Wednesday, May 28, 2008

I Worship in the Temple of Christensen

"I Worship in the Temple of Christensen!"

Back when I was doing my MBA, my International Marketing professor (HarlemBoy, the nickname he choose for himself) used to say as a catchphrase: «I Worship in the Temple of Walmart». In that same term I was taking General Management classes (you may call those Advanced Strategy),and I loved that phrase so much, that I adapted it for myself, and began saying there: “I Worship in the Temple of Christensen”.

You see, that refers to Mr. Clayton M. Christensen, DBA (Doctor in Business Administration, a REAL PhD) and best-selling author. I actually read one of his books “The Innovator’s Solution” before I entered the MBA. That advanced knowledge, and my firm belief in Christensen got me an A+ in General Management class (the Holding Fast Case, in case you are curious). I wholeheartedly recommend reading his books and articles, you can become a convert too.

Every time Christensen talks, I listen. So, I was very surprised when Christensen talked about the « The New Economics of Semiconductor Manufacturing ». I read the article, and something got me thinking:

« Competition is shifting toward a new playing field. Now what matters is making a large variety of products, each product in small volumes and each perhaps for only a short time. Examples of these growing markets include cellphones and MP3 players, which are subject to trends in fashion. Then there are the thousands of chips that are increasingly finding their way into our homes, offices, automobiles—and into every nook and cranny of our lives.

You often hear executives in the semiconductor industry sighing for the next great vehicle for industry growth, like the PC in the 1990s and the minicomputer before that. Well, perhaps the next killer application won't be one thing but rather scores or hundreds of things, none of which require the raw performance that only the biggest, most technically advanced fabs can provide. Perhaps what the next wave of killer apps requires is a new business model, made possible by such things as TPS.

Throughout history, business models that reduced the minimum effective size of factories have transformed entire industries. Steelmaking was transformed by the minimill's ability to efficiently produce small batches of steel, business computing by a succession of ever-smaller machines starting from mainframes for payrolls and ultimately leading to the personal computer, and photographic film processing by fully automated one-hour film-processing machines, which were then replaced by digital photography. Because these transformations offered customers entirely new ways of doing things—rather than simply making the existing model work a bit better—we call them disruptions. The agents of disruption are invariably business models (although these models often come with a new technology wrapped inside).»

That got me thinking. Then I read this blogpost from Mr. Rahul Sood « AMD Breakup ». Here Mr. Sood argues that AMD should split the Fab Business from the µProc+Chipset+Video business. At first I thought “This is Madness! Madness, I tell you!” But then, I heard Christensen’s voice… I mean, I really heard his voice in this podcast: «Spectrum Podcast: Q&A With Harvard Business School's Clayton Christensen »

And here, The Light was made. Basically, One of Christensen’s points is that the semiconductor industry is going through a commoditization/decomoditization phase, things that before were differentiators become commodities, and what was a commodity before, becomes a differentiator (too confusing, read his book, he is a DBA, I am just an MBA).

Of particular interest to us is that, for the bulk of the market (about two nodes behind the state of the art) the capacity to design chips is becoming a commodity, because libraries of modular components are readily available, but now the capacity to produce small batches of wafers with very fast turnaround times is the differentiating factor, because the process in very interlocked, one may say proprietary. His advice to investors:

«Go around and buy a bunch of these fabs […] then as you get the [TPS] system going you can price your products 15~20% over the market price, because you are fast».

Also, remember that at 32nm, with 450mm wafers, there is a huuuuuuuge number of chips that can be manufactured per wafer. Christensen admits that there is a segment of the market (like state of the art X-86 µProcessors) that will need to stay in the forefront of Moore’s law, but for the first time in history, for the bulk of the market, we can go back a couple of nodes and Just Do It Right.

Please bear in mind that I am not the only one listening to Christensen. Many people in the investment community do. So, ¿What would I do if I were Hector Ruiz? Not exactly what the rumor mill is telling you. Rather, here is my recipe:

1.) Make a partnership with some investor (Chartered? TSMC? Some European Player? Some Chinese bit player with no access to such advanced technology?). Give them 45% of the Dresden Fabs right now, for a much needed cash investment. Assure them steady business from AMD (let’s say, for 10 years or more), and full ownership at a later date. Retain operational control.
2.) Do step (1) in a way that is compatible with the covenants in your patent agreements with Intel.
3.) Use the proceeds to finance your Fab in the US. When that FAB is Up-And-Running, transfer the rest of the shares to your partners.
4.) The Fab in the US will be your main Fab, will be your Fab for advanced µProcessors and GPUs (or Fusion, whatever that means). 32nm with 450mm wafers means plenty of chips. Probably, will allow AMD to serve 40% of the Advanced X86 Market.
5.) Let your partner in Germany manufacture yesteryear CPUs, GPUs and Chipsets.

That way the boys and girls at AMD can survive. Will there be anyone interested in grabbing those Fabs? YOU BET!

