Texas Instruments 2008 Annual Report Download - page 40

[ 38 ] TEXAS INSTRUMENTS 2008 ANNUAL REPORT
external sources, we have about 10 percent market share in this fragmented market, and we believe we are well positioned to increase
our share over time.
An important characteristic of Embedded Processing products is that our customers often invest their own research and
development (R&D) to write software that operates on our products. This investment tends to increase the length of our customer
relationships because customers prefer to re-use software from one product generation to the next. We make and sell standard, or
catalog, Embedded Processing products used in many different applications and custom Embedded Processing products used in
specific applications, such as communications infrastructure equipment and automotive.
Wireless
Cell phones require a modem or “baseband” to connect to the wireless carrier’s network. Many of today’s advanced cell phones also
require an applications processor to run the phone’s software and services, and semiconductors to enable connectivity to Bluetooth®
devices, WiFi networks or GPS location services. We design, make and sell products to satisfy each of these requirements. Wireless
products are typically sold in high volumes and our Wireless portfolio includes both standard (or merchant) products and custom
products. Sales of Wireless products accounted for about 25 percent of our revenue in 2008, and a significant portion of our Wireless
sales were to a single customer.
As wireless communications have proliferated, consumers have demanded capabilities beyond voice. Smartphones (phones that
contain email, media, games and computing capability) represent one of the fastest growing wireless markets. These phones tend to
include many semiconductor products. Major handset manufacturers are actively pursuing the smartphone market and increasingly
focusing their R&D on applications and services. As a result, we believe customer demand for applications processors will grow as
handset manufacturers seek to differentiate their products by providing software and a unique user experience. Our OMAPTM product
line has a leading position in the applications processor market and is used by most of the top handset manufacturers.
Our Wireless segment has been shifting focus from baseband chips, a market with shrinking competitive barriers and slowing
growth rates, to applications processors, a market we expect will grow faster than the baseband market. Consistent with this shift in
market focus, we are concentrating our Wireless investments on our applications processors and connectivity products. We continue to
sell custom baseband products but have discontinued further development of merchant baseband products.
Other
Our Other segment includes revenue from smaller semiconductor product lines and handheld graphing and scientific calculators, and
from royalties received for our patented technology that we license to other electronics companies. The semiconductor products in
our Other segment include DLP® products (primarily used to create high-definition images for business and home theater projectors,
televisions and movie projectors), reduced-instruction set computing (RISC) microprocessors (designed to provide very fast computing
and often implemented in servers) and custom semiconductors known as application-specific integrated circuits (ASICs). This segment
accounted for about 20 percent of our revenue in 2008.
Inventory
While our inventory practices differ by product, we generally maintain inventory levels that are consistent with our expectations of
customer demand.
For custom semiconductor products, where the risk of obsolescence is higher, we carry lower levels of inventory when possible.
These products 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.
For standard semiconductor 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 wafer form, giving us greater flexibility to meet final package and test configurations.
As a result of the following trends, we now tend to carry relatively higher levels of inventory than in past years: standard products
have become a larger part of our portfolio; we have increased consignment programs with our largest customers; and our distributors
now carry relatively less inventory on average than in the past.
We manage calculator inventory consistent with expected seasonality.
Manufacturing
Semiconductor manufacturing begins with the wafer fabrication manufacturing process: a sequence of photo-lithographic and chemical
processing steps that fabricate a number of semiconductor devices on a thin silicon wafer. Each device on the wafer is tested and the
wafer is cut into pieces called chips. Each chip is assembled into a package that then may be retested. The entire process typically
requires between twelve and eighteen weeks and takes place in highly specialized facilities.
We own and operate semiconductor manufacturing sites in North America, Asia and Europe. These facilities include high-volume
wafer fabrication plants and assembly/test sites. Our facilities require substantial investment to construct and are largely fixed-cost