Industrial semiconductor recovery broadens, while accelerating AI demand begins to crowd out capacity for other applications

Overview

The report compares the second-quarter 2026 results and third-quarter outlooks of NXP, ON Semiconductor, Infineon, Texas Instruments, STMicroelectronics, Rohm, and Renesas Electronics. Its core conclusions are that the automotive market has largely completed destocking and returned to actual demand, industrial machinery demand is experiencing a broadening recovery, and AI and data centers have become the strongest source of growth and are beginning to affect capacity allocation for other applications. Meanwhile, cost-driven price increases have yet to provide a meaningful boost to industry profits.

Core views

Major overseas analog and discrete semiconductor manufacturers generally reported second-quarter 2026 sales above market consensus and maintained growth guidance for the third quarter. Sequential sales guidance for July—September 2026 is NXP +7%, ON +6%, Infineon (IFX) +13%, Texas Instruments (TI) +8%, and STMicroelectronics (STM) +8%. Among Japanese manufacturers, Renesas Electronics expects sequential growth of 6%. Rohm did not issue explicit guidance for July—September; considering its strong first-quarter performance and the risk from the Kumamoto earthquake, it expects sales to be broadly flat, which the report regards as a conservative assessment. The key change in automotive semiconductors is that the inventory adjustment is largely complete and shipments are returning to actual end-market demand. Except for ON, each company reported roughly 10% sequential growth in automotive-related sales in the second quarter, but the report expects the recovery to remain moderate and not accelerate significantly from the second quarter. Future growth will be driven more by higher semiconductor content per vehicle resulting from software-defined vehicles, electrification, and connectivity than by rapid growth in overall vehicle sales. NXP's automotive sales were US$1.94 billion, up 12% year over year and 9% sequentially; excluding the impact of the MEMS sensor business divestiture, sales grew 17% year over year, although European Tier 1 suppliers have not yet shown a clear acceleration in orders or inventory restocking. IFX's automotive sales were €1.93 billion, up 3% year over year and 6% sequentially, driven by microcontrollers, smart power devices, and Ethernet products, with shortages of automotive-grade semiconductors in China also providing support. ON's automotive sales were US$780 million, up 7% year over year but down 2% sequentially. Its China business was strong and its North American share continued to expand, but seasonality at major European customers weighed on sequential performance. TI's automotive sales increased by the mid-teens year over year and mid-single digits sequentially, driven mainly by the Chinese market, electric vehicles, and hybrid vehicles, while customer inventories falling to extremely low levels also supported recovery-period orders. STM's automotive sales rose 16% year over year and 14% sequentially; Rohm's automotive sales were ¥64.8 billion, up 20% year over year and 12% sequentially; and Renesas's automotive sales were ¥187.1 billion, up 16% year over year and 9% sequentially, with end demand exceeding expectations. In the third quarter, NXP expects automotive sales to rise by the low teens year over year and mid-single digits sequentially; ON expects low-single-digit sequential growth; STM expects low-teens year-over-year growth; and Renesas expects strong year-over-year growth but flat sequential sales. The automotive business still faces structural constraints. IFX noted intense price competition from Chinese manufacturers in high-voltage products, particularly IGBTs, and is therefore reallocating some capacity for lower-margin products to AI applications. Supply of certain ON power-related products is constrained, and the company prioritized shipments to AI data centers in the second quarter. The company expects automotive and industrial machinery capacity to catch up with demand in the third and fourth quarters, but strong AI demand has already begun to affect supply allocation for automotive applications. Therefore, an automotive recovery does not mean a full inventory restocking cycle has restarted, and suppliers must reallocate capacity among traditional automotive demand, product profitability, and AI orders. The industrial machinery business has entered a recovery phase following inventory adjustments, and the scope of improvement is broad. Except for ON, most companies reported sequential growth of approximately 10%—20% in industrial machinery-related sales in the second quarter. This included the fading of the first-quarter Lunar New Year impact and a seasonal rebound, but demand for energy infrastructure, factory automation, and data center support systems is also improving. STM's channel inventories have fallen below target levels, while TI said customer restocking remains at an early stage. NXP's Industrial & IoT sales were US$760 million, up 38% year over year and 20% sequentially. IFX's Green Industrial Power sales were €450 million, up 4% year over year and 11% sequentially, as grid expansion drove demand for energy storage, transmission and distribution, and high-voltage applications, while AI data center construction also increased semiconductor demand for UPS and cooling systems. ON's industrial machinery-related sales were US$420 million, up 4% year over year and 1% sequentially, as growth in energy infrastructure, medical, and factory automation was partially offset by weakness in traditional industrial machinery. TI's industrial machinery sales rose 30% year over year and 10% sequentially, with growth across all industries and regions, although sales remained approximately 5%—6% below the 2022 peak, which the report sees as indicating further recovery potential. STM's sales increased 34% year over year and 20% sequentially; Rohm's sales were ¥19.4 billion, up 33% year over year and 26% sequentially; and Renesas's Industrial, Infrastructure & IoT sales were ¥216.3 billion, up 40% year over year and 10% sequentially. Sequential growth in the industrial machinery