Morgan Stanley is bearish on automotive semiconductors, with ON Semiconductor bearing the brunt

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The correction in the automotive market is widely known to the market. Morgan Stanley Securities has made another move, pointing out that this wildfire has spread to the automotive semiconductor field, and reiterated its bearish view on US stocks ON Semiconductor and Sensata Technologies. Morgan Stanley continues to take a cautious defensive stance on the semiconductor industry, especially as the market's expectations in some areas are still too high, and it has not carefully viewed the risks brought about by weakening demand and inventory reduction.

Morgan Stanley Securities analyst Craig Hettenbach pointed out that although market sentiment towards the automotive supply chain is already quite negative, some suppliers and OEMs have found that demand is worse than expected, and companies that are slower to reset their outlook expectations are more vulnerable to the negative impact of declining orders.

According to data released last week by Continental, a large automotive company, fourth-quarter production is expected to fall 2-3% year-on-year. Looking further, even during the downturn in 2015, quarterly car production fell by a maximum of 1% year-on-year, meaning that the industry outlook this time may be worse than in the past.

Legal persons pointed out that observing the information disclosed in Shengli's financial report last year, its largest customer is ON Semiconductor. Fubon Investment Consulting pointed out that Shengli was affected by the inventory adjustment of customers and continued to adjust its production capacity. In addition, the impact of the Sino-US trade war is getting greater and greater. Therefore, it gave Shengli a "sell" investment rating and estimated that the reasonable share price was cut to 120 yuan.

In October this year, Morgan Stanley downgraded the semiconductor industry for the first time in three years and slashed the target prices of seven international chip manufacturers, triggering a massive sell-off of semiconductor stocks by foreign investors. According to them, given the slowdown in the automotive and industrial sectors, the semiconductor industry's fourth-quarter earnings may be affected. Morgan Stanley cut the earnings and target prices of seven companies, including Amphenol, Analog Devices, Maxim, Microchip, Qorvo, Skyworks, and Tyco Electronics.

Morgan Stanley said that the US-China trade war has brought negative impacts to the automotive industry. First, on July 6, the United States imposed a 25% tariff on Chinese imports worth $50 billion. Then, China retaliated by imposing a 25% tariff on 106 products including automobiles originating from the United States. On July 10, Trump announced that he would impose tariffs on an additional $200 billion worth of products. After three rounds of exchanges, automobile products were included in the list. The escalation of the trade war may have a greater impact. They believe that the US-China trade friction has already affected the automotive industry. Morgan Stanley analyzed that the three major impacts are the decline in manufacturers' gross profit, the reduction in consumer demand, and the difficulty in expanding market share.

In recent years, global automobile production has increased from 82.13 million in 2012 to 97.04 million in 2017. According to the China Information Industry Network, from 2018 to 2022, the global automobile sales will have a compound annual growth rate of about 3.2%, and it is expected that by 2022, global automobile sales will increase to 114 million. At the same time, China's automobile industry has developed rapidly, with a growth rate at the forefront of the world. The output has increased from 19.3 million in 2012 to 29 million in 2017, with an average annual compound growth rate of 8.5%. It has become the world's largest automobile manufacturer and consumer. In 2017, China's automobile production accounted for about 29.8% of the world's total production. It is expected that by 2022, China's automobile production will increase to 39.7 million, accounting for about 36.6% of the world's production, with an annual compound growth rate of 6.5%.

The automotive semiconductor market is booming, setting off a global battle between established chipmakers and emerging companies. Mobile phones are still the semiconductor industry's highest-selling market, but growth has flattened. In contrast, the value of the automotive semiconductor market is rising rapidly. According to Semico's forecast, the automotive semiconductor market will grow to $73 billion by 2023. Below, Huaxin Research Institute analyzes key areas such as automotive SoC chips, power semiconductors, and sensors.

1. Automotive SoC chips

In the next few years, the sales growth rate of electric vehicles is expected to exceed 50%. According to EV sales statistics, global electric vehicle sales exceeded 1.22 million in 2017, a year-on-year increase of 58%. In 2018, electric vehicle sales accelerated significantly. From January to April, global electric vehicle sales reached 435,500, an increase of 68.18% over the same period last year, and sales showed an accelerating growth trend. With the transformation of automobile electrification, the introduction of government policies and the development of technology, the development of autonomous vehicles will be in full swing. In the next decade, the demand for automotive-grade system-on-chip (system-on-chip, SoC) will increase significantly. In 2017, the global automotive-grade system-on-chip market reached a market value of US$12 billion. It is estimated that the compound annual growth rate (CAGR) of the global system-on-chip market will reach 7.7%, and the market value of the market is expected to reach US$26.8 billion in 2028.

