Semiconductor Growth in the Automotive

Through the last few turbulent years for the semiconductor industry, any market showing consistent and growing demand has been welcomed with open arms. Myson Robles-Bruce, Industry Analyst with Databeans Inc, explains how demand for semiconductors in the automotive industry has outpaced the growth of vehicle production itself, and identifies some key characteristics not found in other markets.

The demand for automotive electronics is growing faster than the vehicle market itself, as regulations tighten in emission standards and safety requirements, and as consumers invest in the DVD players and audio products made specifically for automotive applications.

Worldwide vehicle production typically grows at about 2 to 3 percent annually, and automotive semiconductors have out paced this, primarily because electronic vehicle content keeps growing. Overall semiconductor revenue in the automotive market is estimated to increase by 9 percent annually over the next five years.

Safety and Cockpit Electronics Driving Growth
Legislated regulations and consumer demands continue to drive this market upward. High growth application areas for automotive semiconductors include safety (airbags, cruise control, collision avoidance, antilock brakes) and cockpit electronics (entertainment, telematics, instrumentation, phones).

Today, electrical and electronics content, including software, represents somewhere in the region of 20 percent of the cost of the average vehicle. A lower-priced vehicle built in 2004 probably has 25 to 30 electronic control modules, including 150 to 180 components, while today's higher-priced vehicle might contain 70 or more control modules with more than 400 components.

We estimate that the bill of materials for automotive semiconductors is increasing by roughly 7 percent each year, and the overall revenue for semiconductors from the automotive market is growing by an average of 9 percent each year. The typical automotive semiconductor bill of materials is forecast to reach a value of $250 by 2005.

Automotive Figure 1
Source: Databeans Estimates
Figure 1: Global Automotive Semiconductor Revenue Forecast

Asia Pacific Leads Growth Trend
The worldwide automotive semiconductor market is currently valued at about $13 billion, a healthy increase over 2003; and more growth is expected in 2005, bringing the market closer to $15 billion.

The largest regional market was Europe with 38 percent of consumption, followed by America and Japan, both with 25 percent share. Asia Pacific constitutes 12 percent of total consumption.

All regional markets are experiencing demand growth in automotive semiconductors. While it is no threat to replace Europe as the largest market, the Asia Pacific region will show the most growth in terms of demand, due to increased automotive production in China.

Europe is the largest region for automotive semiconductors, due to the higher production of sports and luxury vehicles that feature the latest in automotive electronics. For 2004, Databeans estimates that Europe consumed over $1.6 billion in analog products alone – almost half the value of the global market. This trend will likely continue into the future, with consumption reaching $2.4 billion by 2009, at an average growth rate of 8.4 percent per year.

In 2001, when the worldwide semiconductor market dropped by 32 percent, the automotive semiconductor market dropped only 1 percent. The automotive semiconductor market has proven to be very stable over the last few years.

People seem to always need cars, so in that sense, the automotive market itself is relatively recession-proof. And in fact, this market may actually perform better during an economic slowdown due to instituted fiscal policies. For example, during the last downturn, automotive sales actually improved because of lower interest rates on auto loans in the US.

Manufacturers are attracted to this market because of the higher relative stability. However, new players must proceed with careful planning, as production cycles for automotive semiconductors can range from three to five years. This is a very different scenario than the one seen with consumer or telecom semiconductor production times, which can run for only a few months, and will rarely exceed two years.

Pricing will remain a major concern for automotive semiconductor suppliers, as OEMs continue to seek to maximize profitability through cost reductions. However, opportunities will exist for suppliers to favorably affect pricing by partnering with OEMs in product development.

Pricing is really the only factor that impacts growth in semiconductor usage in cars and trucks. As competition heats up in the standard product space and in ASICs, revenue growth will be impacted. The OEMs in the automotive market have historically had tremendous buying power and can be very demanding consumers. Automakers always seem to have more power than automotive electronics suppliers. They demand and get price reductions of up to five percent every year on existing products. If suppliers reject the terms, the automaker can easily take business elsewhere.

The competition for automotive electronics sales has been very intense; but, because profits and expectations have been low, companies have been getting out of the business, leaving fewer companies behind to compete. Over the last five years, a number of very large automakers have left the automotive electronics industry. Ford and General Motors exited the business when they spun off Delphi and Visteon. And DaimlerChrysler sold Temic, its German automotive electronics maker, to Continental.

A way to gain more power with automakers, and increase profits, is by taking advantage of outsourcing. Instead of manufacturing electronics in-house, several top-tier automotive suppliers are using contract manufacturers to assemble electronic control units. For example, Hewlett-Packard, Cisco Systems, Ericsson, Motorola, and Dell Computer are all committed to this industry. Among automotive suppliers, Johnson Controls seems most devoted to outside electronics manufacturing, and TRW, Visteon, and Delphi will likely use contract manufacturers to some extent in the future.

Analog Growth Continues
Much of the silicon content in cars includes processors, microcontrollers, interface, mixed-signal, and power management. Most products are highly integrated. Sensor use continues to proliferate, driving demand for other products that are required in the signal chain. Application specific automotive analog products constitute 25 to 30 percent of the semiconductor bill of materials. Products are found in multiple systems - from the powertrain to the cockpit electronics.

Worldwide automotive analog revenue increased by about 5 percent in 2004, with much greater growth expected in 2005. In terms of revenue, future growth will be paced at an estimated 8.8 percent per year. Unit shipments will steadily be on the rise at a faster rate, as demand increases, and as manufacturing costs are reduced. Databeans expects that the automotive analog market will be worth over $5 billion by 2009.

Automotive Figure 2
Source: Databeans Estimates
Table 1: Global Automotive Analog ASIC/ASSP Market Forecast

The safety systems sub-segment is a fast growing consumer of automotive analog, due to increased demand caused by new governmental regulations and by drivers’ own expressed preferences. This sub-segment is expected to grow at an average annual rate of 10.5 percent, reaching a market value of $500 million by 2009. Air bags systems generate the most revenue for automotive analog – an estimated $143 million in 2003. This trend will continue into the future, as air bags will be found in probably all vehicle designs.

Cockpit electronics is the fastest growing consumer of automotive analog components, with revenue growth of an average of 11.3 percent per year. By 2005, this could be the largest automotive analog sub-segment. Satellite radio, wireless communications, and navigation have really taken off, and demand will continue to be very high as more people embrace the technologies, and as manufacturers increasingly use them in cockpit designs.

About Databeans
Databeans is a market research firm focused on the semiconductor and electronics industries. Databeans goal is to fulfill the need for analog market research data in the semiconductor industry. Databeans has grown to become a vital source of information and a respected advisor to our clients, providing insight across all semiconductor product categories.

Myson J. Robles-Bruce is a Research Analyst with Databeans, Inc. Myson’s responsibilities include analyzing semiconductor markets and trends, contributing articles and reports, and providing market insight and advice to clients. Prior to joining Databeans, Myson worked as a librarian and research analyst with National Semiconductor. He holds a Master of Library and Information Science degree from San Jose State University, undergraduate degrees in Philosophy and Creative Arts from Santa Clara University and Mission College, and has completed other coursework in law and aeronautical mechanics.

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“In 2001, when the worldwide semiconductor market dropped by 32 percent, the automotive semiconductor market dropped only 1 percent.”

“This market may actually perform better during an economic slowdown due to instituted fiscal policies.”