business is expected to slow in the third quarter, but year-over-year growth should remain high. NXP expects Industrial & IoT sales to grow nearly 40% year over year and by the mid-single digits sequentially; ON expects sales to be broadly flat sequentially; TI expects demand to remain solid; STM expects the recovery to continue, with year-over-year growth approaching 40%; and Renesas expects its Industrial, Infrastructure & IoT business to remain strong, although memory shortages will limit sequential growth to a modest level. The report's conclusion does not rely solely on a low comparison base. Combining channel inventory normalization, the early stage of customer restocking, and concurrent improvements in energy, automation, and data center infrastructure demand, it believes the industrial recovery is broadly based. AI and data centers are the strongest growth theme, with both second-quarter results and subsequent guidance indicating that demand continues to exceed supply. NXP's Communications Infrastructure and Other sales were US$450 million, up 41% year over year and 19% sequentially, driven by higher volumes of data center digital networking products and UCODE RFID. IFX's Power & Sensor Systems sales were €1.44 billion, up 37% year over year and 14% sequentially. Demand for AI data center power solutions was strong, and the company is expanding capacity and reallocating capacity from other applications. ON's other business sales were approximately US$400 million, up 34% sequentially. AI data center demand exceeded expectations, and the company prioritized data center customers while supply of certain power products was constrained. TI's data center-related sales nearly doubled year over year and rose 20% sequentially. STM's Communications Equipment and Computer Peripherals business grew 50% year over year and 13% sequentially. Rohm's second-quarter AI server sales increased 67% year over year, driven mainly by silicon power devices, and exceeded initial guidance. Renesas stated that data center demand was strong and supply remained extremely tight. The companies' AI outlooks for 2026—2027 further reinforce this conclusion. NXP expects data center-related sales to exceed US$500 million in 2026, versus approximately US$200 million in 2025. AI-compatible processors are expected to account for approximately 15% of its Industrial & IoT processor sales in 2026, more than doubling their share year over year, and the company identified physical AI as a growth driver. IFX raised its FY2026 AI power sales target from €1.5 billion to more than €1.6 billion, compared with annual sales of approximately €500 million for traditional data center power solutions. It is advancing multiyear capacity reservation agreements with major customers, with total contracts including prepayments in the high-teens hundreds of millions of euros, and plans to raise its FY2027 data center power sales outlook significantly in November. ON expects FY2026 AI data center sales to more than double year over year, including 60% growth in AI data center silicon carbide sales. The conversion to 800V direct-current distribution is expected to drive growth in high-voltage products, while the spread of AI demand into power infrastructure is expected to support 40% year-over-year growth in energy storage application sales. TI plans to achieve above-market data center growth in 2026 and 2027. STM expects its Communications Equipment and Computer Peripherals business to grow 90% year over year in the third quarter, with data center sales exceeding US$1 billion in 2026 and substantially exceeding US$2 billion in 2027, and stated that its existing capabilities can support AI data center demand. Rohm raised its FY2026 AI server sales target from ¥25 billion to ¥30 billion and plans to meet demand by converting production lines for lower-profit products and expanding capacity. Renesas is gradually increasing its supply capacity and plans another capacity expansion next year, although supply and demand remain tight at present. Regarding pricing, second-quarter adjustments were primarily intended to offset inflation-driven increases in the costs of materials, substrates, precious metals, and outsourced manufacturing rather than to capitalize on strong demand. Consequently, the positive contribution to profits remained limited through the second quarter, and the report does not expect significant accretion in the third quarter either. Overseas manufacturers generally maintained or improved their gross margins, indicating that price increases, improved sales mix, and operating efficiency were sufficient to absorb higher costs, while gross margins at Renesas and Rohm declined sequentially. NXP adjusted prices only for certain products, primarily relying on efficiency to absorb costs and passing them on to customers when they exceeded agreed ranges. IFX implemented a second round of modest price increases from July 1, but expects a limited impact on July—September profits. ON's second round of price increases targeted costs such as substrates and gold, with the effects expected to emerge gradually over the coming quarters. It also expects costs not to decline through 2027 and does not anticipate annual price reductions. TI's prices were flat in the first half, an improvement from their usual decline of several percentage points each year. It negotiates price increases customer by customer, with some reflected from July—September, while customers with annual negotiations may not see changes until the end of the fourth quarter or the following year. STM's rising input costs and product price increases are currently broadly offsetting each other. Rohm is pursuing another round of price increases in response to soaring gold prices, and the report expects subsequent pricing actions to support improved profitability. Renesas made modest price adjustments from July 1 in certain areas where increases could not be avoided, with the effects expected to emerge in the second half. The report emphasizes that broad price increases driven by tight supply and demand, similar to 2020—2021, have not yet appeared. The key variable is when expanding AI server demand will cause overall supply and demand to become genuinely tight.

