China: Chip Makers Exchange Barbs in Corporate Espionage Suit

Publisher Name: 
Los Angeles Times

Semiconductor Manufacturing
International, China's largest maker of custom chips,
accused Taiwan Semiconductor Manufacturing on Wednesday of
conducting a "smear campaign" after Taiwan Semiconductor
filed new documents this week in its lawsuit accusing the
Chinese company of corporate espionage.

The escalation in the war of words came just a week after
the Chinese semiconductor maker's debut on the New York
Stock Exchange disappointed investors; its shares fell 11
percent in its first day of trading to close at $15.52. The
company's stock price has begun to rise in the last two
days, and on Wednesday closed up 19 cents at $14.79.

In December, Taiwan Semiconductor, the world's largest
maker of custom chips, filed a lawsuit in Federal District
Court in San Francisco accusing the Chinese chip maker of
stealing trade secrets and infringing on its American
patents. On Monday, it filed additional legal documents
with the court that detailed its accusations against the
Chinese company.

Semiconductor Manufacturing International "has engaged in
an ongoing scheme of industrial espionage and unfair
competition," Taiwan Semiconductor contends in its latest
filing. Charles Byers, worldwide brand manager at the North
American operations of Taiwan Semiconductor, said the
company was seeking a jury trial "based on the belief that
they infringed our patents and misappropriated our trade
secrets."

Taiwan Semiconductor contends that a former engineer with
the Chinese chip maker estimated that 90 percent of the
Chinese maker's "process flow" for a certain chip had been
copied from the Taiwan company.

The Taiwan company also contends that the Chinese company
lured away important employees with promises of stock and
then encouraged them to divulge Taiwan Semiconductor's
proprietary information.

In a statement Wednesday, executives of the Chinese chip
maker responded to the Taiwan company's latest claims by
accusing the company of "bullying." The company also
criticized Taiwan Semiconductor executives for speaking
publicly about the case outside of court.

The Chinese company said that it intended to vigorously
defend itself in court and that it was "not necessary for
it to misappropriate the trade secrets of others." It has
until April 9 to file a reply to the most recent court
filing. A hearing is scheduled for April 23.

The lawsuit is just one of several events to cast a shadow
over the Chinese company's initial public offering on March
17, which raised more than $1.7 billion. Its shares opened
on the New York Stock Exchange at $17.50 and then fell.
Motorola, a Semiconductor Manufacturing International
customer, owns roughly 11 percent of the company.

The offering came just days after the United States lodged
a complaint with the World Trade Organization over tax
breaks granted by the Chinese government to Chinese chip
makers.

But perhaps more significant to the company's drop in share
price, analysts said, was a correction in the company's
offer filing. Just days before the offering, the company
retracted a statement by its chief financial officer that
it would not need to seek additional external financing and
it said that it would indeed seek such financing for
capital expenditures through 2005.

Taiwan Semiconductor's lawsuit comes as that company faces
increasing pressure from China in the custom chip, or
foundry, business.

Kathy Smith, a portfolio manager with Renaissance Capital
in Greenwich, Conn., which owns shares in Semiconductor
Manufacturing International, said the Taiwan Semiconductor
lawsuit was evidence that the foundry industry was taking
note of the Chinese chip maker, despite its being a
relative newcomer. The suit, she says, could spell trouble
for the company if the court decides for the Taiwan
company.

Adding to the rivalry is the fact that Semiconductor
Manufacturing International, based in Shanghai, is headed
by Richard Chang, the former head of World Wide
Semiconductor Manufacturing, a competitor that was bought
out by Taiwan Semiconductor.

Mark Fitzgerald, a semiconductor analyst with Banc of
America Securities, said that the suit could be a warning
to Chinese semiconductor companies to increase their
research and development efforts. Semiconductor
Manufacturing International is considered a "trailing edge"
company, he said, selling commodity products like memory
chips, rather than the more advanced technology sold by
Taiwan Semiconductor. In the long term, he said, "they've
got to come up with a market-driven strategy."

AMP Section Name:Money & Politics