Infineon Technologies AG (IFX) Earnings Call Transcript & Summary

Welcome to Infineon Technologies Automotive Division Call for 2023. Just to confirm, the format will be a presentation followed by a Q&A. Just a reminder to please use the raise hand function for any questions. Okay. I will now pass you over to our research analyst, Janardan Menon, who will begin the call.

Good afternoon, good morning, and good evening to all of you from my side as well. Thank you very much for joining us today on this Automotive Division call for 2023 of Infineon Technologies. We're very fortunate to have with us Mr. Peter Schiefer, President of the Automotive division of Infineon; and Daniel Györy, who is Senior Director, Investor Relations. I will now pass over to Peter to run through the presentation, which is already on the Infineon website. And as Megan said, once the call -- once the presentation part is over, we will move on to the Q&A session. Over to you, Peter.

Thank you, Janardan. Also from my side, a very good day to all of you, and I'm very happy that you dialed in today, giving me the opportunity to give you an update about the Automotive business. I prepared quite some updates also to the structural growth drivers. But before we go there, I want to start with an overview on the automotive semiconductor market, the position Infineon is in the stickiness of our products also across all the regions. And I also want to give you an insight to why we grew our margins strongly in the past years and why we will keep the profitability at the similar levels. Looking on the long-time performance, we have outgrown the automotive semiconductor market by 3 percentage points over the past 2 decades. And with that, we moved gradually from the #3 to the #1 position. And I would say we are also well on track to keep the things in this way. And this is due to the fact that our growth, and you can see that on the different product segments, is very much broad-based. So we are not limited to only a few particular categories, and we really can use our overall system expertise and the corresponding products to really sell many products into the applications and not just a few ones. This is good for our growth, but it also helps us to become more resilient. So this #1 or #2 position in the product categories, we for sure will really leverage in order to make sure that we can really address all the market segments. And that also means that we will continue to invest in the capacity that we can realize all these major growth segments. And you will see them in the later section of my presentation, the figures from our highest revenue contributors. And you also will see here how we will double our revenue in the next 5 years in each of those segments. So in the automotive semiconductor market, I think you all know, we see structural growth drivers of the market is driven by the growth drivers you see on the left-hand side of the slide. Let's take EV or xEV as an example. Even if you assume a flat to slightly growing vehicle market, the number of electric cars are showing double-digit growth over the next years. So if you take this year as a reference, around about 12 million electric cars, and we expect 16 million next year. That means this alone would be a 30% year-over-year growth. And even if we take a significant haircut on that number, still we will see a double-digit growth in this target market. Similar, the penetration for the ADAS/AD and also the evolution of this new E/E architecture, and I will explain it a bit later, shows similar development trends like the EV part. And yes, basically, you can say that the growth of the automotive semiconductor market is, to a certain extent, kind of decoupled from the vehicle market. It means that total vehicle growth has a lower impact to our growth than the penetration rate of the structural trends. And all of them, so the xEV, the ADAS/AD, the comfort, the premium are topics we talked in the past about, and they are well understood. And therefore, I picked today a focus on this E/E architecture, as I believe that the positive impact so far is underestimated in the community, and there will be some slides on that. Before we go there, let's have a deeper look on the semiconductor bill of material per car. From the past presentations that this is strongly increasing, also in line, for sure, with the strong growth on the electromobility. And already today, a battery electric vehicle can have almost double the semiconductor content compared to a classic ICE or gasoline or diesel car. And here, it's still fair to say that the majority of that BOM growth in electric cars comes from the drive trend. So that means that's already known applications like the inverter, like the onboard chart, the battery management system. So these are the main applications in the drivetrain. At the end of the decade, so by 2030, the semiconductor, one of such an electric car may even increase up to USD 2,000, very much driven by those cars which have much power, more complex drivetrains. And also in that cars, you will see an increasing share of [indiscernible] with its silicon carbide for the main inverter or gallium nitride for the onward charger. And this also will increase the semiconductor content. Yes. And I think here, we're really convinced Infineon will benefit very strong from this semiconductor BOM growth. We are the market leader in power semiconductors. We have an excellent market position in all types of the power semis, silicon, silicon carbide, gallium nitride. And this will really help us to fuel our growth there. But also the other trends that the increasing level of the autonomous driving. This new E/E architecture, the higher safety standards, the needed security features, the comfort and premium applications, all that will, in addition to the EV, drive the semiconductor BOM. And also in that area, I'm highly convinced we are really in an excellent position with this broad product portfolio. We'll talk about later, but we have microcontrollers. We have smart powers, which is mostly sensors, memory, connectivity and many more. And in most of that product categories, we are already leading today. We have a lot of innovations going on, and we have a very strong design win pipeline, which really will make sure that the growth will continue. And that means at the end, so the semiconductor growth means that the revenue will