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Automotive Semiconductor Outlook – Feast or Famine?

by Asif Anwar | Oct 21, 2021

Our latest quarterly update of the outlook for automotive semiconductor demand has just been released. Automotive Semiconductor Demand Forecast 2019 to 2028 - October 2021 forecasts sustained demand coupled with price rises will mean the automotive semiconductor market will show a strong upwards trajectory in 2021, growing by 12.4% year-on-year. With vehicle production assumed to normalize in 2022, and a strong push towards electrification driving production and associated demand across all regions, the forecasted compound average annual growth rate (CAAGR) for automotive semiconductor dollar demand, including sensors, over the 5-year period 2020 to 2025 is expected to be +17.4%.

This outlook includes an inherent assumption that the present semiconductor shortages will not develop into a potential oversupply scenario because of double bookings, which would lead to an inventory correction and a false slowdown in automotive semiconductor demand in 2023-2024.

Shortage or Excess Inventory?

As noted previously, the automotive industry inflicted a semiconductor shortage on itself by effectively taking itself out of the queue in the second quarter of 2020. In the first quarter of 2021, there were a further confluence of events that conspired to further impact semiconductor production including an earthquake in Japan and snowstorms in Texas, US. Another factor that semiconductor manufacturers needed to account for was a drought in Taiwan while a fire at a Renesas facility represented another setback for the automotive supply chain.

Companies such as Infineon that had to shut down facilities in the first quarter of the year because of the snowstorms in the US reported that they were operating at pre-shutdown levels with revenues not fully able to capture the underlying growth opportunities. Renesas had ongoing issues with returning production at the N3 Building (300mm line) of its Naka Factory to the output levels prior to the fire due a series of problems with manufacturing equipment which resulted in shipments levels remaining at around to 90% of the volumes prior to the fire (as reported on July 29).

Despite these challenges, most of the semiconductor suppliers were able to report improving conditions as far as front-end semiconductor production was concerned with Infineon, Renesas and the other semiconductor suppliers able to report increases in revenue, gross margin and operating margin for their respective automotive businesses as well as a growing order backlog (see Automotive Semiconductor Industry Performance Snapshot: Q2 2021).

Unfortunately, the bottleneck at the frontend was replaced with headwinds at backend processing facilities in the second half of the year as a resurgence in COVID-19 cases at backend manufacturing and R&D operations in Malaysia, India and Taiwan hampered the ability of the automotive semiconductor industry to meet both current and ongoing demand over the forthcoming quarters.

The combined impact of semiconductor shortages in general, combined with these other events has served to limit the much-vaunted recovery in light vehicle production. Major OEMs have steadily increased the frequency at which they are reporting adjustments to their production schedules citing the ongoing impact of semiconductor shortages. Even those companies that were initially better prepared, e.g., Toyota are now regularly advising of adjustments to their production lines as the impact of the semiconductor shortage has snowballed.

This has borne out Strategy Analytics earlier assessments that stated semiconductor shortages would impact vehicle production, with the loss in production attributable to semiconductor constraints as high as 5 – 10% for 2021. The latest vehicle production forecasts have seen year-on-year growth curtailed to around 3%. At the same time, automotive semiconductor suppliers look set to continue reporting robust financials for the third quarter suggesting that there is a growing mismatch between automotive semiconductor industry revenues and actual vehicles being produced.

Regrettably, this raises the possibility that despite the best efforts of the supply chain, potential double bookings could lead to excess inventory in play that leads to an inventory correction and a false slowdown in automotive semiconductor demand in 2023-2024.

Another variable in this outlook that will need to be revisited is the issue of pricing elasticity and whether normal pricing pressures will come back into play sooner rather than later.

Whether or not these factors come into play remains to be seen, but for now, assuming vehicle production normalizes in 2022 with a strong focus towards electrification, a restoration of the semiconductor supply-demand balance from 2022/23 onwards, and an ongoing recovery from the COVID-19 crisis will translate to the global automotive semiconductor market growing to be $78.1 billion by 2025 and reach $103.4 billion by 2028.

Feel free to contact me to discuss this post and the underlying questions raised.

Also check out our latest quarterly view of the global outlook for automotive xEV systems and associated semiconductor and sensor demand. Global xEV Semiconductor Demand Forecast 2019 to 2028 - October 2021  predicts continued momentum pushing market demand to $21.8 billion by 2028.

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