"Re-engineering AMD" (hint, hint)

[pxc]

http://bigtech.blogs.fortune.cnn.com/2008/09/08/re-engineering-amd/

No mistake, AMD is in a rough spot. After a series of miscues over the past two years, the company faces a depressed stock price, about $5 billion in debt from its purchase of graphics chipmaker ATI, shrinking cash flows and a run of spotty earnings. Last quarter, for instance, the company reported revenues of $1.35 billion, about $100 million short of expectations. Gross margins were five points lower than expected at 37.1%, and market share losses to Intel (INTC) continued.
...
But like Sanders was back then, Meyer is focused on funding AMD’s tomorrows by getting rid of expensive assets AMD can do without. That’s why the company has announced recently that it would sell its digital TV business to Broadcom (BRCM) for $192.8 million in cash.* (The handheld business is also for sale.) These moves, Meyer says, “give us an opportunity to get some cash in the door and improve the balance sheet, lower the debt burden.”

This is necessary because chipmaking is an expensive business. Once you’ve hired hundreds of engineers to design a chip (not cheap) and tested their work (harder than it sounds), you’ve got to set up massive, state-of-the-art manufacturing facilities, called “fabs,” to create them. Doing that by yourself requires an investment of billions of dollars – money Intel has in abundance, and AMD doesn’t. Even then, you’re not done. For each generation of chips, the fab needs to be upgraded to create more sophisticated chips that pack more power into the same tiny package.

Since it can’t afford to do this anymore, AMD plans to spin off its chip manufacturing operations by year’s end, probably by hawking them outright or by inking a partnership with a larger chipmaker – a maneuver akin to selling a house and leasing it back. Meyer is vague on the exact timing of a deal, but he knows it’s probably the best thing the company can do quickly to improve its financial position, and its reputation with investors. A successful transaction would see AMD pocket a good chunk of cash, while handing manufacturing to a company that can better keep pace with Intel’s world-class operations.

“We’re going to go away from a captive fab model to more of a fables model for the CPU part of the business,” Meyer says. “Longer-term, it relieves us of the burden of having to shell out cash for these gigantic factories. So it will be more of a pay-as-you-go model like a traditional fables semiconductor company.”

* (my comment) That is after writing off almost $800 million of the value of those units.

Anyways, this is the *second* time that Meyer has been quoted saying the same thing. Sorry for the broken record, but I told ya so back in April 2007.

 

[empoy]

getting fabless is the right way to go for AMD. I hope things get brighter for them I mean us (just got pirated)

 

[pxc]

It's not ideal, but it's pretty much the only way AMD can survive. Going fab-less will in no way make AMD more technologically competitive, and in fact it will actually make things worse than it currently is (but better than not having 32nm at all in 2 years).

Part of the "windfall" will of course go back to paying off the debt on the fab(s) sold. The deal for the sale will be interesting because AMD will not be getting as much for the fabs as it cost to build. And of course the fabs are a good chunk of AMD's value, so AMD will shrink yet again.

 

[ALL4AMD]

yeah i do not like the idea of amd going fab-less

 

[piako]

yeah i do not like the idea of amd going fab-less

so this means amd will be farming out all of it's manuf. then?

 

[commissioneranthony]

This seems to be a really bad idea...I mean what about the $3.2 million offered to AMD to build a factory in NY? I guess that's out of the question. I'd rather have a larger AMD then a smaller die size. Anyway, isn't there some deal AMD has with IBM over chip technologies? Why can't they just do a joint venture or partnership? Ibm already has been working on 32nm cpu technology...

 

[Dan_D]

I think this is the right move for AMD. Now they can get back to designing chips and products without having to worry about running those very expensive facility. There are advantages to doing it yourself which is why Intel does it but in their current situation AMD needs to outsource that aspect of their chip making.

I think this will eventually be a good thing in the long run.

 

[Jutsu]

AMD needs to stay in the game, so we have a competitive market to purchase from. Hopefully making a move like this will allow them to get back on their feet and start producing some amazing products.

 

[Dan_D]

AMD needs to stay in the game, so we have a competitive market to purchase from. Hopefully making a move like this will allow them to get back on their feet and start producing some amazing products.

I think it will. It will allow them to design products and then put the manufacturing problems on the shoulders of someone else. The problem with that is it puts certain aspects of manufacturing outside of their control which isn't always good either. Right now though I think it will help the bottom line which is what they need to be concerned with right now in order to stay in the game.

