TI Rides Rising Chip Demand as It Doubles Down on In-House Fabs

Texas Instruments said its quarterly sales soared more than 40% over the last year due to strong demand in the industrial, automotive, and consumer electronics markets, as it continues to invest in its internal production to stay ahead of global chip shortages and amass more control over its supply chain.

The analog semiconductor giant recently reported second-quarter sales of $4.58 billion, a 41% increase from a year ago on strong demand in its core businesses. TI said sales of chips used in factory equipment and robots improved around 40% from a year ago. Its consumer electronics business jumped by 25% from last year, while sales of microcontrollers, radar, and other chips used in cars more than doubled compared to a year ago when economic fallout from coronavirus shut down factories around the world.

The company also revealed that its core analog semiconductor business jumped by 42% to $3.4 billion, while sales of microcontroller and other real-time embedded processors improved 43% to $780 million year-over-year.

Like other semiconductor firms, over the last year, TI has been cashing in on strong demand for the wide range of electronic devices that contain its analog and power-management chips and microcontrollers. The company sells around 80,000 products to more than 100,000 customers globally—one of the longest customer lists in the industry—giving it a more diversified customer base than Intel, Qualcomm, or other players.

The world is in the throes of a severe chip shortage that has ravaged global electronics supply chains. The soaring demand for game consoles, smartphones, and other consumer devices has drained supplies of chips to the automotive sector, leading to a global scramble for foundry production. As demand outruns supply, many components have become harder to buy or more costly. Severe weather around the world, plus prolonged droughts, fires at chip fabs, and other disasters, have hampered operations globally, too.

Many industry executives have warned the component supply gap and foundry shortages could last through 2022 and into early 2023, potentially leading to surplus conditions in 2024 if manufacturing continues as its torrid pace.

TI's management said that its high level of in-house manufacturing has helped it weather the worst of the chip shortage. Other semiconductor giants such as NVIDIA and Qualcomm have never had in-house fabs, while others like AMD have moved to TSMC and other foundries. TI said that its plants can handle 80% of its production demands. TI mass-produces the vast majority of its analog chips in-house, and it contracts production of many of its more advanced microcontrollers (MCUs), including its new 16-nm AM2x family.

While other companies reined in production early last year as the coronavirus agitated the global economy, TI continued to invest in its production output, giving it a larger buffer of inventory that customers are now willing to pay more for because of the supply shortages. The company's overall income improved to $1.93 billion, or $2.05 a share in the second quarter of 2021, up from $1.38 billion, or $1.48 per share, a year ago.

But TI, whose chips serve as building blocks in everything from cars to the factory robots that assemble them, has started feeling the pain, too.

The semiconductor company said that its average in-house inventory slumped to 110 days in the second quarter of the year, falling short of the 130 to 190 days of inventory that it prefers to have on hand. TI said that the lead times for the majority of its products are stable, but that stronger demand expanded its list of "hotspots" in the second quarter, or product categories where it has been forced to delay chip shipments.

TI anticipates sales of $4.4 billion to $4.76 billion in the current quarter ending in September, largely unchanged from the second quarter. The forecast has raised concerns that the chip industry's sales surge is close to peaking. Some industry analysts worry that customers have purposely ordered more chips than they need—also known as "double ordering"—to protect themselves against a prolonged supply crunch, and now they are starting to cancel or pause further orders as demand in their end markets eases.

Net profits are projected to be in the $1.87 to $2.13 per share range, the company said.

"I know there is lots of speculation on how long the strong demand will last, and we have read the ranges that it's going to end soon, and others say it is going to continue for some time," said Rafael Lizardi, chief financial officer at TI, on a conference call with analysts. "We're not going to forecast the fourth quarter or comment on how long the cycle could last, because honestly, we don't know. I don't think anyone knows."

The company said that it has been investing "incrementally" in all its semiconductor fabs to bring supply closer to meeting demand, including at its flagship 300-mm "RFAB1" semiconductor fab located in Dallas, Texas. The company is also working to add more long-term capacity with its soon-to-be-completed "RFAB2" fab, which is currently on pace to start manufacturing analog chips on 300-mm wafers by the second half of 2022.

Earlier this month, TI said that it would buy a 300-mm semiconductor fab from Micron Technology for $900 million, in a move to boost its long-term production capacity and gain greater control over its supply chain. TI plans to re-equip the plant from flash-memory chips to the production of analog and embedded processors on the 65- and 45-nm nodes, with the ability to take the fab to additional nodes as needed.

TI has been trying to give itself a cost advantage over rivals by investing more in its 300-mm production capacity. It estimates that an unpackaged chip sliced out of a 300-mm wafer costs on average about 40% less than the same chip manufactured on 200-mm wafers that are widely favored for analog chips. TI has also shifted to selling more of its chips directly to customers in recent years instead of using electronics distributors. That gives it another advantage in the control of its supply chain, the company has argued.

"We will go through cycles and we will never be able to predict it, but we can make the place stronger. We can continue to invest in our competitive advantages," Lizardi said on the call.