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TI Declares End of ‘Inventory Correction’

This is a complicated industry with a knack for humiliating forecasters. Component demand could never be accurately predicted, and supply or manufacturing capacity has never in more than 50 years come close to being in sync with actual consumption.

Few companies have in recent times experienced the vagaries of the electronics components demand and supply disequilibrium as has {complink 5703|Texas Instruments Inc.}, which a couple of years ago was pilloried for having extended lead times because it could not fulfill all customer orders exactly when required. TI took its lumps and went ahead with an aggressive fab expansion and acquisition program that substantially increased its manufacturing capacity.

The results are in. TI has enough manufacturing capacity to meet current and future demand of up to $4.5 billion in extra sales, according to executives at the analog and digital processor supplier.

“These factories provide us with tremendous headroom for growth, more than $4.5 billion in total additional revenue,” said Kevin March, CFO, during a conference call with analysts. “As we load them with TI analog products, the profit potential is significant.” In fact, TI has added so much capacity that it was in the fourth quarter forced to tamp down on production partly because of “the weaker demand environment,” according to March.

Apparently, demand in the semiconductor market started to weaken in the fourth quarter after six consecutive quarters of strong growth. The sequential (not year-over-year) weakness, combined with the additional production capacity it added through the acquisition of factories in Japan and another plant brought online in Chengdu, China, allowed TI to dramatically catch up on lead times and finally bring it down to more normal levels. Ron Slaymaker, TI's investor relations officer said:

    TI's lead times have now completed an orderly reduction and are back to normal. During the fourth quarter, we were able to replenish our inventory levels, which will help keep lead times normal during 2011. The best thing I can say about our situation is that we got on top of the situation earlier in terms of capacity investments and we brought capacity online. And that's what translated to lead time reduction for us.

That's no mean feat. TI's lead times were at one time believed to have stretched out to anywhere from six months to one year, depending upon the product. The company repeatedly defended its production strategy and reassured customers it had taken adequate steps to ensure lead times would start narrowing. Although industry attention was on TI at the time, it was not alone in having extended lead times. Some of its rivals also experienced similar problems due to the fact many chip manufacturers shuttered facilities during the harrowing sales decline from 2008.

There are a few additional few silver linings in the lead-times controversy for TI. Having conquered the problem by adding capacity, the company believes it is now ahead of the competition in preparing for a market upturn. The industry slowdown that began late in the summer of 2010 is expected to end in the current quarter, and sales should begin to increase strongly by the second quarter, according to TI. If this assumption pans out, many in the industry will be caught unprepared, says March:

    With the onset of the downturn after the third quarter of 2008, something in the order of 17 percent of available capacity was taken offline and remains pretty much currently offline. Since then, there's been some capacity added but the last reports I saw suggested that total industry capacity — and I'm not including memory in that statement — is somewhere around 90 percent of where it was in the third quarter of 2008. I would just say that we are still under capacity given current demand because the total market is now back above where it was in the third quarter of 2008.

    It would certainly seem that the market is going to be very stressed on capacity in 2011 and competitors who have not put capacity in place will find that rather difficult to deal with. What we find particularly attractive is that the capacity we brought online has been at [low] cost points that we simply have not seen in the past. So if it turns out to be a slow growth year it's not going to have much impact financially on a negative standpoint. If it turns out to be a strong growth year, we should be able to convert that into very profitable revenue at a rate beyond what our competitors can manage.

In my book, planning ahead in such a conservative manner represents the smartest strategy for an industry where no forecast can be considered sacrosanct.

8 comments on “TI Declares End of ‘Inventory Correction’

  1. Barbara Jorgensen
    January 25, 2011

    For all the talk of flexibility, real-time, collaboration and just-in-time, accomplishing something like this is tantamount to turning the Titanic.  Nicely done, TI.

  2. Eldredge
    January 25, 2011

    The one certainty about forecasts is that they are wrong. That being said, given the huge investment required to build fab facilitites, it sounds like TI did an excellent job positioning themselves with an appropriate production capacity.

  3. Parser
    January 25, 2011

    Why TI is doing really good it is not a secret what they do and I am puzzled what competition and other companies are doing? After all it is a cost associated with bring fabs online. Coming out of the recession companies wait until last moment to increase production avoiding production and storage costs. Of course the one who can meet demand first wins. Do companies or distributors conduct polls? From engineering perspective I am very reluctant to include anything in my current design which is not available today, but they don’t know what I was looking for.

  4. Jay_Bond
    January 25, 2011

    Texas Instruments is definitely ahead of the pack. When the economy continues to expand and the demand for consumer electronics increases, TI will be able to meet their demands much faster than the competition. As long as they are price competitive, many companies will look to them for their needs with hardly any lead time needed.

    The acquisitions of plants and manufacturers and expanding their own facilities during previous quarters has also allowed them to not have the large expenses associated with those moves to be counterproductive to their current earnings statements.

     

  5. Taimoor Zubar
    January 26, 2011

    What TI did by investing into new plants is a smart move which worked out well for them. However, since there are several factors which can influence the demand for products, companies can never be sure of the future demand. In such cases, would outsourcing of production not be a good option? In this way, companies do not have to invest in additional plant and machinery and at the same time they can maintain the flexibility in the supply chain.

  6. eemom
    January 26, 2011

    It is nice to see a company that has invested and formulated a strategy on how to succeed moving forward.  Now that the economy is slowly turning around and demand will increase again, TI is positioned to be the supplier of choice if they can continue reducing lead times and have faster time to market lead times. 

  7. Anna Young
    January 26, 2011

    Production outsourcing to foundries is always a good option for semiconductor companies and one many have chosen also due to the high cost of building new fabs. However, this is not good for all companies. Foundries cannot always guarantee wafer supply to semiconductor suppliers and this could be a problem for chip makers. Perhaps TI considered this before choosing to continue manufacturing its own products and as the article points out, the company bought the new equipment at a bargain.

  8. Anand
    January 26, 2011

    One more smart thing that TI did couple of years back was, to retain the analog fabs and rely on TSMC for DSM technology. It has taken some burden of TI and hence can concentrate more on Analog domain which is its core area of expertise. When all the companies were reeling under recession TI went ahead and bought equipment from Quimondo at dirt less prices. Fab expansion in China and Japan along with RFAB will give TI extra mileage ahead of its competitiors.

     

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