Why local chipmaker TSMC showed mercy in its IP settlement with China's SMIC

In an out-of-court settlement, the rival chip foundries put to rest a decade-long state of enmity. The subsequent resignation of SMIC founder and CEO Richard Chang set the stage for a more friendly state of competition for a share of China's NT$560 billion semiconductor market.

As part of the settlement, SMIC will pay TSMC US$200 million. On top of that, TSMC gets an eight-percent stake in SMIC in compensation and an option to buy another 2-percent stake within three years at a price of HK$1.3 per share. Should TSMC execute the option, it will hold a 10-percent stake in the Shanghai-based chipmaker, becoming its third largest shareholder, behind Shanghai Industrial Investment Holdings Co. and Datang Telecom Technology Co. The victory has drawn considerable attention within Taiwan's high-tech industry, but the winner itself is far from basking in its glory.

“The very first thing we wanted to do is to protect our intellectual property and our business,” says TSMC vice president and general counsel Richard Thurston, who spearheaded the litigation against SMIC.

“Everything I have done over the eight years since I came here involves using intellectual property not as a clout to beat people, but to give us a competitive advantage, because we had spent billions of dollars to develop our technologies and intellectual properties,” he told CommonWealth Magazine. Throughout the interview Thurston kept reiterating that TSMC's main objective was not to squeeze out its competitor by suing for ruinous royalties as other high-tech giants such as Texas Instruments or IBM had in the past.

On the contrary, TSMC was careful not to cause SMIC to bleed to death from compensation payments, because once SMIC went bankrupt and its fabs were sold off, TSMC's process technology would also be leaked to other competitors. TSMC was anxious to prevent the worst-case scenario: whichever company took over a cash-strapped SMIC would fight a price war and destroy the market order. Given that SMIC's process technology comes from TSMC, TSMC would have suffered most.

“TSMC put billions and billions into the technology. If other foundries in the market can freely get that, what distinguishes us from them? Everybody can claim that they are TSMC-like,” notes Thurston in explaining what drove TSMC to defend its intellectual property in court.

“Once a war situation presents itself, you can only seek to make peace, you can't seek battle,” says Yi-chia Chiu, associate professor at the Department of Business Administration of National Chung Hsing University, in analyzing TSMC's strategy.

Exactly how did TSMC use war to compel peace, and peacefully prevent a war? For the past eight years, what strategies has it pursued?

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