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AMD‚??s gamble

08 October 2008 | By Mark Osborne | Editor's Blog

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AMD will continue to struggle and its foundry friend doesn’t look set to do any better. We all waited and waited and waited some more to find out from AMD and Hector Ruiz what exactly was its ‘asset smart’ plan. Now that it has been revealed, it is very close to what we and others thought it would mean.

That said, the bare details provided in the press release and on the conference call raise some important questions that in some respects should have been answered in the first place!

A simple one to start with was the lack of reference to the fact that in all reality, AMD has become a fabless company. Granted, it has a 44.4 percent stake in ‘The Foundry Company,’ but as the financial wizards will no doubt point out, the fabs have exited the balance sheets.

As any fabless company knows, dealing with foundries becomes an integral part of business operations and with that comes the need to have a ‘Director of Operations’ and a backroom team of engineers to handle that side very closely. In essence, AMD as a fabless company will have to have a unit dedicated to this. I am sure they have this in place as the ATI acquisition would have brought with it that set-up, but this was something the company didn’t mention. It is important, as a restructuring within AMD would or should be taking place to handle its new found freedom from manufacturing.

Going fabless is fundamentally a big gamble for AMD, something that will probably take time to unravel. A point some may not have realised is that the only other microprocessor company that was fabless is up for sale and only after it had become an IP company rather than a fabless company. There is a precedent being set here and that must make Intel very happy.

Another aspect that concerned me was the notion pumped out by AMD that demand for leading-edge foundry capacity was something that was in strong demand. Ask SMIC, Chartered or UMC how much of its capacity is allocated to 65nm-and-below production and you will find it is very small. The number of companies moving to smaller geometries also gets smaller by each technology node.

Also, if demand for foundry capacity was that strong, then why are wafer ASPs in decline and the major foundries cutting CapEx each year?

Even worse is the fact that SMIC has struggled since birth to actually turn a profit, so why should we think that a new foundry start-up in Europe will fare any better?

Importantly, why is there a rush for the foundry spin-off to equip a shuttered fab in Dresden and charge ahead with a new fab in Luther Forrest, NY? Fab 36 has obviously been able to handle all of AMD’s MPU demand and has barely used its then foundry partner Chartered for extra capacity requirements.

Part of that conundrum was answered in an email from AMD last night. Apparently, the graphics chips currently being produced at TSMC will migrate over to Dresden (Fab 38). However, the issue of why AMD/The Foundry Company see the need for the fab in NY has yet to be explained!

With over a $ billion in funding from NY State on the table, it may well be a case of "the fab can be built at zero cost, so why not go ahead?". Figuring out what they can do with it after that it is another matter, but they will have at least 12 months to figure that one out!

That brings me to another important point, something Bill McClean at IC Insights noted in an email last night. The CapEx plans for the foundry seem, on the surface, to be impressive at $3.6 billion to $6.0 billion over the next five years. However, Bill noted that:

Foundry Company’s 2009-2013 capital spending budget is forecast to be $4.8 billion (when using the mid-point of its announced $3.6-$6.0 billion spending plan).  The funds will be used to install capacity to produce devices for AMD as well as to enter the IC foundry business.  IC Insights believes that this financial commitment is uninspiring at best.  It should be noted that AMD’s capital expenditures over this and the previous four years (2004-2008) are expected to total $6.4 billion, and look at what shape the company is in today.

Intel is expected to spend $25.6 billion dollars in capital expenditures from 2004-2008, four times what AMD will spend over the same time period.  IC Insights believes that Intel’s capital expenditures over the next five years will total about $30 billion, which would be five times the Foundry Company’s most optimistic plan of investing $6.0 billion over that time! 

Uninspiring seems to say it all, but Bill had more to say on that matter.

Given that Foundry Company’s capital spending budget for the next five years is forecast to be less than AMD’s capital spending outlays over the previous five years, it is highly unlikely Foundry Company will help AMD gain additional market share.  In fact, AMD will be lucky to sustain flat market share in the MPU segment.  Moreover, a significant portion of the Foundry Company’s budget must be allocated to the new foundry business, and this, of course, will take away precious spending needed for MPU production!  

Obviously, AMD has survived to fight another day by going fabless, but side-stepping the unnecessary hype in which AMD chose to announce the news, AMD will continue to struggle and its foundry friend doesn’t look set to do any better.

