Thursday, October 12, 2006

Dell sucking AMD's capacity (& life) dry

In spite of dialling down the cache from 1MB to 512kb and removing some SKUs it appears AMD is running into a capacity shortage thanks to Dell having first right of refusal on supply:
http://www.theinquirer.net/default.aspx?article=35004

I was beginning to think they had avoided this pitfall but it appears not (scroll down the comments here).
http://sharikou180.blogspot.com/2006/09/amd-won-dell-2-years-too-late-im-not.html

The implications of this are two fold:

1. Dell probably buys on shorter cycles than most other customers to keep inventory low. However, due to their size AMD and Intel probably have to keep a buffer aside for Dell in order to meet their contractual obligations. What this means is if Dell is not moving their SKUs, they still have to hold the inventory for some time thereby starving other customers when capacity is constrained.

2. The fall out of #1 above in this case for AMD is that distribution and unbranded channel without stock will be ticked off that they are losing sales to someone else and begin to put their weight behind someone who can guarantee supply. In this case Intel. The key issue is their "faith" in the supplier is lost. This is exactly why Intel lost significant market share when they had a chipset shortage. And now AMD is going to lose the trust of the channel and they will put their sales push behind Pentium & Core 2 where availability is less of an issue. In addition, they will be further ticked because Dell will be under-cutting them so now AMD is not only starving them of supply but helping the big OEM eat their breakfast.

As the shortage escalates, this becomes a proportionately bigger and longer term issue for AMD. Think about it - the small unbranded DIY guy sitting in his store, customer walks in and asks for PC - what's he going to do...push AMD when he doesn't have stock or push Intel.

The INQ article links to this post on Hexus.net:
http://www.hexus.net/content/item.php?item=6890

Which links to this apology to customers from Mesh Computers in the UK. As you can see, they don't appreciate being on the back foot and willing to push Intel instead:
http://forums.hexus.net/showthread.php?t=87080

So I had a look at the Mesh web site to see whether they had indeed increased their Intel push. The answer is yes - only 6 out of 30 desktop SKUs on offer are AMD...everything else Intel:
Mesh Computers All Desktops

So it appears winning Dell may not only be too late, it may be at an awkard time. It would have been better to win Dell once their 65nm was ramped and reducing any capacity issues. Even 2 quarters of shortage will be a problem as channel momentum will swing Intel's way and re-gaining that momentum across hundreds of thousands of channel players across the world is a BIG task that takes time.

If this capacity shortage is true, it is potentially a big issue for AMD. Specially if Dell is squeezing them on margins and then dropping systems at super low prices as it appears they are. It's a double edged sword with just one head to cut.

I repeat, AMD will lose market share in Q4 if not earlier. Momentum will swing back toward Intel with market share gain from Q4 as well as margins improving from the projected 49% in Q3.

18 comments:

Anonymous said...

This is becoming a real problem. Im having very great diffuclties finding several amd cpus in sweden, allmost all bigger e-shops are missing 4200, 4600, and 5000 is nowhere to be found since july.

Also EE versions are really scares..

/Mork

Anonymous said...

Looking at Newegg, a couple interesting things.

Firstly, prices are creeping up. The 3800X2 is up about $20 from a few weeks ago.

Secondly, at first glance it seems that all SKU's are in stock. But, a closer check reveals that the 65W 3800X2 SKU is gone, and I don't mean out of stock - it is not there anymore.

It is my belief (though I cannot prove this), that the 65W 3800X2 is likely binsplit taken from something like the 5000X2.

Consider that the parametrics of a fast part would work well at a lower voltage, and lower frequency. It's pretty basic physics. So if this is true, would you rather sell a part for $180, or $475?

If production is limited, definately $475. If you have more than enough parts, sell both and hope that volume on the lower priced part makes up the difference.

I think though limited availability has caused the mysterious disappearance of the 65W 3800X2 SKU.

Anonymous said...

