AMD, Fujitsu cut fat from flash

Advanced Micro Devices and Fujitsu will combine their flash memory operations in a new company to cut costs, lower prices and speed up production in a difficult market.

The new company, announced Monday, essentially streamlines the 10-year-old joint venture for flash memory between AMD and Fujitsu. Currently, the two companies cooperate on chip development and manufacturing but split the output from the factories and sell their allotment of chips independently.

Maintaining two separate sales channels, though, comes at a price. Both companies have to maintain separate sales teams, and geographic restrictions built into the agreement prevent AMD from selling chips into Japan while restricting Fujitsu elsewhere. The two companies also have often undercut each other in the past when trying to sell to the same customers, said Kevin Krewell, senior editor of the Microprocessor Report.

Under the new venture, AMD and Fujitsu are creating a new company, called FASL, and transferring all of their engineers, sales representatives and factory capacity to it. Consolidating operations will lower costs and allow for more coordinated product development.

"There will be a single, unified entity. We will completely integrate marketing, management" and research and development, AMD CEO Hector Ruiz said. "We expect the combined profitability of the flash business to improve."

When the new company begins operations in the third quarter, it will be the second-largest flash memory company in the world, behind Intel. Bertrand Cambou, the head of flash memory for AMD, will be chief executive of FASL.

The new company will likely allow AMD to explore new types of flash memory. AMD historically has specialized in making NOR flash memory, the most common type of flash on the market, and has done quite well in terms of market share as a result. In 2001, for instance, the company was the second-largest manufacturer of flash in the world, behind Intel.

In 2002, however, AMD dropped down to No. 4 in terms of revenue, according to research firm iSuppli. Samsung, which specializes in NAND memory, went from eighth place to second in terms of revenue. NAND memory is more dense than NOR and is increasingly being used in cell phones.

Ruiz didn't say whether AMD would move into NAND, but he said the new company will be allowed to explore a variety of memory technologies.

"The company is being set up to compete in the nonvolatile memory market," he said. "It will be up to the company to determine where, how and how soon."

Ruiz, however, emphasized that AMD is not spinning off its flash business. AMD will own 60 percent of the new organization, 10 percent more than its share of the old joint venture, and 60 percent of the new company's revenue and expenses will appear on AMD's balance sheet.

Overall, the change will raise AMD's revenue but its expenses as well, he added. AMD lost $854 million in the fourth quarter.

The most significant impact of the deal could be on how pricing is affected, said Jim Handy, an analyst at Semico Research. Under the joint venture, AMD and Fujitsu could not coordinate on setting prices. Under the new company, no legal restrictions will bar them.

The deal also highlights the different directions that AMD and rival Intel are taking. Intel has devised a strategy of manufacturing a large variety of chips in multibillion-dollar plants. The

Santa Clara, Calif.-based giant is setting up factories that will be capable of manufacturing microprocessors, flash memory, communications chips or combinations of all three chips into a single piece of silicon. Many of Intel's communications chips are outsourced to Taiwan, and the flash memory chips sometimes use a slightly older manufacturing formula than the microprocessors.

By contrast, AMD's product lines are diverging. While the flash memory technology is being spun out to the new company, AMD is shifting its microprocessor engineers to upstate New York to work with IBM, which is helping AMD develop manufacturing processes for future chips.

AMD may begin to outsource microprocessor manufacturing to IBM or Chartered Semiconductor, which is developing manufacturing technology with IBM, sources have said.