Hector Ruiz, president of AMD Devices Inc (AMD), gets a reminder of the chipmaker's rivalry with Intel Corp from his Austin, Texas, office.
8km away, Intel's half-built skyscraper mars the skyline. The chip giant stopped building in February to cut costs as profits fell and its share price slumped. On Ruiz's campus, their PC fabrication plant, or "fab," is running at full speed.
PHOTO: BLOOMBERG
AMD's stock, which has fallen in 12 of the past 18 years, is the sixth-best performer in the Standard & Poor's 500 Index this year after rising 79 percent since Jan. 1.
The turn of events isn't lost on Ruiz, 55, who was tapped by Chief Executive Jerry Sanders in January 2000 to mend AMD's manufacturing. Before he arrived, the company had grappled with delays in introducing new chips, which led to US$282.9 million in losses from 1996 to 1999.
"We're still so shell-shocked from having such a difficult time for so many years," Ruiz says. "You have to really look in the rearview mirror and make sure you didn't forget anything."
Ruiz's scrutiny of AMD's plants and procedures is yielding results. A factory in Dresden, Germany started running without a hitch in June 2000. It now produces the company's most sophisticated chips -- ones that use copper wiring instead of aluminum ones to create faster connections.
Ruiz championed the use of copper as head of Motorola Inc's chip business from May 1997 to December 1999. He got to know Sanders through the companies' collaboration on copper technology.
Gaining Ground on the leader
AMD held the speed record for PC processors for most of last year. In February 2000, it introduced an 850MHz chip and followed with a 1GHz model a month later -- both of them before Intel unveiled comparable products, though Intel jumped ahead in November 2000 with its Pentium 4.
During the first quarter of 2001, AMD took four points of market share from Intel, bringing its share of processor sales to 21 percent versus Intel's 78 percent. Ruiz wants to boost that to 30 percent by year-end.
Unlike Intel and bellwether computer makers Sun Microsystems Inc and Dell Computer Corp, AMD hasn't cut profit forecasts this year. Ruiz says the company is on track to earn US$1.50 a share in 2001, which would top the US$1.38 average analyst forecast by First Call/Thomson Financial.
As AMD's shares have soared, Intel's have dropped 8.5 percent this year, and important institutional investors have taken note.
For example, Fidelity Investments added 4.7 million shares in the first quarter, according to its May filing with the US Securities and Exchange Commission. Janus Capital Corp added 9.8 million shares during the same period, bringing its stake to 23.8 million, according to SEC documents.
"They've got good products in place. They've been first with higher megahertz," says Scott Vergin, a fund manager at Lutheran Brotherhood Inc, which owns 400,000 AMD shares, "and relative to Intel, the stock is cheap."
Even with its surge, AMD trades at 18 times forecast earnings compared with 51 times for Intel.
Not everyone is sold. The personal computer market, which accounts for about half of AMD's US$4.64 billion in annual sales, is heading for its worst slump in 15 years, according to Dataquest Inc analyst Charles Smulders. PC sales will rise 6.5 percent this year -- the slowest pace since the 2 percent growth in 1986 and less than half the 16.7 percent average annual increase, he says.
That means PC makers are less likely to take chances on a company with a shaky track record.
"There hasn't been a competitive, compelling reason from a price perspective for companies who use Intel chips to switch," says Leigh Morrison, Compaq Computer Corp's vice president of West Coast enterprise sales. Compaq buys 83 percent of its chips for consumer PCs from Intel.
Ruiz is trying to lessen AMD's dependence on the PC market by expanding into higher-margin businesses like chips for laptops and servers -- areas in which Intel is also making advances. Profit margins on server chips are 75 percent to 85 percent compared with 50 percent on PC processors, according to Nathan Brookwood at market researcher Insight 64.
Ruiz has a team of engineers working on a new manufacturing process known as silicon-on-insulator, or SOI.
New Procedures
The procedure can reduce the power a chip uses to perform calculations, enabling laptop batteries to last longer, for instance, while ratcheting up performance by as much as 30 percent, according to VLSI Research Inc. However, it costs 20 percent to 30 percent more to produce chips by using the method, the researcher says.
"We either make it or we die by it," Ruiz says.
AMD has gained ground on Intel in the past only to slip back when a chip design or manufacturing procedure proved too complicated. Even with a 23 percent sales decline in the first quarter from the fourth, First Call forecasts that Intel will generate US$26.9 billion in revenue this year -- more than five times AMD's.
The biggest chipmaker has US$10.1 billion in cash and short- term investments and an US$11.7 billion budget for R&D and capital spending. AMD has cash and investments of US$1.6 billion and about the same amount for R&D and capital spending.
Intel's resources make efforts to pass the company -- and then stay ahead -- tough. "Before, it was, find Intel's bumper and get as close to it as we can," says Dirk Meyer, leader of AMD's PC chip unit. "That was a heck of a lot simpler."
In the 1990s, it looked like AMD was going to loosen Intel's grip. Then, manufacturing and design glitches crushed the company's plan to become a serious contender by selling cheaper, yet equally powerful chips.
"AMD has broken my heart in the past," says Louis Kokernak, senior equity strategist at Martin Capital Advisors, which owns 25,000 AMD shares. "They're going to have to have three consecutive years of good execution before I'm satisfied with management."
In 1996, AMD was a year late with the K5 processor -- its answer to Intel's Pentium that was sweeping the PC industry. It had difficulty making the next model, the K6, in large quantities. The K6 trouble left losses totaling US$125 million in 1997 and 1998.
A very Poor 1998 Holiday Season
AMD's inability to produce enough of a faster chip prevented the company from capitalizing on demand for PCs during the 1998 holidays and into the new year. Sanders cut sales and earnings targets three times in the first quarter of 1999.
