WSJ Europe Article
June 24, 1999
Dow Jones Newswires
WSJE: Advanced Micro Bets That Chip Will Be Its Salvation
By DEAN TAKAHASHI
Staff Reporter
SUNNYVALE, California -- Atiq Raza may have the toughest job in Silicon Valley.
The president and chief operating officer of chip maker Advanced Micro Devices Inc. is charged with rallying his troops to attack the nearly impenetrable fortress of industry leader Intel Corp. In case you haven't heard, the battle is going badly.
AMD announced Wednesday that losses will be far worse than expected for the second quarter, in another sign that Intel's most potent counter-weapon, price-cutting, is taking a withering toll on AMD.
But the battle is not only an external one. Mr. Raza, a 50-year-old Pakistani engineer who arrived in the U.S. with $3,000 (2,900 euros) in his pocket in 1979, is heir apparent to an industry legend whose legacy needs changing.
Under W. J. "Jerry" Sanders III, a 62-year-old super salesman who drives Bentleys and lives in a mansion near Beverly Hills, AMD has repeatedly come up with promising chip designs only to stumble in manufacturing them. Mr. Raza's job is to deliver on yet another of Mr. Sanders' promises. He is pushing his team to churn out a chip called the Athlon, previously known as the K7, which is expected to take the speed crown from Intel -- and maybe save the company.
"My hopes for AMD are higher than ever," says Keith Diefendorff, an analyst at Micro Design Resources. "But only if they can figure out how to manufacture the thing."
Besides AMD, National Semiconductor Corp. is the only other significant Intel rival in the market, and it already is planning to head for the exit. That means that if AMD can't recover from its own mistakes, the consequences for the computer industry will be huge: Computer makers will have to rely on Intel for most of their chips and consumers will pay higher prices and wait longer for innovations.
Mr. Raza has to deliver results fast, or pressure from investors may make AMD's long-complacent board take radical action, upending the current succession plan in which Mr. Raza is expected to replace Mr. Sanders as CEO in 2002.
As AMD failed to dislodge Intel with its K5, K6 and K6-2 chips, shareholders and corporate governance experts have pressured Mr. Sanders to bring outsiders onto the board and restrain his multi-million-dollar compensation packages. Mr. Sanders says his pay reflects performance and he wants to satisfy shareholders who are "in it for the long term, not 140 days."
The calls for change may get stronger with Wednesday's announcement. The company posted a loss of $128.6 million, or 88 cents a share, in the first quarter ended March 28, after forcing analysts to reduce their expectations in three separate profit warnings. Analysts subsequently believed AMD would lose 40 cents a share in the second quarter, but have once again been negatively surprised. The company said in a statement Wednesday that it now expects an operating loss of about $200 million for the second quarter. Intel, meanwhile, remains enormously profitable because it makes monopoly profits on high-end machines and can afford to cut low-end prices.
While it made manufacturing improvements in the second quarter, AMD expects it will sell only 3.7 million microprocessors, fewer than the 5 million it sold in the first quarter, because customers who were burned by AMD's supply problems last quarter turned to Intel chips. The company made the announcement after the close of markets, but rumors of the pre-announcement forced AMD's stock price to tank Wednesday morning. In trading on the New York Stock Exchange, AMD fell $1.0625, or 18%, to 18.1875.
For now, Mr. Raza must change the internal workings of AMD so that the Athlon launch and follow-up products roll out smoothly. While Mr. Sanders mingles with the Hollywood elite more comfortably than his own engineers, Mr. Raza is more low key. Known for inspiring his engineers, he once said while at his former company, "we got the chip out and there wasn't a single divorce."
The son of an engineer, he grew up in Lahore, Pakistan. His parents came from an aristocratic family but lost everything in the partitioning of India and Pakistan. Before getting bachelor's degrees in physics and philosophy at the University of London and a master's degree in materials science at Stanford University, Mr. Raza helped poor Pakistanis get access to fresh water and electricity. He lives comfortably in a large house in the Silicon Valley suburb of Morgan Hill.
Mr. Sanders, who hits mandatory retirement in three years, calls Mr. Raza "the Michael Jordan of microprocessor design." After a few more years of coaching, Mr. Raza will be both a great basketball and baseball player, says Mr. Sanders. "Our belief is old men for counsel, young men for war," he quips.
And war it is. The Athlon, which Mercury Research estimates could sell for $300 to $600, compared with AMD's average chip price of $78, is the company's hope to break free of Intel's suffocating price cuts on the low end consumer market. With Athlon, AMD can take the battle to Intel's strongholds in high-end consumer machines, corporate desktops and the highest-end servers and workstations.
"We haven't lost our window of opportunity," says Mr. Raza, pointing to a spreadsheet in his spotless white office at the company's headquarters here in Sunnyvale. "Intel can demolish our profit and loss picture because they cut prices in the one market where we participate and then keep their other prices high. We have to fight them in those other markets too."
But, he concedes, "It's impossible for AMD to become profitable without breaking out of the area where it is stuck. It has to execute flawlessly. Profits are a good deodorant for Intel, hiding their mistakes. But we stink. Our mistakes show up on the bottom line."
Producing the Athlon on time isn't Mr. Raza's only challenge. Mr. Raza has never run a company with 13,000 employees, although his track record shows nothing if not determination.
After several years in Silicon Valley, Mr. Raza in 1988 became engineering chief at Nexgen Inc., where he earned his stripes in guerrilla warfare. In a cash crunch, he recapitalized the company and took over as CEO in 1991.
Under him, Nexgen persevered to get a chip onto the market but was often ridiculed for producing "white papers" and delays. After going through $100 million in capital and nine years in development, the company launched a chip to compete with Intel's Pentium in 1995. Out of cash, Nexgen turned to AMD, which paid an extraordinary $615 million in stock for the 140-person company because of its unique design expertise and methodology.
While others with abrasive styles didn't last at AMD, Mr. Raza thrived as the company's chief technical officer. Respectful in dissent, Mr. Raza alone argued that AMD had to invest in a technical infrastructure well beyond microprocessors. Mr. Sanders felt such moves doomed Nexgen, but he eventually realized that AMD needed to counter Intel by investing in other components like chip sets.
When AMD couldn't get enough working K6 chips out of its factory, Mr. Raza slept only a few hours a night until he figured out why. He followed the chain of command when giving orders, but he reached "all the way down for data collection so that he knew more than the person reporting to him," says AMD vice president Richard Heye. Finding coordination problems, Mr. Raza unified AMD's warring manufacturers and designers, earning respect up and down the ranks.
While not a designer on the Athlon team, Mr. Raza organized the project and chose its key managers. In contrast to Intel's large design teams with hundreds of people, the Athlon squad had a manageable 120 engineers, small enough that experienced managers could see the big picture and easily relate decisions to individual engineers. The team designed the chip in just 17 months, less time than some chip projects took at Intel.
By all accounts, the Athlon chip is relatively easy to make and AMD has lined up an impressive number of component suppliers -- many of whom are disaffected with Intel -- who will grease the launch of the Athlon with their own related products. Key computer makers like International Business Machines Corp., Gateway Inc. and Compaq Computer Corp. are expected to use the Athlon in coming months.
Mr. Raza knows Athlon won't change things overnight, but patience may be the one thing he shares with Mr. Sanders, who has battled Intel for decades. With bleak earnings ahead, they may be lonely at the top for some time longer.
"I got tired of the roller coaster at AMD," says Greg Favor, a key AMD chip architect who jumped ship to a network chip maker recently. "But Atiq sticks with it. Even if it is an enormous uphill battle, inside and outside the company."
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