Hey Hector, if you need more details, you can hire me. Or Christensen. Or both of us! (or just leave a coment)

Salud! Howling2929

Some Clarifying notes:
· If you already heard the podcast, you know one of the companies exploring this is Intel, in FAB 17. They have so many Fabs that for the 32nm nodes and beyond, they will have excess capacity. That is part of the allure of Classmate PC, or Atom, increase the demand of TRANSISTORS (not µProcessors). As usual, Jon Sokes has a great article about it « Beyond the BlackBerry crowd: life in a post-32nm world ».
· Is AMD exploring this? We do not know. Besides, the application of the TPS in the Fabs at Dresden is a problem of the one who buys the Fabs, not AMD’s.
· The investors from Dubai got their 6% in AMD as an investment, in the same sense that my MBA was an investment. They are learning first-hand the Ins and Outs of the semiconductor business from a global player. If the company itself turns a profit later on or not is secondary. Please remember that not every day there is an opportunity to enter such an important company in such a big way, so if the heavens give you lemons, you make lemonade! I guess it would have been impossible for them to buy such a big stake in Intel, Philips, IBM or Samsung at that particular point in time.
· Chinese companies are sitting on 130µm technology (more or less, depending on the foundy). And European regulations are more lax towards China than the US’s, I bet many Chinese foundries would LOVE to get their hands on Dresden, even at a premium.
· Samsung acquiring AMD was my scenario of choice, now is in the second place. I meant to write an article about that, but there is no point now.
· I was thinking on doing an article about Intel’s AMT. Is not Active Management Technology, if that is what you think, but searching for it in the Net is not easy). Does the respectable audience want it? Let me know.

Sunday, May 11, 2008

About AMD's acquisition by Dubai or other countries

Spark left us the following comment upon which I want to elaborate:


I was tossing this around. I also posted it on Robo's blog. What do you think?

We know this, obviously. The performance speaks for itself. I use the word “we” loosely, you make the stuff and know it well (as others on this site).
I know it because I buy the stuff a clock the shit out of it, and I’m personally invested.

Perhaps others, shall we say, possible future AMD investors/owners don’t, or even care? They may see an opportunity into buying into a world class, albeit 2nd class, semiconductor manufacturer.

These cash rich, technology/manufacturing/business poor countries are buying assets, big time. I see it all the time. A good percentage of the hotels in NYC are owned by Middle Eastern concerns looking for a business future when the oil runs out. A couple of billion is nothing to big oil money to buy into a fully operational big name semiconductor firm.

I’ll stick my neck out here, at the risk of loosing my head. Wrectors strategic long term goal is to make the company as attractive as possible to such prospective buyers.

The buyer(s) may see:

That AMD is quite capable of giving its competition a serious challenge, if not outright producing a better product. After all, they’ve done it before.

AMD not only comes with manufacturing capabilities with 2 FABs , but with also a world class graphics component, technically a one stop shop of an established world market in computing.

AMD also comes with a total platform solution, chipsets, laptops, and other marketable Intellectual Property, inclusive.

They have an established supply chain, market exposure, a broad customer base, and a competitive solution for the world’s top 500 HPC solutions. Additionally they have good, if not excellent performance, presently, in the 4P market.

They are slated to start construction on a new state of the art FAB with 1.2 billion dollars of government incentives in July of 2009.

They have open complaints against their main and only competitor, conceivably worth billions.

AMD has strategic allies abroad, the EU inclusive, and a relatively untapped market in the Middle East, where top performance would not be a factor, nor would unvarnished favoritism towards an Arab held company.

IBM is a major technology partner.

Wrector’s long term strategic goal of holding on to market share at all cost, an in house graphic component, competitive laptop solutions, major world market inroads, may indeed have a silver lining, after all. They could do it again, with a little help.

All they need to do is sell this to a buyer with deep pockets, who already owns an 8 percent stake, the entire middle east backing (read: trillions), and a dream of obtaining a world class facility for a miserable couple of billion.

At 6 to 7 bucks a share and under 4 billion in market cap, this might look like a goddamned bargain. Hey, Blackstone bought the Hilton chain for 26B, a nice buy, for private equity, choke change at 4 billion, for big Middle Eastern oil.

FTC, SEC, and other choke points you may ask? So, ultimately this rests in the hands of American political interest to force AMD to die? Nope, this time, unlike the Arab held World Port that failed, this one just may fly.

INTC licensing issues 49% is close to 51%, but not that close.

The slightest pissing hint of this would send AMD stock through the roof, double overnight in fact. We will know soon enough.

Just some food for thought.


AMD acquired by the Arabs, interesting topic:

We had a conversation in Investor Village about why China can not acquire AMD,due to the political influence of Intel, I think that this also applies to the Arabs, albeit not as much.

Regarding AMD's strategies, AMD's only problem of significance is the economies of scale disadvantage. Perhaps I should explain in broad strokes: The market for processors is global in nature, then the marketing investment to have a presence in the global market is relatively fixed, thus, greater number of products means smaller individual marketing cost. Most importantly, the research and development costs of working at nano-scales make sense only if the number of products will be huge, and the factory network becomes more capital intensive as a result of the increased difficulties of working at ever smaller nano-scales. This little company has demonstrated that with 1/5 of R&D budged can out-compete Intel in performance, that means that the problem is not how to do good enough global marketing, R&D, or top class Factories, the problem is that it doesn't have the scale to sustain a competitive parity.

