Analog chips, are we getting further and further away from TI?

Analog chips play the most basic and indispensable role in terminal equipment applications. When talking about players in this field, the first thing that everyone should think of is Texas Instruments (TI), because they have been the leader in this field for many years.

It can be seen from the financial data that TI's revenue exceeded US$20 billion for the first time in 2022, a year-on-year increase of nearly 10%. For comparison (as shown below), even though it has made multiple blockbuster acquisitions in recent years, the market share of the second-ranked ADI company is still far behind TI.

Although the data of Texas Instruments in the fourth quarter of last year showed that the chip giant could not avoid the industry trend of declining inventory, revenue and profits. The company's CEO Rich Templeton also pointed out that as expected, TI's demand in all terminal markets except automobiles was weak. Customers also began to cut orders. When asked when the industry would recover and rebound, the company's chief financial officer Rafael Lizardi gave the answer "I wish I knew."

However, at a time when the industry is generally cutting spending, TI not only made clear the company's determination to maintain investment in its capital expenditure-related briefing. Looking to the future, while Texas Instruments brings confidence to itself and even the industry, it will also bring new "impacts" to competitors in the analog chip industry.

There is no doubt that Texas Instruments is a unique presence in the chip market.

In the view of many analysts, the reason why they have been able to survive in the past ten years is first of all due to the company's management's preparation for rainy days. For example, the company was able to realize its shortcomings on the eve of the smartphone explosion, and bravely exited the smartphone chip market, targeting the industrial and automotive electronics markets. The popularity of new energy vehicles in recent years has indeed brought greater opportunities to this analog chip giant, coupled with the steady development of the industrial market. The stability brought by these two markets is not comparable to the roller-coaster consumer electronics chip market, and has made TI's position more stable in the past few years.

Especially in the current industry down cycle, Texas Instruments' layout is even more confident.

According to ASML at its latest investor day, mature nodes are one of the driving forces behind investment in wafer capacity. Calculated based on 300mm wafers (the analog industry still largely uses 200mm wafer production capacity), mature node wafers are expected to grow at a CAGR of 6%, which is much lower than the 12% CAGR of digital chips, but faster than NAND and DRAM demand. The company is also seeing accelerated growth in mature nodes, especially analog nodes (see chart below). This is what Texas Instruments excels at.

On the other hand, relevant reports have disclosed that TI has tens of thousands of chip products and provides services to more than 100,000 customers. Because it has such a broad product line, Texas Instruments can provide a higher percentage of the necessary components (usually 4 to 10 times more) when customers design systems on a chip, making it a one-stop shop. Texas Instruments' product portfolio also gives them a platform for rapid innovation when customers need custom chips because they typically offer similar products. Therefore, they can deliver components in less time.

An industry senior once told the author that Texas Instruments has developed a large number of chips that may not be used on a daily basis. Some of them may not be used in the warehouse for several years, but if there happens to be a demand one day, they can quickly Serve customers quickly. It is precisely because of these characteristics of their products that when TI's chips face the so-called inventory problem, there are no products with faster iteration cycles such as processors or storage products that are worrying.

Related reports also pointed out that no single product of Texas Instruments accounts for more than 1% of the company's revenue, and 40% of the company's revenue comes from customers outside the top 100 customers. This further enhances TI's ability to resist risks.

In addition, TI's layout in chip manufacturing is also the company's source of confidence in the future of analog chips.

In many past reports, we have said that with the changes in industry development, many traditional analog IDMs have gradually moved towards the Fab-Liter model, such as onsemi being a typical representative. In interviews with media such as Semiconductor Industry Watch, ON Semiconductor shared its understanding of Fab-liter. ON Semiconductor said that there should be no more and no less fabs, and a better balance can be achieved. We call it the Fab-liter model. Based on this thinking, ON Semiconductor has streamlined its organizational structure and adjusted production in the past year or so to maximize production capacity. At present, ON Semiconductor has sold 4 wafer fabs. This transformation, coupled with the company's other strategic adjustments, has allowed onsemi to achieve good performance in the past few years. Manufacturers including ADI, NXP and Renesas seem to be taking advantage of this Fab-liter model.

