Details of AMD's manufacturing plans around the corner

AMD could finally be getting ready to explain how it intends to build chips in the future, almost a year after dropping hints that it would revamp its manufacturing strategy.

Hans Mosesmann, an analyst with Raymond James, believes AMD is about to reveal a new manufacturing strategy that will attempt to take some of the formidable costs out of making chips. Mosesmann thinks that AMD is considering spinning out its manufacturing operations as part of a joint venture with another company, making greater use of partners such as IBM and Chartered Semiconductor, or some such combination.

An AMD representative declined to comment specifically on any actions it might be considering, but said even though the company has been working on this issue for a year, no decisions have been made.

Company executives have steadily refused to explain what "asset-light" (which soon morphed into "asset-smart") actually means, but have hinted that it involves a rethinking of the way AMD develops chips. The term first surfaced during an earnings conference call in April as Chief Executive Hector Ruiz described vague, tentative plans to reduce costs by thinking of new ways to get chips built and out to customers.

There might not be a more costly undertaking in the modern technology industry than the process of designing and manufacturing high-end PC and server processors. Only six or so companies really do it in high volumes (Intel, AMD, IBM, Sun, Fujitsu, and Via). Modern chip plants cost billions of dollars to construct and maintain, and researching new leading-edge transistor designs is enormously complicated and time-consuming, and therefore expensive.

Even in boom times, AMD's pockets are not nearly as deep as Intel's, yet it has to spend the money to keep up. To date, it has gotten around some of the need for huge outlays by working on advanced research and development in a facility owned by IBM, using third-party chip foundries like Chartered Semiconductor and TSMC, and making the most of what capacity it does have in Dresden, Germany.

But AMD's pockets are even lighter right now. Intel has recovered from its mid-decade swoon and is chugging along without incident, while AMD has watched its fortunes spin completely around in about a year. AMD can't continue to lose money forever, and one way to cut costs is to embrace that tried-and-true 21st century management strategy: outsourcing.

Expect AMD to line up a new partner for manufacturing and/or research, expand its relationship with IBM, or accept another cash infusion from its new investor, Abu Dhabi, Mosesmann said in an interview. "They have to be competitive without having to spend billions each year to keep up with Intel," he said.

Don't expect AMD to get out of the chip manufacturing business entirely. After all, "real men have fabs." All bravado aside, there are plenty of good reasons to keep a great deal of manufacturing in-house, everything from quality control to customer flexibility.

And the thing is, AMD can only go so far. Under the terms of a licensing agreement it signed in the early 1990s (AMD licenses the x86 instruction set from Intel), AMD is prohibited from outsourcing more than 20 percent of its production.

That might not necessarily hold AMD back, Mosesmann said.

"There are some issues that have to be overcome, and AMD might be able to overcome them by saying we don't care," he said. In essence, AMD could dare Intel to sue it for violating the agreement, hoping to work out some sort of settlement further down the line when it's in better economic shape. Their lawyers talk on a regular basis already.

This is a huge, huge year for AMD's current management team. After the debacle that was 2007, Ruiz has pledged to make AMD a profitable company in the second half of 2008.

If the company has trouble making the revenue side of the ledger increase amid tough economic conditions, it's going to have to do something about the cost side, which could involve layoffs, a new manufacturing strategy, or both.