Status of the Automotive Supplier Industry

CONFIDENTIAL AND PROPRIETARY

Any use of this material without specific permission of McKinsey & Company is strictly prohibited

March 10th 2021

Status of the Automotive Supplier Industry

Pulse Check Results – Spring 2021 survey

DRAFT

McKinsey & Company 1

Your team for today's CLEPA McKinsey Pulse Check Webinar

McKinsey & Company

Dr. Dirk Breitschwerdt

Senior Partner

Leader of McKinsey's automotive supplier

sector in EMEA

15+ years of automotive experience,

focusing on automotive suppliers

[email protected]

Dr. Ondrej Burkacky

Partner

Leader of McKinsey‘s semiconductor practice

globally

12+ years of experience within semiconductor and

advanced electronics (incl. IDMs, foundries)

[email protected]

Dr. Lukas Michor

Partner

Leader of McKinsey's automotive supplier sector

in EMEA

10+ years of experience, and supported 15+

automotive suppliers

[email protected]

1


CLEPA Pulse Check

Spring 2021

This CLEPA Pulse Check focuses on …

Status of the automotive supplier industry

Semiconductor shortage:

• Insights from Pulse Check

• McKinsey Perspective: Key reasons, implications and

recommendations

Imminent changes to the industry structure and supplier reactions:

− Product portfolio shifts & search for growth in adjacent

industries

− Role of new OEMs for growth aspirations

− Sustainability efforts and challenges

2


Outlook for automotive supplier industry rebounds – almost 40% of suppliers with positive general outlook


Source: McKinsey CLEPA Pulse Check Survey

General outlook significantly more positive than during last two years, healthy order intakes

drive faster than expected recovery

~80% of automotive suppliers expect increasing order volumes in the next 12 months

Positive Neutral Negative

41%

Feb. ‘21

18%

8%

Sep. ’18

60%

68%

12%Sep. ‘19

Sep. ‘20

31%38%

Note: Displayed percent values without accounting for "N/A" answers. N=40 (September 14th – October 4th, 2020), N=74 (February 8th - 26th, 2021)

What is your general outlook for the automotive supplier industry?

Survey conducted between February 8 th – 26th, 2021


Positive trend also holds true for profitability outlook: Suppliers expect margins to continue to stabilize throughout 2021



“We need to replace

temporary measures taken

in 2020 with structural

ones in 2021.”

Selected quotes from

respondents

Note: Displayed percent values without accounting for "N/A" answers. N=40 (September 14th – October 4th, 2020), N=74 (February 8th - 26th, 2021)

“Our fast reaction and the

implementation of hard

structural changes start

to pay off. We expect

significant profitability

improvements from 2020

to 2022.“

Which profitability do you expect for 2021?

Above 5%

Sep. ‘20

-5% to -1% 1% to 5%-1% to 1%

For 2022 suppliers expect even higher profitability with structural

changes taking full effect

Feb. ‘21

11% 44%45%

15% 20%65%

Below -5%



CLEPA Pulse Check

Spring 2021


5





recommendations



industries




Current semiconductor shortage is impacting majority of the suppliers

Semiconductor shortage


Note: Displayed percent values without accounting for "N/A" answers. N=74 (February 8th - 26th, 2021)

How is your company affected from the semiconductor

shortage?

Production already delayed

or interrupted

No impact

26%

26%Production at risk

(e.g., due to very low stock levels)

Supply chain modifications

required

Commercial consequences

with OEMs expected or started

(e.g., regarding claims)

37%

21%

12%

>60%impacted by the

current

semiconductor

shortage


50%of suppliers are not in favor

of governmental support

measures to alleviate

shortages

Selected quotes from respondents

“This effect will remain

limited to the short term.”

“The demand is higher than

required for the produced

cars so a reality check needs

to be done by all participants of

the real needs.”


