Chipmakers look to autos for demand, deals and disruption

Fri Dec 4, 2015 10:23am EST
 
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By Eric Auchard

BERLIN (Reuters) - Faltering demand in computer and phone markets, once semiconductor industry mainstays, have fueled a year-long merger wave as firms look to formerly unloved areas like auto electronics for sales growth. Big consumer chipmakers who once considered automotive electronics too small to merit attention are taking notice as Tesla, Google and Apple (AAPL.O: Quote) have jump-started a drive to turn cars into connected Internet devices.

That promises accelerating growth rates for incumbent electronics suppliers that are the envy of those looking to break into the business. On Monday, NXP (NXPI.O: Quote) is set to close its $11.8 billion deal to buy Freescale FSL.N, displacing Renesas (6723.T: Quote) as the world's top auto chipmaker and putting pressure on rivals to respond. Already, Infineon (IFXGn.DE: Quote) has reportedly begun talks to take a stake in Japan's Renesas. The scope for other major deals in the auto sector appears to have narrowed, but automotive electronics makers who lack the capacity to invest in next-generation products still could come into play, analysts said.

That's the game-plan for Anglo-German chipmaker Dialog (DLGS.DE: Quote), which has a profitable business supplying iPhone power management chips, but wants to diversify into auto and industrial markets by agreeing to buy U.S. chipmaker Atmel ATML.O. In Europe, other targets could include Melexis (MLXS.BR: Quote), Micronas MASN.S and Elmos (ELGG.DE: Quote) or AMS (AMS.S: Quote), which has a small automotive business. The automotive chip market is expected to hit $40 billion by 2019, a compound annual growth rate of 6 percent, Gartner predicts, while the overall global chip market, looks set to shrink 0.8 percent to $337.8 billion this year, it says. "A decade ago, autos was not sexy. Now it is," Reinhard Ploss, chief executive of Infineon, the leader in vehicle power management chips, told investors recently.

Infineon is shooting for 8 percent growth per annum over the next several years in vehicle related work. Europe's three biggest chipmakers -- Germany's Infineon, Dutch NXP and Franco-Italian STMicroelectronics (STM.PA: Quote) plus Japan's Renesas are all broad-based suppliers which also increasingly specialize on key segments of the car. The four account for nearly 50 percent of automotive chip revenue globally. It's an industry fragmented by the national and regional logic of car production, raising big questions over how any newcomers can make in-roads. Trying to break into the market are computer and phone electronics makers such as Nvidia (NVDA.O: Quote), Qualcomm (QCOM.O: Quote), and Intel (INTC.O: Quote), via its acquisition of Altera ALTR.O, and Dialog with its agreed deal to buy Atmel. MORE TO COME More than $125 billion in semiconductor deals have been announced or completed this year, as bigger, more profitable firms gobble up ones who can't keep pace with heavy spending needed for next-generation chips in auto, industrial and data storage markets. "Automotive will remain a highly attractive growth opportunity for the next 10 or 15 years," said Bernd Laux, an analyst with CA Cheuvreux. Among established automotive electronics players, Infineon, an early mover with its $3 billion deal to buy International Rectifier early this year, has signaled it is ready for more mergers, while remaining disciplined on what it will spend.

"Infineon is not afraid of modest-sized deals," Natixis analyst Maxime Mallet said of Infineon's openess to deals in the 1 billion to 2 billion euro range using a mix of cash and stock, without requiring a capital hike from shareholders. Specialists chipmakers such as Belgium's Melexis and Austria's AMS carry price to earnings ratios under 20 that could be conducive to an Infineon deal.

Solid growth has buoyed the companies in recent years, but it may be hard to sustain investing in research to keep their products competitive as bigger competitors leapfrog them, several analysts said. AMS has signaled it is willing to be a buyer or a seller in the current merger craze. Melexis is part of a closely held group of companies, which would make them able to fend off all but friendly takeovers, Commerzbank analyst Thomas Becker said. By contrast, Elmos and Micronas have suffered sales dips and their stocks have slumped accordingly leaving them vulnerable. Newer entrants like Nvidia and Intel argue that vehicles will need more centralized intelligence to govern ever greater electronic complexity. Cars now sport up to 100 separate electronic control points, each of which must be intricately connected to manage specific functions like steering or braking. Computer chip giant Intel, which has struggled for a decade to make headway in mobile phone markets, recently paid $16.7 billion for programmable chip maker Altera

It justifies the deal, in part, as a way to bundle autonomous driving features into future Intel processors for centrally managing critical car features, Intel Chief Executive Brian Krzanich told its annual analysts' meeting last month.

(Reporting By Eric Auchard; Editing by Keith Weir)

 
The headquarters of German semiconductor manufacturer Infineon are pictured in Neubiberg near Munich, January 28, 2014.   REUTERS/Michael Dalder