How AMD’s Chinese "Clone Army" Could Hurt Intel

Chinese chipmaker Hygon recently launched Dhyana, a high-performance x86 CPU designed for Chinese data centers. That move was surprising for two reasons: First, China's domestic chipmakers only produced weaker MIPS and x86 CPUs in the past. Second, the high-end x86 chip market is traditionally dominated by two chipmakers -- Intel (NASDAQ: INTC) and AMD (NASDAQ: AMD) .

However, Hygon's Dhyana isn't built on some Chinese technological breakthrough -- it's based on the same technology as AMD's Epyc CPUs. Hygon produced the clone with AMD's blessing through a complex web of partnerships and licensing agreements. I'll explain why AMD did this, and how it could hurt Intel's data center business.

What is AMD up to?

The Chinese government is currently trying to reduce its dependence on American technologies due to national security concerns, while subsidizing the growth of its domestic tech companies. China still buys plenty of CPUs from Intel since its Xeons are still considered the "best in breed" processors for data centers, but US regulators banned Intel from selling its top chips to China's supercomputer centers in 2015.

That's why China isn't eager to embrace another American chipmaker like AMD. In response, AMD established two joint ventures with Chinese holding company THATIC -- one with Chengdu Haiguang Microelectronics Technology (CHMT), and another with Haiguang IC Design, also known as Hygon.

AMD owns a majority stake in CHMT, which ensures that its IP isn't transferred to THATIC. THATIC owns a majority stake in Hygon, which licenses AMD's IP from CHMT. Hygon designs the chips, and CHMT produces the chips through a suitable foundry and then sends them back to Hygon for packaging, marketing, and sales.

This arrangement seemingly placates American and Chinese regulators -- AMD's IP isn't being passed to a Chinese company, and a Chinese chipmaker gains access to superior data center CPU designs. AMD generates less revenues through these JVs than it would through direct sales, but it still gains a foothold in China's massive data center market. But more importantly, this move could wound Intel.

Why Intel should be worried

AMD's Epyc arrived only a year ago, but it's already causing headaches for Intel. Benchmarks found that it could outperform comparable Intel CPUs in certain high-performance computing and big data applications that require CPU cores to operate independently.

Many big companies, including Microsoft and Baidu , started installing AMD's cheaper chips in their data centers. In a meeting with Nomura Instinet analyst Romit Shah in June, then-CEO Brian Krzanich admitted that AMD was gaining ground, and Intel was trying to prevent it from gaining a "15% to 20%" share of the data center market.

That admission was stunning, since Intel traditionally controlled more than 99% of the data center market with its Xeon chips. Intel's data center group grew its revenues by 11% to $19.1 billion last year, and accounted for 30% of its top line.

Epyc was already a thorn in Intel's side, but AMD's sponsorship of Chinese clones could throttle its sales in mainland China, which accounted for 24% of its sales last year. Its total sales in the region only rose 6% in 2017, compared to 20% growth in 2016.

How this move helps AMD

AMD could be playing with fire, since Chinese firms have allegedly stolen IP from American ones in "forced" joint ventures before. But the move gets AMD in the Chinese government's good graces as trade tensions between the US and China escalate.

AMD's Computing & Graphics revenue -- which comes from its CPUs and GPUs -- surged 54% annually last year and accounted for 57% of the chipmaker's top line. That growth continued into the first quarter of 2018, fueled by robust demand for its Zen-based CPUs. Its total revenues from China rose 58% last year and accounted for a third of its top line.

AMD's Ryzen CPUs are reportedly gaining ground in desktops, but struggling in the notebook market , where many OEMs remain partnered with Intel. Therefore, supporting the growth of a "clone army" in China could finally dent Intel's strongest market.

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Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Leo Sun owns shares of Baidu. The Motley Fool owns shares of and recommends Baidu. The Motley Fool has a disclosure policy .

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