He was head hunted by the PM of Taiwan. I personally think he would move even if he would be CEO TI. But again I do not want to waste time on this as I said lets take that the move was due to racism as a given – csilvia Nov 28 '22 at 23:29
  • Part 2: Show Bob was critical in forming an industry in country B. Countries A, C,D,E and F have many or all of the applicable traits in country B for forming this industry. Yet this industry really only dominates in country B. The only clear thing country B has that A,C,D,E,F don't have is Bob. Similar things happen in other industries like silcon valley tech. So far, my explanation IS the most plausible. – robotcookies Nov 28 '22 at 23:29
  • I believe it is mainly due to cost advantage in Taiwan. If you would create randomized controlled trial where you would create equal company in both US and Taiwan, US, all things equal, would simply not be able to compete with low cost of production in Taiwan. If you ask me that was the most important reason why it happened in Taiwan and not in US. – csilvia Nov 28 '22 at 23:31
  • but he wasn't critical the industry and the company already existed. You are making it sound like he created the industry in his back yard in Taiwan. The company was already there, he was hired there as a manager not even as a scientist. You really seriously claim that this guy is the only person in the world capable of managing chip making plant? No other person on earth could be general manager of chip making company? – csilvia Nov 28 '22 at 23:33
  • Why would the PM of Taiwan head hunt him if he was just "a manager". It literally made the news when he quit TI. It was news when he joined the other US company. News when he quit that company. This guy is a legend in the industry, even pre-moving to Taiwan. TSMC may have been formed before he joined but he made it what it is today. The semi industry was not significant in Taiwan prior to him arriving. – robotcookies Nov 28 '22 at 23:39
  • he did not even became CEO when the company started, the company was founded almost 15 years before he became CEO and was already producing silicon chips. He was the third guy running the company. There were 2 other CEO's before him. He was running the company only for 6 years. Like are you listening to yourself? According to you his 6 year reign almost 15 years after the company started made Taiwan chip making superpower. All the other CEOs of that company before him and after him had zero impact? – csilvia Nov 28 '22 at 23:40
  • "I believe it is mainly due to cost advantage in Taiwan." - Do you know how many billions China has spent on trying to form a competitive semi industry? Many people believe they want to invade Taiwan largely for their semi industry. China has very cheap, hard working labor. That's why they make the iphone there. So why hasn't it overtaken Taiwan's? China considers this super critical to their future. – robotcookies Nov 28 '22 at 23:42
  • so what? Cristiano Ronaldo is also a legend, so what you think Manchester United could not win a match if they replaced Ronaldo with another excellent player? Everyone is replaceable! That's a fact, no matter how smart, strong, educated you are there are scores of other extremely smart, strong, educated people – csilvia Nov 28 '22 at 23:44
  • "He was the third guy running the company. There were 2 other CEO's before him." - I don't think this is correct: "TSMC was founded in 1987 by Morris Chang, when he was 56 years old. It started as a collaboration between the government of Taiwan, the tech giant Philips, as well as private investors with an interest in semiconductor technology." - https://anysilicon.com/history-and-milestones-of-tsmc/#:~:text=TSMC%20was%20founded%20in%201987,an%20interest%20in%20semiconductor%20technology. – robotcookies Nov 28 '22 at 23:45
  • but the China has bad rule of law, not equally educated workforce, also Taiwan had smart industrial policy not like China. No matter how much money North Korea would spend they would never be able to build such industry because policies to support it aren't there, China is not north korea but equally it has too many bad policies to be even a candidate – csilvia Nov 28 '22 at 23:46
  • "you think Manchester United could not win a match if they replaced Ronaldo with another excellent player?" - A lot of tech is not like other industries. Certain individuals have tremendous impact. This is why I brought up Shockley and how significant he was in forming Silicon Valley. – robotcookies Nov 28 '22 at 23:47
  • I thought you were talking about ITRI regardless the point is any other qualified manager could have done the same – csilvia Nov 28 '22 at 23:49
