NXP Semiconductors N.V. (NASDAQ:NXPI) Citi's 2023 Global Technology Conference Call September 7, 2023 1:45 PM ET

Company Participants

Bill Betz - Executive Vice President and Chief Financial Officer

Henri Ardevol - Executive Vice President and General Manager of Automotive Processing

Jeff Palmer - Vice President of Investor Relations

Conference Call Participants

Christopher Danely - Citigroup Inc.

Christopher Danely

All right. This is nice. I don't have to move for the next two presentations. Thanks, everyone. Good afternoon. I'm still Chris Danely, still the semiconductor analyst here at Citigroup. Thank God, although probably to the chagrin of many of you out there. Next up is NXP. Pretty much have the whole management team here, the dream team. We have in order Bill Betz, the CFO. We have Henri Ardevol, I keep wanting to say Henri Prudhon, which is a very famous Burgundy Domaine, but he's not a winemaker. He's on Henri Ardevol, VP and GM of Auto processing, and then the Grand Poobah Investor Relations, Jeff Palmer, to my immediate left.

Question-and-Answer Session

Q - Christopher Danely

So guys, I'll just jump right and we'll get into the automotive questions in a second. But I guess, how are you guys sort of seeing the end markets, nothing near-term. But what are you most excited about over the next, let's call it, 1.5 years in terms of the end markets, if you could rank them for NXP.

Jeff Palmer

Yes. I'll start that off, Chris. So I think, clearly, with automotive being half of our business, clearly, automotive is where we're the most focused on. We feel the most confident about our core automotive business as well as our core industrial business. As you know, Chris, our mobile business is small, maybe 12% of revenue. We're a niche player. We do something very specific there. We're facing the same challenges a lot of our mobile peers are with the Android market. We are seeing a cyclical kind of refresh with the iOS market in the second half of this year. But I think this is why we brought Henri along with us to this conference is, we're very excited about this whole evolution of a software-defined vehicle going forward. And I'm sure Henri will speak to that a bit more today.

We're taking – I mean, from kind of a cyclical perspective, we're taking a more and have been taking a more cautious view of keeping our channel very tight, our distribution channel, which is about half of our revenue, and we're being much more pragmatic and adaptable to our customers' needs on the direct side of the business with what we call our NCNR orders.

Christopher Danely

Yes. Maybe touch on the preemptive measures you guys are taking in terms of utilization rates, keeping inventory low for no matter what the cycle, you're one of the first companies to say, "All right, let's keep inventory low. Let's keep the utilization rates low and see what happens". Maybe talk about sort of what caused that and what actions you've taken?

Jeff Palmer

Yes. So as many of you have followed us for a long time now, our management of the channel has been a learned experience. 2016, we operated the channel probably a little bit more in a laissez-faire approach, ship in, reconciled at the end of the quarter, off you go. That worked fine, but we did stub our toes back in 2016, and we made the concerted effort at that time to change how we manage the channel. So today, and this is directly Bill is doing when he became – before he became the CFO, we manage what we sell into the channel, we manage what sells out of the channel, and we manage what's in the channel by part level, by geography, by distributor. We get that data daily. The management team reviews it weekly, and so we keep a very tight handle on that.

As we entered 2023, if you remember back to our Q4 call, we were a bit uncertain about where the market was going. And so we took the decision to keep the channel tight at about 1.6 months, which is about a month less than our normal target of about 2.4, 2.5. And what we have done instead is keep [Dyform] material on our balance sheet. So using our balance sheet to basically take care of Dyform inventory in case demand rebounds.

Christopher Danely

And you guys were one of the pioneers in terms of using long-term contracts to provide better visibility. Can you talk about, I guess, what is your maybe ideal level of backlog that will be covered by these contracts? And how you feel about maybe backlog for next year in terms of coverage by the long-term contracts?

Jeff Palmer

Yes. So our program we call – it's been non-cancelable, non-returnable orders, NCNRs, right? We run it on a calendar year basis. We only extend these programs to our automotive and our core industrial customers, so no distributors, no mobile customers. And it really was formulated in conjunction with our large direct customers who wanted a supply assurance and we wanted visibility assurance. And so we have put those in place. We're currently in 20 – late part 2023 now, just starting to have the discussions for 2024. They are not yet done. So we're just fulfilling our 2023 commitments at this point. We do think that in 2024, a number of customers will come back into the program again.

