Infineon Technologies AG (IFX) Earnings Call Transcript & Summary

Good afternoon, and welcome to today's call. I will be just momentarily reading a disclaimer, and then I'll be handing over to our Jefferies analyst, Janardan Menon. Members of the media and the press are not authorized to be on this call. If you are from the media or the press, please disconnect on the call now. The content presented on this call is proprietary to and/or subject to the copyrights of Jefferies or third parties. Further, as a matter of legal compliance, we remind you that you must not attempt to elicit from any speaker at this event, any material nonpublic information or other confidential information and accordingly, the speaker may decline to respond to any question in his or her sole discretion. You may not publish or otherwise publicly disclose the name of or otherwise identify the speakers unless Jefferies permits it in writing. By attending this event, you agree to all of these restrictions. Thank you for joining today. I'll hand over to our Jefferies analyst, Janardan Menon.

Hi. Good morning, good afternoon, and good evening, all of you, wherever you are located in the world. And thank you very much for joining this conference call on Infineon's Automotive division. We are very happy to have with us today Mr. Peter Schiefer, Division President of the Automotive division of Infineon Technologies and Daniel Györy, the Senior Manager, Investor Relations of Infineon Technologies. The format of this call will be as follows. The call will last for approximately 1 hour. Mr. Peter Schiefer will initially give a presentation. The slides are also available on the Infineon website. And once he has finished the presentation, we will go through with a Q&A session. And so if anyone wants to ask a question, do please signal your interest on the button at the bottom of your screen, and we will take the questions in the order in which they come in. And so without any further ado, I'm going to hand over to Peter. Peter, do carry on with your presentation. Thank you very much.

