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STMicro Inside Cars Is Chipmaker's Bet on Future

2012-07-11 10:59:26

By Marie Mawad, Cornelius Rahn and Mathieu Rosemain on July 11, 2012

STMicroelectronics NV (STM), Europe s biggest chipmaker, whose shares have

slumped more than 70 percent since Apple Inc. (AAPL) (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.

German Cars

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) (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.

Nokia Cuts

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.

Ericsson Venture

STMicroelectronics, which has the French and Italian governments as its main

shareholders, together holding a 27.5 percent stake, dropped 0.5 percent to

3.99 euros as of 9:45 a.m. in Paris. The stock had declined 13 percent this

year through yesterday while Infineon fell 9 percent in Frankfurt. The 49-

member Bloomberg World Semiconductors Index rose about 2 percent.

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.

China Slowdown

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) (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.

To contact the reporters on this story: Marie Mawad in Paris at

mmawad1@bloomberg.net; Cornelius Rahn in Frankfurt at crahn2@bloomberg.net;

Mathieu Rosemain in Paris at mrosemain@bloomberg.net

To contact the editors responsible for this story: Kenneth Wong at

kwong11@bloomberg.net; Chad Thomas at cthomas16@bloomberg.net

http://www.businessweek.com/news/2012-07-10/

stmicro-inside-volkswagen-is-next-best-thing-for-chipmaker-tech