Intel gets hammered--by AMD

Good things come in small packages, Advanced Micro Devices executives told investors Thursday at the company's annual shareholders meeting.

AMD disclosed that the first of several forthcoming processors, code-named Clawhammer, will be only 105 millimeters square--about the same size as a current Athlon chip and half the size of Intel's current Pentium 4 chips. But it will deliver more than three times the clock speed of the first Athlon, and its small size will help AMD hold down capital expenditures.

Intel surprised the chip industry last year when it revealed that initial Pentium 4 chips would be more than double the size of previous processors, increasing manufacturing costs. The Pentium 4 will shrink significantly, however, as Intel shifts to a new manufacturing process around the same time Clawhammer hits the market.

It's all about value, CEO Jerry Sanders said at the New York meeting. By employing a new manufacturing process, using design innovations such as silicon on insulator (SOI) technology and holding down the physical size of the chip, AMD believes it can keep costs in check and deliver higher performance at a lower cost than Intel can.

To that end, AMD will use a new 0.13-micron manufacturing process to build the new generation of chips. AMD will also include SOI, a performance-enhancing manufacturing technique licensed from IBM. SOI adds a layer of oxide material between the transistor and silicon it rests on inside a chip. The oxide insulates the transistor from the silicon, reducing the amount of energy lost. The transistor, therefore, can run faster and at the same time consume less power.

Sample versions of Clawhammer will be made available to PC makers in the fourth quarter.

At the same time, "We will get a very substantial performance increase from architectural enhancements" to the chip, Sanders told investors.

AMD is developing its own chipsets to accompany Clawhammer, he said. However, the company will also license them to third-party chipset makers. Chipsets connect the processor to other PC components such as memory and network cards.

Chips in the Hammer family--which also includes the Sledgehammer server processor--also will have the ability to process data in either 32-bit or 64-bit chunks, increasing performance for applications that are tuned for 64-bit.

Intel's forthcoming 0.13-micron Pentium 4 chip, code-named Northwood, is expected to be about 116 millimeters square, much smaller than current 0.18-micron chips' 217 millimeters square.

Thanks to the economical Hammer chips, Sanders said, AMD can meet its goal of attaining a 30 percent share of the market while operating only two PC-processor fabrication plants.

Sanders acknowledged that AMD will not hit its market-share goal as quickly as he originally hoped, however, in part because of the weak market for PCs.

"We said our goal was to achieve 30 percent worldwide unit share by the end of 2001," he said. "We have put in place that by the fourth quarter of 2001, we have the wherewithal to achieve 30 percent, and I certainly expect to achieve it."

AMD currently claims 21 percent of the market, according to preliminary numbers from Mercury Research.

Thanks to the small size of Clawhammer, AMD will not look to expand its manufacturing capacity for processors until after 2003. The company will instead increase the manufacturing output at its Dresden, Germany, plant, which is operating at about 50 percent of capacity, Sanders said. The company plans to increase the plant to full capacity by the end of the year.

"We believe we have a capacity plan in place...with our existing capacity to take us through 2003," Sanders said.

Here, the small die size of the Clawhammer chips will help AMD, he said. Beginning in 2004, the company will explore "a number of alternatives that might include a partner and wafers that are larger in size."

The implication is that AMD will go to 12-inch silicon wafers. Chips are manufactured on thin silicon wafers and later separated. Currently, the largest available wafer size is 8 inches. However, beginning later this year, the industry will begin a transition to larger, dinner plate-size 12-inch wafers. For a chip that's about 105 millimeters square, AMD would be able to more than double the amount of chips it produces per wafer without significantly increasing cost, analysts said.

Analysts agreed that the strategy of holding down the size of future chips is prudent.

"Smaller chips are cheaper to manufacture, so you can either price them lower or gather more margin from them. All of those arguments are valid," said Dean McCarron, principal analyst at Mercury Research. "As far as the factory argument goes, it depends on what (AMD) wants its market share to be, obviously. However, it's understandable why it's headed in that direction."

The strategy "very well could work," he said. "All the premises (AMD) is using to choose this path are valid."

Over time, AMD might also look to outsiders to manufacture some of its PC processors. Under a licensing agreement the company has with Intel, allowing AMD to manufacture processors based on Intel's X86 design, AMD can turn to chip foundries for up to 20 percent of its total manufacturing capacity.

"I expect over the next years we'll take advantage of that," Sanders said.

Intel holds patents to the X86 processor design, on which all PC chips are based.

Sanders also reiterated statements he made in the company's recent first-quarter earnings conference call. They include AMD's plans to ship a 1.4GHz Athlon chip this quarter and a 1.5GHz chip in the third quarter, and to officially announce Athlon chips for notebook PCs in May.

Sanders, famous for shooting from the hip, also uttered a few of his famous Sandersisms.

When asked if he would make a "graceful" exit at the end of next year, Sanders said, "I can tell you the better we perform, the more graceful my exit will be."

Sanders, AMD announced recently, will step down at the end 2002, leaving control of AMD to now-President and Chief Operating Officer Hector de J. Ruiz.

AMD also plans to launch a TV advertising campaign in the fourth quarter, Sanders said, responding to a question about advertising.

While asking the initial question, the shareholder complained of being tired of seeing TV ads for Intel's Pentium 4, which feature the theater act Blue Man Group.

"You have no idea how tired I am of seeing the Blue Man Group," Sanders replied.

Finally, Sanders said AMD will break into the corporate PC market in North America soon--"but not soon enough," he said.