GLOBALFOUNDRIES Inc. (GFS) Earnings Call Transcript & Summary

Good afternoon, everybody. My name is Raji Gill. I head up Global Semiconductor and Automotive Technology Research here at the Needham & Company. Welcome to the 7th Annual Automotive Technology Conference. We're very pleased to have GlobalFoundries presenting with us for the first time. From GlobalFoundries is Kamal Khouri, who is the Vice President and GM of GlobalFoundries, automotive end market business. In terms of the format, this will be a fireside chat. For folks that are on the line, if you have questions, there is a chat box, feel free to send those questions, and I'll relay those messaging to Kamal. But maybe before we could get started, Kamal, maybe a brief background on your history, it's quite impressive, and it will be great for the audience to have some familiarity with your career.

Yes. Thanks, Raji, and thanks to Needham for hosting this conference and inviting GlobalFoundries to share our story with you in automotive and beyond. So yes, Kamal Khouri, I run the automotive end market for GlobalFoundries. I've been with the company for 3 years. And this was my first stent in semiconductor manufacturing. Prior to that, most of my career over 20 years has been with chip design and semiconductor design companies. So typically like GlobalFoundries customers. I started with Motorola, a really long time ago as a design engineer, and from there, I moved on to various different roles. I've done software design, I've done hardware design. I've also moved into product marketing, product management. Shortly after Motorola, I joined Advanced Micro Devices, AMD. I was there for 7 years, working again on many different products from high-performance gaming, machines, to do medical devices. And then after AMD, I joined NXP where I ran their ADAS microcontroller division. So this was at the height of all the autonomous driving excitement, and I was the General Manager for that business and then -- and I join GlobalFoundries.

Very impressive background. Thank you Kamal. So maybe we can get started. I'd like to kind of cover 4 major themes during this fireside chat. The first one really is the evolving foundry relationship with the automotive OEMs directly. We see a kind of a new model evolving in the semiconductor supply chain, where essentially foundries like yourself are working more on a one-to-one basis with the automotive OEMs directly. Can you talk about why that is happening? And maybe elaborate on that a little bit further?

Yes, absolutely. And it's a very exciting time. And maybe this is a bad analogy, but for people of my generation that grew up with hot rods and fast cars, you can think about the '70s and '80s where car OEMs were differentiating with the technology that they had in their engines and engine design, right, at the time and suspension design. And what material you use to build your engine? Is it steel? Is it aluminum? Is it some kind of hybrid component of that? And I think at the time, the OEMs started to realize that in order to build the best engine technology in the world, they have to manage their supply chain. And I'm sure during that time, relationships were forged with aluminum and steel smelters and factories. And I think if you take that analogy and you map it to today and you say, well, what is going on in the automotive space? There's this huge transformation where the car is changing from an electromechanical device that takes you from point A to point B, to an immersive, interactive yet safe vehicle and experience that still gets you safely from point A to point B. And that transformation, which at GlobalFoundries, we call ACE, autonomous, connected, electrified, it requires a significant investment in software, and that software has to run on semiconductor chips. And the recognition from OEMs that if they want to deliver that differentiated experience in the car, they have to understand and manage the semiconductor that's running their software. And those semiconductors at the end of the day are manufactured by companies like GlobalFoundries. So having that relationship with us is -- it becomes extremely important. Now notwithstanding the chip shortage, which I'm sure we'll talk about during the session. Putting that aside, I think if you look at that macro trend in automotive, it explains why it's become more and more important for them to have a relationship with foundries.

Can you give us an example of where you're seeing most focus from the automotive OEMs across the technology nodes? And where is GF differentiated offerings are able to support these technologies and applications?

