AMD to Restructure, May Outsource More to IBM, Chartered

During a report of perhaps the worst quarter of performance in the company's history -- what its executives called a "perfect storm" -- AMD CEO Hector Ruiz revealed an extraordinary number of options are on the table for an unprecedented corporate restructuring.

Exploring the possibility of adopting an "asset-light" business model, AMD may go so far as to license manufacturing rights for its microprocessor designs to long-time partners IBM and Chartered Semiconductor, as well as expand its licensing relationship -- one many didn't know AMD actually had -- with Intel.

Ruiz told analysts that, as AMD's mix of customers shifts from selling mainly to the channel - to businesses that purchase in volume - to OEMs which produce designs based on AMD processors that often sell to consumers, his company needs to reconsider how best to address that customer shift.

"One of the things that has become pretty clear in our experience, we've had now for a number of years some experience in partnering with people such as, for example, IBM in joint development programs. That has taught us a lot about how you can do some asset-light strategies, since we didn't have to build an R&D laboratory to do that. We've had also an experience now for a number of years with some of our friends in the foundry business, and in particular, Chartered Semiconductor...Through the acquisition of ATI, we now have a perspective into a very asset-light model that we're pretty excited about learning more about."

In recent years, Motorola's communications division and Texas Instruments have both adopted so-called asset-light business models, that serve to reduce their retooling and maintenance costs by trading them for production costs that are more manageable. As part of the tradeoff, they rely more and more on foundries such as Chartered, whose own business models are based on producing other companies' designs in a cost-controlled fashion.

Ruiz told analysts this afternoon that AMD has already made IP licensing arrangements with a number of partners. For it to go more asset-light, if it so chose, all it would need to do is exercise the options it has already planned out.

"We have a broad array of IP licensing agreements with many people in the industry," remarked Ruiz, "and every one of the options that we're considering for an asset-light business model takes all those into account, and incorporates those into the agreements that we have. We have a lot of flexibility in those agreements. As a matter of fact, I would put it in the category of damn near infinite.

"Our plans are to start really narrowing down the choices and exploring the opportunities with the various possible partners that we could have," Ruiz continued with his characteristic transparency. "It covers the whole gamut of opportunities...We already have a joint development agreement with IBM, which we view as an asset-light strategy from the point of view that we don't have to build an R&D facility."

Ruiz will assemble a special task force, he told analysts, whose job will be to ascertain the health and status of his company, and make recommendations as to what cuts can be made while doing the least damage. Ruiz himself will chair this task force, which will also be staffed by CFO Bob Rivet, executive vice president for sales Henri Richard, and executive vice president for media and former ATI CEO Dave Orton.

"While I expect this task force to be temporary in nature," Ruiz stated, "lasting no more than a year, I expect this transformation to be bigger and [have] more dramatic an impact than the one we undertook in 2002."

Perhaps this task force's first order of business will be reconciling Ruiz' two primary goals, which some could say seem disparate: to work toward a more "asset-light" model, while at the same time accelerating, if possible, the progression to full 65nm production and later to 45nm production. AMD executives this afternoon gave the full impression that any effort to slow down this progression or turn down the volume of this product shift, could jeopardize the company even further.

But there must be changes in AMD fabrication plant development plans - at this point, they can't be avoided. Fab 30 is AMD's main production facility in Dresden, Germany, and one of its oldest buildings, producing 200 mm wafers. Fab 36 has been under construction there for the past three years, being built to produce 300 mm wafers.

Imagine a wafer as a kind of transistor farm, and you can understand why producing bigger wafers automatically means better output. AMD's plan had been to convert the 200 mm facility into an all-new, 300 mm facility to be called Fab 38. As President Dirk Meyer told a Lehman Bros. analyst, "Compared to that change going forward, we will reduce the rate at which we convert Fab 30. We'll still completely ramp Fab 36."

Pre-production samples of the first 65 nm chips using AMD's Barcelona architecture were shipped during the last quarter, Meyer continued. More samples will be shipped this quarter, and customers will be able to start shipping Barcelona-based systems in the third quarter. No delays there.

Next: Will AMD be forced to make peace with Intel?