The founder of AMD used to say that "real men have fabs", referring dismissively to those microchip design firms which outsourced, rather than owned, their fabrication plants. The plants he was talking about - spotless space-age factories where PhD-qualified floor workers in astronaut suits engrave billions of atomic-size transistors onto silicon wafers - perfectly symbolise the semiconductor industry.
But "fabs" are apparently no longer central to the self-image of AMD, where management has now coined the phrase "asset smart" for its new strategy to exit the costly physical side of the business and focus on design and marketing. And after an announcement last Tuesday, AMD's founder may well say that real men come from Abu Dhabi. A new government-owned business, Advanced Technology Investment Company (Atic), snapped up AMD's manufacturing arm and will invest up to US$6 billion (Dh22bn) expanding its capacity in the next few years.
Analysts say Atic faces several challenges to succeed where AMD failed, especially since it has no track record of making a profit from large-scale technology manufacturing and will face an early test, as business is expected to weaken with the global economic downturn. Craig Barrett, the chairman of the world's largest chip maker, Intel, has called modern microprocessors "the most complicated things human beings have ever built".
Building a new fabrication plant can run upwards of $3bn (Dh11bn); keeping it running can go into the hundreds of millions of dollars each year. Atic is an affiliate of the Mubadala Development Company, run by Waleed al Mokarrab, Mubadala's chief operating officer. It believes that spinning off AMD's chipmaking assets into an independent company is a long-term investment that will help further diversify Abu Dhabi's economy.
The new business, known tentatively as The Foundry Company, will offer its services to anyone looking to buy custom made microchips, competing with specialised fabrication business like China's Semiconductor Manufacturing International Corporation and Taiwan's Chartered Semiconductor. These battle-hardened Asian businesses will form stiff competition for a new company owned by investors with sharp business acumen, but no experience in the complex, cyclical semiconductor industry.
Heidi Susanto, an analyst at Gabelli & Company, thinks the new business will have its hands full trying to become a profitable standalone entity. "First, the Foundry Company will have to start with only AMD on its customer list," she said in a research note released after the announcement. "Second, competition with other large-scale established foundries will be challenging. Third, the Foundry Company's cost competitiveness remains a large question. Fourth, general semiconductor outlook is weaker than seasonal given the current weakness in [the] global economy."
"Moving to an 'asset-lite' model is definitely not 'asset smart'," opined the website AMD Investor. "For one, in doing so, it's giving up the 'fundamental technology' race with Intel." While part of the search for better microchips is determined by better design, much is also determined by new technologies, the site said. "That's why AMD can't give up either race." Intel's biggest recent technical achievement is a good example of the need for such research. As the transistors that form the building blocks of a microchip get smaller and smaller, with billions now crammed on a single chip, the problem of "leaking" power increases.
These power leaks make the chips run hotter and deplete batteries faster, two big problems in the era of laptop computing. Intel's solution is to insulate the transistors with hafnium, an element used in nuclear reactors and space rockets. Years of research identified hafnium as an ideal insulator on the atomic scale, and by integrating the element into its chips, Intel will make processors that are up to 20 per cent more energy efficient, while running faster and cooler than anything made before.
The founder of Intel Gordon Moore calls the new technology "the biggest change in transistor technology in 40 years". It will put Intel a full generation ahead of the competition, giving the company a two-year buffer between its best offerings and those of AMD, some analysts say. Whether the "asset-lite" AMD or the newly created Foundry Company will be capable of the advanced theoretical research that leads to such developments, or whether they will consider such research economically feasible, remains to be seen.
Some believe that Atic's strategy will be to instigate a price war, a battle in which its deep, government-backed pockets will defeat those of its rivals. In a research report released following the deal, the investment bank Morgan Stanley said the new competitive might of The Foundry Company will "likely be long-term negative to the foundry industry". Stock in Semiconductor Manufacturing International fell to its lowest price ever following the Atic announcement; Macquarie Securities cut its price target for Standard Semiconductor by 35 per cent and its stock also fell to an all-time low.
tgara@thenational.ae