Having clear what the real problem is, you see that AMD does something right: To hold on to market share at all costs. The ATI acquisition happened, in part, as a way to increase the scale of operations. Why is this a disaster? Because, according to me, it was the wrong way to increase scale, so wrong, that the net effect has been to reduce the scale:
  • The role that ATI fullfills inside AMD was being fulfilled MORE effectively by nVidia and ATI competition
  • At this point it is somewhat proved that there are no manufacturing synergies between ATI and AMD that could have emerged faster than in Joint Ventures.
  • Regarding "Fusion", the concept was totally devalued when it was announced that it won't lead to higher performance but higher power efficiency: absolute graphics performance leads to higher premiums, better power efficiency is difficult to demonstrate and hard to monetize.
  • AMD had the chance to launch the enthusiast and prosumer "coprocessor revolution" of graphic accelerators and physics/AI accelerators, a market where Intel couldn't have gotten to in at least three years, but it didn't, probably because nVidia was already a competitor.
  • The acquisition distracted a financial position that could have been used to improve the core business
We need to know how the licensing of x86 would be affected by an acquisition by Dubai or other country like that. I mean, we can know all about the letter of the contract, but that won't be enough because there is a very important political component of enforcement and negotiations between the parties, and this extremely important, but still, at this point, an acquisition doesn't show me how it will increase AMD's scale, it won't bring more customers, it won't create a new line of products, it would bring just money. It is hard for me to see in what strategic initiative would AMD place fresh money: If it doesn't sell Dresden, it won't make sense to build New York, and then again, who's going to buy the rather unpopular SOI equipment? how's AMD going to get rid of restrictions imposed by the governments that pitched in the money to build those fabs? Thus, we are to conclude that the money would be burned in the current cycle of lack of competitiveness.

Probably, AMD is done for, because it went this absurd route of reducing scale (acquiring ATI) and devoting all resources to a good for nothing architecture (you can't have single-die quadcore semprons, you can't have fast enough high-end quadcores if they are single die, so, AMD is only able to participate in the low-performance quadcore segment, a very limited segment); thus, in its current predicament, it doesn't even have a project that could save it provided it gets the money. More Dubai, or any other country, funding could still happen, but not on sound investing reasons, but because government officials may be getting "a cut".

Tuesday, May 06, 2008

AMD is not viable, by AMD's own admission

I was reading "AMD: 'We must double market share or die", an article brought to my attention by "fair_say", let's quote the first two paragraphs:

AMD needs to more than double its market share to survive as a processor maker. This isn't the opinion of rival Intel, but AMD's own admission, in a court filing which forms part of an antitrust suit AMD is bringing against Intel.

At the end of 2007, AMD had 13 percent of the processor market, "less than half of what it requires to operate long-term as a sustainable business", the brief said, explaining that Intel's alleged efforts to shut the company out of the processor business had largely succeeded.

AMD seems to argue that Intel, understanding that AMD needs 25% of the market to be viable, made sure it never got there by whatever means, including illegal monopolistic practices. What is significant here, and it is mentioned in the article, is that processor customers care a great deal about long term viability of processor producers, thus, AMD is alienating further its customers by explaining that it is not viable, but perhaps it needs to do it because at this point, the normal business of the company are going nowhere and the last hope is the lawsuit.

I have repeatedly explained that AMD is not viable due to the economies of scale disadvantage to Intel. In that regard, I have criticized the ATI acquisition on the grounds that it turned nVidia from a great partner and supplier of complementary products, chipsets and motherboards which was pretty much forced by market realities to promote AMD-based computers rather than Intel-based ones into a powerful direct competitor while weakening the possibilities of the primary business by taking on the great financial burden of the acquisition, that is, the acquisition destroyed any possibility to solve the economies of scale gap, and this happened at times when the Virtual Gorilla was very healthy; on the other hand, it was clear that the ATI part of the company, that at most can pull its own weight, will not be capable of carrying the whole company forward. "Fusion"? if acquiring ATI doesn't lead to vastly superior performing General Purpose Processor/Graphics Processor combinations, it will clearly be game over for AMD. Since all the details of Fusion we know about today, nearly two years after the announcement of the acquisition, is that in its first incarnation it won't be vastly superior performing units, but at most better at power efficiency, we are to conclude that it is not nearly enough.

Regarding the recent spike from about $6.30 to over $7.15, I don't think it is due to information known by the public, that is, something may be going on that we, pedestrians, don't know anything about. I hear fools on the message boards saying that perhaps Wrector Ruinz will finally give some details about Asset Ligth (Smart?), or other speculation. I think those are fools because they miss the real point: There is no clarity whatsoever about what's going on at AMD and we are the last to get the information about it. Great that recently I have only taken $200 in positions on AMD, the little gamble (that now is worthless).