We are a semiconductor manufacturer with manufacturing facilities in the United
States, Europe and Asia and sales offices throughout the world. We design, manufacture
and market industry-standard digital integrated circuits that are used in many
diverse product applications such as desktop and mobile personal computers,
or PCs, workstations, servers, communications equipment and automotive and consumer
electronics. Our products include microprocessors, Flash memory devices and
embedded microprocessors for personal connectivity devices, which we refer to
as our Personal Connectivity Solutions, or PCS, products.
In addition, in order to respond more quickly to changes in market trends in
the Flash memory market and improve efficiencies in the production, marketing
and design of our Flash memory products, we and Fujitsu Limited formed a new
entity named FASL LLC. We own 60 percent of FASL LLC while Fujitsu owns 40 percent.
Accordingly, as of June 30, 2003, we began consolidating the results of FASL
LLC's operations. FASL LLC is headquartered in Sunnyvale, California, and its
manufacturing, research, test, and assembly operations are in the United States
and Asia. FASL LLC engages in the research, development, manufacture, marketing,
and promotion of Flash memory products, which it markets under the Spansion
global product brand name. We and Fujitsu are the distributors of FASL LLC's
Spansion Flash memory products. As part of this transaction, we contributed
to FASL LLC our Flash memory inventory, our manufacturing facility located in
Austin, Texas, known as Fab 25, our Flash memory research and development facility
in Sunnyvale, California, known as the Submicron Development Center, or SDC,
and our Flash memory assembly and test operations in Thailand, Malaysia and
China. Fujitsu contributed its Flash memory division, including related inventory,
cash, and its Flash memory assembly and test operations in Malaysia. In addition,
both we and Fujitsu contributed our respective investments in our previous manufacturing
joint venture, Fujitsu AMD Semiconductor Limited, located in Aizu-Wakamatsu,
Japan, which became part of a wholly owned subsidiary of FASL LLC named FASL
JAPAN LIMITED, or FASL JAPAN. In this report we refer to the previous manufacturing
joint venture with Fujitsu as the Manufacturing Joint Venture.
Semiconductors are components used in a variety of electronic products and
systems. An integrated circuit, or IC, is a semiconductor device that consists
of many interconnected transistors on a single chip. Since the invention of
the transistor in 1948, improvements in IC process and design technologies have
led to the development of smaller, more complex and more reliable ICs at a lower
cost per function.
We strive to establish and broaden our relationships with AIB manufacturers.
We offer component-level graphics and chipset products to AIB manufacturers
who in turn build and sell board-level products using our technology to system
integrators, or SIs, and to retail buyers. Our agreements with AIBs protect
their inventory of our products against price reductions. We also sell directly
to our SI customers. SIs typically sell from positions of regional or product-based
strength in the market. They usually operate on short design cycles and can
respond quickly with new technologies. SIs often use discrete graphics solutions
as a means to differentiate their products and add value to their customers.
We focus our research and development activities on improving and enhancing
product design. One main area of focus is on delivering the next generation
of products with greater system level integration of the CPU and GPU and transforming
our products into SOCs, with, in each case, improved system performance and
performance-per-watt characteristics. For example, we are focusing on improving
the battery life of our microprocessors and APU products for notebooks and tablets
and the power efficiency of our microprocessors for servers. We are also focusing
on delivering a range of low-power integrated platforms to serve key markets,
including commercial clients, mobile computing and gaming and media computing,
as well as developing an HSA, which is designed for software developers to easily
program APUs by combining scalar processing on the CPU with parallel processing
on the GPU, all while providing high bandwidth access to memory at low power.
We believe that these integrated platforms will bring customers better time-to-market
and increased performance and energy efficiency. We also work with industry
leaders on process technology, software and other functional intellectual property
and we work with others in the industry, public foundations, universities and
industry consortia to conduct early stage research and development.
Competition
The integrated circuit industry is intensely competitive. Products compete
on performance, quality, reliability, price, adherence to industry standards,
software and hardware compatibility, marketing and distribution capability,
brand recognition and availability. Technological advances in the industry result
in frequent product introductions, regular price reductions, short product life
cycles and increased product capabilities that may result in significant performance
improvements.
In each area of the digital integrated circuit markets in which we participate,
we face competition from different companies.
Competition in the Microprocessor Market
Intel Corporation has dominated the market for microprocessors for many years.
Intel's market power and significant financial resources enable it to market
its products aggressively, to target our customers and our channel partners
with special incentives and to discipline customers who do business with us.
These aggressive activities have in the past and are likely in the future to
result in lower unit sales and average selling prices for our products, and
adversely affect our margins and profitability. As long as Intel remains in
this dominant position, we may be materially adversely affected by Intel's:
' business practices, including rebating, and allocation strategies and pricing
actions, designed to limit our market share;
' product mix and introduction schedules;
' product bundling, marketing and merchandising strategies;
' exclusivity payments to its current and potential customers;
' control over industry standards, PC manufacturers and other PC industry
participants, including motherboard, memory, chipset and basic input/output
system, or BIOS, suppliers and software companies as well as the graphics interface
for Intel platforms; and
' marketing and advertising expenditures in support of positioning the Intel
brand over the brand of its OEM customers.