DELETE PREVIOUS.

My bad, the 3800 65W is there...

The Sheepshagger said...

I enjoyed AMD's reply to the Hexus story (found at the bottom of the link you provided):

"Jan G├╝tter, AMD's Public Relations and Analyst Relations for Europe, Middle East and Africa (EMEA), was kind enough to offer AMD's thoughts on our take.

'The competitive performance and advantages of AMD’s current product offerings combined with our widening relationships with system builders and regional and global OEMs have hampered our ability to fully meet the demand of some customers, including regional OEM partners. The situation is slowly but steadily improving, and we continue of course to work every avenue to meet the needs of our customers. Because we are in our quiet period prior to reporting our Q3 2006 Financial Results, this is as detailed a response as we can provide at this time'.
Interesting, eh?"


Interesting indeed!

ashenman said...

Isn't this a sign that AMD will gain marketshare? Dell isn't even putting that many AMD desktops/laptops out there, but apparently they are buying more chips than they're selling? This probably means they're ramping for a larger marketing program. Thus AMD market share would increase. I don't get why the channel really matters, being that it's such a tiny portion of PC sales. Other OEM's aren't complaining or giving signs of having AMD shortages, so the portion of the market that actually sees significant enough sales to effect the entire market, isn't having problems with AMD. Ya, it sucks for us DIY'ers for now, but if we were all short sited enough to think that shortages to us really mattered that much, we wouldn't be DIY'ers.

180 Sharikou said...

Anonymous - an interesting point on the rising prices. What this means is a scarcity so Newegg is making more money than MSRP. Similar to what was happening in the early stage of Core 2 when parts were scarce.

Ashenman - a significant volume of WORLDWIDE PC's are sold through unbranded channel and tier 2/3 small OEMs. These guys are serviced by distribution and the people affected. In Asia which is now around 30% of global consumption more than 50% of CPUs move through distribution. So this is a big deal. It's an even bigger deal because the small players tend to move the leading edge technology faster. Simply because the margins are higher and because thousands of these guys with small stores operating on wafer thin margins need to squueze as much upside as they can out of every sale.

On the Dell front, it's quite possible they are moving large volumes of AMD. It is equally likely (read my post again) that AMD is holding the inventory for Dell as part of their contractual obligation and Dell may not finally order all those CPUs. Guess what happened to Intel in Q1. They had to revise their quarterly guidance downward because a customer of their's (guess who) decided to not take all the CPUs they had asked for late in the quarter.

But the most critical issue is that their are customers of AMD who are getting pissed off that they can't get supply while Dell is eating at the trough at their expense. These guys will start pushing Intel and this will gather momentum over time if AMD cannot rectify the situation fast enough. Do you now understand why Otellini in his Q2 earnings call said the biggest mistake they made last year was not building enough inventory on chipsets which allowed AMD to walk into their customer accounts and that he will never make that mistake again. Do you now understand why he built so much inventory and is willing to do a yard sale or write it off as long as he does not ever have to tell a single customer he doesn't have a product to supply.

We shall see whay happens by Q4 if not earlier - AMD is going to lose market share.

Sharikou, Ph. D said...

Please note that with AMD's current capacity, it's enough to supply 33% of the market.

Having a capacity constraint means AMD is already at 33% of the market.

Fortunately, relief is coming. Charted FAB7 and FAB36 are ramping, both are ready for 65nm--which will boost capacity by 2x overnite.

Intel's BK is not far away.

Anonymous said...

So, if as you say, and I'm paraphrasing; equally possible Dell are moving large volumes of AMD. And presuming AMD's capacity hasn't mysteriously shrunk, but more likely is increasing, how come your so gung-ho on market share loss. If AMD is holding chips for Dell, then I could see how your theory would make perfect sense.

