Users have taken the meaning of mobility and portability to new levels and have moved it inside automobiles. This increased semi penetration into automotive means increased diversification opportunities for companies along the semiconductor and electronics supply chain. Beyond a strong revenue stream, the auto semi sector is also driving demand with the release of components that enable new capabilities, safety features, connectivity (for phone, internet, navigation, tracking), and autonomous driver assisted tasks in consumer and fleet vehicles.
"Technology and vehicles are integral components of everyday life and by combining the two, we can […] achieve a truly connected, mobile lifestyle." Ton Steenman, vice president of Intel's Intelligent Systems Group, quoted by EETimes.
Automotive "infotainment," information and entertainment, has seen tremendous growth over the past few years, and this year it is expected to be a significant contributor to overall semiconductor growth, revenue, and increased penetration. Auto infotainment has also pushed automotive semiconductors, electronic (built-in) devices, and connectivity options to the fore with consumer, enterprise, and fleet customers demanding increasingly sophisticated infotainment features from auto OEMs when making purchases. Their demands run the gamut from improved safety to monitoring, fuel efficiency, navigation, tracking, phone capabilities, and passenger entertainment. As a direct result, automotive semiconductors are experiencing solid and continued growth, while also being the driver for presenting a continued stream of new capabilities, safety features (see this from NYT), connectivity (for phone, internet, navigation, tracking), and autonomous driver assisted tasks in consumer and fleet vehicles.
Additionally, the continued rise in sales of hybrid electric (HEV) and electric vehicles (EV) is supporting the automotive semi sector, since these vehicles have even greater component needs for monitoring and managing energy consumption, and especially for recharging. Finally, beyond the revenue and growth that this positive momentum provides, the increased penetration of semiconductors into the automotive sector means increased diversification opportunities for companies along the semiconductor and electronics supply chain (see Smith's recent MarketWatch Quarterly for research on supplier diversification).
Autos now largest CE device
It is not exaggerating to say that today's automobiles are the largest consumer electric (CE) devices out there. Recall the unveiling of Ford's 2013 Focus, not at the annual Detroit auto show, but at the Las Vegas Consumer Electronics Show (CES). And, at the same show, Lamborghini showed its NVIDIA- powered infotainment and Audi previewed use of the Tegra 3 chipset. One look at the interior of most new cars and you can see why it is little wonder that the auto is the largest CE device; whether passenger or fleet, the amount of information, entertainment, navigation, tracking, safety, and fuel/power efficiency presented through in-dash and passenger console displays is significant. These new data presentations are additions welcomed by both consumers and auto OEMs.
EVs take data capture, manipulation, and presentation to the next level. These are truly sophisticated computers that move. EVs operate on roughly 10 million lines of code, plus hundreds of embedded processors, sensors, and other chipsets that make not only the running of the car possible, but also the smart discharging and recharging of the essential battery at the heart of the vehicle. When the global EV market truly hits the tipping point, it will mark a phenomenal growth wave for the semi and electronics industry.
2012 auto semi growth
The anticipated 2012 growth for semiconductors has, thankfully, been forthcoming so far, with consumer spending in the United States (US) market growing at 2.9% for the first quarter of 2012, "the fastest pace since late 2010," as reported by Manufacturing Business Technology (MBT). Citing MBT again, this rise reflects an overall optimism by industrial manufacturers regarding sustained growth in the US economy. While only one of many important economies globally, the strength of the US economy does still set the tone for the global, macroeconomic scene. Importantly, with the European Union (EU) still vacillating on remedies for debt-default solutions and ongoing problems in some member nations' economies, alongside of China's reduced growth forecast of roughly 8.2%, having the US economy on track for rebound is critical to consumer and enterprise confidence.
Worrying about the slowing of China's economic growth, and OEM inventories for auto and industrial, UBS analysts caution that "we still expect healthy growth in autos production in 2012 although there are some signs of slowing end demand. Auto and industrials OEMs revenue forecast […] +2% and +7% [revenue growth] for 2012E and 2013E […]." (UBS Investment Research, Past the trough, OEM inventory risks 8 May 2012, pp. 1, 3-6). The connection here between auto and industrial growth strength and semiconductor growth is important, because, as UBS continues, "Autos/industrials revenue growth and profitability are key drivers of semis industry growth." (ibid, p. 16) And, with the forecasted growth for 2012-13 for the automotive sector, especially, this means that semi growth is further enhanced.
Auto infotainment and safety are demand drivers
The growth in auto infotainment over the past few years has been tremendous and is forecasted to continue at this pace. According to a recent report by IHS iSuppli, "the global market for automotive infotainment is set to expand by another 3 percent in 2012, driven by rising car production and increasing electronic content in vehicles." That increase is on the heels of iSuppli's 2011 data on car infotainment revenue having reached an 11% expansion rate over 2010. Looking forward, iSuppli forecasts auto infotainment to see a steady increase over the next four years, reaching a market value of US $41.2 billion by 2016.
On top of auto growth in general, safety enhancements are increasingly being required as standard equipment (e.g., stability, roll prevention, tire pressure, anti-lock braking, fuel efficiency standards, etc.) and remain sought after add-ons at all price levels. Furthermore, consumers are realizing the benefits of many of the latest safety and advanced driver assistance systems (ADAS), such as parking assistance, lane departure warning systems, and rear mounted cameras for improved visibility while reversing. As these features become more common, the expectation is that they will be provided as standard features, which, in turn, increases semi penetration rates and opens the doors for next generation features that can leverage the existing hardware and software that is on-board already.
In February, Intel, one of the bellwether companies for the semiconductor industry, recognizing the phenomenal growth and diversification opportunities for automotive semi and automotive electronics, announced the creation of a dedicated fund for automotive technology through their Intel Capital group:
- "Intel Capital creates a $100 million Intel Capital Connected Car Fund to accelerate technology innovation in the automotive industry.
