The Inevitable Automotive Semiconductor Glut Has Arrived
2024 has kicked off with a flurry of negative indicators for automotive chips.
In 2021, the supply chain media frenzy was in full swing. We saw shortages for garage doors, furniture, video game consoles, lumber, the list goes on. The automotive semiconductor shortage made front-page headlines and Biden signed an executive order to review multiple supply chains in response.
As the year unfolded, and more and more attention was drawn to shortages, Nassim Nicholas Taleb crafted a simple yet elegant tweet.
It may have taken a few years, but less than 2 weeks into 2024 we can see that the automotive semiconductor shortage is now a glut. Downstream in the supply chain, companies are now making efforts to reduce inventory or delay orders. The first flare went up last month, when I wrote about Jabil (who makes everything) and how its broad-based weakness would be a precursor to downward revisions for component suppliers across many industries. I didn’t have the guts to call out any specific companies, but at the very least we can recap what we’ve learned so far in 2024.
Mobileye’s Customers Have Too Much Inventory
Mobileye has a well-documented history in the automotive semiconductor world. It was a flashy upstart out of Israel and set the record for the country’s largest US IPO in 2014. Demand for its driver-assist products soared and the company nearly tripled its value in three years before Intel’s $15.3B acquisition in 2017. Intel’s struggles and strategic pivot towards foundry services forced the company to divest Mobileye in 2022.
Mobileye’s return as a standalone, public company helps give us more insight into what’s happening in the automotive semiconductor supply chain. It isn’t pretty.
On January 4th Mobileye provided preliminary 2023 results and issued an early and ugly outlook for 2024. The company is forecasting Q1 revenue to be about 50% below 2023 levels. The big blow to their revenue is coming from an inventory build at their customers.
“we have become aware of excess inventory at our customers, which we believe to be 6-7 million units of EyeQ® SoCs. Based on our discussions, we understand that much of this excess inventory reflects decisions by Tier 1 customers to build inventory in the Basic ADAS category due to supply chain constraints in 2021 and 2022 and a desire to avoid part shortages, as well as lower than-expected production at certain OEM’s during 2023. As supply chain concerns have eased, we expect that our customers will use the vast majority of this excess inventory in the first quarter of the year.”
- Mobileye Preliminary Release, 4 Jan 2024 (emphasis mine)
This is pretty well said by Mobileye, they are seeing the other end of the supply chain bullwhip now. Its customers wanted to build more inventory and safety stock when there was a shortage of semiconductors. Now that the shortage is resolved, a lower level of inventory reserves are needed, and Mobileye has to wait to sell its products downstream.
Microchip Misses A Low Target
Microchip is a bit more difficult to connect directly to the automotive supply chain, as its products cut across all end markets. Industrial chips are the largest segment for Microchip at ~40% of revenue. Automotive semiconductors are typically a distant second or third place hovering between 15-20% of revenue for the company.
While Microchip not a pure-play on automotive semiconductors like Mobileye, we can still infer the company is having challenges stemming from its automotive customers.
“The weakening economic environment that our customers and distributors faced during the December 2023 quarter resulted in many of them wanting to receive a lower level of shipments as they took actions to further de-risk their inventory positions. Many customers also had extended shutdowns or closures at the end of the December quarter as they managed their operational activities.
- Microchip Preliminary Release, 8 January 2024
Microchip had initially expected its sales to be down 15-20% from its previous quarter. Its preliminary release indicated they are now seeing a 22% decline. They failed to clear what was already a low bar.
And speaking of customers with extended end-of-December shutdowns, GM had two plants closed from December 25 through January 8. The closures were reportedly for maintenance, but we can read between the lines. Companies will try very hard to avoid mentioning weaker demand or too much inventory as a reason for idling a factory. The best time to do maintenance is when you have a lull in demand and need to reduce supply.
This commentary echoes the sentiment expressed by Mobileye. Customers have lowered their desired safety stock levels now that supply chain shortages have eased. Some are even taking it a step further by slowing operations until inventory corrects.