1. Increased R&D and the transformation of automobile electrification will drive the application of automotive-grade SoCs

Mainstream car companies in the industry are investing in the research and development of autonomous vehicles to meet user needs and achieve a seamless riding and driving experience. Advanced technologies such as voice recognition, audio and video perception, imaging, GPS, radar, advanced driver assistance and safety, integrated circuit LED cars, headlights, etc. all play an important role in automotive automation (autonomous driving), and the realization of the above functions cannot be achieved without the support of system-on-chip. With the improvement of electric and hybrid vehicles, the application of automotive-grade system-on-chip will also increase. In-vehicle cellular network technology and in-vehicle communication technology are important technologies used for autonomous driving vehicle networking.

2. Government support and incentives for electric vehicle production will also strengthen the development of the automotive-grade SoC market

Governments around the world have formulated various measures to vigorously promote the mass production of electric and hybrid vehicles, which has attracted many investment institutions around the world to invest heavily in the semiconductor industry and related integrated chip fields, further promoting the growth of the global automotive-grade system-on-chip market.

3. The demand for luxury commercial vehicles continues to grow, creating good investment opportunities for automotive-grade SoC manufacturers

Although North America, Asia Pacific, Western Europe and other regions have imposed import tariffs on electronic products and consumer electronics, which has affected the sales of semiconductors and related integrated chips in the above regions, thus limiting the development of the global automotive-grade system-on-chip market. However, the current situation of this market also contains opportunities. The demand for luxury commercial vehicles in North America, Europe and Asia Pacific continues to grow, providing huge market opportunities for automotive-grade system-on-chip manufacturers. Volvo and Daimler-Chrysler are committed to providing a new driving experience for their commercial vehicles and integrating system-on-chips for their models.

By application, in-vehicle infotainment systems will dominate the automotive SoC market, accounting for 63% of the market share. IHS predicts that the advanced driver assistance system (ADAS) market segment will have the highest CAGR between 2018 and 2028, with global ADAS penetration increasing to 30% in 2020. The penetration rate in Europe is even higher, reaching 86%, due to automotive regulations. Accordingly, the global ADAS market continues to expand. According to Grand View Research, the global ADAS market size will grow from $14.15 billion in 2016 to $67.43 billion in 2025, with a CAGR of approximately 19%.

2. Power Semiconductors

Benefiting from policy support and sales subsidies, the annual compound growth rate of global and Chinese new energy electric vehicle sales is expected to reach 32%, which will drive the rapid development of the relevant semiconductor industry chain. Most of the new semiconductors used in new energy vehicles are power semiconductors. Infineon estimates that the power semiconductor market will grow by about 8% in the next 3-5 years. According to McKinsey statistics, the semiconductor cost of pure electric vehicles is US$704, which is 1 times the US$350 of traditional vehicles, of which the cost of power semiconductors is as high as US$387, accounting for 55%. Compared with traditional vehicles, the new semiconductor costs of pure electric vehicles include power device costs of about US$269, accounting for 76% of the new costs.

1. IGBT has outstanding growth

The power generation and transmission process of new energy electric vehicles is quite different from that of gasoline engines, requiring frequent voltage conversion and DC-AC conversion. In addition, the high demand for mileage of pure electric vehicles makes the demand for power management more refined, and the demand for power discrete devices such as IGBT, MOSFET, and diodes is much higher than that of traditional cars. All of the above have greatly driven the increase in demand for power devices in automotive electronic systems.

Power semiconductors are the second largest core component of electric vehicles after batteries in terms of cost. With the popularization of new energy vehicles, IGBT, as an emerging power device, will see explosive growth.

IGBT is widely used in automobile motor control systems. Currently, automobile motor control systems require dozens of IGBTs. Taking Tesla as an example, Tesla's rear three-phase AC asynchronous motor uses 28 IGBTs per phase, a total of 84 IGBTs, plus IGBTs in other parts of the motor, Tesla uses a total of 96 IGBTs (the dual motors also have 36 IGBTs in the front motor). Calculated at a price of $4-5 per unit, the value of the dual-motor IGBT is about $650.

