Breakthrough not seen altering microchip arms race

SAN FRANCISCO (Reuters) - Intel Corp. (INTC.O) is set to capitalize on a new breakthrough in microchip technology more quickly than its rival AMD, but analysts say the advantage will only be temporary.

Like two superpowers announcing successful nuclear tests at the same time, Intel and IBM (IBM.N) both said last Friday they had solved a vexing electricity leakage problem in microchips.

While hailed as the biggest breakthrough in transistor design in four decades, the advances do not alter the product roadmaps for the two companies, which call for their chips to shrink roughly every two years.

"It sounds more evolutionary to me rather than revolutionary," said Eric Ross, an analyst with ThinkEquity Partners.

Intel, the world's biggest maker of microchips, said the advances will be used later this year when it shrinks existing chip designs to smaller dimensions, meaning they will run faster and use less power.

Advanced Micro Devices Inc. (AMD.N), a research partner of IBM, is not expected to include the technology in its processors until 2008, coinciding with its next product shrink.

"Who are Intel's biggest competitors? Well it's AMD, and IBM on the server side, so it kind of evens out," Ross said.

The transistor advance is the latest twist in the microprocessor industry, which has seen dramatic shifts in fortune over the past couple of years.

In the latest round, Intel is believed to be beating back AMD, which had been grabbing market share thanks to chips that were more powerful and efficient than Intel's.

The past year has been rough on Intel and AMD shares as a price war chews into profits and gross margins at both companies.

Intel shares, which closed at $20.53 on Friday, have fallen 5 percent over the past year, versus a drop of nearly 60 percent for AMD stock, which ended at $16.22.

Industry progress is guided by Moore's Law, the industry maxim laid down by Intel co-founder Gordon Moore in 1965 that the number of transistors on a chip doubles every two years or so.

The current cutting edge of chip production is based on a manufacturing process that etches circuits just 65 nanometers across -- more than a thousand times thinner than a human hair.

Intel has long planned to begin making chips with 45-nanometer circuits later this year, and it said last week it has successfully produced working processors on that scale, putting it on track to meet its timetable.

But although the companies use Moore's Law as a guide, the shrinking process is far from automatic.

Each generation poses new challenges, and engineers are now dealing with such tiny sizes that they continually need to tweak basic elements of chip design.

Last Friday's developments involve replacing a silicon-based material used in one layer of chips since the 1960s with a substance based on hafnium, an exotic metal used in the nuclear industry.

Ross said that although AMD has a much smaller research effort than Intel, its partnership with IBM had given it some tricks to keep it competitive.

"They are all planning several steps ahead," Ross said. "The interesting thing is that the shrinks are important, but they are only one part of the process technology."