Why Texas Instruments Isn't Worried
TI lowered its second-quarter estimates last week, but in a recent meeting with FORTUNE, CEO Tom Engibous was bullish on the company's long-term prospects.
FORTUNE
Monday, June 16, 2003
By Ann Harrington
For the CEO of a company that had just lowered its second-quarter estimates, Texas Instruments' Tom Engibous didn't seem too worried last week when he met with FORTUNE editors.
Maybe that's because the immediate cause of TI's concern--weakness in demand from Asia, apparently due to SARS--is a temporary issue that TI believes will work itself out fairly quickly. Or maybe, having survived the industry-wide annus horribilis of 2001, when revenues dropped by almost a third, Engibous isn't easily fazed. "What's left, locusts?" he joked.
More likely, TI's confidence stems from the strength of its position in a rapidly changing semiconductor market. TI makes most of its money from digital signal processors (DSPs) and analog chips, which are of increasing importance in cellphones and other consumer electronics devices. Last year, for example, TI made about $2 billion from wireless applications, up 45% from 2001, even though world handset sales were up only 6%. That's because as cellphones and other devices add features like cameras, color display screens and GPS, they need more of what TI makes. Still, you won't see TI imitating Intel with a "TI Inside" label. Engibous is willing to pass up that kind of branding as long as he's building deeper relationships with his customers.
These days, more of those customers--primarily manufacturers of consumer electronics--are in Asia, a change from just three years ago, when the biggest chunk of TI's revenues came from the U.S. (now the U.S. share is more like 20%). SARS notwithstanding, China is now the world's biggest mobile-phone market, and more and more of TI's customers have moved their manufacturing to Asia.
Technology has been in a slump of late, and Engibous concedes he's not very good at predicting business cycles. But "the history of electronics growth does not track with GDP growth," he says. "It's more about new functionality for consumers."
In fact, he believes "we're on the verge of another analog modem scenario." In that case, seemingly unremarkable technology ended up being a gateway to the Internet from the home computer, creating huge opportunities for tech companies to cash in. What's next? Maybe a broadband breakthrough, where the U.S. has been lagging behind. Whether DSL, cable or some other technology finally allows broadband to take off, TI could benefit. Engibous likes to say: "We don't sell religion, we sell Bibles."
Asked about TI's toughest competitor, "we don't have one," says Engibous, "we have many." There's no one competitor that goes after TI head-to-head in all its markets. Instead, TI competes with STMicroelectronics and Analog Devices in analog chips, with Analog Devices, Motorola and Agere in DSPs (where TI dominates), with Qualcomm in wireless, and with Broadcom in broadband.
In five years, Engibous thinks this will be seen as a turning point for the semiconductor industry. One reason he is bullish on TI's prospects is that it has been one of the few chip companies still making the investment necessary to keep up with Moore's Law. In the last couple of years, chipmakers have been through three big changes: 1) a move from 200 mm to 300 mm silicon wafers that can make more than twice as many chips as before; 2) circuits have shrunk even smaller, from 130 nanometers to 90; and 3) a change in materials from aluminum to copper.
Instead of taking these leaps, many tech companies have stopped making their own chips and instead are relying on a handful of foundries. Out of 25 competitors worldwide, Engibous says, only five, including TI, are continuing to invest in fabs to make the new generation of chips. "They're developing into the haves and have-nots" of the semiconductor world, he says. "The companies who are your customers won't want to bet on someone who can't show them a seven-year road map." Engibous isn't going to take that chance.
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