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IBM deal no panacea for AMD

The chip alliance may not expand the K6 market, though it should boost AMD's manufacturing technology.

While a new manufacturing alliance with IBM will certainly help Advanced Micro Devices (AMD) meet demand for its K6 processors, a number of hurdles remain in the path to greater acceptance.

Chief among these is the question of whether more major computer vendors can and will expand the market for AMD technology. AMD already has deals with Compaq and IBM to supply chips to their respective low-end consumer models, but although these relationships could expand, neither company has committed to using the K6 in the lucrative business PC segment.

Other major manufacturers appear unwilling to adopt the chip. Moreover, Digital, one of AMD's larger vendors, will likely dissolve its computer division when that company gets merged into Compaq.

The deal will most probably serve as a way for AMD to gain valuable manufacturing technology, which will see the light of day in 1999.

"Hewlett-Packard is definitely not going to be rushing toward it. Dell? Never. Gateway? Doubtful," said Ashok Kumar, semiconductor analyst with Piper Jaffray.

Executives at HP and Dell have previously echoed such sentiments.

Further, the IBM-produced K6 chips won't be geared for profit. The K6 costs about $40 for AMD to produce, but the same chip will cost around $50 at the IBM factory and will have to sell for around $75, said Kumar. The processors will be hitting the market at about the same time arch-rival Intel releases a high-performance, low-cost Pentium II chip, code-named Mendocino, which will sell for around $110.

K6 processors are on par with high-end Pentium and mid-range Pentium II processors in performance.

The deal seems likely to give AMD's manufacturing technology a strategic boost. This quarter, AMD shifted more of its manufacturing to the 0.25-micron process, an additional hurdle that even AMD has said will not be easy to master. While AMD's success or failure with mass manufacturing chips on the 0.25-micron process won't be known for a few weeks, IBM has resources that will help the company improve these transitions, said Kumar.

Manufacturing processes that yield smaller circuits allow AMD to produce faster chips. Smaller processes, however, are difficult to achieve. AMD will eventually move its 0.25 process to a smaller 0.18 process. The Sunnyvale, California-based chipmaker will be shifting to the 0.18-micron technology for its next-generation K6 "3D +", due in mid-1999.

AMD has failed over the past few quarters to manufacture Intel-compatible K6 processors in the quantities that PC vendors demand. The problems have centered around the company's inability to produce sufficient number of high-performance chips, which are in higher demand than the low-performance chips that are in greater supply.

This in turn has prevented the company from taking market share away from Intel. Intel is an investor in CNET: The Computer Network.

A shift to IBM could not only boost production of the chip but, maybe more important, improve manufacturing efficiencies, referred to as chip "yields," also a thorn in AMD's side.

"They are a reasonably large [chip] supplier and have a propensity to manufacture for others," said Mark Edelstone semiconductor analyst for Morgan Stanley.

"It will have limited impact in 1998," he said prior to the announcement. More of the impact would occur in 1999.

The agreement with IBM spans two years. According to AMD, IBM is expected to begin making the chips starting in the third quarter.

Interestingly, IBM has a history with the K6 although it only started inserting the chip in its own computers late last year. IBM served as the chip foundry for NextGen, which AMD acquired in early 1996; NextGen's processor became the basis of the first K6 chips. IBM has also been making the packaging, the plastic shell that surrounds the microprocessor core and is synonymous with the look and feel of the chip, for the K6.