AMD redux: Analysts question foundry plan’s future

Oct. 9, 2008 – There appear to be two camps of perspective regarding AMD’s spinoff off its manufacturing operations into a “Foundry Company” with help from Abu Dhabi investors.

Financial watchers applaud the move insofar as it significantly cleans up the books for AMD, which only a few quarters ago was seen as on the ropes with viability a real question. The deal significantly reduces AMD’s capital expense burden (pegged at $150M-$250M/year on process R&D), and sweeps away $1.2B in debt while infusing the company with roughly $1B in cash. “The cash infusion, debt off-load, reduction in R&D expenses, operating cash flow and long-term capital commitment must lay to rest all investor concern regarding access and control of future process technology,” wrote American Technology Research analyst Doug Freedman, in a research note. “AMD has answered the question of how it will stay in the CPU race with leading-edge process technology.”

Analysts cited in a Marketwatch story agree that such a deal was both sensible and inevitable. Crawford Del Prete of International Data Corp. and Insight64’s Nathan Brookwood echoed that AMD no longer will have to commit to the “immense” funds required for capital investment in semiconductor manufacturing for equipment and process development.

“This deal is a positive for AMD’s balance sheet. Without it, the company most surely would have continued to die a slow death,” agrees IC Insights’ Bill McClean, in a research note.

But the other camp sees strategic problems for the newly trimmed AMD and its foundry offspring in the greater marketplace. McClean points out that the Foundry Company’s projected capex over the next five years, $3.6-$6.0B, not only is lower than what AMD itself has spent from 2004-2008, but pales next to top rival Intel’s $25.6B over that same period (and anticipated $30B over the next five years). Top foundry TSMC, meanwhile, spent $11.3B from 2004-2008, and even with TSMC’s pledge to focus on profits (read: supporting higher wafer ASPs) and responsible spending going forward (capex as a % of sales in the mid-teens, vs. 20%-30% and higher in recent years), it will probably spend at least another $10B over the next five years. So, comparatively speaking, Foundry Company’s capex plans are “uninspiring at best,” he writes. And by spending less than AMD before, it’s unlikely leveraging the Foundry Company will win AMD any new PC marketshare, he adds.

Moreover, the Foundry company faces an uphill battle in a crowded marketplace full of struggling competitors. “It should also be noted that there is a lot more to being in the IC foundry business than hanging out a sign and announcing you are a foundry,” McClean cautions. “Just ask some of the Malaysian and Chinese foundry startups about the difficulties of gaining marketshare in this segment of the IC industry.”

In the companies’ announcement of the Foundry Company they made multiple references to the Foundry Company being “independent,” but AMD will probably want to use its own increased capacity for its SOI and chipsets/GPUs, business previously gone to Chartered, TSMC, and UMC, In-Stat analyst Jim McGregor notes (see his scorecard below). And being admitted to the IBM-led Common Platform coalition would further pose some threat to other fabless companies. But in general, the new firm won’t pose “an immediate threat” to the general foundry market due to long-standing customer relationships, committed capacity, other foundries’ advantageous footholds in Asia, and additional service offerings such as design services, he says (though AMD has not ruled out such services at some point in the future).

Moreover, McGregor also claims the formation of a foundry company won’t relieve AMD of its debt burdens, nor the need to invest in capacity and future process technology. Such costs could be spread out to any other high-volume customers, but a foundry also adds complexity due to cross-license agreements (e.g. with Intel) and increase costs on a per-part basis. AMD also would lose process manufacturing expertise, something that can be critical with highly integrated and timing sensitive products, he points out (Exhibit A: its troubled Barcelona product line). And such a significant business shift will likely result in staff and relationship changes which could impact AMD’s knowledge base, and its competitiveness with Intel, he adds.


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