BriefCASE: Automotive semiconductor industry sees long-term positive outlook

Over the past few years, the automotive semiconductor industry has navigated a dynamic landscape shaped by a myriad of factors. From pandemic-induced semiconductor shortages to regulatory export controls and ambitious global investment plans, these elements have profoundly influenced industry dynamics. Amidst this backdrop, the industry has demonstrated resilience and adaptability in response to evolving market conditions and technological advancements.

2023: Market followed the historic growth path

The automotive semiconductor market experienced a more-than 25% increase in revenue in both 2021 and 2022, demonstrating significant momentum. Subsequently, in 2023, the market continued its upward trajectory with an increase of 18.1%, reflecting a strong yet relatively slower pace compared to the gains recorded in the previous two years. Electrification, digitization, increased adoption of connectivity features, and automated driving all contributed to this heightened demand for semiconductor chips in the automotive sector.

The chip shortage paradoxically also contributed to inflating the automotive semiconductor sales in 2021 and 2022 because of panic buying. This resulted in high inventory level in the channels which have been a subject of concern for the past 18 months, with an anticipated inventory correction expected to eventually take place. In 2023, there were indications of this impending inventory correction within the automotive semiconductor market, particularly evident in regions such as Europe. This correction aimed to realign surplus inventory levels with actual market demand. From the market share data it is evident that the impact of the inventory correction was greater than anticipated in 2023 already.

In the mainland Chinese automotive sector, the shift towards electrification remains a driving force. Within this landscape, the power-discrete segment has notably gained prominence. A key development is the rise of captive production, with OEMs like BYD designing their own semiconductors, thereby bypassing traditional suppliers such as Infineon. The trend towards self-sufficiency, irrespective of whether an OEM utilizes its own fabrication facilities or partners with foundries, represents a significant shift in the market dynamics, challenging the established semiconductor supply chain. This evolution underscores the importance of OEMs in the semiconductor value chain and the potential impact on merchant suppliers.

2024: Potential reset year

Despite apprehensions surrounding a potential market downturn, the automotive semiconductor industry is poised to experience what analysts refer to as a "soft landing" this year. A "soft landing" describes a scenario where market adjustments occur gradually, preventing a sudden and severe contraction. Since inventory is not concentrated in 2024 — but started in 2023 already — the correction is not as brutal and the market is expected to retain a positive momentum reflecting a resilient response to the preceding inventory correction.

In 2024, the automotive semiconductor industry is projected to have the lowest revenue forecast in the past four years, at less than 4%. Next to the inventory burning, several additional factors contribute to this modest market expansion, including:

1. A change in the distribution of vehicle propulsion, with a reduction in the uptick of battery-electric vehicles (BEVs).

2. Aggressive price drop for some semiconductor categories, such as analog chips, as some suppliers with excess capacity reduce their price to increase their market share and to fill their fab. Additionally, new automotive semiconductor suppliers from mainland China are challenging both internal and global markets with their products.

In terms of key semiconductor markets, the rebound in memory markets is expected to be slow, despite the adoption of generative AI using higher bandwidth memory. However, silicon carbide-based (SiC-based) semiconductor solutions are expected to see increased adoption for the inverters and DC-DC converters — despite costing more than silicon IGBT (insulated-gate bipolar transistor). This is due to their improved energy transfer efficiency and last-mile performance.

2025 and beyond: A long-term positive outlook

There is a positive long-term outlook for the automotive semiconductor industry in 2025 and beyond; S&P Global Mobility forecasts that industry revenues will exceed $130 billion by 2029. After the inventory reset in 2023 and 2024, normalized demand from OEMs and Tier 1 suppliers is expected to drive the automotive semiconductor market forward in 2025.

Electrification is also expected to continue as a pivotal trend within the technology landscape, exerting a significant influence on the dynamics of the automotive semiconductor market with a turnaround expected for BEVs in 2025.

Most OEMs have further outlined plans to transition towards software-defined vehicles, prompting concurrent adoption of domain controllers, central computer architectures, and zonal controllers. As a result, modern vehicles are increasingly equipped with forward-looking hardware, such as sensor suites, computing, and communication components, intentionally over-engineered to accommodate future functionalities via OTA updates. This trend is expected to positively impact the demand for high-end System-on-Chips (SoCs) and DRAM and NAND memory chips.

Additionally, there is increasing demand for SiC-based semiconductors. As SiC-based technologies evolve and manufacturing processes improve — resulting in higher price erosion and an increase in SiC wafer size from 6" to 8" — their adoption rate is expected to increase. This will primarily be driven by lower-segment vehicles that did not previously consider SiC adoption due to costs.

Mainland China's push towards self-sufficiency of chips have positively impacted several regional semiconductor companies. Companies such as Horizon Robotics and Black Sesame are anticipated to expand their presence within the advanced driver assistance system (ADAS) sector with their bespoke semiconductor system-on-chips.

After a soft landing in 2024, S&P Global anticipates a robust market rebound in the coming years, supported by several factors including electrification, growing consumer preference for advanced features and functionalities, and the widespread implementation of Over-The-Air (OTA) support resulting in higher semiconductor content per vehicle. Moreover, the transition of OEMs towards software-defined vehicles presents a strategic advantage for the automotive semiconductor industry.

Author: Nimish Ashar, Associate Director of Research and Analysis, Supply Chain & Technology, S&P Global Mobility

Learn more: Semiconductor Market Share Tracker

This article was published by S&P Global Mobility and not by S&P Global Ratings, which is a separately managed division of S&P Global.