Christopher Danely

Okay. Will there be some sort of ideal backlog coverage. Now I would imagine it's not 100% to provide any wiggle room, ideally, would it be 80% or 90% or 85% over 75%?

Jeff Palmer

Let's use our auto segment as an example. So 40% of auto goes through distribution. So that would not be covered by an NCNR order. So I would mean 60% of our auto might be covered by NCNRs in an ideal case, right? Our core industrial business is roughly 60% of our Industrial and IoT segment. You might extend it to a subset of that. So clearly, it's not going to be 100% of the backlog.

Christopher Danely

Great. And are the terms changing at all of these NCNRs as we enter into 2020, or whether it's a pricing perspective or anything else?

Bill Betz

So pricing the way we need to approach price is, we're only passing along the inflationary input costs that we receive from our suppliers, while maintaining our gross margin percent, so it does have a positive effect on revenue and gross profit, but our gross margin percentage stays stable.

Christopher Danely

Yes. Can you guys talk about overall input costs? Is it pretty much just a case of whatever the input costs do, they go up whatever, 3%, 5%, you just pass that on to the customers and no issuer is a little more complicated than that?

Bill Betz

Well, the math is a little more complicated, right? So if you have a 3% input cost, and you just – as an example, of a 50% gross margin, you've got to pass along a 6% increase, right, to keep your gross margin stable. Passing along increased cost is never easy. It's never a conversation customers like to have. We've been very transparent on why we've taken this approach. We've also provided to our customers the ability to have audit rights, if they think, "Hey, that seems awfully high, Mr. NXP. Let's have a look at why your input costs are going the way they are". You have to also remember, about 60% of our revenue we source externally from foundries, 40% internally. And on the internal side of things, we are still seeing some sticky inflationary costs in terms of energy and labor costs. But a lot of the more consumables into our own fabs and things has normalized today.

Christopher Danely

Yes. And I've noticed that as we've had all this inflation and increasing input costs that clearly hasn't dented your margins. Do you see any of these input costs easing over the next, let's call it, couple of years? And could that be margin enhancing given it was – you were able to pass anything off?

Jeff Palmer

Well, our view is, at least for as far as we can see right at the moment, we don't see input costs on the foundry side going down. But I'll let Bill take gross margin conversation on that?

Bill Betz

Yes. I think we've been doing a pretty good job with our gross margins. If I think about long-term structural changes with the company, and Jeff talked about, we do about 40% internal, 60% external on the wafer fab. That puts about a 30% cost structure on us. When I joined 10 years ago, our cost structure was about 70% fixed. So going from 70% to 30%, that reduces the variability of the movement of your gross margins. So that's a big plus. And if you think about going forward, the real ramp of NXP is 90 nanometers and below, and that's what we're going to continue to source externally. And recently, you saw over a couple of weeks ago, we have an equity position in a joint venture called ESMC with TSMC, Bosch and Infineon.

The other structural change, I would say, is really our investment strategy. All the revenue you see today is coming from investments we made three or four years ago that had a margin hurdle rate of, call it, in the low 50s. So that revenue is coming to be. Think about all the investments we're making today in three or four years' time, that new hurdle rate is around 58% from a corporate because we're oversubscribed. We want the team to go focus on their investments and strategically play and continue to improve the quality of our portfolio.

And so I'd say that will gradually continue to grind gross margins higher. Now more short-term, medium-term, there's a couple of headwinds at the moment. Our utilizations are in the low 70s as well in – and we came from 95. We brought it down to 90, 85. So we learned from keeping and doing that in the right and proper way. We learned also not to stuff our channel or ship ahead of demand which I think we're doing differently than our peers.

You hear our peers talk about adjusting their topline revenue because of inventory digestion. For us, we've been very lean. And so when you have that, this material that we haven't shipped and we're starting just to ship to real end demand, is accretive to corporate gross margins. Think about it, distribution, long tail, has richer mix than your direct business high volumes. And then the mix underneath our segments is also positive. Thus, offsetting that current headwind related to the lower utilization.

