Information Processing: CHIPMAKERS
TEXAS INSTRUMENTS' GLOBAL CHIP PAYOFF
Texas Instruments' high-speed telecommunications chip may look like any other semiconductor. But it's the product of a world's worth of effort. Conceived with engineers from Ericsson Telephone Co. in Sweden, it was designed in Nice with TI software tools developed in Houston. Today, the TCM9055 chip is produced in Japan and Dallas, tested in Taiwan, and wired into Ericsson line-cards that monitor phone systems in Sweden, the U.S., Mexico, and Australia.
Sound complicated? It is. Rather than build factories around the world at up to $1 billion a pop, most chip companies make most of their devices at home and ship them out by plane. Not Texas Instruments Inc. More than 40% of the employees in its $6.8 billion semiconductor group work outside the U.S. And it has cutting-edge fabrication plants--known as "fabs"--in more countries than anyone.
Some industry leaders question TI's globetrotting ways. With demand for chips soaring, most manufacturers are selling everything they can produce without jumping through hoops overseas. Rather than go offshore, Intel Corp., for one, is expanding fabs in New Mexico, Oregon, and Arizona. "We put our plants where they can be cost-competitive," says Intel Chief Operating Officer Craig R. Barrett.
But more chipmakers are following TI's lead. They now see that a local presence can help them to win orders. And a regional base provides chipmakers with a hedge against currency swings.
TI is beginning to see its strategy pay off. Some 65% of the company's chip sales are outside the U.S., while Intel and Motorola Inc. still sell half their chips in America and NEC Corp. gets 60% of sales at home in Japan (chart, page 66). That means TI is positioned to tap market growth wherever it occurs. Market researcher Dataquest Inc. expects worldwide chip sales to rocket from $110 billion this year to $273 billion in 2000--with 61% of the growth outside the U.S. And, says G. Dan Hutcheson, president of market researcher VLSI Research Inc. in San Jose, Calif., "no one can beat TI's ability to design and manufacture semiconductors overseas."
The result: From Nokia cell phones in Scandinavia to Sony seatback entertainment systems for Boeing 777s, a huge number of products around the world are being designed with TI parts. "We're intent on using our geographic position as a competitive advantage," declares Thomas J. Engibous, president of TI's semiconductor group.
So far so good. TI is the only chipmaker besides Samsung Electronics Co. to gain global market share in each of the past three years, according to Dataquest. In the first half of fiscal 1995, which ended July 18, TI posted record earnings on record sales--$508 million and $6.1 billion, respectively. TI shares are around 155, up over 90% since Jan. 1, exceeding the average gains of other chipmakers in the high-tech bull market.
FIGHTING BACK. Before the global strategy came into focus, TI was almost forced out of the market for dynamic random-access memory chips (DRAM) by Asian rivals. Its share sank from 11% to 5% during the 1980s. Other U.S. DRAM makers just gave up. TI fought back. First, it generated billions by vigorously pursuing patent royalties. Then, in 1987, it made a bold bet. It began swapping research on next-generation DRAMs with one of its toughest rivals, giant Hitachi Ltd. Over the next five years, similar links followed--between NEC and AT&T, Intel and Sharp, and the trio of Toshiba, Siemens, and IBM.
Next, TI entered a series of manufacturing joint-ventures. In 1989, CEO Jerry R. Junkins agreed to split the $1.2 billion cost for a fab in Avezzano, Italy, with the Italian government. Finding no ill effects, Junkins made similar deals with Taiwanese PC maker Acer, Japan's Kobe Steel, and a consortium in Singapore that included Canon, Hewlett-Packard, and the Singapore government. Most recently, the company started Twinstar Semiconductor Inc. with Hitachi.
In total, these alliances have saved the company more than $1 billion in plant investment and produced a network of cutting-edge fabs close to customers. All four of TI's production joint ventures are now doubling their capacity. By making PCs near its joint-venture fab with TI, "we can plan our production more efficiently," attests Acer America CEO Ronald Chwang. Acer is spending $1 billion to expand the Taipei plant.
Even competitors give TI grudging praise: "They've done a good job of leveraging other people's money," admits Intel's Barrett. Adds Taiwan Semiconductor Manufacturing President Don Brooks: "TI brought fresh ideas about how to structure capacity deals."
And, without the global push, TI might have missed the current boom in DRAMs, which now account for 29% of its chip profits. "Two years ago, no one wanted to be near the DRAM market," says Apple Computer CEO Michael H. Spindler. "Now, TI just sits back and says, `Thank you very much."'
Chipmakers from Japan's Mitsubishi Electric Corp. and Oki Electric Industry Co. to Korea's Samsung are proceeding with global expansions and joint ventures. But to match TI's success, they may also want to copy the way it changed sales and manufacturing practices, too. TI used to reward regional performance rather than contributions to overall corporate health. So, instead of cooperating to win business from multinational customers, salesmen would race past each other in the client's lobby. When parts were scarce, geographic chiefs fought over inventories. Fab managers in 17 sites were rivals for monthly manufacturing honors--not collaborators. "Just having people and functions around the world proved to be a disadvantage," says TI's Engibous.
