The timing couldn't have been worse: Less than 24 hours after it confirmed that PC maker Gateway Inc. would no longer use its processors, Advanced Micro Devices Inc. last week announced it will close two factories and lay off 15% of its workforce.
At first blush, it looked as if AMD was taking drastic measures to offset its third major design loss in a few weeks. But according to observers-including some of AMD's toughest critics-the company remains well positioned to continue gaining microprocessor market share against rival Intel Corp.
"While I don't see how AMD will leapfrog Intel in the next six months in terms of processor performance, it may leapfrog Intel in the next three to five quarters," said Hans Mosesmann, an analyst at Prudential Securities, San Francisco.
Intel executives were unavailable to comment, but a company spokesman asserted that Gateway's retreat from AMD was just the tip of the iceberg. "There will be more to follow in the near future," he said.
Indeed, design momentum in Taiwan-where more than a third of the world's supply of PC motherboards are made-is overwhelmingly in the direction of the Pentium 4, Mosesmann said.
"I've visited Taiwan every quarter over the past five years and there had always been a level of enthusiasm for AMD's processors," he said. "But about a month ago, we couldn't find anyone, going down the list of the top boardmakers, that was building new products or had build plans or roadmaps that incorporated much of AMD. It was all P4."
However, Patrick Moorhead, vice president of desktop and mobile marketing in AMD's computation products group, Sunnyvale, Calif., disputed notions that Intel's efforts to penetrate Taiwan have been at the expense of AMD's business there.
"We already have our UMA [unified memory architecture] design wins in the low end, SDRAM in the middle, and DDR for the high end. They represent our growing market share [against Intel]," Moorhead said. "And if you look into it further, there's no support for the P4 as yet."
Moorhead also dismissed the loss of Gateway's business as "an ongoing ebbing and flowing relationship." Though it comes on the heels of similar splits with IBM Corp. and Micron Electronics, the design loss doesn't necessarily portend a customer exodus, he said.
"Prior to [last] week's development, our K6 line was phased out by Gateway a few years ago, before they implemented our Athlon processor line," he said.
The Gateway switch could also be attributed to the recent return of Ted Waitt as Gateway's chairman, president, and chief executive. Waitt has long preferred a sole-source relationship with Intel, said Nathan Brookwood, an analyst at Insight64, Saratoga, Calif.
"I knew it was only a matter of time before Gateway switched completely to Intel again once Waitt came back," Brookwood said.
Collectively, lost business from Gateway, IBM, and Micron, as well as any lost board business in Asia, would represent less than 5% of AMD's sales this year, according to industry sources. Brookwood said AMD would continue to gain share against Intel in desktops, notebooks, and workstations due to the performance offered by its existing Athlon and Duron lines, and its 1.5GHz Hammer architecture due later this year.
According to Mercury Research Inc., Scottsdale, Ariz., in the second quarter of 2001, AMD had a 22.2% share of the total PC microprocessor market, up from 17.2% in the fourth quarter of 2000. Intel's share declined over the same period from 81.5% to 76.7%. AMD's current customer base includes Compaq, Fujitsu, HP, IBM, NEC, and Sony, as well as all of the top-tier board makers.
AMD said its decision to shut two fabs in Austin, Texas, and lay off 2,300 employees was unrelated to Gateway's move, or to AMD's microprocessor or flash businesses. The older fabs were primarily foundries for customers like Legerity Inc., AMD's former communications IC division.
"The foundry business represented less than 3% of AMD's revenue, and they were not making any money on it or the legacy deals associated with it," said Dan Scovel, an analyst at Needham & Co. Inc., New York. "So shutting the plants down and pocketing the cost savings makes a fair amount of sense, and won't affect their core processor and flash businesses."
Meanwhile, AMD said it is rapidly boosting capacity and investing in its processor roadmap. The company plans to roll out a successor to the Athlon, code-named Barton, in the second half of 2002. Based on a 0.13-micron design rule, Barton will use AMD's new silicon-on-insulator (SOI) process at the company's fab in Dresden, Germany, and will succeed the 32/64-bit ClawHammer processor, AMD's first chip to use SOI.
But while analysts maintained that AMD will remain a formidable competitor to Intel in the processor slugfest, one analyst said Intel's far-deeper pockets will bolster its long-term prospects.
"In the long term, of course, capital expenditure is a problem for AMD, and they are at a disadvantage with Intel's resources," Scovel said. "You've got to make investments to move forward with process and design technology.
"But AMD has already articulated a strategy of being a 'virtual gorilla' by partnering up with people, which may pay off in the end," he said. OR