2. The on-board charger is used in large quantities

Electric vehicle on-board charger (OBC) is mainly used to ensure the safety of electric vehicle power batteries and automatically charge batteries. According to the data provided by the battery management system (BMS), the charger can dynamically adjust the charging current or voltage parameters, perform corresponding operations, and complete the charging process.

As a power electronic system, the vehicle charger is mainly composed of a power circuit and a control circuit. For the power circuit, the DC/DC converter composed of a transformer and a power tube is an important component. For the control circuit, the controller is the core, which is used to realize communication with the BMS and CAN, and control the power circuit to charge the lithium battery pack according to the three-stage charging curve. When the vehicle charger is connected to the AC power, it does not immediately output the power to the battery, but first collects, analyzes and judges the battery status through the BMS battery management system, and then adjusts the charging parameters of the charger.

With the popularity of electric vehicles, the use of car chargers is increasing, and there is a great demand for related power devices and power management ICs, which are not available in traditional fuel-powered vehicles. Its market development prospects cannot be ignored.

3. China’s new energy vehicle sales account for more than half of global sales

China is one of the most important markets for new energy vehicles. Against this backdrop, international semiconductor giants have established strategic partnerships with domestic automakers. For example, in March 2018, SAIC Motor and Infineon Technologies established a joint venture, SAIC Infineon Semiconductor, with SAIC Motor holding 51% and Infineon Technologies holding 49%. SAIC Infineon Semiconductor focuses on IGBT module packaging business, aiming to serve SAIC Motor and other domestic new energy vehicle manufacturers. The first phase of the project will invest 1.6 billion yuan, and is expected to achieve an annual production capacity of 1 million sets in the next 2-3 years.

In addition, not long ago, Wingtech Technology has acquired the controlling rights of Nexperia Semiconductor. Nexperia originated from NXP's standard product business and has deep accumulation in the field of automotive power semiconductor devices. It has two wafer fabs (6-inch and 8-inch) and three packaging and testing plants. Its sales in 2017 exceeded US$1.3 billion. More than 50% of the company's products are used in the automotive field. According to the plan, Nexperia is expected to expand production in mainland China in the future, which can be said to be a shot in the arm for the development of my country's local automotive power semiconductor industry.

In the traditional automotive electronic semiconductor market, foreign manufacturers hold the initiative with their technological advantages and stable supporting relationships, and domestic manufacturers find it difficult to make breakthroughs. Foreign acquisitions have become a shortcut for domestic manufacturers to get involved in the field of automotive electronic semiconductors. In addition to Ansem Semiconductor, manufacturers such as NavInfo and Kuangda Technology have quickly entered the automotive semiconductor field through acquisitions. While electrification has brought new demand to the automotive semiconductor market, it has also provided many opportunities for domestic automotive semiconductor manufacturers. At present, domestic manufacturers have begun to lay out in new energy vehicle power semiconductors and smart car chips. Representative manufacturers of power semiconductors include BYD, CRRC, Silan Microelectronics, etc., while representative companies of smart car chips include Cambrian and Horizon.

Comparing the competitive landscape of automotive semiconductors and the development history of foreign manufacturers, Chinese domestic manufacturers have two main development paths: one is to acquire technology and customer resources through acquisitions in the traditional chip field; the other is to focus on new energy vehicle power semiconductors and smart car chips.

3. Sensor

Automotive sensors are the core components of the perception layer and are found throughout the vehicle. The number of sensors a car is equipped with directly determines its level of intelligence. At present, ordinary family cars are equipped with about dozens of sensors, while high-end cars are equipped with more than 100. Overall, the global automotive sensor market is currently controlled by Tier 1 manufacturers such as Bosch, Denso, and Sensata.

In a few niche areas, Chinese manufacturers have already occupied a place with advantages such as high cost performance and customized services. For example, Audiwei's UPA ultrasonic sensor devices have a global market share of 9%, and Sunny Optical's automotive camera lenses have a global market share of over 30%.

