[Apple Shockwave](28) "We Fell Behind Samsung" TSMC's Morris Chang's Lament

TSMC and Samsung Face Final Showdown Over Apple Chip Manufacturing
Apple Sparks Competition Between TSMC and Samsung Starting with iPhone 6s
Samsung Reverses Fortunes After Hiring TSMC Veteran Liang Mengsong
TSMC Emerges as Ultimate Winner, Securing Exclusive Apple Chip Production

Editor's Note[Apple Shockwave] is a content series that examines the upheaval caused by Apple entering the semiconductor market. You might wonder why Apple is involved in semiconductors. Apple is no longer just a company that makes smartphones and computers. After long efforts starting from the late founder Steve Jobs, Apple has designed world-class semiconductors used in mobile devices. If Intel was the leader in the PC era, Apple has become the top predator in the semiconductor ecosystem of the mobile era. Amid the global semiconductor supply chain crisis and large-scale investments in semiconductor production facilities, we will carefully examine the upheaval and prospects in the semiconductor market brought about by Apple Silicon to broaden our readers' insights. Apple Shockwave will visit readers every Saturday. After more than 40 installments, it will be published as a book.

"We are behind (Samsung)" (Morris Chang, founder of TSMC)

Morris Chang, the founder of TSMC competing with Samsung, once admitted that they were behind Samsung. It was a crisis rarely seen in TSMC's history. What happened to TSMC, which laid the foundation for a great leap forward by securing Apple chip orders?

TSMC is a Taiwanese company. Naturally, it grew and was supported by Taiwanese people. A representative example is Terry Gou (郭台銘), the founder of Foxconn. Foxconn is the company that assembles Apple iPhones and iPads. It inevitably has a close relationship with Apple.

Terry Gou also played a decisive role in connecting Apple and TSMC. It is said that Sophie Chang, the wife of Morris Chang, founder of TSMC, is Terry Gou's cousin. Although coincidental, this made her the optimal person to build a bridge between Apple and TSMC.

According to Richard Thurston, former legal counsel for TSMC, when a patent dispute arose between Samsung and Apple, Terry Gou advised Apple and TSMC to join forces. He instinctively understood that Apple and TSMC needed each other. Apple believed Samsung infringed on iPhone patents and was dissatisfied with Samsung supplying chips for the iPhone, so Terry Gou's diagnosis was accurate.

Guo Taiming Foxconn Founder
[Photo by Yonhap News]

The relationship between Apple and TSMC, which began over a meal in 2010 with Jeff Williams, Apple's Chief Operating Officer, and Morris and Sophie Chang, quickly developed with the involvement of Apple CEO Tim Cook. Chairman Gou is said to have participated in negotiations between Apple and TSMC. Apple and TSMC began building trust through 'C-level' exchanges via Taiwanese connections.

Preparing Security Beyond What Apple Wants

Chang could not afford to lose Apple. He was displeased that Samsung was designing and producing chips for Apple's iPhone. Samsung had developed application processors (AP) using technology accumulated from producing Digital Equipment Corporation (DEC)'s Alpha Chips. Samsung extended its foundry business by utilizing its own semiconductor production facilities. As the founder of the foundry industry, Chang was uncomfortable with Samsung's rapid rise.

Chang knew exactly what Apple wanted: thorough protection of its intellectual property rights. Apple thoroughly verified TSMC's promise to protect intellectual property. All employees, partners, and customers working at TSMC had to sign non-disclosure agreements. To prevent semiconductor design leaks through hacking, strong firewalls were installed between all TSMC fabs.

To prevent semiconductor design information from leaking through copying or printing, some printers used paper containing metal components. If printed information was taken outside, metal detectors could detect it. Thurston explained in an interview with Fortune, "We strengthened security beyond the level Apple required."

TSMC implements semiconductor designs commissioned by numerous customers into chips. Since they handle designs from different companies, security is essential. To secure Apple as a customer, TSMC operated security and firewalls beyond the level Apple demanded.

