Chipmakers are counting on strong demand from automakers to help offset declines in consumer electronics and other markets.
The automotive semiconductor market is still in flux, struggling to overcome a now two years long supply shortages that have crimped production at automakers while buoying sales and margins at IC vendors. Even as they commiserate with customers, chipmakers acknowledge the positive impact of the supply constraints on their 2022 financial performance and are looking forward to equally strong results for at least the first half of 2023 and even beyond.
Demand for semiconductors headed into the transportation market remains robust and well ahead of chipmakers’ production capacity. In response, OEMs are racing to ink novel supply agreements to insulate their manufacturing operation against future procurement shocks. One such deal includes a contract announced recently between General Motors and GlobalFoundries under which the contract chipmaker would dedicate production capacity at its New York fab for the automaker’s chip suppliers.
GM describe the agreement with GlobalFoundries as a “first-of-its-kind” but OEMs in other electronic markets that have large IC purchasing commitments have in the past adopted similar programs. Apple Inc., for example, is reputed for paying billions of dollars to suppliers for long-term supplies at companies like Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC).
Even in the auto industry, the GM contract with GlobalFoundries follows a recent pattern where automakers are reaching deeper into the supply chain for ironclad procurement deals. Having been hurt by severe shortages of semiconductors in the last couple of years companies like BMW, Ford, GM, and others have expanded chip design activities inhouse and are going straight to foundries for supply fulfillments.
Sales of automakers fell below expectations in the last two years due to challenges securing semiconductor components. The supply constraints resulted in a bunch of problems, including a 40 percent decrease in auto production at one point, according to Modor Intelligence, a market research firm.
“The automobile manufacturing industry has been hit hard by semiconductor chip shortages globally,” Modor Intelligence said, in a report. “Owing to this, various initiatives were taken by regions to boost chip production. For instance, in August 2022, the United States passed the CHIPS act (Creating Helpful Incentives to Produce Semiconductors). The division received funding of $52.7 billion, which is expected to be used for the research, development, and production of semiconductors.”
GM is not waiting for the US government CHIPs Act or rival initiative from the European Union to start yielding fruits before taking action to secure its components needs. The company’s supply chain stabilization activities have been expanded and now includes an overhaul of its design activities with the objective of reducing the complexity of its product offerings. GM is simplifying design activities so it can use similar platforms across its offerings, potentially reducing the number and variety of components required, the company said.
The company said in a statement that the GlobalFoundries deal would help it cut “the number of unique chips needed to power increasingly complex and tech-laden vehicles. With this strategy, chips can be produced in higher volumes and are expected to offer better quality and predictability, maximizing high value content creation for the end customer.”
The real objective remains assurance of component supplies, however. Demand for automotive chips is expected to keep rising through the decade as manufacturers overhaul product offerings and introduce more electronics into cars. The ongoing shift to electric vehicles from internal combustion engines (ICE) is accelerating the trend and leading to higher unit shipments to the auto sector. In turn, OEMs are trying to prepare ahead for the expected increase in semiconductor demand for the sector. Forecasters expect sales of semiconductors going into the automotive sector to more than double by the end of the decade to $115. 8 billion, from $48.9 billion, at the
end of 2022.
“We see our semiconductor requirements more than doubling over the next several years as vehicles become technology platforms,” said Doug Parks, head of global product development, purchasing and supply chain, at GM, in a statement. “The supply agreement with GlobalFoundries will help establish a strong, resilient supply of critical technology in the U.S. that will help GM meet this demand, while delivering new technology and features to our customers.”
Like other chipmakers, GlobalFoundries is targeting opportunities in the auto sector and expanding production to meet rising demand from OEMs. Suppliers have been expanding manufacturing capacity through the addition of new fabs but they are also striking supply agreements with customers to ensure there is a ready market for the output from the new production facilities.
“At GF we are committed to working with our customers in new and innovative ways to best address the challenges of today’s global supply chains,” said Thomas Caulfield, GlobalFoundries’ president and CEO, in a statement. “GF will expand its production capabilities exclusively for GM’s supply chain, enabling us to strengthen our partnership with the automotive industry and New York State, while further accelerating automotive innovation with U.S.-based manufacturing for a more resilient supply chain.”
