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AMD to build chip facility in Singapore

The extensive manufacturing agreement with Taiwan's UMC will give the chipmaker more factory heft with less financial risk. But will it be enough to match Intel's chipmaking might?

AMD has entered into an extensive manufacturing agreement with UMC that will give the chipmaker more factory heft with less financial risk.

Under the deal, AMD and Taiwan's UMC, the world's second-largest foundry, will build a fabrication facility for 300-millimeter wafers in Singapore; it will open in mid-2005. In addition, UMC will begin to manufacture PC processors on behalf of AMD in the relatively near future.

When it comes to factory capacity, AMD historically has been at a severe disadvantage to rival Intel. AMD currently operates two "fabs," while Intel has 13 and is building more. The extra manufacturing capacity has allowed Intel to produce larger volumes of chips, cut costs and accelerate development. As AMD Chief Executive Jerry Sanders has said, "Real men have fabs."

Building fabs is risky, however. They cost billions of dollars and years to erect. If the market shifts, companies can be left owning an empty shell.

By linking up with UMC, AMD can dilute the risks. It won't have to put up as much capital and won't have to worry about absorbing all of the volume itself. UMC will control half the output capacity of the factory, though part of the company's output could be used to make chips for AMD.

"In the face of escalating costs, strategic alliances between leading companies is the wave of the future," Sanders said. "We wanted to remove Intel's one remaining advantage, which was volume capacity."

AMD should be able to react more quickly to sudden surges of demand by increasing production. In the fourth quarter, the company sold out of some processors.

The company will be migrating to 300-millimeter manufacturing much later than other competitors, however. Manufacturers can produce roughly twice as many chips from wafers with 300-millimeter diameters than from wafers with 200-millimeter diameters, at relatively little extra cost. Intel plans to open 300-millimeter factories this year. As a result, Intel claims it will begin to enjoy some of the cost benefits of the larger wafers in the near future.

AMD says it has other advantages. The company's processors are smaller than Intel's, so it doesn't need to migrate to 300-millimeter wafers just yet. In addition, Intel has to invest more capital to build these factories.

AMD signaled that it planned to use a foundry at its analysts meeting last November. Although the company declined to name its manufacturing partner, UMC was the lead suspect. The company already makes chipsets for AMD and had been test-manufacturing Athlon processors.

Analysts generally agreed that the deal could benefit AMD. The company "doesn't need to go nuts on building manufacturing facilities, but they do need to get their next facility under way so they can increase their volumes," said Dean McCarron, principal analyst at Mercury Research.