Just a few days ago, Infineon's plan to invest 5 billion yuan to expand its 12-inch production capacity was still making people marvel at the "overbearing" nature of the automotive chip market. After all, the global semiconductor market is in a slump, which is an undeniable fact. However, the major automotive chip manufacturer Infineon still chose to expand production against the trend, even making the largest single investment in history. This seems to be the strongest proof of the strong upward momentum of the automotive chip market.

However, a week later, the internationally renowned investment institution Morgan Stanley warned that there is an oversupply of automotive chips and pointed out that Renesas and ON Semiconductor have both issued order cuts, reducing chip testing orders for the fourth quarter. At the moment when consumer electronics are weak, the automotive business has once again become a "life-saving straw" for many chip manufacturers. From the beginning of 2020 to the end of 2022, is the once-infinite glory about to come to an end?

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Is the automotive chip caught in an "oversupply" storm?

In fact, before this, TSMC and World Advanced had already warned on a quarterly basis that there would be an inventory adjustment for automotive and server chips. Morgan Stanley believes that automotive chips will shift from a shortage to an oversupply, mainly for two reasons: First, TSMC's automotive semiconductor wafer output in the third quarter increased by 82% year-on-year, 140% higher than before the pandemic; second, the decline in sales of electric vehicles in China (accounting for 50-60% of global electric vehicles) has made the current supply of automotive semiconductors sufficient, leading to major automotive chip manufacturers cutting orders.

Zhan Jiahong, an analyst of the semiconductor industry at Morgan Stanley, pointed out that by comparing the global automotive semiconductor revenue trend with the change in automobile production, it can be found that in recent years, the compound annual growth rate (CAGR) of automotive semiconductor revenue has reached as high as 20%, while automobile production is only 10%. According to this trend, the oversupply of automotive semiconductors should have occurred at the end of 2020 and the beginning of 2021, but at that time, due to the spread of the global COVID-19 pandemic, transportation was disrupted and even cut off, causing a severe shortage of automotive chips and a continuous shortage. However, recently, as the impact of transportation has gradually eased, the increase in chip manufacturing capacity, coupled with the weakening demand for automobiles, has led to the sufficient production of automotive chips, and the chip shortage that has plagued the automotive industry for a long time has officially come to an end.

From a cyclical perspective, the shortage of automotive chips has lasted for more than 3 years. Three years ago, due to the lack of foresight by automotive manufacturers in the rapid growth of new energy vehicles and smart cars, they did not place orders with chip manufacturers in advance, and coupled with the impact of the pandemic, the shortage of automotive chips became increasingly severe. Three years later, as the global pandemic gradually eases, the semiconductor market is also contracting due to high inflation, and the new production capacity of chip manufacturers invested in the past few years is gradually being released, making the alleviation of the automotive chip shortage seem very natural. However, many automotive manufacturers seem not to have felt the joy of "easily obtainable" automotive chips.

Just a few days ago, Ford CEO Jim Farley was still exclaiming, "It's too painful, we need chip engineers." According to Ford's responsible person, the restricted chip supply in the past two years has caused Ford to lose 1.3 million vehicles, and the same problem has led to Ford losing 4 million employee working days this year.

Obviously, Ford is not the only one affected by the chip shortage, Changan Automobile also lost 606,000 vehicles in the first nine months of this year. Data from Auto Forecast Solutions, an automotive industry data forecasting company, shows that as of the end of October, due to the chip shortage, the global automotive market has reduced production by about 3.905 million vehicles this year. According to predictions, by the end of this year, the cumulative reduction in global automotive production will rise to 4.2785 million vehicles, an increase of about 16,200 vehicles compared to previous estimates.

From the number of vehicles reduced due to the chip shortage, the problem of automotive chip shortage is far from over. On the other hand, according to a report by the Economic Daily, an unnamed IC designer also frankly stated that compared with the previous situation where automotive chips were extremely scarce, the current supply and demand are indeed more balanced, and the situation of the supply chain's long and short materials has improved, but it is not yet to the point of oversupply.

