Car chips, painful struggle!

On the one hand, the new energy vehicle market has already stepped into a red sea market ahead of time, with even Tesla, Inc. CEO Elon Musk admitting that he is about to face "operational obstacles" during the financial report conference call. On the other hand, the performance and forecasts of the automotive chip market are also not optimistic, from Texas Instruments Incorporated to STMicroelectronics NV ADR RegS, all are no longer as optimistic as before. This crisis is not unexpected. Since the imbalance in supply and demand and the wave of overordering during the COVID-19 pandemic, the automotive chip industry has been like a giant burdened with heavy inventory, struggling in a market full of uncertainties. The 18-month inventory adjustment period has made the entire industry painfully digesting the "prosperity legacy" of the past. What is more worrying is that this adjustment is far from over. Analysts have found that the rate of inventory digestion originally expected is far lower than expected, like a marathon race, when everyone thinks they have seen the finish line, they find that the track is still infinitely extending. Texas Instruments Incorporated: The Doomsayer's Warning In this industry winter, Texas Instruments Incorporated (TXN.US) plays the most frank "doomsayer" role. While other peers are still searching for traces of recovery, Texas Instruments Incorporated CEO Haviv Haryan brutally poured cold water on the market: "The automotive chip market has not recovered yet." In the five key markets served by Texas Instruments Incorporated, personal electronic products, enterprise systems, communication equipment, and the industrial market all show signs of healthy recovery. The industrial market even shows signs of accelerating recovery, showing positive momentum after several quarters of sluggishness. However, the automotive industry is like an incompatible outsider, with minimal growth and slow recovery that is despairing. The management of Texas Instruments Incorporated revealed a disturbing detail during the second-quarter financial report conference call: they "cannot rule out" the possibility that the stronger-than-expected revenue in the second quarter was due to customers ordering early to avoid potential tariffs. What does this mean? This means that behind the seemingly good performance numbers, there may be deeper demand weakness. This passive demand increase, like a temporary relief to performance pressure, may make future adjustments more painful. Even more worrying is the change in customer behavior. Texas Instruments Incorporated pointed out that customers, especially those shipping to the United States, have become extremely conservative in the face of tariff uncertainties. Original equipment manufacturers and primary suppliers clearly lack the willingness to replenish inventory, only placing orders when needed, this nearly real-time supply model reflects deep anxiety about the future throughout the supply chain. Bernstein analyst Staci Lasg warned of Texas Instruments Incorporated's attitude change. She pointed out that compared to the previous quarter's financial report conference call, this quarter's tone has changed significantly, showing more caution towards GEO Group Inc's politics and tariffs, this change "feels a bit sudden." This sudden attitude change precisely reflects the rapid deterioration of the market environment. In terms of capital expenditure, Texas Instruments Incorporated has maintained relative stability, reaffirming that the total capital expenditure is expected to be around $5 billion by 2025. However, for 2026, the company has given a rather broad range of $2 billion to $5 billion, this huge range of uncertainty itself indicates the company's confusion about future prospects. NXP Semiconductors NV: Seeking Dawn in the Dark If Texas Instruments Incorporated represents pessimism, then NXP Semiconductors NV (NXP.US) is trying to play the role of cautionary optimist. In this era of uncertainty, NXP Semiconductors NV CEO Kurt Sievers tries to inject a glimmer of hope into the market. "The two years of excess inventory of automotive chips may finally end this year." Sievers' words are undoubtedly an encouraging message for the entire industry struggling in the inventory quagmire. He further explained that the inventory levels of most Tier 1 automotive customers are either close to normal or have already reached normal levels. What is the basis for this judgment? As a major player in the automotive chip field, NXP Semiconductors NV's direct sales channel allows them to more directly observe the inventory status of customers. The numbers also seem to support NXP Semiconductors NV's optimistic attitude. The company's total revenue in the second quarter was $29.3 billion, a 6% year-on-year decrease, but this performance still exceeded the median expectation by $26 million. Sievers confidently stated during the financial report conference call: "Our automotive business is experiencing substantial growth from the second quarter