Cars n’ Chips

It is impossible not to talk about the current banking crisis, because the health of the banking sector is one of the most important things for any investor to consider. Two looming issues for many banks are liquidity risk (i.e., the risk too many depositors withdraw their deposits all at once) and interest rate risk (i.e., the risk of having to sell low-interest-rate bonds assets at a loss to cover withdrawals). A significant enough bank run would be sufficient to doom any bank, but you may find Silicon Valley Bank and Signature Bank had a higher concentration of startup firm's deposits and crypto deposits, and First Republic was using nearly 90% of its deposits to fund its lending activities. Although the Fed’s efforts could prevent more bank failures, using this backstop could also come with a cost for those banks.

That said, the main topic of this newsletter is the increasing amount of semiconductors in modern cars. Until recently, the automotive sector has taken up only a small share of the global demand for semiconductors. It’s estimated that chips in cars currently account for only 11% of the overall chip market. However, as more technology is added to vehicles and manufacturing shifts to electric and autonomous vehicles, the future of the automobile industry relies on chips being in full supply.

The average electric vehicle uses about 3,000 chips, meaning an EV will need more than double the chips of a non-electric car. To mention only some components that require semiconductors: The powertrain of an EV, for example, includes the charger, the inverter, the AC/DC converter, the high-voltage battery, the central processor and the motor itself. For autonomous driving, various cameras, multiple radars, ultrasonic sensors, and steering and braking by wire will be essential in the future. Add to this the digital control unit and the infotainment system.

Car sales were held back significantly by the chip shortage in 2022, marking the industry’s lowest sales volume since 2011. We expect a choppy recovery this year, with inventories trending upward throughout 2023 as production capabilities improve.

All-electric and plug-in hybrid vehicles accounted for roughly 10% of the global light vehicle sales in 2022, but their share is expected to be 30% by 2030.