Why does the shortage problem still exist after the chip shortage has lasted for 3 years? Since the upstream chip order cut has already been heard, how long can the automotive chip market last?The ongoing shortage of automotive chips can be primarily attributed to two major reasons. First, the automotive supply chain is lengthy and complex. From the production of chips in wafer fabs to their processing in the automotive supply chain, and then to the production by major supply chain companies like Bosch, it takes at least three to five months. After that, the chips must be obtained by vehicle assembly plants and assembled into cars, a process during which the logistics and sea transportation to the destination take a considerable amount of time. According to reports in the Economic Daily, many car manufacturers believe that, given the current state of the supply chain, the shortage of cars caused by the chip shortage is unlikely to be resolved before the middle of next year.

Second, there is a severe shortage of mature chips required by the automotive industry. Compared to advanced chips, mature chips are a significant obstacle to automotive production. For example, the MOSFET chips used by Ford for windshield wipers cost only $0.40 each, but they have affected the production of 40,000 Ford vehicles.

In order to continue Moore's Law and consolidate their position in the wafer foundry field, semiconductor giants such as TSMC and Samsung have made significant advances in advanced processes. However, these measures are more like a fatal blow to the automotive manufacturers who are eager for mature chips. Although chip manufacturers have also realized the market prospects for mature chips under the drive of huge demand and have started to increase investment, "distant water cannot quench the near fire." How can the future capacity of mature chips fill the current chip gap?

Jeremie Bouchaud, head of S&P Global Mobility Autonomy and E/E & Semiconductor, believes that the surge in investment in mature process node capacity by chip manufacturers in 2022-2023 will not show ideal capacity results before any time in the next 18-32 months, which is the average delivery time for the semiconductor industry's new capacity commissioning.

Although car manufacturers such as Mercedes-Benz, Ho Tai, and Yu Ri believe that the shortage of automotive chips will not be resolved until next year, judging from the time point proposed by Jeremie Bouchaud, it is already a very optimistic expectation that automotive chips will be alleviated next year. Xu Daquan, executive vice president of Bosch China, said that the chip shortage problem has not been resolved, and the forecast for next year is not optimistic. Many chip suppliers have responded that they will not be able to meet the procurement needs next year, and there is still a gap in the supply of automotive chips, with some chips having a larger gap. Ford Farley even believes that the chip crisis in the automotive industry is unlikely to ease before 2025.

Memory giants, relying on the automotive industry to sound the counterattack horn.

At present, it should be no problem for automotive chips to last for another two or three years. However, as a member of the semiconductor industry, cyclical fluctuations are inevitable. Even if the supply is in short demand now, there will be a day of oversupply. Morgan Stanley has already given the industry a preventive injection in advance, and the order cuts by ON Semiconductor and Renesas also imply the signs. However, other chip manufacturers still favor the automotive business "without fear," even if they are now facing the impact of the semiconductor market downturn, the storage manufacturers are no exception.

For storage manufacturers, 2022, especially the second half of 2022, is particularly difficult. The storage market has shrunk severely, and as a result, the revenue of the top three global storage manufacturers, Samsung Electronics, SK Hynix, and Micron Technology, has plummeted in the third quarter of this year. Samsung's third-quarter sales fell by 28.1% month-on-month, and as a result, Intel took over the leading position in the semiconductor market. SK Hynix's sales fell by more than 26%, and Micron's sales fell by more than 27%.

In contrast to the significant decrease in demand for data centers, personal computers, and mobile devices, the demand for high-performance chips for electric vehicles is growing rapidly. This may also be one of the reasons why storage manufacturers are turning their attention to automotive semiconductors. On the other hand, with the popularization of smart cars, the demand for memory in cars is also increasing. The most common definition of smart cars is "smartphones with four wheels." In the development of smartphones over the years, the increasing memory of mobile phones is a personal experience for many people. Social software, games, and others all occupy large memory. From this point of view, the memory capacity configured for smart cars will only increase, and this is an irreversible trend. According to Micron's estimation, fully autonomous driving vehicles require 30 times and 100 times the DRAM and NAND needed for vehicles driven by humans.As the world's leading memory manufacturer, Samsung's recent efforts in the automotive semiconductor field are evident. Samsung Electronics predicts that by 2030, automotive semiconductors will grow alongside server and mobile device chips to become the three major types of chips. Therefore, it has set a goal to occupy the first position in the automotive memory market by 2025, planning to meet the demand for high-performance automotive semiconductors by providing next-generation memory solutions such as LPDDR5X and GDDR7 chips.

