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TI Makes Big Bet on Growth

Perhaps the inventory uptick in the semiconductor market noticed by researcher IHS iSuppli in the fourth quarter was not an anomaly. (See: Global semiconductor levels surge .) It seems chip vendors, wary of being caught unprepared in the event of a second half 2011 demand upswing, have been actively building inventories. That was my conclusion after listening to a 30-minute presentation by Ron Slaymaker, the head of investor relations at {complink 5703|Texas Instruments Inc.}.

Dallas-based TI isn't likely to be nabbed again without adequate parts to support customer demand anytime soon. According to Slaymaker, TI has acquired or added enough manufacturing capacity to support $5 billion in new sales, and during the fourth quarter it raised its inventory hoard by more than 25 percent, to $1.5 billion, from $1.2 billion in the comparable 2009 quarter. And the company is not done with building up inventory, either.

“We planned to continue to replenish inventory in the first quarter with the main goal of that being to maintain our lead times as short as possible as customer demand strengthens,” Slaymaker said. “We are making sure that our sales people send a very clear signal to our customers today that we have plenty of capacity due to the investment we made through the course of the [2008] downturn. We are very well positioned to support growth.”

TI learned a tough lesson two years ago when OEM requests for analog parts skyrocketed and its lead times — the period between when a buyer places an order and when the supplier is able to deliver the product — soared, in some cases to six or more months, versus normal levels of 6 to 8 weeks. In response, TI went on a buying binge, snapping up fabs — many at a discount — and building up the buffer inventory it needed to whittle down lead times. Still, the company admits, lead times are still extended in some product areas.

“Back during our January conference call, we said that by the end of the fourth quarter, we had brought lead times back to normal levels,” Slaymaker said. “Even so, we said that we had some outlier areas where lead times remained extended. I would say we are making progress in those outlier areas.”

Will TI's bet on growth prove to be a smart move? It depends on how events unfold over the next six months. A rise in inventories is always a problem in the semiconductor industry because it highlights gross imbalance between demand and supply, putting pressure on average selling prices. OEMs, of course, are glad to write smaller checks for parts, but nobody benefits on a longer-term basis because suppliers then cut capex, tighten up stocks, and slow investments in plants. The result? Another ugly imbalance, this time favoring component vendors on the supply side and helping to kick up prices.

The current situation is making everyone nervous. Analysts are questioning the wisdom of letting inventories rise at chip vendors; iSuppli said it was surprised by the increase, which pushed total semiconductor industry days-of-inventory to 83.6 (up from 78.1 in the preceding quarter), its highest level in more than two years.

“Inventory levels arguably now are high by any standard, illustrating the difficulty of controlling chip stockpiles despite the arduous efforts of semiconductor suppliers to keep them in check,” iSuppli said in its report. “The sharp increase during the fourth quarter of semiconductor inventory defied expectations of a decline for the period, but the inflated level of inventory could become a concern if semiconductor industry growth falls short of expectations in 2011.”

TI is counting on growth continuing through the rest of the year, but the company's latest update to its first quarter performance indicates some weakness. Sales for the period are now forecast to be in the range of $3.34 billion to $3.48 billion, within the mid-range of the previous guidance for $3.27 billion to $3.55 billion. TI's Slaymaker said the company is seeing some weakness in the PC segment, but noted other industry segments remain robust.

Investors weren't as convinced, however. TI's stock price came under some selling pressure, following the release of the updated first quarter outlook. And during early trading on Thursday, it slid about one percent, in line with the major indices. Does this reflect broad disappointment with TI? Perhaps, but the company is plowing ahead, and I have to agree with its strategy.

Current demand signals — aside from other structural economic problems, such as rising oil prices and high European and US unemployment — still point to expansion in the electronics industry. And as TI executives and analysts like Malcolm Penn at Future Horizons have noted, capital expenditure in the chip market has been low lately, constraining capacity and setting up the market for tough supply conditions, even at moderate demand conditions. (See: Chip Chain Remains Tight.) TI caught some flak for being unprepared two years ago; I bet it would rather be over-prepared, next time around.

1 comment on “TI Makes Big Bet on Growth

  1. Anand
    March 10, 2011

    Bolaji,

     One understands TI's over-preparedness this time around. TI did smart moves during recession by buying fabs at steep discount price like Qimond.TI has now done all the ground work, needs to be seen how the market behaves next 6 month. If the market sentiment remains positive I am sure TI will have upper hand compared to its competitiors.

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