GENEVA, Switzerland – STMicroelectronics executives consider its automotive semiconductor business to be one of its most stable and predictable business segments. It accounted for about 17 percent of the company's $9.6 billion revenue in 2011 and is growing at a double-digit clip even as other divisions are struggling with negative growth.
Major structural changes occurring in the automotive market and the increasing adoption of electronics by auto OEMs gives ST and auto IC rivals hope that market strength can be maintained. With mega trends like energy savings, automation, renewable energy and safety identified, auto suppliers must remain agile. Indeed, customers are requiring more of chip suppliers as the trend towards system-level support in places like China and India, combined with the variations in components demand for vehicles, means companies like ST must simultaneously boost R&D spending while holding down costs.
Meanwhile, suppliers like ST understand that auto makers can't afford to shut down production lines because of supply chain snafus.
ST is therefore pouring resources into the auto business as the division's profile rises within the company. ST has been hiring Chinese engineers to support its business there because it believes a good understanding of local customers is critical to grabbing design wins even for foreign manufacturers selling to the region. Even if the bulk of funds invested in automotive is going into R&D and capital expenditure, the company hasn't neglected the supply chain angle.
Amid constant market fluctuations, ST has deepened back-end supply chain support for its customers, recognizing that for many the idea of a halted production line is anathema. The "line must move" is a cardinal principle of ST's support system for the auto sector, according to Otto Kosgalwies, head of ST’s infrastructure and services unit.
Opportunities in the auto IC market are matched by major challenges. Solid growth for chip vendors entering emerging markets are offset by cost-conscious customers and the general evolving nature of the auto sector. Meanwhile, design differences and customization requirements among Western customers and those in the faster-growing developing economies of Brazil, China and India are among the challenges faced by auto chip suppliers. ST said it sees growing demand for its current portfolio of auto ICs but is still hustling to deliver MEMS-based devices.
"We have to begin selling MEMS to the auto market if we want to maintain our growth rate. In fact, it would be stupid for us not to enter with MEMS," Marco Monti, executive vice president and general manager of ST's automotive product group, said in an interview.
Monti is blunt about ST’s auto strategy because the stakes are high. Semiconductor content in the average car has been growing steadily; ST estimates electronics content is now about $300 per vehicle. High-end cars can have significantly higher semiconductor content than standard vehicles, and many optional features are becoming standard on mid-range cars.
"We estimate the electronic content of cars has been rising something like 10 percent, 15 percent [CAGR] over the last six years," Uche Orji, an analyst at UBS Investment Bank, said in an interview with The Wall Street Transcript. "So electronics inside the car, such as flat-panel TV screens, is going up, but it's also going up in terms of the parts that make the car run.”
One of the fastest-growing segments of the automotive IC market is the infotainment sector, which IHS Corp. estimated at $32.5 billion in 2011. The research firm earlier this year estimated the segment will expand this year to $33.5 billion and top $41 billion by 2016.
ST is therefore boosting capacity in various applications, including motor control, while fine tuning supply chain management practices with the goal of making sure redundancy strategies are in place to guarantee supplies even during and after natural disasters. "We have to be prepared for natural disasters even if we can't predict it,” said Kosgalwies. "We do risk assessment, arrange multiple sourcing with suppliers and we go multiple levels below our suppliers to make sure redundancies are in place. We do the same with logistics.”
A well-oiled supply chain is even more critical in the automotive market than in the consumer segment. Halting an auto assembly line due to delayed delivery of components or subassemblies is unthinkable because of the ripple effect at shipyards waiting to load and transport new cars.
"The cost of running a manufacturing line in the auto sector is so huge that you can't afford to stop even for one hour," Kosgalwies said.
@iniewski & @Dylan: For ST, the auto business is not without risks. The MEMS part of it is most likely going to face a slow down when most regulatory compliances will have been met by 2016. Right now, many MEMS and associated electronics are making their way into that market based on regulatory requirements for rollover, passenger safety, TPMS, etc. ST will have to look elsewhere for growth like Asia and the competition there is fierce from its German counterparts.