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    again no matter how brilliant those people were everyone is replaceable. If you would go back with time machine and killed Einstein someone else would have invented theory of relativity at some point. Second, again in your answer you argue this is the only reason. I guess in your opinion if Morris Chang would be shipped to North Korea or Somalia, now North Korea or Somalia would be the world's hub for chip making. Single individuals do not matter as much as policies or institutions. No matter of genius will produce industry if institutions are garbage – csilvia Nov 28 '22 at 23:53
  • also economy is like biology. You need to have good preconditions for life (firm) existing such as water or temperature (good institutions or industrial policies), then life randomly emerges at some point. No god (legendary individual) is required. Two places might have similar conditions (there is water and (plausibly) suitable temperature on Europa) but life might begin at one spot first just because of randomness and not at the other. – csilvia Nov 28 '22 at 23:58
  • Well yes, you need institutions, policies, laws, etc. But those alone are not enough. Many countries have tried this forming regions perfectly planned to attract a thriving industry. But many of these regions stagnate because they don't attract the talent. The US has both and that is why it leads in many tech industries. It's a strong attractor for talent. But discrimination can reverse that. – robotcookies Nov 28 '22 at 23:59
  • yes many countries have tried but most countries did not actually have the good combination of institutions and industrial policies and cheap labor Taiwan had. Yes there were maybe 5-15 other places that also had similar conditions but its not like this could have ever occurred in Egypt or Turkey or Ukraine or even in my home country Portugal. This could have happened in Japan, South Korea, Hong Kong or Singapore. I do not believe it could have happened in US because manufacturing is not the same as writing code like in silicon valley, for manufacturing labor costs are important – csilvia Nov 29 '22 at 00:05
  • US was too expensive for that. Next as I mentioned in my previous comments you state this was THE reason why Taiwan became silicon chip hub. As I stated previously, there could conceivably be some link. Indeed as you say retaining talent is important and racism in US would make US less attractive, although USA was and still is more attractive destination for talent as judged by high skill migration per capita, but ok it could have marginal effect which further hurt US chances. But US chances were already low and Taiwan's chances already high. If I had to guess I doubt that Morris increased – csilvia Nov 29 '22 at 00:10
  • Taiwan's chance of success by more than 0.5%-2% at best, and decreased US chance of success by the same amount, at worse he had no impact and some other talented guy would develop the industry instead of him. – csilvia Nov 29 '22 at 00:11
  • btw also already in 1986 Taiwan had significant production of semiconductors. In fact the data show already in 1986 Taiwan produced 640 million USD worth of semiconductors. Also, already in 1986 Taiwan derived most of its GDP from manufacturing electronics and chip making did not significantly increased as a share of electronics after Morris Chang moved to Taiwan, rather it stayed almost constant share of electronics production up until 1992 when the share started to increase rapidly. Again all data seem to fly in face of this 'legend' being the sole cause of taiwan chip making – csilvia Nov 29 '22 at 00:27
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    I love Morris Chang but the idea that he was rapidly promoted many times at TI all the way to the second highest position, but was a victim of racism when denied the top spot is an audacious claim. And audacious claims need compelling evidence. Occams razor tells us that the most likely reason is Morris clashed with the board and previous CEO over some important decisions or key business philosophy. And I suspect Morris was correct. – SafeFastExpressive Nov 29 '22 at 17:53
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    Actually reading up further on Morris Chang it’s pretty clear his failure at turning around the TI consumer business is why he was shunted off the CEO track. They probably thought consumer was more important to their future and that Morris’s skills were only suited to semiconductor operations. Whether that was a fair decision or not, it certainly was to Taiwan’s and the worlds benefit. – SafeFastExpressive Nov 29 '22 at 18:31
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    @csilvia Taiwan had semiconductor manufacturing before Morris Chang, but was unsuccessful at it. $600M is a small amount globally, and it was not very profitable. TSMC created an entire new product, the open fab, and dominates because of it, making pretty much all the profits in fabs ever since, and is now over 100 times larger than Taiwans previous semi businesses.