Yes. So if you look at this transformation that we talked about, it's actually touching every point in the vehicle. From the semiconductors that control your seat, that move your seat and set the memory, to your air conditioning system, ambient lighting in the car, right? Nowadays, you can kind of set all these really cool colors and moods inside the vehicle to very smart LED lighting for your headlights as well. That's one aspect of it. Then there's the autonomous driving or safety features in the car, like warning you if you're departing from the lane, getting into a situation where there's somebody in your blind spot, emergency braking, all these safety applications all the way to the car driving itself. And then the transformation to electric drivetrain. So EVs managing the resource of the battery in the car to make sure you get the maximum range while you're running all of these applications in the car. So we focus on these 3 pillars, processing, sensing and power and data management in the car. And we develop technology families that address each one of these sets of solutions. And by looking at that holistically, we're able to have a very real and tangible conversation with OEMs and Tier 1s and semiconductors about how to develop the most differentiating features to address this transformation. And our road map is then developed based on that. And the technologies we look at that help with those 3 areas of transformation are all within the GlobalFoundries portfolio. With the exception, and I think this is well known, with the exception of the 1 or 2 very high-performance central computers in the car, that make -- that may have some high-performance function for things like autonomous driving. But conservatively, 75%, 80%, if not 90% of other semiconductors in the car are within GlobalFoundries Portfolio.

Can we -- let's talk a little bit about General Motors specifically. So you signed a kind of first-of-its-kind long-term agreement with GM in February of this year. Can you perhaps provide some more details around the background of this partnership and some of the key areas of focus for General Motors?

Absolutely. So like many other OEMs, this journey or transformation that I talked about is something that GM has embarked on in terms of electrifying their product portfolio. And so they approached us with 3 key objectives, right? Number one, they wanted to ensure that they could secure dedicated semiconductor manufacturing capacity for their vehicle road map, right? They didn't want to experience the shortage and the production halts that they experienced during the COVID pandemic. So that was the first key requirement. The second requirement that GM wanted was they wanted to ensure that, that took place in the United States that their semiconductors were manufactured in the United States. They had a geographical preference. And thirdly, they wanted to secure the technology corridor of their choice to give them visibility and assurance that what was being manufactured, when it was being manufactured, is making its way into GM vehicles. And so that -- those were the requirements. So in effect, what we did is we built a dedicated technology corridor for GM. The technology that they cared about in the location that they wanted it. And through this partnership, providing the best economics that we can, by eliminating a lot of the stacked margins that would have otherwise been there had we followed a, call it, traditional supply chain where we were and degrees away from the OEM.

Interesting. Interesting. So just a follow-up on that partnership. So you said you're building a dedicated technology corridor for GM. I presume this is in the upstate Malta, New York facility. Okay. So what does the technology quarter -- what does that mean? Is there -- you manufacture x number of wafers a year. You're going to allocate a certain number of wafers for General Motors across, I would presume some of those 3 subcategories you're talking about, whether it's a processor, whether it's sensors, whether it's power management. Is that the case?

That is correct, right? So we will have a dedicated manufacturing capacity for GM that guarantees a certain output of wafers that will address their vehicle production needs. And in the technologies that they care about or that they've chosen to go into their vehicles. And so then they will direct their supply chain that is going to design those semiconductors to manufacture at GlobalFoundries using that particular corridor.

And I would presume in terms of the win-win situation from GM's perspective and from your perspective, maybe I'll just put it to you. What are some of the advantages that you think GM will gain from this partnership? And what are some of the advantages from a GlobalFoundries perspective?

Yes. I mean, look, for GM, number one, they get greater visibility into their semiconductor production. They know exactly when a part is being produced and when it's making its way to them. So full control of the supply chain. They get to choose the technology that best fits their requirements. So again, they're not leaving it to others in the supply chain to make a technology development for them, right? They picked the technology that best fits their needs in a location that they've asked for and with economics that makes sense and makes them competitive, right? For GlobalFoundries, what this provides us is feedback from an OEM from a technology perspective that gives us insight into what matters, what features matter, what works better for cars and how do we ensure that we build that technology and make it robust and long-lasting, and it gives us durability, right? The automotive market wants a particular vehicle line is being produced, it lasts for many years, and we have guaranteed durability from that business. It's not going to perturb up and down wildly.

Are you seeing additional interest from other OEMs for similar agreements?

Absolutely. I mean, I think OEMs are very positive on this framework given the advantages that we just discussed, Raji, and especially in terms of supply assurance visibility and a choice of technology that fits their needs. And so we do see a lot of interest and a lot of conversations taking place around this model.

