Shanghai, China -- It's the second installment of a foundry war saga that has pitted a Taiwanese titan against a Chinese upstart. And like most sequels, this follow-up seems a lot like the original.

In a suit filed with the California Superior Court in Alameda County last week, Taiwan Semiconductor Manufacturing Co. is again going after Semiconductor Manufacturing International Corp., alleging that the Chinese foundry is still using stolen trade secrets as the key ingredient in its process recipes.

The renewed clash marks the breakdown of an agreement reached in January 2005 that settled allegations of corporate espionage and intellectual-property infringement. TSMC is seeking unspecified damages and an injunction against SMIC service sales to IC vendors in the United States.

Generally, such allegations are tough to prove in court and require years of vetting, observers said, so many expect another out-of-court settlement. On another level, however, TSMC may be serving notice through the suit that it is ready to fight for its long-term interests in China, as it carries out plans to install 0.18-micron equipment at a Shanghai facility that today runs at only half its potential capacity of 70,000 wafers per month. TSMC still derives 32 percent of its sales from the 180-nanometer node--the same node for which SMIC is expanding capacity and from which the Chinese foundry today earns 55 percent of its logic revenue.

SMIC is only about one-fourth the size of TSMC, but it plans $1 billion to $1.1 billion in annual capital expenditures over the next few years to maintain its expansion plans at its four fabs. It has also contracted to manage a 200-mm fab and a 300-mm fab in China that are owned by other companies.

"The industry knows that manufacturing supremacy in China will not be determined by who has the most fabs or revenue in 2006; the real winner will emerge over time, and TSMC appears to be re-energizing itself for long-term manufacturing growth in mainland China," said Len Jelinek, a foundry analyst at market watcher iSuppli Corp. "I believe that this attack on SMIC will cause resources within SMIC to be diverted in order to defend itself and will muddy the waters of perception" in the marketplace.

In other words, whether or not the suit's allegations are founded, the action could spook some of SMIC's customers. TSMC has scored a small victory even before stepping into court, asserted Ming-kai Cheng, head of technology at CLSA Asia Pacific Markets. And if TSMC is able to prove its allegations, then SMIC risks owing hundreds of millions in damages to TSMC and having its process technology made liable to licensing fees. Those damages and fees would be in addition to the $130 million payment TSMC is seeking as the balance still due on the original agreement, which called for $175 million to be paid in several installments.

TSMC originally filed suit in December 2003, about three months before SMIC's initial public offering. That suit claimed SMIC had systematically pilfered TSMC trade secrets by hiring hundreds of its engineers and asking a few senior people to take information with them as they left. The two sides settled about a year later.

Soon after TSMC lodged its new complaint, SMIC denied it had failed to keep faith with the 2005 settlement. "SMIC is very shocked by and deeply disappointed with the actions of TSMC and believes their actions are brought in bad faith. Whilst SMIC will fight the lawsuit and defend and protect our interests, SMIC urges TSMC to act reasonably and honor the settlement agreement we reached," Richard Chang, SMIC's CEO, said in a statement.

The kernel of the new suit is whether SMIC has purged itself of TSMC's proprietary information--an action the Chinese foundry had promised to take as part of the 2005 settlement. TSMC alleges that SMIC is still using some of its trade secrets in most of its legacy processes and that the Chinese foundry has also used TSMC technology as the baseline for 130- and 90-nm processes.