The Revolution is Now: How the automotive sector is driving growth for semiconductors

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With over 300 chips and 100-plus computers on average, the automobile is the nexus of cutting edge engineering and consumer electronics and represents a rising sector for 2008 and beyond. The automotive electronics sector has been forecasted to see revenue in the USD $113 billion range for 2008 in addition to power-management ICs and discretes for autos that are expected to meet or exceed USD $5 billion for 2008 (iSuppli). "The proportion of electronics that makes up the cost of a new car has shot up from very little to perhaps a quarter. By 2010 experts think it could approach half" ('Revving up', The Economist 10/11/2007).

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With the fall of ASPs for key semiconductor products in 2007, the currently volatile global economic markets, and the continuing high cost of oil, it seems there are still areas of growth for the semiconductor industry in 2008. In fact, some of the indicators that are weighing heavily on the broader markets are drivers for growth in the automobile electronics sector. Some sectors have already reported stronger January sales, such as Unitech Printed Circuit Board's 11.5% sequential growth due to "applications for cars and GPS devices", as reported by DigiTimes (2/18/1008).

Automotive challenges equate to opportunities for the automotive electronics sector
As oil prices climb, so do efficiency requirements; as climate awareness increases, so do strict emissions standards. Governments worldwide are increasing their pressure on the automotive industry to improve performance and thereby reduce environmental stressors and reliance on fossil fuels. One important advantage to these regulatory initiatives is the simultaneous governmental support through incentives to consumers and manufacturers to pursue the development and adoption of hybrid, hydrogen-based, and electric cars.

Case in point: the Toyota Prius. The Prius has incorporated advancing technology, especially battery technology, offering consumers a distinctive high-tech, high quality driving experience. Prius drivers have also benefited from laws in some U.S. jurisdictions that offer decreased taxes and other benefits to drivers of hybrid cars. As a result, the Prius has increased in popularity (though not yet in profitability) in the U.S. market and brought along with it the acceptance and adoption of hybrid cars as realistic alternatives, particularly in urban areas. As Carlos Ghosn, CEO of Nissan and Renault, offered in his interview with the Wall Street Journal Online (1/17/2008 http://link.brightcove.com/services/player/bcpid607698492?bctid=1379238943), today's lithium-ion battery technology has improved to the point that the electric car has reached a new level of sophistication. In coupling battery improvements with a demand for zero-emission cars, especially in cities, there is a serious market for the electric car. Ghosn added, however, that "today they are not cost-effective," but that government subsidies will provide enough support for the auto industry to weather a three to five year period until the point of mass marketization is reached that makes economic sense for electric cars.

While Ghosn's market predictions are of general interest, they ought to ring especially loudly to those in the semiconductor industry. After all, as the auto market shifts away from fossil-fuels and internal combustion engines, the replacement components become more and more grounded in the semiconductor industry's terrain. The automobile is most certainly the next and perhaps largest consumer electronics device - something that portends significant growth for the well-positioned semiconductor manufacturers and OEMs.

Of further interest to the semiconductor industry is the set of economic forecasts that point to a decline in auto growth in the developed markets but are offset by significant growth in emerging markets (e.g., India, China, Africa, South America). Also, while the new cars being introduced to the emerging markets are less sophisticated than those being introduced to the developed markets, (compare, for example, the new Tata in India to the Hydrogen 7 BMW or Tesla Roadster) they do, nonetheless, support significant numbers of chips. In this manner there is a natural, robust market for the lower cost, perhaps obsolescing, chips and ICs exiting the primary market. Simultaneously, the developed markets create dynamic demand for the newest capabilities and automotive electronics - all good news for the entire semiconductor industry, from batteries to chips and all ICs and discretes.

Interestingly, the emerging markets are pegged to be the large-scale early adopters for the new alternative energy vehicles. Without the cumbersome pre-existing infrastructure heavily favoring fossil-fuel based cars, among other variables supporting smaller and more efficient vehicle purchase decisions, emerging markets are both hungry for and able to leap-frog, rather than step-wise adopt, the new technologies (a similar jump was witnessed during the move from no phones directly to mobile phones in Africa, rural India and rural China ('Revving up', The Economist 10/11/2007)).

Why software and automotive combine to drive auto electronics adoption
While the increased amount of electronics 'under the hood' of today and tomorrow's automobile hold significant opportunities for the semiconductor industry, the additional contributions from advancements in software engineering will ensure a broader spectrum of consumers of electronics both in the short- and long-term. More specifically, as software advances combine with the fast-paced chip improvements the versatility of many of today's consumer end-products is increased. Already DVDs and iPods have become more commonplace as the 'car infotainment' environment moved away from the simple built-in radio, cassette and CD player.

Personal Navigation Devices (PND) are becoming more affordable and commonplace as GPS technology and memory has improved to support 3D displays and simultaneous navigation capabilities. In mid-January, Sony announced a GPS navigation system for its PlayStation Portable device in Europe, enabling owners to use the device's receiver to determine their present location and navigate with maps downloaded onto a UMD disc (www.reghardware.co.uk/2008/01/10/psp_go_explore_gps/). Of course this device is a clear potential competitor for the present market leaders, Garmin and TomTom, who are already feeling competition from the major mobile handset makers (e.g., Samsung, Nokia, Motorola, LG, Sony-Ericsson). "[Telematics Research Group] sees the worldwide portable navigation market growing from 50 million units in 2007 to more than 500 million units in 2015" (http://eetimes.eu/automotive/205207677).

As consumers continue to invest in smart phones and increasingly sophisticated Personal Music Players (PMP) that may also offer GPS capabilities, the expectation of docking stations and full portability of their devices has moved into the automobile as well. All of the major auto makers presently have partnerships with both software companies and OEMs to provide the latest "telematics" (i.e., telecommunications + informatics) features. To name but a few companies and products: Apple's iPod docking station; Denso Corporation's multiple components, computers and sensors that control much of the electronics of today's cars; Micron Technology's image sensors; NEC and NEC Electronics' LSI chip for automotive information systems; NEC Electronics' microcontrollers; TomTom's GO 920 and Magellan's Maestro 4250 voice command GPS devices; Microsoft and Intel's "Microsoft Auto" (a Windows-based car computer that includes Wi-Fi connectivity and "Eco Drive," a fuel consumption and efficiency monitor); Bluetooth's A2DP audio-streaming profiles; various OEM's HD radio compatible devices; Preh GmbH's driver interface controls; and Far EasTone Telecommunications' FET 5G, a GPS and PND model.

As voice and gesture recognition software continues to improve, market watchers and the auto industry leaders, such as GM's CEO, Rick Wagoner, are lauding the arrival of 'safer' driving as the in-car telematics experience increases in diversity and capability. Not only will sensors be able to engage in vehicle-to-vehicle (V2V) communications and road image data to automate speed reductions due to traffic or hazards, but drivers will have fewer reasons to move their eyes from the road in order to control their vehicles or to engage the car's communications or entertainment features.

While the core drivers of the present automotive electronics revolution are rooted in the software and automotive industries, the significant advances from all areas in the semiconductor industry are the true contributors to and beneficiaries of these new-found synergies.

As we look at a relatively volatile present global economic marketplace, there are significant short- and long-term growth opportunities for the semiconductor industry, particularly in the automotive electronics sector. These opportunities are noteworthy because they not only provide a critical end-market, but they offer growth potential for a continuum of products ranging from portable consumer electronics to core components for the present and next generation of automobiles.

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