Okay. Great. So just moving on to the kind of second theme is the kind of the ICE to ACE transition that you talked about, the content increases -- silicon content increases. They are going to be driven by electrification. They are going to be driven by advanced safety systems. So at last year's Analyst Day, you showed a great slide with the ICE to ACE content estimates. And you estimated that the semi content, for instance, for a level 2 electric vehicle is around $1,500. So that's roughly 3x what you would get in a regular kind of ICE engine. Are these still the right numbers? And how should we think about the puts and takes within that -- within the pie?

Yes, absolutely. I mean I think when we look at the overall SAM growth over the next 10 years, it's 15% CAGR, give or take, right? And that semiconductor content is really -- the way we look at it and the way we've developed the model is to double-click into all the components that we see changing in the car and why they're changing and kind of counting. So if you look at -- we talked about a level to EV. So what does that mean? A level 2 EV means that it's providing you with safety functions like blind spot detection and emergency braking. And then we kind of double click on that and say, okay, what does that mean? It means that there's 4 radars for radar systems on each corner of the car and a radar system at the front of the car. There is perhaps 5 camera systems around the vehicle. All of these are interacting in some way. They're sending data to an aggregator of some sort that then is making decisions and sending those decisions to either brake or give you a warning or move -- steer the car in one direction or another. And by doing that analysis, we're actually counting every piece of semiconductor all the way from the sensor, to the brain, to the power management IC, the chip that's sitting next to the microcontroller managing the power and ensuring that battery power is reaching it at all times as a safety function. And so that's how we do our analysis. And then, of course, we compare that to reports. And so absolutely, those are the right numbers, and we're confident in this kind of model.

When it comes to kind of battery and power management and EVs, where is GF able to support the development and address the issues associated with range and power efficiency?

Yes, that's a really great question. And it kind of ties into this question we get all the time about leading edge versus legacy nodes. I love the battery management question because I kind of say leading edge is in the eye of the beholder. If you're a battery management system design engineer in an OEM or in a chip company, a technology that we call 130 BCD, and that's a 25-year old technology is leading edge because we're investing heavily in ensuring that, that technology is able to support battery management systems. So let me just kind of walk you through an example. In an EV where you have hundreds of battery cells, how you discharge and charge those cells in a very uniform way affects the range of the car. What you don't want to happen is one of those cells discharging prematurely that brings the car to a complete stop. And so monitoring the currents in a very precise way at every single battery cell in the car is critical. So we've spent a lot of R&D dollars in enhancing our 25 -- say 25-year-old technology, but it's brand new. We continue to enhance it every year to ensure that you have the highest precision in terms of measuring current and managing as many battery cells as possible. And so the requirement there is that this technology can handle up to 120 volts and amperes of current. And so you compare that to a 7-nanometer or a 3-nanometer node that can barely handle 0.8 volts and micro amperes of current. Totally different applications...

Different application...

Right. But without it, you can't do a battery management system.

Of course, yes.

And so those are the technologies that we're investing in to ensure maximum range. But then think about every other application in your -- in the car, we talked about the radar system or the infotainment system where maybe your kids are playing a game in the back seat. All those are consuming battery power. So managing every jewel of energy in the car becomes extremely, extremely critical and ensuring we preserve every jewel in the car and use it only when it's needed, will help OEMs kind of extend the range of their vehicles.

And how does the manufacturing of those wafers help that power distribution?

It -- the advantage comes in, in developing the actual technology that we manufacture. So what we do is develop the transistors and the components around that technology platform into what we call a design kit and that design kit is then handed over to the companies that are building the chips. That's really where the, call it, the differentiation is that they use those special transistors in a way that is optimized for power consumption as well as meeting their requirements. And once they use that design kit that's unique to GlobalFoundries, unique to our manufacturing capabilities, they get the -- a product that is best-in-class in terms of power consumptions and the features that they're trying to achieve. And then of course, we manufacture it in a very robust and a very robust way that guarantees that this is going to be reliable in a vehicle environment, right? Cars are still going to have to face arctic temperatures in Sweden or blazing hot temperatures in Arizona, and you still want them to function and get you from point A to point B safely.

No. That's imperative. That's for sure. What -- staying on the topic of power management and battery management. What opportunity is GF focusing on regards to wide band gap technologies such as GaN or silicon carbide. Obviously, silicon carbide is a major initiative in the semiconductor industry. It's powering a lot of the traction inverters for electric vehicles. So how is GM positioned there? How do you see these technologies evolving in the coming years?