Faster recovery in other sectors leads to an overall demand increase for semiconductors compared to pre-COVID forecasts

Semiconductor 2019 sales by application1

USD billions

127

67

52

49

41

38

29

26

Server

Consumer electronics

Wireless communication4

PC

Storage, GPU, peripherals

Industrial

Automotive

Wired communication

1. Products include memory, micro components, logic, analog, discrete, optoelectronic, and sensors/actuators

2. The estimates for 2020 were calculated using a 2019 baseline and percentages have been rounded

3. As of December 2019

4. Includes Chinese inventory effect, growth rate w/o inventory expected to be -4 to -8%

2020 post COVID-19 growth forecasts2

YoY growth, percent

Source: Strategy Analytics; IHS; Expert Interviews

-20 0-10 10 20

429Total

-30 30

Actual IHS (Dec 2020)Pre COVID-19 IHS (Q4/19)3

Ø 5 Ø 9



88

042000 1412

90

02 06 08 10 16 18 202060

70

80

100

In last 10 years semiconductor capacity only grew gradually with a high utilization

800

600

0

200

400

1,000

+179%

+4% p.a.

Semiconductor production capacityMillion square inches per month

Semiconductor production capacity utilizationPercent

Dotcom bubble

Utilization

range

Global financial crisis

IDM Foundry Total

Key takeaways

Capacity has been steadily

increased over the last two

decades by 4% p.a. with no

sudden increase visible and a

mild flattening during crises

Utilization was constantly high

and did not fall below 80% over

the last 10 years

With a total utilization of 88% in

2020 total capacity is nearly

exhausted

Source: IHS-Omdia, McKiinsey



Trends claim capacity of trailing and lagging edge nodes which are essential for the automotive industry

1. <= 28 nm

2. > 28 nm

Leading edge1 Trailing & lagging edge2

Automotive overlap of trend

Electrifica-

tion

n/a Discretes

Power

management

Power supply units

5G Logic

FPGA

ASIC

RF switches

Duplexer

Antenna

IoT edge

computing

Main processing

unit

Memory

Sensor

Microcontroller

Analog

(communication)

High overlap Low overlapOverlap between trend and automotive nodes

Source: McKinsey



Ongoing shift to foundries allows formore dynamic allocation of volume to other sectors

100153

208

288+8% p.a.

+8% p.a.

100 111145

173

202010 15 2024

+4% p.a.+5% p.a.

Foundries are gaining compared to the overall semiconductor

market

Source: IHS-Omdia, McKinsey

Insights

Foundries can more dynamically re-

allocate volume between customers/

sectors – many products are already

qualified in the fabs

Foundries have significantly outgrown

market over the last 5 years (8% vs 5%

growth)

This trend is even expected to accelerate

over the coming years up to 2024 (8% vs

5% growth)

Much lower capital requirements for

Fabless supplier enables trend to asset-lite

business models, also IDM’s with

increasing outsourcing share

This trend is driven by the increasing

CAPEX needed to go towards smaller

node sizes and the diverging business

models

IDM revenue,

indexed (2010=100 [USD 311 bn])

Foundry revenue,

indexed (2010=100 [USD 33bn])


McKinsey & Company

Forward contracts are standard in the semiconductor industry, example computer

Wafer foundry,

e.g., TSMC

Tier 1 manufacturer

of power supply

units, e.g.,

Customer,

e.g., computer

manufacturer Dell, HP

Power Semicon

Supplier, e.g.,

Infineon

Automotive suppliers, OEMse.g., Renesas, STM, etc.

Adjusted to automotive situation

e.g., TSMC

▪ Take-or-pay contracts from wafer/semicon suppliers with Tier

1s/customers are standard, Commitment for

1- year (via take-or-pay contract), e.g., for 80 thousand wafers per year

▪ In addition call option (to be called minimum 6 months before), e.g., for

40 thousand wafers per year

Customer needs to provide binding

volume commitments 6 months ahead to

Tier 1

(Take or pay)

Long-term take or pay contracts

are new for the automotive industry


11Source: McKinsey


Current steepening demand in automotive faces limited available supply with >4 months lead times for new orders

Source: McKinsey

Product development & productionCapacity build-up

1. Chip design can be driven independent of Fab manufacturing capacity

2. E.g., ~12 product lifecycle for mobile phones, 24-36 months development time for Automotive MCUs

Semiconductor development & production timescales Key takeaways

Capacity increase takes >6

months even in existing Fabs

Launch of Automotive products

by additional vendors

typically take >12 months

Production takes >4 months –

even when Fab is not fully

loaded

Additionally, complex

qualification process of

alternative suppliers in

automotive industry

Typical

durationMonths

~12-18 >6 >4~12-362~6-18

Influencing

factors

Cleanroom

building

Facilitation

(HVAC, gas,

electric etc.)

