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Will AMD always play catch-up with Intel?

Posted: 27 Jul 2007 ?? ?Print Version ?Bookmark and Share

Keywords:Intel technology? AMD operations? manufacturing directions?

Taking on the world's biggest semiconductor company has been brutal on Advanced Micro Devices Inc. The company's sales, profits and operating margins have weakened considerably following the barrage of next-generation process technology, R&D and manufacturing initiatives Intel Corp. unleashed to blunt the impact of any advances AMD has made in recent years.

It would seem AMD is destined to play second fiddle to Intel, but that's not the way Hector de Ruiz, chairman and CEO of AMD, sees it. Last week, Ruiz informed analysts that his company would intensify its "asset lite" strategy and focus on further cost cutting to improve profitability.

'The right strategy'
"Asset lite is the right strategy for us," Ruiz said during a conference call to discuss the company's latest quarterly results. "We will be monetizing assets such as 200mm equipment, buildings and land, all of which are expected to bring in $1 billion."

Ruiz declined to elaborate on the actions the company expects to take to address other pressing concerns, hinting that the measures would be kept under wraps for now "due to competitive reasons." AMD's reluctance to disclose much information about its strategic review of operations speaks volumes about how its every operational action is all but defined by Intel.

For as long as it has been a microprocessor supplier, AMD has been compelled to review, adjust and adapt its operations and manufacturing direction continually to counter the Intel juggernaut. Last year's acquisition of ATI Technologies is a case in point: The buy rebalanced AMD's portfolio by adding semiconductor graphics that Intel traditionally bundles and integrates with its own microprocessors.

AMD's options
What could help AMD climb out of its rut? There are two less-than-perfect scenarios: the possibility that a group of venture capitalists will ride to the rescue, and a more likely alternative that would tie the company more closely to suppliers and third-party partners, with all the benefits and complications such entanglements imply.

VC investors might be attracted by the thrill!and potential returns!of turning the MPU race into a fair fight between equally matched combatants. But any such group would require deep pockets and a junkyard dog's tenacity, because Intel doesn't yield ground easily. While there has been speculation about a bid for AMD, no investment group has expressed interest thus far.

Will AMD always play catch-up with Intel?

The second alternative is for AMD to forgo building its own fabs, instead using foundries and partnering with external organizations for next-generation process technologies. Judging by recent executive comments, this ap- proach appears to be gaining traction at the company.

At that last Semicon West, Doug Grose, senior VP of technology development for the manufacturing and supply chain, said technology forces in the semiconductor industry are pushing AMD to look outside the industry for guidance on how to manufacture chips more efficiently.

Grose noted that the cost of building a fab has risen 250 percent!and the cost of developing a microprocessor 400 percent!in the past 10 years. "For some reason, we think that the semiconductor industry is unique and that semiconductor manufacturing is such a complex process that it can't be streamlined," he said. "As an industry, we need to develop a value-chain model for our customers, as opposed to running the usual supply-chain model used by the semiconductor industry over the years."

The implication was that AMD would look to partner with third-party manufacturers to reduce operating costs and develop next-generation process technology.

Punch drunk

Crunch time
Price erosion, manufacturing and supply chain snafus and failure to match its rival's product lineup clipped AMD's wings in Q1. But the company clawed its way back in Q2, reclaiming some of the market share it had lost in the previous six months, according to iSuppli Corp.

The research firm pegged AMD's market share at 11.4 percent for Q2, up from 10.9 percent in the first. Intel's share of the microprocessor market for the quarter was estimated at 80.3 percent, down a hair from 80.8 percent in the preceding three-month period.

Don't read too much into the numbers. "With only a one-percentage-point swing in market share between the two companies in Q1, Q2 essentially maintained the status quo? with no significant trade in market-share position between the two main microprocessor suppliers to the PC and server segments," said Matthew Wilkins, principal analyst for computer platforms research at iSuppli.

If AMD fails to take adequate measures to improve its competitiveness, the best-case scenario for the company would appear to be as a second-sourcing alternative for computing and other electronic-hardware OEMs.

It's a harsh conclusion, but one supported by the numbers. Intel's 2006 revenue was $35.4 billion; AMD logged $5.7 billion. Intel spent $5.9 billion on R&D last year; AMD spent $1.2 billion. Intel's cash and short-term securities at the end of the second quarter totaled $8.9 billion; AMD had $1.6 billion.

On the product side, AMD is struggling not to fall more than one year behind Intel on the technology curve. The company has acknowledged that a further slide could wreak havoc on its competitiveness.

The competition in multicore is a case in point. Intel launched quad-core multichip-module processors in Q4 last year, well ahead of AMD, which has said it expects to start commercial shipments of its quad-core products in the current quarter. The lead gave Intel a powerful marketing edge.

Don't call the medics
Analysts and industry observers, however, don't consider AMD's situation dire, for several reasons.

First, computing OEMs would be loath to be locked into a monopoly environment where Intel called all the shots. As a result, continued patronage of AMD is virtually guaranteed!not just in the low-end-notebook segment, where the company seems to have an edge over Intel, but also in the high-end professional notebook, server and desktop markets.

"Customers want us to succeed. Large OEMs, distributors, decision makers and users of PCs and other digital technologies around the world agree that competition in the processor industry is good and healthy for our industry," Ruiz said.

But that may not be enough in a highly capital-intensive business where cash-squeezed AMD cannot afford to miss any of its technology and manufacturing goals, whereas Intel can easily spend billions pushing the frontiers of innovation without expecting an immediate pay off.

For some time, AMD has been part of IBM Corp.'s technology alliance, along with Chartered, Infineon, Freescale and Samsung. The goal is to share the growing cost and risk associated with process-technology development.

Outsourcing moves
AMD is also looking to boost chip-outsourcing programs in an effort to reduce its IC manufacturing costs. It currently works with Singapore-based foundry provider Chartered Semiconductor Manufacturing Pte. Ltd. There has been speculation that the company is also talking to Taiwan Semiconductor Manufacturing Co. Ltd, though AMD has dismissed those reports.

Another issue is AMD's fragile cash position, which has forced it to cut internal capital spending. The company got a boost last week when the European Commission approved roughly $360 million in funding by the German state to support AMD's 300mm fab in Dresden.

Some analysts questioned AMD's use of outside development partners, saying it could complicate the company's efforts to fall no more than a year behind Intel in process technology. "Anything that puts a delay between you and the latest process technology is not good for a microprocessor vendor," said Dean McCarron, principal of market watcher Mercury Research.

But AMD may not have much choice. It's obvious the company cannot continue to fly solo in funding new fabs and the research required to keep it up to date with new process developments. By partnering with other semiconductor players and paring its own expenses, AMD might buy itself enough time to build up its cash position, revive any lagging technology initiatives and convince customers that its continued survival is assured.

"Customers want choice, and AMD is hardwired to enable it," Ruiz said. "We are not afraid of the industry transformation and, in fact, welcome it. It will lead to a new wave of value creation across the industry we serve."

- Bolaji Ojo
EE Times

- Additional reporting by Nicolas Mokhoff, Rick Merritt and Mark LaPedus

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