How TSMC convinced Apple to ditch Samsung – Fortune
Good morning, welcome to the Trust Factor.
As I take over this newsletter, we’re trying out something new: monthly themes that delve into a specific slice of the important role of trust in business. For the rest of February, the Trust Factor will investigate how executives earn trust when entering into new partnerships, either through corporate M&A or through restructuring executive teams.
In the first case study, we’re looking at one of the greatest corporate coups of the last decade: how Taiwan Semiconductor Manufacturing Co (TSMC) won Apple’s trust and replaced Samsung as the Cupertino company’s core chip supplier, kickstarting TSMC’s atmospheric share price inflation.
“I don’t think Apple could ever really trust Samsung,” TSMC’s former general counsel, Richard Thurston, told me over the phone last week.
Back in 2011, Apple was reliant on its rival smartphone maker, Samsung, for manufacturing the iPhone’s most cutting-edge processor chips. But the two companies were also locked in a bitter feud over patent infringements.
Apple accused Samsung of copying design features from the iPhone—features Samsung could have gotten wise to through its manufacturing work—and sued the Korean electronics maker. In 2012, a U.S. court ruled in Apple’s favor and awarded the company $1 billion in damages. But Samsung appealed the ruling and kicked the issue back to the courts, where the case stretched on for seven years until it was settled out of court in 2018. In the meantime, Apple had to find a manufacturer it could trust to replace its rival.
Enter Foxconn founder and CEO, Terry Gou, who had a suggestion for his partners at Apple.
“Really the impetus, as I recall, for Apple and TSMC coming together was Terry Gou recommending to [TSMC founder] Morris Chang and Apple that the two companies should talk,” Thurston says.
By 2011, Foxconn had already established itself as a reliable partner to Apple, as the assembler of iPhones. The Taiwanese company’s founder and CEO, Gou, is also a compatriot and family friend of TSMC founder, Chang.
According to Thurston, Gou even sat in on some initial negotiations between TSMC and Apple, which were quickly elevated to the executive level, with future Apple COO Jeff Williams and future CEO Tim Cook attending at different times. Thurston says establishing those high-level, executive relationships early on was integral to developing trust between the two companies.
By putting its key people in the room, TSMC demonstrated its commitment to a “long-term relationship” with Apple, Thurston says, and assured Apple’s management that the manufacturer was taking Apple’s concerns seriously.
Once the introductions had been made, then came the more practical aspect of building trust: demonstrating competence.
“I don’t think TSMC’s manufacturing skills were ever in doubt,” Thurston says. “But Apple had serious concerns about corporate leaks, and it was because of the strength of TSMC’s trade secret protections that I think Apple really decided to go with us.”
Thurston helped implement many of TSMC’s airtight IP-protection protocols. Employees, customers, and suppliers all sign nondisclosure agreements when working with TSMC. The company’s 16 manufacturing sites in Taiwan are all firewalled from each other, preventing hackers from finding a singular point of access to steal designs. To prevent more low-tech theft, the printer paper in some fabs is lined with metallic strips that activate airport-style gate sensors at the exits if an employee tries to leave with notes in their pocket.
“We were doing things even Apple wasn’t doing,” Thurston says.
By 2013, Apple was satisfied enough with TSMC’s practices that the iPhone maker decided to split its chip manufacturing orders between Samsung and TSMC. It was a test, sort of like “kicking the tires,” Thurston says. Of course, TSMC passed with flying colors and, soon after, became the sole manufacturer of processor chips for Apple’s iPhones and iPads.
Scoring the Apple contract was a game changer for TSMC, helping balloon the company’s share price 600% from 2011 to today. Apple now accounts for roughly 23% of TSMC’s business and, in return, Apple has secured preferred customer status at the world’s largest and most advanced contract chip manufacturer.
“It was very special in my mind, you know, the TSMC and Apple relationship,” Thurston says. “It’s not just something you could create on paper. The relationships between key personalities were essential.”
For more on TSMC and its prowess, check out this Fortune feature.
Eamon Barrett
[email protected]
@eamonbarrett88
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