AMD's restructuring could be fab-less--or at least fab light

Summary:Advanced Micro Devices (AMD) reported a whopping loss, was crushed by Intel and flopped in the first quarter under any metric you choose. The good news: It's promising a game-changing restructuring.

Advanced Micro Devices (AMD) reported a whopping loss, was crushed by Intel and flopped in the first quarter under any metric you choose. The good news: It's promising a game-changing restructuring.

AMD, which reported a first quarter net loss of $611 million, laid out a silver lining that looks like this: revenue will be flat with the first quarter tally of $1.23 billion (I don't buy that) and the company is cooking up an aggressive plan to fix things.

What would this restructuring look like? Of course, it'll feature the usual standbys of layoffs and cost cuts. But beyond that AMD talked a good bit about an "asset light" model. In English, that means AMD is going to outsource more of its manufacturing to firms with better fabrication plants (fabs). The move makes sense in many ways. For starters, fabs are a cash drain, suck up research and development and may be a futile effort considering Intel has more resources. Why not outsource key manufacturing processes?

On a conference call with analysts, AMD CEO Hector Ruiz outlined some of the restructuring parameters.

"The level of restructuring that I am envisioning is very significant, and so it would be difficult to outline it on a phone call. But let me give it a try as to what we intend to discuss later on in the year.

For example, four years ago, we had one product in the company that, through tweaking and maneuvering, we could actually make it serve various segments of the market. Today, we have proliferated on a product line towards goodness. We have a broad array of products, but now we are serving segments in the industry that each of these segments are large in size. For example, an entry level segment in an emerging market is a very large segment. All on its own, it actually requires its own separate business model in how to address that segment. Compare that to a workstation or super computer segment, which all on its own requires a completely different business model."

Ruiz also noted that AMD used to make chips and put them in the channel, but as its products have increased the company is more about partnering with OEMs. In the end, Ruiz said each product line will have a different management nuances.

"As part of that, one of the things that has become pretty clear in our experience, we have had now for a number of years had some experience in partnering with people such as, for example, IBM in joint development programs. That has started a lot about how you can do some asset light strategies, since we did not have to build an R&D laboratory to do that.

We have had also an experience now for a number of years with some of our friends in the foundry business, and in particular Charter Semiconductor. We have learned a lot of that.

Through the acquisition of ATI, we now have a perspective into a very asset light model that we are pretty excited about learning more and more about it. When we look at all these things, we see a tremendous opportunity for us to really do something different going forward, but it’s unique for us."

Jeffries analyst John Lau said in a research note that a manufacturing retooling may offer the biggest returns out of AMD's turnaround initiatives. "A hybrid or a fab-lite model should enable AMD to cut down on its R&D and capital expenditure and improve its return on capital. Given AMD's scale and the challenges in growing its scale, a fab-lite model is likely to create most value," said Lau.

Not all agree. CIBC analyst Richard Schafer said in a research note that relying on outside manufacturers may ensure Intel's generation lead indefinitely. "AMD's cap-ex reduction plan and 'asset-lite' strategy portend increased reliance on foundry partners. We believe such a move would perpetuate Intel's generation lead indefinitely," said Schafer. 

Lau, however, noted that foundries such as TSMC are moving in lock-step with Intel as it moves to smaller manufacturing processes.

In the end though, AMD has little choice but to try an asset light strategy. It can't keep losing north of $600 million a quarter when it only has $1.2 billion in cash as of March 30. Bottom line: AMD will need more capital. The big question is where the capital comes from. 

If there were ever a company that should go private, restructure and re-emerge like Seagate did it's AMD. Ruiz didn't shoot the going private idea down either. "We have absolutely no prejudice or bias towards the source of capital as long as it makes sense for us, and we are very open to any of those ideas," said Ruiz.

Topics: Processors

About

Larry Dignan is Editor in Chief of ZDNet and SmartPlanet as well as Editorial Director of ZDNet's sister site TechRepublic. He was most recently Executive Editor of News and Blogs at ZDNet. Prior to that he was executive news editor at eWeek and news editor at Baseline. He also served as the East Coast news editor and finance editor at CN... Full Bio

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