#tomorrowtoday: Dr. Sven Schneider, CFO Infineon Technologies

We live in a different world when you think about geopolitical topics. We have to become more independent to a certain degree and better position resilience in the core products needed for the core markets in Europe. These are the lessons learned from recent years.

Yes, very gladly, thank you for inviting me.

Yes, that is indeed a question we have been getting from our customers regularly since the outbreak of the COVID pandemic. Let me make a few general remarks. First, where does this situation come from, how do we assess it now, and how might it continue? If we go back to spring 2020, two things came together that, as you rightly formulated in your question, have not yet been fully resolved. First, car manufacturers drastically reduced orders due to the massive drop in demand during the pandemic. At the same time, competing products grew strongly. We all needed a second laptop for home offices and remote workplaces, we needed data lines, and we saw very strong accelerating demand in mobile, server, IoT, and most recently especially in renewable energy. This demand at least partially goes into the same corridors, so these two effects came together and led to the fact that for one of our most important sales markets, the automotive industry, products could not be delivered in the available quantity at the requested time. That was not a fault of ours or competitors. That's the background of how it came about. Secondly, in semiconductors, you have to understand the production of a chip. A chip is a very complex product created in thousands of steps, taking months in manufacturing. That's the short-term timeframe. When you think about capacity expansion, for example in existing plants, we're talking about one to one and a half years lead time. If we build new factories, which we are doing to a great extent, that can mean two to three years lead time. You have to know that when considering the whole topic. Regarding the current situation, I would divide it into two blocks, Mr. Meyer. First, if you look at power semiconductors, sensors, or security solutions, these are products that Infineon predominantly manufactures in its own fabs. Here the situation has improved significantly. The escalations with our customers, what we call demand-supply imbalance, have decreased significantly. On the other hand, there are the so-called microcontrollers that you also need in many places in cars, which we essentially get from suppliers and then process further. Here, the shortage is still very strong due to the statements I made at the beginning, and it will continue for a while, especially because the renewable energy topic also goes into these same corridors. So it has gotten better, but unfortunately, and we all have a common goal, our suppliers and our customers, we are not yet where we were before the pandemic.

Yes, I think I already said that building a factory is a strategic decision, and the strategic decision naturally takes into account cyclical market developments, but very essential for us are the two main drivers of our growth: decarbonization and digitalization. Here we see an unbroken, sometimes even accelerating demand for our core products, and that is the basis for the decision a few years ago to build a 300mm factory in Villach, Austria, or now to expand factories in Malaysia and also in Germany, because we are confident that in two, three, five years, demand will be so high that we will need these capacities. So to come back to your question, yes, a difficult situation, which we should not overstate, I do not consider it a financial crisis like back then, but rather very isolated topics we have to look at. But of course, the interest rate environment, if interest rates rise significantly, is something that can impact consumption, and we see that, for example, in parts of consumer electronics, a decline in demand has been visible for several months. So yes, but the structural drivers of decarbonization and digitalization are not affected by that, especially since the European Commission will give them some tailwind with strategic decisions. We know that with the European Chips Act, the global share of chips from European production is to be increased from 10% to 20%. If you look at that, it would probably correspond to a quadrupling of capacities, since production in other regions will also grow. From your perspective, can Europe thereby reduce or even eliminate dependencies on other regions?

Yes, first of all, we have very clearly expressed time and again that we fully support the initiatives of the European Union, you just mentioned the European Chips Act. We think it is the right development. We live in a different world, unfortunately I have to say, when you think about geopolitical topics, when you think about the war in Ukraine, we have to become more independent to a certain degree and better position resilience in the core products needed for the core markets in Europe. I think these are the lessons learned from recent years where we all agree. However, the European Chips Act is sometimes perceived and presented somewhat shortened, that it is only about production capacities and the next factory. It is about more. Production must be combined with research and development, expansion of top universities, research institutions, attracting qualified personnel, chip design. So there are steps that go beyond production itself. But yes, in the core areas, and also here it is important to distinguish, in which Europe already has a leading position: power semiconductors, sensor technology, security. Our customers, for example the automotive industry and industry, if these industries want to master the digitalization and decarbonization challenges, they also need a better and stronger manufacturing base and an ecosystem in Europe. The European Chips Act will help, just as it will help in the USA, as Japanese efforts or recently Korean efforts will help. That is good. Nevertheless, and you mentioned the numbers at the beginning, it is not so relevant whether it is 20%, 18%, or 22%, it is to be assumed that these measures will lead to complete independence and autarky. That is unrealistic from my point of view, but we can improve the situation and increase resilience, and that is why this is the right step.

