AMD To Spin Off Fabrication From Design Work

I.M.O.G. was one of many readers to write with the news that "Advanced Micro Devices plans to announce Tuesday that it will split into two companies — one focused on designing microprocessors and the other on the costly business of manufacturing them — in a drastic effort to maintain its position as the only real rival to Intel. 'This is the biggest announcement in our history,' said AMD's chief executive, Dirk Meyer. 'This will make us a financially stronger company, both in the near term and in the long term, as a result of being out from the capital expense burden we have had to bear.'"

How is this supposed to make things better?

Can someone give me some insight into why splitting the company into two is supposed to help AMD?

Re:How is this supposed to make things better?

There seems to be some good information here [wikipedia.org]:

IC production facilities are expensive to build and maintain. Unless they can be kept at nearly full utilization, they will become a drain on the finances of the company that owns them. The foundry model uses two methods to avoid these costs: Fabless companies avoid costs by not owning such facilities. Merchant foundries, on the other hand, find work from the worldwide pool of fabless companies, and by careful scheduling, pricing, and contracting keep their plants at full utilization.

Re:How is this supposed to make things better?

So AMD frees its production facilities to accept contracts from other fabless companies. Meanwhile, they can focus on designing and selling chips and chipsets for motherboards and graphics cards.

I think this will turn out well for AMD, if they can maintain a good relationship with their foundry spin off and if the foundry spin off can keep up with the competition in terms of quality and technology. Although, I guess this would also free AMD to find other partners if they need to either expand production or find better production facilities in the future without neglecting parts of their own business.

Re:How is this supposed to make things better?

IC production facilities are expensive to build and maintain. Unless they can be kept at nearly full utilization, they will become a drain on the finances of the company that owns them. The foundry model uses two methods to avoid these costs: Fabless companies avoid costs by not owning such facilities. Merchant foundries, on the other hand, find work from the worldwide pool of fabless companies, and by careful scheduling, pricing, and contracting keep their plants at full utilization.

I don't see anything in here that requires two separate companies. AMD can stay a single company and still build chips for other companies to fully utilize their facilities.

It looks more like a decision appealing towards someone's fuzzy feelings: "look the fab is independent now, it's got nothing to do with AMD chips, you can hire it" and "look we're doing bad but we have a big plan to bail out out of the crysis". Ops how come I worded it this exact way :P?

Difficult to pull off that dicotomy...

If they are a single company, then, internally, the two groups almost have to use each other or else seem bizarre. I.e., if the designers contracted out fabrication of a model even though their own fabrication division was not fully utilized, that would seem unhealthy. By the same token, if the fabrication division pre-empted production in-house designs for a third-party, that would similarly look bad.

With that view, it would be a tad harder for the fabrication portion of the business to attract design companies, with prospective companies knowing they are putting their manufacturing capabilities in the hands of a company that would be both partner and competitor. The conflict of interest is far from appealing.

Few large corporations under typical circumstances preserve in-house at-scale manufacturing. I.e., most x86 system vendors now at most design the system and then feed to another company for fulfillment, potentially even a company spun off from themselves when they reached a similar conclusion.

As consumers, we don't stand to lose, only to gain. For example, if nVidia has been held back in any quality/performance way by inferior fabrication companies, they may now approach AMD fabrication. Same goes for AMD v. Intel, if another fab company can deliver more aggressive process size/yield improvements, then AMD design can go to that company and produce a valid competitor to Intel.

Or it shows that both halves of the company were completely average nowadays even in only the context of their similar competitors, and still doesn't do well, but that isn't different from today.

Re:Difficult to pull off that dicotomy...

"With that view, it would be a tad harder for the fabrication portion of the business to attract design companies, with prospective companies knowing they are putting their manufacturing capabilities in the hands of a company that would be both partner and competitor."

Well that's the idea here. By spinning off fabrication into its own company, other chip designers wouldn't be putting their ideas in the hands of a competitor.

Re:How is this supposed to make things better?

I don't see anything in here that requires two separate companies.

From an organization or technology perspective, no, there isnt any reason to split into two companies. From a financial perspective, this makes a huge amount of sense. You'll note that this new company is receiving an enormous amount of new funds from investors, and taking a lot of the AMD debt. They're effectively splitting off R&D from Manufacturing, and people are free to invest in just the R&D component or just the manufacturing component.

Some folk out there thought the manufacturing side was worth a huge investment of cash. Lots of assets there that are worth a fair bit - but not if they're tied to work purely on AMD products. If the R&D side of AMD failed, then there are a crapload of perfectly good assets that would be lost, in effect. This allowed investors separate AMDs chips from AMDs fabs when investing. There is no inherent value in splitting the fabs off - except when someone is willing to spend $8 billion to fix them up, separate from the R&D side.

This doesn't mean they think AMD R&D is going to fail - its just about risk. Why tie your $8 billion investment to the ADD of the consumer chip market instead of to physical assets that will be worth something regardless of the mood of the x86 CPU market?

