Q&A: AMD Exec Promises Replenished Supply For System Builders

Stephen DiFranco, corporate vice president of marketing at Advanced Micro Devices, discussed AMD's shortage of desktop processors in the channel, why it happened and when the Sunnyvale, Calif.-based chip maker expects to replenish the supply for system builders in an interview with CRN Senior Writer Paula Rooney.

CRN: Can you talk about AMD's chip shortage in the channel?

DIFRANCO: As our company becomes a broader supplier, we're in a lot more consumer platforms in stores. Sometimes in the fall, OEMs build up Christmas inventory, and we have a little glitch in channel inventory because we have to supply more to OEMs.

CRN: Many system builders believe the problem relates directly to AMD's new relationship with Dell.

DIFRANCO: No, Dell only has two SKUs with [Athlon] 2X in them, and the assumption that channel inventory is going to Dell isn't true. Before, we were just channel, and now there's a mix with OEMs. What's changing is the tremendous demand for consumer finished goods. Sales of notebooks are skyrocketing, and sales of desktops are up. What's really happening is businesses move from desktops to notebooks, and the channel has struggled to deliver on that. As the channel moves from building desktops and reselling finished products, we now sell more processors to the channel.

CRN: System builders are less interested in notebooks and more focused on getting desktop processors.

DIFRANCO: You're right. The channel is challenged with the issue of whitebooks, and it hasn't taken off. They're hard to build and hard to build less expensively than the OEMs can. The channel needs to look at that closely and see how it'll affect them over the long term.

That's a big challenge in the channel, and we're directing some of our inventory to notebook builders, ODMs, in Taiwan for notebooks vs. the channel. And they end up getting sold by CDW, Tiger Direct and NewEgg. That's a processor in the channel. It's just in a Fujitsu notebook or Gateway notebook.

CRN: That may be true. But it's just not happening for system builders, and they want desktop processors now. Why can't they get them?

DIFRANCO: We opened up new fab, and we're converting old fab and doubled our capacity for test and packaging. And in all of that, it's still not keeping pace with what is becoming an incredible fourth quarter for this industry. Demand for processors in the quarter is unbelievable. One reason is that there' a lot of concern to make sure non-Vista inventory gets sold and [there's] aggressive pricing on desktops, notebooks and parts. Everyone wants anything that's not going to work with Vista out of their inventory. So retailers are underpricing a lot of stuff and causing a huge wave of buying, and then those prices dictate pricing for the rest of the country.

CRN: Are there other reasons?

DIFRANCO: The second is the shift to dual-core processors. We've got tremendous demand for dual-core processors from all channels, and everybody wants desktop power that's [Vista's Aero GUI]-ready. So you have to have enough memory. Microsoft is creating a situation [where] if you want an advantage, you build premium-ready PCs. And that means everyone wants dual-core processors.

CRN: Right, and Dell is positioned to make a killing on the Vista launch because system builders can't find any dual-core processors from AMD and are missing out. Can't you see their frustration?

DIFRANCO: I do understand their frustration. We're actually going to ship more processors in the fourth quarter than ever before in the company's history.

CRN: How many?

DIFRANCO: We don't publish [that number], but it is substantially more because we have our new fab up and running, and wafer output is dramatic. What we ship out is a lot, and the majority of it ends up getting cycled in the consumer [arena]. The consumer market will take a lot of inventory between the second week of October and the first week of December. Both OEMs and the channel get less inventory in those weeks because we're mixed. CRN: Do you expect the shortage to ease soon for system builders?

DIFRANCO: The channel will have access to a lot of inventory in December because they don't need that until January [when Vista ships to retail]. We think we timed this right. Now it's frustrating for them today because a group of OEMs have earlier cycles, and we're building up now so we can supply a big pull for the channel. System builders won't have a pull process until Vista ships. So they're not going to need processors for Vista until then.

CRN: When will the shortage end?

DIFRANCO: Seeing shortages in the channel is uncomfortable. At the end of October and November, we bias the OEMs because they need stuff early to send to Taiwan. And then we'll bias the channel toward the end of the year because they won't get their software from Microsoft until the end of January. I know it feels uncomfortable, but I think we're doing it correctly. Unfortunately, [there's a shortage now and] I wish we could build more of these suckers.

CRN: That's a nice problem to have?

DIFRANCO: I would much rather have this inventory and reach out to my customers than have my customers not have supply they're asking for and orders to fill. So no, I'm not comfortable with it. We're overwhelmed by the demand we're getting and we're fighting every day to get on top of it. We've got folks all up and down the supply chain making hundreds of little improvements to get the orders to ship better. It's a thousand links in the supply chain, from the silicon to the system builder. It's a thousand links we have to make work, and we're working on it.

CRN: So AMD is more optimistic about replenishing supply fairly soon?

DIFRANCO: I'm very optimistic it'll be in December. I'm as perplexed as everyone else as to what will happen after Vista ships.

CRN: Does AMD have any allocation policies that determine the percentage of supply that goes to OEMs vs. the channel?

DIFRANCO: There really aren't any allocation policies. We try to be smart about balancing the marketplace, and what we tried to do for this cycle is supply the OEMs in October and November because they needed it then. And we'll push more stuff to the channel at the end of the quarter. It's a constant portfolio balancing.

CRN: Do you think Microsoft messed up the system builder channel by delaying the release of Vista until after the holiday, upgrade coupon or no coupon?

CRN: No, it was a good decision by Microsoft. The holiday season is challenging because of retail. And there are end-of-the-year budgets running out, and customers need to buy PCs then. It's not a good time to introduce a new operating system, at the end of the year. Microsoft selected a date that made sense. In the consumer world, the year doesn't end until January because of the post-holiday sales. So I think they've selected the right date to do it.

CRN: What about AMD's plans to ship a quad-core processor, especially as Intel gets ready to ship?

DIFRANCO: In mid-2007. We'll start with the server and work our way down.

CRN: What message do you have for AMD's system builder partners?

DIFRANCO: We covet them and thank them for their loyalty. We're trying to meet their demand as well as balance their needs with our other customers. We've always been very blessed by this channel, and we're under pressure from competitors. They've been loyal to us, and we hope they stay loyal to us. We believe we've been a better company to partner with. We don't have all the marketing dollars and all the fancy systems of [our competitor Intel], but we're a better company to do business with. And our channels team is on a first-name basis with system builder partners.