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Micron Faces Another Trade Secrets Mess in Taiwan

By Leo Sun - Oct 4, 2017 at 7:57AM

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More of the chipmaker's trade secrets have allegedly flowed into China.

Five former employees of Micron Technology's (MU -1.32%) Taiwanese subsidiary, Inotera Memories, were recently charged with illegally passing trade secrets. Taiwanese prosecutors claim that the five men took classified documents from Inotera and passed them to a Chinese firm.

Prosecutors didn't name the company, but according to a Tapei Times article, the United Evening News claims that it was state-backed tech giant Tsinghua Unigroup. The firm allegedly paid the men 200,000 New Taiwan dollars per month ($6,576) -- roughly triple their salaries at Inotera -- to obtain the information.

A stick of DRAM memory.

Image source: Getty Images.

Micron previously owned a 33% stake in Inotera and agreed to buy the remaining 67% of the chipmaker last October. The alleged stolen information -- which was delivered via photos, paper copies, emails, and WeChat messages -- occurred between September and November last year.

A second mess for Micron in Taiwan

This new case shouldn't be confused with another Taiwanese trade secrets case regarding Micron and UMC (UMC -2.59%), the country's second-largest contract chipmaker. In that case, two former employees of Micron's Taiwanese unit allegedly passed the chipmaker's trade secrets to UMC, their current employer.

UMC then allegedly passed those secrets to a joint venture that it operates with Chinese chipmaker Fujian Jin Hua Integrated Circuit. Those allegations were troubling, since it indicated that Micron's memory chip designs could be leaking into the Chinese market. The new mess with Inotera indicates that more leaks are springing up.

Why these cases matter to Micron

The Chinese government plans to grow a domestic semiconductor industry to eliminate its dependence on foreign technologies. It believes that revenue from its domestic chip firms can grow more than 20% annually and become a 350 billion yuan ($53 billion) market by 2020.

The government's main tool for accomplishing this is Tsinghua Unigroup, a state-backed tech behemoth that acquires domestic and foreign chipmakers. Tsinghua already owns RDA Microelectronics and Spreadtrum, the two biggest chipmakers in China, as well as a majority stake in Hewlett Packard Enterprise's H3C technologies. To expand its memory chipmaking business, Tsinghua tried to buy Micron and a major stake in Western Digital, but both deals were blocked by U.S. regulators.

Despite those setbacks, Tsinghua plans to build a $30 billion NAND and DRAM memory plant in Nanjing, which could flood the market with cheap memory chips when it goes online. If Tsinghua has gained access to Micron's chip designs, those cheap chips might offer performance comparable to Micron's chips, which would cause market prices to crash.

Last December, former Micron CEO Mark Durcan warned that the growth of Chinese chipmakers was "absolutely" a concern for the industry, which has been riding high on tight supplies and high prices over the past year.

Micron has invested $12 billion in Taiwan so far, and it plans to invest $2 billion in the country annually over the next three to five years. It plans to recruit 1,500 employees over the next 18 months, and expects Taiwanese plants to account for about two-thirds of its DRAM production.

But Taiwan's stalled wage growth, high living costs, and the allure of higher-paying jobs in China all make it a fertile ground for recruiting corporate spies.

Foolish takeaway

Micron recently reported a blowout quarter, and its stock surged to historic highs. However, Micron's growth has always been cyclical, and memory prices won't rise forever.

Moreover, if Chinese chipmakers are gaining access to Micron's technology via its Taiwanese units, it's a problem that must be addressed, either with reduced investments in Taiwanese plants, better employee wages and benefits, or harsher penalties. If Micron doesn't plug up these leaks soon, a flood of cheap Chinese memory chips could eventually sink its entire ship.

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Micron Technology, Inc. Stock Quote
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