AMD: Limited Options

AMD trailed Intel's 65nm process by ten months in 2006 but the recent speed of conversion at FAB 36 has been impressive. Likewise, the announcement of only 2.0Ghz for Barcelona's release this quarter was disappointing. However, Fuad's article shows normal improvement for Barcelona with each stepping. This is good news because moving forward is really AMD's only option.

The microprocessor volume shares from the last seven years are interesting:

2000 - AMD 16.5%, Intel 83.5%
2001 - AMD 20.7%, Intel 79.3%
2002 - AMD 16.4%, Intel 83.6%
2003 - AMD 17.0%, Intel 83.0%
2004 - AMD 16.1%, Intel 83.9%
2005 - AMD 18.5%, Intel 81.5%
2006 - AMD 23.4%, Intel 76.6%
2007 - AMD 21.0%, Intel 79.0%

We can see that up to 2004, AMD averaged about 16.5% to Intel's 83.5%. AMD had a slight bump in 2001 during K7's competitive period against PIII and Williamette P4 but then dropped back down again in 2002 against Northwood P4. Some people mistakenly think that AMD's fortunes improved right after it released K8 in 2003. This was clearly not the case since AMD's volume share was lower in 2004 than it was in 2003. In 2004 Intel was on its 90nm process and gaining volume from 300mm FABs like FAB 11X and FAB 24 plus D1C which had been freed up for production by the new development FAB, D1D. AMD, in contrast, was expanding FAB 30 as fast as it could in the new clean room space and trying not to lose volume with a K8 die that was twice the size of the K7 die. This did not really come together for AMD until 2005 when the late 2004 move to AMD's own 90nm process allowed a much smaller die and the new expansion ultimately allowed a 50% increase in capacity. Ho weer, the 2006 numbers are misleading because the volume fell off from 2005. Without this dropoff, AMD's volume share would have been only around 19-20% since FAB 30 was topped out and the new production from FAB 36 did not arrive until the second half of 2006.

Some will no doubt see the latest numbers as just another bump like 2001. They will most likely assume that AMD will drop back down to its previous volume of 16%. However, that is not possible. There is a scene in the movie Vertical Limit where a woman has to jump from the tiny ledge she is standing on out into empty air and jam the crampon that is attached to her harness in a crack in the cliff face before she falls to her death. This is pretty much what AMD did when it built FAB 36 and purchased ATI. But, AMD had good reason for such a radical move. When AMD first introduced K7 and K8, Intel used its considerable muscle to prevent 3rd party companies from supporting them. Thus, no motherboard makers attended K8's launch and even companies like Acer were told not to attend. In both cases, AMD had to supply its own chipsets to get these platforms off the ground and there were still delays and areas not covered. For example, although AMD's K6 chip was capable of dual socket operation, there was no supporting chipset that allowed it. Likewise, AMD's 760 MP chipset was the only dual socket chipset produced for K7. Considering that K7's were used to build supercomputers, it would be difficult to suggest that the lack of other MP chipsets was due to K7 itself. Essentially, AMD's Dresden Design Center was able to produce a bare minimum chipset support for AMD's processors. However, this has inadequate compared to the much greater support that Intel provided to its processors. AMD only got out of this box by purchasing ATI. That AMD gained a much more robust capability to develop its own supporting infrastructure can be seen with the 690G, RD790, and 780M chipsets. AMD's choice was to either buy ATI and gain competitive support for its processors or die a slow death.

FAB 36 was also not much of a choice. Processor volume grows slowly most years at 3-11%. AMD did a very good job in increasing FAB 30's capacity by 50%. However expansion alone could not erase Intel's 300mm wafer advantage or prevent FAB 30 from eventually topping out. There was no doubt that AMD badly needed 300mm wafer facilities to remain competitive. It is theoretically possible that AMD could have added 300mm tooling to FAB 30 during its expansion in 2003 and 2004 and this would have reduced costs. However, FAB 30 would still have topped out and AMD would again be faced with the prospect of slipping every year in volume share until it became marginalized. For AMD, to not gain the necessary processor support nor to increase capacity meant marginalization and the eventual loss of any capability to compete in front line processors. AMD's ability to fund research and development would have slipped until AMD was like VIA is today or like AMD used to be before K6.

