How TSMC was funded (VC-free)

Morris Chang's autobiography tells TSMC's almost 40-year story

Morris Chang was at his breaking point. TSMC’s second largest would-be investor, Philips, insisted they design TSMC’s fab. Morris Chang refused. That would be a clear violation of TSMC’s independence. TSMC may well have to forego Philips’s US$40 million investment (27.6% of the total US$145 million equity investment required).

For more than 14 months, TSMC had been discussing and negotiating with Philips, on every point from licensing agreements to a pro rata clause to increase Philips’s stake. But on technical independence, Chang could not budge.

TSMC was founded in response to three companies—Quasel, Mosel, and Vitelic—who requested the Taiwanese government build a fab for them. Each would cost upwards of US$100 million. At that time, it was commonplace for governments who wanted to spur their semiconductor industries to step in—Japan invested hundreds of millions during the era of Hinomaru semiconductors to establish Japan as a leader in memory. For years, Taiwan had been investing in R&D and technology transfers, now it was showtime to build the industry.

Morris Chang proposed a “common wafer fab.” Two weeks after Chang took the post of ITRI (Industrial Technology Research Institute) President, he was set to meet the Taiwan’s head of government—Premier Yu, the President of the Executive Yuan.

Premier Yu’s request “find a multinational company with IC technology” would not be easy. Premier Yu had a strong intuition that the remaining Taiwanese investors would need to see that in order to gain confidence and back TSMC. Despite major US and European companies (Intel, TI, Motorola, Matsushita, Sony, Digital Equipment, AMD, Thomson) response of “no interest,” Philips came knocking on Taiwan’s door.

Philips already operated assembly and testing plants in Taiwan for ICs and were preparing to expand operations into passive components, optoelectronics, etc. in Taiwan. The question was how to gain the government’s favor. By chance, they heard Taiwan was seeking foreign investment in TSMC, and this became the opening shot to their Taiwanese expansion plan.

When the potential Philips investment negotiation was on its last legs because of the dispute over technology independence, the Minister of Economic Affairs requested Minister K.T. Li, the “Father of Taiwan's Economic Miracle” to mediate. Li’s letter to the Philips CEO to drop the IC fab design demand proved effective.

The last hurdle was finding Taiwanese investors. No one was interested. Amongst the largest companies in Taiwan, none contacted Chang when they were invited to invest. Eventually, at the insistence of ministers and Premier Yu himself, they invested. As it was purely on account of “government connections,” they had no need for Chang’s briefing.

Thus the final total equity investment of US$145 million breakdown:

• The National Development Fund, Executive Yuan: US$70 million (48.3%)

• Philips: US$40 million (27.6%)

• The remaining shareholders’ commitments (24.1%):

  • Formosa Plastics: ~US$7.25 million (5%)

  • China American Petrochemical Company (CAPCO): ~US$7.25 million (5%)

  • China General Plastics Corporation: ~US$4.35 million (3%)

  • USI Corp: ~US$2.9 million (2%)

  • Yaohua Glass: ~US$2.9 million (2%)

  • Liencheng Petrochemical: ~US$1.45 million (1%)

  • Tai Yuen Textile: ~US$1.45 million (1%)

  • Cheng-chou Electronics: ~US$1.45 million (1%)

  • Central Investment Authority (中央投资公司): ~US$5.95 million (4.1%)