Too Many Auto Semi Suppliers
If a semiconductor supplier were to ask me if they should try to break into the automotive market, I’d say to them, “probably not, unless you exclusively own proprietary technology the auto industry wants to put into production right away.”
While the market for established players has its attractions — huge volumes and a relatively steady demand for parts lasting as long as ten years — there are too many negatives to make the investment a sure thing.
The automotive semiconductor industry has too many suppliers — the top 30 suppliers worldwide account for only 80 percent of the market, according to recently released numbers from Gartner Dataquest. Yearly price cuts are guaranteed and pressures to cut prices further when industry margins are already thin or nonexistent are greater now than they have been in the last 15 years. While there are plenty of new electronics features on the horizon, it can take three to five years following the development of a new component before it goes into volume production.
What still attracts semiconductor suppliers to the auto industry and could bring in new players, is its relative stability. In 2001, when the worldwide semiconductor market dropped 32 percent, the auto semiconductor market dropped only 1 percent.
In considering the automotive market, Western semiconductor vendors should forget about the domestic Japanese market, worth $3.5 billion in 2002. Japanese carmakers in Japan deal almost exclusively with Japanese-owned suppliers. While many Western suppliers have tried to penetrate the Japanese domestic market, only Motorola, the world’s number-one automotive semiconductor supplier, with $91.3 million in Japanese sales in 2002, has broken into Japan’s top ten. Motorola has been active in the Japanese auto industry at least since the mid-1980s.
While worldwide vehicle production grows at 2 or 3 percent annually, auto semiconductor sales have grown annually by 10 percent for the last four years, primarily because electronics feature content in vehicles keeps growing.
Today electrical and electronics content, including software, represents somewhere around 20 percent of the cost of the average vehicle. While that percentage has been steadily rising, at some point it has to level off. Some say that will begin to happen when the cost of electronics reaches about 35 percent or 40 percent of the cost of building the typical vehicle, perhaps 20 years from now. At that point, the market for auto electronics and auto semiconductors will grow much more slowly than it has, eventually keeping pace with vehicle production.
Auto electronics suppliers serving Western carmakers should also worry about the difficulty non-Japanese carmakers face as they compete with Toyota, Honda and Nissan for market share. The Big 3’s share of the North American car market has fallen almost 7 percent just since 1999. In most segments, Toyota, Honda and Nissan vehicles typically lead in quality performance. In the 2002 model year in the U.S., Honda, Mazda, Hyundai, Subaru, Toyota and Nissan each had half as many electrical system problems as GM, Ford and Chrysler.
And further, according to statistics in the Harbour Report, Nissan’s, Honda’s and Toyota’s North American assembly operations had a $300 to $400 per-car cost advantage over GM, Ford and DaimlerChrysler. In Toyota’s case, that sort of performance gave the company higher profits in the fiscal year ending March 2003, higher than the combined profits of Ford, DaimlerChrysler and GM.
Falling profits will make the Big 3 less appealing as auto electronics customers, especially since carmakers will squeeze supplier prices even harder. Ford’s net income fell 27 percent in the second quarter of 2003, GM’s was down 30 percent and DaimlerChrysler’s second quarter net income fell 90 percent. As a result of financial difficulties, Ford has already taken a much lower profile with electronics, which has frustrated its suppliers. Several electronics projects have either been placed on the back burner or have been cancelled entirely. If present trends continue, other carmakers will have similar problems to Ford’s.
Semiconductor and electronics suppliers should think twice, even three times, before they dive into this wildly competitive market. Paul Hansen is a strategy consultant in Portsmouth, New Hampshire. He publishes The Hansen Report on Automotive Electronics, a business and technology newsletter. www.hansenreport.com.