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Mon 13 Oct 2008 06:03 PM

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Offloading assets

AMD announced last week that it plans to spin off its fabrication facilities. But why has the world’s second largest CPU manufacturer gone this route and how does it affect you? Jason Saundalkar explains…

It’s no secret that AMD has been in hot water for some time.

If you do a little bit of digging you’ll, very easily, find that the company has faced an uphill battle over the last couple of years to manage their debt and remain in business. Unfortunately the situation hasn’t improved for the company in 2008 and this ultimately forced the chip-maker to resort to liquidating its assets.

The company sold off its digital TV unit to Broadcom in August and while this bought AMD some much needed cash, the firm had to do more to keep its doors open for business. This happened last week when the company announced it will spin off its fabrication factories into a separate company, known as Foundry Company.

Without beating around the bush, this move has quite possibly saved AMD from fading into oblivion. You see fabrication plants or ‘fabs’ are the very definition of expensive. To construct a new, up-to-date fab from scratch, you’re looking at an investment of at the very least $3 billion. This of course means you have to have a lot of capital kicking about and the kicker is, almost as soon as it’s ready, the facility will start depreciating (quicker than a luxury car will in fact).

Moreover, the lifecycle of a fab is far from a bed of roses. A new fab will be able to produce state-of-the-art silicon, based on the latest manufacturing process for about two to three years. After this period of time, a new manufacturing process will likely be available and this makes the once state-of-the-art facility out-of-date.

To get this fab to produce silicon based on the new manufacturing process, you’ll need to do extensive reworking and retooling, which is again a costly affair. After the second retooling, it doesn’t actually make sense to retool again because of the massive expense and so these fabs are generally deemed to produce components that are less complex, such as North and Southbridge chips (instead of highly complex CPUs and GPUs).

The bottom line is that owning and running fabrication facilities was just too expensive for AMD. Had the company held on to its fabs, we could have been reading the company’s obituary sooner rather than later. Barring any unforeseen objections from AMD’s shareholders, the deal should go through by early next year at the very latest.

As an end-user, the effects of this move will only really be realised in the future. There is a chance that the quality of AMD’s products could degrade slightly, simply because the company is now relying on a third party to produce its CPUs, GPUs and chipsets.

You see although the fabrication plants and staff once belonged to AMD and though AMD will have a stake in the new Foundry Company, that business is now its own entity, with its own interests. This means AMD’s need to ensure quality in its products will compete with the Foundry Company’s need to remain profitable and this could ultimately affect the quality of products.

On the flipside, AMD has used third party manufacturers before. Some of the firm’s 90nm and 65nm Athlon64 parts were produced by a company called Chartered and those chips were rock-solid.

Furthermore, AMD will be able to use the money it saves from not having fabs, to ramp up its research and development efforts and could thus produce better products and at a greater frequency. The biggest positive of course is the fact that AMD has secured its future meaning we can all look forward to healthy competition between AMD and Intel.

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rajeev bajpai 11 years ago

May be from a financial analyst point of view as the authour envisages - AMD has secured it future. From the pure sales angle AMD is absent from the fastest growing segment - I can add the only growing segment in these times - The Netbook. If a company gloriously omit this fact of market which has been proved right - where can it go. Its also ironical that AMD was the company which was behind the OPLC project as a basic technology provider from where the classmate PC got born..and then the so called Netbook. Its really surprising to see the omissions on the part of AMD. but obviously perhaps they something which ordinary mortals like consumers don't know !! it would be fun to watch the Netbook market. Perhaps their lies the truth somewhere hidden