Advanced Micro Devices (AMD), founded May 1st, 1969 and headquartered in Sunnyvale, California, is one of the largest manufacturers of integrated circuits in the world. Founded originally by Jerry Sanders and seven others in a single room in 1969 with only $100,000, AMD now employs approximately 13,000 people worldwide and has annual revenues in excess of $2.4 billion.
In 1978, AMD opened up international assembly facilities in Manila, Philippines, and expanded the Penang, Malaysia factory that they originally opened in 1973 as their first overseas manufacturing base. By the end of 1981, the company had more than doubled its sales over 1979. Plants and facilities expanded with an emphasis on building in Texas. New production facilities were built in San Antonio, and more fabrication space was added to their Austin, Texas facilities as well.
In the years following 1981, AMD expanded its global operations tremendously with the incorporation of AMD Singapore in 1983; as well as by building a facility in Bangkok, Thailand. By 1994, AMD had become a supplier of flash memory, networking, EPROM, telecommunications and programmable logic chips. In more recent years, AMD’s sixth and seventh generation chips, including the new Athlon processor have been, and will continue to be one of the leading chipsets available worldwide. Their international sales operations entail exchange rate fluctuations, political and economic risks, including expropriation, currency controls, changes in freight rates and changes in rates and exemptions for taxes and tariffs.
The company’s first products were products that they redesigned from other companies for greater speed and efficiency. Now AMD produces processors, flash memories, programmable logic devices, and products for communications and networking applications.
Their processors, the K6 and Athlon, are being used by IBM, Compaq and other computer manufacturers around the world. On November 29, 1999, a 750MHz Athlon (see front cover for photograph) processor was brought to market, making it the fastest processor available in home computers. The 750MHz Athlon processor is priced at $799 in 1,000 unit quantities.
The 750MHz AMD Athlon processor is the first processor that is built using AMD’s aluminum 0.18-micron manufacturing process, and new AMD Athlon processors are now being built using that advanced technology. The 0.18-micron manufacturing process shrinks the size of the AMD Athlon processor die, enabling faster processor speeds and lowering power consumption.
AMD is moving away from only supplying low-end chips, to supplying high-end high performance chips using their 0.18-micron manufacturing process. The Athlon is currently being manufactured in the Austin, Texas facility, and is expected to begin featuring copper interconnect technology later this year in its newest facility, Fab 30 in Dresden, Germany.
Aside from the numerous processors that AMD produces, they also produce flash memory. It does simultaneous read/write and is the first hardware capable of reading data during programming or erasing operations. Programmable logic devices, communications and networking applications are also among the products made by AMD. The company has sales offices worldwide and has manufacturing facilities in Sunnyvale, California; Austin, Texas; Bangkok, Thailand; Penang, Malaysia; Singapore; Suzhou, China and Aizu-Wakamatsu, Japan. A wafer fabrication facility in Dresden, Germany is scheduled to begin commercial production in 2000.
The balance sheets and income statements for AMD are provided in Appendices A & B. Total net sales increased by $186 million, or 8 percent, to $2.542 billion in 1998 from $2.356 billion in 1997. Although sales grew, net loss also grew by $83 million dollars to $103 million in 1998. AMD blames the net loss due to the general downturn in the worldwide semiconductor market and the current economic conditions in Asia, which negatively impacted their results of operations. Closing share price for AMD on the NYSE as of Wednesday, December 1, 1999 was $27.50 US, which gave it a market capitalization of $4.064 billion. The processor market is characterized by short product life cycles and rapid change. To compete successfully against Intel, AMD’s largest competitor, in this market, AMD must be able to develop and bring new products to market quickly and in high volume. Intel has dominated the market for microprocessors used in personal computers for a long time. Intel can set and control processor standards due to this market dominance and dictate the type of product the market requires of Intel’s competitors.
In addition, Intel may vary prices on its processors and other products at will and thereby affect the margins and profitability of its competitors due to its financial strength and dominant position. Given Intel’s industry dominance and brand strength, Intel’s decisions on processor prices can impact and have impacted the average selling prices of the AMD-K6 processors, and consequently can impact and has impacted AMD’s margins. AMD does not have the financial resources to compete with Intel on such a large scale.
In a processor market predominantly run by Intel, AMD has had its work cut out for it to stake its own claim in that arena. The company ranks second in the microprocessor market (after Intel) with about 10% of sales. However, it has grabbed about 60% of the market for sub-$1,000 PCs.
AMD’s major goals are to gain market share and have profitable growth. However, consistent long-term growth is very difficult for AMD to achieve because they must continuously invest in research and development in order to stay competitive in the rapidly changing processor market. Originally AMD had concentrated on low-end chips, but with Intel’s market dominance, they were being threatened of pushed out of the market. Now, with the introduction of the high-end Athlon chip, AMD is trying to diversify their processor line. In an interview with Jerry Sanders November 29, 1999 on CNBC, he stated that:
“Turns out that when we only offered low-end chips, we got over 50% of the retail market, but then Intel collapsed the prices. Intel subsidized the prices of their low-end chips with the higher margins they were making on their high-end chips. Now we have both and feel it will help defend against future strategies Intel may try to employ against us.”
