For AMD, Germany is Right for Fab

Chip maker AMD said it is moving forward on a second $2.4 billion chip fabrication plant in Dresden, Germany, after winning a billion and a half dollars in German government assistance.

AMD said it struck a deal for $1.5 billion in external financing and
government support for the construction of the new factory. The fab will generate chips at Dresden using 300mm silicon wafers for the emerging market for 64-bit processors.

AMD is trying to cut into chip industry leader Intel’s market share with a new line of processors, which have started to pick up sales already. The move comes at a time when AMD’s balance sheet has heavy debt burden with $1.9 billion in long-term debt; credit rating agencies Moody’s and Standard & Poor’s are said to be considering a possible downgrade.

AMD said it has secured $700 million from a consortium of banks, and a series of lucrative guarantees and grants from the governments of Germany and Saxony.

The new chip factory will be called Fab 36, and will be adjacent to the company’s Fab30 plant. The facility will employ close to 1,000 people and will begin producing chips in 2006.

The new plant is an important contract win for the European market, following the relocation of several fabrication operations to less expensive Asian countries.

German Chancellor Gerhard Schroeder was quoted on Reuters expressing his delight that AMD will be building the factory at Dresden.

AMD Chief Financial Officer Bob Rivet said the German government and other support accounted for $1.5 billion, or almost two thirds of the project’s $2.4 billion cost over four years.

Dresden is turning into an important hub for AMD’s European activities. The German city is already the site of Infineon’s advanced memory chip facility and the Advanced Mask Technology Center, a venture developing photomasks used in printing circuits on silicon wafers. Both AMD and Infineon are part of the photomask center. M+W Zander, a specialist in building clean rooms
for the chip industry, won the engineering contract for the plant.

The news follows AMD’s announcement this week that its high-end processors
will be used
in Sun Microsystems’ new line of business computers.

“Positive customer response and increasing momentum for our AMD64 processors make it clear that the time is right to expand our manufacturing capacity in order to effectively meet future demand,” said Hector Ruiz, AMD’s president and CEO.

“Our aggressive push into the enterprise computing market continues to gain traction, as evidenced by Sun’s recent adoption of the AMD Opteron processor and the growing success of server and workstation solutions from IBM, Fujitsu Siemens and others,” added Ruiz.

AMD Fab 36 will produce chips using AMD’s Automated Precision Manufacturing or APM 3.0.

The external financing for the project is expected to include up to approximately $700 million in loans from a consortium of banks, including an 80 percent residual guarantee from Germany and Saxony, approximately $500 million in anticipated grants and allowances from the Germany and Saxonian governments, pending European Union Commission approval, and up to about $320 million in equity funding from Saxony and a group of European investors led by M+W Zander.

AMD said the balance of the financing will be provided by AMD and other potential partners.

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