continue to grow even when the overall light vehicle production levels are basically [ neglecting ] out. And I think very important also, this is valid for next year. So there will be growth in the Automotive division from '23 to '24. Going a little bit deeper now in the profitability. And you see in this chart that over the last 2 to 3 years, we have strongly improved the segment result margin. And this is driven by factors where most of them will stay. So for example, you may remember that in the previous years, I discussed about the xEV products which have not been at scale yet. Now there are surely running at scale, and there is volume ramps in both, the silicon carbide world and the IGBT going forward. Microcontroller, we have rapid share gains. So we just reached in '22, the #2 market position. And the microcontroller, as you know, is a very much sticky business, and we have a very broad base of customers. So this helped over the last years to improve the profitability. Last year, we made a long-term binding supply price agreements with OEMs in Tier 1s. This helps a lot, and then not to forget in the former years, we had done quite some portfolio decisions and product mix improvements, and they are all now kicking in, and we see the positive impact. And this will also last. Also, we'll see in the next years, due to the strong growth, additional OpEx scaling. So therefore, on the long run, the long-term margins will be substantially higher compared to the past years. So higher top of base and also higher business resilience. And as of today, if I look for '24 and if I assume flat car production, as mentioned, still, we will see a nice growth. I would assume that the segment result margin would be anywhere between the Infineon, which is at 25%, and the 28%, which you see as a consensus for the 23 years. So anywhere between 25% and 28%. I think if you look a little bit to my colleagues in the other divisions, this is, I would say, somehow in contrast to the other divisions. We are -- except the renewables, we see, as of today, a weaker development with no [ trough ] achieved yet. And for Automotive, as mentioned, the yearly margin will be in the range I have given, even so, we may see some fluctuating orders. Maybe there is some [indiscernible] cost in the next 1 or 2 quarters. But as mentioned, it's a yearly margin. It will be in the range I have given. Yes. On the next slide, I want to give you a little bit of an aspect or insight on the geographical situation of the Automotive business. And this should show and address a little bit the topic of how resilient our business is across the regions and from a geographical perspective. So you see with the split here, then we have quite a good footprint to participate in the worldwide growth in all the regions. For example, we are already #1 in China, #1 in Korea. We are #2 in Europe and Japan. We had quite some success now for new design wins in North America. This will strongly increase our growth there. And with that, we will see over the next years, and you see that on the chart that the share of the revenue which we do in North America will increase. Contrary, in Europe, you see there's a lot of relocation and offshoring going on that will either decrease the revenue share. But important to mention is that also in Europe, we will see a solid absolute revenue process, a reduction in relative share of the overall revenue, but it's absolute growth still in the Europe region. Yes. And then we will also continue for sure to grow strongly in China. But keeping the China revenue share stable. That means what we factor in, yes, there is competition in China or coming from Chinese competitors. And -- but despite that, we will see a strong growth. And we factored in that Chinese local players will take share of the automotive semi market. [indiscernible] still grows because here, again, what I mentioned before, semiconductor content and the strong benefit on the system expertise and also the high quality awareness of the Chinese OEMs, especially those who want to export their cars outside China. And then going a bit deeper on this China topic, I think we, as mentioned, see China as a key market for it's the biggest market, strongest-growing market. So the market will add growth and value for us. And there are some very nice examples which show that we have significant content in the cars of the key Chinese OEM players. And this is based on many, many products. And even if you would exclude the IGBT topic, which is very often the case, even if you would exclude that portion of the business, we would still grow because we have strong growth in the MCUs. We have strong growth in silicon carbide. And there's many, many more products you need to do as [indiscernible], and that's a key driver for our success, this holistic solution competence, which we have. And on the time-to-market aspect, the China market is working quite fast. So there is a lot of changes going on, and that's why the pace of innovation we can bring on the table helps also to keep the product portfolio and the solution very fresh. And even so you see some Chinese competitors coming in now, it's fair to say that for the most of our solutions, there is simply no local equivalent. And if this is in development, we are also in parallel developing that end are working already on next-generation products. There's also for certain components, quite some, I would say, platform-related stickiness. So take the microcontrollers, once the microcontroller family is designed in typically this component last for many years. And there's also a reason for a more stable long-term growth, having more sticky and complex products in the applications. You may ask why the Chinese OEMs have such a high semiconductor content and why we are so successful, and I would say there is a combination of on the one hand side, mostly it's all new electric cars or BEVs. They all come with a Level 2-plus autonomous driving function. They all come with service over-the-air capabilities. And typically, they have a very powerful hardware setup, allowing that they later on can upgrade new services, new algorithms. So it means the semiconductor content is designed already to cover most of the new features coming in the next years. And this is really then an opportunity for us. And I mean, in the recent years, we have grown like expected, and not ignoring Chinese