Electric Vehicles: Driving the Route to Continued Semiconductor Growth
As a rule, my team keeps an eye toward businesses that have powerful tailwinds associated with them, and we spend a lot of time trying to identify these tailwinds and secular megatrends. By secular, we mean the trend is not short term in nature, but one that will endure for many years to come.
One particularly compelling megatrend, in our view, is the continued growth of semiconductor content in the automotive industry. In 2016, some $30 billion in semiconductor content was present in autos, which translates to roughly $300 per vehicle. Over the next decade, we expect this number to approach $100 billion, or nearly $1,000 per vehicle.
We see two key drivers of this growth. The first is the transition of the automobile fleet from internal combustion engines (ICE) to electric vehicles (EV). The second is the transition from human-driven cars to autonomous vehicles.
We are quite optimistic about the transition of the global auto fleet to EV for a number of reasons. Historically, the primary limiting factor for EVs has been cost of the powertrain. Up to now, traditional gasoline engines have been significantly cheaper than battery-powered ones.
EVs to Grow at 15% CAGR and Amount to 60% of Deliveries by 2050
However, due to advancements in both chemistry and manufacturing scale, we are nearing cost parity between gasoline and battery-powered engines. True cost parity will occur when battery costs drop to roughly $125/Kwh. Depending on the literature one reads, this should occur at some point over the next three years.1 Other advantages of EVs include lower maintenance costs, markedly lower emissions and an enhanced safety profile due to a much larger front impact crumple zone.
Looking at the transition from human-driven to autonomous vehicles, there is a lot of ink being spilled today by the media about the safety, or lack thereof, of autonomous vehicles. We don’t have much to add to this debate because, frankly, we think it misses the point. The media are framing this as a binary event – either the driver drives the car or the car drives itself.
In actuality, there is a whole continuum of steps between complete driver control and fully autonomous. In fact, there is an industry-defined categorization around this continuum, starting at Level 0, which is a totally human-controlled car, up to Level 5, which is a fully autonomous vehicle. Today, many auto original equipment manufacturers (OEM) are designing cars for production that are somewhere between Level 1 and Level 3 — or more akin to improving the active safety of a human-controlled car (think automatic emergency breaking). Tesla appears to be focused on Level 4, and Google’s self-driving car unit, Waymo, is entirely focused on building a Level 5 vehicle.
We expect the twin drivers of EV and autonomous cars to materially increase the semi content per vehicle.
To Add a Little More Granularity
Over the past several years, we have been of the view that the traditional auto industry was underappreciating the ultimate EV penetration rate. Up until about nine months ago, many auto industry executives believed that only 3% to 5% of new cars would be electric in 2025. Now, many in the industry believe the penetration of EVs as a percentage of new car sales could approach 30% in 2025.
Volkswagen, for example, recently announced an ambitious plan to spend $50 billion over the next seven years to build 15 EV plants and wants one-third of its production to be EV by then. The Chinese appear to be even more ambitious with their plans, and several countries in Europe are moving to outlaw ICE vehicles by 2040.
But again, just as in the case of the transition to autonomous, the transition to EV doesn’t have to be binary. There is a continuum of powertrains (hybrid electric, for example) that will help bridge the transition. IHS Markit estimates that a mild hybrid has $428 of incremental semiconductor content, while a plug-in hybrid electric and a full EV both have more than $700 in incremental semiconductor content.
Technology industries can be significantly affected by obsolescence of existing technology, short product cycles, falling prices and profits, competition from new market entrants, and general economic conditions. A concentrated investment in a single industry could be more volatile than the performance of less concentrated investments and the market as a whole.