Aehr Test Systems Hurt By Slowing EV Growth
As the name implies, Aehr doesn’t make semiconductors, it makes test equipment for semiconductors. Aehr’s connection to the automotive end market comes via its relationship with ON Semiconductor (who was only 88% of revenue in Q3). ON’s Silicon Carbide (SiC) products are popular in EVs and are tested with Aehr equipment. 1
Aehr’s stock was already hit hard in late October when ON delayed its expansion plans. Its reduced forecast for 2024 sent the stock down 16% on January 10. Like Mobileye and Microchip before it, Aehr is a victim of inventory corrections in the automotive supply chain.
“In the last sixty days, we have seen how the slowing of the growth rate of the electric vehicle market has had a negative impact on the timing of several current and new customer orders and capacity increases for silicon carbide devices used in them.”
- Aehr 2Q Earnings Release, 9 January 2024
The same story is ringing true throughout the supply chain. There is now a surplus of automotive semiconductors in the supply chain. The bullwhip effect is flowing upstream.
What Does It Mean Going Forward?
The automotive semiconductor industry is not going bust, don’t let anyone sell you on the extremes. These cycles are normal. The application and usage of the products sold by Mobileye, Microchip, and Aehr are likely to continue to grow over time. All signs point to this being a ‘pause’ as the supply chain bullwhip works through the industry. But there are still some key takeaways for us to observe and monitor going forward.
Finding the new normal in automotive inventories:
At the macro level we can see that automotive inventory, while growing to end the year, is still well below the pre-pandemic norm. But defining the norm is more difficult than it appears.
Inventories were steadily trending lower before the pandemic. And the pandemic shortages brought a new inventory management practice with them. In 2022, GM CEO Mary Barra said inventory would not return to prior levels. In August, CFO Paul Jacobson provided clarity on how the inventory strategy has changed, noting that GM will keep more of its vehicles in its distribution centers so that they can quickly meet customer demand where and when it is needed.
Now that the automotive industry has learned they can satisfy customers and function effectively with less inventory, they will. Domestic Auto inventories were reported at 236,000 in November 2023, perhaps that is the new high for marking turning points in the cycle.
The US Has an EV Adoption Problem
It is clear that electric vehicle demand in the US is slower than the industry was expecting. Last year, EV dealers wrote a letter to the president highlighting their growing inventories and difficulty selling EVs. Yesterday, Hertz announced it is selling 20,000 EVs from its fleet..and replacing them with gas cars! Ford, GM, and even Tesla all spoke about demand challenges in the fall.
I regularly talk about the challenges in predicting demand and how forecasting errors can amplify supply chain bullwhip effects. Rising interest rates surely put a damper on EV sales. The strong and steady growth in demand for EVs nearly disappeared in Q4 — Q4 sales grew only 1.3%. With some EVs now losing their tax credits, the demand picture looks even more challenging. Auto manufacturers reacted and now that signal is going up the supply chain.
Watching other companies impacted by the inventory glut:
If you’re curious about what other companies in the supply chain have similar challenges Renesas, NXP Semiconductors, Infineon, and STMicroelectronics are all prominent manufacturers of automotive semiconductors. Their businesses are more diversified across end markets than Mobileye and Aehr, so the market hasn’t penalized them as much to start the year. Either way, its worth keeping a close eye on the major players and their read on customer’s inventory. inTEST is a small-cap name to keep an eye on as well. It sells test equipment like Aehr (though with different testing applications) and had a down 2023, with its automotive & EV sales being one of its few bright spots.
Taleb’s prediction came true. It may have taken a few years, but the automotive semiconductor glut has arrived. My magic 8 ball hasn’t yet told me when the cycle will turn, but I’ll keep my ear to the ground and follow the companies impacted as the bullwhip makes its way up the chain. We’ll see how long it takes for a bottom. Thanks for reading.
OnSemi gave Aehr an award during a ceremony for its new factory in Bucheon, South Korea