AMD revises contracts to lower its chip manufacturing costs

Advanced Micro Devices said Sunday it has revised the contract with its major chip contract manufacturer, Globalfoundries, so that it can pay a predictable amount for its silicon wafers.

Having a stable source of silicon wafers is important for AMD, which designs microprocessors that serve as the brains in about 20 percent of the world’s personal computers. Better prices for chip wafers can make AMD more competitive against its arch rival, Intel, which has far more resources.

AMD spun off Globalfoundries, which manufactures the chips AMD designs, in 2009, but it retained an equity stake in the company.

Based on the revised deal, AMD will record a non-cash gain of $492 million based on the change in value of AMD’s investment in Globalfoundries. Separately, AMD will now change the way it pays for the finished silicon wafers it receives from Globalfoundries. In 2011, AMD will pay only for the good, working 32-nanometer chips it receives from Globalfoundries.

AMD currently estimates that it will pay Globalfoundries $1.1 – $1.5 billion in 2011 and $1.5 -$1.9 billion in 2012 for wafer purchases under the amended agreement. (Wafers are processed in factories and then sliced into individual chips that are used inside computers).

AMD will also pay a fixed pre-agreed price for 45 nanometer wafers from Globalfoundries. In the past, AMD’s 45 nanometer prices were tied to a cost-plus model and included the fixed cost of underutilized factories at Globalfoundries. That was a relatively high price to pay. In 2012, AMD will resume paying Globalfoundries on a cost-plus basis for its microprocessors and combo chips. AMD has committed to paying for a higher number of chips than it had previously agreed to buy.

It’s typical for major chip design companies to order a supply of chip capacity in advance, since manufacturers such as Globalfoundries have to pay billions of dollars to build the factories well in advance.

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