Yes. Thank you, Janardan and welcome to the automotive call in '22. And I will give you a little bit of an update about how I see the automotive market and the Infineon market position. And later on, we will do a bit of a deep dive in the different sections. Just starting with the overall performance. Also the '21 year and the '22 year was a very successful year for Infineon. You may remember that we are constantly outgrowing the market in the past already. So round about in the last 2 decades, we could outgrow the market by 3 percentage points. We nicely did grow from the #3 position over #2 to the finally #1 position. And it's fair to say that we have a very broad coverage of the market. We are basically in almost all of the semiconductor product families. We are -- and this is even more important. We are also at least in a top 3 position in every segment. We have quite some innovation going on in all these product segments. And we also continue to invest in capacity in order to fuel the growth of the semiconductors in the automotive industry. I think it's very important that we also see the semiconductor market for automotive being a growth segment for the next years to come. And that's why it's so important that Infineon has a very broad position there and a very resilient setup in all of these different product categories. Some words on the market. So on the one-hand side, if we see to the market analysts in terms of car production, we see that there is a single-digit growth proposed for the next years. Yes, on the one-hand side, one can say that there may be weaknesses coming from the macroeconomic aspects. We still are in the midst of the COVID. So there could be some COVID issues in the next year. There could be geopolitical issues on the other hand side. We also see that there's quite some upside potential as well. There's quite a huge pick-up demand from the last years where our car production was lost and still has not fully recovered yet. And also, we see for the market when we talk with OEMs that by far, not all of the inventory, which should be in the market is recovered yet. So I would say, a good combination of upside potentials despite the potential headwinds we see. But it's very much important that the car production is only a minor contributor to the overall semiconductor growth. Meanwhile, the content increase. So how much more semiconductor ingredients are going into the electronics of the [ cars ] by far, the most important growth driver, not so much the car production is more like the continuous content, and I will give you some deep dives into that growth areas and the structural growth drivers for the car electronics. When we talk about the Infineon revenue, it's also fair to say that meanwhile, about 30% of our growth is already coming from the electrification of the car and for the automated driving functions. We made in this -- or will make it this fiscal year, also more than EUR 1 billion revenue alone in the electrified cars in the xEV business. But what you also see on the left-hand side of that chart, the user experience part like the comfort functions, the premium functions is still a significant portion of the business. And also, it will remain like that. If you look to the market for the next 5 years and how it is expected to grow, for sure, the structural growth drivers, the electromobility and the driver assist function will grow in the 20s of the CAGR. But also in 5 years from now, more than half of the market will come from user experience, comfort premium-based functions there. And if you look on the right-hand side, where we see the Infineon growth there, for sure, we will disproportionally grow in the structural growth driver. You see that xEV and driver assist function, the ADAS and AD category is giving us a significant growth. But you also see that we will outgrow also in the segment of the user experience part. So you see that we will grow even faster compared to the market so outgrowing in all segments for the next years to come. Yes. And with that, let's go a bit in the electromobility section. So here, I think it's very much interesting to see that by '27, we expect that about every second car produced will be electrified. So more than [ 55% ] of the cars already. China and Europe are already in a strong leading penetration there in terms of electrified cars, and this will also be continued like that. U.S. will join that. And the key applications in the electric car is for sure the inverters and the on-board chargers. There are also some other smaller applications, but the 2 most important one, drivetrain inverter and the on-board charger. If you look to the right-hand side of that chart, you see that the silicon carbide portion, for sure, is growing the fastest there. So we expect that at the end of the decade, silicon carbide will take over the dominance in the market over silicon, but it's also fair to say that for the next 5 to 10 years, the absolute growth in the silicon-based technologies will continue there. Towards the end, especially when we talk about on-board charger, there may be even gallium nitride starting to be introduced. But for sure, the majority of the market will be silicon and silicon carbide. Again, silicon carbide, no doubt, growing the most but not to be underestimated the growth also which we will see until the end of the decade on silicon-based solutions. Yes. When it comes to the product perspective in terms of what Infineon can bring on the table. I think for those who have been part of the automotive roadshow in the past, you know that Infineon is very well positioned in terms of having a very broad base of offering. So basically, we have all the products needed in order to make a system to make it ease of use for our customers to improve their time to market because we can really help them to consolidate our system. There's not only the power semiconductors needed for the on-board charging for the inverter, there's the driver ICs, the support functions ICs, there's the microcontrollers. There's a huge variety of flexible combination of products, and this is all helping the customers to speed up their design and also to make sure that there are the R&D teams of the customers can be very efficient and very effective. So this kind of system solution and helping our customers in designing their systems was a main reason for customers deciding for Infineon. We really can give them all the support needed and all the ingredients needed to come up with their solutions for their applications. Yes. So if you now go in this growth perspective a bit, and I think you very well know that electromobility has a growth perspective in terms of semiconductor content. So if you take the average semiconductor content of a classic car, which is around about USD 500. If you then look into electrifying a car and adding the components needed to make an electric car, you basically double that amount from USD 500 to USD 1,000. And this incremental semiconductor content is mainly the power semiconductors needed for the inverters for driving the car, but also for the on-board charger. And there is more [ EVM ] applications coming, which play a role there, inverter for sure, the biggest, but the on-board charger is starting to increase importance because of the faster charging requirements, requirements into bidirectional charging or that is driving further semiconductor content. Not to forget the battery management system. I also will speak about it. So there's quite some applications which are very nicely contributing to the content increase there. When you, then on the right-hand side, look into the future. So for example, 2027, if we take here electric car, which then also has driver assist functions, there's more semiconductor content coming because the car becomes smarter. You have the electric drive revenue [ may have ] some upside potential. Maybe this is car which has 2 axles, so 2 inverters instead of one, there may be an even higher penetration on silicon carbide, more complex [ architectures ]. So easily, such a premium electric car could come up to a semiconductor content, which is even higher than EUR 1,000, or USD 1,500 could be a good number for such a car in the future. So a question now is, how is Infineon doing and how is Infineon now positioned there. First of all, I think it's fair to say that silicon carbide is growing for sure from a market, but also from a design-in activity from Infineon. Not to forget, as mentioned, IGBT, so silicon-based markets will remain also growing in the next 6 to 7 years. We continue to win business on the silicon base with IGBT. So you see a couple of new OEMs which decided to use Infineon on that front. But for sure, the acceleration on design wins on OEMs on silicon carbide is also improving quite nicely now for Infineon, which was recently added OEMs from U.S., from Japan on our list. And one has to do with the strong demand in newer technologies for the inverter, but also on the on-board charger. As mentioned before, and you see that on the next slide on the left-hand side, so the trend towards fast charging, you all want to make sure that if you drive with an electric car, you don't take a lot of time on the charging station. There will be new features such as bidirectional charging where you can really use the battery in the car also for some applications, which help to stabilize the grid or you can use some power nodes for your house. So all that will contribute to the further growth of silicon carbide for the next years to come. So when you look now into the capacity expansion from Infineon and how we allocate our business [ in to date ], we have, I would say, 2 phases. Phase 1 now is the phase where there is a strong demand. Demand is even stronger compared to how fast can we upgrade our facility in Villach. We have enough raw material. Here, we are basically only limited by the sheer speed and the time it takes to bring new equipment into the Villach facility and ramp up the capacity there. When Villach is fully up and running, we can do more than EUR 1 billion revenue out of the Villach facility. So here we are, I would say, this is the Phase 1. And then that's why we decided to build up our facility in Kulim, which I will call then Phase II, and this goes towards the mid of the decade, 2025, where quite a number of OEMs will start their platforms based on silicon carbide. And that's why it's on-spot with our Kulim site by '24 when we can start ramping that because here, we expect a strong increase in demand, and that's why it's very good that we can also grow our capacity and compared to today by '27, we will have around about a 10x capacity increase to make sure that we really fuel the demand of all these new programs, which will be started in the next years. Yes, one word also to the technology and technology leadership on the one-hand side, as mentioned, we have a strong supplier base. Meanwhile, for the substrate, for the raw material. We have announced recently now our fourth supplier. We are in discussion with more. There's just MOU signed again with the next guy. So we continue our path to link up with partners on the supply side to get the substrates, the raw material, the [ pools ]. Second key point is with our acquisition of Siltectra, company who has a so-called Cold Split technology, which is a very effective technology where we can out of one substrate we buy, we can split it and make 2 out of that or we buy a entire pool and without having a lot of waste, we can cut the raw material. And by that, we cannot only enjoy the increased productivity, it's also an additional contributor to security of supply. Having multiple partners and then being able to make even more out of the provided raw material is our clear strategy into fueling the growth in order to be prepared for not only Villach, but also for the Kulim side. One word on the technology. You may know that we are one out of 2 competitors in parts and suppliers, which are using already Trench technology. We know that from the silicon world. At the end, it will be all Trench technologies. We started with that. We are already now introducing the second generation to the market where competitors are not even starting with the first generation, and we are in parallel, developing our third generation. And with that, we have a constant flow of very innovative