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The semiconductor industry has been hit by a weak macroeconomic environment, and one of the hardest hit markets has been automotive. The IHS Markit Germany Manufacturing PMI contracted in March partially because of a slowdown in the automotive industry. According to Cox Automotive, sales of new, light vehicles in the United States are expected to fall 2.3% YoY to 16.8 million vehicles. According to Trading Economics and China Association of Automobile Manufacturers, vehicle sales in the world’s biggest automotive market, China (FXI), fell 13.8% YoY in February 2019, its eighth consecutive month of YoY decline.

Declining Auto Sales to Impact NXP’s and Cypress’s Q1 Earnings

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The demand weakness in car sales impacted NXP Semiconductors (NXPI) and Cypress Semiconductor (CY), as they earn 40% and 35.5% of their revenue from automotive. However, increasing semiconductor content per car has mitigated the declines.

NXP manufactures secure high performance mixed signal solutions for automotive, identification, and secure payments. Cypress manufactures embedded solutions that connect, compute, and store data for the automotive, industrial, enterprise, and consumer markets.

NXP’s and Cypress’s first-quarter guidance

Cypress enjoyed strong growth in 2018 driven by demand from automotive, industrial, and 5G. The unexpected slowdown in the 2018 holiday season sales, especially in China, created excess inventory in the semiconductor channel. The channel is cutting orders to absorb the excess inventory. For the first quarter of 2019, Cypress expects revenue to fall 8% YoY to $535 million at the midpoint as it becomes cautious with its inventory management amid a slowing demand environment.

NXP expects first-quarter revenue to fall 7.9% YoY to $2.09 billion, nearly in line with Cypress revenue guidance. Even Texas Instruments (TXN), which earns 20% of its revenue from automotive, expects its first-quarter revenue to fall 8% YoY.

The number of vehicle sales may continue to fall, but the above chip companies will likely benefit from increased automation of advanced driver assistance systems.

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