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China: Chip Makers Exchange Barbs in Corporate Espionage Suit

by Laurie J. FlynnLos Angeles Times
March 25th, 2004

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."





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