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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.
ON Semiconductor is executing a deliberate pivot toward high-efficiency power electronics, especially in the electric vehicle (EV) space. By prioritizing silicon carbide (SiC) and GaN for automotive applications, shedding low-margin commodity components, and making targeted acquisitions, ON aims to reposition itself as a premium supplier. While communications and IoT remain less developed, their strategic focus on SiC production capacity, margin expansion, and custom product penetration in automotive and industrial markets reflects a long-term structural shift.
1. Automotive Electrification: The Core Growth Engine
Automotive now represents approximately 30–35% of ON Semiconductor’s revenue, and its trajectory aligns directly with the electrification of transport. The company is positioning itself as a vertically integrated supplier of power conversion and control components for EVs, including:
SiC-based power modules for traction inverters and onboard chargers.
GaN devices for lighter-duty, high-frequency automotive systems.
Image sensors and custom ICs for ADAS and EV subsystems.
The company’s SiC roadmap targets full-stack offerings—from discrete devices to complete modules—delivering performance benefits in thermal efficiency and power density over silicon-based incumbents.
Strategic Bet: ON aims to become the default supplier of SiC power components to global EV OEMs by offering both volume scalability and system-level integration.
ON Semiconductor focuses on automotive power solutions using SiC and GaN technologies while expanding into new markets.
2. Margin Management: Commodity Exit vs Custom Entry
ON’s gross margin goal of 40–45% has been elusive. The core issue lies in product mix:
Commodity products (e.g. general-purpose analog ICs, diodes) dilute margins due to intense ASP competition.
Custom, high-value products (e.g. automotive SiC, imaging sensors) offer pricing power but have longer design cycles and customer lock-in.
Their pivot strategy involves deemphasizing legacy consumer components and scaling premium, long-lifecycle components tied to automotive and industrial platforms.
Financial Transition: The company is actively reweighting its portfolio toward bespoke B2B components with long-term supply agreements—key for margin stability.
ON Semiconductor's revenue is evenly split across automotive, consumer & communication, and industrial segments.
3. Acquisition Strategy: Precision Fill-Ins, Not Big Bets
Rather than pursue headline-making M&A, ON Semiconductor targets sub-$100M acquisitions that reinforce its technology roadmap. The Fairchild Semiconductor acquisition (2016) added critical power devices, but more recent moves emphasize niche capabilities:
Battery management systems
Powertrain optimization IP
SiC packaging and vertical integration
These bolt-on acquisitions aim to accelerate time-to-market for next-gen EV platforms, particularly those seeking vertically sourced power modules.
Playbook Comparison: Similar to how Infineon absorbed Cypress to expand connectivity, ON’s acquisitions aim to backfill gaps across the SiC stack—not to enter unrelated segments.
ON Semiconductor strategically acquires niche players to complete its portfolio and enhance battery management and power electronics capabilities.
4. SiC vs GaN: Technology Segmentation and Prioritization
ON is betting heavily on SiC for EV systems and high-voltage industrial applications:
SiC Benefits: Higher thermal conductivity, lower switching losses, and high breakdown voltage make it optimal for EV drivetrains.
GaN Advantages: Smaller form factor and better switching speed, better suited for consumer and telecom power systems.
SiC adoption is accelerating faster due to automotive qualification cycles and OEM demand for vertically integrated solutions. ON’s multi-billion-dollar capex plans reflect this, including fabs and packaging lines dedicated to SiC.
Capex Focus: Over 50% of ON’s 2024–2026 capital expenditure is aligned with expanding SiC capacity and packaging automation.
SiC outperforms GaN in efficiency, while GaN excels in cost and adoption rate.
5. Communications: Low Ambition, Steady Cash Flow
In mobile and consumer electronics, ON has adopted a follower strategy:
Supplies commodity analog and power management ICs.
Avoids competing in baseband, modem, or RF—areas dominated by Qualcomm, MediaTek, and Broadcom.
Prioritizes cost efficiency and volume stability, not innovation.
This segment delivers stable but low-margin revenue, serving as a cash generator rather than a growth pillar.
Investor Note: ON’s communication strategy is defensive—ensuring fab utilization and market coverage without diluting R&D focus.
ON Semiconductor’s strategic focus is on providing essential, high-quality components while supporting the growing demand in the automotive and industrial markets.
6. Industrial and IoT: Optionality, Not Certainty
ON’s expansion into industrial and IoT markets remains exploratory, driven more by TAM potential than existing competitive positioning.
In industrial, ON has growing exposure to robotics, factory automation, and drones—segments that benefit from efficient power conversion.
IoT remains underdeveloped in ON’s portfolio, lacking clear ecosystem partnerships or a unified go-to-market strategy.
Growth Watchpoint: Industrial markets may offer scale and margin potential, but IoT strategy requires greater focus and clarity.
Industrial investments are growing faster than IoT investments.
7. Margin Execution: The Key to Strategic Credibility
ON’s long-term viability hinges on achieving its stated 40–45% gross margin target—a goal that hinges on portfolio optimization:
Exit or de-prioritize commodity SKUs with sub-30% margins.
Reinvest in custom analog ICs, power modules, and system-in-package (SiP) solutions for EVs and automation.
Track the ramp of SiC capacity and the ability to move high-value designs from development to volume.
Investor Metric: Margin delta is the core KPI to watch; revenue growth without gross margin lift is unsustainable.
Commodity components are like basic ingredients, while high-value custom products are the specialty creations that stand out.
8. Takeaways for Operators and Investors
Automotive is ON’s lead growth driver, particularly through silicon carbide differentiation in EV systems.
Margin rebalancing remains the crux of the turnaround—commodity reduction, premium product growth, and operational leverage.
Acquisition strategy is rational and focused, avoiding dilution and misalignment while plugging IP gaps.
SiC is a long-term investment moat, with internal wafer capacity providing supply chain insulation.
Industrial is a potential breakout, but IoT requires more strategic alignment.
Execution risk is high—success will depend on how well ON reallocates capital toward high-ROI segments and technologies.
ON Semiconductor focuses on automotive, industrial, and IoT markets for growth and success.
