Auto Supply Chain 'Enormously Depleted' of Chips, Says NXP CEO
The “enormous depth and complexity” of the “extended” automotive supply chain amid the global chip shortage caught NXP Semiconductors completely by surprise as it began struggling to meet automotive OEMs’ demand for critical components, conceded CEO Kurt Sievers on an investors call Tuesday for fiscal Q3 ended Oct. 3. Though the chip crunch in many sectors is deeply rooted in the consumer demand spikes from COVID-19 lockdowns that began in 2020, NXP now believes the roots of the chips crisis in the automotive sector began two years before the COVID-19 pandemic, said the CEO.
NXP was struck by “how many stages and companies” play a role in the automotive supply chain “after we ship a product and before that product ends up in a car,” said Sievers. “If that supply chain is enormously depleted” of components and modules, as it first became in 2018, “it becomes incredibly dysfunctional,” he said. “We are still in the process of refilling that supply chain to normalized levels. This is not about building any strategic inventory.” Management previously “had no idea” for how long the supply chain was depleted of components, and how “deep” the shortfall was, conceded the CEO. It will take the industry at least through 2023 to restore automotive chip supplies to normal levels, he said.
The automotive supply chain “has multiple points of product transformation across the globe,” said Sievers. It needs to coordinate the timing and delivery “of up to 30,000 parts and up to 1,500 different semiconductors from hundreds of suppliers to build just one single car,” he said. “For the process to work efficiently, it is essential that all of the components needed to complete a car are available exactly where and when they are required.” When parts and components are not available, some OEMs “choose to build partially completed cars or halt their production lines altogether,” he said.
Fielding calls from automakers demanding critical chips “sits on top of my agenda every day,” said Sievers. “There continues to be no change in pressure to get more product,” he said. “Escalation calls” from automotive OEMs, and “all sorts of weird actions to try to get more product to their manufacturing locations, have not slowed down by an inch,” he said.
Amid the chip crunch, “the whole auto industry has realized now how big and significant the importance of semiconductors is for their future,” said Sievers. “That has led to much closer and better relationships between us and directly the OEMs.” NXP is seeing “significant changes” as a result, including an uptick in “longer-term orders,” he said. “The intimacy we can build with the OEMs now to think about future systems is a great help for us to construct the right road maps.”
NXP investors “continue to ask how to reconcile the revenue performance of NXP’s automotive business” with the reality of flat vehicle production growth due to the chip scarcity, said Sievers. NXP’s “automotive segment revenue” is expected to be up by more than 40% in 2021 over 2020, he said. “Against this, the auto OEMs continue to struggle to match supply to strong consumer demand, with the auto industry likely not able to meaningfully grow unit production versus 2020.”
Increasing that disparity, “we have seen multiple OEMs prioritize the production of premium vehicles, which require upwards of twice the semiconductor content” of more mainstream cars, said Sievers. The fast-accelerating growth in electric and hybrid vehicles also is driving increased automotive semiconductor consumption, he said. “This is very impactful,” because the average semiconductor content in an EV is about $900, roughly two times that of an “equivalent” internal-combustion vehicle, he said. “These trends have resulted in industry-wide content per vehicle increasing at 10% per year over the last three years.”
NXP’s total Q3 revenue of $2.86 billion was up 26% year over year, and about $11 million better than the midpoint of its Aug. 2 guidance, said Sievers. “These are very good results, given the constrained supply position we knew we would face entering the quarter,” he said. NXP exited the quarter with 1.6 months of distribution channel inventory, “almost a full month’s lower” than the company’s “long-term targets,” he said. “We think the automotive demand-supply equation will continue to be out of balance through 2022.”