Like occasional shopping trips, listening to earnings conference calls is one of the necessary drudgeries in my life. While you might expect that someone who writes for the Fool would enjoy these calls, I find that most of the time is spent on questions that aren't really pertinent to the long-term operation of the business.
Nevertheless, these calls occasionally yield unexpected dividends, as was the case recently with Texas Instruments (NYSE: TXN).
The comment I found so interesting had to do with the company's manufacturing plans. Texas Instruments owns and runs its own semiconductor fabrication facilities, but also farms out some of its manufacturing to foundries like Taiwan Semiconductor (NYSE: TSM), resulting in what is referred to as a "fab-lite" strategy.
This can be advantageous because during a downturn, a firm can cut back manufacturing at its foundry partners while keeping its internal fabs more fully loaded. This protects margins and keeps sometimes-nervous shareholders happy. One negative result of using a fab-lite strategy, however, is duplication of effort. It's likely that both TI's fabs and its foundry partners invest money and time to develop and perfect the same manufacturing processes.
On Monday, Texas Instruments Chief Financial Officer Kevin March said he wants to eliminate this redundancy by stopping development of the company's advanced digital manufacturing capabilities beyond the current state-of-the-art 45-nanometer node. Next on the slate is 32 nanometers, where the company apparently plans to concentrate on design only.
Because this is the world's third-largest semiconductor company, you have to wonder what the decision means for the future of captive (non-foundry-owned) manufacturing capacity. While there are some advantages to maintaining in-house manufacturing, the costs are skyrocketing. While behemoths like Intel (Nasdaq: INTC) -- by far the world's largest semiconductor company -- and Samsung (No. 2) can afford the steep costs, smaller semiconductor manufacturers like LSI Logic (NYSE: LSI) have already decided to jump off the bandwagon.
As a result, fabless firms (semiconductor companies with no internal manufacturing at all) are growing in importance. One example is Motley Fool Stock Advisor recommendation NVIDIA (Nasdaq: NVDA). According to semiconductor market research firm IC Insights, sales by fabless companies have increased by 25% per year since 1998 versus just 9% per year for the semiconductor market overall. The result is that fabless firms accounted for 20% of all IC Insights-measured revenue in 2006, which was more than twice their market share in 2000.
IC Insights expects the fabless trend to continue, with these companies accounting for at least 25% of worldwide semiconductor sales by 2011 -- which is why I feel so good about the prospects for Taiwan Semiconductor despite its troubles. With the world's third-largest chip company jumping out of the fast lane, I expect that many others will follow -- leaving plenty of business for Taiwan Semi.
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Fool contributor Dan Bloom owns shares of Taiwan Semiconductor and Intel. He welcomes your comments.
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