Yes. The -- you're absolutely right. Those technologies are critical for many, many of the applications that you mentioned. When we look at our investment in wide-band gap, specifically in the area of GaN, GaN fits the application of onboard chargers. So every vehicle is going to have an onboard charger. And this is a very sweet spot for GaN, and this is an area of investment for us. In addition to when you think of a vehicle that has battery systems that function at 1,200, 800, 48 and 12 volts, you need things to step up and step down the voltage and GaN is also a very ideal and power-efficient technology to allow you to do what's called DC to DC conversion, right? So as you step up or step down voltage, you don't lose a lot of energy doing that through our investments through GaN, and that's one of the areas that we're investing in for the future. As far as silicon carbide is concerned, we're definitely looking at silicon carbide as well. Every -- a lot of the OEMs are -- you can hear and read about announcements every day about OEMs adopting silicon carbide for traction inverters. We continue to look at silicon carbide and monitor. It'd be interesting to see how that market kind of moves forward in terms of the supply/demand and all the announcements that we see coming up today.

Meaning there could be overcapacity potentially?

Potentially. Yes, potentially. It's not clear to me. In terms of short term, there's definitely going to be a need for a lot of capacity as OEMs move to a silicon carbide-based traction system. Long term, it will be interesting to see where that goes. Yes.

Yes, especially with the Chinese coming online as well. There'll be a lot of capacity there. So what are you seeing the most strength across technology nodes within your auto portfolio? And what's so ideal about these to the auto applications?

Yes. So if we stick with the theme of processing, sensing and power and data management, from a processing perspective, the nodes that drive all the edge components in the car. So the thing that's controlling your seat, your HVAC system, your windows, your windshield wipers, that technology doesn't have to change. If you've got a windshield wiper controller, why would you want to move to a newer faster windier controller as long as it's doing that job for you. So we really see the majority of these type of control applications. They have a sweet spot in the, call it, 90, 40, 20, 2x nanometer. And depending on complexity. Obviously, a windshield wiper is very simple, but a 17-way seat controller with a massager is a more complex system. So that's in the area of processing, and then you have this new class of devices called aggregators and zone controllers that are actually doing some localized decision-making and functions in parts of the car that may be exposed to a lot of heat, to a lot of extreme temperatures and so you want them to be reliable. And again, this is where 40-nanometer nodes, 2x nanometer nodes, 12-nanometer nodes are extremely strong and capable. In the area of power management, our portfolio of BCD, I mentioned this 130 BCD, 130-nanometer technology is the sweet spot where it's at. If you get too much smaller in geometry, you can't drive the high voltages that I talked about. Physics simply doesn't work there. And then similar -- there's a similar story in the area of millimeter wave for radar, right? Our 22 FDX platform is world-class leading for millimeter wave, and it is truly one of the leading platforms in terms of giving you the best of all worlds and radar. In radar, what matters is you want a strong signal that you send out and you're able to read that signal back when it bounces off another object with high resolution, you want it to be immune to noise coming from other sources. In addition to that, you want the actual system to consume as little power as possible. And so when you try to push that into slower -- to smaller nodes, you lose one of those features. You either lose your strength. So now the range of your radar instead of being 200 meters, it's now 100 meters. That's not good. You still want to detect cars or objects that are 200 meters ahead of the vehicle. So you start to lose things when you get to smaller geometries, and that's another area of focus for us.

Okay. Fantastic. And so just kind of moving to the ADAS side of the equation. So we talked about the electrification. In our view, electrification and advanced safety go hand-in-hand kind of similar to your ACE notation. So in terms of ADAS from your perspective, where are we in terms of ADAS adoption? When you're working with your OEM partners, are they planning out a couple of years ahead with you? Are you getting insight to say, 5, 10 years ahead when we would be looking at level 4 type of capability? You talked a little bit about the relationship with GM with a dedicated tech corridor. Obviously, you're probably working with them for their long-term road maps. But curious on how you're thinking about ADAS adoption, say 5, 10 years out?

