After a bad 2008, AMD tries to reinvent itself

The new year will be critical to the chip maker's attempt to stay afloat

Next year will be critical for Advanced Micro Devices, as the chip company pursues two major initiatives designed to reverse its financial losses and compete better with industry leader Intel.

To narrow losses, AMD this year cut staff and divested its digital TV assets to focus on profitable markets, including the graphics space through its ATI acquisition in 2006. It also announced that it would spin off its manufacturing assets to become a fabless company and appointed Dirk Meyer as CEO to revitalize the company's efforts to become more competitive in the microprocessor market.

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However, the company earlier this month dropped its fourth-quarter revenue expectations, citing weaker-than-expected global demand for its products, especially in the consumer space. It joined other chip companies struggling due to a slowdown in PC demand and constrained budgets, including rival chipmakers Intel and Texas Instruments.

AMD in October announced that it would focus on chip design and spin off its chip manufacturing operations to a new company temporarily called The Foundry Co. The original plan called for AMD to have a 44.4 percent stake in the new company, with the rest owned by Advanced Technology Investment Company (ATIC), a fund owned by the Abu Dhabi government. Terms of the agreement were renegotiated last week, dropping AMD's ownership to a 34.2 percent stake, with the rest going to ATIC. In addition, another Abu Dhabi fund, Mubadala Development Company, will pay less for its stake in AMD than originally agreed upon, according to the renegotiated terms.

Spinning off the fabs helps AMD reduce expenditure and concentrate on chip design to deliver products competitive with Intel's offerings. It also helps AMD unload debt of $1.2 billion, which will be assumed by the spin-off. The deal, which closes early next year, will also send AMD's two fabrication facilities in Dresden, Germany, to the new company.

However, spinning off the fabs into a separate company has its risks. AMD could lose its independence in chip development, as it will have no fab to test and fine-tune processors while adding more features to smaller chips.

That could put AMD at a disadvantage over Intel, which owns fabs and is a generation ahead in manufacturing technology, said Jack Gold, principal analyst at J. Gold Associates. Intel launched chips manufactured using the 45-nanometer process in 2007, close to a year ahead of AMD's first offering of chips manufactured using the 45-nm process.

AMD can hope for a quick recovery of the PC market and keep its chip road map afloat next year to remain competitive with Intel, Gold said. It will also need to overcome design challenges by coordinating its chip design efforts with the company manufacturing the chips.

The Foundry Co. may initially focus manufacturing efforts on AMD's chips, but it may not remain exclusive as the spin-off tries to expand its market presence. "Changing a fab is a long and expensive process, so it won't happen overnight," Gold said.

PC makers are not worried about AMD becoming a fabless company, as long as the company meets its chip road map, said Kelt Reeves, CEO of Falcon Northwest, a PC maker.

"As long as the inventory shows up when we need it, who owned the fab it was made in is a non-issue," Reeves said.

After years of inconsistency in delivering chips on time, AMD got back on track in the chip space this year, fixing bugs, releasing the Barcelona server chip, and rolling out its Shanghai server chip ahead of schedule. It also revealed a consumer-chip road map late in the year to create excitement around its new products.

But in the new road map, the company revealed that it had delayed the launch of its much-awaited Fusion family of chips, which would combine a graphics processing unit and CPU on a single chip. That impacted PC makers and consumers, who were eagerly awaiting the release of the breakthrough chip.

The CPU and GPU components will now be combined in chips code-named Llano and Ontario, which will be released in 2011. The company will get better economies of scale and power savings from the chips manufactured using the 32-nm process.

AMD may have delayed the 45-nm chips because it didn't foresee the design challenges, said Rob Lineback, senior market research analyst at IC Insights.

"AMD clearly faced technical and economic challenges in combining central processing units with graphics units at the current 45-nm process generation," Lineback said.

On the flip side, delaying Fusion chips may help AMD reap financial benefits of the stand-alone GPU business, which turns a profit and generates a good chunk of AMD's revenue, Lineback said. If released as originally planned, Fusion chips would have reduced the need for separate graphics cards, cannibalizing the sales of ATI graphics cards. That allows AMD to keep the CPU and GPU business, which will help the company.

AMD is doing well in the GPU market, as it understands the needs of enthusiast clients like gamers who buy graphics cards, Reeves said. For being a small player, AMD took a large chunk of the graphics-card market share away from Nvidia and other companies with the launch of its ATI Radeon 4800-series graphics chips this year.

"It was a massive turnaround, and it's just a reminder to never count any major player out in this market," Reeves said.

However, it remains unclear whether progress in the GPU space and conversion to a fabless company will quickly move AMD into a profitable position. With PC sales tanking worldwide, there is no quick fix to escape the economic downturn, Gold said.

"This is definitely affecting AMD as well as Intel, which also has provided the market with some cautious statements about business for the next few quarters. If it's going to take over a year or two years for the market to recover, AMD could be hurting for a while," Gold said.

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