Localisation is happening fast but the impact is overestimated
In this report we revisit work from our Q-Series published last year on the rising use of Chinese semiconductor content by Chinese OEMs. We concluded that Chinese OEMs would gain share globally and push to localise semi content domestically, largely opting for incumbent suppliers in international models. We think investors are increasingly concerned about the near-term impact of this trend on global incumbent semis, which we believe is overestimated. Based on our analysis we highlight two new conclusions:
- We believe localisation at Chinese OEMs has accelerated vs. our initial assumptions, with recent pushes from the Chinese govt. to reach 20% localisation by 2025 and Chinese OEMs share of domestic sales rising rapidly from 46% in 2022 to 60% in Q4'23. In our base case we now estimate 7% share loss by 2028 vs. 2030 previously;
- We launch two new models, which show that even with this acceleration of share loss, impact on growth should be manageable. We estimate global incumbent semis will still see mid-single digit percentage 2023-26E auto semis revenue CAGR in the Chinese market and globally.
Short and medium term risk is manageable
We highlight three further points:
- We continue to estimate our base case scenario will lead to a 2-5% impact on top line per year in the next 5-10 years, for global incumbent semis;
- In the medium term (two to three years), we estimate incumbent semis will see mid single digit percentage auto revenue growth rates globally driven by high growth in the EV market in China but also outside of China as OEMs push to reach new CO2 targets;
- We estimate the "installed base" of models already in production in China, should provide a buffer, as global incumbent share will remain higher in these models.
Based on this and recent evidence, we believe the market is overestimating the impact that China localisation will have on incumbents semis in the short and medium term.
How are incumbent semis reacting?
In our view, the majority of incumbent semis suppliers are aware of the rising competition from China but largely view themselves as protected for various reasons. The majority believe they are only seeing disruption in lower-end products, or specific product types. All companies believe they have some form of defence from rising competition ranging from their focus on higher-end products to participation in Chinese JVs. Overall whilst we agree disruption has started in lower-end and amongst certain products (Power / lower performance, evidenced by our teardown), we believe this will likely spread to higher-end products and other product segments over the coming years. Whilst the various defences may provide some buffer, we continue to believe gradual, though meaningful (>2% annually) share losses within the domestic China market are likely.
