Texas Instruments 2007 Annual Report Download - page 49

TEXAS INSTRUMENTS 2007 ANNUAL REPORT 47
DSP are important characteristics that often indicate the advanced technical nature of the device. Our portfolio includes DSPs that are
among the world’s fastest and most power-efficient.
Our portfolio of DSPs includes three categories of products: custom products, application-specific products and standard products.
Custom products are designed for specific, individual customers with very high volumes in established markets. Application-specific
products are designed for use by multiple customers in established and emerging markets. Standard products are sold into a broad
range of applications and often seed the next generations of innovation in signal-processing equipment.
We are the world’s largest supplier of DSPs with an estimated 65 percent share of the market in 2007. Most of this revenue comes from
custom DSPs.
A digital television broadcast provides an example of how analog semiconductors and DSPs work together in enabling modern
electronic equipment. As a camera focuses on an event, its sensors and microphones send real-world signals to analog semiconductors,
which condition and amplify the signals and convert the signals into digital data. A DSP then compresses and enhances the data for
transmission as a television broadcast. Next, a television receives the broadcasted signal and its chips reverse the process, outputting
the resulting sound and picture. Our portfolio of semiconductor products includes analog and DSP chips that are able to accomplish all
of the processing steps described in real time.
Inventory
We strive to carry levels of inventory that let us meet our customers’ needs as well as fill orders when demand is unexpectedly strong.
Having products when and where the customer needs them is an important element in gaining market share.
Our inventory practices vary by type of product. For standard products, where the risk of obsolescence is low, we generally carry higher
levels of inventory. These products usually have many customers and long life cycles and are often ordered in small quantities. Standard
product inventory is sometimes held in unfinished form, giving us greater flexibility to meet final package and test configurations.
Examples of these products are high-performance analog, standard DSP and standard microcontrollers. (A microcontroller is a
microprocessor designed to control a very specific task for electronic equipment.) For custom high-volume products, where the risk of
obsolescence is higher, we carry lower levels of inventory when possible. These products usually have a single customer, are sold in
high volumes and have comparatively shorter life cycles. Life cycles of these products are often determined by end-equipment upgrade
cycles and can be as short as 12 to 24 months. Examples of these products are digital baseband processors for cell phones and custom
application-specific analog and digital products. In addition, our inventory levels have generally increased over time due to the impact
of consignment programs at our largest customers, our distributors’ desire to carry less inventory and our increased mix of standard
products such as high-performance analog.
Manufacturing
We own and operate semiconductor manufacturing sites in North America, Asia and Europe. Our facilities require substantial investment
to construct and are largely fixed-cost assets once in operation. Because we own much of our manufacturing capacity, a significant
portion of our operating costs is fixed. In general, these costs do not decline with reductions in customer demand or utilization of
capacity, potentially hurting our profit margins. Conversely, as product demand rises and factory utilization increases, the fixed costs are
spread over increased output, potentially benefiting our profit margins.
There is an inherent difference in the cost to manufacture analog semiconductors and DSPs. DSPs generally are on the leading edge
of technology, and consequently, they require the most advanced and expensive manufacturing processes and equipment. Additionally,
digital chips tend to evolve quickly to more advanced technology levels, requiring new production processes and new equipment every
few years. As a result, maintaining an industry leadership position in digital manufacturing requires significant capital spending, along
with investment in research and development, in order to develop new production processes and manufacturing capabilities. To reduce
the dollars we must spend to produce digital chips, we manufacture some of our products at foundries that are owned and operated by
outside parties. Foundries manufactured about 50 percent of our advanced digital chips in 2007.
In contrast to our DSPs, our analog semiconductors typically require a lower level of investment in manufacturing processes and
equipment. While analog chips benefit from unique, proprietary manufacturing processes, these processes can be applied using older,