Re:

The cost of building and running the fab does not show up on their corporate books. AMD management can concentrate on the business of designing and marketing the chips and can avoid the fab issues (not entirely, but for the most part). The fab can potentially be operated at a higher utilization if it is not running solely AMD processors, which might improve profitability for the fab. AMD is maintaining a controlling interest in the company being spun off, so that they will be the priority customer.

Re:

AMD is maintaining a minority interest - the Foundry Company has a 55% majority on the spunoff part.

Re:How is this supposed to make things better?

It is NOT supposed to help AMD. It is supposed to help AMD's stockholders.

This often happens with troubled stocks that have a number of different business functions that can be split off. Some of those business functions may represent a great deal of capital investment, but not return much cash. You don't want that capital tied up in idle buildings and equipment, but you probably can't sell those things to your rival who's happy to see you shrivel up and blow away.

So you split the company up. The more profitable divisions can start to appreciate in value or even pay dividends. The less profitable business can stay afloat on business from its former sibling divisions while the stockholders unload their stock in it. It's possible that new management can turn thing around.

Re:How is this supposed to make things better?

Right now, AMD fabs are ONLY used to produce AMD processors. They don't handle GPU manufacturing at this point. As a result of this, and because of the bad economy, the fab side of things would drag AMD down more than keeping the two companies in a good position. On top of this, from a pure bookkeeping/accounting perspective, it becomes easier for investors and potential investors to see a profit from one side of the business or the other.

The Athlon 64 X2 and Phenom sales numbers really are not bad, but the profits from the sales are never seen for investors if the fab side is losing money. The split will make it very clear how well the company is doing in each area. It will also open the doors for other companies to buy fab capacity from AMD, so AMD could make money by making chips for other companies. We may never see Intel use AMD for this, but other companies are out there.

The downside to this is that as two smaller companies, one side or the other might be purchased by another company, which would hurt in the long run. It's a dangerous time...

ARM is fabless

Because Design without Fab worked so well for Transmeta?

I see your sarcasm, but it works for ARM and MIPS.

Re:ARM is fabless

> Because Design without Fab worked so well for Transmeta?
I see your sarcasm, but it works for ARM and MIPS.

What ARM and MIPS have in common is they are RISC architectures with their own specification and market.

What Transmeta and AMD have in common is that they produce x86 compatible chips and thus compete directly with Intel.

Intel as a company owning their fabs has become famous for their well synchronised "tick tock" process where they successively introduce new design, then introduce better fab for the same design, then a new design etc. Such accuracy and consistency is hard to expect from a design-only company that needs to contract a third party to produce their own product, and both parties are constantly looking for a way to skim some pennies in the process.

Re:ARM is fabless

Intel is in a unique position in that its R&D and fab budgets are, relatively speaking, limitless. With a lion's share of the market, Intel can afford to upgrade some of their fabs to 32nm at enormous expense with the comfort of knowing that the volumes will almost assuredly be there to make back the investment.

AMD had to play a much nimbler and dangerous game of trying to crank out volume while simultaneously playing catch-up on the fab side. It was wise of them to recognize this as a losing game. My assumption is that the AMD/IBM, et al alliance of gate research and the like will be fed into these fabs with some sort of preferential production rights to the contributors of the R&D budget.

Also, let's not forget that Intel is the subject of numerous international anti-trust suits.

IMHO, AMD has had some costly slipups but they have otherwise done an outstanding job of keeping pace with NVIDIA and Intel while on a fractional R&D allowance. In NVIDIA's case, they are pulling ahead.

Re:ARM is fabless

it works for ARM and MIPS.

To be fair, ARM and MIPS don't need cutting-edge performance. They are fabbed on whatever slightly older, absolutely dirt-cheap process is available. They're so small and low power already that a process shrink or two doesn't noticeably affect the overall performance of the embedded device.

Part of the reason it works so well is because companies that need to be on the cutting edge of chip tech (like Intel and AMD) pay the huge expense of building high tech fabs, then, when the technology moves on, they've got to do SOMETHING with the obsolete fabs, so they might as well contract out and make dirt cheap chips at minimal profits. After all, little profit is better than no-profits, on a fab you've long since paid for and (hopefully) profited from.

And I believe AMD was already trying to better utilize their old fabs, making (low-power) Geode chips for embedded apps and the like with spare capacity.

And this really shouldn't have surprised anyone... They've contracted out other fabs to produce AMD cores in addition to their own, but only as contingencies when they couldn't immediately meet demand... I suppose they don't have that problem anymore.

Re:How is this supposed to make things better?

Transmeta failed because its product sucked.

Re:How is this supposed to make things better?

Transmeta failed because its product sucked.