As we expect market to rebound in 2024, we have two tailwinds that will play into our space. We'll have the utilizations help us improve from 70% back to that sweet spot of 85% as well as we are holding back about $500 million worth of revenue because our channel is at 1.6. Where we don't believe or see any indication to replenish the channel this year. So eventually, we will have to, and it will be a gradual approach, which is a richer mix, which then helps drive the gross margins higher in the short to medium-term, I would say. But overall, we're very pleased with the progress we're making as well as passing on those higher input costs to our end customers, but nothing more. We're very transparent about it. And so far, it's been a success.

Christopher Danely

Hey, Bill, when the utilization rates do bounce back to say the optimal 85% or even 90%, what would be the concurrent increase in gross margin?

Bill Betz

Yes. We don't break that out in all honesty, there's lots of puts and takes in the gross margin. Tailwinds, both headwinds, headwinds can be mixed. For example, headwinds could be what if we're not successful passing on the higher input costs. So we like to just – we don't break out every little bit and piece associate with it, Chris, but I would say it's a tailwind that will be beneficial to the company.

Christopher Danely

Maybe one little breadcrumb is, is your incremental gross margins, recently have been somewhere in the 70s. Is there any reason to believe that that would be any different this time around?

Bill Betz

I gave you a wide range. I think, Chris, choose not to answer.

Jeff Palmer

I'll jump in and help my CFO here. We don't speak about incremental gross margins. I mean, I think a couple of things. First off, as we would highlight don't use past performance as a way to try to read the future because we have changed the structure of our internal factories. We've pushed out all bulk CMOs out of our internal factories, and then we've reoriented the lines to be exclusively mixed-single proprietary processes. And so you can't go back and look at a period like March of 2020 and say, oh, the revenue was down X, the gross margin was down Y. That's what I use as my metric really would lead to the wrong direction.

Bill Betz

The only thing I would add is, the current levels of gross margin is not our final destination. We'll continue to work and improve those. We have an Analyst Day coming up in almost a little over a year, November of 2024. And that's the time where we'll probably reinstate our new gross margin targets longer term for the company.

Christopher Danely

Great. Jeff, that's one interesting thing is the 60% foundry, 40% internal, your manufacturing model has changed for the better quite a bit. Whoever wants to take this question, maybe talk about what you've done over the last couple of years to optimize the manufacturing model and could we see any more changes going forward?

Jeff Palmer

I think in terms of at least our commitment to our hybrid model, which is very much aligned with our partners like TSMC, GlobalFoundries and to a lesser degree Samsung will only continue. We're not going to build our own 12-inch factory. We just can't economically justify. It doesn't make sense.

Christopher Danely

Yes. Do you think over time that'll move more towards foundry then like 70%, 30% or something like that?

Jeff Palmer

Sure. Yes, over time.

Christopher Danely

Sure. And then just a question on availability. Shortages, lead times availability have been a hot topic in semis for quite some time, although things seem to be getting better. I guess we'll start with the NXP products first. Could you just give us an update on whatever metrics you use your average lead time or the amount of shortages or both kind of how we stand right now versus maybe earlier in the year?

Jeff Palmer

Yes. So lead times have normalized. And so our cycle time to build apart from a fresh order, fresh wafers through delivering it out is up to six months. So having some subset of that as being a target lead time is a reasonable target, but lead times have normalized. The only exception is in those areas where we do have NCNR orders because effectively you're pre-selling capacity, right. And so if someone comes in who doesn't think they have to forecast an order, they're going to see their lead time quoted to them out beyond what we've already committed to other customers.

Christopher Danely

And can you give us a sense of what they were to say, I don't know, a year ago to talk about these…

Jeff Palmer

Well, I mean, a year ago, we were sold out. We were looking at greater than 52 weeks almost across the board, right?

Christopher Danely

Yes.

