High-Tech Vehicles to Drive Automotive Chip Demand

By Kiyoshi Takenaka and Nathan Layne

Take a spin in Toyota Motor Corporation’s (7203.T) Prius hybrid sedan and you’ll get an idea of why Japan’s chip makers see a huge growth opportunity in the auto industry.

The Prius is powered partly by an electric motor that complements its gasoline engine. Semiconductors control the electric motor.

As electronics become the main driver of car innovation, chip makers will be among the top beneficiaries, analysts say.

“Because penetration of electronics in cars is still quite low, we expect to see growth (in chip demand) coming from further penetration,” said Mike Williams, Research Vice President at Gartner.

Global automotive chip demand is expected to double to $24.5 billion by 2008, outpacing the 68 percent growth in the overall chip market, according to research firm iSuppli.

Automotive chips already range widely from microcontroller units that help boost energy efficiency to system chips that read fingerprints for keyless engine starts, and to sensor chips for climate control.

Analysts say there is much room left for further chip-led innovation in automobiles.

“Electronics is where car makers can really start to do innovation and they can differentiate their cars from competition,” said Drue Freeman, vice president of global automotive marketing and sales at Philips Semiconductors, a unit of Philips Electronics (PHG.AS).

“Also, the use of more electronics and semiconductors will actually help reduce the costs that car makers have to spend in building cars (by eliminating mechanical parts).”

The niche potential isn’t lost on chip makers.

In announcing its decision to sell part of its power chip operations to Mitsubishi Electric Corp. (6503.T), Toshiba Corp. (6502.T), the world’s fifth-largest chip maker, said last month the deal would exclude products for automotive use, underlining strong growth potential of auto-related semiconductors.

“Car technology ultimately heads toward automatic driving. Technologies will be developed for that end. Supporting those technologies will be, of course, semiconductors,” iSuppli Japan President Yoshihisa Toyosaki said.

Besides power chips, which can be used to control hybrid car motors, image censor chips are expected to meet strong demand as they help car makers offer cutting-edge safety features.

Image censors, which are used widely in camera phones and digital cameras, can be embedded on the surface of automobiles to monitor the moves of vehicles around them and override drivers’ steering, if necessary, to avoid a crash.

They can also observe the facial expression of a driver. If they find signs of drowsiness, such as frequent blinks, an alarm would go off to give the driver a warning.

“As people seek enhanced safety and comfort, five to 10 image censors are likely to go into a car in the future,” Sharp Corp. (6753.T) spokesman Tetsuya Igarashi said. Sharp is the world’s largest maker of camera modules for mobile phones.

“We have high hopes that autos will form a new market for image censors just like cellphones did.”

If 10 image censors find their way into a car, automotive demand for image censors could be as big as the $1.6 billion market for image sensor chips used in cellphones since automobile shipments are roughly one-tenth of mobile phone shipments.

Having a lineup of automotive chips, which are required to function properly even in adverse conditions such as extreme heat, could also provide a favorable ripple effect for chip makers.

“If your chips are used in cars, especially in the critical area of engine control, that boosts the credibility of your products among all kinds of customers,” said Minoru Matsuda, general manager of automotive systems at NEC Electronics Corp. (6723.T), the world’s eighth-largest chip maker.

Even semiconductor equipment companies are getting into the act. Advantest Corp. (6857.T), the world’s largest maker of testers for memory chips, is building machines that test automobile-use semiconductors to help diversify its business.

Advantest estimates that the number of chips used in a car will double by 2008. A typical passenger car today uses 50 to 70 microcontroller units. The number goes beyond 100 for a luxury sedan.

Rivals in the tester industry such as U.S.-based Teradyne Inc. (NYSE:TER – news) and Yokogawa Electric Corp. (6841.T) have also positioned themselves to capitalize on this trend.

“The automobile will continue to deliver steady incremental growth, which is not something we can say about the PC,” said Advantest President Toshio Maruyama in a recent interview, referring to the volatile nature of memory chip demand.

Advantest expects revenues from its testers for automobile-use chips to nearly double to 2.4 billion yen ($22 million) in the current business year to March 2005 although that is still a small portion of its group sales of about 250 billion yen.

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