Global Automotive Semiconductor Forecast: 1Q03 Update

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1 Forecast Analysis Global Automotive Semiconductor Forecast: 1Q03 Update Abstract: Gartner Dataquest has cut its forecast for 2003 to $13.9 billion. Semiconductor vendors must expect market volatility if automotive production slows further, but safety applications still offer strong growth potential. By Mike Williams Strategic Forecast Statements The automotive semiconductor market forecast for 2003 has reduced from $14.4 billion to $13.9 billion. This is because of lowered expectations of automobile production in view of the uncertain economic and political environment. The automotive semiconductor market is set to achieve 3 percent growth in It is forecast to reach $13.9 billion in This growth will be supported by production of 57.6 million cars and light commercial vehicles in Recommendations Automotive semiconductor vendors must plan for a general semiconductor industry recovery in the second half of 2003, assuming global economic and political stability Semiconductor vendors must prepare for volatile market conditions if global automotive production slows further. However, safety and security applications will remain key competitive areas for automobile manufacturers with similar automobile model platforms. Semiconductor vendors must be prepared to meet demands for adaptive airbag systems and image and position sensors resulting from changes in U.S. legislation. Publication Date:6 March 2003

2 2 Global Automotive Semiconductor Forecast: 1Q03 Update Forecast Overview In the face of continuing economic uncertainty and political instability, Gartner Dataquest has developed three forecast scenarios best, most-likely and worst case for automotive semiconductor sales to Changes Since the Previous Iteration In November 2002, Gartner Dataquest published its previous iteration of this forecast (see "4Q02 Update: Automotive Semiconductor Forecast Scenarios" [SEMC- WW-DP-0211]). Significant changes since then are: Downward revision of revenue from automotive semiconductor sales to $13.9 billion in This is because of lowered expectations of automobile production in view of the uncertain economic and political environment. The general drop in average selling prices for semiconductor devices, combined with expected reductions in automobile production, has affected the automotive semiconductor market more than any significant change in the unit volume production of automotive electronics. Increased unit production of safety, security and convenience semiconductor applications, especially airbag controllers, climate control units and remote keyless entry. Stronger growth for semiconductor devices used in engine control units because of changes in vehicle production mixes. Market Drivers Telematics and automotive GPS navigation will remain the main growth accelerators for automotive semiconductors. Automotive manufacturers, especially in Europe, will fit antilock braking systems as standard equipment on new models by Introduction of mandatory smart airbag systems in the United States in 2003 will bring incremental growth in new image and position sensors for automotive airbags. Initiatives by auto manufacturers for increased pedestrian safety will stimulate growth in automotive lighting applications. This will increase use of LEDs (lightemitting diodes) and high-intensity lamps for enhanced night vision and safer day driving. New legislation in 2003 on fuel exhaust emissions in Europe (Euro IV) and in the United States (LEV [Low Emission Vehicle] II) will drive further growth in the mature engine control unit market. Stricter legislation in Europe (Euro V) and in the United States (LEV III) will affect engine control designs between 2004 and Increased deployment of automotive electronic data networks for high-speed time-triggered applications using technologies from, for example, FlexRay and TTTech by New design opportunities will emerge with the deployment of 42-volt batteries beyond This will allow the implementation of new automotive electronics, especially x-by-wire applications.

3 Market Inhibitors Forecast Scenario Commentary Asia, specifically China, is becoming an important market for automotive sales and production. Many automotive electronic OEMs are ramping up production, particularly of auto stereos. Healthy automotive semiconductor market growth will come from new automotive electronics for powertrain applications such as engine control units and transmission systems. Continued penetration of electronics such as body control systems, safety and comfort electronics, and advanced in-car entertainment will contribute to automotive semiconductor market growth. Safety and security electronics remain key competitive areas for auto manufacturers with similar auto model platforms. U.S. airbag system production will be dominated by adaptive airbag systems, while Europe, Japan and Asia/Pacific will see growth in antilock braking systems and airbag system installations. Sales campaigns with interest-free loans (underwritten by U.S. automotive manufacturers) for new auto purchases during 2001 and 2002 have encouraged consumers to buy new automobiles sooner, contributing to a stronger slowdown in the U.S. auto market in A slowdown in new automobile sales will affect auto unit production. This will reduce the potential market penetration of electronics in automobiles. Production problems with new technologies for wireless connectivity and telematics and delays in the development of new sensor products or applicationspecific chipsets such as speech processing, Bluetooth, automotive networking chipsets and digital radio (both satellite and terrestrial). Increasing global unrest and political instability in the Middle East will affect automotive demand negatively. Sustained disruption in oil supply resulting from tensions in the Middle East will have a major impact on new auto sales patterns (for example, in terms of engine type, fuel consumption, reduced demand for sport utility vehicles) and the automotive electronics industry. Adverse economic conditions such as a prolonged global economic recession or increasing inflation will force up interest rates for loans, making it less attractive for people to buy new cars and 2004 The global automotive production market grew more strongly than expected in 2002, quarter over quarter, with increased production in North America, Western Europe and Japan. Further penetration of electronics in cars is driving growth in semiconductors for automotive applications. In 2003, production will weaken in North America. Elsewhere, the market is uncertain. The full effects of Germany's new company car tax system, introduced in 4Q02, on the European automobile market remain to be seen. Cyclical demand for company cars in Germany has already slowed. Germany still dominates the new car market in Europe, accounting for 33 percent of total production. 3