and cost performance road map elements in our road map because you saw it the market, half of the cars will be electrified by the end of the decade. This needs leading-edge technology, combined with leading-edge supply of the raw material and the manufacturing capacity. And we all have that. And by that, we will fuel the growth of the market quite nicely. Yes. One also important interesting situation in the -- in these years I wanted to share with you, and this is about customers who we originally lost against competitors and where these customers are now coming back, returning back to us either because there was issues on the supply or issues on the quality. And this is the area where we, as Infineon, where we are in for long and we have a long-lasting relationship with our customers and acting as a reliable and the trustworthy supplier. We got a lot of good momentum for even programs which we originally lost, gaining them back and getting here customers sync up with us and projecting up to make sure that we then also support our customers in that phases where they didn't get either the right supplier or the right quality. And I think this is a good sign, and this is where and why Infineon is so successful in the market and where Infineon stands at this. We deliver on our promises and our customers can rely on us. Battery management, I mentioned that already. This also becomes now an application which gets good traction and also a good contribution to the semiconductor content. So around about EUR 100 per application, you can easily get with the battery management if you have a full system because there's a lot of product needed there. There is monitor product, there is cell balancing, which you need to make the most use out of the battery. There is even systems now with wireless control like [ Bluetooth Low Energy ], the pressure sensors, current sensors. You need a lot of compute [indiscernible]. There is big, huge opportunity for, again, this system play where you need all products combined really nicely fitting together to make a system. For sure, battery monitoring and the cell balancing is one important product. For those of you who remember 2 years ago, I introduced this monitoring and cell balancing ICs, [ receptively ] launched these chips. And meanwhile, we are very happy because we could start production on that. Amongst many customers, there's a significant design win also on a U.S.-based OEM. That's a Japanese one in. So also here on the battery management systems, we are making very good progress. Yes, switching to the automated driving section. Also an update on the market. So already in this year, we can say that we have more cars which are equipped with either level 1 or higher in terms of automated driving levels. By 2027, we would say that around about 2 out of 3 cars will be a level 1 or higher. So a lot of demand in terms of semiconductors here. When it comes to radar versus camera, and I know that there's very often the question, do you need still radar in the future or will camera will be good enough? And my clear answer is no. Camera alone will not make it. There will be 2 key use cases for the radar, the standard radar, which is very much about getting the distance and the detection of the speed. So very precise, distance detection and speed detection. And then there will be room for what we call high resolution radars. This is more for improving the angle resolution by that you can do object detection and object classification even better. And the big benefit on radar is that radar is pretty effective in different weather conditions, whether this is fog, rain, snow, all that is very well mastered by radars the combination radar [ where as ] the camera we will see throughout the next 10 years, for sure. So when it comes now to the penetration of the radar systems. On the bottom hand side, there will be simply more cars which have a higher automation level. And then inside the automation level, we will see increase of the penetration of the number of the radar systems. And we will basically see 2 main areas. One is the silicon germanium-based radars, and this is very much going in this long distance. So whenever you have long-range radar system, it's all based on silicon germanium. And then we [ head ] to that what we call the short-range radar systems. And this is currently in the progress to be replaced from silicon germanium into CMOS-based. So the long range will remain and silicon germanium, the short-range radar will be addressed by CMOS. And if you take the Level 1 and Level 2 automated driving functions, this was last year round about 47 million pieces. This alone will go up to 140 million in 5 years from now. Then the higher levels, the Level 2+ will add about 30 million. And overall, if you take all systems, we will see a very nice growth from 55 million to about 200 million radar systems in the next 5 years. Very nice growth, 24%, and this will fuel our growth on the automated driving part. So what does it take to make a good radar system? So you basically have 2 key ingredients. One is the radar ICs, so the sensor element and the second one is the microcontroller. In the sensor element in the radar IC Infineon is already leading. There's -- based on external analyst reports, we have more than 50% share here. We are currently sampling also our CMOS-based radars, where we get a really good feedback. So the -- there's 2 key technical parameters which are important for the CMOS-based radar, the signal-to-noise ratio and the linearity, both parameters are very much needed in order to optimize the operating range and the object separability. So that's key. And here, we got extremely positive feedback from the customers who are now sampled with our latest CMOS sensor ICs. And then the second portion on the microcontroller. So you may have heard about it Infineon AURIX, microcontroller, meanwhile, becoming the gold standard in the automotive. And we are winning a lot of business here and in 3 to 4 years, we will also lead the microcontroller section of the radar and by then, being really in the top leadership position. Basically, all OEMs -- all major OEMs using our products and out of the 8 leading Tier 1s, 6 of them used Infineon for their radar solutions. So now we talked about the 2 key structural growth drivers, but I also want to give you a little bit of a perspective on how a car becomes an even smarter car. And there is quite some change ongoing now in what makes a new car an even smarter car. OEMs try to get the control over the software. We call it software-defined cars, that's a strong driver in the architecture. There's a lot of activities going into comfort, luxury, the cockpit will become a digital cockpit, so a lot of connectivity requirements. There is more and more human-machine interface opportunities. And this is all important because Infineon being the #1 semiconductor player, we are all addressing also these functions in these applications. And this will be a source for continuous outgrowing the market in a nonelectric car, in non-ADAS functions. And as mentioned before, this market will still be more than half in the future. And that's why it's important that I share a little bit about what you can expect Infineon to grow in that section. Yes, starting with one, the key trend, which is going to the software-defined car. So the OEMs want to make sure that they control the software. They only can do it if they decouple software with hardware, so there's a new hierarchy in terms of electronic and electric architecture. And the first approach, which was taken was the so-called domain structure, which you see on the left-hand side of that chart. And this is basically a functional clustering. So they cluster in functions all the different applications in the car. But then they found out that this is not optimal, especially when it comes to wireless harness. And that's why a new trend has been invented, which goes into zone architectures. And where the domain is a functional class, the zone is more a physical cluster. And in the beginning, there's kind of a stepwise approach, where, for example, the main domains remain functionally clustered and some OEMs start to do zones only in the body electronics. And then to the far end, if you do a fast forward in time, cars may be like a full car computer, which is only about zones. And then you will see over the next 10 years, a lot of shades in between there. Very much important is that this kind of zones and domains need a lot of more semiconductors compared to the classical architecture. And this is not only the processing power, there's smart power distribution needed. There's a lot of more sensors needed. There is smart actuator needed. And in all of these [indiscernible] applications, you need semiconductors and one good example is, again, our AURIX microcontroller technology, which is well fit -- fitted-in, well position for all these microcontroller and compute tasks in all these domains and zones. And this explains why we see a strong growth. So we expect that we can more than a factor of 2.5 increase our revenue in the microcontrollers due to that trend. And there is even new customers coming up which do new ways of how to architect the cars. We call it skateboard makers, there's a company called [indiscernible], for example. It's a good example because they simply use for each of their control [indiscernible] our microcontrollers. So AURIX really will become a key growth success story in the new architectures. A different example, let me talk about digital cockpits, some new stuff, exciting stuff there. When we talk about head-up display or augmented head-up display, there's a very good optimization now with MEMS mirrors where you use MEMS micromachine mirrors to improve the high definition of this kind of displays. Another example where we can use this MEMS technology is for doing silicon microphones, which can either be used in the car for noise cancellation or you can use it outside in the car for [indiscernible] detection. So basically, we help that the car listens better to the environmental situation. Another good example is LED lighting. LED lighting becomes really now a key differentiator for different OEMs. Infineon is one of the 2 major market players in the LED lighting. And this example here shows our newest innovation. It's 16K pixel light. This is done with micro-LEDs, which we do with a [ chip-based company ] called [ Meteor ], so it's a combination. On top of the 16,000 micro-LEDs and underneath is the Infineon driver IC. And with that combination, you really can have the next-generation of lighting and differentiation for OEMs, a good source for further growth also when it comes to this [ entire ] light LED penetration in the cars. One more example, let me talk about this comfort features, whether this is seats or doors or windows, air conditioning, there's a lot of application, which meanwhile are electrified. If you take a seat, meanwhile, seats have a lot of comfort function that can be up to 7 small motors in a seat. This kind of application can easily fuel EUR 80 as a semiconductor content. And important for you to know is we have a full suite of solutions there. It's the driver ICs, you need the motor controller, [ ICs ] the microcontroller and also the software to make it one offering for our customers, again, to support their time to market. They can take our complete system use in building in very fast and with that, grow the functionality of the applications. Yes. So I wanted to show that because typically, we talk a lot about the electrification of the cars in the ADAS, but don't forget the car becomes even smarter and more comfort car. A lot of applications will drive the growth and Infineon will over-proportionately contribute to this growth. We are [ well here in ] automotive, we are in the forefront here in the automotive transformation. The decarbonization and the digitalization of the car will further grow the potential semiconductor content. You saw the USD 1,000. You saw the opportunity even going to up to the USD 1,500 for electric cars. And with the broad leadership we have providing all the different types of semiconductors, you can trust that we will continue to really shape the future of mobility. And one thing is clear, this future will not happen without Infineon. Thank you very much.