Samsung introduced the industry's first automotive UFS solution in 2017, and at the end of last year, Samsung began mass-producing automotive memory. The product lineup includes a 256GB PCIe Gen3 NVMe ball grid array (BGA) SSD specifically for infotainment systems, 2GB GDDR6 DRAM and 2GB DDR4 DRAM, and 2GB GDDR6 DRAM and 128GB Universal Flash Storage (UFS) specifically for autonomous driving systems. As for another major Korean memory manufacturer, SK Hynix, it established an automotive team in 2016, focusing on automotive DRAM. According to recent reports from Business Korea, like Samsung, SK Hynix has also turned its attention to automotive semiconductors.

However, when it comes to the current strength of automotive DRAM, Micron Technology naturally stands out. With more than 30 years of experience in automotive-specific chips, Micron Technology has a high market share of nearly 50% in the automotive DRAM field, thanks to its geographical advantages, long-term cooperation with European and American Tier-one car manufacturers, and a complete range of products (from the most traditional DDR to DDR4, LPD2 to LPD5 and GDDR6, to NAND, NOR Flash, and MCP).

As a top automotive storage supplier, Micron is very optimistic about the future automotive market. It estimates that by 2025, the annual growth rate of DRAM in the automotive market will reach 40%, and NAND will be 49%. At the beginning of last year, Micron launched LPDDR5 memory specifically for automobiles, with a 50% increase in data access speed and an energy efficiency improvement of more than 20%. It is the industry's first automotive memory to meet the ASIL safety level D requirements. In November this year, Micron officially released the world's most advanced 1β technology node DRAM. Although it is currently only sampling to some smartphone manufacturers and chip platform partners for verification, Micron also emphasized that it will mass-produce the 1β node in other applications such as industrial and automotive, embedded, and data centers within the next year.

In addition, Taiwan's Nanya Technology and Huabang Electronics are facing the automotive market with diversification. Nanya Technology has a complete product combination from DDR to DDR4, LPSDR to LPDDR4X, which can be used, and the yield rate is relatively stable for the time being. Huabang has been deeply involved in the automotive field for more than 10 years, and its NOR Flash and niche DRAM can stably supply to the world's top car manufacturers. The D20 process products are aggressively entering the automotive field, and a series of certifications are expected next year.

Huabang's General Manager, Chen Peiming, recently emphasized that Huabang will actively enter the automotive market, which is more optimistically viewed by the market. According to him, Huabang currently accounts for about 20% of the Nor Flash market, including the industrial control field, and will further develop the automotive DRAM field in the future. The Taichung factory has already obtained certification from related customers, and the Kaohsiung factory is actively preparing for certification. These steps will be very important for entering the automotive electronics market.

Wanghong Electronics is also striving for automotive chips. Wanghong Electronics started to expand into the automotive electronics market in 2009 and currently has a global shipment of more than 440 million code flash memories. Its automotive NOR flash chips have entered several chip manufacturers, including NXP, TI, NVIDIA, STMicroelectronics, and Qualcomm. It is expected that by 2023, each luxury car model will use Wanghong's chips, becoming the leader in automotive NOR Flash. Although affected by the overall environment, Wanghong's capital expenditure in 2022 was revised from the original 16 billion yuan to 10.6 billion yuan, but Wanghong's future capital expenditure will focus on NOR Flash applications, striving to maintain stable prices in the fourth quarter and 2023.

Although many memory manufacturers have started to turn to automotive semiconductors, it is not easy to do well in automotive-grade chips. For example, due to the long service life of automobiles, which is often more than 10 years, the maintenance of the automotive storage product line and the durability requirements are much higher than general commercial products. In addition, to adapt to the different extreme climates of various countries, the temperature tolerance of automotive memory needs to have a higher critical value to avoid sudden failures during driving, which will bring high production difficulty and high production cost challenges to automotive DRAM.

Will pure car manufacturers also become the target of wafer foundry competition?

The automotive track can be said to be a new track that wafer foundries are actively deploying at the forefront, especially when consumer electronics are shrinking. The most popular recent event is the competition between TSMC and Samsung for Tesla's orders.The cause of the matter is that TSMC's 5-nanometer wafer factory being built in Arizona, USA, is about to be completed. Foreign media reports that one of the most important customers of this wafer factory is the electric vehicle leader Tesla, and it may also be the largest order for TSMC's factory in the United States. TSMC will manufacture the new generation of fully automatic driving assistance (FSD) chips for Tesla, using the 4/5nm process technology, and Tesla is expected to become one of TSMC's top 7 customers in 2023. If the news is true, then Tesla will become the first pure electric vehicle manufacturer to appear among TSMC's main customers.