Analysis framework

The report first compares the second-quarter sales of major manufacturers with market consensus and summarizes their sequential third-quarter guidance. It then examines the automotive, industrial machinery, and AI/data center end markets, analyzing each company's sales growth, inventory position, sources of demand, capacity allocation, and outlook. Finally, it combines pricing adjustments with changes in gross margins to assess whether manufacturers can pass through costs using price increases, product mix, and operating efficiency. The overall logic begins with reported performance and then uses inventory, supply-demand, and capacity signals to determine the stage of each end market.

Methodology notes

• Industry/Sector Analysis FrameworkSupply-demand framework

  Analysis of end demand, capacity allocation, and supply tightness

  The report compares changes in automotive, industrial machinery, and AI data center demand with manufacturers' capacity allocation to determine whether supply can meet demand and whether AI orders will crowd out other applications.

• Cycle and Business Conditions FrameworkInventory cycle (Kitchin)

  Identifying the end of inventory adjustments and the restocking phase

  Using channel inventories, customer inventories, and manufacturers' comments on destocking progress, the report concludes that automotive has returned to actual demand while industrial machinery has entered a post-inventory-adjustment recovery phase.

• Industry/Sector Analysis FrameworkVolume-price decomposition

  Decomposition of sales growth, pricing adjustments, and gross margin changes

  The report separately examines volume or revenue growth, cost-pass-through price increases, and gross margin changes to distinguish growth resulting from demand recovery from the pricing impact of merely offsetting costs.

• Industry/Sector Analysis FrameworkUpstream-Midstream-Downstream Industry Chain Transmission

  Transmission of AI data center construction demand to power supplies, grids, energy storage, UPS, and cooling systems

  The report looks beyond server chips and tracks how data center construction drives semiconductor demand related to high-voltage power devices, energy storage, transmission and distribution, UPS, and cooling systems.

• Event-Driven Strategy and Behavioral FinanceExpectation Gap/Expectation Management

  Comparison of results against consensus, company guidance, and target increases

  The report identifies differences between actual operating performance and prior expectations by assessing whether second-quarter sales exceeded consensus, reviewing third-quarter guidance, and examining increases in AI business targets.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• NXP Semiconductors (NXP)

  Automotive destocking is complete, while both the Industrial & IoT and data center businesses achieved growth.

