But while the shift into cars promises higher margins and new markets for some companies, analysts warn that EVs alone may not be enough to counter sluggish demand for smartphones and other devices.

Foxconn, the world’s largest contract electronics manufacturer and a bellwether for the tech industry, is cautious about the overall economic outlook but positive about the EV industry.

“The impact of the war in Ukraine and Covid is expected to extend to the first and the second quarter of this year,” Foxconn Chairman Young Liu recently told reporters. “The electric vehicle industry, on the other hand, is still on the growth track … North America will lead our EV business this year.”

The iPhone assembler has been shifting aggressively into the auto sector as its mainstay business segments face slowing growth. Foxconn is betting on the EV business to boost its gross margin to 10% by 2025, from just over 6% in 2021.

Margins tend to be higher in automotive than in consumer electronics, although exact levels vary depending on the component or service. The profit margin for assembling electronic devices, for example, is around 5% or less. The margin for making automotive electronics components is easily above 10%.

The advent of EVs has also opened up new markets for China Star Optoelectronics Technology (CSOT), one of the country’s leading makers of smartphone and TV displays.

“Demand for smartphones, TVs and notebooks dropped sharply since last year,” a manager at CSOT said. “But the good thing is we’re making good progress in the automotive industry.”

The company will begin shipping displays to carmakers in Europe this year, according to two sources familiar with its plans. This would mark CSOT’s first foray into a foreign automotive market. CSOT entered the auto industry around 2018 and is now a supplier to major Chinese EV maker BYD.

CSOT did not respond to Nikkei Asia’s request for comment.

Foxconn and CSOT’s optimism is shared across the tech supply chain.

Pegatron, a smaller iPhone assembler, and Compal Electronics, which makes Dell computers, both said their automotive businesses will be growth drivers this year. Foxconn, Pegatron and Compal are all increasing their presence in Mexico to meet the growing demand for automotive electronics for the North American market, Nikkei Asia reported.

The electrification of vehicles gives the tech supply chain a unique opportunity to penetrate the auto supply chain because EVs need far more semiconductors, electronics systems and power management systems than traditional cars.

“I spent four months on a business trip to our factories in Dongguan, Suzhou, China, recently. The only thing that our company, our suppliers and our compatriots talk about and feel hopeful about this year is EVs,” said a procurement manager at a maker of thermal modules for PCs, smartphones and servers that also supplies BYD. “The demand for consumer electronics is basically doomed for half of this year,” the manager added.

Taiwan Semiconductor Manufacturing Co, the world’s biggest contract chipmaker, said it expects revenue to fall by a mid-to-high single-digit percent, year-on-year, in the first half of this year, as most customers and suppliers work to digest high levels of inventory.

The supply of automotive chips, however, remains “very tight”, and demand is continuing to grow, TSMC CEO CC Wei recently told investors.

The chipmaking titan’s revenue from automotive chips increased 74% on the year, accounting for 5% of the chipmaker’s record revenue of 2.26 trillion New Taiwan dollars (US$75.88 billion) last year. Automotive chips contributed 4% of TSMC’s total revenue in 2021.

Tesla’s recent price cuts in the US, Europe, the Middle East and Asia to fend off rivals and stimulate demand were welcomed by many of the American automaker’s suppliers.

“We think it’s a good move by Tesla, as it will narrow the price gap between fuel-based vehicles, which is positive for the prospects for EV sales,” said Roger Liang, chairman and co-founder of BizLink, a supplier of cable connectors for data centres, cars and more.

There is also optimism that the production of automotive chips is finally catching up with automakers’ ravenous demand.

Global auto shipments were severely hampered by shortages of chips and components in the past two years, said Paul Peng, chairman of Taiwanese display maker AUO, one of the world’s top three automotive display suppliers. But as those shortages improve amid the downturn in consumer electronics, suppliers are all expecting automobile shipments to improve this year, he said.

“In addition to the booming demand for EVs, we are seeing rapidly growing orders from the automotive industry,” Peng said.

But there is a risk in expecting too much from the automotive sector, analysts warned, as the global economy battles inflation and cost of living crises in major countries eat into consumer buying power. An end in January to some of China’s incentives for EV purchases sparked worries over demand, and even Tesla’s price cuts were viewed by some as a sign of a weakening market.

Boyce Fan, a display analyst with research agency TrendForce, said every tech supplier is betting on the automotive sector, but warned that this rush could lead to an overcrowded market.

“The margin of automotive displays is better than the margin in consumer electronics. But it is only slightly better, as we are seeing intensifying competition in the automotive sector as well, with more and more Chinese display makers entering this market,” Fan told Nikkei Asia.

There are also questions about how healthy the overall auto market is. Isaiah Research Senior Analyst Eddie Han said demand for electric cars is increasing steadily, but not exceptionally so, given the slowdown in the global economy.

“It will grow, but we don’t expect to see exponential growth this year. It’s going to be a tough year for the tech supply chain. They will spend half of the year dealing with excess inventories and declining production utilisation of factories,” Han said. “Everyone expects the markets to bounce in the second half, but no one really knows.”