Manufacturing flexibility is the key to enabling chip producer AMD compete with Intel, Tom Sonderman tells Jamie Smyth, Technology Reporter

It's unusual for Advanced Micro Devices (AMD) executives to get an invite to Dublin, which is considered "home turf" for Intel, its bitter rival in the semiconductor sector.

It is no secret that the two firms, which are regularly involved in antitrust disputes, don't get on well. And Intel, which employs 3,600 people in the State, still follows the guiding management principle, popularised by co-founder Andy Grove, that "only the paranoid survive".

But Tom Sonderman, director of automated precision manufacturing technology at AMD, is too big a name to miss addressing the sixth annual European conference focusing on microchip making process technology, even if the event is being hosted by Intel.

Sonderman is a pioneer in the semiconductor industry who specialises in developing sophisticated software to help AMD manage the highly complex manufacturing process in factories.

A graduate of the University of Missouri in the US, Sonderman lays claim to more than 40 patent applications and was recently named by Cambridge University as one of the top 200 innovators of the 21st century. That's a difficult label for anyone to live with, but when competing against the manufacturing might of a company like Intel for most of your career, it is particularly tough.

"The big difference between AMD and Intel in terms of manufacturing is that we don't have the same amount of money to invest in new facilities," says Sonderman. "So we have to be much more flexible in the way we manage our fabrication plants."

Intel has 16 wafer fabrication plants pumping out microprocessors - the silicon chips that act as the brains of computers and other electronic devices - while AMD has one wafer fabrication plant based in Dresden, Germany. A second more advanced plant in Dresden is due to begin full production of AMD microprocessors next year.

"This means that we have to be able to constantly retool our fabrication plants to manufacture different types of chips at a moment's notice to cope with a spike or fall in demand," he says.

The AMD manufacturing model is known in the semiconductor industry as "automated precision manufacturing" and is very different from the "copy exactly" model that is followed by Intel. Under this model, Intel builds its fabrication plants to exactly the same specifications as previous plants and specialises in producing the same type of chips at a single fabrication plant.

The capacity constraints that AMD faces when compared to Intel have forced it to be nimble and compete on quality and design rather than cost, says Sonderman, who notes that AMD successes are now forcing changes to Intel's product strategy.

One of the biggest shifts in the semiconductor industry in many years is expected to occur next month when AMD and Intel launch dual-core chips. The new chips will combine two separate microprocessors on a single piece of silicon, enabling them to perform different tasks - such as scanning for viruses while downloading music - at the same time.

Intel had originally planned to concentrate on continuing to increase processor speeds by producing a four gigahertz chip. However, it changed its strategy to follow AMD last year when it encountered technical problems.

"As we scale things down further and cram more transistors onto a single piece of silicon, it strains the technology," says Sonderman. "As the electrons move around they generate more heat."

Intel engineers' inability to cope with the extra heat produced as processors become much more powerful persuaded the firm to abandon its pursuit of speed and focus on performance.

To combat this problem, AMD and IBM have joined forces to develop insulation technology using new materials that enable electrons to move around faster without producing the same amount of heat. For example, AMD now uses 160 elements in the manufacturing process compared to 20 when microprocessors began to be mass produced in the 1960s, says Sonderman.

He says the current industry shift toward dual-core microprocessors doesn't necessarily signal the end of Moore's Law, the industry's guiding principle over the past 30 years. This law, named after Intel co-founder Gordon Moore, states that every 18-24 months the number of transistors on a single microprocessor doubles, producing far better performance. But 10-15 years down the line things could be different, says Sonderman.

AMD is hopeful that its launch of dual-core microprocessors will enable it to grab more market share from Intel. It is concentrating its efforts on the server market, the upper end of the business computing market where it has already had considerable success with its Opteron chips.

"We are trying to differentiate ourselves from Intel and, to do that, we need to focus on innovation," says Sonderman, who points to AMD's successful introduction of 64-bit microprocessors that enabled customers to continue to support systems based on earlier 32-bit systems.

Analysts generally agree that AMD handled the introduction of 64-bit microprocessors better than Intel, which piloted chips that did not enable customers to run legacy systems.

And this type of customer-focused strategy has helped AMD boost its market share from less than 10 per cent in 1998 to 17 per cent in 2003. But AMD is still a minnow when compared to Intel, which supplies microprocessors to four out of five of the world's computer systems. And figures by IDC show that AMD's share of the market fell by a percentage point last year to 15.7 per cent, while Intel gained a point to 81.5 per cent.

So what went wrong in 2004?

A ruling last week by the Fair Trade Commission that Intel violated anti-monopoly laws in Japan by offering hefty discounts to customers if they agreed to use only its chips highlighted one big problem: Intel's dominance. A similar antitrust complaint has already been filed in the EU by AMD, which last week called Intel an "avowed monopolist".

Sonderman won't dwell on the high-profile Japan antitrust case but says there seems to be a lot of validity in the landmark ruling.

In the Republic, Intel's European home, AMD is even weaker, claiming just 6 per cent market share, says Sonderman, who says that AMD has to compete and learn how to do things better than Intel. Outspending Intel is simply not an option, he adds.

The massive difference in manufacturing capacity available is a major factor in the cyclical semiconductor industry. Last week Dell - one of a handful of key players in the PC market - again said it would not use AMD chips. One reason cited by Dell chief executive Kevin Rollins was that AMD might have trouble meeting mass-market demand for high-volume PC products, although not necessarily for its server computers.

Sonderman says AMD may announce the construction of a new fabrication plant dedicated to producing microprocessors sometime in 2006. Ireland may be considered as a location for the investment, although he concedes that generally new fabrication plants are built where you have existing facilities.

Dresden, the location of its two existing chip plants, should be well placed to win the investment. However, Ireland only narrowly lost out to Dresden when AMD first built in the 1990s.

AMD bought a site in Greystones, Co Wicklow, in 1985, which it evaluated for an Irish project. It only sold this land in 1999 after its German plant was completed.

"There are very few places in the world that offer the skills and infrastructure necessary for plants. Dresden, Ireland and some places in the US are still competitive," says Sonderman. "But Silicon Valley, the home of the technology, is now priced out of the market."

The lure of huge grants valued at $500 million (€388 million) by the German state attracted AMD to Dresden. It also owns manufacturing facilities for flash memory microchips in the US and Japan. Next time around it may be more difficult for AMD to persuade the EU to allow this type of assistance, particularly given EU resistance to the failed Irish attempt to offer €170 million grant aid to Intel for a plant.

Sonderman says AMD made sure it got its grant application in well ahead of the 2004 change in the EU rules for state aid. And he warns against the EU designating chip making as a purely manufacturing process.

Otherwise, no new fabrication plants will be built in the EU and many highly skilled jobs will be lost overseas.