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INVESTMENT FOCUS
March 2021

Semiconductors: Driving the Future of Cars

Over the last few months, a global shortage of semiconductor chips has forced several carmakers, including Volkswagen and Ford, to halt production, hurting their efforts to recover from depressed demand on the back of COVID-19 lockdowns. The crisis has shone a spotlight on the auto industry’s growing reliance on chips, and the implications for both industries. Lead Portfolio Manager of our Tech Disruptors strategy, Tomasz Godziek, and co-Portfolio Manager, Daniel Lurch, discuss why the future of cars and semiconductors will be increasingly intertwined, and what this means for investors.

We have seen how the worldwide shortfall in chips has hurt car manufacturers. What does this mean for semiconductor firms?

Tomasz: Semiconductors are the brains of many electronic devices, such as smartphones and computers. They're also critical components for modern cars, controlling various parts of the vehicle, ranging from the engine, to emissions, and even windows. In the last few months, automotive groups like Volkswagen and Toyota warned that bottlenecks in the supply of semiconductors will impact production volumes, since demand is currently significantly outstripping supply. The most visible fallout has been in the auto industry, but the supply squeeze is also impacting other sectors. Semiconductor demand from areas like consumer electronics is also surging, boosted in part by COVID-19. Semiconductor stocks are therefore benefiting from extremely high demand, pricing power and higher capacity utilization.

It seems that semiconductor companies have the upper-hand currently. But how will this play out in the longer-run?

Daniel: Today, only about 10 percent of semiconductor fabrication plants are used for automotive parts, but this could increase, supported by growing demand for electric vehicles (EVs). EVs contain three times more semiconductor content than traditional combustion engines, due to the complex power electronics needed in EVs . Therefore, the EV market represents a huge growth opportunity for semiconductor companies.
There has also been speculation about Apple’s entry into the car industry, with reports suggesting that the company will target introducing a passenger vehicle by 2024 with self-driving features and its own battery technology. The focus of Big Tech on the car market would be disruptive for existing manufacturers, but also highlights the massive market opportunity in future mobility applications. All this bodes well for companies manufacturing chips that are vital for EVs and smart mobility, including power semiconductors.
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Can you tell us more about power semiconductors, and how they are important for EVs?

Tomasz: Power semiconductors control the flow of electricity and are therefore critical to increasing the energy efficiency of electronic devices and, by extension, electric vehicles. We believe that semiconductor companies can expect significant near-term market growth from the switch from internal combustion engines (ICE) to battery electric vehicles. Furthermore, next-generation vehicles that allow autonomous driving will require even more advanced sensors, including radars, and cameras to enable advanced driver assistance systems. As a result, semiconductors will become increasingly essential, allowing the high processing power of enormous amounts of data and permitting real-time decision making based on what is happening in and outside of the car.
In short, power semiconductors will enable the electric vehicle revolution and autonomous driving, while also further disrupting the electrification of industrial applications, renewables and consumer electronics.

A large part of the growth in power semiconductor demand seems to hinge on the future of EVs. What is your outlook for the EV market?

Daniel: Environmental themes are becoming more and more relevant to the investment community. Reducing greenhouse gas emissions has become the priority in a global fight against climate change. Under Joe Biden’s presidency, this trend will only accelerate, and EVs will play a key role in the transition to a low-carbon world. Nearly 75 percent of transport emissions come from road vehicles, making their electrification essential to curbing emissions . Already, many governments are rolling out regulations aimed at curbing ICEs while promoting EVs. The adoption rate of EVs is also expected to grow, helped by a combination of improved battery efficiency, longer driving ranges and expanding networks for charging stations. It is not surprising that the market for EVs is expected to boom in the coming years, with an estimated growth of nearly 30% annually .
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The growth in EVs is likely to bring about many beneficiaries. Why do you focus on power semiconductors in particular?

Tomasz: There are certainly many companies and sub-sectors along the entire EV value chain that will benefit, for instance, battery producers, OEMs, and electronic firms. However, we find that within the relatively new EV industry, which is still in the middle of a transformation, semiconductor firms appear to be better-placed in terms of competitive positioning. Besides benefiting from rising volumes and higher content per vehicle, they also enjoy high barriers-to-entry, high market profitability, and pricing power. Moreover, unlike some electronic component makers, they face little risk of in-housing from car makers. Therefore, auto semiconductor players are key enablers within the EV value chain.  

Can you give us an example of a semiconductor player that stands to benefit as a key enabler in the EV revolution?

Daniel: Infineon, a Germany-based supplier of power chips to the automotive industry, is a good example. It is well positioned to profit from tight chip supply, a cyclical car volume recovery, and also stands to gain from rising semiconductor content per vehicle e, as the industry moves from ICEs to electric and smart mobility. We see it as an electrification pure-play, with diversified exposure to major growth themes including autonomous driving, rising renewables investment, and industrial automation.

How does this theme of power semiconductors and EVs play into your overall Tech Disruptors strategy?

Tomasz: We have a positive outlook on power semiconductor players and see them as a key enabler in the electric vehicle and clean energy revolution. This is reflective of our distinctive investment approach, which allows us to cover the entire disruption value chain, and find attractive investment opportunities that are often overlooked by the market.
1. McKinsey, Mobility trends: What’s ahead for automotive semiconductors, April 2017
2. Our World in Data: Cars, planes, trains: where do CO2 emissions from transport come from? October 2020
3. Deloitte, Electric vehicles – Setting a course for 2030, July 2020
4. The company presented is provided as an example investment and might not be part of the investment portfolio of the fund. The example is given for illustrative purposes only and does not account for individual circumstances of potential investors.

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