competition, I am very confident that we can continue our growth to the level we expect in the next years. So now switching to the part which I want to address now, the key areas for growth and stable profitability. The areas which we will address now are covering around about 70% of the automotive revenue from Infineon. And you will see that most of these parts are basically exposed to one or the other of the structural growth driver, and they will continuously help not only to grow the business but to grow it on a very profitable level. And in the next part, you will see a typical picture of this, what I call, new E/E architecture. So why is the car industry migrating towards this new E/E architecture? And it's basically a core enabler for what you can read a lot now, which is the software-defined car. So the OEMs must decouple hardware from the software in order to keep the software complexity low and to be able to manage that. And this move in the architecture has certain consequences. And if I look to the different examples I see at OEMs, they are all very much similar like in this picture. So we have a certain number of high performance computing zones, you have a varying number -- a high number of zone controllers. You still have the so-called real-time control ECUs. They are needed to make things like the braking, the steering. So they're very much safety-relevant applications. And underneath that, you have multiple families of complex or simple sensors and actuators. So this kind of hierarchical structure we see throughout most of the OEMs as target structure. And there's a lot of growth opportunity. So as an example, in the high-performance computing, you will pretty much see in most of these reference designs, the Infineon AURIX microcontroller as a companion MCU monitoring the safety and the security aspect of the SoC. And when we talk about the zones and the other functions, I have 2 more slides, which go a little bit more in detail, and which specify now the reason why there is a great opportunity for Infineon. So starting first with the microcontrollers. So as mentioned, you find the AURIX in the high compute part as the companion chip and microcontroller for the SoC. But you find the AURIX microcontrollers pretty much in all the zones and in all these real-time ECUs. So that's the home turf, and this is the success story of Infineon on the microcontroller part. We increased our market position. We came from #3 in '21, achieved #2 in '22, and we have the clear target to become the #1 in the next few years. In order to do so, we collected almost 20 billion design win in the last 4 years. And this will lead to a growth of a factor of 2, based on around about EUR 3 billion revenue number in calendar year '23. And very much important also to mention, many of these major design wins are covering minimum mid, if not end of next decade. So these platforms are very long-lasting and very sticky. So the second example for this E/E architecture is the power distribution. And the power distribution in this E/E architecture becomes very critical. So it's driven by the software-defined cars but needed. And there's 2 -- yes, I would say, 2 main drivers. First one is the so-called replacement of electromechanical relays. And there's a product family, we call that PROFET, which is key component for that. And if you take innovative OEMs or fast followers like Tesla or Volvo, you will find that they do not have any really -- relay any longer. So all relays are in place. And this means that there is anywhere between 170, up to 200 electric loads where you need intelligent power switches to drive that. If you now compare that to our volume OEM, they today may have 50 to 55. And in the next generation, they may go up to 150 of that load. So you see there's a strong growth opportunity for the smart switches as relay replacement. There's a second driver. This is replacing the fuse. So for a software-defined vehicle, as mentioned, you need this new E/E architecture. And there's -- on the one side, there's the clear trend to have big data processing and the signal processing more central, but at the same extent, you have a decentral power supply. So from one, [ bioharness ] to a decentral power supply. The challenge now is that in each of that tables or wiring, there may be failures. So therefore, the decentral power supply solutions need to be able to detect such a failure immediately. They need to be able to isolate that failure and then very fast to reconnect the backup supply that the car can still operate. And you can imagine that this is not possible with a mechanical fuse. So you need to have smart power switches to replace all the fuses. And this is a great example why the overarching trend on this new E/E architecture also will drive a lot of this smart power switches, which is a new growth area we see very much coming now in the next years. Yes, e-mobility, I think, one of the key topics we also discussed in the last years. Let me also today talk a little bit about e-mobility and give you an update there. Here, you see one example, which shows that we are the clear leader in the automotive semiconductors when it comes to electromobility. We as Infineon have basically all the active components you need for an inverter design. And also for the convenience of our customers, we have ready-to-use reference designs. You see one on that picture here. There is a wide range of application areas and power classes where this reference can be used. And you see that all our components cover the needs for the application. You have the power screens controller. You have the modules, the driver, I see the MCU, the communication components, the sensors and many more. And overall, the broad product portfolio allows us to cover around about 95% of an inverter solution. And you can imagine that this is really maximizing the value we can provide to our customers. But I think, as mentioned before, we have to say that out of that, the power system is the biggest growth or the biggest share of that semiconductor BOM. That's why it's also very much important that we as Infineon lead in these power systems. I think it's fair to say that nobody has a broader portfolio than us. We cover basically all the classical silicon applications. We have [indiscernible]. We combine this with our strong module competence and the know-how on the system. And you see that in this