Bill Betz

But I think one thing is we never really talked about our backlog because we have always discounted it. The way to think about it, our best metric to really understand what's going on in the market is through our distribution channel sell-through. And so in Q1, Q2, we kept that very, very tight. And so if you think about any new orders that came in within the quarter are real demand orders and what we've seen, and we were able to service them and do a little bit better than what we thought. But the key here is making sure that you can drive that upside related to those orders, understand those different pockets of areas across the world where you want to go focus and drive real end demand. And that's our leading indicator I would say Chris is really getting a good feel of that to give you confidence. And since then I would say, we've gradually sequentially improved in China every quarter since then. Not from a year-over-year standpoint, but China has improved since Q1.

Christopher Danely

Great. And then so can we also infer that the availability of foundry product is, has pretty much normalized at this point? Or is there still some spot shortages or difficulties or extended lead times or whatever?

Bill Betz

I would say it's normal and normal means you always have a couple of percentage, probably 5% of your portfolio that's always doing some sort of mismatch or you need to expedite or something along those lines, but it seems back to normal for us.

Jeff Palmer

And that's both on the internal foundry side and the external foundry side, right.

Christopher Danely

And so I've asked this to every company on the analog space and they've all given different answers. So I'll ask you guys that you've got this sort of wide range of companies saying, we're seeing a correction to, we're not seeing anything – where would you guys characterize NXP on that spectrum and why do you think you are where you are in that range, I guess?

Jeff Palmer

I'll take it and maybe Bill will chime in on it. As we entered this year, in Q4 when we had our call, we really felt very uncertain about the environment and clearly it was due to what was going on in China, right. Some of our peers anticipated a rapid rebound after the COVID reopening. We didn't see indications that was going to occur. So we took a more cautious approach, right. And we think that that's served us well.

Christopher Danely

Yes. Keeping the inventory low, keeping utilization rates low.

Jeff Palmer

Keeping things tight, staying close to customers. Now what we have seen, as Bill mentioned a minute ago, we have seen a sequential improvement in China, but not on a year-on-year basis. We're continuing to be down year-on-year in our consumer IoT business as well as in our Android handset business. Auto in China is actually pretty good. And auto in the rest of the world still pretty good as is core industrial.

Christopher Danely

Great. So yes, just to go back to the sequential improvement in China. You're the first semi company that said that at the conference, that's good news. Maybe just expand on the, I guess, we'll call those green shoots or something like that we're seeing in China?

Jeff Palmer

I think it was more that we took a pretty big hit in Q1. More than that one…

Christopher Danely

Yes. Okay. Great.

Bill Betz

I think what you see with our peers is that they're going through this inventory digestion, right? When there is no inventory in the channel, which we try to keep it very lean, then we get them real view of what real demand is doing. And I think many of our peers tell us, demand is there, they have to go through this inventory correction and it's just timing. And I think that's on both the distribution side, but also on the direct side, it's how you treated these NCNRs that Jeff talked about in the beginning, did you jam it and force your customers to take it when real demand is not there. And we've kind of taken a different approach.

Since Q1, again, we entered into these NCNRs back in October of 2022. So as we post the new orders came in, we checked with them and they maybe customer A would say, I wanted 100, but now I need 95 or 90. And we said, okay, well, that's not what we assign capacity for you. Okay, let's find a win-win, and we work this out through commercial ways, meaning, okay, they didn't know, but we could actually take that supply. They don't need those five units and give it to somebody else in need. So that work, but we also got something else out of it, like a future design win, or maybe higher pricing because of the working capital. We didn't take on their working capital issues and gave it all back to us. We found the win-win or maybe on a previous quality claim or something.

So we think we did that a bit differently than some of our peers throughout the year and just not now when some are now adjusting their internal utilization or their ordering purchase and behavior. We did that, as you could tell by our internal utilization went from 95, 90, 85 slowly went down, and that's a lesson learned as well as how do you manage your internal factories and your ordering behavior to be able to have a soft landing, and I think we've been going through that soft landing.

Christopher Danely

Yes. I think the industrial market is a perfect example of that. Everybody is worried about it rolling over. You guys already went through that. Already corrected for you, and now it's starting to stabilize?

Jeff Palmer

But I think that's also, Chris, we keep being asked about when is the shoe going to drop in automotive. And I would say that we've – through our approach in NCNRs and our management of the channel, you've already kind of gotten that correction already, right. Our guidance for Q3 for automotive is – auto to be up in the mid-single digits, up 5% year-on-year. That's below our long-term growth rate, right. And so clearly, you're already going through that rationalization now.

