AMD Cozies up to Contract Chip Maker TSMC

— -- Advanced Micro Devices Inc. (AMD) has tapped TSMC to manufacture its latest graphics processors using microscopic 65-nanometer technology, increasing its ties to the contract chip giant.

On the surface, the deal is simply an extension of what Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) has been doing for years, producing graphics chips designed by ATi Technologies Inc. AMD bought ATi last year. But the announcement follows another substantial manufacturing agreement between TSMC and AMD affiliate Spansion Inc., and comes amid speculation that AMD might seek a partner for a joint venture chip plant to cut costs.

AMD's US$611 million loss in the first quarter raised alarms about its cash management, especially since it's up against Intel Corp. The companies have been locked in a price war over the past year, and it's a battle Intel can afford and AMD cannot. Intel's revenue last year was $35.38 billion, more than six times AMD's $5.65 billion, and Intel turned a net profit of $5.04 billion, compared to a loss of $166 million for AMD.

Continued losses for AMD in the first quarter caused some industry analysts to question how it would be able to afford new production lines when it's burning through cash and reducing microprocessor prices to keep customers from buying fresh new products from Intel. Talk turned to a possible joint venture facility, where costs were shared by AMD and a contract manufacturer.

Any such deal would be a boon to users because it would prolong the current microprocessor price war. Microprocessors are the most expensive part inside a PC.

Such a joint venture isn't far-fetched. In 2002, AMD announced a plan to build a joint factory with contract chip maker United Microelectronics Corp. (UMC), dubbed AU Pte Ltd. At the time, AMD called the idea its plan to become a "virtual gorilla" in its battle against Intel, saying it could work with partners instead of trying to take on Intel by itself. But the deal with UMC was scuttled after AMD joined a technology alliance led by IBM Corp.

Taiwan's contract chip makers have also recently talked about the possibility of gaining new microprocessor orders. At its first quarter investors conference early this month, the head of UMC said his company expects major chip makers, including microprocessor makers, to continue to outsource production to reduce their spending on new factories. TSMC also said it saw opportunities to take on more microprocessor work.

"We're going to work our butts off to go into that market," said Rick Tsai, president of TSMC, at the company's first quarter investors' conference in late April.

Both UMC and TSMC have been basking in praise by multinational chip companies recently. Texas Instruments Inc. has said that the strong research and development work done by Taiwanese contract chip makers has given it enough confidence to stop some chip manufacturing-related R&D altogether and rely on their technology. NXP Semiconductors, formerly the chip division under Koninklijke Philips Electronics NV, has said it will drop out of a major European chip production research alliance and work exclusively with TSMC in the future.

To be sure, AMD has kept its options open. The company last month announced a plan to raise up to $2.2 billion through the sale of convertible notes, which will shore up its near-term cash position.

The company also currently farms out some microprocessor orders to IBM and Singapore's Chartered Semiconductor Manufacturing Ltd., in addition to producing chips at its own factories.

But it has also said it is realigning its business to ensure long-term profitability, and that could mean some major changes in its operations and partnerships.

Last week, AMD spinoff Spansion Inc. signed an agreement with TSMC to jointly develop its MirrorBit flash memory chips at 40-nanometers and below. The nanometer term describes the size of the smallest feature that can be manufactured on a single chip. There are about three to six atoms in a nanometer, depending on the type of atom, and there are a billion nanometers in a meter. Reducing the size of the features on a chip enables companies to create smaller, more energy efficient, and more powerful chips.

AMD's cash position dropped by around $400 million in the first quarter. "Given the massive hemorrhaging, it is a relief to us that AMD announced that it is adjusting its business model, capital spending and cost structure to return to profitability," wrote Michael Masdea, chip analyst at Credit Suisse Securities (USA) LLC, in a recent report.

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