Waiting for The Godfather Part II

(Bloomberg Gadfly) -- Morris Chang's retirement shouldn't have come as a surprise, but it did.

At 86 years old, the founder and chairman of Taiwan Semiconductor Manufacturing Co. was due to exit. But for the past few years he couldn't seem to let go, and more importantly, no one wanted him to.

Chang isn't some aging leader who outstayed his welcome; he's a lion in the fast-paced and expensive semiconductor manufacturing business.

By pioneering the semiconductor foundry model, TSMC paved the way for the fabless chip-design business. It's thanks to Chang that dozens of chipmakers could eschew their own billion-dollar factories and outsource manufacturing. Beneficiaries include Qualcomm Inc.,  Nvidia Corp. and MediaTek Inc., itself a spinoff from rival United Microelectronics Corp.

And there's a reason why he's affectionately dubbed The Godfather of Taiwan's chip industry. Investors, clients, competitors and employees hang on his every word. His outlook for the industry, or his comments about future trends are taken as gospel.

When he gave the CEO role to Mark Liu and C.C. Wei in 2013, Chang retained the chairmanship, saying bluntly: "There's no such thing as a non-executive chairman."

Investors breathed a sigh of relief and have driven the stock up more than double since. 

But now, after grooming his successors, Chang is handing over the reins at a turning point for TSMC and its clients. The global chip industry was both a driver and a beneficiary of a decade-long smartphone boom. TSMC itself gets about $10 in revenue from every single handset sold globally, a lot more if it's an iPhone.

Despite spending $10 billion per year on factories and equipment, resulting in escalating depreciation expenses, TSMC's technological prowess has put it in the enviable position of widening gross margins -- an indication of how much pricing power it has with clients. In the fourth quarter of last year, right after the iPhone 7 was released, that figure hit 52.3 percent.

TSMC's dominance is so profound that GlobalFoundries Inc., a spinoff from Advanced Micro Devices Inc. and backed by Abu Dhabi money, has been trying for years to catch up and is reported to have recently complained to the European Commission alleging antitrust activity. A slew of Chinese contenders armed with government funds and a drive to poach talent have also been trying to muscle in on TSMC's turf, but have so far failed for lack of technical firepower.

Yet the smartphone business is slowing and the whole industry is looking for the next big thing. Terms like big data, artificial intelligence, driverless cars and the internet of things are all tossed around as if they'll take up the slack. But some of that talk sounds more like wishful thinking than a deep-seated belief in the future.

TSMC shares, YTD

+22.3%

At a press conference Monday, Chang noted that there are various challenges ahead for the company, including technological hurdles. The complicated physics of manufacturing chips at ever-smaller geometries actually works in TSMC's favor. Few other firms have the engineering talent or the money to work away at a problem year after year. Samsung Electronics Co. and Intel Corp. are its only intellectual peers.

In departing now Chang leaves TSMC in the hands of two extremely competent managers -- Wei will become CEO and Liu chairman. Investors and clients seem comfortable, considering TSMC's shares barely budged after the news.

What Chang hasn't left is a script for the sector's next chapter. It's one that promises legal fights, talent poaching, technical challenges that escalate expenses, and a desperate search for killer products.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

To contact the author of this story: Tim Culpan in Taipei at tculpan1@bloomberg.net.

To contact the editor responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net.