Christopher Danely

Yes. Okay. Enough about the near-term stuff – we satisfied all the client questions. Let's talk about the fun stuff. One thing is – it seems like every other day, there's an announcement about some analog start-up in China. There's a couple of reasonably well-established companies like Silergy over there on the competitive front. I get this question all the time. How much of a threat do you guys see as China's domestic semiconductor industry to your core mixed-signal MCU business?

Jeff Palmer

You want to take that one Henri?

Henri Ardevol

Yes. So I think on the low end, there's probably some possibilities for them to creep in on the high volume, low complexity kind of products. Really with the transition, which is happening in an accelerated way to xEV as well as to SDV, especially in China. Our angle and what the market requires is to continue to accelerate in terms of complexity and in terms of the quality of the portfolio. So we're not very concerned about the threat of China in the coming period in terms of local suppliers.

Christopher Danely

Note to everybody, you already sold the low-end standard products business. So that's all gone, yes.

Jeff Palmer

Yes. And we've said this at other conferences, Chris. But in China, out of level playing field, the competitors we see are the same competitors we see in the Western markets.

Henri Ardevol

If we were a silicon carbide supplier, it would be a different.

Jeff Palmer

We're not our excrete supplier, and there is a lot of excess capacity being built in China but that's not our area.

Christopher Danely

Sure. Okay. Let's get to the fun auto. There's everything from ADAS to efficiency, the safety to you name it Henri, what would you say would be that, at this point, I don't know, top three drivers of semiconductor content in the automotive space right now, and then we'll dig into a series of questions on that.

Henri Ardevol

Yes. So really, what we see is accelerated trends which are combining xEV together with SDV together with ADAS. And so on the overall automotive business, we said we're going to grow at 9% to 14% CAGR on 2021 to 2024, and we're well on our path to execute on that.

On the SDV, which is related to the core processing portfolio that we run we said we were going to run at 10% to 12% CAGR and particularly the most advanced part of our portfolio, the S22 family was going to grow from $300 million to $600 million in the 2021 to 2024 period, and again, we're executing to that.

On xEV, BMS, inverters, we have an outsized presence particularly in China. And so the target that we put, which was to go from $200 million to $500 million in 2024, we actually achieved $400 million at the end of last year. And so we are well on the path to execute and to exceed the target.

And then finally, ADAS for us is a very focused and very strong leadership play in radar, where the secular trend is clear that it's going to be a triple growth of the more complex types of radar, which are being installed in car, the higher number of radars, which are coming into cars as well as the high level of autonomy, which is are requiring more processing capability into the – into those processes. And so that brings that business from around $600 million in 2021 to $1.1 billion in 2024, which is a 20% to 25% CAGR. So those three drivers are at play, and we see them accelerating each other.

Christopher Danely

Henri, as the automotive business is really exploded for you and everybody else over the last 10 years, has there been any change in the margin profile of that business? Is it a little bit easier to maybe keep pricing flat to slightly up and have your margins been able to go up? Or do you kind of model it so they stay flat? Or how does the sort of the P&L work for that?

Jeff Palmer

So I'll probably jump in on that. So we really don't break down our margins by segment. But over the last five-plus years the dispersion of margin across the segments has become very, very tight. So you don't have as much dispersion as maybe you did five, 10 years ago.

Christopher Danely

Okay. Interesting.

Jeff Palmer

I think historically, Chris, we had been operating in an environment where you would get very low single-digit annual price downs to your customers in automotive negotiated every year. But as we started, as we talked about a few moments ago, as we're seeing input costs go up, we've had no choice but to go back to all of our customers and say, "Hey, our input costs are higher and demonstrate to them why.

Henri Ardevol

Yes. And so for us to improve our gross margins just to pass on.

Christopher Danely

Great. And then Henri, how about on the geographic side, there's sort of different pockets of the automotive market where North America, Japan, Europe, China, maybe describe where you're seeing perhaps the most growth for NXP and the different approaches that all these sort of regions of their domestic manufacturers take. And if you could give us a rough breakdown of your exposure to the main end markets in automotive.

