Silicon Valley Watcher - Former FT journalist Tom Foremski reporting from the intersection of technology and media

Advanced Micro Devices Spins Off Chip Plants as a Foundry Joint Venture

Posted by Tom Foremski - October 7, 2008

Advanced Micro Devices, Intel's main competitor in microprocessors, Tuesday said it plans to spin-off its chip plants into a jointly owned venture with Abu Dhabi.

Reuters reports: AMD spins off plants into venture with Abu Dhabi

The new venture, temporarily called Foundry Company, will assume all $1.2 billion of AMD's manufacturing operations debt so the remaining company can compete hard against Intel, which sells about 80 percent of the central processing units at the heart of the world's 1 billion PCs. AMD makes the rest.

. . . Advanced Technology Investment Company (ATIC), an Abu Dhabi state-owned venture capital company, will invest at least $5.7 billion, getting a 55 percent stake and half the board seats. AMD will own the rest.

Another Abu Dhabi government company, Mubadala Development Co, will spend $314 million to increase its stake in AMD to 19.3 percent from 8.1 percent and gain a seat on AMD's board

. . .The 3,000-person Foundry Company will make all of AMD's central processing units as well as chips for other companies. It plans to break ground next year for a factory in upstate New York, employing 1,400 people, if New York state will transfer financial incentives to the new company.

The chief executive will be Doug Grose, senior vice president of technology at AMD, and its new chairman will be Hector Ruiz, now chairman of AMD.

The joint venture will upgrade an existing AMD plant in Dresden, Germany, and build the plant in New York to the latest technology standards, AMD said. It said the Foundry Company, which will be on AMD's balance sheet, may ultimately build a fab in Abu Dhabi.

ATIC will invest an initial $2.1 billion, paying $700 million directly to AMD. After that, it will invest an additional $3.6 billion to $6 billion over five years.

Foremski's Take: AMD has been hampered by owning its chip fabs, which are a quick way to lose money if they cannot be run at nearly full capacity 24 hours a day. By spinning off its fabs and turning them into a foundry, it still has access to its finely tuned production lines and excess production capacity can be sold to other chip makers.

Over the past two decades the chip industry has moved to a fabless business model where the chip design companies use third party foundries to manufacture their chips. This has led to an explosion of new chip designs that have made electronic devices cheaper and more powerful because companies don't need to own their fabs, which now cost $3 billion and more.

There are only a few companies such as Intel (an SVW sponsor) large enough that can afford to build and run fabs for their own products. Because of the high cost and high productive capacities of today's chip fabs, they must be run at 90 per cent plus capacity to offset their high costs of operation.

Also, high productive yields are necessary, which is a major challenge with today's tiny chip geometries. The slightest contamination in a several hundred step manufacturing process can destroy large batches of chips.

AMD has a long history of difficulties in producing its own chips at high enough yields. This has made its competition with Intel extra challenging. With this deal and its $700m cash infusion, AMD will be in a better position to compete against Intel.

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