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Is AMD's hope of recovery in asset-lite?

Posted: 12 May 2008 ?? ?Print Version ?Bookmark and Share

Keywords:asset-lite strategy? AMD recovery? microprocessor industry?

If Advanced Micro Devices Inc. were to spin off or combine its manufacturing operations into a standalone company with any of its current production partners as is

being speculated

, the microprocessor supplier could dramatically alter its cost structure and reduce this enough to improve its competitive stance against rival Intel Corp.

While industry observers believe the asset-smart strategy could overall be positive for AMD, it could also distract management attention as it executes what would amount to a delicate transition at a time the company is struggling to vend off intense competition from Intel in the microprocessor area and Nvidia Corp. in the graphics IC sector.

The company isn't disclosing details of the asset-smart manufacturing strategy it first announced more than one year ago but industry sources expect an announcement soon from AMD.

AMD's depressed shares initially surged in after-hour trading on May 6 and rose more than one percent in early trading May 7 to $7.20 from $7.12 before retreating again following unconfirmed reports the company plans to merge its manufacturing operations with a foundry partner and spin off the business as a separate company.

The remaining business would continue to design, market and sell the company's microprocessor and graphics IC products, according to analysts. Such a move would help to sharply reduce the company's operating costs, giving it the much needed financial relief in its bruising fight against Intel although AMD would still face tremendous obstacles keeping up with its archrival in rolling out advanced technology products.

One area where AMD would see immediate cost improvements if it pursues a spinoff of its manufacturing operation is in its selling, general and administrative costs, which in 2007 and in the Q1 represented approximately 23 percent of total revenue, compared with 14 percent for Intel.

The added savings could be poured into stabilizing the company's shaky finances by paying down long-term debts of approximately $5 billion.

R&D costs, considerations
It's not clear though that AMD's R&D expenses would be impacted by the move towards an asset-light manufacturing strategy. In its bid to catch up with Intel, AMD jacked up its R&D budget in 2007 to $1.9 billion from $1.2 billion in 2006.

While this amount is dwarfed by Intel's $5.8 billion R&D budget for 2007, last year's figure represented an outsized 31 percent of AMD's annual revenue compared with 15 percent for Intel.

While outsourced manufacturing might be a viable option for AMD, it's not that clear the company would greatly improve its competitiveness by outsourcing R&D, a key driver of differentiation and market share gain in the semiconductor market.

AMD is locked into a microprocessor manufacturing process development agreement with IBM Corp. focused on the development of leading-edge 45nm, 32nm and 22nm technologies. The agreement is expected to continue for several years and AMD isn't likely to scuttle the engagement with IBM even if it spins off its manufacturing operation.

Foundry partners
AMD already has outsourced manufacturing agreements with several wafer foundries including Chartered Semiconductor Manufacturing Co. Ltd for microprocessors, and for graphics ICs and chipsets, with Taiwan Semiconductor Manufacturing Co. Ltd, United Microelectronics Corp. and Chartered.

Chartered is the most likely candidate for a manufacturing joint venture company if AMD were to move in that direction, according to Ashok Kumar, an analyst with CRT Capital Group, speaking with Thomson Reuters News. Kumar believes AMD would still maintain a controlling interest in the company.

AMD currently operates five manufacturing facilities, two of them microprocessor wafer fabrication plants located in Dresden, Germany. The company also runs three microprocessor assembly and test facilities in Malaysia, Singapore and China that it could pool into a new company with a joint venture partner.

Other production agreements and operations the company might also have to review as it prepares for the asset-smart strategy are test, assembly and packaging as well as board-level services it currently outsources to contract manufacturing partners, including Amkor, Advanced Semiconductor Engineering Group, King Yuan Electronics, Silicon Precision Industries, Stats-Chippac,Celestica and Foxconn.

- Bolaji Ojo
EE Times

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