to the third quarter." He believes that once the oversupply situation is resolved, NXP Semiconductors NV should benefit from the growing demand. However, NXP Semiconductors NV's optimism is not blind. Sievers frankly admitted that although he is optimistic, he will not attempt to "gloss over" the current situation in the automotive industry. This realistic attitude reflects the seriousness of the current situation even for relatively optimistic companies. NXP Semiconductors NV's performance forecast for the third quarter reveals this caution. The company expects revenue for the third quarter to be between $30.5 billion and $32.5 billion, with the midpoint of this range down 3% from the same period last year and below analysts' highest expectations. Bernstein analyst Stacey Lasg called the report "basically good," but said that the numbers did not fully align with some people's "whisper" expectations. As a company heavily reliant on the automotive industry (which accounts for more than half of its total revenue), NXP Semiconductors NV is inevitably impacted by the Trump administration's tariff actions. These tariffs not only disrupt the global supply chain but also create uncertainty in customer orders. Some automakers are starting to hoard chips to deal with the tariffs, but this hoarding behavior could lead to further demand decline in the future. Bloomberg industry research analyst Ken Hui gave a relatively neutral assessment of NXP Semiconductors NV's performance. He believes that NXP Semiconductors NV's third-quarter revenue beating expectations by 3% may have slightly disappointed the market but is in line with expectations, indicating that due to the uncertain market environment, the chip manufacturer may be attempting to keep channel inventory below long-term target levels. Meanwhile, the expected gross margin of 57% for the third quarter is consistent with analyst expectations, which may imply that NXP Semiconductors NV is facing competitive pressure on key products. STMicroelectronics NV ADR RegS: A Giant Stuck in the Quagmire In this industry winter of the automotive chip industry, STMicroelectronics NV ADR RegS (STM.US) is facing the most miserable fate. This European chip giant, a French-Italian joint venture, is undergoing an unprecedented crisis, the severity of which can be described as "blood flowing in rivers." STMicroelectronics NV ADR RegS reported an adjusted operating loss of $133 million in the second quarter, while analysts had originally expected an operating profit of $54 million. This huge gap from profit expectations to significant losses caught investors off guard. More shockingly, this loss also includes $190 million in impairment and restructuring charges, meaning that the company had to write down its previous investments and assets significantly. The market's reaction was merciless. STMicroelectronics NV ADR RegS stock saw its largest drop in a year, with its price falling 11% to 24.11 on the trading day. This is not an isolated incident the company's stock had already fallen 35% last year, and investor confidence is rapidly eroding. As a company whose majority of revenue comes from the automotive industry, STMicroelectronics NV ADR RegS is facing multiple blows brought about by global trade wars. Tesla, Inc., as one of its largest customers, accounting for about 6% of the company's total revenue, and Elon Musk's warning about the "difficult" prospects for the coming quarters undoubtedly casts a thicker shadow over STMicroelectronics NV ADR RegS's future. When your important customers are all shouting "tough times," as a supplier, you can imagine the days ahead. The company's revenue in the second quarter decreased by 14% to $2.77 billion, with automotive chip sales slightly below expectations. Although revenue from personal electronics and the industrial sector increased, these gains are far from enough to offset the decline in automotive business. This structural imbalance reflects STMicroelectronics NV ADR RegS's strategic risk of being overly dependent on the automotive industry. CEO Jean-Marc Chery is trying to inject some hope into the company's prospects. He stated that the outlook for the third quarter is affected by a single customer and that this setback is expected to be temporary, with growth expected in the fourth quarter. However, this explanation based on the impact of a "single customer" precisely highlights the company's problem of high customer concentration. When one customer can dictate a company's performance for a quarter, the vulnerability of this business model is evident. Faced with continued industry downturn, STMicroelectronics NV ADR RegS has begun painful self-rescue efforts. The company announced a cost-cutting plan last October, pledging to reduce staff by about 6%. This scale of layoffs not only means that thousands of families will be affected but also reflects the company's deep pessimism about future demand prospects. STMicroelectronics NV ADR RegS is further compounded by pressure from shareholders. The Italian government and the