January 31, 2005 12:30 PM PST

$175 million settles suit between Asian chipmakers

One of China's premier chipmakers has settled a high-profile intellectual property suit with Taiwan's largest chipmaker, but it's doubtful that the two have buried the hatchet.

Semiconductor Manufacturing International Corp. (SMIC) has agreed to pay $175 million to Taiwan Semiconductor Manufacturing Co. (TSMC) to resolve lawsuits filed in California and Taiwan and a complaint filed with the International Trade Commission. The payments will be made over a period of six years, and the two companies have agreed to cross-license their patents through 2010.

TSMC also agreed not to sue SMIC for trade secrets, although trade secrets are not part of the cross license. In the lawsuits, TSMC alleged that SMIC's manufacturing processes were "strikingly similar" to its own.

TSMC pioneered the concept of foundries--semiconductor-producing chipmakers that don't have their own factories--and it is still the world's largest foundry. Consequently, foundries have been one of Taiwan's more important IT industries. Due to tax breaks given to chipmakers, TSMC, along with other chipmakers, often makes more money after taxes than before.

China's emerging chip industry, however, has begun to challenge Taiwan's turf. Not only does the Chinese government provide substantial tax breaks to companies that build facilities there, but water and electricity can also cost less in mainland China.

SMIC so far has been one of the most successful indigenous companies. The company obtained hundreds of millions of dollars in venture funding from New Enterprise Associates, among others, and it held an initial public offering in the United States last year. Its clients include Texas Instruments and Broadcom. SMIC's chief executive, Richard Chang, is a former high-ranking executive from TSMC.

Even without the lawsuit, competition between the two companies, and among other chipmakers in China and Taiwan, will continue to be intense. To better compete, Taiwan's government is now giving its chip companies permission to build facilities on the mainland.

 

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