Top Toyota Supplier Denso Mulls $3 Billion Chip Unit Spinoff

(Bloomberg) -- Denso Corp., one of the world’s top automotive semiconductor manufacturers and a key supplier to Toyota Motor Corp., may consider spinning off its chip business, which generates around 420 billion yen ($3.1 billion) in sales, the company’s chief technology officer said Friday.

Most Read from Bloomberg

• Americans Are Building Vacation-Home Empires With Easy-Money Loans

• China Alarms US With Private Warnings to Avoid Taiwan Strait

• Volatility Grips Stocks as Treasury Yields Surge: Markets Wrap

• Biden’s ‘Never Been More Optimistic’ Despite Troubled US Economy

• Stocks’ Pandemic Bull Run Ends With Recession Fear: Markets Wrap

Well known as the world’s second-biggest auto-parts maker, Denso has also quietly built up a presence in automotive chips. Now, with semiconductor-related capital expenditures totaling around 160 billion yen over the past three years, Denso ranks as the world’s fifth-largest supplier of automotive chips by sales.

“We need to think about whether the time will come when we sell semiconductors, alone, externally,” CTO Yoshifumi Kato said in an interview at Denso’s headquarters in Aichi prefecture. “It’s worth looking into whether that kind of structure is possible.”

Today, the semiconductors Denso makes in-house go into automotive parts that it then sells to carmakers or other suppliers. When examining the possibility of supplying semiconductors on their own, Denso will consider whether the division is better positioned outside of the company, Kato said.

To date, nothing has been decided regarding a split, Kato said, adding that Denso’s focus for the time being is on meeting internal chip demand. Denso shares erased earlier losses late Friday, jumping as much as 2.4% in Tokyo trading.

A shortage of chips used in cars first began in late 2020, when Covid-induced lockdowns of millions of people around the world spurred a huge uptick in the purchase of consumer electronics goods. That resulted in semiconductors being diverted away from automakers, which had also reduced their own orders in expectation of falling demand for cars.

The chip dearth quickly became symptomatic of a broader supply chain crisis that’s upended the smooth delivery of goods globally.

Chip supply today appears to be getting back to normal in some industries, amid concerns around how well consumer demand can hold up against the backdrop of accelerating inflation and higher interest rates.

Read more: Carmakers Feel Chip Crisis Easing as Global Growth Slows

According to Denso’s Kato, demand for automotive semiconductors, on a tear amid the industry’s shift to electric, internet-connected and autonomous cars, is likely to continue going from strength to strength.

Facing such conditions, funding directed toward its chip business will grow and make up over 10% of Denso’s research, development and equipment-investment expenditure, Kato said. Denso said at a briefing earlier this month that it’s targeting 500 billion yen in sales from its in-house power and analog chip business, up from around 420 billion yen currently.

Denso’s also looking to external partners to help strengthen its hand in the semiconductor market. In February, the Japanese parts giant announced it’s joining a project led by Taiwan Semiconductor Manufacturing Co. to build its first chip plant in Japan.

Still, there’s a significant lag between setting aside funding and when actual chip production can commence. At the moment, it appears that chip shortages, which have caused billions of dollars in lost revenue for the car industry, will ease late in the current fiscal year, Denso Senior Director Yoshinobu Tao said.

(Updates with share move, context throughout.)

Most Read from Bloomberg Businessweek

• A Billion-Dollar Crypto Gaming Startup Promised Riches and Delivered Disaster

• A Parisian General Store’s Radical Message for Its Customers? Buy Less

• A Ragtag Band of Hackers Is Waging Cyberwar on Putin’s Supply Lines

• Amazon and Spotify Boost Podcast Offerings, and Audiences Soar

• Mexican Biologists Aim to Save Hummingbirds With Wildflowers

©2022 Bloomberg L.P.