The fabs will close "no later than the middle of next year," an AMD spokesman said, and about 1,000 Austin employees will receive severance packages. Separately, AMD customer Gateway Inc. announced plans to eliminate its product line which uses the company's microprocessors.

AMD plans to shutter Fab 14 and Fab 15, both built in the mid '80s, which are used to produce networking and communications-related ICs in CMOS and bipolar process technologies. Also, AMD is moving certain assembly and test operations from its Penang, Malaysia, facility to a newer back-end facility in Suzhou, China. Approximately 1,300 people will be impacted there, about one-half of the Penang workforce, the spokesman said. Overall, AMD will be trimming its head count by some 15 percent.

The two Austin fabs produced some networking and embedded processing ICs for AMD, using 6-inch wafers and 0.7-micron and older process technologies. However, most of the capacity was used as a foundry source for older products from two AMD spin-offs, Legerity Inc. and the former AMD programmable logic operation called Vantis that was sold to Lattice Corp. two years ago.

AMD retains a 10 percent stake in Legerity (Austin), which makes chips for subscriber line interface cards and other telecom-related markets. A Legerity spokesman said approximately 25 percent of Legerity products are made at AMD's facilities. Legerity also has a foundry relationship for bipolar products with Sony Microelectronics, which operates a fab in San Antonio, and with United Microelectronics Corp. (UMC) for its newer CMOS products.

The Legerity spokesman said the economic downturn has resulted in large inventories, both in terms of a die bank and wafers in progress, that will keep the market for its older line card chips supplied through the end of 2002. Most of the older products are being redesigned and will be produced by Sony and UMC using more advanced design rules.

The AMD spokesman said that these foundry agreements were forged as part of the spin-off agreements and were not a significant source of revenue. "It is not part of our strategic vision for the company to be a foundry," he said. "Demand for these parts has diminished sharply, and utilization rates are quite low. We just can't afford to keep it open."

W.J. Sanders III, AMD's chairman and chief executive officer, said, "These actions will allow us to reduce costs without impairing our new product development activities in pursuit of long-term growth opportunities. We will focus our organization around our two most promising opportunities: flash memory devices and PC processors."

Fabs 14 and 15 are AMD's oldest fabs, originally constructed in 1984 and 1985.

Closing the two fabs is expected to result in an annual cost reduction of approximately $125 million, and AMD will take a one-time charge of between $80 million and $110 million related to the restructuring activities and other special charges in the current quarter.

Dean McCarron, principal analyst at Mercury Research (Scottsdale, Ariz.), said the decision was a good one. "This is ancient technology, and with demand for semiconductors way down, it was a drain on the company's resources."

The AMD spokesman also confirmed that struggling PC vendor Gateway Inc. has eliminated its product lines that use AMD microprocessors. The PC vendor will eliminate its Select line of systems, which use Athlon devices, within the next few months.

McCarron said this decision is based more on Gateway's own struggles within the cutthroat PC market than on any weakness within AMD. "Gateway has been having a lot of trouble lately," he said, and when sales volumes are falling, economics dictate consolidating production on fewer lines. A side effect of that decision is having to eliminate some product lines."

And for any PC maker, when forced to choose just one MPU supplier, it is very difficult to consider anyone other than Intel Corp. However, McCarron said that position was easy to understand but somewhat short-sighted. "OEMs can't afford to not have AMD in the market," he said. "If they thought that AMD was actually in a great deal of jeopardy, they would step in with some volume orders. They know what kinds of benefits they get from having a viable competitor to Intel in the market."

These advantages include falling prices and rising performance, as Intel and AMD vie for market share, and McCarron said that AMD has been stronger this year that at any other point in its history, especially six months ago when it claimed both the fastest MPU available and the most popular. However, Intel has since reclaimed the speed crown, and its Pentium 4 has become much more desirable in recent weeks with the availability of a new chip set that allows the device to be used with standard SDRAM.

"This is certainly a big hit for AMD, but you shouldn't read it as saying something bad about AMD," said McCarron.

However, there is no doubt that both the overall economy and the PC segment are in trouble. Sanders noted in a memo issued to all AMD employees that "it is now clear that the levels of information technology expenditures [in 1999 and 2000] which drove semiconductor demand were a bubble and unsustainable."

AMD has already served notice that it expects to post a loss during the current quarter. "At the sales levels we currently anticipate, we will not be profitable as presently structured," said Sanders. "We can't wait for a general economic recovery or a strengthening of semiconductor demand sufficient to return us to profitability. Our strong balance sheet will enable us to endure the difficult times, but only if we take decisive actions to improve our financial performance."