TAIPEI -- The legendary founder and executive chairman of Taiwan Semiconductor Manufacturing Co. this week will hand over the company's reins, entrusting two successors to guide the top contract chipmaker and key Apple supplier through a critical phase of slowing iPhone sales.
Morris Chang, 86, will host the company's annual general meeting for the last time on Tuesday. Though the leadership change was announced on Oct. 2, for many it is still difficult to imagine TSMC without the man known as the godfather of Taiwan's chip industry.
"I think this is an end to a very important era," Jensen Huang, chief executive of U.S. chipmaker Nvidia, told reporters Wednesday in Taipei. "No one could replace Morris."
The men replacing him -- company veterans and board directors -- will have their hands full as TSMC grapples with a slowdown in a smartphone market that has powered growth over the past decade. C.C. Wei will become the sole chief executive, overseeing all daily operations, including the financial and legal affairs units that Chang currently supervises directly. Mark Liu will serve as chairman.
Although TSMC is still likely to generate record revenue and profit for 2018, it cut its full-year revenue growth target to about 10%, from up to 15%, in U.S. dollar terms in April. It cited lackluster demand for premium phones, widely recognized to refer to iPhones.
"We saw Apple scaled back orders in the current quarter amid weakening demand and also learn from supply chain checks that Apple gave a very conservative forecast for the upcoming iPhones in the second half," said Mark Li, an analyst at Bernstein Research.
Li said that another important growth pillar this year -- demand for cryptocurrency mining chips -- could be at risk, too. These chips have been a driver of the semiconductor industry since the second half of last year.
"There are even possibilities that TSMC could not meet its growth target for this year as the Bitcoin price continues to plunge," Li said. "According to our model, the company might only grow some 9% in revenue, which is a bit below its current forecast and market consensus."
At the same time, TSMC is building a $24 billion advanced chip project, pouring in record capital expenditure of up to $12 billion in 2018 to secure the next growth opportunities in artificial intelligence, despite the rising cost and challenge of producing leading-edge and more powerful chips. The new leadership also needs to deal with growing competition from Samsung Electronics, the world's biggest memory chipmaker, which has pledged to expand its foundry business. And, like most tech companies in the world, they must also deal with the uncertainties brought by trade friction between Beijing and Washington.
Despite the challenges ahead, Nvidia's Huang said Chang is leaving his successors with a "foundation of culture and a business system, an operating system for TSMC that will last for generations."
"I hate to say this but is there an older CEO in the world?" Huang said. "I think it's the world record. But Morris works until now because he wants to leave TSMC for the [next] generations."
The company Chang founded in 1987 now holds 56% of the foundry business making chips for others. As the sole supplier for the core processor chips used in Apple's iPhones, TSMC has 465 customers worldwide, including almost all major chip designers that do not operate their own factories. Apple, Qualcomm, AMD, Nvidia, Broadcom, NXP, Huawei's chip arm Hisilicon Technologies and Mediatek all rely on TSMC's leading-edge manufacturing capabilities to build advanced chips.
TSMC manufactures various chips, including application processors, modems, graphics processors, networking processors, fingerprint chips, image sensors and driver ICs.
Most investors agree that, in the short term, there should be nothing to challenge the company's dominant position. They are more worried about uncertain market conditions -- including lackluster iPhone demand -- than the management changes.
As of June 1, TSMC's shares were down more than 15% from their peak on Jan. 23, when the company's market capitalization sat at $6.89 trillion New Taiwan dollars ($229.81 billion), or NT$266 a share, which topped Intel and Toyota Motor. However, the company's market value has tripled since the iPhone launch that ushered in the decade of the smartphone back in 2007. TSMC's revenue and net profit in 2017 were both more than triple the figures in 2007.
As the new leadership takes over, TSMC's customer landscape is changing. It is becoming more reliant on Apple, its No.1 customer, and on Chinese clients. For 2017, Apple accounted for 22% of its revenue of NT$977.45 billion, while in 2016 and 2015 the U.S. company only contributed to some 17% and 16% of sales.