 

[Steveindajeep]

I dont know this might be a god-send. The only big name player I can think of is IBM. Seeing that they already have their fingers into AMD perhaps they are sick of the bullsh*t.

 

[piako]

The problem with that is it puts certain aspects of manufacturing outside of their control which isn't always good either.

Agreed. Instead AMD will now be paying a profit margin on every chip they buy from their supplier(s). If they owned their own factory(ies) they wouldn't have to. Sounds more expensive to the consumer. Perhaps they can weasel some way to make prices stay low.

 

[kamalyka]

Poor AMD....... I still remember being an AMD advocate only a few years ago when intel was sucking with its hyperthreading Pentium 4/D lameness.
Core2 pwned AMD. =(

 

[empoy]

let AMD concentrate on what they do best which is to design innovative microprocessor architecture. not many of you how much each chip really cost to manufacture, well roughly less than $5. what commands a premium value is what's inside the chip.

 

[Dan_D]

Poor AMD....... I still remember being an AMD advocate only a few years ago when intel was sucking with its hyperthreading Pentium 4/D lameness.
Core2 pwned AMD. =(

Until the Athlon came out Intel always pwned AMD. Even then AMD never really pwned Intel hardcore until the Athlon 64 and X2's came out. Then it became Intel's turn again to bring on the pwnage.

 

[Scali2]

I've been hearing about this fab-less idea for a while now...
But I wonder how they want to make it fit in the current x86-license. Unless ofcourse they're planning to bail out of the x86-market and concentrate entirely on GPUs and other chips.

 

[KaCaBUla]

it will be a good idea for them to go fabless. if they use TSMC for their fab production then they will upkeep with the Die shrink race. they might be able to work out a better deal to keep the prices low due to TSMC making most if not all their GPUs. since they wont have to spend any money for upgrading fabs all they need to do is just design better chips. when they become profitable again then they might venture into owning a fab. anyways im still waiting for the 45nm phenom to come out. when they do ill be buying one

 

[thekernel]

I think people who are quick to assume this is a good idea are forgetting some basic economics here. Outsourcing manufacturing might seem like a great long-term strategy, but it ignores some of the basic concepts behind outsourcing.

One reason to outsource is to take advantage of economics of scale of companies that do more of this than you. Trouble is for AMD that they have been completely capable of keeping their fabs working at capacity (at least by all the reports I've seen) so I'm not sure this works in their favor. Worse, because chip manufacturing has high barriers to entry (REALLY high...to the tune of $3 billion for a state-of-the-art fab) and with long startup times, you can bet that it isn't exactly what economists call a perfectly competitive environment. These manufacturing companies provide a valuable service and I'm quite certain that people pay a significant premium for it, which means that AMD is going to take a significant potential hit to their margins.

Aside from cost issues, you also have the problem of fabs having other customers besides you to service. Sure you can shop for competitors, but there are very few state-of-the-art fab companies in this world, and if you need to stay on the bleeding edge like AMD, you might have to take hits to your process shrink timelines as well as not being able to deliver stock as reliably (which is ALREADY a problem for AMD).

In the short term this is a great solution as it gets an incredible amount of debt off of AMD's balance sheet and lets them go out and raise more money. But the sad reality here is that while this will give them a significant lifeline in the short term, they may very well be sacrificing a huge competitive advantage in the long run.

Don't anyone kid yourself -- this is an act of desperation.

 

[empoy]

This is not the short term solution for AMD but rather a long term one. They just cant keep up with Intel's manufacturing might.

 

[KaCaBUla]

well since i work in a fab, ill let you know its cheaper to outsource when you need to keep pace with new tech. reason being is that you dont have to worry about buying a new machine that costs upwards of 50million to make and then wait 6 months for the right samples to come out. the fab company worrys about this. since your not spending alot of money upgrading you can use it for R&D. yes i can cost a bit to get into it, but since AMD already has a contracts with TSMC it wont be as bad as if they just started with them. this is why AMD is heading this way. im happy they are doing this. it means that we can get better chips from them that might be a bit cheaper or a little more.

 

[pxc]

No doubt AMD will save big dollars over chasing Intel on process technology, but they're also giving up complete control over the process and that may also impact performance (clock speed) and performance/watt on future processors.

If you work in a foundry manufacturing other companies' products, maybe you can comment in general how adapting to the foundry's node processes affects customer designs, if the customer is outsourcing high performance, custom designs.

 

[Lost!]

