- Nexan Insights
- Posts
- ON Semiconductor
ON Semiconductor is strategically focusing on the automotive market, leveraging silicon carbide (SiC) and GaN technologies for electric vehicles while balancing high-margin custom products with commodity components. Acquisitions target niche technologies, aiming to boost power electronics capabilities. Despite margin challenges, ON is shifting towards premium segments, cautiously exploring industrial and IoT markets for future growth.
Imagine a sprawling chessboard, where every piece is a semiconductor technology, every move is an acquisition, and the board itself is the global electronics market. In the center of it all sits ON Semiconductor, maneuvering strategically to capture markets from automotive to industrial, all while keeping an eye on emerging opportunities. Let’s dive into this chess game—where every move is critical and every piece has a role.
The Automotive Gambit: Betting Big on Electrification
ON Semiconductor is all in on the automotive market, and they’re doubling down on electrification. Picture a game of Tetris where instead of geometric blocks, you’re stacking silicon carbide chips, GaN transistors, and image sensors. ON’s approach is to fill every possible gap in the automotive tech stack, stacking vertically and ensuring they’re the go-to solution for the industry’s power needs.
Automotive currently makes up about 30-35% of ON Semiconductor's revenue. As more manufacturers move towards electric and autonomous vehicles, the demand for power-efficient and scalable solutions is skyrocketing. ON is not just keeping pace; they’re driving innovation by leveraging silicon carbide and GaN technologies to deliver more efficient power conversion systems for EVs.
ON Semiconductor focuses on automotive power solutions using SiC and GaN technologies while expanding into new markets.
Commodity Components and the Margin Conundrum
ON Semiconductor finds itself in a unique balancing act. On one side are the high-margin, custom products tailored for specialized applications; on the other, the low-margin, commodity components that fill the broader market. ON’s strategy has been to increase its focus on high-value products, especially in the automotive and industrial sectors, to push overall margins up—a 40-45% target they’ve struggled to hit.
Think of it as trying to bulk up for a bodybuilding competition. Custom products like image sensors and specialized power modules are the muscle, while the commodity components are the carbs. ON Semiconductor has recognized that they need more muscle if they want to flex their financial gains and impress investors.
ON Semiconductor's revenue is evenly split across automotive, consumer & communication, and industrial segments.
Acquisitions: Strategic Growth or Filling Technology Gaps?
Acquisitions have been at the core of ON Semiconductor’s strategy. The company’s purchase of Fairchild Semiconductor boosted its power electronics capabilities, but what’s next? ON is eyeing smaller acquisitions in the sub-$100 million range—these are not about creating a media buzz but about filling in specific technology gaps, particularly in the automotive sector.
It’s like collecting puzzle pieces at a garage sale, but only those that fit into your grand vision of the final picture. ON Semiconductor aims to acquire niche players that can enhance their battery management or powertrain technologies, ensuring they remain indispensable in the evolving electric vehicle landscape.
ON Semiconductor strategically acquires niche players to complete its portfolio and enhance battery management and power electronics capabilities.
Silicon Carbide vs. GaN: The Future of Power Efficiency
To understand ON Semiconductor’s technological bet, think of silicon carbide (SiC) and Gallium Nitride (GaN) as two superhero characters—each with distinct superpowers. SiC is strong, resilient, and efficient, perfect for automotive power applications that demand durability. GaN, on the other hand, is faster and better suited for high-frequency tasks, such as communications and high-efficiency power converters.
ON Semiconductor is investing in both, but prioritizing SiC for the automotive market where efficiency and reliability are paramount. They’re betting on SiC to help automakers pack more power into electric vehicles without adding bulk, making them more energy-efficient and extending their range.
SiC outperforms GaN in efficiency, while GaN excels in cost and adoption rate.
The Communications Segment: Following, Not Leading
ON’s approach to the communications market—smartphones, wearables, and portable devices—has been conservative. Unlike their automotive efforts, they’re more of a follower here. They’re not trying to reinvent the wheel; instead, they’re producing commodity parts and supporting existing technologies. This “follower” strategy might not sound exciting, but it’s a pragmatic approach given the competitive landscape dominated by giants like Qualcomm and Broadcom.
ON is essentially saying, “We’re not going to try and outrun the big dogs, but we’ll be ready to supply the essentials.” For investors, this means stable, albeit lower-margin, revenue from a segment where ON can maintain a presence without overextending.
ON Semiconductor’s strategic focus is on providing essential, high-quality components while supporting the growing demand in the automotive and industrial markets.
Industrial and IoT: The Foggy Frontiers
The industrial segment, encompassing high-power applications, robotics, and drones, represents a less-defined area of growth for ON Semiconductor. It’s like a foggy road that they’re exploring cautiously, rather than charging full speed ahead. While the potential is enormous, the path forward is not entirely clear—ON needs partnerships with major players to solidify its presence in the IoT space, and those partnerships are still developing.
For IoT, ON’s strategy remains vague—they’re dabbling, but there’s no cohesive grand plan yet. It’s the segment investors should keep a close eye on, as it could be the difference between steady growth and exponential scaling if they manage to lock down significant partnerships.
Industrial investments are growing faster than IoT investments.
The Margin Battle: Can ON Turn Up the Heat?
ON’s margin struggles are no secret. They’ve aimed for 40-45% margins for years but have yet to hit that sweet spot. The problem? Too many commodity components dragging overall margins down. Their plan: shift towards more high-value, custom solutions, especially in growing sectors like automotive and industrial.
Imagine a bakery that wants to focus less on selling plain bread loaves and more on specialty cakes. ON needs to make that transition—more premium products, less commodity churn. Investors should watch how well ON shifts its focus; achieving their margin targets will be a key indicator of their strategy’s success.
Commodity components are like basic ingredients, while high-value custom products are the specialty creations that stand out.
Wrap-Up: Where the Moves Matter
ON Semiconductor is in an exciting phase—they’re leveraging their strengths in automotive while cautiously exploring industrial and IoT opportunities. Their acquisition strategy shows that they’re filling in gaps to strengthen their offering rather than making flashy purchases. The chessboard analogy is apt: ON is making deliberate, strategic moves that might not always make headlines but could set them up for checkmate in the years to come.
For investors, the key is to watch how they execute on margins, manage acquisitions, and push into high-value segments. If ON can move from being a commodity-heavy player to a high-margin, premium product leader, they’ll be on a path to sustained growth and industry leadership—one silicon carbide chip at a time.
ON Semiconductor focuses on automotive, industrial, and IoT markets for growth and success.
