IBM and AMD have extended their chip-making collaboration for another three years.

The agreement, signed in December 2002 was due to end in three months but will now last until 31 December 2008 and so see the two giants work together on the next-generation 32nm process.

Under the revised agreement, and included in documents filed with the Securities and Exchange Commission, AMD will pay IBM between $250 million and $280 million over the next four years. In exchange, IBM will continue to host the research and development work at its New York facility. "It's a sign that our relationship with IBM is going very well and this has benefitted both companies," said Karen Prairie, an AMD spokeswoman.

The most advanced chip-making processes today can create wires on a microchip that are as small as 90nm, but IBM and AMD were collaborating on techniques to shrink them even further. "We were already collaborating on 65 nm and 45 nm technology," said Chris Andrews, an IBM spokesman. "Now we've also added joint development on 32nm technology to the agreement."

Though both IBM and AMD maintain chip-making foundries, the updated agreement gives AMD the right to have a third party manufacture chips based on the jointly developed technology, Andrews said. AMD has also now licensed IBM's C-4 "flip chip" packaging technology, which is used to connect the microprocessor to the circuit board on Big Blue's server processors, Andrews said.

AMD and IBM have also worked together on the silicon-on-insulator technology that is used in AMD's Opteron processors, he said.

With the business of manufacturing microprocessors steadily becoming more complex and expensive, many vendors have turned to partnerships to defray costs. HP, for example, partnered with Intel on the development of the Itanium microprocessor that is at the heart of HP's Integrity systems. And earlier this year, Sun announced it would stop development on its next generation UltraSparc V processors in favour of chips built by Fujitsu.

Last week, Gartner predicted that the number of semiconductor companies will shrink by 40 percent over the next ten years, largely as a result of the increasing cost and complexity of the business. IBM's spokesman reiterated this feeling. "Increasingly these more advanced technologies, like the move to 65nm and the move to 45nm are going to be very challenging," he said. "If you have a skilled partner with whom you can share the investment, it helps."