STMicroelectronics NV (STM), Europe’s biggest chipmaker, whose shares have slumped more than 70 percent since Apple Inc. (AAPL)’s iPhone triggered Nokia Oyj (NOK1V)’s decline, is betting its future on cars.
Even with plummeting business from struggling customers in the wireless industry such as Nokia and Research In Motion Ltd. (RIM), Chief Executive Officer Carlo Bozotti said Asian demand for luxury cars loaded with semiconductors will boost sales. Every new car produced last year contained at least 25 automotive chips, with some models carrying more than 100, he said in an interview.
As Geneva-based STMicroelectronics and Germany’s Infineon Technology AG tie their future more closely to the automotive industry, they are developing semiconductors and sensors that boost engine power, monitor speed and correct steering when cars veer off designated lanes. The car-chip market will expand to more than $33 billion by 2016 from $23 billion last year, with China growing 17.7 percent each year, London-based researcher Strategy Analytics said.
STMicroelectronics is “carrying a dead leg, which is the wireless business,” said Lee Simpson, a Jefferies International analyst. “If you’re a European semiconductor company and you can supply to the German auto industry directly, or to other European carmakers, you have a better tie, while the European handset space is disappearing.”
In the first quarter, STMicroelectronics had an operating loss of $352 million, of which $293 million stemmed from chips for mobile phones. In contrast, operating profit in the cars business was $37 million. The company’s top client in the automotive industry is Germany’s Robert Bosch GmbH, the world’s largest automotive supplier, with clients such as Volkswagen AG (VOW), Daimler AG (DAI), Ford Motor Co. (F) and Toyota Motor Corp. (7203)
“The car industry, and especially the German one, is benefiting from appetite in Asia for high-quality cars,” said Bozotti, who has an electronic engineering degree from the University in Pavia, Italy and took over as CEO in 2005. “Car manufacturers also use more and more electronic components to slash costs and make cars more intelligent. We benefit twice.”
There is plenty of room for growth in the car-chip market because no one yet dominates it. STMicroelectronics ranked third in the market for automotive chips with a 9 percent share, compared with 14 percent for market leader Renesas Electronics Corp. (6723), which is based in Kawasaki, Japan, according to Strategy Analytics. The researcher predicts the car-chip market in North America will grow 8.1 percent each year and 6.1 percent in Europe.
Infineon, the second-largest supplier, whose customers include Bayerische Motoren Werke AG (BMW), last year opened manufacturing and research facilities in Beijing to address multiple markets, including automotive. Neubiberg, Germany-based Infineon in May raised its full-year forecast after quarterly profit topped analyst estimates. It boosted its market share in the automotive-chip segment by one percentage point to 9.8 percent over the past year.
STMicroelectronics’s sales to Nokia fell 30 percent in 2011 to $1 billion, less than half the $2.1 billion it sold to the Finnish mobile-phone manufacturer four years earlier, according to data published in the chipmaker’s annual reports.
Last month, Nokia forecast a wider second-quarter operating loss from handsets and said it would cut as many as 10,000 jobs as it ceded market share to iPhones and handsets by Samsung Electronics Co. (005930) Since the iPhone’s introduction in 2007, Nokia shares have fallen 93 percent, while STMicroelectronoics dropped 72 percent.
STMicroelectronics, which has the French and Italian governments as its main shareholders, together holding a 27.5 percent stake, dropped 1.6 percent to 3.95 euros as of 3:19 p.m. in Paris, while Infineon fell 2 percent to 5.17 euros in Frankfurt.
Other top mobile clients of STMicroelectronics such as BlackBerry maker Research In Motion and France’s Alcatel-Lucent SA (ALU) also posted lower sales and operating losses for the three months through March. ST-Ericsson, STMicroelectronics’ mobile- phone chip venture with Ericsson AB, said in April it will eliminate 1,700 jobs. The venture hasn’t turned profitable since being formed in 2009.
Still, the European chipmakers’ bet on strong Asian demand leading the car market has risks.
Auto demand in China, the world’s largest vehicle market, has slowed with the economy. More Chinese cities may also restrict vehicle ownership after Guangzhou this month imposed a quota on new cars to control congestion and pollution, which Mizuho Financial Group Inc. predicts will threaten sales growth of carmakers such as General Motors Co. (GM) and Volkswagen that depend on growth in Asia to counter declining demand in Europe.
China’s automakers’ association said today that passenger- car deliveries in June rose 16 percent to 1.28 million units after a 23 percent gain in May. Figures for both May and June last year were hurt by disruption from the Japan earthquake. In the first five months, passenger-car sales increased 5.5 percent to 6.33 million units after growth of 6.1 percent a year earlier.
Bozotti said STMicroelectronics’s growth rate of 18 percent at the car division last year is “not sustainable.” Instead, revenue from that segment will increase between 5 percent and 10 percent this year and going forward, he said.
While the global economic slowdown is also affecting STMicroelectronics’s revenue from cars, which declined to $391 million in the first quarter from $433 a year earlier, Bernd Laux, a Frankfurt-based analyst at Credit Agricole, said the focus on car semiconductors will pay out in the long term.
“There’s enduring growth from the car industry because more and more semiconductors make their way into cars, and that is only going to speed up with the spread of hybrid and electric cars,” he said. “That trend, even when it’s tied to demand cycles, will make sure demand will keep going up.”