Automotive Industry Semiconductor Outlook Remains Positive

TechInsights latest quarterly update of the outlook for?automotive?semiconductor?demand has just been released, Automotive Semiconductor Demand Forecast 2020 to 2029 - January 2023. Automotive semiconductor demand is forecast to maintain growth with the market forecast to grow by 21.3% to $53.3 billion in 2022, as semiconductor supply continues to play catch-up to vehicle production. This is augmented by higher ASPs and the continued momentum towards electrification underpinning moves towards domain-based and zonal E/E architectures that will drive ADAS/autonomy, advanced infotainment, telematics, and vehicle connectivity.

Over the 5-year period 2021 to 2026 the CAAGR is expected to be +15.9%. Excluding semiconductor-based sensors, the CAAGR for automotive semiconductor dollar demand is expected to be even higher at +16.6%. The global automotive semiconductor market value is forecast to be $92.0 billion by 2026 and reach $111.8 billion by 2029 (including semiconductor-based sensors).

Automotive Industry Semiconductor Shortage Update

During the global lockdown period, the decision by many automotive OEMs to stop ordering materials as they shuttered production, effectively put the industry at the back of the queue. When production started up again, a feeding frenzy placed excessive strain on automotive-specific semiconductor technologies, especially those based on older process nodes e.g., 28nm, 40nm etc. The fabs running these processes had typically not been upgraded so they filled up very quickly. With little overhead, these facilities have continued running at full capacity leading to significant bottlenecks and forming one of three contributing factors that resulted in the automotive semiconductor shortage.

While supply of these more mature products started to close the gap with demand in the second half of 2022, the push towards electrification provided the other two contributing factors to the semiconductor shortage. As automotive OEMs started to follow early leader Tesla into electrification, the premium sector became the primary target as companies looked to retain profitability amidst the significantly higher costs associated with the electrified powertrain. The push to premium sector vehicles brought with it, a near doubling of semiconductor content compounding the bottleneck even as overall production volumes remained low.

The third contributor centred around electrification plus the associated trends around ADAS/automated driving, infotainment systems, connectivity, domain, and zonal/centralized architectures. This shifted focus towards higher performance and specialized semiconductor requirements that were not in place prior to 2021. This rapid shift in focus continued to represent a supply-demand imbalance that continued to be worked through in 2022 and were expected to rollover into 2023.

To meet these ongoing demands, many automotive semiconductor suppliers entered long-term supply arrangements with their customers. In many cases, these are NCNR (non-cancellable, non-returnable) and LTA (long-term-agreements) arrangements which provide a certain measure of protection against customers building up excess inventory or cancelling orders.

This helped automotive semiconductor companies to continue posting robust financials through to the third quarter of 2022 despite the confluence of COVID-related lockdowns in China, the Ukraine conflict, a slowing global economy and rising inflationary pressures. This led to a notable slowing of demand from consumer-focused PC and mobile markets and data centre markets. This in turn led to a build-up of inventory for semiconductor suppliers as end customers adjust their ordering, but the automotive sector remained insulated from the impact of this slowing demand, helped by the continued push towards electrification, which in turn is underpinning the move towards high-end infotainment systems and broader adoption of ADAS (advanced driver assistance systems) and vehicle connectivity.

The automotive sector was insulated from the impact of slowing demand in the third quarter of 2022, helped by the push towards electrification.

However, this has started to change with a notable slowing in performance projected for the industry based on our interpretation of the financial outlook statements provided by the major automotive semiconductor suppliers. This as reflected in our preliminary outlook of the TechInsights Auto Semi Index for the fourth quarter of 2022.

The TechInsights Auto Semi Index looks specifically at the automotive revenues for the ten leading publicly quoted automotive semiconductor companies based on company financials and our estimates.

After consecutive quarter-on-quarter growth in 2021 and for the first three quarters of 2022, the automotive semiconductor industry is now starting to feel the impact of the broader consumer led slowdown in demand.

Automotive semiconductor industry revenues had been artificially bolstered over the past several quarters as the sector played catch-up to pent-up demand. The macroeconomics around the Ukraine conflict, the Chinese property sector crisis, European energy prices and the ensuing global inflationary pressures has resulted in consumer confidence dissipating as disposable income dried up. The third quarter of 2022 saw this reflected in consumer-focused semiconductor revenues dropping and the effects are now starting to be reflected in the automotive sector also.

We reported in the last update that we believed that the automotive semiconductor supply-demand imbalance would remain through 2023, and that we were starting to see the beginning of the end of the semiconductor shortage, with a normalization of the supply-demand balance to be observed from the second half of 2023. It now looks like the consumer side of the automotive supply-demand equation will accelerate this normalization, but will this be at the detriment of automotive semiconductor revenues and profitability with a “false slowdown” impacting growth through 2024?

We’ll be analysing the automotive semiconductor company financials over the coming weeks to see whether the outlook presented in our latest forecast aligns with company revenues and their expected outlook for this year and beyond. Results from Micron, STMicroelectronics and Texas Instruments have been mixed so far, with Micron showing a marked slowdown but continuing to posit robust growth for 2023 as memory demand from automotive continues to ramp on the back of of next-generation infotainment and ADAS requirements. For STMicroelectronics and Texas Instruments, automotive is continuing to provide growth opportunities against a backdrop of slowing revenues in other sectors. These early indicators coupled with the forecast results suggest that the slowing down of growth is more reflective of a normalization of supply-demand dynamics and the underlying fundamentals of automotive semiconductor growth remain robust.