The main challenges facing Texas instruments

Anne Shields - Author

Nov. 24 2014, Updated 4:00 p.m. ET

A highly competitive and constantly changing industry

To be a competitive player in the technology industry, a company must constantly invest huge amounts to develop cutting-edge and better technologies than its peers. A highly competitive such as this requires significant research and development, or R&D, investment.

Owing to increased competition in the industry, companies are now outsourcing manufacturing operations to reduce capital expenditures. Since its earliest days, Texas Instruments Incorporated (TXN) has owned its own manufacturing facilities and has many technological innovations to its credit. However, analysts believe if the company does not soon follow suit and begin outsourcing, its growth, and consequently its investment value, will be negatively affected.

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High fixed costs

Texas Instruments, like Intel Corporation (INTC), has its own fabs, or chip-making fabrication plants, that incur high fixed costs to produce semiconductors. Technology leaders such as Apple Inc. (AAPL), Qualcomm Inc. (QCOM), and NVIDIA Corporation (NVDA) design chips in-house. Meanwhile, the actual manufacturing of the chips is outsourced to companies such as ARM Holdings plc (or ARMH).

Because fabrication costs are fixed, they cannot be easily reduced. High fixed costs combined with the cyclical nature of the semiconductor industry increase volatility, and expose Texas Instruments to a degree of risk.

Shorter product life cycles

Consumer demand for the latest features and applications is huge. Endless technological innovation addresses that demand to a point, but has led to consistently shorter product life cycles. On the other hand, customer interests also shift, making demand difficult to forecast. So sometimes, just when integrated circuits, or ICs, are developed and ready to ship, something else comes along to make them redundant.

As the above chart shows, developing a competitive advantage is challenged by shifting consumer preferences and the delay in getting products to market. As analog products make up so much of Texas Instrument’s portfolio, these are the risks that the company must face.


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