Deflation is rearing its head in the chip-making business. Advanced Micro Devices intends to reduce its workforce by nearly 9 percent and will reduce employee compensation during its first quarter.

Even its top executives are taking a hit to their base salaries (no word about their bonuses); the rank and file will see their incomes drop on a staggered basis depending on their employment status. Other perks, including the company’s 401(k) matching program are being suspended indefinitely.

AMD must take difficult and prudent steps to reduce its cost in response to the worldwide economic downturn, it explained in a statement to the press.

This should come as no surprise considering there has been a corresponding downturn in the sales of semiconductors. Chip sales dipped to $20.8 billion in 2008 from $23.1 billion in 2007, according to a recent report by the Semiconductor Industry Association. Public companies like AMD are going to respond to reduced demand by cutting expenses, because they have to act in the interest of shareholders.

The company is not selling the copper plumbing–yet. While its sales have dipped, it still remains second largest semiconductor producer in the world next to Intel, and it has laid out long term road maps for future technologies. Further, new chips designed for low-cost computers, such as its Neo processor, could entice spendthrift consumers to open up their wallets.

Should PC buyers worry about AMD’s prospects or even shy away from buying machines that use its chip? Not really. Companies  that big don’t just close up shop overnight, and AMD is also highly unlikely to skimp on its manufacturing processes or R&D, lest it risk damaging its brand or ceding even more market share to Intel. Customers can buy AMD-based systems with confidence.

HP is showcasing its new Pavilion dv2 ultraportable notebook at the Consumer Electronics Show (CES) in Las Vegas this week. It is the first PC manufacturer to utilize AMD’s value-priced Neo processor, which it is selling for under $1000, and looks like a sensible option for buyers that want to purchase a lightweight–but not bleeding-edge-machine.

The Pavilion is stylish and packs some decently robust hardware. The Neo processor, formerly codenamed “Huron” has a clockspeed of 1.6GHz and is comparable to Intel’s Ultra Low voltage Chips in its power consumption. The notebook offers hard-drive options as large as 500GB, it has AMD-ATI Mobility Radeon HD 3410 graphics, a 12.1-inch LCD screen, and Blu-Ray. Pricing starts at $699; higher-end models cost nearly $900.

Consumers that pay less than $700 for an ultra-portable should not expect every bell and whistle. AMD’s Neo processor has scant cache memory (512K), and is a single-core processor. However, people who are in market for the Pavillion probably will not be using the kinds of applications that take advantage of many-core processors. There isn’t much commercial ‘parallelized’ software on the market anyway.  The Pavilion will pack more than enough of computing power for people to surf the Web and type reports.

AMD will release a dual-core portable chip code-named Conesus in the second half of the year, News.com is reporting. In the meantime, I see no reason why the average person should hold off their PC purchases other than Windows 7 compatibility (although it would seem unlikely that a relatively new machine would not be upgradable).

The T-Mobile G1, the Nokia 5800 XpressMusic, and now the BlackBerry Storm. The iPhone-like touchscreen phones are coming at us fast and furious. And while the Storm doesn’t look to be the mythical “iPhone killer” that folks like to talk about, it’s the most interesting iPhone rival from a hardware standpoint.
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It’s been a possibility for a while, and now it’s a reality: AMD, the perennial number-two CPU company to Intel and one of the few chip companies that both designs and manufactures processors, plans to break itself up. The company behind Phenom, Athlon, Opteron, and other CPUs will become two companies: one that designs chips, and one that makes them. The design company will end up partially owned by Mubadala, a company which is owned by Abu Dhabi; ATIC, another company owned by Abu Dhabi, will own the majority of the manuacturing company. Both of those Middle Eastern investments will provide an infusion of cash which is designed to help AMD with its next-generation chips and therefore its overall competitiveness with Intel.

Emotionally, the move may be a big deal for AMD, which has spent decades taking on Intel by, essentially, trying to be Intel. But nearly everyone else involved in the designing and building of processors has decided that financially, it makes sense to separate the building part–which involves massive, massively expensive plants–from the designing.

I’m neither an economist nor an expert on chip manufacturing, so I can’t judge the deal on its merits. But if it helps the two new companies produce more advanced chips more quickly, it’s a good thing for consumers. And, of course, a good thing for AMD, which has struggled to stay even vaguely competitive with the products from its much larger competitor in recent years. (The golden age of the Intel-AMD wars were back around the turn of the century, when AMD rolled out the excellent original Athlon CPU, giving every PC user a reason to consider an AMD-powered computer–and giving Intel a scare that ensured it wouldn’t spend the next few years resting on its technological laurels.)

The chip wars matter to most consumers only because they’re a driver of healthy competition that results in faster, cheaper CPUs that power faster, cheaper computers and other devices. For that reason, I’m happiest when AMD is at its most competitive versus Intel–and hope that this corporate breakup makes as much sense as AMD thinks it will.