The impact of COVID-19 on the semiconductor supply chain has extended from consumer to automotive electronics. Since Q2 2020, many automotive electronics suppliers, such as NXP, Renesas and Microchip, have announced price increases for some key components. Some automakers in China even slowed down their car sales due to insufficient supply of these components in Q4 2020.

COVID-19 reduced automobile sales in H1 2020. The demand started recovering in H2 2020 in many regions but here, too, the pandemic proved to be a spoiler by impacting automotive electronic manufacturing. Furthermore, the limited capacity expansion of 8-inch semiconductor production in the past few years has intensified the shortage. In the short term, this has led to price increases. In the long term, this will transform the global automotive electronics ecosystem.

Automotive electronics’ quality requirement may be rigid and qualification process complicated, but the profit margins are stable and high. Besides, since its product lifecycle is long, it is always the target market for most semiconductor suppliers.

Outsourcing of production to foundry partners

The investment required for setting up an in-house advanced semiconductor manufacturing facility is not only huge but also risky. Further, the reliability testing, verification and qualification of automotive semiconductors may take a long time, affecting the short-term and long-term utilization rates of production plants. Also, both frontend and backend processes need to be optimally synchronized to develop competitive and high-quality products.

As a result, most automotive IDMs (Integrated Device Manufactures) have not set up any new fabs in the past three years and continue to increase the proportion of outsourced manufacturing to reduce production risk. For example, Infineon has decided to increase the foundry service percentage to 70% and 25% for logic and power components, respectively. Renesas has been reducing its fab capacity since 2011 and adding orders to TSMC to become a fab-lite IDM.

The top five automotive electronics companies – NXP, Infineon, Renesas, Texas Instruments and STMicroelectronics – were all affected by COVID-19 in H1 2020. The most affected semiconductor components were microcontrollers (MCUs) and power semiconductors.

Exhibit 1 Automotive Semiconductor Supply Chain

MCU

The major suppliers of automotive MCUs include Infineon, STMicro and NXP. Due to the impact of COVID-19 in Europe, the capacity utilization of these IDMs has not recovered. For example, STM’s capacity utilization is only 70%-80%. The most significant impact of the MCU shortage is on the Electronic Stability Program (ESP), also known as Electronic Stability Control (ESC), which is an essential part of the vehicle computer. In the fourth quarter, MCU delivery time for ESP products has been extended and prices increased.

In response to the growing demand for wireless connectivity, smart and electric vehicles, most of these companies outsource their MCU production to other foundries using 28nm and below technologies. NXP's technology in its fab is only 90nm, so it has to outsource most of its high-end production MCUs. NXP has also established a factory in Singapore with TSMC. However, TSMC and UMC are currently running at full capacity in almost all production lines. UMC has announced that it would increase the prices for its 8-inch products. Therefore, the MCU prices will continue to increase while the delivery time will get extended.

Power semiconductors

The demand for power semiconductors in the automotive industry continues to rise with the soaring electronic content in vehicles. The market for power semiconductors is expected to grow even further as ADAS (Advanced Driver Assistance Systems), electric and hybrid cars become more prevalent.

Power semiconductor devices are the core devices for power conversion, accounting for about 50% of the automotive semiconductor market. Their primary applications include inverters, voltage converters and gate drivers used to supply and regulate power systems.

IDMs’ in-house production facilities still dominate today’s power semiconductor production. However, outsourcing is increasing, especially for regular products. For example, Infineon is building a 12-inch power semiconductor factory while increasing outsourcing, which is expected to reach 15% in the next four years.

Short-term trends

1. Automotive semiconductor shortages may decrease automobile production in Q1 2021, especially in major car producing countries such as China and India, as the main supply of their automotive semiconductors comes from Europe, North America and South Asia, where production has slowed down due to COVID-19. At present, 88.5% of China’s automotive semiconductor MCUs are from other countries, and this number is even higher for India.
2. Usually, car manufacturing follows the JIT (just in time) inventory management system that allows the carmakers to keep low inventory. However, in an uncertain situation, every stakeholder in the ecosystem will try to increase inventory, thus worsening the component shortage.

Long-term trends

1. Automotive semiconductor production will increase to meet the growing market, either by expanding or migrating from the 8-inch to 12-inch fabs.
2. The increasing electronic content in vehicles will motivate major auto-producing countries to increase local production.

Conclusion

In the short term, the supply shortage of automotive semiconductors will continue till Q3 2021, but the price increase will continue till 2022.