Now Hear This!

Have you ever blacked out? When the body does so, it's preserving blood flow and air to vital organs and the brain, and reducing energy usage for non-essential muscles and senses like sight. The body goes into a sort of survival mode until it can fix whatever the problem is. If it can fix the problem, sight returns and, assuming there is no long-term damage (ie, in blacking out, you missed a step on the stair and took a header down two flights), you're ok. If the body can't fix what's wrong, well, move toward the light.

AMD this week entered survival mode, spinning off its life-force-sucking manufacturing operations in an effort to redistribute its vital resources. (See "AMD spins off manufacturing ops, creates foundry with Abu Dhabi investment firm" for our news coverage.)  As this blog and many analysts have suggested for months now, changing its business model will allow AMD to cut its costs significantly (some analysts estimate it will save between $150 million and $200 million per year on process technology R&D), which should allow it to focus more on design and better thwart market share gains from the likes of Intel.

While AMD was vocal about the fact that the not-so-creatively named new entity "The Foundry Company" will assume approximately $1.2 billion of AMD’s existing debt, surely easing some of Wall Street's concerns, it has given only scraps of information so far on its game plan from here on out. Little has been said on AMD's plans to focus on design now that it isn't spreading its resources as thin.

That makes the announcement somewhat disappointing. The industry has been waiting for a year now to hear about AMD's elusive "asset-smart" strategy and when it is finally announced, it's light not just on manufacturing but on details as to how the move will grow AMD.

And we need AMD to grow. It's floundering but must remain a competitor for the industry's sake. Otherwise, we'll all be wearing blue shirts before you know it. 

There's also the question of whether this Foundry Company can compete in manufacturing. According to estimates from IC Insights, Foundry Company’s 2009 to 2013 capital spending budget will be in the $4.8 billion range, as compared to AMD’s estimated total $6.4 billion capital expenditures from 2004 to 2008. Meanwhile, the research company estimates that Intel will spend $30 billion in capital expenditures over the next five years and TSMC will spend $10 billion in the same period. How does the newbie company compete for market share gains, keep its manufacturing process current, and add new business when its spending is so low in comparison?

The move also makes one wonder how AMD will now cooperate on its cross-licensing agreement with Intel.   The agreement is very far reaching and does not allow AMD to transfer any of Intel’s technologies to a third-party. So, while AMD can outsource some of its production, it can only legally do so up to a point of its total output. The manufacturing split also has Intel questioning its validity and stating that it will "vigorously protect" its IP rights.

So, yes, as I've stated in this blog many times before, this is a welcomed and wise move for AMD, but it needs to be played right and it must be played carefully. Very carefully.

What do you think? Will AMD survive this move? And, if so, will it thrive post survival? Share your thoughts below.