China's Semiconductor Manufacturing International Corp., facing a lawsuit by Taiwan Semiconductor Manufacturing Co. in a U.S. court over alleged breaches of an agreement, has responded with a suit claiming the Taiwanese company didn't honor the accord.

The Shanghai-based company, China's biggest made-to-order chipmaker, also filed a response "strongly denying" allegations made by Taiwan Semiconductor in its complaint, Semiconductor Manufacturing said in an announcement yesterday.

"The lawsuit by TSMC shows it's taking SMIC seriously in China," said Pranab Kumar Sarmah, head of electronics research at Daiwa Institute of Research in Hong Kong who has an "outperform" rating on both companies. "Since Taiwan doesn't allow it to put advanced technology fabs in China, there's potential for customers" to go to Semiconductor Manufacturing.

Semiconductor Manufacturing said in statement it will "vigorously pursue" a cross-complaint and defense against the Taiwan chipmaker's claims. Taiwan Semiconductor spokesman J.H. Tzeng said in a telephone interview that his company did receive a cross complaint and are reviewing it. "We have no further comment at this time," he said.

China's chip market grew 32 percent to US$40.8 billion in 2005, according to an IC Insights Inc. report on Jan. 9. Global sales of customized chips are poised to rise 22 percent this year, according to estimates by the researcher.

Taiwan Semiconductor, the only chipmaker with approval from the island's government to operate a plant in China, is restricted to plants that produce chips on 8-inch silicon wafers. The more advanced 12-inch plants cut costs and produce double the number of chips per wafer than foundries with older technology.

Taiwan Semiconductor filed a suit on Aug. 25 in the California Superior Court of Alameda County, alleging Semiconductor Manufacturing didn't comply with a January 2005 agreement that settled an earlier suit by the Taiwanese chipmaker, which claimed the Chinese company violated trade secrets.

Semiconductor Manufacturing agreed last year to pay Taiwan Semiconductor US$175 million in installments over six years to settle the earlier lawsuit, the Taiwanese company said in a release on its Web site. That agreement included a cross- licensing accord until December 2010, according to the release.

The cross-complaint alleges, among other things, that Taiwan Semiconductor has "undertaken a concerted effort since the previous lawsuits to discredit SMIC by making unfair and misleading accusations," Semiconductor Manufacturing said in its statement.

The chipmaker said it's seeking damages for Taiwan Semiconductor's "breach of contract and breach of implied covenant of good faith and fair dealing."

The Chinese company also said the Taiwanese chipmaker was using the lawsuit to "disrupt SMIC's business and valued relationships" with its customers.

"Some of SMIC's customers may get nervous because of these legal disputes, said Sarmah at Daiwa. Customers at the Shanghai-based chipmaker include Infineon Technologies AG and Elpida Memory Inc.

Taiwan Semiconductor controls 50 percent of the world's market for customized chips, while Semiconductor Manufacturing, the industry's fourth-biggest manufacturer, holds 7 percent, according to IC Insights.

"These legal processes are a business strategy," Lung Chu, vice president of Cadence Design Systems Inc., the world's largest maker of semiconductor-design software, said in Taipei.

Taiwan Semiconductor spent NT$4.05 billion (US$123 million) on research and development in the second quarter, almost twice that of nearest rival United Microelectronics Corp., which spent NT$2.1 billion.

Semiconductor Manufacturing posted second-quarter net income of US$2.2 million, compared with a loss of US$40.4 million a year earlier. Taiwan Semiconductor's second quarter profit rose 85 percent to NT$34 billion (US$1 billion).

Shares in Semiconductor Manufacturing rose 2.9 percent to close at a two-month high of HK$1.05 in Hong Kong. The stock has gained 8.3 percent since falling to a record on Aug. 29 after the company said it was being sued. Taiwan Semiconductor shares closed 3 percent higher at NT$58.40 by the 1:30 p.m. end of trading in Taipei. The stock is down 3.8 percent this year, compared with a 1.8 percent gain in the Taiwan's Taiex share index.

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