Thank you very much, Peter. That was a really informative presentation. Maybe I'll just kick off the questioning with 2 questions on 2 areas. One is I think what a lot of investors would be interested in which is the current demand trends in the market. And two is what's happening on pricing levels, especially given that your annual negotiations with pricing are probably coming up at this point in time. So let me start off with demand. There is a weakening of the global economy. However, it seems to be that car demand is still holding up very reasonably well. What are you seeing in your order book? Are you seeing any fluctuations? Are you seeing upward revision? Are you seeing downward revisions? And within that, is there differences between car OEMs or regions as well as the differences between different types of chips and microcontrollers where the shortage seems to be especially acute whereas sensors, analog, power discretes, et cetera? Any comment would be very useful.

Yes. Thanks for the question. First of all, the order book is extremely strong, again, or still strong. And by far, it is exceeding the capacity which we have in order to fulfill all these demands of our customers. In the recent weeks, we saw for some product families a little bit of a push out of some orders, not really cancellations, more pushouts but only in a very limited way, and this is for product families, which have not been in allocation for quite some time. But those categories like the microcontrollers, the products for the xEV continue to be significantly overbooked. We don't see any pushouts there. Demand is very strong. And also, I think that in long the value chain, there are still a lot of request to fill up the inventories and fill up the shelves, especially for that product, which have been in allocation for a long time. And that's why now looking to '23, we will continue to see product segments, which remain in allocation. The microcontrollers for sure, products for electromobility also. So this will not be in a good balance between supply and demand for the entire year '23. When it comes to different regions, I would say, distributors are going back to a normal inventory level. So here, I expect that we are back on normal levels soon. But then in terms of regional distribution, I think it's fair to say that especially in the last month, China was extremely strong. You also saw that from the number of cars produced in China. But I expect that towards the end of the year and also for the first half of next year, demand stays strong in all the regions because still the OEMs couldn't produce the amount of cars that they had to produce. And even if there is some weakening due to the overall economics, there's still a lot of pent-up demand which need to be recovered. So therefore, I still see a strong order picture.