picture on the right upper side, we are already now developing first, what I would call, fusion modules. So that's a module where we combine in one module, silicon IGBT and silicon carbide power switches. I think this will have also a good opportunity for more affordable electric cars. And basically, whatever the market does, we will be there and ready to have the right solution for our customers. Maybe for those who are interested in this chart on the left-hand side, a couple of remarks. So if you would add all these gray bars, you would come up to around about 8.5 million electric cars in '22. The green bars would add up to 40 million BEVs in 2030. You see that there is a sweet spot in this area of 150 to 174-kilowatt growing the fastest, but there is also a sweet spot in 100 to 124. That is where we feel this will be a power class for the more affordable cars to scale up the electrification of the cars. And also an interesting data point, which we have from S&P Global, the power range per vehicle is still increasing. So where we end around about 126-kilowatt in '22. It's estimated to go up to 149 kilowatt in 2030. And I think that's very clear that with this growth of the total wattage of inverter, for sure, the demand for power switches and power modules also goes up. So there is continuous growth into that segment as well. Yes. Coming to the manufacturing part of the silicon carbide. I think as you know, we have recently announced a significant expansion of our upcoming facility in Kulim. Here, this will allow us to provide an estimated annual revenue run rate of about EUR 7 billion by the end of the decade. And you can expect that around about half of that would be automotive. And in Kulim, we'll construct the first world scale [indiscernible] facility, and we really are believing that this will give us an edge on the productivity and the cost. And together with our broad supplier network for the raw substrates, the wafers, this will bring us in a very nice spot to capture a big share in this growing market. And at the same time -- [indiscernible], not at the same time -- also our strong design win momentum continues covering not only traction inverters but also onboard charges, and this is new customers, but for sure, also existing customers. And we will make sure that then we will ramp the capacity inside the BEV, very much synchronized with their projected customer needs. So here, we are in good dialogue with our customers. And as you know from our announcement, we also are to receive about EUR 1 billion as Infineon for prepayments for our customers for the Phase II of Kulim. And I would really say this is a very strong sign for the relationship we have with our customers. And we are very grateful for that support. But on the asset side, we are also looking very much forward now to fulfill our part of the deal and creating capacity that we can support the customers accordingly. And not to forget when we talk about EV, BMS, battery management systems, definitely one of the strongest markets we are currently seeing with a lot of innovation, a lot of new products coming online. We did quite some nice design wins with OEMs in the automotive area. But not to forget, there is also additional businesses in the non-automotive area. So energy storage is one, which should grow significantly over the next years. And also, the effect comes on the need for more battery management systems comes also from bigger batteries. So if we take the battery capacity per car and fuel that over time, we see that this is increasing. So we have around about 60-kilowatt of average battery capacity in '22. And there's market forecasts which say that this may go up to 75 on average for the end of the decade. And as mentioned, of course, if the battery capacity is increasing, this for sure will drive semiconductor content increase in the BMS. And this also will help the growth on top of the overall number of systems. So at the end, one more category which I want to express a bit further today, MOSFETs. So now you would say that's more like a commodity product, why would we be interested in hearing about that? And I think it's underestimated, how well this MOSFET business is doing. And it's not only about strong growth. It's also very profitable and accretive. And there's many, many different categories. So it's not like a single component which is commoditized, it's a very broad and complex product portfolio. Also here, nobody has our scale from the production point of view and from the broadness of the portfolio. So whatever the application needs, you can say we have always the optimal fit. So we don't need to -- what the customer don't need to take a product which is only partially fitting. We have such a great variety that the customer always will find the optimal fit. We just recently introduced the seventh generation. So competitors in China are maybe 2 generations after us. So that means there is a 2-generation advantage. And there's many applications where you, for example, not only have one product in the application. You may have many, like in electric power steering. So the seventh generation offers you [ after ] chip size compared to the fifth generation. That means in an application where you have 2 MOSFETs, you simply can replace it as one. And that's on the system side, a lot of cost saving for the customer despite the fact that the product is more expensive compared to the old one. So that's a big win for both. And for those who may have heard about 48-volt as the [indiscernible] in a car. And there are some OEMs now going into that direction. Alone for that new application, we will launch around about 70 new products in the next months to come. And this also shows the innovation level which we have in this category, which maybe is underestimated in the market. Yes. To summarize all that, I think I'm really convinced that Infineon is better than ever positioned to be the #1 in the automotive area and also to build on that and leverage that. We have more than 70% of our business exposed to accelerated structural growth levels, which I mentioned today. We continue to see a strong and profitable growth in those areas and for the entire business. And we also will foster and balance our digital footprint and really shape the future of the car [indiscernible] by with our customers. And with that, Janardan, thank you. I think I'll give it back to you.

