Texas Instruments 2014 Annual Report Download - page 11

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FORM 10-K
Market characteristics
Product cycle
The฀global฀semiconductor฀market฀is฀characterized฀by฀constant,฀though฀generally฀incremental,฀advances฀in฀product฀designs฀and฀
manufacturing processes. Semiconductor prices and manufacturing costs tend to decline over time as manufacturing processes and
product life cycles mature.
Market cycle
The฀“semiconductor฀cycle”฀refers฀to฀the฀ebb฀and฀flow฀of฀supply฀and฀demand.฀The฀semiconductor฀market฀historically฀has฀been฀
characterized฀by฀periods฀of฀tight฀supply฀caused฀by฀strengthening฀demand฀and/or฀insufficient฀manufacturing฀capacity,฀followed฀by฀
periods฀of฀surplus฀inventory฀caused฀by฀weakening฀demand฀and/or฀excess฀manufacturing฀capacity.฀These฀are฀typically฀referred฀to฀as฀
upturns฀and฀downturns฀in฀the฀semiconductor฀cycle.฀The฀semiconductor฀cycle฀is฀affected฀by฀the฀significant฀time฀and฀money฀required฀to฀
build฀and฀maintain฀semiconductor฀manufacturing฀facilities.฀
We employ several strategies to dampen the effect of the semiconductor cycle on TI. We acquire our facilities and equipment ahead
of฀demand,฀which฀usually฀allows฀us฀to฀acquire฀this฀capacity฀at฀lower฀costs.฀We฀focus฀our฀resources฀on฀our฀Analog฀and฀Embedded฀
Processing segments, which serve diverse markets and diverse customers. This diversity reduces our dependence on the performance
of฀a฀single฀market฀or฀small฀group฀of฀customers.฀Additionally,฀we฀utilize฀consignment฀inventory฀programs฀with฀our฀customers฀and฀
distributors,฀which฀gives฀us฀real-time฀insight฀into฀end-market฀demand,฀allowing฀us฀to฀better฀manage฀our฀factory฀loadings.
Seasonality
Our฀revenue฀is฀subject฀to฀some฀seasonal฀variation.฀Our฀semiconductor฀revenue฀tends฀to฀be฀weaker฀in฀the฀first฀and฀fourth฀quarters฀when฀
compared฀to฀the฀second฀and฀third฀quarters.฀Calculator฀revenue฀is฀tied฀to฀the฀U.S.฀back-to-school฀season฀and฀is฀therefore฀at฀its฀highest฀in฀
the second and third quarters.
Competitive landscape
The฀analog฀and฀embedded฀processing฀markets฀are฀highly฀fragmented.฀As฀a฀result,฀we฀face฀significant฀global฀competition฀from฀dozens฀
of฀large฀and฀small฀companies,฀including฀both฀broad-based฀suppliers฀and฀niche฀suppliers.฀Our฀competitors฀also฀include฀emerging฀
companies, particularly in Asia, that sell products into the same markets in which we operate.
We฀believe฀that฀competitive฀performance฀in฀the฀semiconductor฀market฀generally฀depends฀on฀several฀factors,฀including฀the฀breadth฀
of a company’s product line, the strength and depth of the sales network, technological innovation, product development execution,
technical฀support,฀customer฀service,฀quality,฀reliability,฀price฀and฀scale.฀The฀primary฀competitive฀factors฀for฀our฀Analog฀products฀include฀
design proficiency, a diverse product portfolio to meet wide-ranging customer needs, manufacturing process technologies that provide
differentiated levels of performance, applications and sales support, and manufacturing expertise and capacity. The primary competitive
factors฀for฀our฀Embedded฀Processing฀products฀are฀the฀ability฀to฀design฀and฀cost-effectively฀manufacture฀products,฀system-level฀
knowledge฀about฀targeted฀end฀markets,฀installed฀base฀of฀software,฀software฀expertise,฀applications฀and฀sales฀support,฀and฀a฀product’s฀
performance, integration and power characteristics.
Manufacturing
Semiconductor฀manufacturing฀begins฀with฀a฀sequence฀of฀photolithographic฀and฀chemical฀processing฀steps฀that฀fabricate฀a฀number฀
of semiconductor devices on a thin silicon wafer. Each device on the wafer is packaged and tested. The entire process takes place in
highly฀specialized฀facilities฀and฀requires฀an฀average฀of฀12฀weeks,฀with฀most฀products฀completing฀within฀8฀to฀16฀weeks.฀
The฀cost฀and฀lifespan฀of฀the฀equipment฀and฀processes฀we฀use฀to฀manufacture฀semiconductors฀vary฀by฀technology.฀Our฀Analog฀products฀
and฀most฀of฀our฀Embedded฀Processing฀products฀can฀be฀manufactured฀using฀mature฀and฀stable,฀and฀therefore฀less฀expensive,฀equipment฀
than is needed for manufacturing advanced logic products, such as some of our processor products.
We฀own฀and฀operate฀semiconductor฀manufacturing฀facilities฀in฀North฀America,฀Asia,฀Japan฀and฀Europe.฀These฀include฀both฀wafer฀
fabrication฀and฀assembly/test฀facilities.฀Our฀facilities฀require฀substantial฀investment฀to฀construct฀and฀are฀largely฀fixed-cost฀assets฀once฀
in operation. We own much of our manufacturing capacity; therefore, a significant portion of our operating cost is fixed. When factory
loadings฀decrease,฀our฀fixed฀costs฀are฀spread฀over฀reduced฀output฀and,฀absent฀other฀circumstances,฀our฀profit฀margins฀decrease.฀