Despite plenty of discussion around shortages, the global semiconductor sector is doing just fine. McKinsey & Co. projects annual semiconductor growth of 6 to 8 percent through 2030 when the global chip market is expected to reach a record $6 trillion. Seventy percent of that growth will be driven by three sectors: automotive, computation and data storage, and wireless.
The automotive semiconductor market is the smallest of the three sectors but the fastest growing. McKinsey forecasts it will triple in size from $50 billion in 2021 to $150 billion in 2030, for a CAGR of 13%. The reason? Carmakers are transitioning from the internal combustion engine (ICE) era to the electric vehicle era that includes advanced driver-assistance systems (ADAS) and, perhaps eventually, fully autonomous vehicles that communicate with each other and roadside infrastructure. By the end of the decade, the automotive chip market will account for about 14 percent of global semiconductor demand, up from eight percent in 2021, according to McKinsey.
How did we get here?
The outbreak of the global coronavirus pandemic in early 2020 was primarily responsible for auto plant closures, parts shortages and unpredictable global demand, which led to the collapse of sales and production of vehicles in the first half of 2020. The result was a near-10% drop in worldwide automotive output or about 8 million vehicles.
Carmakers reduced their capacity planning requirements for parts, including electronic components and semiconductors. However, by Q4 of 2020, demand began to recover, driven by China and the growing demand for electric vehicles worldwide. China’s passenger car sales in Q4 2020 were about half a million vehicles higher than in Q3.
At the same time, consumer electronics sales increased as companies closed offices and factories and sent employees home with laptops, PCs and other electronic equipment. Consequently, semiconductor manufacturers shifted production to IT and consumer electronics customers and away from automotive manufacturers. In early 2021, carmakers shuttered their assembly plants because they lacked components and parts.
Rising inflation has dampened demand for consumer electronics, increased inventories of electronic components, and driven down prices of memory chips and other components. In addition, the threat of a global recession and strained relations between China and the US put downward pressure on GDP growth.
However, the electronics market appears to be shaking off the bad news. According to the Supplyframe Commodity IQ forecast for H1 2023, only 27% of semiconductor prices across all major commodities will increase, down from 76% in H1 2022. Moreover, by Q3 2023, less than 20% of semiconductor prices are expected to increase, while just over three-quarters of IC prices will stabilize.
Not surprisingly, the exception to the falling-prices trend includes automotive-grade components. Supplyframe projects that this class of components will remain expensive and constrained through Q4 2022, with lead times averaging 40 and 60 weeks. The tough times are expected to persist into the first half of 2023 as significant-to-severe constraints on complex semiconductors continue.
The Future of Mobility is Ubiquitous and Wireless-Enabled
Despite speed bumps caused by short-term market conditions, the automotive sector is working through a transformation to wireless connectivity as carmakers integrate cloud connectivity, wireless communications, and autonomous driving technologies into their vehicles. The change is facilitated by integrating standard wireless cellular technologies in the connected car.
The global market for vehicle wireless communication technology was estimated to be $3.6 billion in 2021 and is forecast to nearly double to $6.9 billion by 2028, with a CAGR of 9.6 percent, according to one market research report. The number of vehicles shipped worldwide with embedded cellular connectivity is expected to rise from 46% in 2020 to 76% in 2026.
However, among the largest semiconductor manufacturers today, only three have a significant sales share in the automotive sector: Infineon (42% automotive), NXP (44%), and Renesas (48%), according to the World Electric Vehicle Journal. Other major chip makers, including Texas Instruments, Qualcomm, AMD/ATI, and Nvidia, have less presence in the automotive market, ranging from 4% to 20%. Even TSMC, the world’s largest chip manufacturer, had an automotive share of sales of only 3% in 2020.
The Lifecycle Insights 2022 Engineering Design for Resilience (EDfR) survey sheds some light on electronic component sourcing and supply chain issues relevant to automakers. The survey revealed that traditional supply chain visibility had significant shortcomings in achieving real-time sourcing intelligence.
As a result, a staggering 89% of engineers reported they had to remove or replace electronic components from their printed circuit board (PCB) designs due to unexpected supply chain disruptions. Disruption has been an ongoing issue for automakers throughout the Covid-19 pandemic.
In light of these challenges, it is hardly surprising that 84% of survey respondents said they are working to strengthen their supply chain intelligence. Their efforts include sourcing from multiple vendors for a single component instead of relying on one preferred supplier and improving design engineers’ processes to select components.
Companies, including automakers, also need to expand their approved vendor lists (AVLs) to include alternate sources of supply. But, again, the goal is to circumvent component supply shortages while meeting pricing targets.
The EDfR study found that 74% of companies have been forced to replace electronic components from their board designs at least once. In addition, some respondents reported replacing as many as 20 items per design due to a lack of component availability or lifecycle and compliance issues.
Cellular technology development is a significant, risky, and costly endeavor, including large numbers of R&D staff and corporate partners. For example, Ericsson, Nokia, and Qualcomm each invest around $5 billion annually in R&D, primarily for cellular. Other companies collectively invest billions more. Smartphones generate virtually all of the return on this R&D investment, which totals around $15 billion in standard essential patents (SEPs) annually.
While connected vehicles exploit cellular technologies, including prime 4G LTE capabilities for streaming video, cellular technologies developed specifically for vehicles are also a significant focus for the standards organization 3GPP and the companies that contribute patented technologies to its standards. Cellular Vehicle-to-Everything (C-V2X) technologies include many features that can improve safety on the road and help enable or enhance ADAS and automated driving systems (ADS). Analysis of the 3GPP Radio Access Network Working Group’s contributions reveals that a significant 5% of these are for cellular V2X, according to WiseHarbor.
Leveraging Intelligence to Balance Growth with Supply Management
The electrification of the automobile is in its formative years. However, by 2030, it will be approaching maturity as roadside infrastructure is installed and vehicles become more “intelligent.” This evolution sets a course that could ultimately lead to zero CO2 emissions and autonomous driving.
It is vital to stay on the leading edge of technology as the auto industry shifts from the internal combustion engine to electric battery power and perhaps hydrogen-powered fuel cells. But, just as important is keeping up with market intelligence about current market conditions, prices and availability of the components and technologies that will define the future.
The Supplyframe Commodity IQ service (CIQ) produces a 12-month outlook every quarter of market conditions, including raw materials, electronic components, contingent labor, transportation and logistics, and factory operations. The insights cover market dynamics, component prices and inventory availability.
CIQ is unique in providing specific, actionable, updated quarterly insights about the current and future market conditions, lead times, and prices across many sectors. The data enables Supplyframe to analyze market trends in advance so companies can adjust their sourcing strategies in a timely fashion.