And then on the pricing side, you -- I think you tend to do your -- the entire industry tends to do the annual negotiations towards the end of the year for the next year. How do you see that shaping up given that you're still in shortage on most of your products and demand is continuing to look very strong and on allocation in many of these products into next year? Do you think you could get quite a big increase in pricing? I'm also keeping in mind that Infineon possibly did not raise pricing as much as some of your competitors over the last 12 months. Or is there a catch-up here? And would that have a positive impact on your automotive margins going into 2020 -- FY '23? And at the same time, given -- is there a pushback? There seem to be a bit of a tug of war in the industry on pricing between the supplier and the buyer. So is there any pushback that you are seeing from your OEM customers that they won't give that kind of pricing increase?

Yes. First of all, you're right that when -- in the early times of the COVID where we still had contracts, we did stick to our contracts. That's why we started later than others in terms of upgrading our prices. We had a quite successful situation here because we did not only increase prices in those areas where we had -- a fixed period of the contracts have been expired. We also could renegotiate existing long year contracts in order to make up for this additional cost increases. This was quite successful, and you saw the result already in the last quarter when you look into the profitability of automotive. So the growth on the one-hand side, but also the improved pricing activity was -- contributed there. Yes, we are currently in the [ PPA ] for '23. Some first customers, we already closed with a further increase of the prices. We still see a good opportunity to further upgrade the prices in order to be also prepared for whatever energy cost increases and so on. So there is still a situation where we -- where the customers see value in capacity and value in commitments for growth in '23, and we can trade that with also upgrade in our pricing activities.

Understood. [ Poppy ], could we now take the questions from the call, please?

Yes, of course, we go first to Didier Scemama. [Operator Instructions].

Just a question on the commentary you put on inventory at certain Tier 1s. I wasn't quite sure, I've [ got ] products actually seeing elevated levels of inventory. And second, is there any way you can quantify where your lead times on power discretes and metal controllers at the moment and where they were perhaps 3 months ago.