Thank you very much, Peter, for that great presentation. It really gave us a brilliant overview of the business and what we're seeing going forward.

Maybe I'll kick off with a couple of questions. [Operator Instructions] So first, perhaps, you said that you expect to grow in FY '24 in the Automotive business. As you're aware, there are some concerns in the market of inventories, potential slowing of cars, demand, et cetera. And obviously, at the same time, there's very strong momentum in the EV, ADAS side, and you've talked about market share gains. So would you be able to give us some kind of an idea of what kind of growth, sitting where you are today, that you expect for FY '24? And what are some of your assumptions behind your expectation for growth next year?

So I expect low double-digit growth, assuming a flat car production. And this comes -- we have a strong growth in all the products which go in electromobility. It will come through a strong growth of the microcontrollers. This is due to the fact that there's more content, more projects ramping up. And also like we demonstrated last year, there will be also market share gains. And in the more classic business, the growth will be a little bit smaller, for sure. But overall, low double-digit.

Understood. So I mean -- so you're really not seeing any kind of a slowdown in your Automotive revenues at all, given that expectation. But let me just narrow a little bit into China. One of the concerns in the market is that Infineon is losing some market share in China, as are many of the Western Japanese semiconductor suppliers because of the concern of the trend towards localization. But your numbers suggest that that is not the case. You've just said that your China revenues grew 35% last year, and you should be growing about 25% this year, which seems to suggest that you may even be gaining market share in China rather than losing market share. However, there is some evidence to suggest that especially in IGBTs, you are losing share in certain OEMs. So just -- can you put this into perspective into China? Are you losing market share in some of these product categories? And is it that the big growth that you're seeing in, say, microcontrollers, where you talked about getting to almost EUR 3 billion of revenue. Is that happening more in China where cars are very advanced and require more microcontrollers? And is that the sort of thing which is helping you achieve these kind of growth rates? And do you expect China to continue to be sort of a strong growth area for you in coming years as well?

Yes. First of all, for sure, there is local Chinese semiconductor companies which are in competition with us. And you mentioned IGBT. That's -- and you see also market reports on that, that's an area where they are gaining momentum. So here, we may lose share, but still we would see growth because the overall market is growing so much. So yes, the share would go down, but the absolute market or absolute revenue, there still has a growth momentum. But it's not only the IGBT. And I mean, there is so many hundreds of products we have in Chinese cars. The new modern car models have 20 and more microcontrollers there. You have not only IGBT, there's silicon carbon also coming in Chinese cars. And there's many more products. So that means even if you would lose or if you would eliminate the IGBT portion of the semiconductor content we have in those key players in China, then there still would be growth. So it's basically -- the answer is right for other relative share and some of the categories, we will lose. But overall, we will have a strong growth driver leading to the fact that the revenue share compared to the other region will not go down in the next 5 years.

Understood. Megan, can we now take some questions from the audience, please?

Yes, no problem. So the first hand raised is Francois.

Hello. Can you hear me? Yes? Can you hear me now?

Yes, we can. Yes.

