Automotive Industry Fueling Chipmakers
By Alexei Oreskovic
TheStreet.com Staff Reporter
12/21/2005 7:04 AM EST
Power steering may not have the sex appeal of pocket PCs, but the underlying technology is created by the same companies at the forefront of the digital revolution.
For years, the automotive market has represented a reliable if unglamorous side market for chipmakers, with semiconductors playing a role in everything from fuel injection to airbag deployment. New government regulations and rising demand for in-vehicle infotainment features, such as DVD players, are pushing yet more chips into the car.
But with Detroit's car industry in a funk, the automotive sector hasn't exactly seemed like the dependable business it has been for chipmakers. Freescale Semiconductor (FSL:NYSE) was the first company to hit a pothole, writing down $10 million in its latest quarterly financial results as a result of the recent Delphi bankruptcy. The writedown appears to assume Freescale will get a little less than 50 cents on the dollar for the $22 million it is owed by the bankrupt auto parts company.
Other chipmakers with smaller Delphi claims include Infineon Technologies (IFX:NYSE) , Philips Semiconductor and Texas Instruments (TXN:NYSE) , although TI's $5 million claim is peanuts relative to its more than $12 billion in annual sales.
Of course, if General Motors (GM:NYSE) were to file for Chapter 11 bankruptcy, as some analysts believe it may ultimately be forced to do, semiconductor companies could face a potentially larger round of charges. And the risks go beyond bankruptcy petitions. As carmakers such as GM and Ford (F:NYSE) haggle with their workforces over wage and benefit concessions, the likelihood of a work stoppage is ever present. For chipmakers, such a stoppage would be tantamount to a temporary loss of business from the affected customer.
"If companies have a bigger exposure to the automotive industry, absolutely it's something that could impact them," says Tore Svanberg, a semiconductor analyst at Piper Jaffray.
But in the automotive sector, global demand is key. While the automotive market provides 70% of the revenue at Freescale's largest business unit -- the Transportation and Standard Products Group -- the company is not overly perturbed by Detroit's recent struggles.
"Clearly it's a situation that has to be closely watched, but I don't feel that that's a huge issue for us at this point," says Sumit Sadana, Freescale's VP of strategy and business development.
The American car industry's woes are symptomatic of a regional competitive problem, Sadana says, which is why Freescale has taken steps to increase its penetration among Asian car manufacturers for several years.
"The overall industry would be in trouble if the unit volumes [of worldwide car shipments] were dropping or the electronic content in cars were decreasing," says Sadana.
James Graves, the North American auto segment manager of Analog Devices (ADI:NYSE) , has a similarly confident outlook. "We certainly can't predict the final outcome of some of the restructurings, but our assessment is that these companies are going to come out of their restructurings stronger, and one of their strongest points in terms of divisions and investments is their electronic groups," says Graves.
Indeed, notwithstanding the malaise among North American carmakers, the global picture for chipmakers looks quite rosy. The automotive semiconductor market is currently worth about $13 billion and is expected to grow 12.5% annually through 2009, according to IC Insights.
Philips Semiconductor is on track to record nearly $1 billion in automotive sales in 2005, up from about $600 million in 2001, according to a presentation it made to financial analysts in September. Freescale's transportation group sales were $2.56 billion in 2004, up from $2.37 billion the year before.
The challenging times for American carmakers could make the short-term business environment a little more unstable for the semiconductor companies that supply them, says Brian Matas, VP of Market Research at IC Insights. In the long run, though, he sees the automotive market as remaining an attractive one for chipmakers.
The long product cycles in the automobile industry mean that once a company's chips are designed into a line of cars, they can remain in that car model for years, providing a reliable stream of revenue, immune from the cyclicality that characterizes the PC industry.
And because many of the chips used in cars don't require cutting-edge manufacturing processes, semiconductor companies can use their older, depreciated manufacturing facilities to produce the chips, boosting factory utilization rates and cash flow. All in all, say analysts, the automotive market can provide a stabilizing force to a chipmaker's financials.
PCs, of course, are the No. 1 market for chips, followed by consumer electronics devices and cell phones. But among the remaining chip markets, only the automotive sector appears to be increasing its share of the pie, while the military, industrials and wired communications sectors are losing ground, according to the Semiconductor Industry Association. In 2006, the automotive sector is expected to account for about 8% of total chip sales.
For carmakers, chips are a vital component as the industry grapples with new safety and environmental regulations. Under the Transportation Recall Enhancement, Accountability and Documentation Act of 2000, 70% of all light vehicles sold beginning in September 2006 must have sensors that alert the driver when a tire is underinflated. After Aug. 31, 2007, all new cars must feature the tire pressure monitoring sensors, which use radio frequency signals to transmit the data to a car's dashboard display.
Increasing fuel-efficiency requirements is also creating business for chipmakers, as sensors and microcontrollers are at the heat of such efforts. And the emerging class of hybrid gas-electric vehicles, which feature special propulsion and battery management systems, are inherently more electronics- and semiconductor-intensive than standard cars.
An even-bigger growth driver could be consumers' thirst for all things electronic. According to Thilo Koslowski, an automotive analyst at industry research firm Gartner, a key selling point of cars going forward will be the integration of eye-catching gizmos like satellite-guided navigation displays, on-board DVD players and wireless connectivity.
"If you think about ways for automakers to differentiate themselves, there is not very much available from a mechanical perspective," says Koslowski. "It really boils down to providing electronics as a value-add to consumers."
Last week, Intel (INTC:Nasdaq) and BMW announced that the two companies would work to develop an industry specification that will allow for the seamless integration of cell phones, MP3 players and other electronic devices in BMW cars. More such announcements are sure to follow, Koslowski says.
For investors and analysts, all of these trends appear to be strong enough to overshadow concerns over the health of the American car industry. |
