Forget Tesla, Buy SMH as an Electric Vehicle Play
April 28, 2021
Read Time 3 MIN
Semiconductors are everywhere you look today, from smartphones, to PCs, automobiles, TVs, smartwatches, screens and any other technology related device. As we wrote back late last year, semiconductors are driving new technological advances and are expected to continue to do so in the future.
Within those technological advances, semis have been playing a key role within the auto industry. Today, autos have become more connected, which has triggered a boom for the semiconductor companies involved. NXP Semiconductors1 one of the top semiconductors in the world and the number one auto semiconductor company by market share after it purchased Freescale in 2015, has reported in its Q4 2020 earnings strong trends in the auto end-market with 44% of its revenues coming from this segment. Despite that, the chip shortage has dented the auto industry of $60bn2 in revenues as the dependency on semiconductors has grown significantly.
In considering how many chips a new car contains, or even better, how many chips electric vehicles (EVs) use, we may see a big push in the semiconductor industry as revenues potentially jump. EV adoption has accelerated in previous years – now everyone seems to own a Tesla – and there are global trends that are also pushing the adoption of EVs.
- Europe has been aggressively pushing to reduce emissions and it is buying electric vehicles at a record pace, as consumers are encouraged to do so with new cars and more importantly, the plethora of government subsidies.
- Watch out for the EU7 proposal as it continues to demonstrate European commitment to accelerate the shift to sustainable and smart mobility.3
- In the U.S., Biden has committed to transition the federal fleet (over 645,000 vehicles) to EVs. Traditional carmakers such as Ford and GM have reconsidered and will now be transforming their business models to include EVs. Ford committed $29bn to electric band self-driving cars through 2025 while GM said that it will stop selling gasoline powered cars by 2035.4
- China is also part of this movement as the State Council issued a development plan for the new energy vehicle industry which lowers its electric vehicle sales penetration target to 20% in 2025 (previously 25%), but it also targets that by 2035, pure battery vehicles are to become the mainstream of new car sales.5
The SIA stated that in 2020, auto semiconductors demand was expected to decline by 10.1%, but the advance drivers’ assistance systems (blind spot detector, parking assistant, collision warning, etc.) and vehicle electrification will drive growth in the next few years6. Deloitte also published a report where automotive electronics (powertrain, chassis, navigation, safety, radio, etc.) are estimated to account for 45% of car manufacturing costs by 20307.
Semiconductor content has been on a trend over the years and it is expected to accelerate, as consumers are hungry for more in-vehicle electronics, systems with greater connectivity, safety-related systems and the preference for EVs continues to accelerate.
Examples of Key Applications of Semiconductors in an Automobile
Semiconductors are pervasive across the automobile. The key use cases have been summarized below.
Source: VanEck, 4/27/2021.
We believe that the global auto industry will likely experience a faster shift toward vehicle electrification and a potentially decline in combustion engine vehicle sales (in our view, everyone is heavily invested in the transition away from oil). Not only are better batteries needed, and that is where most investors are looking, but they should also pay attention to the chips going into car production.
VanEck Vectors® Semiconductor ETF (SMH®) seeks to replicate the performance of the MVIS® US Listed Semiconductor 25 Index, which is comprised of the 25 largest and highly liquid U.S. listed semiconductor companies. SMH is a pure-play semiconductor industry ETF, meaning that each company must generate at least 50% of their revenues from the production of semiconductors and/or semiconductor equipment.
1 4.36% as of 3/31/2021
4 https://www.utilitydive.com/news/biden-plan-to-electrify-federal-fleet-will-boost-ev-market-but-many-questi/594029/, https://www.caranddriver.com/news/a35432253/ford-ev-commitment-announced/, https://www.nytimes.com/2021/01/28/business/gm-zero-emission-vehicles.html
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