AMD Ditches Fabs to Stay Alive

It’s been a long time coming, but AMD said this morning that it has entered into a transaction with the Advanced Technology Investment Company of Abu Dhabi to create an independent semiconductor manufacturing foundry called The Foundry Company. As part of the spin-out of AMD’s fabrication plants into this separate entity, AMD raised $1 billion in capital and got rid of about $1.2 billion in debt.

The move has been anticipated for over a year, as AMD has struggled to stay afloat amid production delays and brutal pricing from rival Intel. Last quarter, it reported a $1.2 billion loss. AMD finally had to admit it couldn’t keep up with the costs of building a $3 billion-$4 billion fab each time it wanted to shrink its chips and gain some economies of scale in manufacturing. That’s a business model that has moved on. Now most companies have created manufacturing partnerships, or are fabless, meaning they outsource the building of their chips to a third party.

The Foundry Company will join the ranks of those firms, and will be 44.5 percent owned by AMD and 55.5 percent owned by ATIC, an independent fund capitalized by the government of Abu Dhabi. ATIC will make a $5.7 billion investment into the business to build out a planned fab in upstate New York and finish out a fab in Dresden. This is the first major investment for ATIC. It will also invest $700 million in AMD.

The ATIC has also brought in the Mubadala Development Co. to help operate the fabs for the next 12 months. Mubadala made a $622 million investment in AMD last year, becoming an 8.1 percent shareholder. Today it said it would invest $314 million to eventually own 19.3 percent of AMD.

Doug Grose, the former senior V-P of technology development, supply chain and manufacturing for AMD, will lead the new company. Hector Ruiz, former CEO of AMD and its current chairman, will become chairman of the new company, leaving his position as chair of AMD. A new AMD chairman has not yet been selected.

Some problems I see with the deal:

  • New York State has promised $1.2 billion in assistance to AMD if it builds its fab in New York. The state does not have an agreement with The Foundry Co. Given the economic uncertainty and the foreign ownership of the new business, that assistance may change (although it wouldn’t likely disappear altogether.)
  • Because AMD has a 44.5 percent ownership stake in the fab it has some disincentives to negotiate hard for better wafer pricing. That could hurt AMD’s bottom line.
  • AMD has a licensing agreement with Intel that allows it to manufacture x86 chips. AMD says this deal fits within the confines of the Intel licensing agreement, but further details about that agreement would help investors understand exactly how it may limit The Foundry Co.’s ability to cut costs and expand.
  • AMD uses other foundries to make some of its chips. As a majority owner of a competitor, how will other foundries treat AMD’s wafers?

image of Dresden fab courtesy of AMD