SiS vs. UMC - and the winner is: Intel?

Taiwan is shaking, this time not from an earthquake - but from motherboard pile-up. During VIA Technology Forum, word spread like wildfire in this gossip-ridden town about the SiS-USB-ITC injunction.

When SiS (Silicon Integrated Systems Corp.) announced construction of an 8" fab in April 1999, it let it be known it would stop using the services of UMC (United Microelectronics Corp.). Although that in itself might have been cause for a disagreement with regard to fulfilling contracts, UMC, which has a reputation for playing hardball, filed suit in the U.S. District Court of San Jose in December, 2000 alleging SiS recruited some of UMC's engineers and infringed its intellectual properties. SiS was also alleged to have violated strict nondisclosure agreements as well as agreements not to compete with UMC.

By February 2001, The U. S. International Trade Commission (ITC) voted to investigate whether Silicon Integrated Systems Corp. was violating two patents owned by United Microelectronics Corp., the world's No.2 silicon foundry.

And so it ground on through the courts and ITC, until this week. On October 9, 2002 UMC announced it had won a ruling against SiS by the ITC. In a Notice of Final Determination and Issuance of Limited Exclusion Order issued in Washington DC on October 7, 2002, the ITC ruled that SiS is manufacturing products using a patented UMC process in violation of United States law. The Limited Exclusion Order directs the U.S. Customs Service to bar the entry of all SiS products made with the infringing process into the United States.

Infringing SiS chipsets and graphics chips, and all motherboards containing infringing SiS products, are to be barred from importation into the United States immediately following the law-mandated 60-day period for Presidential review of the decision. During this review period, infringing SiS products may be imported into the United States only if a bond is posted with the U.S. Customs Service in the amount of 100% of product value for each chipset and graphics chip, and 39% of product value for each motherboard containing those products. If the ITC's decision stands after the 60 days have elapsed, infringing SiS products will be barred from importation or sale in the United States until the year 2017.

SiS said it partially disagreed with the determination, and has adopted a new manufacturing process to manufacture redesigned products for import to the U.S. Therefore; asserted SIS, the production and product shipments will be unaffected, and there will be no impact on customer supplies and imports to the U.S. For its part, SiS claims the ITC upheld only one of the 29 complaints brought before the ITC by UMC.

Just the same, posturing aside, SiS parts and SiS-based motherboards are not coming to the U.S for at least 60 days, plus there are already shipments backed up due to the West Coast port shut down. And, even though West Coast dockworkers headed back to work under court order Wednesday, they face a huge backlog of cargo that built up over 10 days but could take more than two months to clear. All that means no SiS-based motherboards or chips will touch US. distributor's warehouses until maybe next March!

You'd think this would delight ATI, Nvidia, VIA and others, but it doesn't. Instead it worries the hell out of them because the SiS-based motherboard suppliers, with built up inventory, hoping for a end of year sales pop, are now likely to start dumping to get rid of inventory and a potential legal problem. And where will they dump? Everywhere except the U.S. - East and Western Europe, Asia, India and the Mid-East, South America, Canada, Mexico, and Africa.

In the meantime who's left to supply motherboards? Intel's OEMs. Fighting a lawsuit with Intel over the P4 bus, VIA has seen sales of its P4-based chipset motherboards fall off as Intel scares VIA's customers with potential involvement in the suit. Having gone to other markets VIA now faces a panicked group of motherboard suppliers who will try to off load the SiS stuff.

Is this good for UMC? Hardly. Those motherboards have other parts on them that are made in UMC fabs. Will SiS pay off UMC in court to get the injunction lifted? Who knows, but even if they wrote a check tomorrow, the damage has been done for this year and possibly Q1 of next year.

So now the only question is, can/will Intel ramp up production to pick up the vacuum SiS (an Intel licensee BTW) will create?

The other potential accidental beneficiary to this injunction is AMD. If SiS-based motherboards are dumped, they will need processors. AMD may find an opportunity to empty out their inventory of older K7s, something that has been worrying the company and its investors with the introduction of the K8 coming up.

Just last week SiS announces monthly revenue for September of NT$ 1,667M (~US$49M) based on the company's preliminary estimate. That was an 84% increase over September 2001, and a 28% improvement from August 2002. The 2002 year-to-date revenue is estimated at NT$10,870M, a 49% increase over the same period a year ago.

SiS stated that both the chipset unit shipment and sales hit record highs in September. Growth from new products, including the SiS648 core logic chipsets and graphic chip Xabre series add momentum to the existing product lines. Those chips, estimated to be in the range of 3 to 4 million, are mostly on motherboards now. That's going to be a big dump, and it couldn't come at a worse time with the industry struggling to gain a little traction after two years of slow sales.

"From where we sit, this looks like a lose-lose-lose situation for everyone," said Jon Peddie. "It's the injunction that stole Christmas."

More at Jon Peddie Research

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