This strategy will help AMD diversify and protect against these types of strategies that Intel may try to employ in the future. Nearly all product assembly and final testing of AMD products occurs at their manufacturing facilities in Penang, Malaysia; Bangkok, Thailand; and Singapore; or by subcontractors in Asia. AMD also recently entered into one of the most potentially explosive markets in terms of growth. They constructed an assembly and test facility in Suzhou, China and production began in the first quarter of 1999. For a complete list of AMD’s foreign subsidiaries refer to Appendix C. AMD also depends on foreign foundry suppliers and joint ventures for the manufacture of a portion of their finished silicon wafers. Foreign manufacturing and construction of foreign facilities entail political and economic risks, including political instability, currency controls and fluctuations, changes in freight and interest rates, and loss or modification of exemptions for taxes and tariffs. Any disruptions or changes in international politics, or shipping could potentially have an adverse effect on sales. In 1993, AMD and Fujitsu Limited (Fujitsu) formed a joint venture, Fujitsu AMD Semiconductor Limited (FASL), for the development and manufacture of non-volatile memory devices. AMD controls 49.992% of the company and Fujitsu controls the remaining stake.
In connection with FASL, AMD and Fujitsu have entered into various joint development, cross-license and investment arrangements. Accordingly, the companies are providing their product designs and process and manufacturing technologies to FASL. In addition, both companies are collaborating in developing manufacturing processes and designing flash memory devices for FASL. Interestingly, the right of each company to use the licensed intellectual property of the other with respect to certain products is limited both in scope and geographic areas. For instance, AMD and Fujitsu have cross-licensed their respective intellectual property to produce stand-alone flash memory devices within the joint venture.
Furthermore, AMD’s ability to sell flash memory products incorporating Fujitsu intellectual property, whether or not produced by FASL, is also limited in certain territories, including Japan and Asia (excluding Taiwan). Fujitsu is likewise limited in its ability to sell flash memory devices incorporating AMD intellectual property, whether or not produced by FASL, in certain territories including the United States and Taiwan.
The functional currency of FASL is the Japanese yen. They translate these financial statements in the U.S. dollar using the exchange rate at each balance sheet date for assets and liabilities and a weighted-average exchange rate for each period for income statement items. Translation adjustments are recorded as a separate component of stockholders’ equity in the U.S. dollar financial statements. AMD uses foreign exchange forward and option contracts to reduce their exposure to currency fluctuations on net monetary assets position in their foreign subsidiaries, liabilities for products purchased from FASL, fixed asset purchase commitments and obligations for future investments in AMD Saxony.
They had $13 million (notional amount) of short-term foreign currency forward contracts denominated in the Japanese yen, German mark and British pound outstanding as of December 27, 1998. They also had entered into various foreign currency option arrangements. In 1997, AMD purchased $150 million of call option contracts to hedge their obligations to provide loans to, or invest equity in, AMD Saxony, of which $75 million were outstanding as of December 27, 1998. In 1998, AMD entered into a no-cost collar arrangement to hedge Dresden Fab 30 project costs through which they purchased $300 million of put option contracts and sold $300 million of call option contracts. AMD had $220 million of no-cost collar option contracts outstanding as of December 27, 1998. The reason that AMD uses these contracts is to minimize the impact of foreign currency exchange rate movements on their operating results and on the cost of capital asset acquisition.
Problematic Issues & Their Solutions
AMD is up against a tough competitor in Intel as described earlier in the Market Conditions & Competition section, however, they have taken measures to try to gain market share. AMD must try to gain market share and at the same time strive to reach and sustain profitability. With the introduction of the Athlon, AMD has broadened their product line in the microprocessor arena. This will help them make gains in market share and brand recognition. By introducing the fastest chip available in a personal computer, AMD has turned more then a few heads in the industry, garnering more respect and recognition. These Athlon chips, being high-end, will have a higher profit margin and, if widely accepted, should lead AMD closer to profitability.
For quite some time AMD had been plagued by lawsuits filed against them by numerous companies claiming patent and copyright infringement. The largest of these claims could have put AMD right out of business had the plaintiff, Intel, won. Intel and AMD were locked in a tough five-year arbitration battle, over the rights to make and sell the Am386 family of microprocessors. The judgment on this case came in February 1992, with AMD awarded full rights to make and sell the Am386.
Three years later, in 1995, AMD reached an agreement with Intel to settle all previously outstanding legal disputes between the two companies and not in court. In December 1995, AMD signed a cross-licensing agreement with Intel that will expire on New Years Eve 2000. The agreement gives AMD and Intel the right to use each other’s patents and some specific copyrights. If AMD uses Intel technologies in their products, through the cross licensing agreement, they are required to pay royalties.
Taiwan is currently recovering from a major earthquake that occurred on September 21, 1999. The earthquake resulted in an interruption of power to their suppliers’ manufacturing facilities that contributed to a severe shortage of motherboards in the last week of the third quarter of 1999 which adversely affected their sales of AMD Athlon microprocessors. Overall sales growth in the fourth quarter of 1999 and in the first quarter of 2000 is dependent upon a successful production ramp on 0.25-micron and 0.18-micron technology, market acceptance of their AMD Athlon microprocessor and availability of chipsets and motherboards from Taiwanese and other suppliers, as to which they cannot give any assurance. The effects of the earthquake in Taiwan may continue to have an adverse impact on their business. AMD is currently trying to make up for lost production time and hence sales due to this earthquake.
AMD is currently devoting their attention to producing a wider array of processors to help defend against possible strategies that Intel might wish to pursue to try and hurt AMD. Not only are they defending against these strategies, they are also gaining respect, recognition and building towards profitability. The earthquake in Taiwan may have disrupted their Athlon production somewhat, however, this is a one in a million event that is not foreseeable and not likely to occur often. AMD is doing the right thing by broadening their product lines through investing heavily in research and development. Having a first mover advantage in the processor market may mean hundreds of millions of dollars to the company’s bottom line if they are able to continue the trend they have started with the 750MHz Athlon chip.
AMD should try their best to maintain this first mover advantage as the personal computing and hence processor market, in accordance with Moore’s Law, is a rapidly changing market and the benefits of being the first to offer the newest, fastest chips available are extremely great as the margins on high-end chips are immense.