Henri Ardevol

So I think in China, as a company, about 30% of our revenues coming from China, which in automotive is maybe a little bit farther than that. So that's a good thing because the innovation cycles in China are a lot shorter. And so they are early adopters of new versions of technology, and we are at the forefront of innovation in SDV as well as in xEV and radar. So we're benefiting from what is happening right now in terms of Chinese manufacturers, which are serving in the local market as well as the export market.

On the short-term, we actually continue to see the U.S. and Europe continue to perform. The numbers of vehicle sales were out from August where the U.S. was 14% growth year-on-year, year-to-date versus 13% in July versus a forecast of 11%. So we're ahead in Europe, 18% growth versus the forecast, I think, is around 10%. So that is also executing.

The inventory levels of finished cars are very low at 39 days in the U.S., which is about 1 million to 1.5 million cars less than historical. So we feel pretty good in terms of what the market is doing. And therefore, our focus is not so much on what the units of vehicles are going to do but much more on the content growth. And this is where everything that we do with OEMs in terms of driving the innovation in terms of the programs which are going to come into play in the 2025, 2026, 2027, you are all going to be a big acceleration.

Christopher Danely

And then within your products, so you guys do like literally tens of thousands of products within your products, what would be the top, I guess, three to five or the top products you would care to mention that you see the most increasing content for NXP?

Jeff Palmer

Overall for the whole company processing is probably the number one. Secondarily would be analog attached – we also in our industrial and IoT business, we're seeing real interest in bringing not only the processor and the analog attached to the solution, the connectivity, whether that's WiFi, Bluetooth, near-field communication as well as security. So that's kind of your rank order.

I think something – for those of you who have followed NXP for a long time, probably know this, but if you were to kind of cut the company by products, about half of our revenue comes from processing products. The other half comes from analog and RF type products.

Henri Ardevol

And we try, and that's a big difference for us as NXP at five years ago, to really mesh those different product lines such that the sum is greater than the parts. And so if you look at automotive, half of our revenue is microcontrollers, but the fact that we have the power management, the fact that we have all of the IVN and the physical side of the networking, the fact that we have the other upfront end for the battery management systems, the fact that we have the gate drivers for the inverters enables us for those customers that want to go very fast to market, for example, China, to deliver complete solutions where it's, of course, the typical hardware reference design, but we go a lot beyond that in terms of delivering software, which is integrated across the complete system solution, function safety concepts, which are also at the system level security concept, which are at the system level.

And so it's a complete box where customers can go and get in production very quickly. And in that xEV market is very important because there's a lot of new actors which are coming on board. And so they need us to step up and enable them to go into the application development. That then enables us to also continue to innovate, where there's going to be a consolidation of the different domains within the electrification of the powertrain, right? I mean if you take a typical powertrain of a Chinese OEM, you would have a lot of physical integration, but it's still separate boards. So you still have a board for your BMS, a board for your inverter, the board for your charger, your DCDC and your onboard charging.

And so there is still the opportunity to combine all of that into an EV on a chip kind of concept which we are then able to further optimize by the fact that we have the analog front and gate drivers, et cetera, into building higher-speed interfaces to those peripherals and then to concentrate all of the processing and decision-making into that single processing unit which then enables us to have this concept of a software less software-free BMS, which is going to be driving a lot of efficiency.

Christopher Danely

By the way, is there any, I guess, figure or a number you guys look at where if there's so much x amount of processing content for every dollar of processing content you can or you get, I don't know, $2, $3, $4 of mixed signal and other content. And would you say that the primary decision Henri is the processing unit? Or is it the analog? Or is it something else? Or is it both or neither? When you guys are working with customers on design wins, is there anything that they particularly start with from NXP and then you build out from that?

Henri Ardevol

Yes. Typically, I would say that the processor is the primary decision and actually, very often, the conversation now is even not so much above the silicon but it's much more about what kind of architecture do they want to drive. And so we have gone with OEMs into much more of a consultancy type of engagement instead of a product conversation that we were having with Tier 1s with OEMs, you want to have a holistic conversation about all of the different layers of the vehicle architecture such that you are able to create a hierarchy, then you are able to meet their objectives in terms of software, in terms of functional safety, security, the organization of the network, how the data structures in the car are going to be organized, how do you have the lower the air structure across the vehicle, which is stable and which can drive monetization, how do you connect it to the cloud.