1. Camera/millimeter-wave radar/lidar technology innovation is active, and the market size is growing rapidly

Among automotive sensors, the technology and application of MEMS sensors and ultrasonic radars are relatively mature, while cameras, millimeter-wave radars and lidars are experiencing active technological innovations as autonomous driving technology develops rapidly. It is estimated that from 2016 to 2025, the market size of MEMS sensors and ultrasonic radars will grow at a compound annual growth rate of 5% and 10% respectively, while the market size of cameras, millimeter-wave radars and lidars will grow at a compound annual growth rate of 26%, 22% and 48% respectively; the overall automotive sensor market will reach US$61.5 billion (18% CAGR) by 2025, with broad room for future growth.

MEMS sensors are an important part of traditional automotive electronic systems. Among them, pressure sensors, accelerometers, gyroscopes and flow sensors are the most commonly used MEMS sensors in automobiles, accounting for 99% of the total share of automotive MEMS systems. Ultrasonic radar is mainly used for reversing radar and close-range obstacle monitoring in automatic parking systems. Reversing radar has been transferred from high-end models to mid- and low-end models, with a high penetration rate and a pre-installation rate of about 80%; automotive cameras can be divided into front-view, surround (side view + rear view) and interior view cameras according to the coverage of the field of view. Although binocular or multi-view cameras have higher ranging accuracy and wider viewing angles, they have not yet been mass-produced due to their high cost and high requirements for accuracy and computing chips. At present, the monocular camera solution led by Mobileye is the mainstream of the market. According to the different ways of radiating electromagnetic waves, millimeter-wave radars can be divided into pulse type and continuous wave type. At present, frequency-modulated continuous wave in the continuous wave type is the mainstream solution. In recent years, benefiting from the boost of autonomous driving, millimeter-wave radars have attracted widespread attention and set off a global research and development boom.

2. Domestic manufacturers of ultrasonic radar have successfully made a breakthrough in some areas, and the prospect of domestic substitution is promising

The global ultrasonic radar module market is dominated by Bosch and Valeo, and domestic manufacturers include Taiwan Tongzhi Electronics, Hangsheng Electronics, Haowen, Huichuang Electronics, Shangfu Electronics, etc. The ultrasonic sensor device market is dominated by Bosch, Japan Murata Manufacturing, and Nicera, and domestic manufacturers are represented by Audiway.

The development of ultrasonic radar is already quite mature, and the technological gap between domestic manufacturers and foreign giants is not large. However, although there are many domestic ultrasonic radar manufacturers, most of them have not been able to enter the original equipment market. On the one hand, the stability and reliability of domestic manufacturers' products need to be further polished, and on the other hand, the Tier 1 suppliers of vehicle manufacturers are relatively stable and have a long verification cycle.

With cost-effective products and fast and timely services, the UPA products of Tongzhi Electronics, Haowen, and Audiway have successfully entered major domestic car manufacturers. Tongzhi Electronics' UPA ultrasonic radar has the largest share in the Asian OEM market, with customers including Shanghai GM, Shanghai Volkswagen, Dongfeng Nissan, SAIC, Chery, Geely, etc. Haowen's UPA ultrasonic radar has successfully entered customers such as Shanghai Volkswagen, FAW-Volkswagen, Geely Automobile, Lifan Automobile, and Shanghai GM Wuling. In 2016, Audiway's UPA ultrasonic sensor device sales reached 26.27 million. According to the company's prospectus, its share of the global market is about 9%. In addition, the company's APA ultrasonic sensor has also been launched on the market in 2016. Tongzhi Electronics and Haowen are Audiway's first and third largest customers in 2017, accounting for 24% and 5% of its revenue respectively.

3. Automotive-grade camera modules are dominated by overseas manufacturers, and domestic parts have made breakthroughs

Considering safety and complex driving environments, automotive-grade cameras have strict performance requirements in terms of high temperature resistance, shock resistance, anti-magnetic and stability. The average price of an in-vehicle camera module is over 500 yuan, while the average price of a similar mobile phone camera is less than 100 yuan.