But unlike them, TI is using another method to bring new impact to analog chip competitors. That is to promote the shift of its analog chips to 300mm manufacturing.

In fact, it is not appropriate to say that the above-mentioned 300mm transfer is a "new" impact. Because TI has been doing this for a long time. As early as 2009, it built the industry's first 300mm analog wafer factory RFB1. In September 2022, Texas Instruments announced the RFAB plan. The new factory is more than 30% larger than RFAB1, and the total clean room area between the two factories exceeds 630,000 square feet. Once fully constructed, the 15-mile automated overhead conveyor system will seamlessly move wafers between the two fabs. When fully operational, the two factories will produce more than 100 million analog chips per day, which will be used in electronics ranging from renewable energy to electric vehicles.

However, from a recent investment briefing, Texas Instruments emphasized that in the face of the semiconductor cycle, the company must make long-term plans. It is based on this thinking that in addition to the above-mentioned factories, Texas Instruments also talked about the factories acquired from Micron and more information about the Sherman factory plans announced by the company in 2021. Texas Instruments said that these factories cover the 45nm to 130nm process and are ready for analog and embedded products.

As can be seen from the planning diagram provided by Texas Instruments (shown in the figure below), TI plans to increase the revenue from internally manufactured chips from 80% of total revenue in 2020 to more than 90% in 2030. TI also hopes that the proportion of internally assembled chips will increase from 60% in 2020 to more than 90% in 2030, allowing them to better control the supply chain. We can also see from the figure below that in 2022, only 40% of the chips produced internally by TI will be produced by 300mm wafer fabs, but by 2030, TI also hopes to increase this proportion to more than 80%.

It is worth mentioning that, as you can see from the figure below, TI hopes to bring the company's revenue to US$45 billion by 2030, which is more than double that of 2022. In order to achieve such a goal, TI has readjusted its already increased capital expenditure plan.

At Texas Instruments’ investment briefing, Texas Instruments also disclosed data that the migration to 300mm wafers can bring about 40% cost savings. At the same time, the company will also increase its gross profit to 68%. . This also explains why Texas Instruments is so actively involved in this transformation. In addition, TI has been cutting off distributors in the past few years and selling chips through direct sales, which is bound to further improve its control of product profit margins.

After carrying out this series of operations, TI will not only be able to take the initiative in product supply and supply chain control in the future, but will also be able to handle product pricing with ease. Taking into account the long life of the analog chip manufacturing process and TI's high gross profit, coupled with the funding brought by the US Chip Act, TI does not need to face the pressure of the equipment upgrade cycle of traditional wafer factories.

In short, judging from these reports alone, the analog chip giant is moving to a higher level.

These decisions of Texas Instruments not only caused great pains to the competitors who followed behind them. Coming to China, those who hoped to replace TI to gain market share through low prices in the past may not be feasible in the next few years.

Especially for those domestic analog chip Fabless. The strength of wafer fabs in the past few years has caused them to suffer a lot. Now, many fabs have changed their production expansion plans for mature processes due to the downturn in the cycle. This will continue to be a sticking point in the future.

Even now some domestic analog chip factories are building their 300mm wafer fabs. A set of data from Texas Instruments analog chips also makes us look up.

Relevant statistics show that from 2016 to 2021, Texas Instruments' analog chips' share of overall revenue increased from 64% to 77%, and its share of overall operating profit also increased from 70% to 83%. Specifically, the historical operating profit margin of Texas Instruments analog chips has also increased from 40% to 50%, which has been maintained for a long time, to 53% in 2021 (embedded processing and others are 39% and 32% respectively).

From this point of view, are we getting further and further away from Texas Instruments?