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Automotive Semiconductor Outlook – Are We Out of the Woods Yet?

by Asif Anwar | Feb 01, 2022

Our latest quarterly update of the outlook for automotive semiconductor demand has just been released, Automotive Semiconductor Demand Forecast 2019 to 2028 - January 2022. The automotive semiconductor market showed growth of 11.9% year-on-year (including sensors). With vehicle production assumed to normalize in 2022, and a strong push towards electrification driving production and associated demand across all regions, the forecasted CAAGR for automotive semiconductor dollar demand, including sensors, over the 5-year period 2020 to 2025 is expected to be +17.5%.

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.

Automotive Semiconductor Shortage Update

Semiconductor supply was constrained in 2021 as the automotive industry competed with sharp increases in demand from the mobile, consumer electronics and other end markets. The semiconductor shortage was further impacted by several other events including an earthquake in Japan, snowstorms in Texas, a fire at a Renesas facility and a severe drought in Taiwan.

Despite these challenges, front-end semiconductor production started to normalize, but the second half of the year was characterized by headwinds at backend processing facilities 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 ongoing demand.

The combination of strong demand and constrained supply translated into semiconductor pricing being increased in the second half of 2021 with further increases being implemented in 2022. Current modeling predicts a slowing down in price increases from 2023 onwards with ASP year-on-year declines starting to see normalized rates of decline from 2028.

Price rises resulted in the automotive semiconductor market showing a strong upwards trajectory in 2021, not reflective of the vehicle production slowdown.

The combined impact of semiconductor shortages in general, combined with several other events (snowstorms, droughts, fires) served to limit the much-vaunted recovery in light vehicle production. Major OEMs steadily increased the frequency at which they reported adjustments to their production schedules during 2021 citing the ongoing impact of semiconductor shortages. Even those companies that were initially better prepared, e.g., Toyota were regularly advising of adjustments to their production lines as the impact of the semiconductor shortage continued to snowball.

While the frequency of announcements related to production adjustments declined as OEMs adjusted to the supply constraints, there was also an acknowledgement that OEMs did not fully appreciate the intricacies of the semiconductor supply chain. This has led to major OEMs publicly announcing deals with major semiconductor suppliers.

The stunted growth for global vehicle production in 2021 because of these semiconductor shortages has been in sharp contrast to the robust financials being reported by automotive semiconductor suppliers through 2021.  This is reflected in rising backlogs with suppliers continuing to run at capacity to fulfil the robust growth in automotive semiconductor demand. The combination of strong demand and constrained supply translated into semiconductor pricing increases.

Semiconductor shortages will continue into the second half of 2022, but there is an inherent assumption that supply-demand dynamics will start to normalize. This will be tied with COVID-19 impacts lessening as more of the global populace is vaccinated and an assumption that further variants will have less of an impact on those vaccinated, easing the pressure on hospitals and reducing the requirement for lockdowns.

While noting the potential for excess inventory build, most automotive semiconductor suppliers have entered long-term supply arrangements with their customers and in many cases, these are NCNR (non-cancellable, non-returnable) agreements which provide a certain measure of protection.

We also expect that the pricing for strategic components that support the move towards electrification as well as associated trends of ADAS/autonomy, connectivity, domain/zonal and centralized architectures will not see a return to the same demands for year-on-year price declines as traditionally observed for mainstream automotive components. This should help insulate suppliers from the risks of excess inventory, avoiding a false slowdown in 2023 and 2024.

With vehicle production normalizing in 2022, the continued 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, the global automotive semiconductor market could approach $105 billion by 2028. So, are we out of the woods yet?

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 - January 2022  shows the continued momentum pushing market demand to over $25 billion by 2028.

For more information on Strategy Analytics’ extensive coverage of the automotive industry, take a look at the PBCS (Powertrain, Body, Chassis & Safety), AVS (Autonomous Vehicles Service), AIT (Automotive Infotainment and Telematics) and ACM (Automotive Connected Mobility) services.
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