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What’s Chipping Away at Automotive Production

Auto makers caught short by the semiconductor shortage are wondering how long it will last and how to respond. Here are some answers.

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What’s Chipping Away at Automotive Production

  1. 1. What’s Chipping Away at Automotive Production? March 2021
  2. 2. Summary Source: BCG analysis. Today’s semiconductor shortages threaten to slow down the growth and recovery the auto industry has fought so hard to win. On the supply side, non-memory capacity grew by 4% in 2020 (compared to pre-COVID plans of 6%) but was insufficient to absorb the demand surge. We expect semiconductor demand (excluding memory) to accelerate further in 2021 and semiconductor supply conditions to remain tight, with a major impact on OEMs in the first quarter of 2021. Automotive companies have poor visibility into demand-supply dynamics, but can gain transparency into—and influence over—the semiconductor supply chain by rethinking their semiconductor strategy and position in the value chain. Auto sales began to recover in mid-2020 just as semiconductor sales (excluding memory products) from other applications had climbed 5% to 10% above pre-COVID levels. A surge in sales of PCs, consumer electronics, and cloud and networking infrastructure caught many by surprise. Contrary to some comments and conjectures in the media, geopolitical tension does not appear to be a major factor, as the share of semiconductor shipments to China has remained stable.
  3. 3. In January 2021, demand recovery in automotive appeared as semiconductor sales (excluding memory products) from other applications were already 5% to 10% above pre-COVID levels Source: BCG analysis based on Semiconductor Industry Association data from the World Semiconductor Trade Statistics database. 50 60 70 80 90 100 110 120 Jul 2019 Jan 2019 Jul 2020 Jan 2020 Jan 2021 Monthly global sales of semiconductors ($) Base 100 = 2018 month FULL 2020 VERSUS 2018 Automotive-specific –11% Total semiconductors –6% Memory –24% Non-memory semiconductors1 excluding auto-specific +4%
  4. 4. A surge in sales for smartphones and automotive joined continued strong demand for PCs and data center equipment in Q4 2020 to boost the semiconductor market Source: BCG analysis based on Semiconductor Industry Association data from the World Semiconductor Trade Statistics database. Note: ICT = Information and communications technology. Change in monthly global sales of application-specific semiconductors versus 2018 ($ billion) –1.0 –1.5 –2.0 –0.5 0.0 0.5 1.0 1.5 2.0 –10 –15 –20 –5 0 5 10 15 20 Data center demand was already strong due to cloud and AI investments Strong demand surge across all end markets—particularly smartphones Continued strength in semiconductor demand from PCs and ICT infrastructure Jan 2019 Jan 2020 Apr 2020 Jul 2020 Oct 2020 Dec 2020 Apr 2019 Jul 2019 Oct 2019 $ billions % variation Variation versus 2018 (%) Other consumer electronics Smartphones PCs and data center equipment Communications networks Automotive Industrial and multi-purpose
  5. 5. Three key factors drove the evolution of semiconductor demand in 2020; two of them were known at the start of the year—then COVID-19 hit Source: BCG analysis. 1Amazon, Microsoft, Google, Facebook, and Apple. 2 Battery electric vehicles. FACTORS ALREADY KNOWN AT THE BEGINNING OF 2020 UNEXPECTED HIT IN Q1 2020 New devices with increased semiconductor content from legacy nodes • Image signal processors: from two to four or more cameras per phone • 5G: 30% to 40% more semiconductor content in smartphones; 2x to 16x more antennas in base stations • Display touch controllers and connectivity (WiFi/Bluetooth): adoption in wearables, IoT, and automotive • Electric vehicles: penetration growing rapidly, from 2.7% BEV2 in 2020 to 3.9% in 2021 and 5.5% in 2022 Rollout/commercialization of highly anticipated new technology and devices • Rollouts of 5G networks in major markets, including China and the US • Apple’s new 5G iPhone models introduced in September-October, expected to create the biggest upgrade cycle in years (70 million units or more) • New-generation gaming consoles by Sony and Microsoft (250 million installed base) introduced after seven years Massive migration to work-from-home due to COVID-19 • PC sales up by 5% in 2020, reversing a years-long decline • Massive investments in cloud and networking infrastructure driven primarily by hyper-scalers: the capex of US players1 alone reached $95 billion in 2020 (up 38% year-on-year, after 13% growth in 2019)
  6. 6. The share of semiconductor shipments to China has remained stable; geopolitical tension does not appear to be a major factor behind the demand surge Source: BCG analysis based on Semiconductor Industry Association data from the World Semiconductor Trade Statistics database. Breakdown of global semiconductor sales (%) by shipment-destination region 0 10 20 30 Huawei typically accounted for 5% to 6% of global semiconductor demand, so it's possible that lower Huawei purchases in 2020 as a result of US export controls may have been offset by higher purchases by other Chinese OEMs. 40 50 60 70 80 90 100 Europe Americas Asia Pacific/All other China Jan 2019 Jan 2020 Apr 2020 Jul 2020 Oct 2020 Apr 2019 Jul 2019 Oct 2019 Jan 2018 Apr 2018 Jul 2018 Oct 2018 Total share of China as destination has remained stable since 2018