At present, the automotive camera module market is mainly divided up by overseas manufacturers, including Japan's Panasonic, Fujitsu Ten, Sony, Europe's Valeo, Continental, etc., almost all of which are the world's leading Tier 1 suppliers. Domestic mobile phone camera industry chain manufacturers such as Sunny Optical, O-Film, and Jingfang Technology are actively developing automotive camera module business. The upstream of camera modules mainly include CMOS image sensors (CIS, CMOS Image Sensor) and lens suppliers. In terms of automotive camera components, OmniVision Technologies (mergers and acquisitions) and Sunny Optical (basic extension of the mobile phone industry chain) have achieved domestic breakthroughs.

Compared with CCD, CMOS image sensors are more suitable for high-speed driving and actual driving environments with drastic changes in light conditions due to their high technical barriers. Due to its high technical barriers, most of the market share of CIS is also controlled by foreign manufacturers. The top five global automotive CIS manufacturers, ON Semiconductor, OmniVision (Chinese-controlled), Pixelplus, Sony and Panasonic, have a combined share of nearly 90%. Camera lenses are a traditional advantage industry for Chinese companies. Taiwan's Largan Precision, Sunny Optical, and Yujing Optoelectronics are currently at the forefront of global camera lens companies. According to relevant Sunny Optical, since 2012, Sunny Optical has ranked first in global automotive lens shipments, with a market share of more than 30%. Downstream of camera modules are automotive camera solution providers, whose core technologies are often visual algorithms or visual processing ASIC chips. Mobileye is the global leader in automotive camera solutions; domestic related start-ups include MINIEYE, Horizon Robotics, Smart Eye, Tiantong Vision, Suzhou Zhihua, Zongmu Technology, Forward Qichuang, Chuanglai Technology, Maxieye, etc.

With the rise of autonomous driving technology, emerging high-growth fields such as vehicle-mounted cameras, millimeter-wave radars, and lidars have broad market space and active innovation, among which a large number of Chinese startups have emerged. In these emerging fields, there are many different technical routes, and technical standards have not yet been monopolized by foreign manufacturers. At the same time, with the combined effect of factors such as the good domestic entrepreneurial environment, the participation of outstanding talents at home and abroad, and the accumulation of the electronic industry chain in recent years, Chinese companies are expected to break through.

IV. Summary

Semiconductor components are at the core of automotive electronics, including vision-based graphics processors (GPUs), application processors, sensors, and key components such as DRAM and NAND flash memory that drive automotive innovation. Depending on the car manufacturer and model, a modern car may require up to 8,000 chips, and this number will only increase as self-driving cars become more popular. As the complexity of cars increases, the demand for automotive semiconductors is bound to grow steadily, so the automotive sector is a new engine for the semiconductor industry to drive its long-term development. Although automobiles only account for about 10% of the entire semiconductor industry compared to other fields, Gartner predicts that by 2020, the profit growth rate of the automotive semiconductor business segment will be twice that of the global semiconductor market.

There is no doubt that the rapid growth of the automotive semiconductor market will bring huge profits to automotive semiconductor manufacturers. However, there is still a gap for Chinese semiconductor companies to get a share of the pie. For example, BYD has joined hands with Shanghai Advanced Semiconductor Company to develop new energy vehicle chips. The two parties will make full use of their respective advantages to "combine the core key technologies of IGBT with independent intellectual property rights and semiconductor chip manufacturing technologies, accelerate the pace of localization of IGBT chips for new energy vehicles, jointly promote the process of IGBT design and chip manufacturing, and improve China's IGBT industry chain. In 2016, SMIC acquired 70% of the shares of an Italian integrated circuit wafer foundry, and officially entered the global automotive electronics market with this acquisition... There are continuous positive signals in the field of domestic automotive chips, and a prosperous scene. However, we also need to face a cruel reality: compared with the advanced level of foreign countries, the gap in my country's automotive chip technology is still large.

However, Chinese chip manufacturers have "unique resource advantages", especially in autonomous driving processors and AI processors. For example, we had a market capacity of 28 million vehicles last year, which will grow to 42 million in the future. This allows us to understand the needs of Chinese consumers better than our international counterparts, understand China's road conditions better, and more accurately predict the behavior of pedestrians when crossing the road because we can collect more data. In addition, the high requirements of autonomous driving for edge computing, coupled with extremely broad application scenarios, determine that AI chips used in autonomous driving are an excellent breakthrough point for start-up chip companies. So far, among domestic companies, Horizon Robotics, Cambrian, NavInfo, Xijing Technology, and Senguo Technology have all released autonomous driving chip plans in 2017.

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