4 4 Global Automotive Semiconductor Forecast: 1Q03 Update The volatile political situation in the Middle East may adversely affect the positive growth forecast for worldwide automobile sales and production in South America remains an area of concern, especially Argentina, Venezuela and Brazil, where automobile manufacturers still report weak sales and low production. The outlook for automobile production in Eastern Europe is also bleak, particularly in Poland and Turkey. Tables 1, 2 and 3 show worldwide automotive semiconductor revenue, sequential growth and year-over-year growth forecasts from 1Q02 to 4Q04. Table 1 Worldwide Automotive Semiconductor Forecast Revenue, 1Q02-4Q04 (Millions of Dollars) 1Q02 2Q02 3Q02 4Q Most-Likely Case 3,129 3,225 3,250 3,247 12,851 1Q03 2Q03 3Q03 4Q Best Case 3,445 3,455 3,555 3,766 14,221 Most-Likely Case 3,445 3,385 3,502 3,562 13,894 Worst Case 2,953 2,805 3,125 3,274 12,157 1Q04 2Q04 3Q04 4Q Best Case 3,813 4,018 4,331 4,824 16,986 Most-Likely Case 3,790 3,958 4,274 4,523 16,545 Worst Case 3,025 2,983 3,348 3,385 12,741 Source: Gartner Dataquest (February 2003) Table 2 Worldwide Automotive Semiconductor Forecast Revenue, 1Q02-4Q04 (Sequential Growth) 1Q02 2Q02 3Q02 4Q Best Case -9.0% 3.1% 0.8% -0.1% 2.9% Most-Likely Case -9.0% 3.1% 0.8% -0.1% 2.9% Worst Case -9.0% 3.1% 0.8% -0.1% 2.9% 1Q03 2Q03 3Q03 4Q Best Case 6.1% 0.3% 2.9% 5.9% 10.7% Most-Likely Case 6.1% -1.7% 3.5% 1.7% 8.1% Worst Case -9.1% -5.0% 11.4% 4.8% -5.4% 1Q04 2Q04 3Q04 4Q Best Case 1.2% 5.4% 7.8% 11.4% 19.4% Most-Likely Case 6.4% 4.4% 8.0% 5.8% 19.1% Worst Case -7.6% -1.4% 12.2% 1.1% 4.8% Source: Gartner Dataquest (February 2003)

5 5 Table 3 Worldwide Automotive Semiconductor Forecast Revenue, 1Q02-4Q04 (Year-Over-Year Growth) 1Q02 2Q02 3Q02 4Q Best Case 0.0% 0.2% 0.0% -0.1% 2.9% Most-Likely Case 0.0% 0.2% 0.0% -0.1% 2.9% Worst Case 0.0% 0.2% 0.0% -0.1% 2.9% 1Q03 2Q03 3Q03 4Q Best Case 10.1% 7.1% 9.4% 16.0% 10.7% Most-Likely Case 10.1% 5.0% 7.8% 9.7% 8.1% Worst Case -5.6% -13.0% -3.8% 0.8% -5.4% 1Q04 2Q04 3Q04 4Q Best Case 10.7% 16.3% 21.8% 28.1% 19.4% Most-Likely Case 10.0% 16.9% 22.0% 27.0% 19.1% Worst Case 2.4% 6.3% 7.1% 3.4% 4.8% Source: Gartner Dataquest (February 2003) Gartner Dataquest Perspective In the midterm, political stability in many parts of the wealthier regional markets will positively affect the outlook for the global automobile production market. Any recovery in automobile sales in the United States will stimulate the global automotive semiconductor market. Conversely, increased hostility between the United States and Iraq could affect U.S. automobile sales and, consequently, the global automotive semiconductor industry. "Antiwar" countries are concerned they may experience adverse market conditions in the United States. European auto manufacturers are concerned that exports to the United States will drop, affecting production. Leading exporters of European autos to the United States are German, including Audi,Bentley,BMW,Mercedes-Benz,Mini,Rolls-RoyceandVolkswagen.German autos have a relatively high semiconductor content. Concern in the European semiconductor market stems from the possibility that Germany's share of the U.S. auto market will shrink owing to its antiwar stance. If this happens, the auto semiconductor market will suffer. Judging from the oil crisis during the 1970s, severe disruption in oil supply will change the profile of the U.S. auto market, as most new car buyers will seek models with better fuel efficiency. Sales of sport utility vehicles in the United States will most likely decline. In the 1970s, Japanese OEMs were successful in the United States largely owing to the low fuel consumption of their vehicles. Automotive OEMs' market share of the U.S. market could change significantly, causing a knockon effect in the automotive semiconductor market. Our automotive semiconductor forecast does not take into account war in the Middle East. The forecast will need recasting if oil supplies are disrupted, as consumer preference for new autos will change, affecting demand for automotive semiconductors. Likely changes include choosing cars with diesel engines, rather than petrol, and smaller more economic engines.

6 6 Global Automotive Semiconductor Forecast: 1Q03 Update In Germany, changes to the company car tax system have increased the tax liability for business users by nearly 40 percent, making company cars less attractive. This will affect total European auto production. Key Issue What is the size and projected growth of the key application market segments? This document has been published to the following Marketplace codes: SEMC-WW-DP-0244 For More Information... In North America and Latin America: In Europe, the Middle East and Africa: In Asia/Pacific: In Japan: Worldwide via gartner.com: Gartner, Inc. and/or its Affiliates. All Rights Reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice