Getting in Intel's Face

Via Technologies' success has spawned a litigation battle

There's something about Via Technologies that gets under the skin of Intel Corp. (INTC ) CEO Craig Barrett. Sure, the Taiwanese chipmaker is a speck of a company, with just $894 million in sales last year. But Via has done what few other chipmakers have pulled off: It bested Intel in an important business. Intel contends that Via only managed to do so by stealing its intellectual property. Via vigorously denies the charge.

The companies, so unevenly matched, are rivals in designing and selling clusters of semiconductors known as system chipsets. These devices don't rule over all other PC hardware the way Intel's Pentium microprocessors do. But they play a critical role in carrying instructions between the microprocessor and other chips controlling the monitor, modem, disk drives, and other peripherals. The rivalry has ensnared the two in a series of lawsuits that are being closely watched by electronics companies across the U.S., Europe, and Asia. That's because the battle's outcome will help determine how quickly Intel will be able to extend its influence into new niches in the global semiconductor market--and how boldly other small companies are likely to challenge its influence.

The battle began to take shape two years ago, when for the first time Intel's market share in chipsets fell behind that of another company--Via. How could that happen? As Via and analysts in Asia tell the story, PC makers in Taiwan and elsewhere simply preferred the Taiwanese product to Intel's more expensive alternative. In the summer of 1999, the American giant sued, charging patent infringement, and eventually the two sides settled--thus allowing Via to grow more.

CHINA CHALLENGE. Since then, Via has become more aggressive. The company recently made a bold move into the microprocessor arena, Intel's core business, and laid plans to challenge Intel in China. What's more, Via President and CEO Wen-chi Chen likes to razz Intel in public, likening the Taiwanese company to David vs. Intel's Goliath.

So it's no wonder Intel decided to strike back. Early this year, when Intel was awarding licenses to Taiwanese companies seeking to build chipsets compatible with the new Pentium 4 processor, the U.S. company snubbed Via, refusing to provide such a license. When Via defied Intel and started offering a P4 chipset anyway, Intel filed suit in U.S. District Court in Delaware, charging Via with patent infringement. "They are proceeding without a license, in our view, and offering products that infringe," says Chuck Mulloy, an Intel spokesman in Santa Clara, Calif., "which leaves us very few choices." In late September, Intel ratcheted up the pressure by launching additional lawsuits, this time also targeting several Via customers.

HARBINGER. The Taiwanese David is starting to feel the strain. In October, Via slashed by more than a third its projected earnings for the year, and its stock price has plunged 21% since Intel kicked off the litigation war. One reason for the slump: With Intel suing some of its customers, Via has had to issue assurances that it will indemnify them for any legal costs stemming from the fight. "Of course it's painful," says Chen of the struggle against Intel. "When you run into a bully, you feel pain. But we are doing the right thing, and justice will prevail."

The current round of Intel vs. Via is a battle for domination of the small but important chipset niche. The struggle is also the opening salvo in the contest to win sales in the lucrative Chinese market, the world's fastest-growing semiconductor arena. More than anything, it is a harbinger of coming fights over intellectual property, which most chip companies now recognize as the key to profits in a hypercompetitive industry. "All companies violate each other's patents," says Dan Heyler, head of Asia Pacific semiconductor research at Merrill Lynch & Co. in Hong Kong. "The question is, when you sit down to negotiate, how many do you have and which ones are you going to give up?"

Some analysts believe patent litigation is the inevitable outgrowth of fragmentation in the chip business. A decade ago, a few large, vertically integrated companies dominated the business. Today, niche companies handle more and more parts of the design, manufacturing, and assembly of chips, and each is intent on preserving its own unique intellectual property. "The patents will become more and more obscure and arcane," argues Julian Snelder, a Hong Kong-based Morgan Stanley Dean Witter & Co. vice-president specializing in technology. As the industry moves toward a less integrated model, "the relationships are fragmenting and intellectual property tensions could escalate."

Via concedes it has already lost a lot of ground to Intel. Chen says his company previously had high hopes for its P4 chipsets, expecting to more than double its market share to a dominant 80%. But then Intel frightened away Via customers. "This is a classic case of scare tactics," says Chen.

While Via is the biggest, it's hardly the only Taiwanese company feeling squeezed by Intel's strategy. Via is one of the top customers for TSMC, the world's No. 1 foundry, and any slowdown in Via sales may hurt TSMC, too--at a time when the Hsinchu company can ill afford any further lost orders. Because of the global slowdown and the aftereffects of the September 11 terrorist attacks, TSMC's chip fabs are operating at just 40% of their capacity, compared with 100% a year ago.

Smaller Taiwanese companies are more vulnerable still. One target of Intel's lawsuits, stemming from its fight with Via, is Elitegroup Computer Systems, a Taipei producer of motherboards--the core circuit board in a PC--with $600 million in sales last year. Elitegroup is a Via customer. Its assistant vice-president for finance, Tim Lee, says he has received assurances from Via that it "will take all the legal responsibility" from any Intel-related litigation. But the threat of a lawsuit is not the only thing spooking Taiwanese motherboard makers, Lee adds. They also fear Intel will withhold early intelligence on future versions of its Pentium microprocessors. Favored motherboard companies that get access to such data are often able to get a leg up on their competitors.

ACER OPPORTUNITY. Amid all the fallout from the Intel-Via battle, some Taiwanese companies are finding reason to smile. Acer Laboratories Inc., for example, managed to secure an early chipset license for the Pentium 4. Now, Chin Wu, president of the Acer unit, sees Via's woes as an opportunity to regain lost market share. In the current court battle, he predicts, Via won't be as lucky as the last time. Back then, he says, Via had a fast chipset that Intel's customers in the PC sector desperately wanted. The PC makers put pressure on Intel to settle, he explains. "But this time it's different. Via is no longer the only supplier, so there is no need for Intel to settle with them," says Wu.

In the meantime, Via is making some enemies of its own. Taking a page from Intel's book, Via has started branching into other products. On Oct. 15, the company announced it would start designing its own motherboards--which could mean running smack into its customers in the motherboard business.

Ironically, the latest round of Intel vs. Via comes at a time when the Taiwanese are more focused on intellectual property rights protection than ever before. Among the big contract houses, both TSMC and archrival United Microelectronics Corp. (UMC ) have good reputations for protecting customers' chip designs and other trade secrets. "Taiwan has come a very long way in protecting intellectual property," says Jonathan Ross, chief technology analyst with Goldman, Sachs & Co. in Hong Kong. In fact, as more Taiwanese IT companies relocate their operations to less expensive locations in China, the big worry is that they themselves will suffer at the hands of IP pirates on the mainland.

If, indeed, Taiwan has come up in the world of intellectual property, there's no better sign of it than Via's own strategy in court. Within days of being sued by Intel, Chen wheeled around and countersued on the grounds that its own IP had been violated. And the case will undoubtedly drag on.

For now, however, Chen is trying to get on with business. On Oct. 20, on the sidelines of the Asia Pacific Economic Cooperation summit in Shanghai that attracted both President Bush and Chinese leader Jiang Zemin, Chen gave a speech to business leaders. The topic? "Intellectual Property in the New Economy." Thanks to Intel, that's a subject with which Chen has become all too familiar.

By Bruce Einhorn in Hong Kong, with Adam Aston in New York and Cliff Edwards in Santa Clara, Calif.

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