AMD to Consider Building Chip Sets for Partners

SAN FRANCISCO--Advanced Micro Devices may get into the business of manufacturing chip sets after it opens a new chip factory in 2006, according to the company's chairman.

For the most part, chip sets for AMD's processors are currently designed by partners such as ATI Technologies, NVidia, and Via Technologies, among others, who often hire other companies to manufacture the chip sets. AMD has previously said that it is not interested in building its own companion processor/chip-set products like those made by its rival Intel. However, Hector Ruiz, AMD's chairman, president, and chief executive officer, said today that his company is not opposed to deeper ties with chip-set partners that could involve manufacturing agreements.

If chip-set vendors farm out chip-set manufacturing to AMD, the company would benefit in various ways. For example, AMD would generate additional revenue from manufacturing capacity that would otherwise sit unused. It would also have increased control over the process of manufacturing chip sets, which are used in tandem with AMD's chips to control the flow of data around a system.

Right now, AMD does not plan to start developing its own chip-set products for the mass market, Ruiz said.

AMD will have the capability to take on additional manufacturing work between late 2006 and early 2007, after a new state-of-the-art chip fabrication plant, or "fab," ramps up to full production in Dresden, Germany, adjacent to a current AMD fab. Growing shipments of the Sunnyvale, California, company's emerging products such as its low-cost Geode chips could take up some of that excess manufacturing capacity, but financial analysts are curious as to whether AMD has other plans in mind for its older chip-making equipment.

About 1.5 million silicon wafers are produced each year to support the chip-set needs of companies other than Intel, which is the world's largest chip-set manufacturer, Ruiz said.

"It's entirely possible that some of that [excess] capacity can be part of a partnership with a chip-set manufacturer," Ruiz said. In any event, AMD definitely plans to deepen relationships with its chip-set partners in coming years, which could help the company produce better chips, he said.

AMD makes a limited number of chip sets to support its launch of new processors, but the vast majority of the chip sets for its products are made by third-party vendors, said Dean McCarron, principal analyst with Mercury Research in Cave Creek, Arizona. In the past, AMD simply hasn't had the capacity to build its own chip sets, nor has it had the desire to enter a low-margin market that requires research and development expenditures, he said.

Streamlining

Intel believes it can produce a more complete product when the processor and chip set are designed together from the beginning of a project. The company's current model is its Centrino mobile technology, which consists of a processor, a chip set, and a wireless chip designed to work together to lower power consumption and improve performance. Intel is expanding this design concept to desktops and servers as part of its "platform" strategy.

Intel's chip-set business also allows the company to squeeze more productivity out of older factories that otherwise would sit idle, McCarron said. Chip sets are far less complex than microprocessors and don't require the most advanced processing technologies, he said.

Lastly, Intel's huge lead in microprocessor market share makes it harder for the company to grow without taking on more of the silicon that runs a computer, McCarron said.

AMD, on the other hand, has consistently maintained that its server and desktop customers want the freedom to choose their own chip set suppliers in order to meet different customer needs.

But in reality, AMD hasn't had the ability to make its own chip sets, because it has needed all of its fabs for making chips, even those that weren't state-of-the-art anymore, McCarron said.

State-of-art Facility

AMD is expected to complete construction on Fab 36 in Dresden in the first part of 2006. It will transfer production of its most advanced and important products to this facility, creating excess capacity in the company's current facility in Dresden.

The current Dresden facility uses 90 nanometer processing technology to produce silicon wafers that are 200 millimeters wide, which by late 2006 will be considered an older manufacturing technology that might be better suited for chip-set production. AMD's forthcoming facility will use 65 nanometer processing technology to make chips with smaller features as well as 300-millimeter silicon wafers, from which more chips can be produced. Intel and IBM already have 300-millimeter facilities in place, and are making the transition to 65-nanometer chips.

If AMD's Opteron and Athlon 64 chip business grows beyond the capacity of AMD's forthcoming fab, the vendor can offload microprocessor production to a more modern facility operated by Chartered Semiconductor, which signed an agreement with the Singapore fab in 2004.

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