    https://www.semi.org/en/Oral-History-Interview-Morris-Chang

     – SafeFastExpressive Nov 29 '22 at 18:41
  • @SafeFastExpressive 640 mill USD might be small today but wasn't in 1986. If we account for inflation in today's money 640 mil would be almost 2 billions. Also, already in 1986 it was major part of Taiwan's GDP. Furthermore, as mentioned Taiwan's share of semiconductors really increased after 1992. Look I am not saying the guy might have no influence whatsoever, but people love stories about famous people and tend to exaggerate their influence. For example, US would probably manage build atom bomb without Einstein, they would likely get to the moon without von Braun, influence of individuals – csilvia Nov 29 '22 at 20:42
  • on history gets constantly exaggerated. Individuals do play some influence but there are other factors that ultimately lead to loss or success. It is just comforting for people to think that everything is controlled by someone or that important effects are caused directly by someone. Truth is that most of the time random sh*t happens and individuals just slightly affect the dice rolls. Sure maybe thanks to Chang it was enough for Taiwan to roll 3 or higher instead of 4 or higher using table top analogy, but most of the success was already predetermined by thousands of other factors – csilvia Nov 29 '22 at 20:45
  • csilvia - I will add one last comment - Why couldn't the US have simply outsourced the production for a semi industry like Apple does to China? That way a US company would have all the benefits of funding, a rich ecosystem, talent pool, policies, etc AND have cheap labor. Billions of dollars from both the US and China have not succeeded at this. And 640 million in '86 is still peanuts accounting for inflation. The US just signed the CHIPS act which invest $280 billion into semi industry. This is after already investing over 20 billion by Intel. – robotcookies Nov 29 '22 at 22:44
  • safefastexpressive - "Audacious"? Did you work in the US in the 80's as an Asian? I doubt you be so skeptical if you did. – robotcookies Nov 29 '22 at 22:55
  • @robotcookies: I see you linking some webpages in the comments. Why not link them in your answer? (And if they are not peer reviewed sources but you need to rely on them, you should probably spell it out clearly.) – Argyll Nov 30 '22 at 05:13
  • @SafeFastExpressive: I would just caution against interpreting Taiwan's existing semi industry prior to Michael Chong and TSMC as Chong making the difference. UMC had its own reasons for being entrenched and failing to be the TSMC today. Without UMC first and thus the related supply chain, maybe TSMC wouldn't have worked. etc. – Argyll Nov 30 '22 at 05:18
  • @csilvia: There are indeed flaws in this answer. But it has promise as well. Perhaps you can take a step back yourself. The linked interview one commenter offered addressed (countered) most of your points, if not all, including your 92 comment, which ignored growth lag. When you emphasize causality between the particular features of Taiwan you raised and TSMC's rise, you (and the other answer) similarly provided zero evidence for the causality. I mainly commented to highlight the link you already had. – Argyll Nov 30 '22 at 05:44
  • @csilvia: Thought I may as well point out the other obvious. – Argyll Nov 30 '22 at 05:45
  • @robotcookies I did not work in the US as an Asian, but Morris Chang did. And he was rapidly promoted his entire career, including TI paying for his advanced college education. The only time he missed on promotion was after achieving poor results running the consumer division. That seems clearly to be the reason he didn't get the CEO role, especially when AFAIK he's never mentioned racism as a reason he wasn't given it. So to allege racism is an audacious claim without a shred of evidence and I think Morris would agree. – SafeFastExpressive Dec 01 '22 at 19:56
  • @Argyll You can't plant a crop in the infertile ground and without a domestic semiconductor industry, Morris Chang and TSMC clearly would have had a much more difficult start. The real question is, where would the Open Fab business model have been implemented if Taiwan hadn't been there? It was a model that was looked on very dismissively at the time, every new semiconductor company thought they needed their own fabs. Where were there lots of trained semiconductor engineers in a relatively low cost area so that large volume fabs could be cheaply built to share among customers? – SafeFastExpressive Dec 01 '22 at 20:02
  • @csilvia I agree that $600M would be significantly larger today but a couple billion is still a tiny fraction of Taiwans current semiconductor sales. And I think the key point is profitability, semiconductor companies in Taiwan had no significant competitive advantages in IP, scale, or products. That means lower margins, profits and less investment over time. The Open Fab model changed all of that. – SafeFastExpressive Dec 01 '22 at 20:05