Spinning off fabs would be risky for AMD, analysts say

Recent comments from Advanced Micro Devices about controlling manufacturing costs have led to speculation that the company may divest its chip fabrication plants, but some analysts say that wouldn't make sense for AMD.


Recent comments from Advanced Micro Devices about controlling manufacturing costs have led to speculation that the company may divest its chip fabrication plants, but some analysts say that wouldn't make sense for AMD.

The comments led to speculation that AMD would either sell its fabs or spin off its manufacturing unit to improve profitability and reduce expenses related to chip manufacturing. Fabs require massive capital investment that requires a lot of ongoing cash, while AMD is not in a cash-flush position.

By spinning off fabrication plants, AMD would be at the mercy of third-party manufacturing facilities that could affect the production and supply of chips, analysts said. AMD could also lose control of chip design and development by separating the research and manufacturing of chips.

Spinning off the fabs could also raise the cost of manufacturing chips, which could hurt AMD in the pricing competition against Intel, analysts said.

Some analysts said unloading the manufacturing business has an upside. AMD's manufacturing assets were paid by loans, which is a big financial load on the company, said Dean McCarron, an analyst with Mercury Research. Unloading the manufacturing business would transfer the debt to the new company and free up AMD to pursue the processor business.

AMD has two fabs - Fab 36 and Fab 38 - in Dresden, Germany, that manufacture integrated chips. The company is planning a new fab in New York state, due to be ready next year. The company also outsources the production of graphics chips and chipsets to companies like Taiwan Semiconductor Manufacturing (TSMC) and United Microelectronics.

Speculation about AMD's potential spin-off of its fabrication plants surfaced after recent comments by AMD's CEO Hector Ruiz that the company would deploy its manufacturing assets more cost effectively and cut down on capital expenditure to deliver better margins.

The company is trying to reverse six consecutive quarters of losses in part by reducing manufacturing costs through what it calls an "asset smart" strategy. The company hopes to deliver additional details of the strategy "in the very near future," Ruiz said in a speech to shareholders on Thursday that was webcast.

AMD did not respond to calls for comment about how it plans to manage its manufacturing assets.

Although speculation is rife, AMD might not sell its fabs, said Jack Gold, president of J. Gold Associates, an analyst firm. Selling off the fabs would be risky for AMD, as it would have no fab to design, debug and fine-tune processes as the company moves to finer and finer features in its chips, Gold said.

AMD made heavy capital investments in the fabs, and the ongoing cost to upgrade the fabs will continue to be high. Given the cost, AMD will need to avoid significant investments to catch up with Intel.

"[AMD] has two options. Design more products that run in that fab or take in other people's chips. But the processes run in the fab are not up to the leading edge like Intel has." Intel is heavily invested in 32-nanometer and 22-nanometer chip-making processes.

If it spins off its fabs, AMD may be hesitant to outsource some parts of chip manufacturing to TSMC, which is behind Intel in manufacturing technology and unlikely to catch up quickly, Gold said.

To compete with Intel, AMD needs to be an integrated chip supplier with both design and manufacturing of processors done in-house, said Nathan Brookwood, principal analyst at Insight64. Leveraging manufacturing and design closely could drop chip manufacturing costs, allowing AMD to compete with Intel on chip prices.

To help reduce capital expenditures, AMD can put off buying some of the manufacturing tools it needs to upgrade the fabs until the company reaches profitability, Brookwood said.

AMD can increase production at its fabs now that the Barcelona blunder is behind it, Brookwood said. AMD's most recent server chips, the quad-core Opteron processors code-named Barcelona, started shipping in volume last month after bugs were found that led to multiple delays.

"Even though AMD hasn't been generating profit, it's not because of not shipping a lot of units. It's because of Barcelona - they had to make huge pricing concessions to maintain business," Brookwood said.

Now that the company is on the cusp of a new product cycle, there could be a resurgence in the sale of chips - which could pump up production in the fabs, Brookwood said. AMD this week announced new chips, including a 12-core processor code-named Magny-Cours, due for release in the first half of 2010.

AMD is optimistic about being profitable in the second half and meeting processor ship dates. "They are feeling pretty good about where they are," Brookwood said.

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