Yes, the investments we announced for a factory in Dresden recently, an analog mixed-signal and power fab, is the largest investment in the company's history, to put it in perspective. We will invest 3 billion this year, which is already the highest investment budget in the company's history. So 5 billion at one location is already a word even for a strongly growing Infineon. Yes, it is also a commitment to the location Dresden. When you look at semiconductor investments, you have a certain bias to go near or to the location where you already are. Why is that? These are the famous scale effects. It makes much more sense for ongoing costs but also for lead times to go and expand where you already are. That's why we have large locations, Dresden is already a large location, also Villach in Austria, also Kulim in Malaysia. These are large locations we are expanding, and Dresden is for us the location of choice for these very relevant products that are indispensable for our growth drivers: autonomous driving, electrification, data centers, IoT. And besides scaling, other factors play an essential role: qualified personnel, stable infrastructures, if we think about electricity, water, ecosystem, a good overall system, and not least, I should add, these semiconductor fabs are also subject to a worldwide subsidy competition. That means we have seen for years that, for example, Asian factories are massively supported by local or regional governments. To achieve a certain level playing field, it is also very important for this factory, and we are very glad that we feel great support from both the federal government and the EU in the sense of this European Chips Act, and we have received the so-called preliminary measures for the factory so that we can start work now so that the factory will be ready in a few years. So in sum, that is of course a commitment to the location.

Yes, one must also put semiconductors into perspective. There are much more energy-intensive industries, if you take the chemical industry or the automotive industry. For us, the energy part is a relevant cost factor, but it is not decisive. Let me give you a number that is publicly available. If we talk about the total energy costs of Infineon this year, we are talking about approximately 400 to 450 million euros. That is a large number, but with a revenue of 15.5 billion or cost of sales of 8.9 billion, it is of course smaller amounts. Therefore, for us, the energy topic in terms of prices and costs is relevant, but much more relevant for us is the security that the infrastructure is there. What the semiconductor industry absolutely cannot tolerate, if you allow me the direct formulation, are interruptions. We had a case where we had a short interruption of the power grid, which led to effects on production that we could only fully compensate after weeks, sometimes months. So we need not only attractive competitive prices in the international environment but also a correspondingly good and secure grid. These are the things we are very strongly interested in and that have also flowed into our investment decision.

Thank you for the question, Mr. Meyer. That is indeed the core. The word 'technologies' is not in the name Infineon Technologies for nothing. So first the market, then the technologies. We expect very strong market growth in the coming years. Last fall, we adjusted our target operating model, where we communicate the main KPIs to the capital market, especially profitability upwards, but also growth. We expect that through the cycle, our company will grow on average more than 10% per year. I mean, those are already big numbers. I joined Infineon four years ago with 8 billion revenue, now we have almost doubled revenue in four years despite COVID. These are really big growth topics that support us in the sense of digitalization and decarbonization, and we have made very good business decisions in the past to focus on these topics like electrification, renewable energy, etc. For these applications in the end markets, more and more different technologies are available. For decades, everything was based on silicon. Now there are compound semiconductors: silicon carbide, gallium nitride. The market is not yet fully read, but certain focuses are developing. For silicon, for example, we assume that in the coming years, home appliances or wind power will remain on silicon, and that remains by far the largest market, but of course with lower growth rates. Then the second market is silicon carbide, already familiar to many as a technology for electrification of vehicles, for example the inverter in the car or fast charging stations are increasingly moving to silicon carbide to generate efficiency advantages or range advantages in electric cars. The third and newest area is gallium nitride. For gallium nitride, we are talking about applications like onboard chargers, solar systems in the private sector, but also servers, where these new technologies switch faster, provide better efficiencies, and thus enable significant performance gains for our customers. Our approach as the large player in the power semiconductor area is that we want to have leading positions in all three: silicon, silicon carbide, gallium nitride. That is why we are very consciously strengthening ourselves. You already mentioned the factory in Malaysia, we plan to invest over 2 billion in a silicon carbide and gallium nitride fab in Kulim. And the most recent step announced a few weeks ago is that we intend to acquire a Canadian company, GaN Systems, which is very strong in gallium nitride and would complement our gallium nitride activities. The transaction is subject to regulatory approval, and we assume that in this combination we will also be very strong in gallium nitride. So very relevant growth drivers, technologies, and being able to play in all technologies is, to summarize briefly, the strategy we pursue here.

