July 12, 2006 9:00 PM PDT

AMD starts getting chips out of Chartered

Singapore's Chartered Semiconductor has started to produce and ship microprocessors made on behalf of Advanced Micro Devices, a key element in AMD's strategy to take market share away from Intel.

The foundry has begun to ship chips based on the 90-nanometer process, which is the same process AMD uses to crank out chips in its own factories in Dresden, Germany.

In the fourth quarter, AMD will start to ship chips based on the more advanced 65-nanometer process from its own factories, said Thomas Sonderman, director of Automated Precision Manufacturing (APM) Technology at AMD. Chartered will follow by putting out 65-nanometer Athlon family chips in mid-2007.

Chartered will not be confined to producing low-end chips. The foundry is capable of making the full range of AMD processors.

"They could be doing Opteron to Turion (AMD's notebook chip) and everything in between," Sonderman said. The contract between the two companies comes with a minimum production figure as well as a maximum ceiling.

The Chartered deal, along with AMD's own capital expansion program, will give the company the manufacturing footprint to produce enough chips to command 30 percent of the market by 2008, according to AMD executives. The company now controls about 21 percent.

PC microprocessor makers have tried, and failed, in the past to get third-party foundries to produce chips for them. Often, the foundries charge too much. IBM agreed to produce microprocessors on behalf of Cyrix, but kept 50 percent of the output as its fee. AMD signed an option to produce chips at IBM back in the 1990s but never exercised it.

Complexity is another problem: A deal between AMD and Taiwanese foundry UMC flopped because of this.

To conquer these problems, AMD licensed its manufacturing technology to Chartered, said Sonderman. In this arrangement, Chartered gets a technology injection that allows it to take on complex projects, while AMD gets a break on pricing. Sonderman did not go into details of the transaction, but said that when it comes to intellectual property, "nothing is free."

Chartered can use the manufacturing know-how it culled from AMD to make other types of chips for other customers. The main restriction is that Chartered can't make chips based on the x86 architecture--the underlying architecture for AMD and Intel processors--for other companies.

"After the UMC deal, we realized that if you are going to get a foundry to make microprocessors, you are going to have to license some of your technology," Sonderman said. "There is always a (price) premium with a foundry but it (the AMD-Chartered deal) is economically viable."

Once known for production mishaps, AMD has been recognized as one of the most efficient chipmakers in the business by several analysts over the past few years. The APM methodology has allowed the company to fix defects in early production runs more rapidly and increase the number of wafers that come out of its factory every month. Manufacturing efficiencies increased operating profit by $48 million from the second quarter of 2005 to the first quarter of 2006. Inventory dropped by 35 percent for the same period, he added.

The manufacturing techniques, along with chip design changes, also allow AMD to delay the kind of chips a given wafer will yield until toward the end of the production process. By postponing the decision, the company can put out chips to meet new or sudden changes in demand.

"You can change the pedigree of the chip in midmanufacturing stream," Sonderman said.

AMD's manufacturing, though, isn't flawless. Intel started coming out with 65-nanometer chips, which are faster and smaller than their 90-nanometer counterparts, in late 2005. Thus, AMD trails Intel in this by about a year. Still, Sonderman said that the conversion to 65-nanometer processing will happen relatively quickly and the company will try to close the time gap when it comes to delivering 45-nanometer chips. Intel will come out with 45-nanometer chips in late 2007. AMD says it will follow in mid-2008.

AMD will also adopt immersion lithography, which involves outlining circuits by immersing the silicon wafer in purified water, with 45-nanometer manufacturing. Intel won't adopt immersion until later, according to Intel.

The efficiencies in a lot of ways were born out of the bad old days of the mid- to late-1990s. AMD realized it would have the funds to own only a single factory. Intel has several factories.

"We didn't have the luxury to be fat, dumb and happy," he said.

AMD largely lived on one fab until April, when it started a second microprocessor facility next door to its current one in Dresden. The company also has an option to build a fab in New York state. To qualify for financial incentives from the state, AMD has to start construction between mid-2007 and mid-2009.

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