industrial espionage redux

[Eubulides <paraconsistent@xxxxxxxxxxx>]

latimes.com
http://www.latimes.com/business/la-fi-chipspies3jan03,0,581820.story?coll=
la-home-business

Spying Case Underscores Rivalry of Asian Chip Firms
In a California court, Taiwan Semiconductor is accusing Shanghai-based
SMIC of blatantly stealing its manufacturing secrets.
By Terril Yue Jones
Times Staff Writer

January 3, 2005

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.