AMD's Asset Lite is the path to AMD 5.0 – defined by a “MAD” investment

In its current configuration, AMD needs about $2.0 billion in revenue per quarter to turn a profit, and the company right now cannot deliver more than $1.5-1.7 billion. With the reduction in workforce, the company will save $40-$60 million per quarter, which should help the final bill. In a best case scenario, at least one quarter per year should turn in a profit, if sales and margins stay the same. Your guess is as good as ours, as to whether AMD in fact can deliver its promise to become profitable again in H2 2008.

But there is a more dramatic change in the works at AMD: Asset Light. Before to get to that, let’s look at the history of AMD.

AMD 1.0: 1960's, 1970's. A memory semiconductor company, reverse engineering of Intel's 8080 processor, the bit-sliced microprocessors Am29K series, experiments with graphics and EPROM memory. Sex, drugs and rock'n'roll are all parts of an industry legend how company founder Jerry Sanders signed some of his first customers.

AMD 2.0:  1980's to mid-1990s. A lot of AMD employees like to skip the first part, given the wild-60's and 70's nature of the business, so they like to say that AMD actually started with a so-called age of “second-source”: IBM wanted a second source for x86 CPUs, and Intel had no choice but to give an x86 license to an … unnamed company, in a way to be able reverse engineer the CPU: The first semi-serious challenge to Intel was the AMD 386DX/40, a 386 CPU with an integrated FPU, working at 40 MHz (Intel's 386 peaked out at 33 MHz). Truth to be told, 386DX/40 appeared when the i486 was gaining ground. However, the finances were questionable and the company struggled to survive.

AMD 3.0: mid-1990s to 2006. AMD made its first serious acquisition when the company was bleeding badly - with 5x86-PR1xx and K5 processors suffering from dismal performance in floating-point operations. They acquired NexGen, brought Atiq Raza on-board and started the creation of the first truly competitive architectures: K7 and later K8. This era resulted with the success of the Opteron and other signs that company had grown up enough to start working on mission-critical infrastructures.

AMD 4.0: 2006-2008. The acquisition of ATI came at the very end of a time when AMD was sitting on its laurels, enjoying the utmost success of the K8 architecture, challenging Intel on all fronts: desktop, mobile, server and workstation. However, after the acquisition, the company slowed down to a crawl, while the competition stepped up the game and left AMD/ATI offerings behind.

AMD 5.0: Asset Lite era, 2008-2012. During and after cutting 10% of its, AMD’s business units are migrating into more flexible divisions. By Q1 2009, AMD announces an additional Mubadala Abu Dhabi investment for its business, which we rename from “RealMenHaveFabs^TM” to “OnlyArabsHaveFabs^TM”. AMD is set to adopt a semi-fabless model. The biggest challenges remain: Corporate culture and market conditions.

Mubadala Abu Dhabi is an investment fund owned by Abu Dhabi Government and serves as a direct investment company for United Arab Emirates. Mubadala invests in the aeronautics & automotive industry, electricity and real estate. Technology-wise, MAD owns two telecommunication companies: YahSat (100%, satellite phone) and du (20%, fixed line provider).

What is Asset Lite?

There have been various conclusions and thoughts about what AMD's Asset Lite is: In short, we are talking about the creation of an influential giant that links USA, Canada, Germany, Russia, Emirates, Singapore, China and Korea into one melting pot. It is important to understand the fact that AMD’s vision for the future is not delivering chips, but rather complete platforms. My ex-colleague Charlie Demerjian delivered a spot-on analysis a while back, but what he omitted is just how "AMD Foundry" would operate.

AMD is splitting into two entities: Daamit Inc. ("original" AMD+ATI), AMD East Fishkill, AMD Saxony, facilities in Malaysia, Singapore, China and upcoming AMD New York will going to form into "AMD MAD LLC". By some odd chance, the short name for Mubadala Abu Dhabi would be MAD. So, we have a MAD AMD in the making.

This is the very same model as FASL LLC (Fujitsu-AMD), a joint venture that was renamed into Spansion. FASL LLC started its life as Fab 25 in Austin (TX), which was converted from CPU to flash manufacturing; it took capital from Fujitsu and ended up being spun off. This reduced the headcount by 8400 employees and you can expect that AMD MAD could do the same.