  7. 7. On the supply side, non-memory capacity grew by 4% in 2020 (70% of pre-COVID plans) but was insufficient to absorb the demand surge Source: BCG analysis based on Semiconductor Industry Association data from the World Semiconductor Trade Statistics database and Gartner. Note: Monthly capacity additions estimated based on Gartner's quarterly capacity evolution for foundries. Memory Non-memory 50 60 70 80 90 100 110 120 Jul 2019 Jan 2019 Jul 2020 Jan 2020 Jan 2021 50 60 70 80 90 100 110 120 Jul 2019 Jan 2019 Jul 2020 Jan 2020 Jan 2021 Sales growth 10% above capacity growth Actual capacity increases in 2020 were ~70% of pre-COVID plans (~4% versus ~6%) Installed capacity (wafers): pre-COVID plans Installed capacity (wafers): actuals Sales ($) Base 100 = Q4 2018 (not adjusting for seasonality)
  8. 8. We expect semiconductor demand (excluding memory) to accelerate further in 2021 due to major increases in smartphone and auto demand Source: BCG analysis based on company earnings and financial analyst reports; Semiconductor Industry Association historical data from the World Semiconductor Trade Statistics database; Gartner. Semiconductor revenues, excluding memory-product category, by end market ($ billions) 2018 Smartphones PCs ICT Infrastructure Consumer electronics Industrial goods Automotive 2019 2020 2021 (preliminary) 40 38 35 41 46 44 43 45 35 33 36 39 73 71 77 83 58 57 64 63 63 +5% +8% –1% +6% +8% –1% –2% –5% –4% –3% +9% +11% +8% +10% –1% –9% +16% –1% +7% +9% +4% +18% 313 310 327 354 65 71 82 8% growth for 2021 year-on-year, excluding memory products • Midpoint of current forecasts by semiconductor market analysts • Up from 7% growth expected in May 2020 • In line with prior historical growth rates
  9. 9. Source: BCG analysis based on company earnings and financial analyst reports; Semiconductor Industry Association data from the World Semiconductor Trade Statistics database, Gartner, SEMI. 1Based on data for over 30 companies across end markets representing 40% of total semiconductor demand. OEM quarterly revenue forecasts are applied to estimate semiconductor sales in the prior quarter. 2Based on fab construction projects with a production start date in 2021. Semiconductor supply conditions are expected to remain tight over the next four quarters as demand growth continues to accelerate Indexed quarterly semiconductor sales versus capacity, excluding memory-related products (Q1-Q4 2008 = 100) 80 85 90 95 100 105 110 115 120 125 Q4 2018 Q1 2019 Q2 2019 Demand: 99 Supply: 101 Demand: 104 Supply: 104 Demand: 113 Supply: 109–111 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 2019 average 2020 average 2021F average Semiconductor sales forecasts based on device OEM revenue forecasts across applications:1 Demand Actual Forecast Manufacturing capacity forecast based on bottom-up view of fab projects planned as of March 20202 Supply Actual Forecast Meeting the expected 8% growth in semiconductor demand in 2021 will require average global manufacturing utilization to reach at least 90%, the highest since 2010
  10. 10. Source: IHS Markit; New Street Research; BCG analysis. Note: BoM = Bill of materials. The shortage will have a major impact on volumes in the first quarter of 2021 “Although semiconductor manufacturers have already responded to the unexpected demand with capacity expansions, the required additional volumes will only be available in six to nine months.” CONTINENTAL DECEMBER 4, 2020 “Shortages are being felt in the overall automotive supply chain. It will take time to bring more capacity on line.” REINHARD PLOSS, CEO, INFINEON FEBRUARY 4, 2021 Semiconductor supply issues “will potentially have substantial impact on light vehicle production in the first half of 2021.” FREDRIK WESTIN, CEO, AUTOLIV JANUARY 26, 2021 “Our current estimates from suppliers support a scenario where we could lose 10% to 20% of our planned first quarter production.” JOHN LAWLER, CFO, FORD FEBRUARY 4, 2021 “We are doing everything in our power to minimize lost production and to ensure that normal deliveries to customers can be resumed as rapidly as possible.” MURAT AKSEL, BOM PURCHASING, VOLKSWAGON DECEMBER 18, 2020 An approximately 1 million unit downturn in light vehicle production volumes is expected for Q1 2021
  11. 11. Source: IHS Markit; BCG Analysis. Note: IC = Integrated circuit (semiconductor). Automotive volumes will decline in 2021 despite expected gains in Q2 and Q3, with potential shortages ahead Global quarterly light vehicle production 2021 (million units) 0 21 22 23 24 Q3 Q4 Q1 Q2 Q3 Q4 2020 2021 F Shortage caused by multiple factors • Auto semiconductor demand in Q4 up to 10%–15% above pre-COVID levels • Demand crowded out by demand surge of other sectors • Supply up by 4%, but not enough to absorb depleted inventories Potential shortage by the end of 2021 Lost volumes partly recovered Potential volumes (w/o IC shortage) Reduced volumes due to IC shortage Expected excess production Expected volume reduction due to IC shortage Expected amount of units lost Expected amount of units recovered Automotive units lost –0.1 to –0.2 –0.8 to –1.2 +0.6 to +1.0 –0.1 to –0.3