Unfortunately, neither of these could be done in stages or phased in. You can't really build 10% of a FAB nor can you buy 10% of a graphics company. This is why AMD had to take a leap out into empty air and hope it didn't plummet to the rocks below. I've seen some people try to lay the blame for AMD's financial troubles entirely on the ATI purchase. Seemingly, these people do not realize that AMD will spend $1.8 Billion in this year alone for tooling to outfit FAB 36; this is in addition to what it spent in 2006 and will spend in 2007 plus what the FAB itself originally cost. You can reasonably look at the issue either way. AMD could have easily afforded ATI if it hadn't built FAB 36 or AMD could easily have afforded FAB 36 if it hadn't bought ATI. Having to pay for both is what is difficult. I've wondered many times if there was any other option that could have gotten AMD out of the trap it was in. However, delaying the ATI purchase would have meant delayed benefit as well and AMD desperately needs the 780 mobile chipset that will come in 2008. Similarly, Fusion will not pay off until 2009 but, with Intel's moving in the same direction, pushing this back any further would have meant even greater competitive disadvantage to Intel. So, having built FAB 36 and bought ATI, AMD can now no longer survive on 16% of the market. AMD must move forward with at least 25% volume share or else it has no future.

That AMD intends to gain volume share is without question since in spite of the losses in Q4, Q1, and Q2 AMD's production plan is the same as it was in October 2005. AMD still plans to make 100 Million chips in 2008. This is more than double the number of chips that AMD made in 2005. However, the market is not growing that fast. The only way that AMD can sell 100 Million chips in 2008 is if it takes share from Intel. Naturally, Intel would prefer otherwise and will do its best to prevent this from happening. Looking at the volume share, one might easily think that nothing has changed over many years. However, this impression would be wrong. There has indeed been a strong dynamic element to the market even though Intel has garnered an advantage at each step. For example, Intel originally benefited by being ahead in terms of processor performance. This lasted until AMD introduced K6 in 1997. However, by that time Intel was making Pentium Pro and chipsets so it gained income from server and chipset sales that AMD couldn't match. It would be another four years before AMD released Athlon MP in 2001 and had a server processor offering of its own. However, with only a single chipset for support, Athlon MP never gained much marketshare and it would be another three years until AMD actually began taking server share in 2004 with K8.

By 2002 Intel had a steadily increasing advantage from 300mm wafer manufacturing compared to AMD's 200mm facility. AMD is only now benefiting from a majority of 300mm wafers in production. Likewise, it has only recently purchased ATI to gain stronger chipset support. Intel still has some advantages in mobile but these will essentially be gone in 2008 with AMD's new mobile platform. AMD will finally release a small volume of K10 server chips this quarter. In Q4, AMD should have more chipset offerings plus more K10 chips. However, Intel will begin releasing 45nm chips in Q4 and should hold onto the highest clock speed. It gets more interesting in Q1 08 because Intel will have a good volume of 45nm chips by then while AMD should have both faster K10 chips and a reasonable number of desktop K10 chips. On the face of it Intel could lose its speed advantages in Q1 08 but with 45nm ramping it should experience lower costs. AMD is unlikely to match 45nm until Q3 08. Intel's entire strategy seems to be based on lower cost 45nm chips plus low prices to put pressure on AMD. This was certainly effective up to now but may be less so as AMD's chip ratios move more strongly towards 65nm and 300mm wafers. Presumably, Intel swaps its 65nm to 90nm advantage for a 45nm to 65nm advantage. However, Intel does lose the 300mm advantage. This is a gain for AMD but then AMD hasn't made any profit for three quarters. The final factor though is that K10 should have more value versus Penryn than K8 did against Conroe.

With AMD's recent $1.5 Billion losses the notion of any gain for AMD seems counterintuitive. Yet if we list Intel's advantages:

Intel Chipsets – Declining as AMD moves forward with ATI
Intel mobile – Less than before, gone in 2008
300mm wafers – Declining rapidly, gone by 2008
65nm – Currently declining but will begin increasing again with 45nm in Q4
Quad core – Gone this quarter
C2D higher value – Declining once K10 is released, gone by Q2 08

So, except for the 45nm process, Intel is losing most of its advantages. This should make AMD much stronger by the start of 2008. Intel does still have Nehalem which could be a great processor and put Intel back in the lead. However, it looks like AMD may be better prepared this time with Shanghai than it was with K8. On the face of it I can't see any reason why AMD would not be able to gain share. And, since I've already shown that AMD has no middle ground it is a certainty that they will be striving their best to do just that. I think we will also find out conclusively in Q4 whether Intel has truly cut costs and leaned out the company. I think the last thing that Intel wants is to have a bad 4th quarter and they will have to have excellent cost control to maintain a price war with AMD in Q4. If AMD's only options are to gain share or go out of business we also have to look at who would lose if AMD failed. It's pretty obvious that neither IBM, Sun, Cray, HP, Dell, Gateway, nor Apple would be happy with the absence of AMD. Other than Intel, the only companies I can think of that would benefit might be VIA and possibly Silicon Graphics. With that number of companies benefiting from AMD the idea that it would go out of business soon does seem unrealistic.