Product

complexity

Fab utilization

Product

complexity

Physical and

chemical

processes

Fab utilization

Product

complexity

Tool lead times

Hook-up and

qualification

Also required for

expansion of

existing Fab

Also required

when transferring

existing product

between Fabs

New Fab

build-upFab ramp

Chip

design1

Yield &

volume

ramp-up

Production

(cycle time)



2021 forecasts show a continuing robust growth across segments

Semiconductor 2020 sales by application1

USD billions

138

80

59

49

44

38

31

29

Industrial

Wireless communication

Storage, GPU, peripherals

PC

Consumer electronics

Automotive

Wired communication

Server

1. Products include memory, micro components, logic, analog, discrete, optoelectronic, and sensors/actuators

2021 growth forecastsYoY growth, Percent

Source: Strategy Analytics; IHS

-20 0-10 10 20

429Total

-30 30

Forecasted 2020 to 2021 growth (as of Dec 2020)

Ø 9



Current conclusions

Current semiconductor shortage revealed shortcoming of just-in-time low

upfront volume commitment automotive value chain competing with mainly

consumer electronics for high utilized semiconductor capacity

Short term recovery not expected before 3 months from now given production

lead times

Situation in Q3/Q4 to be closely monitored as increasing automotive demand

might collocate with historically strong Q3/Q4 electronics demand that might be

further fueled by „post COVID-19“ consumer spent behavior

Going forward, need to strenghten competitiveness of semicon sourcing:

longer term volume commitments, closely aligned OEM and tier-1 outlook,

leverage of common strategies in other sectors (e.g., corridor booking at foundries,

take-or-pay with call option agreements), consolidation of chip variants paired with

inherent automotive benefits: long production times and relatively stable demand


Source: McKinsey


CLEPA Pulse Check

Spring 2021


15





recommendations



industries




Significant disruption for the automotive supplier industry expected in the next 5 years

Industry structure & portfolio changes


Note: Displayed percent values without accounting for "N/A" answers. N=74

(February 8th - 26th, 2021)

What changes to the automotive supplier industry

structure do you expect within the next 5 years?

Emergence of "super-suppliers“

with sizable (i.e. >30%) market share in

key components (e.g., Car OS, AV stack)

Shift of profit pools from traditional components

(e.g., engine, body) to software & E/E

Increasing importance of suppliers

focusing on key high-tech components

(e.g., for chips, CCU)

Consolidation of supplier landscape

22%

50%

68%

61%


Only 4%

of suppliers believe there will

be no significant changes to

the automotive supplier

landscape in the next 5 years



Selected Key Elements

Changing supplier landscape

End of unit growth in the light vehicle market

Global light vehicle sales might not reach previous levels until 2030 and beyond;

growth in China/rest of Asia will not overcompensate stagnating or declining sales in

EU/USA – driving suppliers to search for growth outside of the automotive

industry

New OEMs entering the market

New players – either with strong tech-background or from growth markets – are

attacking incumbents and fight for market shares – thus increasing the importance

for suppliers to develop new relationships

Technology-driven portfolio shift (ACES)

Disruption of automotive industry along ACES trends is accelerating – resulting in

shifting profit pools towards new technologies (esp. E/E components, software)

Increased focus on sustainability

Increased societal focus on sustainability, backed with tightening regulation (e.g.,

Euro 7, green deal targets) accelerates structural change and decarbonization

Co

nso

lid

ati

on

Shifting profit pools

Adjacent growth

Digital

business

models Div

ers

ific

ati

on

Changing

component

demand

Shared mobilityElectric

vehicles

The supplier landscape is changing

Regulation

McKinsey & Company 18Source: McKinsey CLEPA Pulse Check Survey; McKinsey Center for Future Mobility


Technology-driven portfolio shift: Component landscape is changing…

What type of portfolio changes are particularly being

considered?


of suppliers currently actively reshaping

their product portfolio>90%Sunset commodities Growth opportunities Stable components

Expected market size development, EUR billionsSurvey conducted between February 8th – 26th, 2021