It should be noted that in the past, TSMC's top 7 customers were mostly brand manufacturers, IC design companies, and IDM factories, and pure car manufacturers were the first case. Although Tesla and TSMC have not responded to this news, it must be admitted that TSMC's recent offensive in the automotive field is very fierce. In addition to the 82% year-on-year increase in TSMC's automotive semiconductor wafer output pointed out by Morgan Stanley Securities in the third quarter, TSMC's automotive electronics revenue in the third quarter is also considerable. The financial report data shows that TSMC's automotive electronics revenue accounted for about 5% in the third quarter of this year, and the related revenue increased by about 15% quarter-on-quarter, ranking in the top three applications in terms of quarter-on-quarter growth. Legal persons estimate that TSMC's automotive electronics revenue exceeded $1 billion in the third quarter of this year.

In the field of MCU, TSMC's automotive MCU has occupied about 70% of the market share, and the main suppliers of MCU such as Infineon, ST, NXP, TI, and Renesas Electronics use TSMC for OEM manufacturing; in terms of capacity planning, TSMC's Nanjing and Japanese production lines may be used for automotive wafer production.

In the news of Tesla ordering TSMC, the former can have more advanced manufacturing processes, and the latter can have a considerable order, while Samsung may become the only victim of this news. As the world's second-largest foundry after TSMC, Samsung is the main OEM partner for Tesla's previous generation of fully automatic driving chips, Hardware 3.0, mainly using the 14nm process technology.

At the end of last year, there were sources who revealed that Tesla and Samsung Electronics' OEM department started chip design and sample production from the beginning of 2021. Finally, Tesla decided to outsource the HW 4.0 autonomous driving chip to Samsung, and Samsung will produce it at its Hwaseong factory in South Korea using the 7nm process technology. However, after a year, there was news that Tesla would switch to TSMC as the main supplier, and Samsung would mainly provide production of the previous generation of old chips and memory support, which should be a considerable blow to Samsung.

After all, from the industry's estimates, Tesla's order volume is considerable. The industry estimates that Tesla's production scale will start from 3 million vehicles next year based on Tesla's production plan. Looking at the design of two chips for the fully automatic driving chip (one main and one backup), if it is concentrated in TSMC with advanced packaging and other designs, the order volume for TSMC is estimated to reach nearly 15,000 pieces, and it is growing rapidly. From this point of view, as the scale of the smart car market continues to expand in the future, those who develop their own chips may also hope to become the target of wafer foundries.

To get back to the point, although it is still unknown whether Samsung will really lose this order from Tesla, cars are a hot track now, and Samsung will not miss it in the field of memory chips, and it is even more so in the foundry market. In October, South Korean analysts pointed out that Samsung plans to invest in building a new wafer factory in Europe, and its target customers are the automotive electronic semiconductor needs of Europe. At the same time, Samsung also shared its willingness to strengthen its automotive semiconductor business at the technical forum held a few days ago.

At the 2022 Foundry Forum, Samsung's wafer foundry business division also disclosed a plan to increase the number of mature and specialized processes in wafer foundry by more than 10 by 2024, and the increased capacity will be 2.3 times that of 2018. This is undoubtedly good news for car manufacturers who are seriously short of mature chips.

Of course, in addition to TSMC and Samsung, other wafer foundries are also actively deploying. UMC has confirmed that automotive chips will be one of the key areas and main axes of its focus on special processes; World Advanced Automotive Electronics continues to introduce a number of process technologies and put them into mass production, and has entered the supply chain of international car manufacturers; GlobalFoundries will continue to expand the production capacity of automotive chips; Huahong enters the automotive-grade chip market; Jinghe accelerates automotive certification...As for why wafer foundries are actively deploying in the automotive chip track, the article "Wafer Foundries, Aiming at a New Track" summarizes the reasons into three aspects: First, the automotive market has a large increment, and the production capacity is continuously tight; second, the industrial chain model is adjusted; third, after the "chip shortage tide," the automotive industry chain is reshaped. However, this may also be inseparable from the overly complex automotive supply chain. As mentioned above, automotive chips from wafer foundry investment production to the terminal market require a long time, and wafer foundries can only respond to the subsequent demand recovery and avoid the loss of a chip shortage by deploying ahead of time.

