IBM was scheduled to begin manufacturing Intel-compatible AMD K6 processors this quarter under an agreement announced earlier this year, said sources at that company. However, AMD has now chosen not to exercise their rights, according to sources at IBM and AMD.
In other words, the deal is not being torn up, but it will not take effect for the foreseeable future. AMD recently notified IBM, which purchases a number of K6 processors for its own PCs, said the AMD spokesman.
The reversal apparently results from AMD's reevaluation of its manufacturing capabilities for its K6 processor. "We just don't need the capacity," said the spokesman.
IBM runs a premier chip fabrication facility, but it is expensive, according to semiconductor analysts. AMD thus stood to make less profit off of processors manufactured by IBM than those made in its own factories.
Rapidly changing market conditions is another possible reason. Although it has been gaining market share and big customers, especially in the sub-$1,000 PC arena, AMD has seen prices for microprocessors and other products decline due to PC price wars, excess inventory, and stepped-up competition from Intel.
In a conference call with financial analysts last week, AMD CEO Jerry Sanders indicated that manufacturing had improved at the company but profitability sank because of substantial setbacks in the company's non-microprocessor divisions. Chances for a profitable third quarter will be dependent on increased processor sales and better average selling prices for processors, he said.
AMD endured a series of manufacturing mishaps with the K6 last year. This quarter the company has been able to stay on track. AMD shipped roughly 2.7 million microprocessors this past quarter, compared to 1.6 million the quarter before. But in the end, despite the market share gains of the K6 and the newer K6-2 chip, the company lost $64.6 million.