Okay. Great. Peter, so I just wanted to ask you about the underlying assumptions on the pricing front. So I think you showed us the strong fundamentals of your business. And one area of concern as well is if we look going forward, how should we think about the pricing in your business? And I'm asking because we see evidence of kind of oversupply today. I mean, if you look at the underutilization of many players in the field, it's now not fully booked, and we can assume that there is some sort of supply. And with the level of investment that the industry is undergoing, what makes you feel that the pricing should be resilient? Just trying to reassure the market on that front would be very helpful. And then you showed the margin side, this may be related to that, but the margins increased significantly for the Automotive division specifically. And can you help us understand the drivers of this? Is there any product mix that we should be aware of that is impacting significantly this? And how sustainable it is, basically?

Yes. Thanks for this question. Yes. First of all, on the pricing. So a significant share of our Automotive business is negotiated with customers in the last 1 or 2 years with multiyear agreements. So that means 2 things. That means that like in the previous years or in the past before the crisis, these multi-year agreements have small steps year-over-year. So there is a small step price decline built in, in the contract, but it also means that we have that as binding agreements. There is no renegotiation of debt, as there are price agreements and also supply agreements instead. There's also a certain point where some portion of the business, this has -- where we have locked in customers with long-term orders. So also that is, I would say, already in the plans in terms of what the pricing is expected. And then the rest is maybe a mix of some products staying flat, some products going a little bit down. But I would say the predominant factor is this multiyear agreements and booked orders for the long term. Yes, your second question was on the margins. And first of all, yes, I don't say the price is flat or stable, but the prices will not go down significantly because of these factors. And in addition to that, we have drivers which did lead to this margin improvement over the last years, which will not go away. So in the earlier discussions which we had 2 or 3 years ago, when I was asked about why is the segment result of Automotive below the Infineon average? I've always mentioned 2 things. One is that we pre-invested a lot in a broad base of products in the electromobility, and all that products did not have been produced in scale that time. And this changed now. So we have outgrown there. All of these products are now running at scale, and there's more volume ramps coming up. So this structural problem is solved. And as we grow significantly in xEV and also the market demand is very much strong. So I don't even see oversupply here, and we have much more customer expectations compared to what we can produce. This will stay. The second answer I gave 3 years ago also is that we are not at scale in the microcontroller. The R&D investment in microcontroller is significant. This is very complex products, hundreds of millions of R&D you need for this product. And we didn't have revenue at that time to basically balance that with our OpEx. So the product price was okay. We also approved on that one, but we did not run at scale from the OpEx. Now with achieving #2 position, that's a clear evidence that we are now big enough for that investment. And as mentioned, we will not stop at #2 for further growth. So these are 2 examples next to the long-term agreements with price for our customers, which help us on the profitability and also a little bit will come. We will not grow in our resources as fast as we grow in our revenues. So also here, some OpEx scaling can be expected.

So we'll move to the next hand raised. That's Andrew Gardiner.

I had one on silicon carbide. Peter, if we compare the slide you've shown us today with the one you showed us last year, just sort of adding up the different OEMs and Tier 1s on there. You had 12 shown on the slide last year. You're at 26 this year. So clearly, you've won a lot of business. Can you put that in perspective with sort of the amount of, let's say, RFPs that are out there? I mean, how would you categorize your win rate at the moment? Do you feel that it has -- you're taking more share within the silicon carbide opportunity relative to where you had been?

Yes. Thanks, Andrew, for the question. Yes, answer is clearly, yes. Compared to the late start we had because you know that we've, from the beginning, focused our silicon carbon technology on trench because we are strong believer that at the end, trench will be the technology which you need in order to drive cost performance down. By the way, we are now ramping the second generation, and we are developing already the third generation. So we are well in the market with trench technologies. But due to this late start, we didn't have the share like we used to have in IGBT, and this current design wins really demonstrates that we increased that share. And all this design wins where also customers help us to finance the capacity will lead to the fact that the market share which we had in the past will be increased compared to or using the new assignments and adding them to what we had already.

And are you able to help us in terms of what that means for silicon carbide revenue this year or next year or the type of growth or just help us quantify it a little bit?

Good question. Daniel, do we have a number there?

Yes. I mean -- Andrew, this is Daniel here. I think all the information we gave here is up to date in the last release. So it will be more than EUR 1 billion in 2025. And you know that for the end of the decade, we are aiming at EUR 7 billion of revenue.

So the next call on the line is Sébastien. Sébastien, can you hear us?

Yes, I've got it. I've got one question on competition in China. We are seeing growing competition in IGBT in China right now. How do you see the potential competition building up on silicon carbide in China? How many years are we from, I would say, the beginning of the ecosystem around the silicon carbide there? And the second question is on, as inventory level in the automotive market, where are we standing on the inventory today? Do you see any kind of buildup or we are still quite lean?

