TXN is ahead of its peers
The analog chip market is highly fragmented. Small players have a hard time competing with large players. The large players have proprietary designs, engineering talent, and the ability to face strict quality requirements.
Analog engineering talent is hard to acquire. It usually takes years of training to learn and develop the intricacies required in chip designs. For example, in the automotive sector there isn’t room for defects. Defects can be as low as one part per million. Small players have a hard time meeting these strict requirements.
Leadership position in the analog space
In 2013, the Analog segment contributed ~60% towards Texas Instruments’ (TXN) overall revenues. As stated in the company’s 2013 annual report, the worldwide market for analog semiconductors was ~$40 billion. TXN’s Analog segment earned revenue of $7.2 billion in 2013. This translated to the company holding ~18% of the market share in this space.
As the above chart shows, TXN held the market leadership position in the analog market in 2011 and 2012.
Analog Devices (ADI), STMicroelectronics (STM), Infineon Technologies (IFX), and Qualcomm (QCOM), are the other leading players in this space. TXN holds a leadership position in this fragmented market. It had 18% market share in 2013.
Long product life cycle
Analog designs have relatively long product life cycles. The designs are difficult. They require considerable expertise and resources. Once the designs are produced, they can be replicated for a long time. Also, they don’t require cutting-edge manufacturing processes like central processing units (or CPUs).
In 3Q14, this segment’s operating profit as percentage of revenue was ~37%—compared to ~30% in 3Q13. The analog devices’ broad portfolio—with a diverse customer and product base and high profit margins—gives the company an edge over its peers.