The auto industry has hit the brakes on semiconductor consumption for the first time since the pandemic, when it had gone into an overdrive after facing massive disruptions in global supply chains.
A massive chip shortage has now swung all the way to the other end of the spectrum, with automakers sitting on excess semiconductor stock, industry experts said.
On February 3, Eindhoven-headquartered NXP Semiconductors reported a 6% year-on-year decrease in chip consumption by the automotive industry for the December quarter. Geneva-headquartered STMicroelectronics said its revenue in the digital integrated circuits and radio frequency products segment decreased by 22.8% in its Q4 results on January 30, mainly because of a decrease in automotive Advanced Driver Assistance Systems (ADAS) and infotainment.
US firm Microchip reported growth in the latest quarter but said the industrial and automotive sectors are two major sectors going through a big change because of too much inventory and less demand. Another US firm, Texas Instruments (TI), saw mid-single digit automotive market decline due to more pronounced weakness outside China.
“Semiconductors are a cyclical industry,” Hitesh Garg, vice-president and India managing director, NXP Semiconductors, told ET on January 2. “Post-pandemic, there was an industry boom for six or nine quarters. However, for the last three to four quarters, it has been sliding down in minus percentage. At this moment, we are in the negative cycle… India is in the same boat. India is not a big consumer of chips.”
He noted that the semiconductor industry is a feeder industry, or a horizontal industry which feeds various industries, like telecom and automobile. “We are working in automotive. If the demand for the number of cars is not going up, it will impact us,” Garg said.
Global Downwind
This is indicative of a global trend, which ties back to companies getting jittery after the post-pandemic chip shortage. “Globally, automakers accumulated significant inventory in anticipation of sustained demand post-Covid. However, sales have tapered off over the last three to four quarters,” said Ashim Sharma, senior partner and group head – business performance improvement consulting (auto, engineering, and logistics) at Nomura Research Institute (NRI).
“This mismatch between production and market demand has resulted in excess stock across the supply chain,” Sharma said. “In addition, the industrial automation sector has witnessed sluggish investment activity.”
According to the latest data from the Society of Indian Automobile Manufacturers (SIAM), domestic automobile dispatches from manufacturers to dealers increased by 11.6% in 2024, primarily driven by the two-wheeler segment.
Jittery times
Vinay Balkrishna Shenoy, managing director, Infineon Technologies India, said the general mood in the automotive industry has deteriorated significantly.
“We can see that many customers are reducing their semiconductor inventories. At the same time, forecasts for global vehicle production are slightly down,” he said. “The share of electric cars is stagnating in many regions, which is unlikely to change in the first few months of 2025.”
Infineon, headquartered in Munich, Germany, is one of the global leaders in automotive, power, and security semiconductors.
While Infineon’s automotive revenue decreased 11% from Q4 FY24 to Q1 FY25, it reduced 8% from Q1 FY24 to Q1 FY25. Sharing the market outlook for CY25, the company, in its latest investor presentation, said, “Car demand is expected to remain flat. Although macroeconomic conditions are improving, headwinds remain, including dealer inventory adjustments and cautious consumer demand. Key regions Europe, Japan, South Korea, and North America are expected to decline.”
Chandler, Arizona-headquartered Microchip Technology saw a modest 1% year-on-year revenue growth from the automotive market — from 17% to 18% in the latest quarter.
“Industrial and automotive are two major sectors going through a big change because of too much inventory and less demand from the market,” said Srikanth Settikere, vice-president and managing director, India Development Centre at Microchip India.
“Customers are replete with inventories,” Settikere said. “Over the next few months or quarters, true numbers will really show. Semiconductor companies are going through a cyclic situation. The supply-demand situation that we had during Covid has reversed now.”
Settikere said that ever since China started manufacturing more EVs, it has impacted competition from Europe. “Volkswagen has moved out of the Chinese market. These are macroeconomic changes that are bringing the auto demand down,” Settikere said.
According to Sharma, another reason for the slump could be a significant shift in powertrain technologies across the globe, with modern vehicles increasingly relying on smaller, more efficient semiconductor chips. “This transition with a slower-than-expected adoption of EVs in regions like the EU may have created a mismatch between production and demand for specific chip types, thereby highlighting the challenges in aligning the chip supplies,” he said.