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Reader comments

I see a potential problem for Intel in the proposed AMD deal, a problem that could force Intel and AMD end up in litigation. The 2001 AMD-Intel cross-licensing agreement demands at least 50% AMD ownership of any subsidiary AMD chooses to outsource its fabrication. This requirement would be simple to meet if AMD was a successful company, with high market capitalization. However, AMD‚??s low stock market capitalization poses a problem structuring any deal that can provide enough capital for AMD‚??s plan s for The Foundry Co. since almost any reasonable capitalized spin-off company would result in very small minority participation of AMD in the ownership of the spin-off. The deal announced by AMD was structured giving ATIC 50% (the Dubai Co.) voting rights although they own 56% of the company. You can get away with this lawyerly maneuver only within reasonable limits, an 80-20% ownership split with 50% voting rights would be impossible to explain. The bigger problem is that The Foundry Co. has insufficient capital to operate as described by the analysts; this force The Foundry Co. to either issue debt or raise capital. Raising debt is going to be difficult in light of the turmoil in the credit markets, although may well be already agreed having ATIC to buy this debt. Expanding the capital base would have additional diluting effect on AMD ownership of the The Foundry Co. I believe it is quite clear that The Foundry Co is in precarious financial shape and that will need to sell debt or raise capital. Questions that need answer are: (1) Why would Intel renew a licensing agreement with AMD and The Foundry Co considering that AMD will own less than 20% of the foundry? (2) Would Intel be willing to allow a licensing agreement that may open the door for IBM owning a major portion of the foundry either through a transfer of foundries and/or a capital investment?
By Adolfo Gutierrez on 13 October 2008
I agree that this marks the beginning of AMD's life as a fabless company. While I agree also with the concerns for the Foundry company, I have to say that it is heartening to see a silicon foundry in the U.S. One aspect to consider is that the Foundry company will likely leverage R&D;from IBM and Albany Nanotech. If this is so, they may be able to survive with a lesser overall investment relative to Intel. Another key factor in their success will be to sign up at least one or two additional high volume customers. Having said this, I do agree that the Foundry company will have a daunting task to keep up with the fast moving leaders in semiconductor technology and the foundry business....
By Rakesh Kumar on 09 October 2008
Everything I've read on this seems to assume the Abu Dabai investment is about making money. But I'm not so sure that's true. I suspect this is more about moving an Arab country away from dependence on resource extraction and into manufacturing. I suspect that after 5 years of, at best, break-even American and German manufacturing, The Foundry company will move operations closer to home in the middle east. But more importantly, this might just be another example of a new era of investment where political goals replace financial ones
By DRB on 09 October 2008
It is a promising deal for NY, although a few observations are in order to moderate the hype of the announcement: (1) AMD is not coming to NY; the newly formed The Foundry Co is coming. AMD remains in Austin and Silicon Valley. (2) The Foundry Co is a relatively well funded startup, having a hugely complex business model, operating in at least three time zones (GMT+2, GMT-5, GMT-8) (3) The Foundry Co has only one customer at the moment, AMD. (4) The transaction has reduced the downside risk for AMD and piled up significant risk on The Foundry Co. (5) The Foundry Co competes against TSMC that has a 20 year lead on them, owns about 70% of the global foundry business, and operates in a single time zone (Taiwan) (6) Fabless Semi demand today can be satisfied with just a handful of MegaFabs. (>> 100,000 Wafer Start/Month), and very little is leading edge. This implies that around 2012 The Foundry Co Fab 4X in Malta will be competing head on against the largest 28nm Fab of TSMC. (and that the Dresden Fabs will have been most likely sold) (7) Key to the success of The Foundry Co is its ability to operate at full capacity. This imposes a huge performance burden on the new AMD which will have to utilize, at least for several years, most of that capacity. (8) Clearly The Foundry Co is compounding risk factors since things can go wrong either through: (1) Insufficient additional demand for over AMD's base capacity utilization; or if (2) AMD fails to secure/retain a sizable market share of the global microprocessor market. (9) Most likely, the transaction will have to go back to NYS legislative bodies for approval, after the election and under a very different public finances reality in light of Wall Street collapse. The Foundry Co is exciting news for NYS in the sense that, at least, has now purchased a ticket in the global semiconductor lottery. NYS can share some of the reward provided that The Foundry Co timing and execution are correct amidst a complex an uncertain plan as your article so clearly suggests.
By Adolfo Gutierrez on 08 October 2008

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