Too early to read AMD last rites: analysts

With intensifying competition from rival chipmaker Intel putting the firm under pressure, and feeling the pinch from the US$5.6 billion it coughed up to buy graphics chip maker ATI, AMD has definitely been feeling the heat of late.

Many looked to the company’s annual shareholder meeting last week to shed some light on just how AMD hoped to dig itself out of what appears to be an ever-deepening hole. But chief exec Hector Ruiz was saying nowt.

Would AMD be going “asset light”, or just “asset smart”? Was there a master plan in place to pull the chipmaker out of the doldrums? Ruiz wasn’t going to say. At least by keeping quiet, no further damage could be done, and it didn’t hurt the stock price to inject a bit of mystery and intrigue into the proceedings either.

No-one denies that AMD has had something of a year from hell, but talk of the chipmaker’s imminent demise don’t cut much ice with analysts.

Although the delays in launching Barcelona did much to hurt the firm’s reputation and credibility, few believe it was the final nail in AMD’s coffin.

Chip-spert Nathan Brookwood of Insight64 said that although he was “disgusted with the way AMD ran Barcelona over the last 12 months”, he didn’t believe it would spell doom for the company, especially now that Barcelona was actually shipping, and firms like HP, Dell and Sun had all launched products incorporating the chip.

Rob Enderle, principle analyst at Enderle Group, said Intel had also missed past launch dates, but it had recovered well and AMD probably would too. Even so, AMD had “better not do it again anytime soon or they may not recover”.

“AMD basically have no credibility now and the only way to get that back is to deliver,” said Brookwood. AMD wasn’t exactly languishing in the pit of despair, and the chipmaker was “pretty confident it can deliver”, he added. Getting its Shanghai 45nm server chip out on time would definitely be a step in the right direction.

Fabless or fab-lite? As to whether AMD would go fabless, opinions were divided.

Jack Gold, head analyst at J.Gold Associates doesn’t believe AMD will sell off its fabs, but was likely to rely more heavily on outsiders to do its manufacturing. AMD already allows TSMC to manufacture a significant number of its chips, but because TSMC’s fabs are at least one-and-a-half generations behind Intel, offing the whole manufacturing process to TSMC seemed an unlikely move, he said.

Gold noted that AMD had to “be a lot smarter in how it optimises products” being at the mercy of a manufacturing facility the company did not control. “This is no easy task,” he said.

Brookwood was also sceptical about AMD going taking the fabless route, saying he thought it was more likely the chipmaker would be “looking for partners” such as Singapore’s Chartered, TSMC or possibly even IBM.

When it came to running fabs and fab technology itself, Brookwood said AMD “came top of the class” which would make the company extremely reluctant to get out of fabbing.

“Besides, there is not really much point in selling a fab if you have enough business to keep it going, and fab 36 is running at close to full capacity.”

Enderle, however, sees things differently. Giving up its fabs would give AMD “flexibility” and would “reduce significantly its capital commitment, while making better use of in-place resources”. In the short term, though, he expected the chipmaker to be relatively careful with how much fab capacity it gave up, learning hard lessons from Transmeta and Cyrix.

There has been much speculation that AMD might have to sell off its Dresden fab in Germany in order to raise a bit of cash, but the issue is not exactly straightforward as AMD was given loans by the state of Saxony to build the fab in the first place.

As Broockwood points out, AMD did still generate cash last quarter, and despite its losses, was still turning enough profit to avoid panicking and frantically selling off everything it owns.

It is no easy task to simply shut down a facility, noted Gold, saying it would be especially difficult to do so in Europe unless AMD sold it outright to a new owner who would take over its operation.

“With the current state of the semi market in Europe, I am not sure anyone would want to purchase the facility outright and continue to operate it”, he said.

Shake, rattle and heads a-roll Most observers agree that the ongoing management shake-up, which has seen the exodus of at least four senior execs – most recently Mario Rivas, executive VP of computing solutions and chief talent officer Michel Cadieux – were part of a drive to get the compay back on track rather than a dash to abandon the sinking ship.

“Sure, AMD have lost a few people, but they’ve also been reorganising”, says Brookwood. “I get the feeling that some may be being pushed overboard rather than jumping ship.”

Gold agrees that not all the departures appeared voluntary.

Both of them seem to be referring to Rivas, who might well have been forced to walk the plank over the whole Barcelona launch debacle.

Enderle said the changes were “a good thing” as the company sorely needed new blood to shake things up and get it back on track.

A graphic future? On the subject of AMD’s purchase of graphics firm ATI, both Brookwood and Enderle said the acquisition, although expensive, was an important move, and one that could set AMD up as a significant Intel rival by positioning company efforts against Intel’s Achilles heel -- graphics.

“It is a costly move, but in five years we may look back and realise it was what AMD had to do to gain some kind of competitive advantage” explained Enderle. “It was very risky, though”.

Brookwood said ATI was at a very good point in its product cycle, and its acquisition was wise because it gave AMD “access to a great big pot of intellectual property”. Did the company pay too much for ATI though? Brockwood doesn’t think so. “They negotiated and came up with a price that was acceptable to both”, he said.

“AMD can not compete with Intel across the board on all products”, Gold said, noting that AMD had to “be smart and innovate where it believes a niche exists that Intel does not fill”. This is why a move into the graphics and visualisation areas could be so critical for the company.

No one denies that AMD has had something of an annus horribilis, and that there is still much work to be done to get the company back on track. However, it would seem there is light at the end of the tunnel, even if the company doesn’t go fabless.

AMD says it will ramp up production in the first half of this year, which probably means chips should be ready to ship to OEMs by September, and OEM products due out in either October or November.

AMD also has to start being more cautious with its investments seeing as the company, though far from going broke, doesn’t have masses of money to spend at the moment.

Although AMD is unlikely to recapture 25 per cent market share when it comes to servers, it may still be able to recover a fair bit, because at least now the products are available.

“The company is not sending out unarmed soldiers to the battlefield to do battle with Intel and its canon,” Brookwood says.

“AMD has to be very cautious, meet its commitments, do whatever it can on the core, on the chip, and increase performance.”

Then it will be doing just fine.