AMD Building Chip Factory in Germany

Advanced Micro Devices Inc. broke ground Thursday on a $2.4-billion computer chip factory in eastern Germany to boost its capacity and allow it to make cutting-edge chips.

The fabrication plant, or “fab,” will be built in Dresden next to AMD’s only other PC-chip plant. The Sunnyvale, Calif., company decided to build in Germany after receiving $500 million in government grants and more than $1 billion in additional funding, Chief Executive Hector Ruiz said.

When it opens in 2006, the fab will be able to make chips with transistors a mere 65 nanometers wide, about 2,000 times more narrow than a human hair.

AMD currently makes chips with transistors that are 130 nanometers wide.

The new fab also will allow AMD to produce chips on 300-millimeter wafers, which is more efficient than the 200-millimeter wafers now in use.

Industry analysts expressed surprise at AMD’s decision to take on the expense of building an entire plant on its own. Most semiconductor companies rely on other companies to produce the chips they design.

“A 300-millimeter fab has a prodigious output, and I don’t know that AMD can sell everything they make there,” said Nathan Brookwood, principal analyst with Insight 64, a market research and consulting organization in Saratoga, Calif. “Unless their demand picks up, it could be overkill for them.”

AMD spokesman Rob Keosheyan defended the decision.

“We’re confident we’re making the right move to meet demand as we see it,” he said.

In addition to $500 million in grants from the German federal government and Saxony state government, AMD will receive $700 million in loans from a consortium of German banks and up to $320 million in equity funding from Saxony and a group of European investors.

AMD shares fell $1.10, or 6%, to $16.50 on Thursday on the New York Stock Exchange.