AMD Agrees: Manufacturing Is an Expensive Distraction

OK, this isn't a news flash if you're following news about AMD (NYSE: AMD  ) , but it's been the center of controversy lately. Judging from reader response to a few recent articles about its foundry spin-off, it sounds like a few investors have their doubts, but I still see the move as a case of Profitable Semiconductor Business 101. In short, AMD is doing fine -- and that spin-off was the right move.

CNet News landed an interview with AMD CEO Dirk Meyer, where he explained the thinking behind spinning off the company's chip-making fabs.

Outsourcing the manufacturing makes sense because it's cheap: "In the past, we've had to invest between one and two billion dollars a year in manufacturing capacity for wafer fabs," Meyer said. "We don't have to do that anymore." Instead, the Foundry Company will fund its operations, expansion, and technology upgrades from its own balance sheet.

Yes, AMD will still own some 34% of that company, but is under no obligation to pump any more money into that asset-heavy balance sheet. There will still be research in manufacturing processes to keep AMD close to archrival Intel (NYSE: INTC  ) in the eternal race toward more compact chip traces and transistors. But that investment comes from Abu Dhabi now.

And to those who scoff at the move because it will a) slow down the process development, b) increase the cost of doing business, or c) both, Meyer scoffs right back. There's plenty of precedent for an "asset-light" semiconductor business from industry leaders like Texas Instruments (NYSE: TXN  ) , QUALCOMM (Nasdaq: QCOM  ) , and graphics rival NVIDIA (Nasdaq: NVDA  ) . When AMD bought ATI, it got a taste of how to run that model -- Taiwan Semiconductor (NYSE: TSM  ) makes the ATI chips.

Sure, AMD won't overtake Intel's process technology lead anytime soon, but that's nothing new. "We've never introduced products on the next [manufacturing] node first in the industry," Meyer said. For one, it's kind of like buying a $1,000 Blu-ray player for the bragging rights, rather than wait six months and get one for half the price. But even if AMD wanted to get ahead of the game, that might not be possible: "Given our scale, we don't receive the first copies of manufacturing tools."

So there you have it, straight from the horse's mouth. This spin-off makes AMD lighter and lets it focus on just chip design. It has worked for others before, and even for parts of AMD itself. Finally, the runner-up manufacturing spot makes sense for an underdog like AMD. This stock should be a Rule Breaker, because a change this drastic will take the skeptical market by surprise -- in a good way.

Further Foolishness:

Intel is a Motley Fool Inside Value recommendation and NVIDIA is a Motley Fool Stock Advisor selection. The Fool owners covered calls and shares of Intel. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Anders Bylund owns shares in AMD and Taiwan Semi, but he holds no other position in any of the companies discussed here. You can check out Anders' holdings or a concise bio if you like, and The Motley Fool is investors writing for investors.


Read/Post Comments (5) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 27, 2009, at 6:55 PM, actue wrote:

    Anders, Anders, when will you give this up. Do you think these Abu Dhabi people are planning on just pouring money into this "foundry" and not expecting anything back. There is practically no possibility that they can compete in the real "foundry" business (especially with their fabs in Germany and upstate New York) so AMD will be their only significant customer and consequently have to bear the burden of all that overhead including some new stuff from Abu Dhabi. I don't understand how that makes their "system" of producing parts cheaper. If they think competing with Intel is tough, wait until they try TSMC.

    I also don't remember Abu Dhabi as a world leader in developing and running leading edge semiconductor manufacturing. They own 63% and they will not stand still and watch AMD try to pi$$ away their money.

  • Report this Comment On February 27, 2009, at 9:36 PM, Fliujniligui wrote:

    NVDA does outsource all the stuff at TSMC. And NVDA has no debt. AMD has a long way to go.

  • Report this Comment On February 28, 2009, at 2:24 AM, jpjjp wrote:

    Why invest when you can borrow ?

  • Report this Comment On March 01, 2009, at 1:21 AM, TEBuddy wrote:

    People being haters, when they have no reasons why an AMD fab couldnt do just fine. Do you think anyone invests billions of dollars into an operation without prospects on the horizon? Dont be foolish. The men with the money are probably smarter than you are.

  • Report this Comment On March 19, 2009, at 4:26 PM, TMFSelzhanik wrote:

    Manufacturing semiconductors is an expensive distrction for a semiconductor company. I really wish the irony in that headline was played out more in the article.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 841266, ~/Articles/ArticleHandler.aspx, 10/21/2014 8:00:36 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement