Analysis - Will AMD separate manufacturing and design?

Questions regarding AMD's "asset-smart" strategy are once again being asked, as rumours concerning the possible spin off of AMD's manufacturing entities into a separate company reemerged after an Austin, Texas-based newspaper in mid-July wrongly reported that the company's newly appointed CEO Dirk Meyer had confirmed fabless plans.
"He was misquoted," Drew Prairie, an AMD representative, told our sister site Electronic News earlier this week, confirming that the company hasn't communicated any plans. "We've weighed out a high-level overview of what we are trying to do and that it is going to involve a mix of internal and external manufacturing capabilities, but we haven't gone into any details about how that might look specifically.
"I'm not putting a value statement on will we or won't we do that. It's just that we haven't gotten that far in saying what we are going to do and it falls under speculation," Prairie continued.
AMD for several quarters now has said it plans to share information on its "asset-smart" manufacturing strategy soon.
Most recently, Hector Ruiz, the company's former CEO, who yielded the position to Dirk Meyer on July 17 as AMD reported a $1.2 billion charge in its Q2 financials, said he would be the "most disappointed man on Earth" if AMD did not share its manufacturing plans by the end of the year.
At that time, Ruiz transitioned to the position of executive chairman of AMD's board. Meanwhile, Meyer's appointment as CEO left few industry watchers surprised:
Not only did Q2 mark AMD's seventh consecutive quarter of loss under Ruiz, but Meyer was groomed for the position, being appointed president and COO in 2006 and elected to AMD's board last year.
"Part of the reason we did this CEO transition when we did at the earnings time was because we can see the end [of this non-communication] in sight and it requires 100% of Hector's time and focus to see it through. No specific timing, but we see the end coming. We see being able to communicate and driving the strategy to conclusion hopefully by the end of the year," Prairie said.
What that communication will give way to, however, is unclear. Industry speculation as to whether AMD will spin off its fabs to form a separate company is as visible as speculation that AMD will split itself into two company divisions that will work in partnership under one corporate umbrella.
"AMD has had an excellent, excellent manufacturing approach to their shop-floor administration and all that, which has been a strength," said Len Jelinek, iSuppli's director and principal analyst, semiconductor manufacturing.
"Splitting this into an R&D company and a manufacturing entity would clearly help them with respect to their P&L [profit and loss]. When you add focus and clarity, you really execute much better."
Mentioning AMD's two key manufacturing partnerships-its ATI partnership with Taiwan Semiconductor Manufacturing Co. and its partnership with foundry Chartered-Jelinek said that if the company was to create an entity that strictly focuses on manufacturing, "it will make management of both their internal and external manufacturing facilities much cleaner, much more crisp. Similarly when you look at the design, that also allows them to coordinate better between the free entities as to how they want to approach their next generations."
However, at this time, the analyst does not believe AMD will split into two separate companies. "It will just be easier to keep more control on generations and coordination of the whole process by keeping it under one CEO," he said.
"But if you are saying a CEO and two divisions, that's a good structure because it pushes clarity out there. To have just strictly a design company would present a series of challenges that might not be in the best interest of getting product to market."
Such a spin-off would create a cash infusion for AMD as it would sell its fabs, but Jelinek (pictured, left) cautioned that despite the immediate advantage of doing, the move would not bode well for AMD's long-term survival.
"If you spin the fabs out and get a cash infusion, you now have a company that is saddled with some degree of debt and they have to sustain themselves by improving technology, as well as filling their factories," he said. "You would kind of have a captive foundry there that would be competing with other companies in the long run," he said, pointing to the Common Platform Alliance, as well as TSMC.
"That would be a challenge three to five years down the road, and that is a burden," he continued. "If you look at some of the recent spin-offs that have done something like that-Magnachip, ON Semiconductor-it took them a couple of years to recover P&L-wise from that position. They've all done a good job at it, it's just that in the short term that company if it were to spin off picks up some other challenges, financially."
The iSuppli analyst did not dispute Ruiz's statements concerning sharing information on AMD's manufacturing plans by end of year.
"Let's give the new CEO 100 days," Jelinek said, estimating an announcement at the end of Q3 or the beginning of Q4.
"AMD is a good company. They have these challenges of execution in front of them. Once they get that execution worked out, I think they'll come back with a good challenge to their competitor," Jelinek concluded.