Tricky Moves Ahead for AMD After Spin-Off

Now that AMD has spun off its fabrication facilities as a quasi-separate entity, the question now becomes whether this will free the company to once again be truly competitive with rival Intel.

“This is kind of a life support step,” said Jim McGregor, senior analyst for In-Stat. “This is something definitely required because they needed to do something about their financial position. They had to do something to enhance their balance sheet. It gives them the necessary working capital and possibly a new business model to do more of their own stuff.”

Spinning off the fabs into a new company, called The Foundry Company, was an important, necessary step, analysts and industry executives noted. Wall Street cheered the news by sending the stock up by 8.5 percent on an otherwise down day in global markets. But industry watchers say AMD needs to take even steps to improve its competitive position.

Even Nigel Dessau, chief marketing officer for AMD (NYSE: AMD), will admit to that. “I don’t think that this on its own makes us more competitive with Intel,” he told “What makes us more competitive with Intel is to get execution right in the way we produce out products, design and engineer them.

[The move] “takes pressure off our balance sheet, helps us focus [as] AMD the design company, so it just does that thing; out innovate the competition, out-design the competition and produce better products than the competition,” he added.

Intel’s lawyers on line two?

Intel may want to have a word with AMD about its spin-off news. The firms have cross-license agreements dating back to 1976, although that hasn’t stopped them from suing each other.

The latest agreement, last signed in 2001, requires AMD to hold on to its fabrication business at least in part. An Intel spokesman said Intel has “serious questions about today’s announcement” as pertains to the terms of the agreement.

He could not say what, however. The terms of the agreement are sealed unless both parties agree to disclose it, and they have not. The published agreement has numerous redactions, made by AMD at Intel’s request.

Intel said it’s willing to publish the whole thing unredacted, while an AMD spokesman would not comment on that part except to say it has “complete confident the structure takes into account cross-licensing agreements.”

AMD has not washed its hands of the fabs entirely. It still holds a 50 percent stake and the new company will show up on AMD’s balance sheet and income statement. Still, it has been a growing trend among semiconductor makers to go fabless.

The fabless trend

At this point, only Intel (NASDAQ: INTC) and memory makers are making their own chips. With revenues of roughly $40 billion a year, Intel can afford it. But AMD, more in the $4 to $6 billion per year range, could not.

“It comes down to capital costs,” said Dean McCarron, president of Mercury Research. “If you’re not above a certain level of volume, you can’t make the math work out to your advantage.” AMD wouldn’t have announced plans to build the new fabrication plant in Saratoga County, New York – expected to come online in 2012 – if it didn’t expect to attract more business for TFC than just its own chips, he added.

Fabs need a high volume of business and the facilities need to run as close to 100 percent capacity as they can, because keeping up with giants like Intel and IBM (NYSE: IBM), also a chip maker, is an expensive proposition.

“It used to be a foundry could be a generation behind and not suffer for it,” said McCarron. “Now even a half-generation behind isn’t acceptable. My sense is that over time you will see a convergence that there are enough customers demanding cutting edge that there will be a few companies that specialize in it.”

Going forward, finally

With the pressure off AMD, it can now focus on chip design, although it admits even if it had been without the pressure of the Dresden complex, Barcelona would have still had its problems. Still, Dassau promises that Shanghai, the next generation server processor, will benefit from this change.

Barcelona’s problems stemmed from AMD “growing too fast without management discipline. Some of it was engineering testing didn’t find things early enough,” said Dassau.

AMD has made changes over the last year in how it designs and manufactures its products, something the company has discussed already. “The separation accelerates the transformation of the company by freeing up the value of the manufacturing asset,” said Dassau.

But that also makes McGregor nervous. “It’s critical to maintain, with high performance logic devices, that you have that project logic expertise in-house so you know how to tweak it. Now they are giving all that up. That worries me long-term.”

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