NEW YORK - By the end of this week, chipmaker Advanced Micro Devices should reveal how it plans to save itself in 2003.
There is much work to do at AMD (nyse: AMD - news - people ). Losses are piling up, totaling about $448 million in the first three quarters of the year on sales of $2 billion. Much of the share of the global PC processor market that it had seized--point by precious percentage point--from rival Intel (nasdaq: INTC - news - people ) has evaporated. Intel's chips now go into about 83% of the world's PCs, up from 77% a year ago, according to Mercury Research. The overall decline in demand for PCs, and hence the chips that go into them, hasn't helped.
It also hasn't helped that Intel continues to release faster PC chips; it's due to break the 3-gigahertz performance barrier any day now. AMD, whose chips have lagged behind, has argued that pure clock speed isn't the only thing that accurately measures a chip's performance. The argument may hold up, but Intel's response--aggressive price cuts--have done much to extend its lead.
Chief Executive Hector de Ruiz has a plan to get the company back on track, but it can't happen without significant pain. The goal is to cut $100 million from quarterly expenses next year, which would require a workforce reduction. Rumors have it that pink slips have already shown up in the in-boxes of hundreds of AMD employees around the world. By the end of the week, the company should be ready to confirm exactly how many jobs will be lost, but expectations are that the cuts will range from 10% to 20% of AMD's staff, or between 1,300 and 2,600 jobs. Those layoffs will come on top of 2,300 jobs eliminated in September 2001, and another 200 in May.
But there's more cutting to be done. Ruiz expects to reach a point where AMD, which turned in sales of $508.2 million in its most recent quarter, will be able to break even with sales of $775 million.
That means more cuts in tender places. First, Ruiz says AMD will have to take what he calls a "significant charge" for restructuring costs; he has so far described this as being in the "several hundred million dollar" range.
Other points of the cost reduction plan call for cutting sales, general and administrative costs by 9% for 2003, as well as another 9% from research and development.
"The plans seems to indicate that management has a good grasp of what they need to do," says Dan Scovel, analyst at Needham and Co. in New York. "But these are pretty significant changes, and I need to know more details before I'm going to endorse it."
Research and development has been one of AMD's bright spots in recent years. AMD spent more than $650 million on R&D last year, and the fruits of R&D labor from previous years are starting to show. Its Sledgehammer 64-bit server chip, which will be sold under the brand name Opteron, is showing significant promise for helping the firm break into the low-end server business. AMD's Clawhammer chips, which have been delayed until next year, are expected to add new fuel in the PC performance race with rival Intel.
Clawhammer, a PC chip that is capable of running in both 32-bit and 64-bit modes, was expected to retake some of the ground that AMD lost to Intel over the past year. It was initially scheduled for release before the end of this year.
"It used to be that Sledgehammer, the server chip, was going to be icing on the cake," Scovel says. "Then it went from being the icing to being the cake. Now it's the bread that AMD hopes to survive on."
AMD's R&D efforts have pushed the envelope in other areas. The company just announced the availability of a new type of flash memory chip that stores twice the data of other flash chips without slowing down performance.
Other indications of AMD's long-term cost reduction plan are already clear. Earlier this year it announced a deal to jointly build and operate a chip factory in Singapore with Taiwanese contract chipmaker United Microelectronics (nyse: UMC - news - people ). It has also shifted some of its research efforts on next-generation manufacturing technologies to joint efforts with German memory chipmaker Infineon (nyse: IFX - news - people ) and UMC. Kevin Krewell, analyst at Instat/MDR, expects more deals like these, in which AMD seeks to shift some of its costs onto partner companies.
"It helps AMD mitigate the impact on the business, but it gets the costs savings it needs," Krewell says. "The tradeoff is that AMD would lose some of the control over things it develops in-house."
And after what appears to be the toughest two-year period in the chip industry's history, expectations are that the picture should brighten next year. The Semiconductor Industry Association last week predicted a 19.8% growth in overall chip sales for 2003.