Lose complete control? No. It's still partially owned, and will serve AMD/ATI's interests first, others second. Same as IBM East Fishkill. Power processors first, nVidia's chips second.

 

[pxc]

and will serve AMD/ATI's interests first, others second.

LOL

So someone is going to pay top dollar AND let AMD run it as its own? Even Meyer hasn't said something so ridiculous.

The "complete" part was the key word. As a foundry, the purchased fabs will be run by the new owners. I don't think you understand the foundry model.

 

[Zoogle]

I can't help but think that this will come back and haunt them at some point although going fabless is definitely more appealing right now. I know that they've been getting good results with TSMC but I guess its always uncomfortable not being in control of all aspects of manufacturing a product.

They might be left feeling that "We can do it better, but we just don't have the tools that you do". Kinda how I felt when I had contractors put in tiles in my house....

 

[Flyboat]

I've been hearing about this fab-less idea for a while now...
But I wonder how they want to make it fit in the current x86-license. Unless ofcourse they're planning to bail out of the x86-market and concentrate entirely on GPUs and other chips.

I was thinking the same thing.

Fabless is not a solution for AMD.

 

[Devnull]

Until the Athlon came out Intel always pwned AMD. Even then AMD never really pwned Intel hardcore until the Athlon 64 and X2's came out. Then it became Intel's turn again to bring on the pwnage.

I remember my original slotted athlon. The thing was a beast. I went from a p2 333mhz/voodoo2 sli to the overclocked athlon. I think it was a 700mhz part overclocked to 1ghz. Also got the GeForce DDR- think it was my first agp card. A very meaningful upgrade.

AMD has been making me pretty happy since the athlon. Sure, intel has pretty much been faster since the c2d, but its not like AMD chips are useless. I just got a great deal on a phenom and I love it.

 

[Dan_D]

I remember my original slotted athlon. The thing was a beast. I went from a p2 333mhz/voodoo2 sli to the overclocked athlon. I think it was a 700mhz part overclocked to 1ghz. Also got the GeForce DDR- think it was my first agp card. A very meaningful upgrade.

AMD has been making me pretty happy since the athlon. Sure, intel has pretty much been faster since the c2d, but its not like AMD chips are useless. I just got a great deal on a phenom and I love it.

Yeah, if I got a Phenom for free I'd use it. I'm not going to buy one, but that's just me. (Though I'd consider it for HTPC usage due to the motherboard selection that's geared towards HTPC usage being so great for AM2 CPUs.) I had an extra Q6600 so I went with that for my HTPC build instead. The board I got was $100 so I couldn't complain.

 

[Met-AL]

Agreed. Instead AMD will now be paying a profit margin on every chip they buy from their supplier(s). If they owned their own factory(ies) they wouldn't have to. Sounds more expensive to the consumer. Perhaps they can weasel some way to make prices stay low.

And you don't think that the cost of a chip today already has the cost of the fab figured into the price?

 

[jarthel]

without any fabs, I suppose their innovation (e.g. high K/SOI and etc) is at the mercy of TSMC and etc?

 

[Dan_D]

without any fabs, I suppose their innovation (e.g. high K/SOI and etc) is at the mercy of TSMC and etc?

Yep. AMD may continue to design things like that into their newer chips but actually pulling it off is going to be up to TSMC or whatever company actually builds them.

 

[jarthel]

Yep. AMD may continue to design things like that into their newer chips but actually pulling it off is going to be up to TSMC or whatever company actually builds them.

that doesn't sound good.

I suppose AMD needs a quick fix and worry about the longer term when they have enough cash.

 

[Met-AL]

Kind of ironic this is, as AMD used to make Intel's chips back in the day.

 

[Scali2]

Kind of ironic this is, as AMD used to make Intel's chips back in the day.

Well perhaps they can now ask Intel to return the favour

 

[sethk]

No one like the idea of a fab-less AMD, but in terms of pure financials, it is an inevitability. The cost of a new die-fab plant and accompanying R&D, engineering and ramp up costs with each die-shrink are growing explosively. AMDs revenues are not growing explosively and no is foreseeing that they are going to any time soon.

Even if AMD were to bet the farm and ride it out to one more die shrink past 45nm, long term they can't keep it up unless they suddenly split the market 50-50 with Intel. It is sad to see AMD leave the chip manufacturing business, but I guess we'll see one of the fab companies (like TSMC or UMC) turn into a new manufacturing tech powerhouse in the next decade or so.