What the U.S. Could Learn from AMD

Rob Enderle

I'm sure I'm like many of you in that I'm frustrated by a U.S. government that seems unable or unwilling to manage well. There are a number of things our U.S. politicians could learn from business; this latest move by AMD is a case in point. AMD was faced with a significant revenue shortfall and a massive planned increase in capital expense. It could have blamed the situation on others and not tried to address the problem and had a significant number of reasons for why it failed. Instead, AMD got busy and came up with a creative solution that both saved the company and made it more competitive, potentially, than it ever has been.

 

The problem for AMD is that it has always been overmatched. It needed to find a way to close the funding gap with Intel so it could not only gain market advantage but hold onto it if Intel stumbled, which leaders eventually do.

 

AMD's Plan

 

The requirements put on a public company to provide adequate reporting are both massive and incredibly costly. Given that the financial industry melted down because of a lack of regulatory control in the face of these massive reporting requirements, I'm not convinced they do much real good either. But, be that as it may, getting out from under this onerous set of rules is one of the reasons a number of companies have been taken private over the last several years.

 

AMD's greatest expense, one it shares with Intel, is the cost of its factories, called FABs. These facilities not only are incredibly expensive to build, but they have a relatively short useful life because the technology they use becomes obsolete incredibly quickly. The result is that a number of firms ranging from Sony to Texas Instruments (this EE Times Asia piece requires registration) have had to exit this market; it simply is too costly.


 

But AMD couldn't simply close these down because it needed the capacity. Writing off this kind of an expense would, in and of itself, put AMD at financial risk. It needed a way to have its cake and eat it, too. The result was that it sold off half ownership in the FAB and placed it in a separate, private, company that is half owned by AMD and half owned by an Abu Dhabi investment consortium that has been successfully investing in U.S. businesses for years in anticipation of the time when oil revenues run out. It would seem the Arabs are thinking more strategically than many of our own politicians have been for some time.

 

The end result is that AMD effectively has its cake, the FABs, has the benefit of not having to report the incredible detail of these FABs because they now belong to a private entity and AMD is simply a large investor, and it gets $2 billion in cash for its trouble. The FABs, which will be run by the same people, can turn out the same quality parts at a lower cost because they don't have the reporting overhead, and can seek contracts from others, increasing the economies of scale. In addition, because this new firm is private, it isn't under the same quarter-to-quarter performance requirements that a public company would be.

 

Risks and Wrapping Up

 

This move isn't without risks. Any change has them. But these risks, which have to do with the separation of the units, are vastly less than the virtual certainty that AMD would have gone under had it not come up with this plan. It was simply burning cash too quickly and had a massive need to create a new FAB in order to compete, but lacked the money to do that. Now the new New York FAB is in place and, at a time when the country needs every job it can get, it will be increasing the number of jobs in New York by 5,000, according to the announcement.

 

In looking at AMD, I think the U.S. government could learn something. I've been commenting recently on how Intel, with Arnold Schwarzenegger, made a move to increase California revenues and how this too provided an example that others should follow. I think the U.S. could learn a lot from the technology industry right now, from HP, which actually did a successful turnaround and became the most powerful technology company in the world, to AMD, which turned a situation that was as dire as the one the U.S. is in into an asset. Wouldn't it be nice if our politicians were as creative and less focused on things that don't seem to provide any real value?



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