Also, the comparison between Paul O.'s missing chipsets and AMD supposedly stiffing the channel now is wrong. Paul had to say something and that sounded better than "some of our most loyal clients have decided to go AMD because they have the better product." Let's not try to make Paul O. out to be some genius because he has billions worth of stockpile. He'd shove everyone down Dell's throat to be rid of them, wait he tried that already.

180 Sharikou said...

Anonymous - I'm gung ho on market share loss because I believe Intel is regaining share on DP server and winning back in the desktop 80-130$ price range now that they have dropped their Pentium brand prices and filled the seam between their Celeron (at 80 bucks) and Pentium (130 bucks) that used to exist for the distribution channel.

In this case, there are two things playing into Intel's favour:

1. If AMD is capacity constrained, then customers will buy elsewhere (i.e. Intel) rather than lose a sale if they can avoid it.

2. There is a longer term implication of loss of faith. If they can't rely on AMD for supply when they need it, they will push Intel and regaining this momentum from the distribution channel worldwide is hard.

Let me clarify the chipset data point. This issue cropped up for Intel in 2004 and has lived with them all the way into Q106. It is only now that their chipset supply is stable. It was in Q206 when Otellini was questioned on inventory build up of Netburst did he make the comment I refer to. But the lesson was learnt 2 years earlier. Now imagine the amount of business lost over that 2 year period. It was during this period that AMD got entry into many customers who were pissed with Intel's inability to supply them. This is why Intel went to ATI for chipsets. In fact, Intel had started placing 3rd party chipsets in their own boards...something never done before. If this supply issue baloons for AMD, they will face a similar loss of faith and customers. Now it is compounded by the fact they are making the same mistake Intel did. They are depriving the channel at the benefit of their new/large customer. Intel did the same. And this year Intel has turned their approach. Core 2 was first available in the channel. If you head to Asia, many of the large players there like Lenovo have not even really launched Core 2.

We can wait for the Q4 results, though I won't be surprised if Intel re-gains some share even in Q3.

180 Sharikou said...

One more thing - look around. The Intel & Dell relationship started to go sour when Intel began to sleep with Apple. Why - because Michael was screwing the entire industry by not only squeezing everyone's margins...but then they began to push the low end stuff instead of selling up as they traditionally did from Q305. At that point their business took a dive and they decided to change strategy and launched XPS. But alas, too late. Intel has gone Apple. HP has decided to innovate again. And everyone is getting more and more price competitive...on top of which Dell's brand is taking a beating on service issues. Forget the past - watch the signals. Dell was nowhere in sight at IDF. Apple was on stage. So was IBM for servers and so was HP. Intel and HP are getting back together. Dell is toast. They are going to continue to lose market share. To HP in mature markets and Lenovo is going to give them a price war like they've never seen in China where Dell has been growing. On top of which Apple is going to out manouvre everyone into the digital home - read my earlier post.

The world is changing. Dell's influence is waning. Why do you think Dell went AMD just before Conroe arrived. Because Intel told them we're going to uniform pricing. Their price advantage disappears significantly and with HP gaining share even their volume discounts are not much better. AMD has won Dell two years too late. Even Apple's desktop/notebook business is growing rapidly in the US. Now that Apple is price competitive with Dell in some SKUs. Where do you think that share is coming from?

Anonymous said...

Listen, Dell blows, no argument there. But from what your saying, I gather if AMD sells every chip they produce their in trouble and if they can't sell chips and start stockpiling (ala Intel) their still in trouble. I don't know about balanced POV, but Sharikou 180° is a good name if, as it seems, you always see the glass as half-empty for AMD.

By clarifing the chipset point you made earlier, a lightbulb should have come on. I still contend that its a red herring, it just so happens that during the same period AMD had the better product up and down the line with the exception of the mobile market.
Either way you site a 2 year chipset shortage with Intel losing momentum (despite Netbust having lost momentum after northwood and being dead by prescott), but are willing to declare AMD in trouble after less than a qtr. of cpu shortage after just having signed a new OEM and leading into their busiest (holiday) season. On top of that, they're ramping 65nm at Fab36. Fab30, which was at 30k wspm around Q1-Q2, mainly because Fab36 was being used primarily for storage, has probably fell off from this as Fab36 has started ramping and needs more space.

