AMD CEO's Shoddy Record Taints Turnaround - TheStreet

Call it déjà vu, or a flashback, but Hector Ruiz has been here before.

Ten years before the

Advanced Micro Devices

(AMD) - Get Report

CEO's current effort to keep his company afloat, Ruiz was caught in another strait. As the head of

Motorola's

( MOT) chip group, then the world's third-largest semiconductor maker, Ruiz was the architect of a massive reorganization that upended Motorola's manufacturing model, transformed its product strategy and resulted in the loss of thousands of jobs.

The goal was to revitalize a moribund organization amid growing competition. In practice, it was a messy affair, marked by continual setbacks and revisions, in which success ultimately proved elusive and rendered Ruiz's legacy controversial.

"He never got it right," says Will Strauss, principal analyst of market research firm Forward Concepts, noting that Ruiz tried to reorganize Motorola's chip group almost as many times as the number of years he led it.

Whether Ruiz can get it right at AMD -- which has lost $4.3 billion in the past six quarters, and has seen its share price plummet more than 50% in the last 12 months -- is a key question for investors. Ruiz has promised to reinvent some of the most fundamental aspects of the Sunnyvale, Calif., microprocessor maker in the coming months and return the company to profitability.

But a look back at the last time Ruiz tried a reorganization of this scale raises plenty of reasons for uncertainty.

When Ruiz took over Motorola's chip group in 1997, he had a bold vision for overhauling the business -- and a free hand to carry it out.

"We need to learn our markets and customers better, not learn semiconductor manufacturing better," Ruiz was quoted saying in an internal company publication at the time, declaring that the changes would position Motorola to reclaim its title as the world's No. 1 chipmaker.

Not long after becoming president of Motorola's Semiconductor Product Sector, or SPS, Ruiz unveiled a sweeping reorganization plan, which made everything from microcontroller chips to digital signal processors. Under Ruiz's plan, Motorola's chip group was split into four separate units, with each focused on a different market such as networking and computing, transportation and wireless. A new management team was put in place to lead the various groups.

The makeover was much more than cosmetic, altering job duties and reporting structures long etched into the organization.

But according to one former Motorola employee who worked as a financial analyst within the chip group, the reorganization, which Ruiz devised with the help of a university professor, created more inefficiencies than improvements.

"Where you may have been an expert on microcontrollers, now all of a sudden you had to be an expert on microcontrollers and six other products that were all sold to the automotive market," says the former employee, who says the new scheme turned product engineers into generalists and ultimately contributed to a loss of market share.

Instead of picking up, chip sales declined under the new plan, and the semiconductor group was soon losing money. Within 18 months, one of Ruiz's original four business groups was disbanded, and two new groups were created.

Even worse, the chip group bore the brunt of the 15,000-employee layoff that Motorola announced in September 1998.

In fairness, a major, industrywide downturn in the semiconductor business played a big part in Motorola's problems. And key missteps within the rest of the Motorola organization, such as betting too heavily on analog cell phones instead of digital phones, also reverberated into the chip group.

But the radical nature of Ruiz's plan, and its failure to pay off, made him a prime target for the group's problems and earned him a variety disparaging monikers within the ranks, most famously "Hector the Sector Wrecker."

By 2004, Motorola had washed its hands completely of chips, divesting itself of assets into what is now

Freescale Semiconductor

(following the earlier spinoff of

On Semicondcutor

(ONNN)

).

But Ruiz was gone before the end, having taken the job of president at AMD in 2000.

Whether AMD represents the setting of the Sector Wrecker's second act will become clear in the next few months.

AMD spokesperson Drew Prairie says he can't comment on Ruiz's experience at Motorola, but notes that AMD and Motorola are different companies, facing different challenges and different opportunities. And he points out that the restructuring at AMD is being orchestrated by both Ruiz and President Dirk Meyer, who serve together in a so-called Office of the CEO.

In many ways however, the challenge is even greater at AMD.

Unlike Motorola, which had a rich corporate parent to carry the ailing chip division, AMD must absorb the shock of its deteriorating financial performance on its own. Nor does AMD have any market sewn up or to itself, depriving it of a cushion to fall back on in tough times. The company competes with

Intel

(INTC) - Get Report

, the world's dominant maker of PC microprocessors, which is currently fielding its strongest product line in years.

On the other hand, Ruiz has the advantage of focusing his turnaround effort on a single market -- PCs and servers -- whereas Motorola's chip business was spread across various, disparate markets. Ruiz underscored the point in April, announcing the company's intention to

evaluate "noncore" businesses

, suggesting that AMD will dump its modest business making chips for consumer electronics devices.

The most eagerly awaited step in Ruiz's current effort is his yet-to-be-announced plan to overhaul AMD's manufacturing model. Like Motorola, AMD was born as an integrated device manufacturer, designing its own chips and producing the parts in its own network of semiconductor fabrication facilities.

Ruiz moved away from that tradition at Motorola by shutting down many of the facilities and outsourcing more chip production to third-party "foundries."

He has promised to do the same at AMD, working behind the scenes for more than a year on a plan he calls "asset smart." The move could ease some of the financial burden on AMD by reducing the massive capital expenditures to build and maintain advanced manufacturing facilities.

But outsourcing manufacturing is a particularly risky and unproven strategy when it comes to microprocessors -- it's not clear that a third-party manufacturer could build chips with the most advanced technology necessary to be competitive in the microprocessor game.

"If you have to depend on someone else to do the legwork, naturally you're going to be further behind," says Bill Ong, an analyst at American Technology Research who covers semiconductor manufacturing. As it stands today, the world's No. 1 foundry,

Taiwan Semiconductor Manufacturing

(TSM) - Get Report

, is about a year behind Intel in manufacturing process and technology, Ong says.

One recent rumor has

AMD splitting into two separate divisions

, with one firm operating as a fabless design house for microprocessors and AMD's current manufacturing arm becoming an independent foundry.

Stifel Nicolaus analyst Cody Acree believes AMD's salvation will ultimately come from the quality of its products.

"Intel and AMD have succeeded and failed over the past several years on the strengths of their products," says Acree, who rates AMD a Buy.

"So, whether or not Hector has this past reputation, or this capability, the fact is these products that his team has brought together are likely to be a suitable alternative for the Suns and the H-Ps of the industry," says Acree, pointing to some of the recent announcements by server makers like

Sun Microsystems

( JAVA),

Hewlett-Packard

(HPQ) - Get Report

and

IBM

(IBM) - Get Report

to offer AMD's quad-core processor in their machines.

Of course, AMD's latest products have only recently started to ship following a delay of several months because of a technical bug. That snafu, along with the decision to incur billions of dollars in debt to buy graphics chipmaker

ATI

, are ample evidence for some observers that Ruiz is simply repeating the types of missteps that ravaged Motorola's chip business.

Getting AMD out of its current bind while competing with Intel would be a tall order for any leader, no matter how solid his or her restructuring resume. With Ruiz's track record, perhaps the best AMD shareholders can hope for is that yesterday's ordeals will provide perspective and fresh insight to the present challenges.

"I think Motorola turned out to be a training ground for him," says Forward Concepts' Strauss, "albeit a very expensive one for Motorola."