It is an important part, but there are other factors: the overall portfolio, market trends, customer relationships. You see here, especially in these new technologies, you know the term 'win with the winners'. There are some that have developed very strongly, for example the electric car manufacturer based in California. If you are in these projects or not, that can make a big difference in growth rates. So there are many facets that play a role. The important thing is to bet on the right drivers, and Infineon, if you look at the past, has set itself on very good future-oriented fields with courageous important decisions in the portfolio, and that gives us the confidence to make such very large investment decisions now. The financial strength and balance sheet, I think I don't need to tell you as CFO, you have to have that, because otherwise you can have the best ideas, but if you can't finance them, then nothing works. So it is always a combination. That is why the financial policy, the solidity with our investment grade rating, is very relevant.

Thank you for the question. Indeed, this is a very important topic for us, and not just recently. It is not lip service, but part of the DNA of this company. You notice that when you talk to our employees, there are very high expectations of the company, and of course then also of us, which we want to meet. Why do we believe we can achieve this? Let me put it simply: we are part of the solution, not part of the problem. Many of the challenges we see on the energy and environmental side can only be managed with technology and intelligent solutions. One example is CO2 reduction. Clearly, if you are the leading player in the area of electromobility in terms of power semiconductors, then that contributes well. Or in the area of renewable energy, or everything that is energy efficiency, be it in a charger or in data centers. And if you look at what computing power and data volumes are needed today, how high the energy consumption is, it is all the more important that we contribute with more and more innovative solutions to reduce energy consumption. We are committed. We have said we want to be CO2 neutral by 2030, and by 2025 we want to have reduced 70% of our baseline value. We are on a very good path. How do we do it? On the one hand, with efficiency, with technology. We do it with green electricity. We do it with so-called 'scrubbers', that is exhaust air cleaning in our factories. And only to a very small extent, if at all necessary, do we want to think about certificates, and then only with corresponding proof of origin and quality. That is the strategy. And perhaps one more number to put it in perspective: if we compare our CO2 emissions with the savings realized in the chain at our customers, we have a factor of more than 30 to 1. That is the basis for the statement that we are part of the solution. And perhaps one last sentence: everything we discuss in populations and at government level, if you think about renewable acceleration, if you think about wind and solar parks, none of these activities is possible without power semiconductors in energy generation, energy storage, and energy transport. Just one example of how relevant this is.

Yes, we are making very fast and good progress. But if I had one wish, we have, as I said at the beginning, in various markets we manufacture and invest further, and not every market has the same maturity regarding the availability of green electricity. We are in discussions with governments and authorities to make the implementation of these green solutions in procurement easier, to have a larger market. That would be one wish I would have. But again, we are on a good track, and I have no reason to doubt the goals we have communicated.

Yes, I think besides the challenges we already mentioned, that the overall growth of the population but also the growth in demand for topics that consume more and more energy, that we have to get that under control, and from our point of view one of the keys, besides certain sacrifices here and there, is technology. Of course, for us the question is how do we manage to achieve this 10% growth every year through the cycle. That has to do with investments and the necessary financial resources, but also very significantly with employees, with locations that we have to expand. You mentioned demographics, Mr. Meyer. We are an attractive employer, so graduates, especially in STEM fields, know Infineon, and we are on the list. But one must also be fair, there are other interesting companies. So we have a competition for talent. That is certainly a topic we want to continue to accompany very well to remain successful. One must be attractive in terms of product, the famous concept of purpose, but I think I was able to explain why we believe in our company. But also working conditions, flexibility, work from home, all the topics we have learned in recent years, we will consistently drive forward to remain attractive and to manage this growth. That is definitely a prerequisite, otherwise it won't work.

Yes, first of all, I think what depresses us all is the general geopolitical situation. I would naturally wish that if we do another podcast and you invite me again, the prerequisite is that we no longer have to deal with topics like the war in Ukraine in the middle of Europe or geopolitical tensions between the superpowers. I am unfortunately not so optimistic that things will resolve very quickly, but I have hope that over time we will find certain structures that allow us to compete with each other. We all, customers and companies, have benefited from being in this very highly specialized world in the semiconductor area. We have reconsidered that in parts, as we discussed earlier, with more resilience, which also leads to higher expenses. That is a pity but an unavoidable consequence of the environment. It would be nice if we saw improvements here. And the other thing, I am not a technician, but all the more I can be enthusiastic about all the technical things that are being thought of. Not all of them will work, but many will. That means we will certainly see innovations in the coming years that are in their infancy and from which we will all benefit. I look forward to that. We can talk about artificial intelligence, quantum computing, but also small things like the great noise suppression with our silicon microphones that have come into headphones so that you can make phone calls in the stadium or listen to music on the plane without finding the noise disturbing. So there is a lot, and we are at the forefront. I would wish that this continues and that at one point or another it might happen a bit faster than we think.