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The two companies will work together on developing extremely small 65 nanometer (nm) and 45nm process technologies for new chips.
The most advanced processors on the market today are built using .13-micron, or 130nm, process technology. The size of the process technology refers to the width of the smallest wire on the chip.
AMD, Intel and IBM are all working on 90nm process technologies, the next step in the evolution of chip-making technology.
Intel is expected to release a version of its flagship Pentium 4 desktop processor built on the 90nm process technologies later this year, while AMD's 90nm products will begin production in the fourth quarter of 2003 and will reach the market in the first quarter of 2004.
AMD and IBM have worked together on projects in the past, developing the silicon-on-insulator technology that is expected to be part of forthcoming processors based on AMD's Hammer architecture, said Dean McCarron, principal analyst at Mercury Research.
"Developing manufacturing technologies is a complex task, and it makes sense for them to work together since they don't compete against each other," he said.
While shrinking the process technologies used to manufacture processors helps companies create better products, a crucial part of the production process is the size of the silicon wafers from which the individual chips are cut.
Both Intel and IBM already have their own production plants set up to use 300mm wafers, while AMD's main production plant in Dresden, Germany, based on 200mm wafers. Use of larger wafers means these companies can reduce their costs, and therefore their prices, through a more efficient manufacturing process.
AMD has partnered with United Microelectronics to build a 300mm plant, but that is still under construction, and is not expected to begin production until 2005 in Singapore. Chip production plants are enormously expensive to build, and AMD's financial picture is not as healthy as that of Intel or IBM.
Products based on the 65nm process and 300mm wafers are expected in 2005, around the time AMD's 300mm plant comes online, the companies said.