Yes. I mean I think we have to believe that with all our technology innovations, we'll be able to achieve level 4 autonomous driving in the future. And I think that's a goal for every OEM. And not just from a convenience perspective, it's really from a safety perspective. I mean imagine the number of accidents that are being reduced when you have automated systems talking to one another, communicating with one another, one car telling another car where it is and what its next action is going to be. That reduces fatalities, it reduces accidents, it reduces insurance costs, it is absolutely very, very critical to support that. And so we're up front and center with our customers in terms of the sensing technologies that they need, in terms of the edge processing technologies, AI at the edge at the radar node or at the camera node required to implement. Today it is level 2, moving to level 3 and in the future level 4, absolutely an area of focus and investment for us.

In terms of networking connectivity. So there's obviously a lot of demand for sensors, radar, cameras. There's a lot of demand for power management. One of the things that we've been hearing from this conference is the demand for Ethernet, the demand for PCIe, so in vehicle connectivity, Bluetooth, Wi-Fi or some more of the kind of IoT-like applications. So tell me about that. I mean we're -- some were talking about that opportunity for Ethernet is larger than some other opportunities in microcontrollers. So curious how you're thinking about it from the foundry perspective?

Yes. So imagine if I were to count every edge node in the car, right, let's say there's 6 camera, 5 radars, 2 LiDARs that are on the exterior of the car. You have smart headlights upfront. You have passenger detection technology or radar in the cabin monitoring, whether you're falling asleep if there's a kid or dog in the back seat, all of those sensors are generating data that are then being routed to a zone, a node that's doing some computation or to a central computer that's doing computation. So the amount of data is exploding exponentially. Now the nuance there -- so you're absolutely right. The demand in the vehicle is skyrocketing, right? And then when we talk about Bluetooth and ultra-wideband, these are IoT applications, but they're also secure applications, right, remotely opening your car with your phone and ensuring that nobody can hack into your car or crack that code as well. That is key. So there's levels of security required on top of the data that's being shared in the car, as well as the data being transmitted in and out of the car, again, ensuring that nobody is hacking into that data stream, taking control of your vehicle or taking control of your personal information as you're transacting. So a lot of things going on. And the question is, it's not always about the highest bandwidth because there's also real-time requirements, right? When you send an instruction to hit the brakes, you want that instruction to be instantaneous within a fixed amount of time because you want those brakes to go off as soon as you detect danger. And so Ethernet, as it is today, is not suitable. So there's enhancements to things like real-time Ethernet with priority. So this is where the kind of, call it, innovation starts to take place is how do you take what we have in consumer data center, but layer on top security and safety to ensure that it's happening real time, and that data is reaching where it needs to be in the right amount of time to implement a safety function like braking or steering. So a huge, huge opportunity in that space as well.

Got it. We have about 5 minutes left. I just want to hit 2 quick topics. One, just your view, macro in terms of the auto industry. From your vantage point, where are we in terms of the supply chain shortages, where are we in terms of more capacity coming online to support microcontrollers or power management? And any kind of sense in terms of the demand profile out there for auto? Is that slowing down at all from your vantage point, given kind of the higher interest rates for leases and things? Or is that still -- that market is still pretty robust?

Yes. I think in the short term, Raji, it's a little difficult to predict, but I think we all look at the same reports. We look at dealer inventory levels, car manufacturing output, and they're still at levels that are close to or below pre-COVID. And so I do think there's still robustness in terms of vehicle manufacturing through the end of the year and into 2024. But again, I can't predict exactly if we're going to see a slowdown. I think the thing that is undisputed in my mind is this 15% growth over the next 10 years? And whether -- sure there will be a few months of slowdown or upside. Overall, that trend, over the next 10 years because of this transformation that we've been talking about today, is absolutely going to happen. And the demand for semiconductor is there and the supply is not. It needs -- the supply will need to grow over the next 10 years to meet the needs of the automotive makers. I think that some of them are looking at it in that holistic way and are preparing and planning for the future. And those folks are going to be in good shape.

Great. We'll leave it at that. Thank you so much, Kamal. This is a great conversation. Thank you, everybody, for joining on the line as well.

Thank you so much, Raji. Appreciate the opportunity.

Absolutely.