Sealing and testing manufacturers, local enterprises accelerate the layout of automotive packaging

From the perspective of the industrial chain, the impact of the overall environment on sealing and testing factories is not small, and the inventory correction of many manufacturers continues to the first half of next year, and the capital expenditure plan for next year is reduced. However, even so, they are still optimistic about the continuous and stable demand for automotive and industrial control, and the financial director of the leading sealing and testing company, Day Moon, Dong Hongsi, expects that the automotive performance of Day Moon this year is expected to grow by more than 50%, and the automotive and network communication applications will continue to be strong in the first quarter of next year.

In November, Day Moon invested 300 million US dollars to build a new factory in Malaysia, which is expected to be completed in 2025. Day Moon emphasized that the main reason for building a new factory in Malaysia is to cater to the development of 5G, artificial intelligence, high-performance computing, and automotive electronics. In addition, Huanxu Electronics, a subsidiary of Day Moon, is also actively expanding its automotive electronics business, with the goal of challenging a revenue of more than 1 billion US dollars related to automotive electronics by 2024. The semiconductor of Day Moon is also laying out the advanced packaging of chiplets, focusing on artificial intelligence and automotive.

Another major sealing and testing factory, Jingyuan Electronics, also affirmed the prospects of the automotive market. Its legal person believes that the demand for consumer electronics is still not visible, and the demand for network communication has also slowed down since the third quarter, and only automotive is basically stable. Affected by the overall market, Jingyuan Electronics expects the performance in the fourth quarter to decline by a single-digit percentage, but it also expects the annual revenue to increase by a single-digit percentage (7~9%), and will continue to set a new high.

As another major sealing and testing battlefield, mainland manufacturers are also accelerating the layout of automotive packaging. For example, Tongfu Microelectronics revealed the latest news that it has cooperated with international giants in automotive unmanned driving chips, and 5-nanometer chip packaging products have been developed and gradually mass-produced. Tongfu Microelectronics has been in the automotive electronics field for 20 years, and in the first half of this year, it also obtained cooperation opportunities with automotive electronics companies such as Infineon, NXP, STMicroelectronics, Bosch, BYD, Silan Micro, and Hefei Jiefa.

As a leading sealing and testing manufacturer on the mainland, Changdian Technology stated at the performance briefing on November 17 that it has continued to increase production capacity in the fields of 5G communication, high-performance computing, automotive electronics, and high-performance storage, especially in the automotive electronics industry to make up for the production capacity gap and in the field of chiplet technology. Earlier, Changdian Technology planned to accelerate the product structure from consumer to automotive electronics, industrial control class application structure optimization in the second half of the year, and the capital expenditure in the testing field in 2022 increased significantly compared to last year, and it will also introduce more 5G RF, automotive chip, high-performance computing chip testing business.

In the field of automotive electronics, Changdian Technology has established a special automotive electronics business department. In the first half of this year, its subsidiary, Xingke Jinpeng's Korean factory, obtained several automotive product module development projects for European, American, and Korean automotive customers. The mainland factory has completed the layout of IGBT packaging business, and has the capability of packaging and testing SiC and GaN chips, and has shipped the third-generation semiconductor packaging and testing products for automotive charging piles. In the second half of the year, Changdian Technology announced the completion of a 1 billion yuan capital increase to its wholly-owned subsidiary, Changdian Technology Management Co., Ltd., aiming to promote the development and verification of high-end packaging and automotive chips.In addition, Huatian Technology's automotive electronic packaging products have also been mass-produced. The latest financial report from Huatian Technology points out that the demand for consumer electronics has weakened, and the order volume and capacity utilization rate of packaging and testing have declined, resulting in short-term performance pressure. However, advanced packaging and automotive electronics will provide long-term growth momentum. It is understood that the automotive electronic products packaged by Huatian Technology mainly involve power management, MCU, MEMS, CIS, SOC, etc.

In conclusion, although computers and communications are still the main driving forces in the integrated circuit market, the proportion of automotive applications is relatively low. However, looking to the future, the prospects are undoubtedly huge. IDC reports show that the scale of China's new energy vehicle market will reach 15.98 million units in 2026, with a compound annual growth rate of 35.1%. The main reason why chip manufacturers are turning to automotive semiconductors is to deploy in advance to cope with the prosperous future. As for the potential oversupply problem that may be faced in the future, the entire semiconductor industry has a cyclical characteristic. As long as the strength is strong, there is no need to fear the unknown future.