A Bubble Fit to Burst: How AMD Nearly Met Its Downfall

Global semiconductor company, AMD, displayed steady growth in recent years, but the company’s expanding bubble nearly burst amid supply chain woes. A combination of rising market share stunted by a lack of supplier diversification and the global chip shortage were just a few factors that rocked the company and led it to re-evaluate its production model.

Positive Beginnings - The Rise of AMD

The steady rise of AMD started in 2017, when it launched its first chips based on its Zen architecture with the help of TSMC’s top-tier process for chips and continued through Q4 2020.

In 2019, EU manufacturers began switching to AMD’s Ryzen CPU series, with overall demand growing in 2020 – allowing the company to narrow the market share margin with Intel, and even slightly surpass it in certain sectors. The gap further narrowed when Intel was faced with manufacturing struggles leading the company to scrap much of what its factories had made during trial runs of its new generation of CPUs. As a result, AMD gained 50.8% of the market share for Windows desktop CPUs.

While the COVID-19 pandemic began to take its toll on all aspects of the supply chain, AMD fared well –continuing to grow its market share because its latest Ryzen 5000 desktop processors was the top pick for PC gaming, a product that was in extreme demand as people shifted to working from home. Apple, for instance, announced it may replace Intel processors with AMD in its future MacBook and other Mac devices. Unfortunately, in Q4 2020, the shortages caused by supply chain disruptions started to impact the company, creating a decline in the strides it made to take over as the leading CPU manufacturer.

Fit to Burst – Near Downfall for AMD

What attributed the dramatic turn from steady growth one moment to an unfortunate downfall the next? AMD (along with many other US semiconductor firms) outsources the advanced manufacturing of logic chips, which means the company does not operate its own fabs but contracts to foundries. A few attributing factors, including the amassing raw material shortages, demand for the automotive sector to rebound and increased cryptomining activity began threatening the production model that AMD grew dependent on for manufacturing its chips. Add the stiff competition among chipmakers for resources and electronic components, and it became a matter of time before AMD experienced the repercussions of the damaged supply chain.

In the second half of 2020, AMD’s production was further inhibited by severe capacity constraints at the biggest global foundries, which led to extremely tight supply and skyrocketing prices. As a result, AMD faced severe shortages for many of its products, stunting market growth for the company. Unfortunately, AMD’s rival, Intel, was at an advantage since it does not depend on other foundries for chip production.

With limited resources, AMD prioritized certain products over others, focusing on the supply of higher-end and higher-margin CPUs and graphics cards for PCs and gaming – including CPUs for future PlayStation 5 and Xbox Series X consoles. While Intel was able to produce its own chips to some capacity, Intel decided to strategically focus on lower-end processors that they outsourced to TSMC. With TSMC increasing manufacturing capacity for lower-end processors, such as Intel’s Celeron and Pentium, AMD was unable to keep up and couldn’t produce APUs, along with a variety of other products.

With nowhere else to turn, customers began reverting to Intel. Intel started regaining some of its market share with increased sales of lower-end processors and a new manufacturing capacity in Q2 2020 to address CPU shortages in that sector. The surge in lower-end products resulted in a 15% year-over-year decrease in Intel’s average selling price for laptop processors but grew 30% in revenue for Q4 2020.

An Optimistic Outlook – AMD’s Potential Rebound

The cataclysmic disruption to its supply chain left many skeptical of a rebound for AMD, but the company persisted and saw growth in some of its other sectors. The company continues to persevere through the many obstacles to find steady ground once again to prevent the bubble from bursting.

Despite losing some market share to Intel in PCs, AMD still ended 2020 with a 6.2 point increase in its processor market share compared to Intel over the previous year, bringing its share to 21.7%. A large factor in AMD surpassing Intel’s in this sector was its success in 10 nm chip production. Major supply gaps arose when Intel struggled to roll out a lot of its newer products that required the new node, giving AMD the opportunity to pull ahead. This is a positive indicator of AMD’s future growth against Intel as the company already has a competitive advantage in the data center space through the launch of its latest EPYC server processors based on 7nm processor technology, allowing it to be twice as fast as Intel’s competing chips. AMD already has powerhouse companies like Amazon, Cisco, Dell Technologies, Google, Microsoft, Lenovo and Tencent using the EPYC server processors.

This might prove difficult as Intel ramps-up its production strategy by utilizing its ABF substrate allocation, securing substrate for the next five years knowing AMD is getting limited supply and production is at a limited capacity amid material shortages. Intel plans to use this advantage to compete head-on with AMD in the mobile CPU front in order to buy more time to develop its 7nm technology.  AMD still plans to complete the transition to the 5nm manufacturing node within the next couple of years, which will widen the gap between AMD technology and Intel’s.

However, to prevent history from repeating itself in its production model, AMD is amending its wafer capacity agreement with GlobalFoundries to lock in minimum annual capacity of 12nm and 14nm nodes through Dec. 31, 2024. This capacity will support AMD’s cutting-edge products like CPUs, GPUs and dies for its Ryzen and EPYC processors. Its ongoing agreement with TSMC also includes continuing to provide 7nm compute cores for its products.

The revised agreements factor in AMD’s plan to purchase approximately $1.6 billion USD of wafers during the 2022-2024 period and will give the company full flexibility to turn to other foundries for any product manufactured at any node.