Spying Case Underscores Rivalry of Asian Chip Firms
It wasn’t unusual for Y.L. Wang to spend weekends at the factory he helped manage for Taiwan Semiconductor Manufacturing Corp., one of the biggest chip-making companies in the world.
But he had never before seen his colleague C.Y. Shih at the plant on a weekend until that Saturday in September 2001. He’d never seen anyone making so many photocopies either. Shih, a manager in TSMC’s technology transfer division, was huddled over the copier that weekend amassing piles and piles of paper.
“There were stacks of files covering a large table,” Wang later recalled.
One week later, Shih quit to join Semiconductor Manufacturing International Corp., an up-and-comer based in Shanghai. According to TSMC, Shih was one of more than 140 workers lured away over a two-year period starting in mid-2001 -- and many of them didn’t leave empty-handed.
TMSC, the No. 1 maker of chips for other companies, sued its Chinese archrival. Now the two are facing off in California courts and before the U.S. International Trade Commission in a case of alleged industrial espionage that underscores the intense competition in the $17-billion contract semiconductor manufacturing sector.
“ ‘Cutthroat’ is probably a good word to describe this business,” said Brian Matas, an analyst with IC Insights, a semiconductor consulting firm in Scottsdale, Ariz.
In the lawsuits, Hsinchu, Taiwan-based TSMC accuses SMIC of conducting a coordinated campaign to steal proprietary technology, including secret manufacturing techniques and training manuals. TSMC also alleges that SMIC infringed its U.S. patents.
The Shanghai company has asserted in statements that it doesn’t “need to misappropriate any third party’s trade secrets” and has dismissed TSMC’s charges as part of a “smear campaign.” SMIC executives declined to comment. The company’s San Francisco lawyer, Ned Isokawa, didn’t return calls.
Both TSMC and SMIC are so-called foundries that make chips for companies that can’t afford -- or don’t want to make -- the huge investment it takes to produce them on their own.
China-based foundries are on track to capture 9% of the world market by 2007, up from 4% in 2003, says technology market research firm ISuppli Corp. in El Segundo. And SMIC is the largest of six emerging Chinese foundries that together took in $1.85 billion in revenue last year, according to IC Insights.
The world’s top chip companies, such as Intel Corp., Samsung Corp., IBM Corp. and Advanced Micro Devices Inc., generally operate their own fabrication plants, or “fabs.” With equipment that can be as big as a school bus, sterile “clean rooms” and complex chemical cleanup facilities needed to turn a delicate silicon wafer into hundreds of computer chips, one fab can cost upward of $2 billion to build. When fully operational, a fab typically puts out 20,000 wafers a month.
“Most companies with revenue under $2 billion can’t keep a factory that size going,” said Nathan Brookwood, who runs Insight 64, a consulting firm in Saratoga, Calif., that specializes in semiconductors.
TSMC’s top-drawer customer list includes Sony Corp., Texas Instruments Inc. and Philips Semiconductors. The 11 fabs operated by the 17-year-old Taiwanese company produce hundreds of millions of chips a year -- 47% of all the chips made in foundries around the world, according to IC Insights.
In 2003 the company earned $1.3 billion on $5.9 billion in revenue. If it were a branded chip maker in its own right, TSMC would be the world’s fourth-largest, with 6.3% of the global market, according to IC Insights figures. Industry leader Intel’s market share is 7.5%.
As for SMIC, it was founded almost five years ago as China’s first high-volume chip foundry and produces a variety of logic and memory chips. It operates four fabs in Shanghai and the industrial port city of Tianjin; a fifth in Beijing is still honing its production process. Shanghai Industrial Holdings Ltd., which is majority owned by the Shanghai municipal government, owns 10.2% of the chip maker.
Broadcom Corp., Toshiba Corp. and Infineon Technologies are on SMIC’s growing client list. With $683 million in sales and $98 million in profit through the first three quarters of 2004, SMIC can claim global market share among chip foundries of about 4%.
The company attributes its success to the global shift toward outsourcing and its competitive prices.
TSMC sees things differently. “You begin asking questions when a company ramps a process in six months that took another company two years,” Charles Byers, Taiwan Semiconductor’s director of worldwide brand management, said in an interview in his office in San Jose. “That raises eyebrows.”
In December 2003, TSMC sued SMIC in U.S. District Court in San Francisco, claiming patent infringement and theft of trade secrets. (About 110 of TSMC’s more than 500 customers are headquartered in California, accounting for $2.3 billion in revenue in 2003 and more than a third of the 3.7 million silicon wafers TSMC etched that year.) The suit accuses SMIC of approaching TSMC customers and offering to produce identical chips “at prices substantially lower than TSMC’s prices.”
As TSMC lawyers gathered evidence for the federal court case, they became convinced that the supposed espionage plot was bigger than they first realized. In May, they filed another suit focused solely on the theft of trade secrets, this time in California state court in Alameda County.
TSMC didn’t specify what damages it’s seeking in either case.