Absolutely. For those who don't know, the Crusoe uses a VLIW architecture with 128-bit words, and x86 instructions have to be decoded and RE-ORDERED in real-time into those 128-bit words. This is the same brick wall Intel ran into with optimizing compilers for the Itanium, but unlike Intel the Crusoe has to do it in REAL TIME.

Sure, the software translation layer meant that they could run Crusoe any architecture, but in the end it cost them precious performance. The chip itself wasn't much to sneeze at (two integer units and an anemic FPU), so it really didn't have the performance to spare. Then they hobbled the chip by integrating a nortbridge; this meant that ALL Crusoe-based systems would have the same video and I/O performance limitations, all in exchange for saving a buck or two on parts.

It didn't help that they hyped the successor, the Efficion, and then it didn't deliver in clock speeds or promised performance increases [vanshardware.com].

Hmm...

You have to wonder if this was actually a good long term idea that Intel would be doing it as well. I'm guessing this is more of an accounting trick to help their numbers look better and/or some how lower taxes. I don't own any AMD stock so this doesn't effect me too much... I just hope that they don't go under as Intel does need some one to compete against.

Backwards

Funny, my company just did the opposite. Our design department was just recently merged with manufacturing. This was done because:
A) Design would rarely factor in the manufacturability of it's designs, driving up costs.
B) Manufacturing had a tendency to sacrifice quality to reduce costs.

This new corporate structure has only been in place for a few months, but so far has worked quite well. Entire product lines have been eliminated (design didn't know manufacturing was still making the old stuff). Entire processes have been eliminated (manufacturing thought they were needed to meet the final spec, but weren't).

Most of these issues could have been resolved with better management and communication, but when design and manufacturing are a single unit, these issues resolve themselves naturally.

Stick a fork in 'em...

Stick a fork in AMD, they're done.

A design firm plus a foundry does not equal an integrated semiconductor powerhouse.

Who is left to compete with Intel now? At least we will have Nehalem. Get used to Nehalem, embrace it, love it. Because it's going to be around for a long, long time. At least we have the x86-64 ISA, on-board memory controller, and point-to-point processor communications as an AMD legacy. And thank $DEITY that AMD was able to put a stake through the heart of Itanium.

There won't be much future innovation from Intel without the spur of aggressive competition from AMD.

Cheers!

Abu Dhabi Investment Group

So the bottom line is that the Abu Dhabi Government is buying AMD?

It's a smoke screen for mismanagement

A hot fab is useless unless you can get product to market, and sell into the markets you need to achieve sales goals. AMD hasn't done this.

While they have very good engineers, they're weak in so many places. An infusion of foreign capital makes no sense if you can't get the basics right.

Yes, Intel, IMHO, used illegal tactics to kill AMD at many turns. AMD needs to recruit the best and brightest and get a regime change in motion to diffuse their preyed-upon attitude. They could lead again, but not with the current regime.

Chopping the company into bits will be a distraction, not a savior.

Slow sucking sound

Once again, another American company selling off to foreign investors.
Another powerhouse US industry falling to the wayside.
Sucks that I foolishly spent many years studying to work in said industry.

At least both presidential candidates are planning to retrain me to sell cars or something.

A lot of it is simply accounting....

AMD have a lot of issues, and they've made a lot of mistakes.

They got greedy when they were on top, and charged too much for processors which allowed Intel to do to them exactly what they did to Intel(swoop in with cheaper parts).

They've also got some problems with maintaining any presence in the top end of the CPU market. This isn't a huge deal for fabrication as almost no one buys those thousand dollar CPUs anyway, but those thousand dollar CPUs are your next generation main stream CPUs so you've got to have them.

They've also had some issues because they aren't big enough to take what's been happening in the market lately as easily as Intel has. AMD is now worth less than they paid for ATI, they're not alone in being worth a lot less, but it's not as visible for other companies.

Essentially the biggest thing this does is allow AMD the design company to ditch its debts into AMD the fab company. Investors will be much more willing to accept debt in the fab company because at the very least the assets are worth cash and it won't be dependent on whether AMD can come up with something halfway decent design wise. If the design company goes under, they can always just go fab Intel CPUs.

The design company on the other hand, after offloading a whole lot of its debt, is much more likely to stay alive long enough to fix things. They've got to get designs out into the market, they've got to be cheaper, and they've got to be at least almost as good as the Intel parts, but they have to survive long enough to do that.

Realistically, AMD will probably buy the company back if they do survive because having your own fabrication facilities is probably key to being in the top of this market, but in the meanwhile they get to stay alive in a failing economy, a credit crunch, and a time of total lack of vision for the future.

This split, silly as it sounds, may allow them to survive long enough to do this, and at the very least might keep Intel worried enough that they don't go back to the old days for a few more years.

Re:

Not really. By decoupling it makes it somewhat easier for the fabrication company to fill it's production lines by making chips for other fabless companies. It's not quite a move of desperation or some kind of accounting trick as you seem to imply.