Apple is designing more chips in-house, including the current processor chips, fingerprint chips and Bluetooth chips for Airpods. The U.S. company is also developing its own power management chips and core processors for MacBooks, and others, according to industry sources. Those chips are also manufactured by TSMC. There is a chance this growing dependence could make TSMC vulnerable if Apple's products do not sell as expected.
Meanwhile, as China boosts its semiconductor sector, which it sees as key to national security, TSMC has found its Chinese market is growing the fastest. In the January-March quarter, China-based customers accounted for 19% of TSMC's sales, compared with only 11% a year ago, even though customers from the U.S. still took up 59%.
A TSMC executive who has worked with both of Chang's successors said they are "very different people."
"Mark is extremely careful and is good at going back and forth for contemplative planning for the long-term while C.C. is very straightforward and a quick decision-maker who could give you a yes or no answer right away," the executive said.
Wei, 65, was senior vice president of technology at Chartered Semiconductor Manufacturing in Singapore, before joining TSMC in 1998. He has a Ph.D. in electrical engineering from Yale.
Liu, 64, has a Ph.D. in electrical engineering and computer science from the University of California, Berkeley, and previously worked at Intel and AT&T Bell Laboratories in the U.S. He began his career at TSMC back in 1993.
Industry sources suggest that Wei, who is responsible for customer accounts like Apple, is known for being good at making clients happy.
"C.C. is very transparent and he always has time to go over things with us. He would give us honest advice on what kind of chip manufacturing technology we should use," an executive at a Chinese chipmaker told the Nikkei Asian Review. "Even though TSMC is a market leader and almost all the chip designers need its manufacturing expertise, and even if we are not its top customer, they want us to be successful too."
As a devout Christian, Liu is known to be very focused on detail and has a good track record of running and managing semiconductor factories and developing chip production technology.
"He is very inquisitive when you report to him -- he would want to learn about all the numbers and details and he wants things to be perfect and precise," a TSMC employee said.
"Liu is a marathon-type of person. Like in sports, he prefers long-distance swimming," another longtime TSMC employee said. "He is more prudent and would think more before making any conclusion. We think he could be a good complement to Wei."
Chairman Chang told the Nikkei Asian Review in an interview in October that he had paved the way for a smooth leadership transition, with the new team responsible for executing plans for the future.
"Up to now, I am still synonymous with the company," Chang said. "But, like in China in the past, Mao Zedong was once synonymous with the country. But that is no longer the case."
The founder continued: "I have made my contribution to keep the continuity for the new board of directors without me ... I certainly expect that they can continue come up with innovations with their own ideas. I made my contribution and beyond that, it's not my business."
The company's board members for the new term beginning on Tuesday will remain the same, except for Chang. The board has some veteran independent directors including Michael Splinter, former chief executive of Applied Materials, Sir Peter L. Bonfield, chairman of NXP Semiconductors, Thomas J. Engibous, former chief executive of Texas Instruments, and Stan Shih, co-founder of Acer.
Nevertheless, following a strongman founder like Chang will be a challenge, with market observers suggesting that the two executives' ability to work together will be closely watched, especially given TSMC's relatively broad shareholder structure.
TSMC's single largest shareholder is Taiwan's National Development Fund, with 6.38% of shares, while all the executives, including Chang, hold minor stakes of less than 1%.
Joseph P.H. Fan, professor at the Chinese University of Hong Kong, a longtime researcher on succession, pointed out that it is rare to see a successful case of dual leadership and that most do not last very long.
"It's extremely difficult to succeed such an iconic and revered leader ... I think that's probably the reason Chairman Morris Chang picked two people to together take over the role," Fan said. "However, collaboration could be challenging. When Chang is still in charge, the two executives might be able to work well with each other. But it's not clear whether they could still collaborate well without Chang."
On top of this, Fan said, with both successors in their sixties, they will have to think about cultivating the next generation of leaders for the company -- and "they have to start as early as possible in the tech industry that changes so rapidly."