Its obvious for anyone choosing to see that there are a myriad of factors coming together to constrain supply for a short time.

What makes you think any supply problem would last into Q107 or even the holiday season itself? And if it doesn't just how "pissed off" will some disti's be?

Anonymous said...

Regarding my previous post (the second post) about the 65W 3800X2, Newegg shows it now out of stock, and it is the only SKU out of stock.

So I think there may be some merit to downbinning of higher ASP parts to fit this SKU. If I were short on parts, I'd do the same thing.

180 Sharikou said...

Anonymous - your question on the ideal state of capacity:

The ideal state is to be able to sell your entire capacity while ensuring you have the required level of inventory build up necessary. Probably somewhere around 10-15 days inventory.

However, if one has to pick a shortage or over-supply I'd pick a shortage but with two caveats:

1. Your comeptitor is also supply constrained because overall demand is much higher than what both can supply. If your competitor is not constrained then while you may have a great product, he is walking into and winning deals at your customer.

2. You should be able to command a price premium due to the supply constraint and really milk the margins. But in this case AMD is not. Neither is Intel but then they are not supply constrained. If anyone is going to make some extra money, it will be e-tailers like Newegg for whatever limited supply they have.

Hence, had normal market conditions prevailed this shortage would be a good thing for AMD. But the reality is this is not normal market. This shortage is being spurred by the price war along with the market wide acceleration of dual core both of which Intel has propogated hoping that AMD would run into capacity constraints as one of the by products. This allows them to walk in and win back customers they had lost...and the timing for them is fortuitous because now they even have a good product to offer - Conroe. One other thing, while Netburst is undoubtedly crap, some of the 9xx Pentium D's with lower TDP are not too bad. Couple that with the Pentium brand name and you have something saleable.

Next - I am not writing off AMD. I picked my words carefully in the post. I said as this escalates the issue becomes proportionately larger for AMD. It is not the end of AMD. But it does create a problem for them that is not solved merely by telling their customers they now have supply - because faith is what is hard to recover.

But I do want to clarify, my contention on market share loss for AMD and recovery for Intel is not solely hinged on this. Though a shortage will help Intel. It is based on the other factors like dropping Pentium into the value space, Woodcrest recovery, Core 2 seeing a significant volume bump in Q4 with the OEMs coming on board worldwide in time for the holidays, etc.

ashenman said...

Doesn't AMD sell orders before they go to production? I'm pretty sure all their interviews over production have reflected this. So if people lose faith in AMD, it will be because they go their too late to order before AMD's production capacity is filled? I have the feeling that OEM's wont lose faith, because AMD can tell them ahead of time, this is what's available, what part of it do you want? Also, I was under the impression that woodcrest was doing poorly in the marketplace, because it still underperformed or performed at the same level as AMD, especially in memory intensive applications, which is what most servers actually care about. I realize that Intel has been able to replace most of their old netburst sales, but woodcrest doesn't seem to be regaining any of Intel's marketshare.

Anonymous said...

You seem to forget Dell isn't the only one announced more AMD lines of products. Founder, Lenovo, IBM also going more AMD. The deal with Chartered was put in place for flexible production for someone like Dell.
If AMD is maxing out orders from Chartered, it can only be good news for
AMD.
Also, Intel's channel stuffing has caused a lot of grief for distributors and some are turning more to AMD, which can also explain any AMD shortage.
Plus, maybe AMD is concentrating more on business accounts, which are more sizable and profitable.