  Strengths

  Industrial & IoT sales grew 38% year over year, and the 2026 data center sales target exceeds US$500 million.

  Weaknesses

  European Tier 1 suppliers have not yet clearly accelerated orders or restocking, while some costs must still be absorbed through efficiency and selective price increases.

  Comparison

  Third-quarter overall sales are expected to increase 7% sequentially, below IFX's 13%, although both the automotive and industrial businesses continue to grow.

  Risks

  The automotive recovery lacks a clear restocking catalyst, while back-end process components, substrates, and precious metal costs are rising.

• Infineon Technologies (IFX)

  AI power demand is strong, and the company is expanding AI supply by reallocating capacity from other applications.

  Strengths

  Its FY2026 AI power target was raised to more than €1.6 billion, and the company is advancing multiyear capacity reservation agreements.

  Weaknesses

  High-voltage products, particularly IGBTs, face intense price competition from Chinese manufacturers.

  Comparison

  Third-quarter overall sales are expected to increase 13% sequentially, the highest among the manufacturers covered in the report.

  Risks

  Reallocating capacity to AI may constrain supply for applications such as automotive, while the second round of price increases is expected to make only a limited near-term profit contribution.

• ON Semiconductor (ON)

  AI data centers are the fastest-growing category, and the company prioritizes AI customers when supply is constrained.

  Strengths

  FY2026 AI data center sales are expected to more than double year over year, while SiC sales are expected to grow 60%.

  Weaknesses

  Automotive sales declined 2% sequentially in the second quarter, while traditional industrial machinery remained a drag.

  Comparison

  Industrial machinery sales grew only 1% sequentially, below the approximately 10%—20% growth reported by most peers.

  Risks

  Supply of certain power products is constrained, while raw material and outsourced manufacturing costs continue to rise.

• Texas Instruments (TI)

  Demand in automotive, industrial machinery, and data centers is improving simultaneously.

  Strengths

  Data center sales nearly doubled year over year, industrial machinery sales grew 30% year over year, and customer restocking remains at an early stage.

  Weaknesses

  Industrial machinery sales remain approximately 5%—6% below the 2022 peak, while price increases require customer-by-customer negotiations.

  Comparison

  Prices were flat in the first half, while the company stated that product prices usually decline by several percentage points.

  Risks

  The benefits of price increases for customers with annual negotiations may be delayed until the end of the fourth quarter or the following year.

• STMicroelectronics (STM)

  The automotive, industrial machinery, and data center businesses are all showing high growth.

  Strengths

  The company expects data center sales to exceed US$1 billion in 2026 and substantially exceed US$2 billion in 2027, and says its existing capacity can support AI demand.

  Weaknesses

  Rising material and outsourced manufacturing costs are currently being broadly offset by product price increases.

  Comparison

  The CECP business is expected to grow 90% year over year in the third quarter, one of the strongest explicit near-term data center growth forecasts in the report.

  Risks

  If input costs continue to rise, selective price increases may remain insufficient to improve profits significantly.

• Rohm

  AI server and automotive sales are strong, and the company plans to convert production lines and continue raising prices.

  Strengths

  AI server sales grew 67% year over year, and the FY2026 target was raised from ¥25 billion to ¥30 billion.

  Weaknesses

  Gross margin declined sequentially, and third-quarter sales are expected to be only broadly flat.

  Comparison

  The report believes its flat sales outlook accounts for a strong first quarter and Kumamoto earthquake risk and is conservative overall.

  Risks

  The Kumamoto earthquake, rising gold prices, and execution effects from capacity expansion and production-line conversion.

• Renesas Electronics

  The automotive and Industrial, Infrastructure & IoT businesses are recovering, while data center demand is strong.

  Strengths

  Automotive sales grew 16% year over year, IIoT sales grew 40% year over year, and automotive end demand exceeded expectations.

  Weaknesses

  Gross margin declined sequentially, while memory shortages are limiting third-quarter sequential IIoT growth.

  Comparison

  Third-quarter overall sales are expected to increase 6% sequentially, with strong year-over-year automotive growth but flat sequential performance.

  Risks

  Data center supply remains tight, while additional supply capacity will take time to come online.