Yes. First, the question on the lead -- on the inventory. So we see that the inventory is recovering now, for example, on the distributor side, but also in our direct customers. Not every [ year ] to the level it should be, but at least we see now some progress that this very low inventory situation from the last years becomes more close to normal. So it's not yet in a situation that we have excess of inventory, but we are coming towards a normal mode of the inventory levels in the supply chain throughout distributors and direct customers. In terms of lead time, I would say, still as we are overbooked in almost all products, also in the power discretes, lead time remain quite high. So here, I do not really see a significant relaxation in terms of order lead time. Also from a -- I would say, from an order behavioral aspect from our customers, I don't really see that customers want to go back in this phase to have very short order lead times. I still see strong demand and strong requests in terms of now locking in already orders for the entire year '23 to make sure that the capacity is reserved for the customers.

That's great. A quick follow-up just on silicon carbide. Your 2 main competitors have given some relatively ambitious revenue targets for next year, but probably even better for 2025. We were talking about multiples of billions of dollars of revenue in silicon carbide. You seem to have a better silicon carbide design win momentum at the moment. Would you care sharing with us perhaps your revenue target or is it still EUR 1 billion by the middle of the [ 2020s ]?

Yes, I think as of today, we stick with the EUR 1 billion for the middle of the decade. We definitely will upgrade it when it comes to our next calls, which we have. You also know that we are targeting on the long run that we have 30% market share in the silicon carbide overall market. You know that we started quite successful in the industrial part. We are now adding the automotive part in. And when Infineon targets 30% market share overall, then automotive target market share cannot be far away because automotive will be a big portion of the overall market.

Moving on to the next question from Aleksander Peterc. [Operator Instructions]

So I'd just like to understand a couple of things on the market situation. At the back of your slides, I know this is not your forecast, but you give quite an optimistic forecast for the car markets into next year, growth of 7% to 8%, if I remember well, in the EU and U.S. To what extent do you think that there is a risk to those numbers as a result of a tough macro situation at the moment, especially if that continues to worsen? Or do you think that pent-up demand is so high that there actually isn't much downsize to volumes here? That's the first thing that I'd like to understand. And the second one is on the actual mix in the market. So that's been very favorable. A lot of premium cars in the mix in 2021 and the current year as well. And that was the main driver of the high increase in semi content per car. And that's why the semi market grew so fast, whereas the car market was basically stagnant. Now if the mix reverses to more low-end cars, do you see a risk to the actual [ headline ] numbers for the semi -- auto semi-industry as a whole and for you, in particular, as you have high exposure to premium?

Yes, that's a very good question. And first of all, you're right that -- there is -- if you listen to the analyst or the car market analysts, you see a small single-digit increase. I think the latest numbers you currently hear is anywhere between 85 million to 86 million cars in '23 coming from 81 million to 82 million in '22. Now one can argue whether this is -- will really happen or maybe this is flat. And you mentioned this pent-up demand, we see that there is still, in most of the dealers, not enough cars in the dealerships, there's not enough cars to really get the ordering lead times of cars, especially for the mid-class and premium cars down. So yes, I believe that there is some supportive momentum in terms of number of cars. But even if the car production would be flat in '23, the semiconductor content would overcompensate that and really disproportionately contribute to the growth. Now you made a good suggestion, if this demand is a little bit reduced, then maybe it bounces back from this push towards premium back to more smaller cars. And our calculation did show that the premium effect was there, but it's maybe only a part of the growth. So we calculated around about 2 to 3 percentage points in semiconductor content. So that by far, the content increase was more coming from electric cars, from ADAS function, from cars getting smarter. So yes, the premium effect was there, but it was not the biggest lever in '22. And then I would assume that if there is a weakening of demand due to buyers being more cautious in spending money, that would first impact the smaller cars again, not the premium cars because a lot of premium cars are company cars, rental cars, where the economy downswing in the past also showed that this was actually more robust. So I would say, yes, can it be that there's a bit of a change mix back from premium to what it used to be before COVID? Yes, can be. But I would think that this is an effect which is not significantly impacting the overall semiconductor growth, how I see it in '23.

And can I just have a very quick follow-up. Have you made a calculation given the current increase in the penetration of electric vehicles, in particular, but also ADAS? What is the current increase in semicon content per car over the cycle, let's say, over the next 5 or next 10 years? Has that changed -- increased versus what we saw in the past?

It's a little bit increased, and this was due to the fact that now the number of electrified cars have been upwards corrected in the models. And also, there is some contribution to, for example, there will be more cars which not only have one inverter per car, but they have 2 because it's a 4-wheel car like an SUV or a premium car. So there's even a higher share of number of inverters per car on average. So therefore, overall, I would say, compared to the assumptions which we did in the last years, this model actually even improved a bit in terms of semiconductor content, driven by the electrification of the cars.

