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AMD's problems stem from factory

Lack of production capacity is hurting the chipmaker, which will take a financial loss for the first quarter and lay off about 300.

Real estate is at the heart of AMD's problems.

Analysts say Advanced Micro Devices--which announced yesterday that it would report a "significant" financial loss for the first quarter and lay off about 300 workers in the first half--is essentially facing problems because it does not have enough fabrication facilities, or fabs, to consistently compete with archival Intel.

The "fab" question goes to the heart of the pricing and volume dynamics of the microprocessor industry. In short, AMD has one microprocessor fab, while Intel has 13 and is building more. When Intel wants to boost the speed on a chip, it tries out the new design in one fab and, when the kinks are worked out, it rolls the manufacturing technique out to the rest of the factories in a process called "Copy Exact."

AMD doesn't have that luxury, so when the inevitable kink comes up, a shortage occurs. Intel then attacks on price.

In other words, it's not as if there are major design problems with AMD's chips. They just can't produce enough of them fast enough to turn a profit.

"It's not like AMD is a total screw-up," said A. A. LaFountain, semiconductor analyst at Needham & Company. "AMD picks up some market share, which leads Intel to become more aggressive on pricing. The only response on AMD's part is to accelerate the product development cycle...AMD is fighting a two-front war on technology and volume."

The consequences, however, are severe. AMD disappointed investors in the fourth quarter after it could not produce enough 350-MHz K6-2 processors. Yesterday, AMD's COO Atiq Raza said that the losses and layoffs this quarter came because the company could not produce enough 350-MHz and 400-MHz K6-2s.

The news of the shortfall has sent AMD's stock tumbling today and caused analysts to recast their earnings and revenue estimates for the company. Instead of a profit of 66 cents a share for 1999, AMD will likely report a loss of 14 cents a share, according to LaFountain. Others downgraded the stock as well.

The K7, which comes out in June at 500 MHz and higher, will give AMD some insulation against pricing pressures. The company will open another facility toward the end of the year in Dresden, Germany.

The question that remains is whether this will be enough. Will they be able to produce enough K7 processors? How efficient will Dresden be? What will Intel do in the price war?

"When they get things right, everything runs great," said Dean McCarron, principal at Mercury Research. Unfortunately for AMD, "Intel can copy exactly. AMD doesn't have a bunch of fabs to do that in."

Like LaFountain, McCarron believes that the upcoming K7 can help break the cycle, but only if AMD can actually pull of the manufacturing feat.

"If they can deliver what they are promising, it will make an interesting value proposition," he said.