Thanks, Sébastien, for the question. Yes, silicon carbide is indeed a very, very good one. So -- and you mentioned the IGBT, the hybrid big drive China competition. When I was -- the first time meeting one of these Chinese competitors, this was back 2009. That time they started this activity. And I would say their volume production was starting in the late '19 or '20. So for the IGBT, it took them more than 10 years, to really qualify. They started earlier in industry but to qualify that in automotive. So I don't necessarily say that each and every product will take 10 years, but it tells a bit that it's -- yes, Chinese competitors will come, but it's not so easy to replace each and every product in instant time. So this will be a long-time perspective and not a short risk. Now what I see on silicon carbide, I think the good part here is that most of this investment at the moment goes into the substrate, they're all wafers. And Infineon always had a paradigm that we don't want to produce that on our own or with our own facilities. We always said that we want to have a broad base of suppliers where we buy our substrates. We have qualified quite many of the suppliers already, 2 out of them coming from China. And I see a lot of investment going in China into this substrate fabrication. So therefore, the Chinese supply of raw material will be, I would say, the first step where China goes into. And this will be not competition to us, but will be competition to those silicon carbide players who make their own wafers. Then it's fair to assume that as a next step, maybe they go into the device manufacturing and then silicon carbide chips will be there. But again, here, this will take some years before you see that coming and then you need to make it automotive-grade and automotive qualification. Then you need to make sure that you have a good yield, because if the yield is not good enough, then you throw a very, very expensive inverter modules. That's an issue. And then what we see here is that more and more Chinese OEMs want to export their cars, for example, to Europe. And what I hear and see in my discussions with the OEMs is very much that they want to make sure that the cars they export are having the automotive standards from the Western world. And you may even can foresee that there are 2 grades, but there may be versions where they use Chinese suppliers for cars remaining in China. And they may use, for example, Infineon products for those cars, they do an expert. Now this also could be a future to see. Yes. On the inventory, I would say now -- I mean, if I look to my business, first of all, a big part of when business goes into the distributors into the channel. When I look into the channel inventory, I would say this is at target range. I do not see an inflation in the distribution inventory. And for the last 3 months, the inventory also was stable. It was not increasing. I even saw now in China, distributors that the inventory is a little bit declining. Then when I look into the direct customers here, I would say that most of our business with the direct customers is on the vendor-managed inventory. That means here, we have daily updates where we see what the inventory is doing. And in addition, in the last weeks, we checked the situation with our biggest customers to see what they see in their inventories when it comes to Infineon. And I did not find any alarming signal there. If you link that a bit to the product segments, then I think it's fair to say that the classic power semiconductors, they see inventory corrections now for 4 quarters, and the trend is declining. So here, I would say that on this classic products, which are out of allocation now for a year where we see corrections ongoing now with a declining trend that I don't expect that there will be big risks in that. Microcontroller, still in allocation. Here, we very likely will be out of allocation in the quarter 1 fiscal '24. That means then we finally can start to build strategic inventory for our customers. And the area where I see not at all inventory buildup is on the electromobility because here, the total demand of my customers is still exceeding my capability from our production. Then you mentioned -- or I mentioned that I expect a year-over-year flat car production. Maybe some of the Tier 1s still plan for an increase in car production despite the fact that this flat prognosis is out now for many months. So therefore, maybe there is some Tier 1s which plan on a growth and there may be some smaller correction comments. But as mentioned, from an order book and inventory. All in all, no alarming signals from my side.

If we want to quickly move on to the next question, Lee Simpson. Okay, Lee seems to have dropped from the line. Gianmarco, would you like to unmute yourself?

Yes, a couple of questions for me. On China, still, can you confirm how much up is China domestic for the IGBT business? And in particular, did you hear any political risk in the sense that we know there is more capacity being built, but we had also that for political reasons, there may be some balance on using the foreign products? So is this something you are seeing already? And the other question is about margin because you clearly alluded to good visibility on our revenues given the backlog. On the margin side, you gave a kind of range between 25% and this year, so 28.6%. What kind of visibility you have within the range? Because you mentioned you have visibility on the pricing. So what would make the, let's say, low end or high end of the range more likely?

Yes. Thanks, Gianmarco, for the question. I think the China domestic share -- and I hope I interpret the question correct. Did you mean how much of that revenue we do in China remains in China? Or is there...

