Let's get this straight right up front: I've had Taiwan Semiconductor Manufacturing (NYSE:TSM) on my watch list of stocks for some time now. I like the company for several reasons, many of which I profiled here. There's no need to rehash that laundry list, but it's worth noting that I think the company's biggest advantage is that it has lots of capacity, and can very efficiently make chips on the cheap. That gives it downside protection when, as so often happens, global demand for semiconductors slows.
Part of Taiwan Semiconductor's secret is its manufacturing processes, which it has spent years perfecting. That makes sense, of course. Unlike Intel (NASDAQ:INTC) and Advanced Micro Devices (NYSE:AMD), Taiwan Semi doesn't design semiconductors. It makes money by making loads of chips at cheap prices.
That's why I'm so disappointed by the news that the company has settled a patent dispute with China's Semiconductor Manufacturing International (NYSE:SMI). The settlement pays Taiwan Semiconductor $175 million over six years. The problem is that most were expecting a bigger payout. One regional analyst was quoted as saying he estimated the payout would be more than $700 million. The center of the dispute? Taiwan Semiconductor's manufacturing methods.
According to a Bloomberg report, a witness at one of Semiconductor Manufacturing's facilities said that more than 90% of its 180-nanometer process for creating chips was copied from Taiwan Semiconductor. Read that again. Yeah, I really did say 90%. (Nanometer refers to the space between transistors on a chip. A smaller space allows more chips to be made during production.)
Bear in mind that these are allegations, and the settlement may indicate that the allegations were, at best, inflated. Still, in the world of technology, patents provide key protections to innovators. And innovation drives profits when it comes to technology. The good news is that Taiwan Semiconductor gets cross-licensing rights in the deal, and that the settlement doesn't grant Semiconductor Manufacturing a license to its patented technology and processes. That's good, because it may mean more licensing revenue is in the chips for Taiwan Semiconductor. At least, it better be, because $175 million is nowhere near enough.
For related Foolishness:
- Taiwan Semiconductor was one of my three stocks for the Scrooge in you in December.
- But I also think it might be a hidden giant.
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Fool contributor Tim Beyers has been a downer on Intel and the semiconductor industry in general. But there are plenty of experts who think he's nuts. You can find them at the Fool's Intel and Semiconductor Industry discussion boards here at Fool.com. Tim doesn't own stock in any of the companies mentioned in this article. To find what stocks he owns, check Tim's Fool profile, which is here. The Motley Fool has a disclosure policy.