Key data

• Third-quarter sequential overall sales guidanceNXP +7%; ON +6%; IFX +13%; TI +8%; STM +8%; Renesas +6%July—September 2026 versus April—June; Rohm expects broadly flat sales
• NXP automotive salesUS$1.94 billionSecond quarter of 2026: +12% year over year and +9% sequentially; +17% year over year excluding the impact of the MEMS business divestiture
• IFX automotive sales€1.93 billionSecond quarter of 2026: +3% year over year and +6% sequentially
• ON automotive salesUS$780 millionSecond quarter of 2026: +7% year over year and -2% sequentially
• Rohm and Renesas automotive salesRohm ¥64.8 billion; Renesas ¥187.1 billion+20%/+16% year over year and +12%/+9% sequentially, respectively
• NXP Industrial & IoT salesUS$760 millionSecond quarter of 2026: +38% year over year and +20% sequentially
• TI industrial machinery sales growth+30% year over year and +10% sequentiallyStill approximately 5%—6% below the 2022 peak
• STM industrial machinery sales growth+34% year over year and +20% sequentiallyThird-quarter year-over-year growth is expected to approach 40%
• Renesas Industrial, Infrastructure & IoT sales¥216.3 billionSecond quarter of 2026: +40% year over year and +10% sequentially
• NXP data center sales targetMore than US$500 million in 2026Approximately US$200 million in 2025
• IFX AI power sales targetMore than €1.6 billion in FY2026Previous target was €1.5 billion
• ON AI data center outlookFY2026 sales to more than double year over yearAI data center SiC sales are expected to increase 60% year over year, while energy storage application sales are expected to increase 40% year over year
• TI data center sales growthNearly doubled year over year and +20% sequentiallySecond quarter of 2026
• STM data center sales targetMore than US$1 billion in 2026; substantially more than US$2 billion in 2027Third-quarter CECP business is expected to grow 90% year over year
• Rohm AI server sales target¥30 billion in FY2026Previously ¥25 billion; related sales increased 67% year over year in the second quarter of 2026

Impact & implications

The report believes the industry recovery is clearly divergent: automotive has completed destocking, but growth will depend mainly on higher value per vehicle and is unlikely to accelerate significantly in the near term; industrial machinery is transitioning from inventory adjustment to a broader demand recovery, supported jointly by energy infrastructure, factory automation, and data center support systems; and AI data centers are delivering the strongest growth, spreading across the broader industry chain through power supplies, high-voltage devices, energy storage, UPS, and cooling systems. As AI demand has already prompted manufacturers to reallocate capacity and adjust shipment priorities, other applications may face supply constraints. However, current price increases are still primarily intended to cover costs and are not yet sufficient to create an industry-wide profit expansion similar to the previous shortage cycle.

Risks

• Rapid growth in AI data center demand is crowding out capacity and may constrain supply for automotive and industrial machinery applications.
• Although the automotive market has completed its inventory adjustment, European customers are not restocking significantly, and subsequent growth may remain only moderate.
• Price competition from Chinese manufacturers in high-voltage semiconductors, particularly IGBTs, is pressuring some suppliers.
• The costs of substrates, gold, precious metals, raw materials, and outsourced manufacturing continue to rise, while price increases can mainly only offset costs.
• Rohm's sales outlook is affected by the risk from the Kumamoto earthquake.
• Memory shortages may constrain near-term growth in Renesas's Industrial, Infrastructure & IoT business.
• Gross margins at the Japanese manufacturers Renesas and Rohm declined sequentially, and the profitability benefits of pricing adjustments have yet to emerge.

What to watch

• Monitor the impact of expanding AI server demand on the industry's overall supply-demand balance and when a material shortage similar to the previous cycle may emerge.
• Monitor IFX's updated FY2027 data center power sales outlook planned for November.
• Monitor whether ON's automotive and industrial machinery supply can catch up with demand in the third and fourth quarters of 2026.
• Monitor when the price adjustments implemented by Rohm and Renesas from July will translate into improved gross margins.
• Monitor Renesas's gradual expansion of data center supply capacity and progress on further capacity expansion next year.