So for cars which are basically for the domestic market, because you mentioned some Chinese customer, maybe they want to export. And so I guess this business will not be at risk. But clearly, if they produce especially chip card for the domestic market, it seems also from a political point of view, there is a pressure for them to use domestic supplier. And maybe just to conclude, we heard one of your competitors made a JV with a local foundry. So you're also thinking about maybe this as a defensive move.

Yes. We -- thanks for that question. Yes, we also have a joint venture now for 5, for 6 years already with SAIC for the IGBT modules for the electric cars. And this is all for domestic models, and we basically -- this is not even included in my numbers, because it's the joint venture revenue. So they do the IGBT module business for the China domestic market. They are growing. They're invested also now in an additional line. And they are clearly seen as a local player, being a joint venture with SAIC, which is one of the biggest and most important OEMs. So it's basically from that perspective, this joint venture is seen as a local partner also for the local domestic products. And your second question was on the margin in terms of visibility and where we would end up. I think the drivers for the margin, which will stick, we clearly -- are clearly aligned. There is some topics which will not be stabilized for sure. You know that we had expediting fees in the allocation. So this is a portion which was there in the '23 fiscal year and will not be there in '24. So there are some smaller buckets which will disappear because simply, there is no allocation. So you don't get a premium field, that one. But all the other drivers which I mentioned, I'm pretty confident that they will stay firm.

Okay. Megan, I think we can take our last question. We're already over the hour. If Lee Simpson is back on the line with us, we'll take that. Otherwise, take somebody else.

Okay. Yes, Lee has appeared back on the call. So Lee, if you want to unmute your line?

Yes. You can hear me now?

We can, yes.

Perfect. I just wanted to ask maybe a slightly longer-term question around the implications for software-defined vehicles. And it's clear that you've got a class-leading family with AURIX. You have the TC4 ready now. But you're standing up to competition, it looks like certainly in the zonal compute area. There are others looking at where they can be companion or where they can be even more relevant in co-development. So could you maybe just paraphrase again the strategy for how your microcontroller division will cope with that decoupling and the introduction of SoCs and the car? And maybe related to that, I thought it was quite curious, but perhaps interesting also that you entered into a JV with a number of players around the development of RISC-V. And that seemed to have ramifications for the car, perhaps on a cost basis. Or maybe it was an insurance policy. I wasn't quite sure, but maybe you could round that out for me as well.

Yes. Thank you, Lee, for the question. So first of all, there's 2 main areas which we shoot for the next generation of MCU. So after TC4 was TC5, however, we will call it that time. One is, for sure, continuing on partnering with the SoC makers for this varying number of high-compute platforms as a safety companion. But even more important is then this [ solar ] controllers. And what you need in this architecture for software-defined cars, the [ solar ] ECUs is basically transforming the service-based world coming from the high compute. It's all about the services there into the signal base. So transforming to the real analogue car part. And what you need in this multiple zone control is new families of microcontrollers, they need to have more data processing power. They need to have more connectivity, because it all will be Ethernet-based. You need to have more security aspects, because it's all connected. So more robust and advanced security concepts are needed. And you need -- because some of the real-time control from the past will be transformed in model-based design. So what you need is inside the microcontroller, you need also hardware accelerators which are able to make AI inference, because part of this real-time control functions will not be controlled in any way, it will be model-based. So these 4 ingredients, we will bake into the next generation of AURIX. And that's why we decided also to move to FinFET, but memory-based. So with [ RM ]. And we also moved to the RISC-V. So the reason for that, and this was your second question. I would say, if you take the evolution in the car or in the microcontroller. So in the beginning, it was the Intel-based world, and it was more on the data center, data programming. Then in the automotive, it moved to the real-time world. And this was the time of the TriCore, the Infineon microcontroller. We had our own core -- TriCore in the AURIX microcontroller, because the Intel world was not optimized for real-time control, and we made a dedicated core for real-time control. And this is why AURIX is so successful. Now we are moving from the real-time control in the servicing model-based. And here, you need that -- again, it's time for a different controller, because the TriCore is not maybe too heavy or too over designed from a core perspective to that environment. You need different architectures, and that's why we decided for RISC-V. That's a good momentum now for this model-based microcontroller approach, and that's why we didn't pick the RISC-V as the key core.

I think that brings us to the end of this call. Thank you very much, Peter, for a great overview and for answering all our questions. Thank you very much, Daniel, for joining as well. And thank you all of you for joining this call. With that, we end it and have a good rest of the day.

Thank you. Bye-bye.