TSMC, the world’s top foundry, and WolfSpeed Inc., a supplier of silicon carbide for power applications in a wide range of markets, including automotives, have been expanding production for the transportation industry, too. In January, WolfSpeed agreed to supply SiC devices to Mercedes-Benz for the automaker’s electric vehicles. In a statement, the company said the products would be made at its facilities in Durham, North Carolina, and at a new 200mm fab in Marcy, New York.
Mercedes-Benz said the agreement would help the German automaker achieve its goals of revamping its platform to reduce complexities in the EV product lines. With WolfSpeed’s support, Mercedes-Benz would be able to “improve vehicle range and power,” according to Gunnar Güthenke, head of procurement and supplier quality for Mercedes-Benz.
“We have now chosen WolfSpeed as one of our key partners for future Silicon Carbide devices, thus securing preferred long-term supply, technology and quality of this decisive semiconductor component for our electrification offensive,” Güthenke said, in a statement.
Adds Gregg Lowe, CEO of WolfSpeed: “We are pleased to be supporting Mercedes-Benz, an organization with a long, successful history of providing world-class performance and luxury vehicles, as they introduce next-generation EVs to the market with highly efficient power systems. We are continuing to invest in our manufacturing capacity to support a steepening demand curve for Silicon Carbide devices that will not only improve EV performance and drive greater consumer adoption, but also support the sustainability efforts of global automotive leaders like Mercedes-Benz.”
In addition to the agreement with Mercedes-Benz, the SiC vendor said it will build a new leading-edge 200mm wafer plant in Saarland, Germany. The fab will service customers in automotive, energy, and industrial markets. Its construction is dependent, however, upon contribution from the European Chips Act.
WolfSpeed’s proposed German plant is part of a bigger $6.5 billion fab expansion scheme the company previously announced. Other projects under the scheme include the construction of a semiconductor materials facility in North Carolina and the opening of a 200mm device fab last year.
“This new fab represents a big step forward for both WolfSpeed and our regional customers, as we enhance the ecosystem for semiconductor production and innovation,” Lowe said. “This new facility will be crucial to supporting our expansion in a capacity constrained industry that is growing very rapidly, especially across the EV marketplace. It was important for us to have a facility located in the heart of Europe, near many of our customers and partners, to foster collaboration on the next generation of Silicon Carbide technologies.”
While semiconductor suppliers are working closely with customers to alleviate the current shortages they are hardly hurting now. In fact, most are benefitting from the automotive IC shortages. Despite the tight shortages, auto IC vendors have benefitted from higher average selling prices as seen in their recent financial results. Bookings are also stronger and there are signs the strong demand will continue to lift auto IC vendors for several more quarters.
STMicroelectronics is a typical example. The company delivered strong fourth quarter results recently and projects 2023 sales would also be strong, buoyed primarily by continued strength in the automotive industry. The Geneva-based company reported revenue of $4.4 billion in the December quarter, up 24 percent, from $3.6 billion, in the year-ago comparable period. The company’s gross profit margin rose to 47.5 percent, from 45.2 percent, while operating income climbed 45 percent, to $1.3 billion, from $885 million. Sales to the automotive market contributed strongly to the solid financial performance, the company said.
“2022 was a year marked again by strong demand in automotive and industrial, still impacted by supply chain challenges due to continuing shortages and capacity constraints,” said Jean-Marc Chery, CEO of ST, during a conference call. “In the second half, we started to see market softening in personal electronics and computer peripherals. In automotive, we again saw unprecedented demand across all geographies, driven by increasing semiconductor, structural transformation, and inventory replenishment.”
ST said it sees revenue in its silicon carbide division, which sells primarily to the automotive and industrial markets, to rising above $1 billion for the first time in 2023, from $700 million, in 2022. The expected increase is seen coming from investments the company plans to make in its SiC production capacity and from design wins in the automotive, industrial and power markets.
“We continue to lead in silicon carbide as we have moved to high volume production of our third-generation transistors for multiple Automotive customers, and we will ramp our fourth-generation transistor in volume in the second half of this year,” Chery said. “In power and energy management applications, such as electric vehicle charging stations, photovoltaic systems, and industrial power supplies, we have many important design wins with our discrete portfolio of both silicon and wideband gas-based devices, and we further extended our product offer during the year.”