For AMD, more money means more problems

Demand for its current chips has AMD scrambling to get capacity online just as Intel gets ready to win the race to four cores.

Success has its pitfalls, especially when you've awoken a sleeping giant.

For the past two years Advanced Micro Devices has made Intel, one of the world's most prominent companies, look bad. Better products and better timing have brought AMD significant market share and prominent new customers like Dell. But Intel is on the comeback with new processor designs better suited for the power-efficient multicore era, and it will beat AMD to the quad-core punch by using a design strategy that makes purists scoff but accountants happy.

The next six months will be tricky for AMD CEO Hector Ruiz. For starters, his company is taking a hit in the stock market after disclosing that its gross margin fell five points from the second quarter to the third, which ended last week. Part of that was due to the price war in the PC processor market, but AMD also is facing a challenge of overall demand rising before new manufacturing technologies are completely ready.

"It's a good problem to have," said Dean McCarron, an analyst with Mercury Research, since it means people want your products. "But AMD needs more factories." The company's design strategy for the quad-core era requires that it successfully navigate the transition to building smaller transistors at the same time it gets a new factory up and running.

AMD's current pickle is the result of its success, which makes it a little easier to swallow for company executives. Demand is high, but the company's dual-core processors still use its 90-nanometer manufacturing technology. Intel's chips, on the other hand, are built using the smaller transistors provided by its 65-nanometer manufacturing technology. Not only is AMD using larger transistors, but its dual-core Opteron and Athlon 64 processors contain two processing cores integrated onto a single piece of silicon, or a die. This design has given AMD great performance during the past few years, but resulted in processors that were almost twice the size of its single-core chips.

Individual chips are cut from round silicon wafers. Manufacturers obsess over reducing the number of defects on those wafers, but there's always going to be some number of chips on a wafer that simply don't work. The problem is that when each individual chip is relatively large, there's an increased risk that a portion of that chip might contain a defect. Since it costs the same to make a wafer whether a chipmaker gets six chips or 60 chips from that batch, maximizing yields--or the number of good die per wafer--is essential to this business.

AMD's 90-nanometer dual-core Opteron and Athlon 64 processors have a die size of 199 square millimeters. By chip design standards, that's considered a little large, McCarron said. When AMD starts making dual-core Opterons on its 65-nanometer manufacturing technology, that die size is expected to go down to something a little more comfortable that will allow AMD to produce more chips per wafer. An AMD representative declined to comment on the die size for its first 65-nanometer products.

On a conference call following AMD's earnings results last week, Chief Financial Officer Bob Rivet noted that the company would see a cost benefit from its move to 65-nanometer processors in the fourth quarter, since the cost of building the wafer can be spread over more chips. He also pointed out that AMD still hasn't made the full transition to 300-millimeter-wide wafers from 200-millimeter wafers. Obviously, the larger the wafer, the more chips that can be cut from that wafer, and--not counting the one-time expense of purchasing 300-millimeter equipment--the extra costs of the larger wafer are negligible.

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