Uneven rise of electric
As per the International Energy Agency’s ‘Global EV Outlook 2024’ report, electric car sales neared 14 million in 2023.
EVs are gaining momentum globally but are mainly concentrated in China, Europe, and the US, which account for nearly 95% of global sales. In 2023, China accounted for just under 60% of new electric car registrations, Europe just under 25%, and the US 10%, it said.
Within the automotive industry, passenger cars generally use the highest number of chips due to the growing integration of advanced features and technologies that rely heavily on specialised chips.
“Globally, the automotive semiconductor segment grew by 3% in 2024 compared to 11% in 2023,” Ashok Chandak, president of India Electronics and Semiconductor Association, said. “Expectations of higher growth led suppliers to stockpile inventory, leading to increased stock levels in the latter half of the year.”
But there is a global slowdown in certain segments. For instance, the global light vehicle production market has been experiencing a challenge in growth for the past few quarters, said Gaurav Vangaal, associate director, LVP forecasting at S&P Global Mobility. “In India, we project a flat to negative forecast for the January-March quarter, largely due to the high base effect from the previous year,” he said.
While the passenger vehicle industry in India saw over 25% growth in FY23, followed by an 8% growth in FY24, there are still challenges. “With the high base set by these exceptional growth years, the industry is expected to experience a more modest growth of lower single digit for the ongoing fiscal,” said Hemal Thakkar, senior practice leader and director at Crisil Intelligence.
China the exception
Haviv Ilan, president and chief executive officer of Dallas-headquartered Texas Instruments (TI), during the earnings call of TI’s Q3 results, had said the company saw a 7-8% growth in the automotive market, and that most of the growth came from its business in China because of the momentum for EVs.
“Now, the rest of the automotive market is different. We are seeing a continued weakness over there. That revenue peaked in the third quarter of ’23, and in general trended down,” Ilan had said. During the earnings call of TI’s Q4 results on January 23, he said, “The automotive market was down mid-single digits…”
“…on the automotive market, similar to Q3, we did see a pretty significant weakness, maybe outside of China. So it declined about mid-single digit, about 5% sequentially…the growth in China was less pronounced and the decline outside of China was more pronounced,” Ilan said.
TI India did not immediately respond to ET’s queries.
Shenoy said China has been a bright spot. “Every second new car sold in China is an EV, and the trend is rising. In the long term, we believe that the structural growth drivers around electromobility and software-defined vehicles are fully intact,” he said.
As the automotive industry undergoes a technological revolution, innovations such as ADAS, software-defined vehicles (SDVs), and AI are rapidly becoming standard features. This transformation requires OEMs to reconfigure their supply chains to accommodate a significantly larger volume of electronic components and chips.
However, experts suggest that during periods of economic downturns, when price sensitivity among consumers is high, the adoption of modern technologies tends to plateau.
In such times, consumers prioritise affordability over advanced features, leading to slower demand for premium technologies like autonomous driving systems or other high-tech automotive solutions. Meanwhile, in India, Thakkar expects ADAS penetration to “improve significantly” in 2025.
Tempering expectations
“2024 turned out to be one of the worst years in many decades for the industries we serve, particularly industrial and automotive. It was characterised by unexpectedly weaker demand and higher level of inventories which significantly impacted ST,” Jean-Marc Chery, president and CEO of STMicroelectronics, said during the Q4 results on January 30.
Revenues on a year-on-year basis showed that automotive declined by about 20%. “Our revenues, compared to our expectations, were higher in personal electronics, declined less in industrial and were lower in automotive,” Chery said.
As per its latest quarterly results, NXP Semiconductors saw a year-on-year 7% decrease in sales of chips to industrial and IoT, and a 19% decrease in demand for chips from communications infrastructure and others.
NXP has microcontrollers, sensors, and products for battery management in cars. The industry is hopeful of a recovery in demand in the coming months.
“There has been some softness in the global market for automotive semiconductors, but the most recent forecast projects a broad recovery in the market for automotive chips over the next few years,” John Neuffer, president and CEO of Semiconductor Industry Association, said. “This recovery would likely be driven by demand for EVs, which are bristling with semiconductors,” he told ET.
The market growth is projected for automotive logic chips, which are used for infotainment and other systems, as well as automotive analogue chips, which are often used in power management systems and ADAS, among other automotive applications.