180 Sharikou said...

Ashenman/Anonymous - you guys are missing the point I made. Which is unfulfilled demand is sales for your competitor. But more importantly there is a loss of faith from the DISTRIBUTION and DISTRIBUTION DEPENDANT CHANNEL. Disti channel does not get to secure product 3 months in advance the way Dell does. They also do not get the kind of volume pricing or supply preference that a Dell does. This was exactly the mistake Intel made when they had capacity constraints - they starved the channel and the smaller OEMs in some of the fastest growing markets like Asia and gave everything to their big customers.

Mark my words - Intel will take back market share when they announce their Q4 results...if not earlier. Do you say different? If not, there's nothing to quibble about.

And remember, this is in the absence of any real OEM support WORLDWIDE for Core 2 outside of Dell. SKUs are not there yet but will be in time for the Q4 holidays. I can guarantee you even Lenovo will add more Intel SKUs in Q4. An account where Intel has taken the beating of their lives going from 100% to below 50%.

Anonymous - Lenovo is already over 50% AMD desktop in the market that matters to them...PRC. Founder yes...and IBM on some server SKUs. But I can tell you this. Next year...if not earlier for the holidays you will see HP dial up their Intel SKUs. And so will Lenovo.

One last thing - I think Intel's channel stuffing tactics are reprehensible and they fully deserve any backlash from that...and then some. To use your might to lean on the small guy who depends on you put food on his table is nothing but the act of a bully.

Anonymous said...

As I've posted earlier, I don't see a constrained capacity for AMD lasting two QTRs or causing the lack of faith to disti's your suggesting.

What's to quibble about, well I don't see a loss of market share happening in Q4 either. Maybe a slight loss in Q3, but back on track for Q4.

I think AMD has done a good job of grabbing the mainstream. Their line-up from about $80-$200 is strong and seems like it will remain that way until Q107 when Intel intros E4300. That's the real worry, I should think for AMD, as that chip can rule the mainstream at a time when Vista could sell alot of systems. AMD may not have a K8L dualie priced comparably for some time, maybe Q307 or later. They'll be forced to use 65nm K8's against the E4300 at higher clock speeds than 1.8Ghz to compete.

But I haven't missed your point about missed sales going to your competitor, such is the case when two Co. own +95% of the market.
In a perfect world, AMD would be able to supply 100% of the worlds cpus 100% of the time. Unfortunately, it would wallow under its own weight(ala Intel) and it would lose money as it only sold a fraction of that to support its huge girth. You seem to think in far too absolute terms.

The best way to think about it is the oft repeated racing qoute (by Porsche or Chapman depending on who you believe). "The perfect racing car crosses the finish line first and subsequently falls into its component parts." We shall see if AMD's balance between capacity and demand was right when they report their Q4, obviously Q4 being more insightful than Q3. I hope we can at least agree on that.

180 Sharikou said...

Anonymous - no issue. You're entitled to your opinion. And I do agree that Q4 is a better indicator. I've also said previously that margins will be down for both AMD & Intel in Q3. This price war is not good for either. However, AMD will have a relatively better Q3 than Intel when compared to Wall Street's expectations. But momentum will return to Intel in Q4.

But I think there is one thing that many of the folks who are disagreeing with me over here are ignoring. And that is the strength of the Intel and Pentium brands. With a 70$ Pentium, and a 90$ dual core Pentium, Intel will take back market share in the seam which used to exist. This was the crucial price band between 90-120$ CPUs that used to exist between their Celeron and Pentium brands. This is where a large part of the consumption and unbranded channel live in emerging markets...the fastest growing markets in the world. There are also plenty of non techie consumers in the US and other mature markets who would be happy to buy the Pentium brand for under 100$.

One more comment on capacity. The shortage began a couple of months ago and has been growing...if we are to believe the Inquirer then there was a report back then about not enough parts in Europe. This was shortly before AMD dialed back their 1MB parts and EOLed some SKUs. Partly these constraints are being driven by an agressive dual core ramp that Intel is trying to accelerate for exactly this reason. They know AMD has limited capacity.

We'll see Q3 results in a few days and know more.