Posted by: Arik Hesseldahl on July 17, 2008
All those wondering how much longer Hector Ruiz would remain CEO of Advanced Micro Devices got their answer on July 17, when the struggling chipmaker replaced him with COO Dirk Meyer. The change up was long overdue.
Under Ruiz, AMD mounted a valiant attack on Intel’s dominance of the computer chip industry, logging impressive market share gains earlier this decade, with its Opteron platform for servers, and its Athlon chips for PCs before that. But the groundwork for was laid long before Ruiz joined AMD. Both chips are versions of AMD’s Sledgehammer architecture that was first demonstrated in 1999, before Ruiz joined the company.
More importantly, the era didn’t last. Intel responded with a series of technical advances of its own and recaptured much of its lost market share. AMD then suffered a nasty delay on one of its server chips allowing Intel to press its case even further. AMD’s main response was to cut prices on its existing lines of chips in order to stay competitive.
It might have worked. Cutting prices might have bought AMD and Ruiz some time, had it not occurred during the same period that AMD was still suffering from the digestion pains brought on by the $5.4 billion acquisition of the Canadian graphics chipmaker ATI. While there were arguably some good technical reasons for the combination, financially it has been a disaster. Not only did AMD take on a huge load of debt to get the deal done — long term debt was $1.3 billion at the end of fiscal 2005 and is more than $5 billion now — but within a year of announcing the deal it had to write down the value of ATI’s assets. Its now worth a little more than half what it paid. Saying 2006 was a lousy time to buy ATI is something of an understatement.
But this latest loss is nothing sort of catastrophic: $1.19 billion on revenue of $1.35 billion. That brings total losses for the fiscal year so far to nearly $1.6 billion on sales of $2.8 billion. And while the operational loss was only $269 million, it's hard to spin this number as anything else. Some $920 million of the loss alone stems from discontinued operations at ATI that had been focused on selling graphics chips for handhelds and digital TV sets.
This is on top of fiscal 2007 where AMD lost $2.8 billion on $6 billion in sales. This kind of performance is simply unsustainable, and it has been clear for some time that a change at the top was needed.
AMD's stumbles are especially hard to digest at a time when Intel is booking record demand for notebook chips. Some of the most interesting news coming out of AMD lately has centered not on chips, but on its multi-year antitrust lawsuit against Intel. While there are certainlly fair questions worth asking about Intel's conduct in the marketplace, AMD's biggest enemy over the course of the last two years has been AMD.
Meyer certainly has his work cut out for him, and righting the ship won't be easy. Given his association with the company's existing strategies, convincing Wall Street that he's the guy to lead AMD may
also be a battle.
There are signs of daylight. Meyer, who’d honed his technical chops at Digital Equipment before arriving at AMD in 1995, has been COO the last two years as well as handled the nuts and bolts of product design. “He has the widespread support of people inside the company,” says Nathan Brookwood, head of research firm Insight64. AMD just shipped a chip platform called Puma designed to let notebooks handle intense graphics without burning lots of battery juice, so a user could watch a Blu-Ray movie front to back without plugging in. A comparable offering from Intel will likely arrive later, missing the heart of the back-to-school sales rush, Brookwood says.
In the business market, Meyer said that AMD is on schedule to deliver a more powerful server chip called Shanghai in the fourth quarter. That could go a long way toward restoring the eroded confidence of customer who had been burned by the lengthy Barcelona delay. "In a way it’s really tragic," Brookwood says. "Had they met that schedule, this whole storyline could have been, not, ‘Can AMD survive', but, 'How does AMD continue to cause so much grief for Intel?'"
One option that's clearly going to have to be one the table is selling AMD's chip factories, known in the industry as "fabs." AMD founder Jerry Sanders was known in the industry for saying "Real men have fabs," in defiance of an industry trend of going "fabless" where chip companies essentially outsource their manufacturing operations to contract chipmakers like Tawain Semiconductor Manufacturing and United Microelectronics. AMD has long struggled with this problem. It has a very advanced fab in Germany where it has done the majority of its manufacturing in recent years. And it has relationships with both of these companies -- TSMC had been building ATI's graphics chips -- as well as Chartered Semiconductor in Singapore which has manufactured some of AMD's Opteron chips. It also has a partnership with IBM to develop leading edge chip manufacturing technologies. But chip fabs are expensive expensive to build -- the first fab in Germany cost $2 billion or so to build and now just upgrading a fab every two years costs about that much. AMD will have little choice but to give serious consideration to going fabless. This or course is antithetical to its heritage as a company that has always shouldered its own manufacturing burdens.
As executive chairman, Ruiz's job will work on a plan called “asset light,” which may involve partnering with a company or government to sell of some of or all of its factories and capital equipment, which would alleviate expenses and let AMD concentrate on its strong suit, chip engineering. The downside is outsiders may be less technically savvy. "The vision for AMD has changed," says Dean McCarron, principal analyst at Mercury Research, a chip industry consultancy and market intelligence firm. For the company now, "the value-add is higher on the design side," and less on the manufacturing side.
Ruiz first came on board in 2002 as President and the designated successor to founder Jerry Sanders, just as the back-and-forth battle between Intel and AMD for the performance lead in desktop chips was running fast and furious. As the underdog of the microprocessor industry, AMD has always been interesting to cover and Sanders was always a colorful personality. After all who doesn't like rooting for an underdog that refuses to give up run by a founder once mistakenly left for dead in a dumpster after a street fight? Whenever someone would pronounce AMD close to dead for whatever reason, it was easy to fall back on the too-often told tale of Sanders' near-death experience and use it as a metaphor for the company.
That was then and this is now. Quiet-spoken Ruiz has been a clear departure from the hard-charging, fast-talking, Sanders. Where Sanders had been all two-fisted gravitas, Ruiz was always the gentleman engineer. Even when he was getting angry, as he often did when talking about AMD arch-enemy Intel, he never seemed to be the guy to rally the troops around the flag. Wall Street will be watching close to see whether Meyer can do any better.
-With reporting from Aaron Ricadela in San Mateo, Calif.