After more than three years of verification and prototype production, Apple and TSMC confirmed each other. In 2013, Apple placed an order with TSMC to produce A-series chips for the iPhone. The A8 chip was the first Apple Silicon made by TSMC. The A8 became the power source of the iPhone 6, released in 2014.

The A8 was manufactured using a 20-nanometer process. With TSMC's emergence, the competition with Samsung for securing Apple chip orders and advanced process technology intensified.

iPhone 6s. Photo by Apple

The Final Showdown Between Samsung and TSMC: iPhone 6s

In 2015, Apple made a unique attempt by using chips from both Samsung and TSMC in the iPhone 6s. It was such an unusual move that speculation arose it was to weigh the two companies' processes. In a way, it was the final gateway for Apple to choose TSMC. It was the 'OK Corral duel' where Samsung and TSMC faced off directly.

Until the duel, TSMC was on the defensive. The year 2015 was a crisis for TSMC. The 'dark cloud' of Samsung loomed over TSMC. Samsung had started the 14-nanometer process ahead of TSMC.

In January 2015, TSMC admitted it was behind Samsung in the advanced process competition. At the earnings conference, analysts persistently pressed Chang. Chang said, "We are slightly behind." When TSMC revealed it had been overtaken by Samsung, it caused a stir in both the semiconductor and investment industries. After Chang's confession, investment banks lowered TSMC's target price and issued sell recommendations. Credit Suisse, which had rated TSMC positively for over five years, expressed pessimism for the first time.

Apple produced the A9 chip at both Samsung Electronics and TSMC for use in the iPhone 6. The one on the left is manufactured by Samsung, and the one on the right is made by TSMC. Photo by Wikipedia.

TSMC and Taiwanese media poured criticism, claiming Samsung's rise was due to a defector. The defector they pointed to was Liang Mengsong (梁孟松), known as Yang Mongsong in Korea. He moved from TSMC to Samsung and served as vice president. After losing internal power struggles at TSMC, Liang headed to Samsung, a company from his wife's country. Using his expertise in 3D FinFET technology, he dealt a significant blow to TSMC. Samsung broke free from stagnation after the 28-nanometer process and sprinted to the 14-nanometer process.

When Liang Mengsong broke his promise and thrived at Samsung, TSMC filed a lawsuit in Taiwan to ban his employment and won. However, TSMC did not sue Samsung. Previously, after confirming that China's SMIC had copied its technology, TSMC filed a lawsuit in the U.S., securing $200 million in damages and 10% equity. Since then, SMIC has not been a match for TSMC.

TSMC knew that suing Samsung would not be easy. Compared to SMIC, Samsung was a giant in the semiconductor industry. They judged that rushing into a lawsuit could worsen the situation. Sylvia Pang, then TSMC's legal counsel, said diplomatically, "Even if always prepared, we cannot act hastily."

Ryangmeongsung

The fact that chips made by Samsung and TSMC were randomly used in the iPhone 6s was only revealed after the product launch. Samsung manufactured chips using the 14-nanometer process, while TSMC used the 16-nanometer process. Consumers focused on performance comparison results. Apple likely did as well.

Results began to show that TSMC chips were on par with or slightly superior to Samsung chips. Normally, Samsung's chips, made with a finer process, would be expected to perform better, but that was not the case. The initial expectation that Samsung chips would outperform TSMC chips disappeared.

The A9 was the last Apple semiconductor manufactured by Samsung. Afterward, TSMC produced all of Apple's semiconductors. Apple concentrated all its orders with TSMC. The range of chips expanded. Design blueprints for all semiconductors designed by Apple, including iPhone, iPad, AirPods, and MacBook, were sent to TSMC. Apple's share of TSMC's revenue, which was about 8% at the start of the partnership, has now soared to 23%.

Because of TSMC's largest customer Apple, Nvidia's generative artificial intelligence (AI) training chips cannot be produced using the latest 3-nanometer process for the time being. Although TSMC and Nvidia have grown together since the early 1990s, their relationship is inferior compared to that of Apple and TSMC.