Credit Suisse chip analyst John Pitzer today offers an update on the state of affairs in chips for cars, arguing that On Semiconductor (ON) and Infineon (IFX) are both poised to benefit as the market shifts from mere “unit growth” to growth in the amount of “content,” meaning, how many functions chips perform in a car.

Pitzer has Outperform ratings on both On Semi and Infineon.

“Growth in Semi Autos over the last 10 years has been skewed towards unit growth over content growth – i.e., ~60% of Auto Semi Rev growth was driven by more cars, ~40% from higher content which is perhaps lower than most investors perceived,” writes Pitzer.

That’s going to change,

Content growth has been an important but secondary driver of Auto Semi Rev growth for two reasons: (1) design cycles in autos are inherently long 5-7 years and (2) higher Semi content historically has been focused on the high-end of the fleet and there has been a 3-5 year waterfall effect for new applications to proliferate into the volume mid and low end of the fleet. While investors are focused on the impact of slowing unit growth on Semi Auto Rev, we would argue that going forward Semi Auto Rev is much more dependent on content growth than unit growth. Specifically, from 2003-2013, ~60% of Semi Auto Rev was driven by unit growth and ~40% by content growth (unit CAGR of 3.7% vs. content CAGR of 2.4%) – from 2013-2019, ~65% of Semi Auto Rev will be driven by increasing content and only ~35% by unit growth (unit CAGR of 2.1% vs. content CAGR of 4.2%). Note – there is still a large gap between the silicon content in high-end vs. low-end automobiles. Specifically, luxury cars have ~$1,000 of content, while mid-range cars have ~$350 of content and low-end cars have closer to ~$100 of content. As such, over the next ten years silicon content is likely to accelerate from what has been a ~2-3% CAGR to a ~5-7% CAGR – supporting a LT Auto Semi Rev CAGR of 8-10%.

ON Semi gets a third of its revenue from autos, notes Pitzer. The company is the “market-share leader in “ADAS” driver assistance technology, notes Pitzer. He doesn’t offer any specific detail on Infineon.

As far as what the rising content will be, autonomous vehicles should become a bigger and bigger focus of industry chip sales:

While ADAS is the most important concept relative to Semi Auto content, we would highlight that the next five years are more likely to focus on driver assistance than actual automated driving – i.e., making driving safer and easier. In 2019, 15% of automobiles produced will have some form of ADAS, up from 6% in 2014. Until now, ADAS has been relatively confined to luxury vehicles or premium car packages. However, government regulations will likely prove an essential growth driver as the safety benefits of ADAS gain wider acceptance by regulators. In addition, the cost of CMOS image sensors is declining, making ADAS more affordable. The more bandwidth a car can support, the more connections are created. While Body Control requires somewhere between 20 kbit/s to 1 Mbit/s, it has less than 50 nodes/car. In contrast, ADAS requires 100 Mbit/s and has closer to 200 nodes/car. Another growth driver is Electric Vehicles/Hybrid Electric Vehicles (EV/HEV), as fuel consumption continues to influence consumer purchasing decisions, especially outside the U.S. While Gartner believes internal combustion engines (ICEs) will remain the dominant model for the next 20 years, they see EV/HEV accounting for ~5% of light vehicles produced in 2019. 

Fun fact: Pitzer notes that Intel (INTC) says cars are generating much more data per day thansmartphones, making the total computing done by cars bigger than that done by the total amount of smartphones, despite there being a lot more phones in use:

While the ~105m+ Global Auto Market in 2021 is modest compared to the ~2.1bn Global Smartphone Market in 2021 – the average internet user will generate ~1.5GB of traffic per day, while self-driving cars will each generate 4,000 GB per day. To put that in perspective, despite smartphones having 20x the global volume, Autos will generate ~130x more GB of data per day, or alternatively it would take >1/3 of the year for smartphones to generate as much data as autonomous cars do in a day.

 

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