ON Semiconductor Talks About Strategic Transformation and Future Outlook

At the BofA Securities Global Technology Conference (BofA Securities) held on June 5, 2024, ON Semiconductor CEO Hassane El-Khoury and CFO Thad Trent had an in-depth discussion with Vivek Arya of Bank of America Securities, sharing the company's strategic transformation in recent years and future outlook, showing how ON Semiconductor has transformed from a deeply cyclical company to a growth company with multiple product cycles.

Corporate transformation and fabless strategy

Hassane El-Khoury and Thad Trent both joined ON Semiconductor more than three years ago. During this period, the company has undergone a significant transformation from a deeply cyclical company to a cyclical growth company. El-Khoury emphasized that the company has made a number of structural changes, including optimizing its product portfolio and divesting high-volatility businesses, making the company's results more sustainable and predictable.

To achieve this goal, ON Semiconductor abandoned $475 million of high-volatility businesses and divested four wafer fabs. This move helped the company increase its gross margin from 29% to 31% in the past to 45% today, while maintaining a manufacturing utilization rate of 65%. Through these structural changes, the company established a new baseline that enables it to quickly increase utilization and revenue when the market recovers.

The role of the East Fishkill fab

The East Fishkill fab plays a key role in ON Semiconductor's wafer strategy. The company achieved capacity increases by transferring IGBT and silicon power products from Korean fabs to East Fishkill while converting production from 8-inch to 12-inch. In this way, ON Semiconductor has significantly increased its silicon carbide production without building a new fab.

Thad Trent added that the East Fishkill fab had a certain dilution effect on gross profit margin at the beginning of the acquisition, but by improving the cost structure and cycle time, the company has reduced costs to the same level as other fabs. In the future, as GlobalFoundries gradually withdraws from the foundry business, East Fishkill's gross profit margin will further increase.

Challenges and opportunities in industrial business

ON Semiconductor's industrial business covers a wide range, from traditional industrial applications such as power tools and appliances to structurally growing areas such as renewable energy, energy storage and factory automation. El-Khoury pointed out that the traditional industrial business began to weaken in the fourth quarter of 2022, but has now stabilized. Although some areas still show signs of weakness, the overall market shows a stable trend.

As for the future market bottom, El-Khoury said that we need to see a rebound in demand and order patterns, as well as a recovery in terminal demand. Only after these conditions are met can the market recovery be confirmed.

Growth and Outlook of the Automotive Business

Although vehicle production is basically flat in 2023, ON Semiconductor still has significant growth in the automotive business. In particular, in the field of silicon carbide, although the growth rate may be lower than expected, it still maintains growth. El-Khoury pointed out that there is still huge room for improvement in the penetration rate of silicon carbide in electric vehicles. The current market penetration rate is only 25%, which provides huge opportunities for future growth.

Thad Trent emphasized that the penetration rate of the low-priced electric vehicle market has also brought new opportunities to the company. ON Semiconductor is able to provide a full range of products from high-end to low-end to meet different market needs.

The potential of AI and data center markets

Although ON Semiconductor has a low exposure in the AI ​​and data center markets, the company has developed relevant strategies. El-Khoury mentioned that the company has launched a new generation of silicon and silicon carbide products and will expand to analog mixed-signal controllers and drivers in the future. These products will help the company gain more market share in the AI ​​and data center markets.

Last words

Through a series of structural changes and strategic adjustments, ON Semiconductor has transformed from a deeply cyclical company to a cyclical growth company. The company has made significant progress in manufacturing utilization and gross profit margin, and has enhanced its market competitiveness by optimizing its product portfolio and fabless strategy. In the future, the company will continue to explore new growth opportunities in areas such as industry, automobiles, and AI data centers.

“We are managing the company according to an L-shaped recovery structure. If the market recovers, our utilization, gross margin and revenue will all go up. If there is no recovery, we are also prepared to respond,” said Hassane El-Khoury.