  12. 12. Sources: BCG analysis based on company earnings and financial analyst reports; Semiconductor Industry Association data from the World Semiconductor Trade Statistics database; Gartner. Note: IC = Integrated circuit (semiconductor). SAT = Outsourced semiconductor assembly and test vendors. Tier-1 = Leading distributor. OEM = Original equipment manufacturer. The semiconductor supply chain is complex, and automotive companies have poor visibility into demand-supply dynamics IC vendor Foundry OSAT Distributor Tier-1 OEM LIMITED VISIBILITY INTO SUPPLY CHAIN Structural challenges for supply-demand balance Auto makes up just 10% of semiconductor demand and less than 5% of the foundry business There are over 30 product types, with different design and manufacturing chains Six end markets, with semiconductor companies far removed from end-user demand Complex, distributed global supply chain; bottlenecks can occur anywhere 10- to 20-week lead times Fragmentation of manufacturing capacity across integrated device manufacturers and foundries
  13. 13. Source: BCG. OEMs can gain transparency into—and influence over—the semiconductor supply chain by rethinking their semiconductor strategy and their position in the value chain SHORT-TERM | Address now MID-TERM | Set up Q1–Q4 2021 LONG-TERM | Progress in 2021–2022 A. Build visibility into the semiconductor demand-supply balance over the next eight quarters across key components B. Plan and execute rapid interventions C. Build early warning indicators at the semiconductor parts level to prevent additional bottlenecks Secure continuity of supply Get more control over the supply chain Achieve independence from IC vendors D. Plan IC technologies, raw materials, and manufacturing processes over a three- to five-year horizon E. Evaluate potential structural changes in semiconductor supply terms, e.g., a premium for security of supply, extension of consignment F. Move to sourcing approaches that provide direct control and security over supply, e.g., direction relationships with semiconductor vendors, capacity contracts G. Identify specific semiconductors with a high potential for differentiation, e.g., in performance, integration, or supply security H. Define new semiconductor roadmap, including new in-house development I. Build or acquire new competencies
  14. 14. Source: BCG analysis. Disclaimer The services and materials provided by Boston Consulting Group (BCG) are subject to BCG's Standard Terms (a copy of which is available upon request) or such other agreement as may have been previously executed by BCG. BCG does not provide legal, accounting, or tax advice. The Client is responsible for obtaining independent advice concerning these matters. This advice may affect the guidance given by BCG. Further, BCG has made no undertaking to update these materials after the date hereof, notwithstanding that such information may become outdated or inaccurate. The materials contained in this presentation are designed for the sole use by the board of directors or senior management of the Client and solely for the limited purposes described in the presentation. The materials shall not be copied or given to any person or entity other than the Client (“Third Party”) without the prior written consent of BCG. These materials serve only as the focus for discussion; they are incomplete without the accompanying oral commentary and may not be relied on as a stand-alone document. Further, Third Parties may not, and it is unreasonable for any Third Party to, rely on these materials for any purpose whatsoever. To the fullest extent permitted by law (and except to the extent otherwise agreed in a signed writing by BCG), BCG shall have no liability whatsoever to any Third Party, and any Third Party hereby waives any rights and claims it may have at any time against BCG with regard to the services, this presentation, or other materials, including the accuracy or completeness thereof. Receipt and review of this document shall be deemed agreement with and consideration for the foregoing. BCG does not provide fairness opinions or valuations of market transactions, and these materials should not be relied on or construed as such. Further, the financial evaluations, projected market and financial information, and conclusions contained in these materials are based upon standard valuation methodologies, are not definitive forecasts, and are not guaranteed by BCG. BCG has used public and/or confidential data and assumptions provided to BCG by the Client. BCG has not independently verified the data and assumptions used in these analyses. Changes in the underlying data or operating assumptions will clearly impact the analyses and conclusions.

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