In Switch, Toshiba Buys AMD Chips
Losing Toshiba as a customer never sat well with Advanced Micro Devices. Japan's Toshiba ditched AMD for Intel as a maker of chips for its laptops in 2001. Since then, AMD has been fighting its way back into Toshiba's lineup in a campaign that has accelerated in recent months.
The effort finally bore fruit. On May 29, AMD (AMD) said Toshiba will use AMD Turion 64 X2 chips in three of its Satellite notebook PCs expected to ship in time for the back-to-school sales season this year. It's an important milestone in AMD's efforts to shake Intel's dominance of the PC chip market. Last year Dell (DELL), long an Intel-exclusive PC maker, started using AMD chips (see BusinessWeek.com, 5/19/06, "AMD Inside").
Other vendors like Gateway (GTW) and Hewlett-Packard (HPQ), and Acer and Lenovo have AMD-based systems. The only household-name in personal computing to boast an Intel-exclusive relationship is Apple (AAPL), but Toshiba had been the last major vendor of PCs running Microsoft's (MSFT) Windows to claim an Intel-exclusive relationship.
The roots of that relationship are a bone of contention between archrivals AMD and Intel and became legal fodder in AMD's antitrust lawsuit against Intel in 2005. Toshiba received a substantial payment from Intel that was provided on condition that Toshiba's notebook PCs contain no AMD processors, AMD alleged in the lawsuit. Toshiba "executives agreed that Intel's financial inducements amounted to 'cocaine,' but said they were hooked because reengaging with AMD would jeopardize Intel market development funds estimated to be worth $25-30 million per quarter," the filing says. Intel has denied any wrongdoing.
Whatever the basis of Toshiba's decision to use Intel, frays in the arrangement have been showing for some time. Last year Toshiba confirmed that some of its executives had favored adding AMD chips to its product lineup, but backed away from the change (see BusinessWeek.com, 6/27/06, "Intel Starts to Push Back").
Shifts in Strategy
According to sources within AMD, a recent shift in sales strategy played a key role in winning Toshiba back. Senior vice-presidents are now working directly with large accounts like Dell, HP, and Toshiba. These executives have the power to make decisions themselves that typically had to go back to AMD's upper management for approval.
"We've put some of our top executives in charge of our key accounts," says AMD Senior Vice-President Marty Seyer. "And that way we can make more decisions close to the customer without going back to HQ." Seyer is the point man in charge of AMD's relationship with Dell. Ben Williams runs AMD's relationship with HP. AMD didn't immediately name the executive in charge of the Toshiba relationship.
The revamp speeds up decision-making in relation to big customers, and the promises AMD makes to them. These decisions had previously taken longer, and required sign-offs by senior execs up to and including AMD Chief Executive Officer Hector Ruiz.
A byproduct of the new approach is making sure senior executives get their expectations for PC demand clearly mapped out before huge supply commitments are made. "It's all about making sure we have visibility," Seyer says.
It's a lesson AMD learned the hard way. In recent years, AMD had stepped up efforts to court big customers like Dell, which require chipmakers to provide supply guarantees for set periods of time. AMD was happy to oblige, particularly in the run-up to last year's holiday selling season, when it looked like demand would be strong through the end of the year. "The demand from big PC makers like Dell and HP was strong and so AMD responded, and made strong commitments to meet that demand," says analyst Dean McCarron of Mercury Research, based in Cave Creek, Ariz.
But AMD's relationships with other, smaller manufacturers began to suffer. Having made commitments to the likes of Dell, AMD found it had demand for more chips than it could realistically deliver. "AMD had to pick: The big PC makers or the channel," says McCarron, using the industry term for the smaller computer makers. "It went with the big PC makers." Intel, meantime, pounced on the channel business, winning back some territory previously lost to AMD.
Regaining Lost Ground
Fast-forward to November, 2006. Big vendors saw their sales projections weren't proving as strong as they had hoped two months prior, and having built all the computers they needed for the holiday season, they didn't need to buy any more chips. Turning its attention back to the channel, AMD found that smaller vendors, having fulfilled their needs with Intel, didn't need many AMD chips. "Everyone pretty much had all the chips they needed sitting on shelves," McCarron says.
The result? AMD swiftly lost ground in the market for PC and server chips. By the end of the first quarter of 2007, AMD's overall share of the PC and server chip market had tumbled to 18.7% after having risen to 25.3% in the previous period, according to Mercury. Intel's share widened to 80.5% from 74.4%.
It's too early to tell how far the Toshiba deal will help AMD regain those precious percentage points of share, but winning back the Japanese PC maker as well as a new approach to sales are a step in the right direction.