1.200

2019

1.300

2030Growing

components, e.g.E-Motor

BMS

LV / HV Battery cells

Fuel cells

…

Stable

components, e.g.Exterior lightning

Wheels

…

Sunset

commodities, e.g. Body exterior

Suspension, wheels,

tires

Engine systems

…

… thus suppliers are reviewing and adapting their portfolio

Only half of components (by revenue 2030)

expected to remain unaffected by portfolio shifts

61%

29%

Inhouse development

of new technologies

Consolidate portfolio to core

business and promising markets

51%

Keep portfolio, but change

strategic focus for struggling

product groups

32%

Extend portfolio through M&A


End of unit growth in the light vehicle market –Global car sales will likely not reach 100 mn units in the long term

Global light vehicle sales, millions

COVID caused 2020 global sales to decline by ~20% compared to 2019

Depending on resurgences and economic recovery, sales may be negatively impacted

for several years

Regional growth in China and Rest of Asia not sufficient to compensate

stagnating and declining markets in Europe and North America

Source: McKinsey Center for Future Mobility, IHS

2010

95

105

2812 1814 16

90

20

110

22 24 26 20300

75

80

85

100

115~111

(IHS Jan. 2020)

~97(McKinsey - Low

disruption scenario)

~104

(IHS Jan. 2021)

~87(McKinsey - Medium

disruption scenario)



End of unit growth in the light vehicle market is driving suppliers search for growth outside automotive


Are you targeting new growth areas outside of the

automotive industry?

Adjacent areas to the automotive

industry (e.g., charging infrastructure)

Areas not connected to the

automotive industry (e.g., household)

New digital offerings connected

to our current business

72%

50%

33%

Respondents show particular interest in new

industries, with >70% looking for options

completely outside of automotive



Which target areas outside of the automotive

industry are you exploring? (% of yes)

49% 51 %


Yes, we actively

seek opportunities

No, we focus on

the automotive

industry


New OEMs are entering the market – but suppliers see limited relevance until 2030


Source: McKinsey CLEPA Pulse Check Survey, McKinsey Center for Future Mobility, CapitalIQ


Which relevance do you expect that new OEMs will have

for your company’s revenues in 2030?1

Medium

High relevance

Low – medium

Medium – high

18%

Low relevance

1%

15%

32%

34%

66%expect no significant

exposure to new

OEMs in 2030


Only 34% think faster development cycles will be a challenge

when dealing with new OEMs

1 High relevance: > 30%; Medium – High (20-30%); Medium (15-20%); low-medium (5-15) 2. As of March 2021

Examples of new OEMs

As the regional relevance of China

and Asia will continue to rise, regional

new OEMs will gain additional

importance.

Further boost in relevance expected

through a massive rise in valuation

for new OEMs within L12M2:

+974%

+312%

+324%

+109%


report an increase in the relevance of sustainability within their company in the last 12 months

Note: Displayed percent values without accounting for "N/A" answers.

N=74 (February 8th - 26th, 2021)


What are the key drivers for the increased relevance of sustainability

in your company (% of respondents reporting an increase in relevance)

54%

61%

Other (e.g. local legislation)

Pressure from OEMs

(e.g., in RfQ process, contract requirements)

Pressure from society

(e.g., end-customers, talent)

Dominant opinion/belief

within the company

Pressure from capital markets

57%

29%

7%

~80%

Selected quotes from respondents

“Sustainability becomes

not a key competence

but more a condition”

“Curious how OEM will decide in case

supplier A with best CO2 footprint is

slightly more expensive than supplier B”


Increased sustainability focus:



Increased sustainability focus:Most suppliers have started on their sustainability roadmap



Survey conducted between February 8th – 26th, 2021

Majority of suppliers have set overall

sustainability targets…

…however, only one third has taken the next

step and defined measures

Defined general, overall

targets on sustainability83%

Did not define

sustainability

targets yet17% ... finding the right ambition level

... the cost assessment of decarbonization measures

... the appropriate sequencing of actions

Currently, suppliers predominantly struggle with:

Deducted high-

level measures

from overall

targets

35%Developed a

detailed roadmap

from high-level

measures

15% 7% Started

implementation

incl. due

diligence within

supply chain


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Status of the Automotive Supplier Industry