AMD Playing It "Smarter"

AMD Plays It "Smarter," Looks to China

The "asset-smart strategy," as the formation of the new foundry company is referred to, is expected to enable Advanced Micro Devices (AMD - Analyst Report) to generate the much-needed volumes of its superior technology products and enjoy the benefits of operating a fabless model. Management focus will now be on developing innovative products.

This is a breather for the company, but a lot depends on execution, in our opinion. AMD is pitted against very strong players, and will have to spend heavily on R&D in order to compete effectively.

The company’s pricing strategy necessitates maximum cost containment and efficient operation in order to generate profits. Although the ongoing inventory correction is heavily impacting profitability, the product mix continues to improve. Management stated that the 45nm server products made a mark in Q408, and most of the products shipped in Q1 were 45nm products. This means that AMD is just a step behind Intel (INTC - Analyst Report), which completed the transition in the third quarter of 2008.

Management stated that it was on track to bring the AMD product company operating breakeven point to $1.3 billion by the end of the current quarter. The asset-smart strategy is expected to play a key role in this regard. There will also be a significant reduction in manufacturing headcount, as the corporate focus is now expected to shift to R&D and marketing.

AMD’s focus on the fast-growing greater China market is paying dividends. The company’s Chinese business has grown in leaps and bounds, with the total contribution increasing from 14.5% of sales in 2005 to 44.0% in 2008, an increase of 201.8%.

According to a survey by Gartner in 2007, AMD captured 28% of the Chinese computing market by the second quarter of 2007. The research firm reported AMD growth across desktops, notebooks and servers. According to the research firm IDC, AMD has secured a very strong position in the desktop segment, which comprises two-thirds of the regional PC market.

The company has also established relations with local leaders such as Lenovo and TCL, as well as global leaders such as Hewlett-Packard (HPQ - Analyst Report), Acer and Dell (DELL - Analyst Report). According to analysts at IDC, this two-pronged strategy is clearly going as expected, because most of the OEMs are showing an increasing preference for AMD over Intel processors for products being shipped into China.

We view the success in China as particularly significant, since developing economies are likely to remain the main drivers in the computing market, whereas developed economies are more mature, and are therefore likely to have slower growth rates. Additionally, the focus on China will enable AMD to build a sizable installed base, and encourage related hardware vendors to build products on the AMD platform. We do not, of course, expect this to be a cakewalk for AMD, as Intel has alredy strengthened its China strategy.

Sejuti Banerjea contributed to this post.

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