https://stratechery.com/2020/chips-and-geopolitics/
The debate around who belongs on the Mount Rushmore of tech would be a long one; what is certain is that Morris Chang should be on the list. He certainly leads the way in terms of impact relative to name recognition.
Clayton Christensen, in 2003’s The Innovator’s Solution, explained how the natural course of industries was from interdependent architectures to modular ones:
Customers will not buy your product unless it solves an important problem for them. But what constitutes a “solution” differs across the two circumstances in Figure 5-1: whether products are not good enough or are more than good enough. The advantage, we have found, goes to integration when products are not good enough, and to outsourcing — or specialization and dis-integration when products are more than good enough. The left side of Figure 5-1 indicates that when there is a performance gap — when product functionality and reliability are not yet good enough to address the needs of customers in a given tier of the market — companies must compete by making the best possible products. In the race to do this, firms that build their products around proprietary, interdependent architectures enjoy an important competitive advantage against competitors whose product architectures are modular, because the standardization inherent in modularity takes too many degrees of design freedom away from engineers, and they cannot not optimize performance.
This makes intuitive sense: optimizing everything results in better performance, at the cost of long-term reliability and flexibility. Sure, long-term reliability and flexibility are nice-to-have, but they are lesser priorities. Once that top priority is met, though, these secondary priorities come to the forefront.
Overshooting does not mean that customers will no longer pay for improvements. It just means that the type of improvement for which they will pay a premium price will change. Once their requirements for functionality and reliability have been met, customers begin to redefine what is not good enough. What becomes not good enough is that customers can’t get exactly what they want exactly when they need it, as conveniently as possible. Customers become willing to pay premium prices for improved performance along this new trajectory of innovation in speed, convenience, and customization. When this happens, we say that the basis of competition in a tier of the market has changed.
This is a big problem for firms that are dominant in a market undergoing this transition; after all, the reason said firms are dominant is because they are the highest performing, which is to say that they are highly integrated, and to unwind said integration is usually untenable for both business model and more deep-rooted cultural reasons. That opens the door for new entrants:
The pressure of competing along this new trajectory of improvement forces a gradual evolution in product architecture, as depicted in Figure 5-1 — away from the interdependent, proprietary architectures that had the advantage in the not-good-enough era toward modular designs in the era of performance surplus. Modular architectures help companies to compete on the dimensions that matter in the lower-right portions of the disruption diagram. Companies can introduce new products faster because they can upgrade individual subsystems without having to redesign everything. Although standard interfaces invariably force compromises in system performance, firms have the slack to trade away some performance with these customers because functionality is more than good enough. Modularity has a profound impact on industry structure because it enables independent, nonintegrated organizations to sell, buy, and assemble components and subsystems. Whereas in the interdependent world you had to make all of the key elements of the system in order to make any of them, in a modular world you can prosper by outsourcing or by supplying just one element. Ultimately, the specifications for modular interfaces will coalesce as industry standards. When that happens, companies can mix and match components from best-of-breed suppliers in order to respond conveniently to the specific needs of individual customers.
Taiwan Semiconductor Manufacturing Company (TSMC), the company Chang founded in 1987, is arguably the single best example of the process Christensen described.
Intel invented the microprocessor in 1971, and for decades to come, it was not good enough. The 4-bit Intel 4004 was followed by the 8-bit Intel 8008, and then the Intel 8080. Then, in 1978, came the Intel 8086, a 16-bit processor that was backwards compatible with programs written for the 8080 and 8008. That was followed by the Intel 80826, and in 1985, the 32-bit Intel 80836. It was the 80836 that defined the baseline x86 instruction set that undergirds modern processors in most laptops, desktops, and servers, but x86 has its roots in the 8008. Intel, by integrating design, manufacture, and software from the 1970s, would go on to define and dominate the processor market for decades.
It would take a very long time for this integrated approach to overshoot the market. Intel’s 80836 was succeeded by the 80486, then the Pentium, and every release made computers so much faster that use cases unimaginable only one or two years prior suddenly seemed within reach, if only Intel could continue its rate of improvement. And, to the company’s credit — and with a solid push from AMD into a 64-bit variant that retained backwards compatibility to the 80386 — Intel did just that.
Still, Intel made general purpose processors; processors that were created for a specific task would be much faster, at least in theory, but it was hard to get started: Chang, then a long-time executive at Texas Instruments, observed in the 1980s that it cost $50~$100 million dollars to start a new chip company, primarily because of the cost of manufacturing. You could contract production from Intel or Texas Instruments or Motorola, but it wasn’t reliable — and they were also your competitor!
A few years later, in 1987, Chang was invited home to Taiwan, and asked to put together a business plan for a new government initiative to create a semiconductor industry. Chang explained in an interview with the Computer History Museum that he didn’t have much to work with:
I paused to try to examine what we have got in Taiwan. And my conclusion was that [we had] very little. We had no strength in research and development, or very little anyway. We had no strength in circuit design, IC product design. We had little strength in sales and marketing, and we had almost no strength in intellectual property. The only possible strength that Taiwan had, and even that was a potential one, not an obvious one, was semiconductor manufacturing, wafer manufacturing. And so what kind of company would you create to fit that strength and avoid all the other weaknesses? The answer was pure-play foundry… In choosing the pure-play foundry mode, I managed to exploit, perhaps, the only strength that Taiwan had, and managed to avoid a lot of the other weaknesses. Now, however, there was one problem with the pure-play foundry model and it could be a fatal problem which was, “Where’s the market?”
What happened is exactly what Christensen would describe several years later: TSMC created the market by “enabl[ing] independent, nonintegrated organizations to sell, buy, and assemble components and subsystems.” Specifically, Chang made it possible for chip designers to start their own companies:
When I was at TI and General Instrument, I saw a lot of IC [Integrated Circuit] designers wanting to leave and set up their own business, but the only thing, or the biggest thing that stopped them from leaving those companies was that they couldn’t raise enough money to form their own company. Because at that time, it was thought that every company needed manufacturing, needed wafer manufacturing, and that was the most capital intensive part of a semiconductor company, of an IC company. And I saw all those people wanting to leave, but being stopped by the lack of ability to raise a lot of money to build a wafer fab. So I thought that maybe TSMC, a pure-play foundry, could remedy that. And as a result of us being able to remedy that then those designers would successfully form their own companies, and they will become our customers, and they will constitute a stable and growing market for us.