Ben Gilbert: evaluation

Transcript context

…Little preview to fast forward to today, TSMC, they’re a contract manufacturer for silicon. That is what they are. TSMC has 40% operating margins as a contract manufacturer. It’s not like there’s no technology or R&D. They are one of the most advanced technology organizations in the whole world. There is so much IP, just in the manufacturing. Take out the design, take out the functions, just making this stuff is so hard. Now it involves lasers. We’re going to get to that later. It’s going to blow your mind how this stuff is done. Anyway, Morris, he’s coming up. He’s learning literally as this whole industry is getting developed, he’s right there. A couple of years after he gets back from Stanford, he’s still rising through the ranks. In 1967, TI made him a general manager of one of the divisions within the semiconductor business, and that’s where he had his next big breakthrough. This is on the business side. Morris notices what they’re doing—setting up these new plants for all these successive new methodologies and processes of manufacturing, at this point integrated circuits and silicon-like semiconductors and pumping out these chips—is super expensive to do this, super cost capital–intensive. What TI and everybody else in the industry did, when they would start a new product line that would use a new fab for chips, they charged a lot of money for it because man, they put a lot of money into these things. Right off the gate, you want the latest new hotness in the end products that TI’s selling, they’re going to charge a lot of money for it. Morris realizes that that’s not actually optimal to do that, because as evidenced by his first big win at TI with the IBM line, there’s a learning curve to getting the yields right and learning how to manufacture a new process. In the beginning, you’re going to have a really low yield. And so what you want, ideally from a fabrication perspective, is you want to have a ton of volume from the get-go. As soon as the plan is online, you want to be running at max capacity so that you can, learn as fast as possible, get yields up to the profitable levels, and then you want to still be running at max capacity as long as possible because you already spent the fixed cost to make the plant. Basically, you always want max capacity. When you started out, by pricing so high, you kept demand low and you weren’t able to get up to capacity fast enough. It’s almost like they didn’t realize the benefit of the potential operating leverage that they had because they were just passing their exact economics on to their customers and saying, you basically have to pay us for us to do all these fixed costs, and then you’ll get all the benefits of how cheap it is to stamp it off the press every time. Whereas what they really should have been doing is saying, we will make an investment. We’ll eat the cost of having to spend all this up, but boy, are we going to be super profitable on every chip that comes off the line. Totally. Morris is thinking about this. He hires BCG and they come up with the idea of actually pricing low to start to drive this volume and speed up the yield curve. And then also, the side benefit of that is, if they’re pricing low and everybody else’s pricing high, they’re going to grab a ton of market share and probably keep that.…

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