Moving on to the next question from Francois Bouvignies.

Just 2 quick questions. The first one is you mentioned that you expect further announcement in terms of increasing flexibility on the silicon carbide space. So I just was wondering what you were referring to in terms of the work you are working on, what kind of options you have on the table on the flexibility side and on 200-millimeter specifically would be helpful. . And the second question I have is on your total capacity. So you mentioned a lot the demand environment possibly and pricing. But how should we think about 2023 capacity -- total capacity for automotive versus 2022, both internally and externally? So just to understand your capacity at least potential for next year.

Yes. Thanks for this question. So we continue to add suppliers to the raw material, to the substrates of the silicon carbide to become robust there and to really ensure also that we are prepared for the growth. We have now added the 4 supplier. We are currently signed an MOU with the next one. And we -- it's also fair to say that with all of them, we -- which we partner, we also make sure that they are prepared for our 200-millimeter conversion because that's definitely on our road map because growing capacity in 6-inch, 150-nanometer is what we have in our plan, but then we want to migrate it up to 200-millimeters to further expand the capacity there. To your second part, in general capacity, I would say that externally, everything which we get in CMOS-based technology to fuel the demand of our microcontroller will remain very tight in '23. So '23 is not yet a year where we can claim that we have supply and demand imbalance. We communicated all the capacity increase, and that's quite significant. There's an increase to our customers, but we see that it's not yet enough to fulfill the demand side of that one. When we come to the internal part of the capacity, as we invested significantly in the past to upgrade our 300-millimeter factory in Dresden and also added last summer, the 300-millimeter factory in Villach, we can ensure that capacity increase. I would say, for most of the products, we will have enough capacity to support our demand. There will be 2 categories which remain tight. One is, again, the high-voltage portion, IGBT, for the electric cars for sure, also on the silicon carbide and maybe power IC. So discrete power should be fine but power ICs, so this is -- this kind of [ 150-nanometer ] cluster, this order will remain tight. So I would say a good portion of the product, including the sensors, we should be fine, but still a handful of product families will be difficult.

Moving on to our next question from Andrew Gardiner.

I was just going back and comparing what you've said today with some of the things that you told us around this time last year at the Capital Markets Day. And in particular, you had -- at the time, you talked about roughly 10% through cycle growth for the Automotive division. If I look at the compound annual growth rates you're presenting on Slide 5 today, that looks about 12% or so. It certainly feels from the tone of today's presentation that you are more bullish today that things have changed. You mentioned the average semi content rising per car. So is it indeed right that we should be using that slightly faster growth rate around 12% as we look forward from here?

Yes. I think I would agree that -- first of all, we don't update a new CMD today, for sure. And also, as you said, when you listened to me in the CMD '21, I said, should be also at least 10%. So and that's why I think your assumption that it should be more than the 10% as we plan to have the 10% already in the greenish section alone and then you add on the ADAS and xEV. So therefore, you should not be surprised if the number is more than 10% up.

Moving on to our next question from [ Laurence ].

Great presentation. I just have a broader question on in regards to the chip shortage as it relates to the auto industry. It just -- I still don't fully understand how there still is a chip shortage. Given we're 2 years in, OEMs are saying that this should continue to be a bottleneck through 2023. The statistic I hear is that auto industry is like 3% of the demand for chips. And yet I have to think that these OEMs are probably willing to pay more than anyone else for chips. And so I'm just -- if you could just help me understand why is it still that this is a bottleneck for even another year as they're calling it out. Does it not work that whoever pays the most, gets the chips?

Yes. Here, I think one need to go a little bit more into the substructures. And you're right. Overall, automotive demand is maybe 3% of the entire capacity but if you drill down a bit, you have different technologies and different maturity levels. And here, it's fair to say that mobile phones, consumer equipments are on the very latest, newest technologies where all the new investment was going in. And automotive is an industry which is predominantly using technologies, which from a mobile phone or consumer space are considered mature technology nodes. So this is the capacity buckets which have not been invested in, in the silicon foundry area. And now there was a strong demand meeting already constrained capacity. And then it's not so much about who is paying more because if this capacity is already only or mostly used in automotive, then it's more like how fast can a silicon foundry partner add capacity. And we know it from our own manufacturing landscape, for example, the decision to build the next 300-millimeter factory in Dresden was 4 years ago because you have a very long cycle time until you can plan, build, construct and ramp a new factory. And that's why from a building perspective, we always make sure that we don't just put factory against a certain order picture because we need to plan strategically long term, prepare for the growth to come, believe in the growth and support it. So therefore, this availability of the right capacity for those products needed in automotive is the one limitation. And the second limitation is that there was more demand in terms of semiconductor content than ever planned before. This is more electric cars than planned, more premium cars as planned. And with this tightness in the market, the OEMs try to add even more semiconductor content to make more functions. So all that is helping together despite the fact that overall automotive is only 3%. It's still not there in the right capacity buckets than needed.

