TXN and STM - A study in contrast

Sunday, June 1, 2008

[In this two part series, I will compare the strategies of TXN and STM]

Texas Instruments (TXN) and ST Microelectronics (STM) are leading semiconductor companies. They are second and third respectively among wireless semiconductor solution providers. As I completed my STM valuation series recently (read here), I noticed the divergent strategies the two companies employed despite broad similarities in their business models and markets addressed.

The 2007 revenues for both companies topped $10 billion. With very broad product portfolios, they compete directly in many markets including communications, computing, consumer electronics, industrial and automotives. Each company owns and operates its own manufacturing facilities. You can get a detailed overview of the companies here and here.

While TXN is a US technology leader, STM is Europe’s semiconductor flag-bearer. More recent news involving the two companies has been about how STM has managed to venture into TXN’s strong wireless accounts – Nokia and Ericsson Mobile Platforms (EMP).

With this as a background, let us look at the contrasting strategies that these companies are executing on.

Manufacturing: TXN has diverted its manufacturing capabilities towards analog slowly migrating towards the fabless model for digital manufacturing. This move away from the Integrated Device Manufacturer (IDM) model to a more hybrid strategy has allowed TXN to become more nimble.

In contrast, STM seems firmly committed to the IDM model spending substantially in Capital expenditure and process technology research. Although it is engaged in joint R&D efforts with other companies like IBM to gain scale, this strategy may make it increasingly difficult for the company to compete with the aggressive pricing and product strategies from the fabless vendors.

TXN has been executing well on its target of 55% gross margin and 30% operating margin. In contrast, STM is struggling with about 35% gross margin and an operating loss of about 5% in 2007. The company aims to reduce its operating expenses to about 28%. This still implies single digit operating margins for 2008. Europe’s labor laws make it difficult for STM to become nimble.

I will conclude this series in the second part after peeking into the companies’ divergent product strategies. In the meantime, for a detailed overview of these companies, I will direct you to my TXN valuation series here, here and here and to my STM valuation series here, here and here.

Posted by Vijay Nagarajan at 10:30 PM  

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