Fabless future: Struggling AMD spins off factories

SAN FRANCISCO -- For years, Advanced Micro Devices' scrappy image was best summed up by an insult that founder Jerry Sanders lobbed against rivals: "Real men have fabs."

Sanders meant that while many chip companies design semiconductors and outsource the manufacturing, AMD enjoyed the relatively rare advantage of owning its factories, known as fabrication plants, or fabs.

Times have changed, though, and now so has AMD's commitment to hanging onto those facilities, which have become a cash drain on a struggling company. The world's No. 2 maker of microprocessors said Tuesday it is spinning off its manufacturing operations in a deal with an investment arm of the Persian Gulf state of Abu Dhabi.

Advanced Technology Investment, AMD's partner in the joint venture, has promised to contribute up to $8.1 billion over the next five years to upgrade AMD's factories in Germany and help build another one in New York. Those factories will be absorbed into the new company, called Foundry.

The unusual deal, which will likely face U.S. government scrutiny since semiconductors are considered sensitive technologies, allows AMD to unload $1.2 billion of its $5.3 billion in debt onto the new company and focus on chip design. Foundry Co. will produce chips for AMD and other customers.

The move should help shore up AMD's finances, but it also highlights the company's recognition that it can't compete dollar-for-dollar on manufacturing against Silicon Valley rival Intel, the world's biggest semiconductor company.

Building ever-more sophisticated computer chips requires billions of dollars in factory upgrades every few years. With a market value more than 30 times that of AMD, Intel has vastly more resources to pour into developing new manufacturing technologies.

That dynamic pushed AMD in 2002 into a partnership with IBM to jointly develop new chip-making technologies, a relationship that will continue under AMD's new structure.

"This isn't sleight of hand — this is a very hefty investment that helps clean up AMD's balance sheet," said JoAnne Feeney, senior research analyst with FTN Midwest Securities. "This is the beginning of turning AMD around."