AMD vs. Intel: The Challenger's New Plan

Struggling AMD may look to unload its chipmaking facilities to a partner to concentrate on battling the industry's giant

AMD Module Shift Manager Peter John presents a 200mm wafer in Dresden, Germany. Norbert Millauer/AFP/Getty Images

By Arik Hesseldahl

Chipmaker Advanced Micro Devices says it's about to go through a major change concerning how it makes chips, but it hasn't said exactly what that change will be. Speculating about it has become a great guessing game among Wall Street investors and Silicon Valley's chattering classes.

AMD (AMD) is suffering through one of the toughest stretches in its history, racking up losses of $1.6 billion on sales of $2.8 billion so far this year. It's now struggling with a nagging question: how to continue making chips for personal computers and servers that can compete with those of rival Intel (INTC) without having to bear the heavy expenses required to operate its chip factories known as "fabs."

AMD has said it's pursuing a new strategy it calls "asset smart," aimed at saving money while at the same time preserving its manufacturing muscle. Hector Ruiz, CEO up until he stepped down on July 17 (BusinessWeek.com, 7/17/08), says that in his new position as executive chairman he'll focus his attention on completing the transformation. Many chip industry analysts believe the outcome will either save the company or doom it.

At Least Some Outsourcing

The company has managed to keep a tight lid on its plans, unusual for the gossipy chip industry. The company declined to comment on its plans to BusinessWeek, beyond issuing a brief statement: "AMD continues to look at multiple options that leverage our world-class manufacturing capabilities and relationships to achieve an optimum blend of internal and external operations."

The phrase "optimal blend" is important, because it suggests that AMD is going to outsource at least some of its existing manufacturing operations. The backbone of its manufacturing operations are two fabs in Dresden, Germany, and all the chipmaking equipment in them. It also has two large test and assembly plants in Malaysia and Singapore, and a smaller one in China. One popular theory has AMD turning to a third-party chip foundry company like Chartered Semiconductor Manufacturing (CHRT) of Singapore to step in and operate the fabs under contract. Chartered already makes some of AMD's chips under contract to help AMD keep up with demand surges. Taiwan Semiconductor Manufacturing (TSM) handles manufacturing for AMD's graphics chip unit ATI.

Selling off fabs would have clear financial benefits for AMD, but would also expose some problems. For one thing it would go a long way toward cutting AMD's operational expenses, which were $1.6 billion in the first six months of the fiscal year, eclipsing its $1.3 billion gross margin. Unloading the fabs would put AMD in a class of chip companies who don't own their own factories, and thus hire companies like Chartered, TSM, United Microelectronics (UMC), and even IBM (IBM) to make chips under contract. Going "fabless" has meant success for chip companies as varied as Nvidia (NVDA), Broadcom (BRCM) and Qualcomm (QCOM). Still, such a move would fly in the face of AMD tradition: Its founder, Jerry Sanders, once famously quipped "Real men have fabs."

Maybe, but there are pitfalls to owning fabs. They're expensive to build—$3 billion to $5 billion each—and expensive to maintain. Competing with Intel means upgrading a fab with billions' worth of new manufacturing equipment every two years or so. There are also costs to holding chip inventory, which, given the volatile nature of the PC market (BusinessWeek.com, 5/30/07), has caused AMD to occasionally be left holding a lot of costly chips that are hard to unload.