US chipmaker further threatens Intel's dominance by investing €2 billion in Dresden plant and winning coveted Dell deal, writes Derek Scally in Berlin

US chipmaker Advanced Micro Devices (AMD) has launched a fresh attack on arch rival Intel, announcing it is investing nearly €2 billion to quadruple the output of its Dresden plant.

The investment comes as growing numbers of computer companies defect to AMD, prompting Intel to launch a huge restructuring programme.

"As global demand continues to rise for AMD products, we are scaling our manufacturing capacity intelligently to meet our customers' growing needs," says Hector Ruiz, AMD's chairman and chief executive officer.

"To achieve this, we are pursuing an aggressive path to invest in and expand our top-rated manufacturing capabilities in Dresden."

Last week Dell broke its exclusive contract with Intel, announcing it would start installing AMD chips in a line of server computers.

The deal is a small beginning but it shatters a 22-year industry taboo that had prompted market analysts to joke that such a deal would only happen "when Dell freezes over".

Now Dell joins a long list of companies such as Hewlett-Packard and Sun Microsystems that have opted for AMD chips over Intel in recent years.

The new production facilities in Dresden will allow AMD to move production of its silicon chips from the current 200mm "wafers" to 300mm "wafers" that will contain at least twice as many microprocessors.

For years AMD was the no-name processor that PC manufacturers slipped into their machines, hoping customers wouldn't notice.

After a dangerous sales slump in 2002, AMD's fortunes revived in 2003 when bosses bet the company on the new 64-bit Athlon processor line.

Intel disputed AMD's claim that the chips were technologically superior to its own products, but customers voted with their feet and signed lucrative new deals with AMD.

Now AMD has a market share of 22 per cent in the upper-end server market, while its personal computer market share rose from 11.9 to 15.3 per cent in the last quarter of 2005.

There are increasing signs that Intel has been feeling the chill of the competition. The company still has more than 80 per cent of the "x86" PC microprocessor market and posted record revenues of $38.8 million (€30.2 million) last year.

But sales rose by just 6 per cent in the last quarter compared to a rise of 45 per cent for AMD.

Intel's revenues dropped by 5 per cent in the first quarter of this year and the company expects its sales to fall 3 per cent by the end of the year, following three years of double-digit growth.

That prompted Intel chief executive Paul Otellini to unveil a plan to "restructure, repurpose and resize" the company last month, cutting costs and capital spending by €800 million and €233 million, respectively.

The AMD investment is a huge boost for the Dresden region, dubbed "Silicon Saxony", which in the past decade has become Europe's largest centre for microprocessor production.

Since arriving in 1996, AMD has invested €8 billion in its Dresden manufacturing facilities.

Now the company employs more than 2,500 people in its Dresden facility, which has turned out over 150 million processors.

AMD's presence has drawn more than 200 other related companies and €9 billion investment to the region, a bright spot in east Germany.

The Saxony state government estimates that more than 20,000 people are now employed by the microelectronics industry and twice that number in Saxony's IT industry overall.

State officials have wooed companies to set up in Dresden with grants worth more than €1 billion in the past decade.

Meanwhile, the federal government in Berlin has allocated more than €160 million to finance collaborative projects between academic researchers and the microelectronics industry, with more funding to come.

On Wednesday AMD announced a new deal with PC and software manufacturers to create new media-player PCs.

The machines, based on Microsoft's media-player technology, will bear a new "AMD Live!" badge, flaunting the processor under the hood in a cheeky nod to Intel's long-running practice.

But the decision of leading computer manufacturers to adopt AMD chips could have an unexpected effect on a lawsuit it filed against its rival.

AMD accuses Intel of abusing its market dominance by forcing its customers, including Acer and Fujitsu-Siemens, to sign deals to limit their purchases of AMD chips.