In the movie the Graduate staring Dustin Hoffman, Mr. Robinson tells the Dustin Hoffman character the future is plastics. It could be, but the real future was the transistor or what we call computer chips.

Recently read an excellent book on the subject called Chip War by Chris Miller published by Scribner, NY, 2022. The book highlights the history of the computer chip as well as adds geopolitical themes which the State Department worries about.

In 1985, Taiwan’s powerful minister K.T. Lie called Morris Chang into his office in Taipei. Minister Li said we want to promote a semiconductor industry in Taiwan, how much will you need?

Taiwan had deliberately inserted itself into the semiconductor supply chains since the 1960’s as a strategy to provide jobs, acquire advanced technology and strengthen its security relationship with the US. Companies involved in Taiwan included Texas Instruments, RCA and UMC.

Morris Chang at the time had been passed over for CEO of Texas Instrument and was looking for something new to do. Minister Li and a blank check was something he never had at TI.

The model Mr. Chang was going to do was to produce chips designed by customers. At the time, firms such as TI, Intel and Motorola mostly manufactured chips they had designed in house.

The reasoning was as technology advanced and transistors shrank, the cost of manufacturing equipment and R&D would rise. Only companies that produced large volumes of chips would be cost-competitive.

The Taiwanese government supplied 48% of the business plan Chang drew up. Dutch company Philips agreed to put up $58 million, transfer production technology and license intellectual property in exchange for 27.5% of TSMC. The rest of the money came from wealthy Taiwanese families that were asked to invest by Minister Li. The company also received generous tax benefits.

Throughout the 1990’s, half of TSMC sales were to American companies. Chang told its customers we do not design the chips, we build them for you.

By the 2000’s, it was common to split the chip industry into 3 categories: Logic – the processors that run smartphones, computers and servers. Memory – refers to DRAM; Other – analog chips, semiconductors that mange how devices use electricity. This last category is more dependent on clever design.

The biggest chip maker in the analog is Texas Instruments.

The DRAM market has been dominated by a relentless push toward offshoring production to a handful of facilities. The reason is the high cost of fabrication (in the 1980’s $20 billion). The 3 companies which dominate are Micron, Samsung and Hynix from South Korea.

Linking to dividend paying stocks, there tends to be reasons why they developed the way they did. Sometimes it is government policy, sometimes it is the most cost effective, the biggest margins, many different issues come into play. As an investor, you want to look forward to see if those good things from the past continue.

There are more questions than answers, till the next time – to raising questions.