After a bad 2008, AMD tries to reinvent itself

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.