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Meyer says "smart men have foundries"

AMD is struggling with returning to profitability at the same time it is fighting with Intel in the X86 processor market. The struggles have led to some hard decisions at AMD that have included layoffs and pay cuts.

As AMD prepares to shed its foundry operations and spin them into a new company, AMD CEO Dirk Meyer is opening up about the changes. AMD founder Jerry Sander has a maxim he lived by when AMD first started that stated, "Real men have fabs."

Meyer suggests that while Sander's was a smart man, the market has changed significantly since AMD was founded. Meyer suggests a new maxim, "Smart men have foundries." Meyer said during an interview with eWeek, "Jerry was a real smart guy but the industry has changed a lot since that time, so I think, ‘Smart men have foundries,’ is my new quote."

Whatever Meyer's new maxim for success is, the fact remains that spinning the foundry portion of AMD off into a new company was a good way for AMD to get much needed capitol and remove debt from its books at the same time.

EWeek reports that the spin off means AMD received $800 million in capital and was able to remove $1.2 billion in debt from its books. The majority of that debt was from the purchase of ATI, which continually haunts AMD.

Meyer continued saying, "Clearly it’s going to be a culture change for the company. There are a large number of capable manufacturing technologists and manufacturing people who will no longer be part of AMD, but the good news is they get to create a new company. Some people have asked me about the risk—as to imply there are big risks—but honestly I think we are on top of what we have to do both in terms of R&D and supply chain operations."

The spinoff of the foundry portion of the company was announced in October of 2008 and was temporarily called The Foundry Company. The spin off was finally approved by AMD shareholders this month allowing the process to continue.

Former AMD CEO Hector Ruiz will head The Foundry Company and the official name of the company will be announced soon according to eWeek. The split will allow AMD to focus on the design and marketing of CPUs to better compete with Intel.

Intel has moved well ahead of AMD in many markets and AMD has work to do to regain ground it has lost. AMD has been hit with a number of significant losses over the last several years that have impaired the company. The most recent loss came in 2008 with AMD posting a loss for the year of $3 billion.

Meyer also talked a bit about Intel and its claim that license agreements in place between AMD and it would not be covered for the new company. Meyer said, "I think it’s pretty clear that they [Intel] are trying to instill fear, uncertainty, and doubt in the minds of our customers, shareholders and other stakeholders."

AMD still maintains that the licensing agreements are in effect despite the spin off.

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Was the ATI move really bad?
By joey2264 on 2/27/2009 12:58:00 PM , Rating: 5
I'm not sure what kind of business ATI is doing, but they are competitive (finally) in the GPU business, while AMD isn't nearly as competitive compared to Intel. Isn't that a great thing for the overall business of AMD?

RE: Was the ATI move really bad?
By Regs on 2/27/2009 1:17:54 PM , Rating: 2
What do you mean? The CPU was AMDs cash cow that turned into a dog over night. X2 went out dated, and the first phenom was a problem child. They had to dump a lot of money into Phenom I (65nm --> 45m) just to make it reasonably competitive.

Manufacturing x86 CPUs takes billions of dollars of capital to produce. AMD needs a return investment after spending all that money to make it. This spin off of the fabs means AMD no longer needs to spend a ton of money on capital to get the next chip out. Though the problem is what if the Foundry runs into their own problems and cannot produce what AMD has designed?

RE: Was the ATI move really bad?
By BSMonitor on 2/27/2009 1:41:06 PM , Rating: 4
No kidding, the best move AMD could make would be to allow Intel's Fabs to produce their chips!!

RE: Was the ATI move really bad?
By Pirks on 2/27/2009 2:52:11 PM , Rating: 1

RE: Was the ATI move really bad?
By JumpingJack on 2/27/2009 11:53:50 PM , Rating: 3
This spin off of the fabs means AMD no longer needs to spend a ton of money on capital to get the next chip out.

That ton of money on capital appears under the line item capital expense on the quarterly reports and balance sheets, but it does not mean they won't spend a ton of money after the split.

Two items here.

First, it costs money to make the physical CPU. The silicon wafer costs money, the chemicals used to treat the wafer and make the transistors cost money. From wafers, to the fab equipment, to the testing, to the packaging this all costs money. When the fabs have (had) the AMD sign on them that costs could be accounted for per wafer, say it cost them 16K per wafer to make 400 CPUs on a wafer (just as an example), it will cost the Foundry 16K per wafer to make those same CPUs -- we shall assume for the moment, and this is true near term, that AMD is the Foundries only customer.

The cost structure therefore is the same, except now AMD pays someone else 16K + some margin for the same wafer -- this is under the assumption that the Foundry does in fact want to make a profit. AMD will show this not as capex costs, but as cost of sales, this is why AMD states gross margins will fall to 30% or so. Overall, this is not a win for AMD since either they will pay more for the same wafer produced by the Foundry Co. or the Foundry Co. will eat the costs themselves, consequently they will show massive losses which in turn AMD will carry on the consolidated reports -- i.e. nothing much really changes in the immediate future.

The second item, and this is where it gets good for AMD, is when the Foundry Co. does bring in more customers other than AMD. In that case the Foundry Co can load the fab to full utilization, and as such the total capex costs are spread over thousands of wafers, AMD may take up 60% of that capacity, and a few other companies the remaining 40% as such the cost per wafer drops for the Foundry and the cost per wafer + margin sold to AMD also drops. Here AMD saves money, but this only happens if the Foundry Co. can dilute the costs over several customers by keeping the factory as fully utilized as possible.

In the end, only time will tell if this will work for AMD, and it is a risky move because the foundry business is very competitive. The Foundry Co. will be competing with TSMC, UMC, IBM, Chartered (to name a few). They need other customers using the fab in order to dilute the costs overall to a broader base. This split only works if the semicondutor industry is healthy and the capacity is utiized. So the logic is sound, but it carries with it a certain amount of risk -- if they cannot get the customers some one will lose money either AMD or the Foundry. Luckily, the new owners have deep pockets so they can continue to finance the operation for a long time. How much they are willing to sink into the operation (if it indeed is losing money) is another question without an answer.

RE: Was the ATI move really bad?
By Penti on 2/28/2009 10:18:15 PM , Rating: 3
I think your forgetting that the old factories wasn't incorporated in the same corporation as AMD Inc as they where there own corporations back then too just that AMD was the parent company and therefore design and fab people worked for the same companies even if that was AMD Germany. Design people will still sit in the same offices next to the fabs though. The real benefit from it is that it brought in capital, capital that AMD itself couldn't bring in. CSM already has foundries with AMDs tech (APM etcetera). AMD itself should also have a easier time bringing in investments and capital for design and product development now.

So it shouldn't really be a problem to have other customers. Not sure who that would be yet though, chipsets and GPUs are still made by TSMC. Foundry company would still work with others foundry companies like before, already mentioned CSM, and there's IBM too. They won't stop working together just because they become a foundry, they still need to license tech between each other, develop technologies and cooperate. They just wouldn't be competitive any of them if they didn't. And they get paid for doing all that work for each other any how.

"Game reviewers fought each other to write the most glowing coverage possible for the powerhouse Sony, MS systems. Reviewers flipped coins to see who would review the Nintendo Wii. The losers got stuck with the job." -- Andy Marken
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