Cease-Fire in the China-Taiwan Chip War?

Since its early days, Shanghai-based chipmaker Semiconductor Manufacturing International (SMI), or SMIC, has been on the losing end of a feud with one of the industry's heavyweights, Taiwan Semiconductor Manufacturing (TSM), or TSMC. SMIC was founded in 2000 by Richard Chang, who had left TSMC after the Taiwanese chipmaker acquired a company he had run. And as his executives recruited engineers from Taiwan to work in Shanghai, the company quickly found itself a target of TSMC's legal team. In 2005 the two companies settled a lawsuit filed the year before by TSMC alleging the other firm had stolen trade secrets, with SMIC promising to pay $175 million. TSMC also won a victory in a Chinese court, where SMIC had filed suit in 2006 accusing the Taiwanese company of unfair competition. SMIC, the biggest chipmaker in China, is now appealing that verdict, and it is awaiting a ruling by a California appeals court on a decision last year in favor of TSMC. Now, after yet another win for TSMC, the latest round of fighting may be coming to an end. On Nov. 3 a California jury ruled in favor of TSMC, which in 2006 sued SMIC for failing to live up to its 2005 agreement. The Alameda County Superior Court jury is now deliberating what, if any, damages the Chinese semiconductor company will need to pay. But a verdict in that penalty phase might not be necessary: Reuters reported on Nov. 9 that the two companies are in the midst of negotiations over a settlement. Settlement StrategiesNeither TSMC nor SMIC will comment directly on the report. However, both indicate that they're open to the possibility of a settlement. TSMC spokesman J.H. Tzeng points to the original 2005 settlement as proof the Taiwanese chipmaker can reach deals with opponents. "Both parties reached a settlement once," he says, "so we never rule out an opportunity for another settlement." The same goes for SMIC, says spokesman J. Matthew Szymanski. "We are going to continue to review our options," he says. Even though it has emerged once again on the losing end of a fight with TSMC, SMIC still has leverage, Szymanski says. One reason the company lost the latest round in California, he says, was a ruling by Judge Steven Brick not allowing SMIC to argue its contention that TSMC had misappropriated SMIC's own trade secrets. That argument, the judge ruled, would have to wait for the trial of the countersuit that SMIC filed against TSMC. The cases are "mirror images," says Szymanski. "We wanted the jury to hear our side of the story." He adds that TSMC's alleged behavior meant it was in no position to sue SMIC. "A party coming to court seeking justice must itself have clean hands." The judge's decision to keep the two cases separate means there could be another jury trial, this time with SMIC as the plaintiff and TSMC accused of stealing trade secrets. Another trial could be costly and time-consuming: Opening arguments for the trial that just concluded were in early September. By reaching a settlement now, the companies could probably avoid another round of litigation. SMIC and TSMC might have another reason to settle the dispute and move on. The two companies, which once seemed to be on track to becoming archrivals, have gone in different directions. TSMC, the world's largest foundry, or made-to-order chipmaker, opened its first Chinese plant in 2004. At the time, many people in the industry saw the Shanghai plant as a first attempt to grab local customers away from SMIC, the hometown favorite. But TSMC Chairman and CEO Morris Chang says the sales of the Shanghai factory have been disappointing. The factory produces fewer than 40,000 8-inch silicon wafers a month, making it a small plant by TSMC standards. "The market has not developed as fast as we had hoped when we first went in," says Chang. There are many chip-design companies in China with potential, he says, but "very few of them have the critical mass to grow." The Chinese market isn't too small for SMIC, though. Indeed, the Shanghai chipmaker is depending on many of those companies that are too small for TSMC. One-third of SMIC's revenues are now from Greater China, says Szymanski, with the bulk of those coming from the mainland rather than Taiwan or Hong Kong. China, he adds, "is a big part of our future."

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