This week’s news brought again to our attention the rumors about AMD spinning off some of its manufacturing facilities in an attempt to reduce costs and turn to profitability. Confirmation on the company's “asset smart” strategy came from John Lau, senior semiconductor analyst and managing director of Jefferies & Co. Mr. Lau stated that the Sunnyvale chip maker would have some of its fabrication plants be made part of to a Middle East consortium, while also stating that the new company would manufacture chips for both AMD and third parties.

 

The conclusion that AMD will spin off the manufacturing facilities comes from an analysis of the company's financial status during 2007 and 2008. While this year brought better revenues than the previous one, the chip maker needs to upgrade its fabrication plants to the latest advances in the industry, mainly to the 45 nanometer manufacturing process, which would require bigger funds than it can afford at this moment.

 

“We believe that given the current cash position of the company and the capital expenditures necessary to upgrade their current fabs, this will create a hardship for the company,” said Lau. “The company has [been] on the record indicating they will pursue a fab-light strategy. We have been looking for more details of this strategy for quite some time now and our contacts in Asia indicate this effort is near finalization. We believe that the spin out will result in divestiture of their wafer fabrication capabilities but they will retain their packaging and test operations.”

 

According to Gary Silcott, an AMD spokesman, the company will disclose information on its “asset smart” strategy by the end of the year, but is not willing to respond to rumors at the moment. “At a high level, asset smart is our broader strategy to take a close look at how we're doing our wafer manufacturing and our chip manufacturing, the research and development,” Silcott has revealed today. He has also stated that the company is looking into “everything associated” with its way of producing devices, as well as into the actions that it should take by itself or jointly with third parties.

 

AMD has seen some executive changes during the past few months as well, and analysts are expecting another restructuring, also based on the fact that the company announced in July its seventh consecutive quarterly loss. Spinning off some plants is, therefore, the likeliest action that the company could take. “It seems that the winds are blowing in that direction,” said Jim McGregor, an analyst at In-Stat in Scottsdale, Ariz. “My concern is that if they get rid of manufacturing, they're going to say they don't need to focus on new process development technologies. That kind of expertise is critical to their long-term competitiveness, either against Intel or other market segments. If they lose that, I'd be concerned. That could be a short-term gain but a long-term loss.”

 

Some analysts and industry watchers, however, seem relatively concerned about AMD spinning out some of its manufacturing utilities. According to Dan Olds, principal analyst with the Gabriel Consulting Group, the company relies heavily on how it can execute the manufacturing process, in both the CPU and GPU areas. “I would think that, given how critical this is to their business, that it would not be in their best interest to give up control over this part of their business model. It'll give them a short-term financial gain, but it will definitely make their future roadmaps more risky in my mind,” he said.

 

Other analysts, like Mr. Lau, consider this to be a rather profitable action on behalf of AMD. “However, we believe this is a luxury that AMD can now not afford. We believe this spin off of the fabs is a much welcome change to their balance sheet and improvement in cash flow,” he said. Control over the manufacturing capabilities is a very important factor, Mr. Lau admitted, especially when it comes to leading-edge processing technologies.

 

He also said that the Sunnyvale company would have difficulties in investing in both chip design and upgrades for its fabs. Turning one facility to the 45nm manufacturing process on 12-inch wafers would require a $2 billion investment, according to Mr. Lau. Currently, the chip maker has only $1.1 billion in cash on hand.