Analysis: AMD's fab-light strategy; myth vs. reality

Joined at the hips
Also, AMD is partly on the hook for any future capital expenditure required by GlobalFoundries, although the company is only obliged to provide matching funds if it wants to retain its current shareholding stake in the wafer enterprise.

AMD said it has "the right, but not the obligation, to provide additional future capital to GlobalFoundries in an amount pro rata to its interest in the fully converted ordinary shares of GlobalFoundries."

The line of demarcation between "right" and "obligation" may be almost invisible, however. Although AMD does not have to match ATIC's capex-related contributions, the chip vendor may not have much of a choice. Since AMD is sourcing most of its MPU requirements from GlobalFoundries it may be compelled to step in especially if ATIC for any reasons balks at pouring money into the venture.

Even the funding commitment made by ATIC requires both GlobalFoundries and AMD to meet certain goals, including the "absence of a material adverse effect on GlobalFoundries or AMD," according to the companies. AMD, it seems, carries a heavier burden than is typical in a regular wafer sourcing agreements between truly fabless chipmakers and their foundry partners.

While semiconductor vendors can commit to long-term relationships with a single company, for instance, they typically have more than one foundry partner or at least several back-up suppliers.

In AMD's case, the Sunnyvale, Calif., company is bound by a 15-year agreement to source wafers from GlobalFoundries through at least May, 2024. That agreement can only be "terminated if a business plan deadlock exists," AMD said.

AMD's relationship with GlobalFoundries is, of course, not patterned along the lines of what generally holds in the market. Being a parent and still a substantial shareholder in GlobalFoundries, the chip manufacturer is naturally interested in the survival and ongoing financial success of its latest corporate offspring, hence the extended-nurturing nature of their wafer sourcing and sales agreement.

However, AMD's future survival and continued financial viability is also at stake in this relationship. Unable to fund alone the staggering costs of competing at every technology level with Intel and weighed down by $5.7 billion in long-term debts, the company spent more than one year trying to figure out the optimal cost structure for its operation and settled on a fabless strategy.

Much needed funding for the manufacturing division and also for AMD was secured through the Abu Dhabi-government owned ATIC, which poured money into both AMD and GlobalFoundries, boosting their combined cash to $2.7 billion as at March 28, 2009 from $933 million in December. The money would be sufficient to "fund operations and capital investments over the next twelve months," according to AMD.

Furthermore, ATIC has agreed to spend between $3.6 billion and $6 billion on GlobalFoundries over the next five years, giving the wafer vendor and AMD a better fighting chance in the unending war for dominance against a better financed Intel in the microprocessor market. Without the promised funding from ATIC, it is possible AMD could fall further behind its arch rival, according to analysts.

Even then, some industry observers believe that AMD and even GlobalFoundries are still standing on shaky grounds. AMD needs strong demand for its products to fill GlobalFoundries' plants and the wafer vendor also needs to secure additional customers for all the partners to benefit fully from the relationship, according to S&P's Patricola.

"Despite the overall increase in liquidity and the commitment of ATIC to invest as much as $5.6 billion in fresh capital under the shareholder agreement, we believe highly challenging operating conditions could result in meaningful depletion of existing consolidated liquidity in 2009," Patricola said in a report.

"With the transfer of depreciating assets to GlobalFoundries, AMD as a standalone entity is likely to incur much of the group's expected earnings before interest taxes depreciation and amortization losses and would not benefit directly from ATIC's commitment to provide subsequent capital infusions to GlobalFoundries," Patricola added. "Conversely, GlobalFoundries bears the burden of the amortization of the Fab 36 term loan and future capital spending."

Consequently, AMD and GlobalFoundries for the foreseeable future will remain joined at the hips, meaning it will take some time before AMD can really reap the full cost advantages envisioned by its top executives when they opted for a fab-light manufacturing strategy.