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Technology Stocks : Advanced Micro Devices - Moderated (AMD) -- Ignore unavailable to you. Want to Upgrade?

To: Tony Viola who wrote (75387)	3/22/2002 10:37:16 PM
From: pgerassi	Read Replies (3) \| Respond to of 275872

Dear Tony: Lets take your example. Intel is well able to process a million wafers in a year. And the market demand is for a million CPUs in any year, say P4s. At $7.5 billion every year for capex, the minimum cost for 1 million a year of wafer production is $7500 a wafer without including variable costs. No matter what the yield is, Intel can not make money unless each CPU gets at least $7500, even if the variable cost for producing another wafer (CPU) is zero! Even if Intel could put all 1 million on a single wafer! That is the problem you have with the situation! This problem is a boundary problem and one of the bounds is market size. Another boundary is fixed costs per die which inversly varies with the number of dies produced. But, no matter how many are produced above the market limit, no more will be purchased and thus a number equal to the fixed cost divided by the market size is a lower bound for low cost producer. All additional production capacity does is increase this bound. This is the essence of overcapacity! If AMD's fixed cost is lower, its lowest cost is the number it can make, if the capacity does not exceed demand. Now the variable cost for Intel may be lower but, the lower fixed cost of AMD may be to such an extent that Intel's lead in variable cost (if it exists) can not overcome. And when the market shrinks, the gap between Intel's and AMD's cost per CPU widens. AMD has stated that if they get $10,000 per wafer in revenue, they make money (Yes, I know that this figure could have changed since then). If Intel could not make money at $10,000 a wafer, Intel by definition is not the lowest cost producer. If demand satisfaction requires no more than 750,000 wafers to be produced in a year (a yield of less than 200 die per wafer), Intel can not be low cost producer with a capex of $7.5 billion since their fixed cost is $10,000 per wafer at least. Even if yields were higher, Intel's fixed costs would still be so much a CPU. In fact they can not be lower since Intel only has a net profit per CPU of a few dollars even with an ASP of $160 or so. Subtract $10 (being overly generous) from that ASP and you get a figure far higher than AMDs $80 to $90 a CPU breakeven. Thus, Intel is not the lowest cost producer. If the market only paid $100 per CPU, AMD would make money and Intel would lose it by the billions. Pete