So for the past four years, the 19-year veteran has been on a crusade to wipe out internal fiefdoms. Now, factories use the same procedures and equipment. With an upgraded computer network, engineers in Dallas can run chip-testing machines at assembly plants in the Philippines. When they find a flaw, they can remotely reprogram the production line by the start of the next shift. Special software now distributes orders to whichever fab needs the work at the moment. The result: With fewer delays in the factory, TI has improved on-time delivery from 77% to 96% since 1990.
On the marketing end, country sales groups have been replaced by worldwide teams of product specialists. Trouble-shooting teams, made up of everyone from top executives to factory hands, routinely shuttle between continents. When a machine for depositing chemicals on silicon wafers kept getting contaminated by microscopic dirt at TI's fab in Avezzano, a team of "particle busters" from the U.S., Taiwan, and Japan convened to figure out why.
FAST WORK. One of TI's biggest advantages is a 10-person plant-building team. After two decades of working together, they've reduced fab construction to an art--sailing through regulatory red tape around the globe, finding suppliers of ultrapure water and chemicals, and creating world-class cleanrooms an average of eight months faster than competitors, according to VLSI's Hutcheson.
The cumulative effect of these technological and management steps is huge efficiency gains. By running its 17 fabs as a single virtual factory, Engibous says that TI freed up capacity equal to a brand-new, $500 million plant. "We are starting to see the kind of improvements that truly great companies make," boasts CEO Junkins. Says Motorola Semiconductor Group president Thomas D. George: "If TI is not doing a better job, they're hiding it well."
TI's efficiency is a real marketing edge for customers who need to design and introduce new products in a hurry. It used to take Nokia Mobile Phones Ltd. as much as six months to forge annual contracts that set terms for delivery, payment, and such. "If you made an agreement with a local [TI] organization, say in Europe, you had tremendous problems getting guys in the U.S. and Asia to agree to the same conditions," says Nokia Senior Purchasing Manager Kari Taimi. Now, it's immediate, he says.
The gains haven't been consistent. In Europe, TI is just starting to gain ground on competitors, after five years of shrinking revenues. And compared with Motorola and AT&T, says one European telecom customer, "TI is still weak." But TI Asia, which has more fabs than any company from outside the area, is booming. It will pass TI Europe in size this year and could overtake the U.S. unit by 2000, according to TI Asia President Keh-shew Lu.
A key reason is TI's lead in digital signal processor (DSP) chips, which are ideal for consumer products, from multimedia PCs to futuristic gizmos such as pen-size communicators. In DSPs, "TI is the team to beat," says Will Strauss, president of market researcher Forward Concepts in Tempe, Ariz. He figures the DSP market will hit $16 billion by 2000. "TI is the dominant player, and it's still continually increasing market share."
Another TI global initiative is "systems-on-a-chip." The idea is to etch all the electronics of a new product onto a single slice of silicon, rather than assembling a board full of chips. But without local hand-holding, this approach becomes unwieldy. "Customers don't want to be down for 24 hours or more every time they find a bug," says Senior Vice-President Richard K. Templeton.
Competition is already intense. In addition to LSI Logic Corp. and Cirrus Logic Inc., TI will soon face Fujitsu, NEC, and Toshiba, as well as Sony and Matsushita. Sony hired LSI Logic to design the guts of its Play Station video- game machine. But for the next generation, "Sony will do the work in-house," says Kenji Hori, head of Sony Research in the U.S.
ROUGH SPOTS. TI also faces the prospect of the next downturn in the DRAM business. Motorola's George figures prices will stay high for a few years, but eventually the old roller-coaster cycles will return. "It could be even worse, because there are more big players in the market than ever before," he warns.
TI insists that if it produces a wide enough variety of chips, with the right global balance, it can ride right over such rough spots. "This is not the industry it was in the 1970s and 1980s," Junkins says. "The engine that's pulling us along is bigger than ever. Where else can you find a $100 billion market with $100 billion in growth opportunities?" That tells him that chip companies must shelve their perennial worries. "You make a big mistake if you look in the rearview mirror," he says. Today, if he does glance back, he'll have the gratifying view of competitors eating a lot of TI's dust.
HOW TI'S SYSTEM WORKS
1 In Sweden, Ericsson engineers brainstorm with TI experts to improve
the quality on Ericsson's digital phone equipment.
2 On the sunny Riviera, a team of TI designers turn Ericsson's vision
into electronic blueprints.
3 To make prototypes, TI taps Japan's manufacturing expertise through
its 31-year-old Japanese subsidiary.
4 Production fans out to include Dallas, so TI can maintain a stable
supply and hedge against currency swings.
5 Like most chipmakers, TI packages the finished chips in Southeast Asia.
Its global information system lets engineers fix bugs remotely by
tweaking automated assembly lines in Taiwan.
6 TI's chips arrive on time and are embedded in Ericsson phone switches in
the U.S., Mexico, Europe, and Australia.
DATA: COMPANY REPORTS, BUSINESS WEEKBy Peter Burrows in Dallas, with Linda Bernier in Brussels and Pete Engardio in Hong Kong