So that engagement actually happens even before talking about the silicon, then the silicon becomes a logical consequence and of course, the configuration of the processes and then how can we make that something which is even more efficient than coming into market faster with all of the peripherals.

Christopher Danely

Great. A couple of other questions on automotive. I've had a few people over the last month, bring up the UAW potential strike. Does that ever come up in your conversations with customers? Is this a concern? Or is it more of a – whatever it will be a month or two months of disruption and then we'll move on. Does this pop up for a semiconductor company at all? If the answer is no. I'll take it. I just need to ask...

Bill Betz

Yes. I mean, we've experienced this in the past that didn't really have an impact. I mean, we'll watch it, right? Obviously, we don't want supply chain get disruptive. So that's our biggest concern. The last thing we want is a COVID repeat, but we don't think that's going to happen based on the lessons learned recently. It's still pretty fresh. So we think, as Jeff mentioned, it takes three to six months just to reach that point to them.

Henri Ardevol

Yes. If I kind of zoom out from the question. There's a lot of learning that has happened in the industry, I would say, particularly with OEMs in the sense of wanting to make sure that the new model is going to be very different from the model of the past. And so when we look at new awards from OEMs, typically, they have a requirement of at least three months of inventory in the chain towards the supplier in order to actually have a chance to get the award and some of them go up to six months. So very structurally, those measures are being put in place, and some of the cost is also being discussed from the OEM are being passed down the value chain in order to sustain that. So the learning seems to be there on a structural basis.

Christopher Danely

Great. Thanks for answering that. Okay. So in terms of NXP content, I am required to ask you the obligatory question of EV versus hybrid versus ICE car. What's your sort of average content and maybe how you expect that to trend over the next two to three years?

Bill Betz

Yes. So Chris, for us, on average ICE car for the industry is about $500 of semiconductor content, for EVs is probably doubled out of $1,000. Something that was very eye-opening to us as the EV mix start to really accelerate, we basically saw a huge pull-through beyond just our electrification portfolio. So we pull along more radar, pull along more in vehicle networking and pull along more processors. The unfortunate thing is how the supply chain works is we don't get a clear view that one of our Tier 1s orders a radar product from us. They don't say x percent of that product goes to EVs, X percent goes to ICE cars. We just don't get that level of granularity.

Henri Ardevol

Yes. The only thing, I would say the way to think about it is in terms of waves [indiscernible] discussing before. I mean you have the electrification waves you have the SDV wave, you have the ADAS wave and they add to each other. In a similar way when you think about SDV, how the OEMs are organizing now the vehicle architecture, you have the end nodes and you have more of those because you have more functionality. So you need more microcontrollers. The main controls, which is the clustering of the function is a reality. And I'm going to be hard-pressed to think of any OEM, which in 2024, 2025, is not going to be in mass production with the domain controller.

Then they want to go and also think about the physical network. How to simplify the harness, how to take hundreds of meters of copper wire away from the car, which is leaving cost, we're leaving weight out which can be reinvested into the silicon and those would be the zone controllers. And then you have the really advanced guys that want to take this consolidation, which is taking place in domain controllers and even further integrated into the whole vehicle state management into a complete vehicle computer. And so those are then building on each other. Different speeds, depending on the OEM, but they're providing additional layers.

Christopher Danely

Yes, that's what I was getting at is I would bet that NXP content is probably up 30% in the average EV/hybrid vehicle over the last, I don't know, four or five years, but I'm always looking for new data points to confirm or deny that to see what's going on in the future.

Henri Ardevol

Yes. I mean our electrification players, as we’re discussing, we said it was going to grow at a 30% CAGR and we're well on track to actually exceed that radar 20% to 25% CAGR. And on the processing side, 10% to 12% CAGR.

Christopher Danely

Great. Thanks, guys. We're out of time. Appreciate it.

Bill Betz

Thanks, Chris.

Henri Ardevol

Thank you.