We're moving on to our next question from Adithya Metuku.

So a couple of questions, please. Firstly, just on silicon carbide, you have talked about roughly EUR 300 million in revenue this year. You previously said that this industry is capacity constrained. You're talking about 10x capacity by 2027. So if I just do the simple math, it sounds like EUR 3 billion in silicon carbide revenue in 2027. I think it's unlikely you'll deploy capacity if you don't see the demand and given all the pictures you showed with traction for silicon carbide. It seems to me like EUR 3 billion in 2027 could be a reasonable number. Would you disagree with that? And if so, why? That's my first question. And then I have a follow-up just on the AURIX microcontrollers. You're seeing very, very strong traction there. I just wondered if you could explain technology what is it within AURIX that is driving this traction? Why are people not moving away from a legacy architecture towards something newer? That's my second question.

Yes, as the first question. So basically, we didn't mention this EUR 300 million. I don't know where this was coming from. But the official number, which we said is for the mid of the decade, EUR 1 billion in silicon carbide both in industrial and automotive. And then I think when it comes more into this '27, '28 number, where you see then the increase of the Kulim factory kicking in, then this can become higher because if you take the Villach facility alone, if this is completely filled with tools, Villach can do more than EUR 1 billion in revenue, and then you would add the Kulim factory on top of that, and Kulim is, by a factor, higher in terms of capacity compared to Villach. So this can give the cornerstones. Then your second question, so why is AURIX the gold standard and why is AURIX so successful in the market. All these new systems in the car need to be safe and secure. So the safety aspect and the cybersecurity aspect are 2 key requirements. And here, with our first-generation AURIX already we designed and architectured this device in a way that it's intrinsically [ fail ] operational. So the safety aspect is built in. And then we added later on, on the cybersecurity aspect. And this made it so successful because the customers then could make their systems safe and secure without spending a lot of additional R&D effort. They simply could trust the safety anchors, the cybersecurity anchors, which are built-in and use all the benefits from that one. And this made it so easy for our customers to design in the AURIX.

Understood. Peter, just a quick clarification on that EUR 300 million, that was mentioned by Reinhard in the first quarter call this year as the silicon carbide revenue target for this year. And so that was my...

Yes.

So my thinking was if you do 10x of that by 2027, you get to EUR 3 billion.

Yes. Thanks for that because this was the industry and automotive. But thanks for clarification, yes.

So this capacity increases only for automotive?

No, no, it's for both together. I was just thinking about my automotive number, that's why I was not getting it. But now as you clarify, it makes sense. This was industrial and automotive.

Maybe to add on this quickly from the IR side, Adi. I mean that's absolutely a reasonable number, also given what we have said on the Kulim capacity. But do not forget, this is at 150-millimeter. So there is further upside potential once we move one or the other factory to 200.

Got it. And you're talking about 80% more, so that could be more like [ SEK 5 billion ] in revenue once it's filled?

Absolutely, we gave a factor around that. So we can do the calculation, I think that is as said. I mean we're talking only ballpark numbers here, for sure, but I would say it's in a reasonable range.

Very bullish.

And we'll move on to, I think, what might be our final question. [ Austin Haber ].

I just wanted to double-click a bit on the end market commentary. I know you said you're seeing strength in China right now. I was just wondering specifically about Europe, if you're seeing any change in demand trends given the macro-outlook? And any more color there would be appreciated.

Yes, I look very careful in Europe because here, I expect due to this energy cost increase that the customer sentiment would be very conservative there. I would say not -- I don't see any significant movement of the order pictures now. There is maybe some customers which are pushing out some of the orders of the -- from the first half of the year into the second half of the year '23. So some first, I would say, very small data points there, but far away from any dramatic move or change. So not yet. I don't see it yet.

Got it. And maybe just a quick follow-up, kind of similar to a question that was previously asked about content next year. I know you remain bullish that content will be a net positive factor for you guys next year. I'm just wondering, could you break down between what you would see in just ICE content moving upwards versus increased xEV penetration in terms of content contribution?

[indiscernible] It's a good one. Hard to say. But I would say that I would expect 3, 4 percentage point content increase out of the ICE part, 3, 4 percentage point out of the ICE part, and the rest in the ADAS and xEV. And as mentioned earlier, then it depends a bit on how is the mix changing. Will the mix remain between premium and small cars like it was in '22 or is there a small counter effect on that one.

Okay. I think with that, we have run out of time on this call. On behalf of Infineon and Jefferies, I would like to thank all of you for having joined this call and spend this slightly more than 1 hour listening to the comments here. Thank you very much, Peter. Thank you very much, Daniel, for giving us the time. And with that, we will end this call here. Thank you.

Thank you. Bye-bye.