When AMD reported a loss from operations in the amount of US$118.8 million, or US$0.81 a share, rather than analysts' original forecasts for a profit of US$0.13, Sanders commented, "The best thing that can be said about the first quarter is that it's over."
Ruiz hasn't shaken off the apprehension. "This industry is such a volatile and fragile one that you're always walking on a minefield," he says.
Ruiz reviews production of the Dresden and Austin processor plants each week and started five-day training sessions for new managers. He spends three days a week in Austin and commutes to AMD's Sunnyvale, California, headquarters for the other two.
He says the scrutiny is necessary as AMD contemplates advanced server chips -- a complicated market but one that holds more growth potential as PC sales fade.
Sanders, 64, who will retire as CEO in April 2002 and as chairman in 2003, says he chose Ruiz precisely because of his technical expertise. "You have to be an engineer to run this company," Sanders says.
Sanders himself spent his early career as head of marketing at Fairchild Semiconductor. He started AMD 32 years ago, a year after his former colleagues at Fairchild -- Robert Noyce and Gordon Moore -- founded Intel.
Sanders's early dream was to be a movie star, but a fight left his face scarred. Today, his taste for tailored clothing and Rolls Royces supports the image that he's better suited to pitching his company than to handling the daily oversight that manufacturing requires.
Ruiz, by contrast, grew up in Mexico wanting to be an auto mechanic. At Motorola, he demonstrated that he could get things running. He cut 21,000 workers, pruned low-profit products and made higher-margin semiconductors for cars, computers and consumer electronics, which allowed the unit to turn a US$47 million profit in the first quarter of 1999 from a loss of US$58 million a year earlier.
"He instilled a lot of order into the Motorola manufacturing machine," says Mercury Research Inc analyst Mike Feibus. "It's a good idea to focus on where you're weaker, and that has been the Achilles' heel for AMD."
Workers welcome Ruiz's manufacturing background, saying he pays more attention to details than does Sanders or any of Ruiz's predecessors. "He has the best comprehension of anyone who's been close to that level," says John Behnke, director of operations at the Austin plant.
Ruiz often starts discussions by asking for updates on cycle time, a term that measures how long it takes to build chips. He makes AMD managers compare their operations against 18 other plants, including those of Intel and Motorola.
A really Tough Boss
Plant managers say he can be tough. "If one of our metrics is not OK, he politely and pointedly asks what our improvement plans are, what our time line is," says Hans Deppe of the Dresden plant.
Another Ruiz goal is to increase the number of usable chips per batch. That's key for AMD to sell its chips more cheaply than Intel, even as Intel slashes prices -- by 69 percent on its 1.5GHz Pentium 4 since November, for instance.
New software lets engineers monitor the production line and tweak the setup of the next machine to make up for small errors. If the wire on a pattern is too wide, the next tool can etch a line that's thinner.
Brookwood, the Insight 64 analyst, estimates that AMD was getting 40 percent to 50 percent good chips per batch in late 1998 and early 1999. Today, the performance is 80 percent to 90 percent and comparable with Intel's, he estimates. Neither company will disclose actual manufacturing yields.
Ruiz has made sure AMD can adjust the type of chips it produces as well. In the first quarter, the company had planned for all of its Athlon chips to be built at its German fab.
However, when demand spiked as customers started buying Athlons rather than chips from Intel that cost 17 percent more, AMD added Athlon production in Austin to fill the orders.
The switch meant routing the silicon wafers on which chips are built to a different tool on the manufacturing floor, and downloading different software to print chip patterns and scrape away any extraneous material.
Engineers started to work with new software and procedures in 1995 and Ruiz has overseen the most of this work personally. Today, AMD can stop chip production at a few steps along the way and can switch to a new chip within two days.
That's a change from 1999, when it couldn't make enough of one chip to meet demand, let alone switch when one product proved more popular.
"We can't live in that kind of mode," says Behnke, the plant manager.
The first-quarter change to the Athlon in Austin helped AMD lift its sales CPUs for desktop PCs 17 percent over the December quarter. Intel, hurt by slack demand for PCs and servers, saw its PC processor sales fall 25 percent to US$5.13 billion during the same time period.
For Ruiz, the hardest part comes next: building future chips with SOI. He has, however, one factor strongly in his favor: About two-thirds of the 150 engineers on the project worked together on the Athlon, the CPU that's beaten Intel and AMD's first chip in years that didn't run afoul along the way.
SOI Server Chips
AMD plans to use SOI in server chips, as well as products for laptops and desktop PCs. Ruiz expects to extend the technique to top-notch systems now run with chips made by Sun, IBM Corp and Hewlett-Packard Co.
Intel derides the SOI effort, saying that the costs outweigh the performance gains. "We've got the fastest transistors without SOI," says Intel Senior Vice President Sunlin Chou.
Though his engineers say early work is promising, Ruiz admits that the finished product will be the real test. "You never quite know -- until you finally get silicon -- if you did what you thought you did," he says.
AMD workers agree that it's a hefty task to introduce chips in the second half of 2002 that use SOI, as Sanders has said they will. The effort is crucial, analysts say.
"Reputations are built very slowly and destroyed very quickly," says Brookwood of Insight 64. "If they were to fumble in some very visible way, people would say, `It's the old AMD again.' If Intel fumbles, no one says they'll never recover."
As high as the hurdles look, Ruiz says he'll win pieces of the laptop and server markets by reducing the amount of power that chips consume and by perfecting SOI. That will help him gain business-PC clients -- a bigger and more profitable market than consumer PCs.
If Ruiz fails to show consistent progress or if his bet on SOI fails, AMD will have lost time, money and perhaps its final shot at sustaining shareholder confidence.
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