MAD AMD LLC is an interesting combination: A split ownership between AMD and the Mubadala Abu Dhabi investment fund. We're talking about a more than $5 billion investment for a minority stake in this joint venture, or a golden ace from Hector's sleeve. Ironically, according to our sources, this new company will be “worth” almost twice as much as AMD's current market cap.

Just like in a case of Ferrari S.p.A, Mubadala Abu Dhabi is apparently happy with a minority stake, while AMD has to control the company: The x86 license terms between Intel and AMD state that the percentage of non-AMD manufactured wafers cannot exceed more than 20% of x86 market share. MAD AMD LLC will be owned by AMD, case closed.

According to numbers that found their way to us, AMD Saxony LLC (Fab36+38) has to undergo a $2.5 billion investment for a complete conversion to a 45 nm 300 mm wafer plant and the ability to produce 50,000 wafer starts per month (resulting in a manufacturing capability of more than 100 million CPUs).

At the same time, the New York Fab was supposed to cost $3.2 billion. However, due to the continuous devaluation of the US Dollar and the rising cost of oil, the New York Fab is now expected to cost around $3.6-4.2 billion, plus an additional $1.1 billion from NY State (originally, it was $900 million). Thus, MAD will have to invest between $4.5 and $6 billion. Our bet is on $5.5 billion as the original sum, but we are very deep into speculative territory here.

The headcount for AMD Inc. will decrease by 4000 (Saxony) and 3000 (Malaysia, Singapore, China). With the completion of the New York Fab, MAD AMD LLC will employ around 10,000 people across the globe, according to industry insiders.

Daamit Inc. is nothing else but the current company without the manufacturing headaches. This will tremendously help to reduce Capex and enable AMD to turn in revenue with much better margins. In numbers, AMD’s staff count will first decrease from a current 16,800 to around 15,000 (10% cut) and an additional 7000 - 8000 will be spun off into MAD. With approximately 7000 - 8000 employees, AMD should be much more flexible in terms of designing new products. However, the inherited danger of The Sludge will remain.


Timeline

According to our sources AMD has started to migrate from version 4.0 to 5.0. This will happen in following stages:
1. Workforce reduction: 10%
2. Reorganize regions in order to cover the market better. We've seen EMEA becoming EMEAI (Europe, Middle East, Africa, India), and the trend is set to continue.
3. Asset Lite announcement: changing the business model into AMD Inc. and MAD AMD LLC. Manufacturing will receive a cash injection high enough to build the New York Fab and pay for tooling machines for Fab 38 and Fab 36.

Of course, each of these moves can result in a positive, but also in a negative way. The inherited traps are:
1. Keeping the obedient, pink slips for creative individuals. During the first wave of firings at AMD/ATI, we heard that people who kept their head down stayed on the job, while people that were trying to change the status quo and threatened the sludge were given good-bye letters. If AMD loses its creative soul, the company is destined to remain on the outskirts of competitiveness.
2. Expanding the regions by too much will result in poor coverage due to lack of understanding for specific markets (we heard numerous complaints about how all three major players mistreat Africa, middle-East and India/Singapore).
3. AMD siding with middle-Eastern companies is guaranteed to cause a lot of turbulences, especially in the case of the Luther Forest Technological Park. Arabs owning the largest allowed number of shares for a factory close to The Big Apple is a tough one to crack.

Conclusion

AMD is not going down any time soon and even after the AMD + ATI vs. MAD AMD LLC split, the cooperation with IBM, TSMC, Chartered, ANGSTREM will still be in place. In fact, it may expand into another alliance. The current corporate climate has to change, otherwise AMD will continue to be just an occasional challenger to industry heavy-weights such as Intel and Nvidia. This is, according to our information sources, one of primary reasons why the deal with Mubadala Abu Dhabi fund has not been announced yet.

One thing is certain: Doomsayers claiming that AMD is dead forgot to check the facts. Just like they forgot to check actual facts of Ferrari in 1993, Apple in 1997, Airbus SAS in 2006, Nvidia in 2002, and Microsoft in 2007. This is big business, and big changes do not happen overnight. And success or failure of one product cannot change the destiny of a company.

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