- "Intel Capital Connected Car Fund targeted at technologies that will deliver new in-vehicle infotainment solutions, seamless mobile connectivity, compelling applications and advanced driver assistance systems.
- "By 2014, automobiles will be among the top three fastest-growing market segments for connected devices and internet content."
This investment by Intel Capital is significant not only in the amount of the investment and the breadth of automotive company collaboration, but also because it underscores the scale of the opportunity for automotive semi and automotive electronics. When considering this strong signal from Intel Capital alongside the amount of existing MEMS industry automotive research and development, the prospects for semi growth through automotive certainly offset the concerns for the waning computing sector, which has seen a slowdown in recent years.
Auto strength in HEV & EV
As mentioned above, the forecasts for auto sales growth continue to show strength after very positive results for 1Q12. Morgan Stanley analysts reported that "several US-based auto manufacturers increased output in response to growing demand. Johnson Controls' auto business reported 4% organic growth in 1Q12, with sales up 12% in North America, up 8% ex-FX in Europe and up 5% in China," (Electrical Equipment and Multi-Industry, Weekly #23, April 22, 2012, p.36).
The latest auto sales increases are importantly centered on smaller cars, with fuel efficiency being the top criterion for 37% of new car purchasers' reasons for buying the model they did, according to a recent Consumer Reports survey cited from Phys.Org. When considering the rising cost of fuel and the increased emphasis on fuel economy, it is also understandable that more consumers are considering and purchasing the widening selection of hybrid electric vehicles (HEV) and electric vehicles (EV). IHS Automotive analyst Paul Lacy is cited in this MBT article on the trend:
Lacy expects hybrids and electrics to make up about 4 percent of U.S. sales this year […]. Lacy predicts hybrids and electrics will double their market share to 8.5 percent by 2017, in part because there will be more options on the market. Last month [April 2012], 35 hybrids and electrics were on sale, double the number from 2008. The proliferation of models will also bring down costs.
Once doubted as a feasible mass-market option, HEV and EV sales are obviously proving that global demand and acceptance are on an upward growth curve, and, in response, we see the major auto makers increasing hiring, new factory or line additions, and output on a global level. The auto OEM investment is based on the early upswing in sales for 2012 and the continued strength in new, smaller, and HEV and EV sales. According to 1Q12 data reported by EETimes Europe, "Increased production of hybrid electric and battery electric vehicles is forecast to offer substantial new revenue opportunities for semiconductor suppliers in the years ahead, with production of hybrid vehicles forecast to rise from five million in 2011 to 62 million in 2018." One cited example of the impact that EV and HEV sales have on semiconductor growth is the direct correlation between these vehicle sales and the increase in demand for power discretes and modules, as the same article underscores.
But we cannot honestly present a positive outlook for HEVs and EVs without mentioning the remaining challenges and opportunities to a truly wide-scale adoption tipping point. For one, cost deserves mention; however, it is clear that, with the increased competition for the electronic components supporting the vehicles' operation, increases in complex, integrated chipsets that reduce overall costs, and increases in the number of automotive OEMs and vehicle types, the sale price for these otherwise more-costly vehicles for both consumer and fleet uses is on the decline.
The next greatest challenge to adoption is at the heart of these vehicles: batteries and limits on range and recharging options. The batteries of the HEV and EV are at the core of where large-scale rechargeable battery research is being directed and whereadvances have certainly been seen. One of the recent issues at hand is the recharging of the EV batteries. A single standard needs to be put in place for EV connectors for normal or for quick-charge plugs, and that has led to significant market positioning and automotive panel discussions in order to come to agreements on the various competing plug types that are currently on the market (see this report from Bloomberg on EV charging standards). Once standards for EV charging plugs are in place, there can be a further increase in the number of EV charging stations and solutions, the lack of which is the next hindrance to more wide-scale adoption, as the range of the present EV is generally around or under 100 miles before recharging is required. As Financial Times points out, the automotive industry recognizes that EV and HEV are absolutely part of the future because of both consumer adoption and increased legislation focused on emissions-reduction; as such, a standard will be determined.
Meanwhile, there is innovative collaboration on smart EV recharging that leverages the connected car through smart wireless device features, smart grid load management, and EV recharging optimization. In April, IBM, Honda, and Pacific Gas & Electric announced their joint venture pilot project in selected sites in the PG&E area in California, which allows direct vehicle-to-grid (V2G) connectivity. V2G connectivity monitors the battery charge level of an EV, the location of the vehicle, and its proximity to recharging stations, and couples this with optimal recharging times and prices based on load demand on the electric grid through smart grid technology and demand management information provided by the utility company. Should these types of connected-car, smart-charging options pass pilot testing, the greatest concern for EV drivers, recharging their vehicles quickly and with cost options available through simple smartphone applications, may be made possible. Additionally, not only would the increase in EV vehicles be a positive for the semiconductor and electronics industry, the added infrastructure for V2G and Smart Grid further increases volume and revenue opportunities for our industry.
Mobility is among the most important features demanded by users for any device and used for any purpose, business or personal. What "mobility" means today necessarily centers around the ability to be and stay connected (voice, internet, GPS, etc.) and to have access to the same level of information and data manipulation, as well as communication, regardless of location. Market evidence of the importance of these feature demands is seen not only in the handheld smart wireless device sector (number of units and diversity of competition), but also in devices that are beyond the pocket and briefcase. Users have taken the meaning of mobility and portability to new levels and have moved it inside automobiles. This movement is manifest in promising growth forecasts for the increasingly electronically-sophisticated auto industry, and for the semiconductor manufacturers that support it.