French government collectively own over a quarter of the company's shares, and the recent poor performance has led to criticism from the Italian government towards the management. When government shareholders start questioning the management's capabilities, the company's governance pressure is evident. Citi analyst Andrew Gardiner succinctly summarized the difficulties facing STMicroelectronics NV ADR RegS in a report: "Signs of cyclical recovery are being offset by tariff-related uncertainties, and particularly weakness in the automotive industry." This statement not only illustrates the challenges facing the industry as a whole but also points out the additional pain that STMicroelectronics NV ADR RegS, heavily reliant on automotive chips, is bearing. The Global Market Game It is worth noting that the challenges facing the automotive chip industry are not consistent globally, with different regions presenting vastly different situations, reshaping the entire industry landscape. In Europe, demand for electric vehicles appears to be weak and sluggish. This region, once seen as a pioneer in the transition to electric vehicles, is now facing multiple challenges such as consumer confidence, inadequate charging infrastructure, and more. Renault significantly lowered its operating profit margin forecast for this year last week, while Stellantis NV announced an unexpected net loss for the first half of the year on Monday, these struggles of European automotive giants directly affect the demand for automotive chips. The U.S. market presents a different picture. Driven by policy changes, the U.S. has experienced a surge in electric vehicle sales, but this enthusiasm may quickly cool down. Policy uncertainties make the U.S. market full of variables. Some customers are pulling in deliveries early to avoid potential tariffs, but this passive demand increase lacks sustainability. The situation in the domestic market is the most complicated. As the world's largest automotive market, mainland China is still deeply mired in intense price competition. While customers are still placing orders, the order volume is limited, price pressure is immense, and the fierce competition between automakers is not only compressing their profit margins but also transmitting cost-cutting pressure upstream. The impact of tariff policies looms over the entire industry, disrupting the global supply chain and triggering massive uncertainty in customer orders. Some automakers are starting to hoard chips to cope with tariffs, but this hoarding behavior could lead to further demand declines in the future, creating a new cycle of inventory. In this winter, an interesting phenomenon is worth noting: not all submarkets are suffering equally. Differences in technical specifications are creating completely different market fortunes. Industry insiders reveal that some suppliers focusing on high-end automotive applications are not experiencing significant demand decline. Sales of high-end models are steadily increasing, and the continuous upgrade of technical specifications provides these suppliers with a relatively stable demand base. The popularization of high-tech configurations such as autonomous driving, intelligent cabins, and electrification, has made the high-end automotive chip market show a completely different picture from the mass market. In contrast, the operational performance of integrated device manufacturers (IDM) serving a broad range of automotive customers in Europe and the United States is directly impacted by the overall market conditions. These companies, due to their more diverse customer base, are unable to avoid the impact of market fluctuations like specialized manufacturers. This trend of differentiation may intensify in the future. With the deepening of electrification and intelligence in automobiles, the demand for high-end chips may recover first, while the traditional bulk chip market may take longer to emerge from the trough. For chip manufacturers, this highlights the increasing importance of upgrading product structures. In Conclusion The industry winter that the automotive chip industry is going through is destined to be a significant turning point in industry history. Texas Instruments Incorporated's pessimistic warning, NXP Semiconductors NV's cautious optimism, and STMicroelectronics NV ADR RegS's deep plight, regardless of which company, all need to face a new rhythm of adjustment. This is not just a simple market cycle adjustment but a profound industry restructuring. Companies that can maintain technological innovation, customer service levels, and cost control capabilities in adversity will gain a larger market share in the future recovery. Companies overly dependent on a single market and lacking technological differentiation advantages may lose competitiveness forever in this winter. How long will this winter in the automotive chip industry last? No one can give a definite answer. But what is certain is that when spring eventually arrives, the entire industry will look completely different from today.