Court records show that executives at the company became suspicious by early 2002 amid the exodus of employees hired away by SMIC. Suspicions deepened after SMIC said in August of that year that it was ready to start production of chips with features as narrow as 180 nanometers, or about 700 times thinner than a human hair. In the federal suit, TMSC calls it “an implausibly quick ramp-up” of SMIC’s production facilities.
“When you put their announcements together with the fact that so many people had left the company ... you say ‘Gee, I wonder,’ ” Byers said.
There were conspicuous clues, the court filings say.
For instance, there was the weekend flurry of photocopying at TSMC’s plant in Tainan, in southern Taiwan. Shih, the technology transfer manager who was making the copies, also made some unusual requests, according to Wang.
He “repeatedly asked me and two of my colleagues ... to provide electronic and hard copies of all improvements made during the past quarter for thin-film processes,” said Wang, the plant manager who ran the thin-film department, in a sworn statement made in March. (The thin-film processes deposit layers of silicon on wafers before they are etched, a crucial step in chip production.)
According to Wang, he and his colleagues complied. And Shih abruptly left TSMC a week later, Wang said, disregarding a company policy requiring employees to give a full month’s notice before resigning.
Over time, Wang added, word traveled through the grapevine that employees who jumped to SMIC and brought TSMC secrets with them would receive 50,000 to 80,000 SMIC shares or stock options.
Shih’s alleged exploits were tame compared with those of Katy Liu, a former TSMC quality control manager convicted in Taiwan in 2003 on charges of stealing company secrets.
For six months in 2002, Liu operated as an SMIC “corporate spy” while employed by TSMC, the federal suit claims. After that, she went to work for the Shanghai chip maker.
As evidence of the secret relationship, TSMC submitted to the court an e-mail sent to Liu from Marco Mora, then vice president of operations at SMIC, asking for the “detailed process flow” for the production of six different kinds of logic and memory chips. Mora, now SMIC’s chief operating officer, also requested both Chinese and English copies of the “training plan” for newly hired TMSC technicians and engineers, the e-mail said.
“Sorry for the long list, but we need a lot of material to set up the new operation,” Mora wrote.
SMIC noted in a court filing in April that the e-mail was undated and said “there is no evidence that [Liu] ever provided SMIC with any of the information in the e-mail.” But Mora’s e-mail played a key role in Liu’s conviction in Taiwan. (Liu, who was convicted in absentia, is assumed to be in China, Byers said.) The Taiwanese court also ordered SMIC to stop seeking proprietary information if it hired TSMC employees.
According to Willy Luo, a senior process engineer for TSMC who later went to work for SMIC, it was an open secret that SMIC made use of documents and processes purloined from its Taiwanese rival.
“I was told that SMIC had a code name for TSMC’s process recipes called BKM1, which stood for ‘Best Known Method One,’ ” Luo said in a sworn declaration in March. “Engineers would describe the BKM1 solution to various issues and problems.”
Another SMIC worker estimated that 90% of the process his company used to make 180-nanometer chips was copied from TSMC.
“This was confirmed by my co-workers at SMIC, many of whom had come from TSMC,” said the unnamed worker, who also gave a sworn statement in March. “To my knowledge, SMIC’s use of TSMC’s process information was both known by, and encouraged by, senior SMIC managers.”
In a rebuttal to the charges, SMIC said in the April court filing that the patents TSMC claims were infringed cover only a small part of the chip manufacturing process. The Shanghai company also noted that with 5,000 employees, the 100 or so who used to work for TSMC are only “a small percentage,” about 2%.
“To the extent it was needed, SMIC acquired its technological assistance legitimately, entering into technology licenses and transfer agreements with major industry leaders,” the company said in the filing.
The two California cases are moving forward slowly, and Byers said he didn’t expect either to come to trial before January 2006.
In August, TSMC took its case to the International Trade Commission, which is investigating the misappropriation of three TSMC patents. An ITC ruling in TSMC’s favor could halt sales of chips using allegedly stolen technology.
While the litigation plays out, TSMC has implemented measures to stop future loss of company secrets. Employees are reminded twice a year to maintain the confidentiality of intellectual property, and e-mails are monitored more closely.
“To this day I get reports of e-mails above a certain size,” TSMC’s Byers said. Usually they are brochures and PowerPoint presentations, he said, but management watches over such communications, just in case.
*
(BEGIN TEXT OF INFOBOX)
Made to order
Top chip foundries in Taiwan and China, annual revenue (in billions)
*--* Company 2002 2003 2004* Taiwan Semiconductor** $4.70 $5.90 $8.03 United Manufacturing** 2.20 2.70 4.20 Semiconductor Manufacturing 0.05 0.37 1.03 Huahong-NEC 0.15 0.17 0.26 Advanced Semiconductor 0.09 0.13 0.18 Central Semiconductor 0.08 0.12 0.17 He Jian 0 0.03 0.12 Grace Semi 0 0.02 0.10
*--*
*Estimates
**Taiwan companies; all others are from China
Source: IC Insights