Intel exerts substantial influence over computer manufacturers and their channels
of distribution through various brand and marketing programs. Because of its
dominant position in the microprocessor market, Intel has been able to control
x86 microprocessor and computer system standards and to dictate the type of
products the microprocessor market requires of Intel's competitors. Intel also
dominates the computer system platform, which includes core logic chipsets,
graphics chips, motherboards and other components necessary to assemble a computer
system. As a result, OEMs that purchase microprocessors for computer systems
are highly dependent on Intel, less innovative on their own and, to a large
extent, are distributors of Intel technology. Additionally, Intel is able to
drive de facto standards for x86 microprocessors that could cause us and other
companies to have delayed access to such standards.
We expect Intel to maintain its dominant position in the microprocessor market
and to continue to invest heavily in marketing, research and development, new
manufacturing facilities and other technology companies. Intel has substantially
greater financial resources than we do and accordingly spends substantially
greater amounts on research and development and production capacity than we
do. We expect intense competition from Intel to continue.
Competition in the Embedded Processor Market
With respect to our embedded processors for personal connectivity devices,
our principal competitors are Freescale Semiconductor Inc., Hitachi, Ltd., Intel
Corporation, NEC Corporation, Toshiba Corporation and Via Technologies, Inc.
We expect competition in the market for these devices to increase as our principal
competitors focus more resources on developing low-power embedded processor
solutions.
Competition in the Graphics and Chipset Market
In the graphics and chipset market, our competitors include discrete graphics
suppliers and suppliers of integrated graphics chipsets. A recent trend in the
graphics processing market is that PC manufacturers are increasingly choosing
to use integrated chipsets, particularly for notebook computers, over discrete
GPUs because integrated chipsets cost significantly less than discrete GPUs
while offering acceptable graphics performance for most mainstream PC users.
Intel manufactures and sells integrated graphics chipsets bundled with their
microprocessors and is a dominant competitor in this market. It is possible
that Intel could leverage its dominance in the microprocessor market to sell
its integrated chipsets, which could shrink the total available market for certain
of our discrete GPUs, that Intel could re-enter the discrete GPU market, or
that Intel will take other actions that place our discrete GPUs and integrated
chipsets at a competitive disadvantage such as designing a proprietary graphics
interface.
Other than Intel, our principal competitor is Nvidia Corporation, and to a
lesser extent, Matrox Electronic Systems Ltd., Silicon Integrated Systems Corp.
and Via Technologies, Inc. Other competitors include a number of smaller companies
which may have greater flexibility to address specific market needs. However,
we believe that the growing complexity of visual processors and the associated
research and development costs represent an increasingly high barrier to entry
in this market.
Competition in the Consumer Electronics Market
In the semiconductor market for consumer electronics products we have different
competitors in each of our product categories. With respect to our products
for handheld devices, we have three primary categories of competitors: vendors
of baseband processors, vendors of applications processors and vendors of media
co-processors. The baseband processor provides the basic voice and communication
processing functionality in mobile phones. For certain value categories of the
market, baseband processor vendors are integrating the multimedia processing
required for feature-rich mobile phones. Baseband processor vendors incorporating
this basic level of graphics processing include Analog Devices, Inc., Agere
Systems Inc., Broadcom Corporation, Freescale Semiconductor Inc., Infineon Technologies
AG, Koninklijke Phillips Electronics N.V., Qualcomm Incorporated and Texas Instruments
Incorporated. Another category of competitor, application processor vendors,
target manufacturer of high-end feature and smart phones whose products require
large amounts of general purpose processing capability as well as multimedia
processing. These vendors include Freescale Semiconductor Inc., Marvell Technology
Group Ltd., Nvidia Corporation, Qualcomm Incorporated, Samsung Electronics Co.,
Ltd., STMicroelectronics N.V. and Texas Instruments Incorporated. The third
category of competitor provides dedicated processors to drive a high level of
multimedia functionality. This approach is most comparable to our strategy,
and our competitors in this category include Core Logic Incorporated, Epson
Corp., MTEK Vision Co. Ltd., Nvidia Corporation and Renesas Technology Corp.
With respect to our products for digital TVs, our primary competitors include
Broadcom Corporation, Genesis Microchip Inc., MediaTek Inc., NEC Corporation,
NXP Semiconductors, STMicroelectronics N.V., Trident Microsystems Inc. and Zoran
Corporation, as well as in-house semiconductor development divisions at companies
such as LG Electronics, Inc., Matsushita Electric Industrial Co., Ltd. (a brand
of Panasonic Electronic Devices Co., Ltd.), Samsung Electronics Co. Ltd. and
Toshiba Corporation.
In the game console category, we compete primarily against Nvidia. Other competitors
include Intel and IBM.