Speculation surrounds AMD’s asset light strategy

MALTA — Advanced Micro Devices is conducting the company’s annual shareholder meeting today, but it’s unknown whether it will discuss any new details about a proposed “asset light” strategy and what that would mean for its planned chip plant in Luther Forest.

Under an asset light strategy, AMD would likely contract out much of its manufacturing to third-party companies.

“For competitive reasons, we can’t really disclose what [asset light] is going to look like until the actual strategy is complete, meaning all of the contracts are in place,” AMD spokesman Travis Bullard said. “What we’re looking to do with Fab 4x in Luther Forest is a piece of this global manufacturing strategy that we’re going to roll out. It is a part of it, but we can’t really get into how it fits into the larger puzzle.”

AMD has until July 2009 to commit to building the plant in Malta or else lose $1.2 billion in Empire State Development grant funding, tax breaks and other incentives promised to the company if it builds the chip plant.

AMD’s stock surged 59 cents Tuesday, its biggest one day gain in almost five years, after the company confirmed that it has filed court documents alleging that Intel Corp. used unfair business practices to stop AMD from winning microprocessor contracts with major computer makers.

American Technology Research analyst Doug Freedman said there could be a sizable cash payment for AMD if Intel agrees to settle the case. He also said Wall Street is anticipating the launch of AMD’s asset light program. It has also been speculated that AMD might possibly separate its existing manufacturing business into a subsidiary of the research and design segment of the company. Morningstar analyst Andy Ng said the “asset light” strategy has been so vaguely defined by AMD that it has led to great speculation among investors.

“AMD CEO Hector Ruiz has been pretty mum about their asset light model. He’s talked about it in very broad terms, but he hasn’t given the details. It’s pretty much all speculation right now,” Ng said. “One of the rumors is [AMD] could split up into the manufacturing and the processor design side. Another rumor is they could just outsource more of their manufacturing.”

Last summer, AMD revealed that it has been exploring contracting with another company to build and operate the Fab 4x microchip plant planned for the Luthor Forest Technology Campus.

The company has been exploring restructuring its manufacturing operations since it purchased ATI Technologies in 2006. ATI only designed microchips and contracted with other companies to build them, while AMD has traditionally done almost all of its own manufacturing.

Bullard said that AMD has begun to look at ATI’s operations as less risky and more flexible. AMD has contracted with manufacturing companies such as Singapore-based Chartered Semiconductor Manufacturing and Taiwan Semiconductor Manufacturing Company to supplement AMD’s microchip production capacity in periods of higher-than-expected demand, Bullard said.

AMD officially filed its first quarter results with the U.S. Securities and Exchange Commission on Wednesday. In the report, AMD officials stated that the company has begun an internal restructuring, the cost of which it expects to be charged against the company in the second quarter.

“However, as of the time of this filing, we are unable in good faith to make a determination of an estimate of the amount or range of amounts of the restructuring charge,” officials wrote.

Ng said outsourcing manufacturing might help reduce AMD’s substantial cash burn, but could hurt the company in the long term.

“The risk for AMD to completely give up control of their manufacturing is that they [won’t] have control over how fast they can drive Moore’s Law,” Ng said.

Moore’s Law was a concept first described by Intel co-founder Gordon Moore. Moore speculated in 1965 that the number of transistors that can be inexpensively placed on an integrated circuit will increase exponentially, doubling approximately every two years.

Companies that fall behind in the race to advance Moore’s Law can end up with out-of-date products.

“One reason Intel has such good microprocessors is because they are pretty much nine months to a year ahead of AMD in technology,” Ng said.

AMD’s stock fell 21 cents Wednesday to close at $6.91.