Nvidia's 'Next Billion-Dollar Business' Impacted as China's EV Growth Slows Down

25 Aug, 2023

Nvidia's 'Next Billion-Dollar Business' Impacted as China's EV Growth Slows Down

Nvidia exceeded analysts' expectations for major revenue streams this week, with the exception of the automotive sector, which is experiencing a slowdown due to waning Chinese demand for electric vehicles (EVs).

The automotive division primarily supplies chip systems for assisted driving, a sector that Nvidia's CEO, Jensen Huang, previously hailed as the company's "next billion-dollar business." However, this segment's growth has decelerated this year, with Huang refraining from restating such ambitious projections in the latest earnings call.

In the three months ending on July 30, automotive revenue plummeted by 15% from the previous quarter—marking the first consecutive decline in over a year. The actual revenue of $253 million also fell significantly short of the $309.3 million forecast from a FactSet analyst poll.

Colette Kress, Nvidia's Chief Financial Officer, attributed the sequential decrease primarily to diminished auto demand, notably in China. Nonetheless, the demand for self-driving systems managed to drive a 15% year-on-year growth in automotive revenue.

Although the automotive revenue remains a fraction of Nvidia's overall business, it has expanded rapidly from slightly over $100 million per quarter two years ago. China, being the world's largest auto market and a significant promoter of electric cars globally, has been a driving force behind this expansion.

Local Chinese EV manufacturers such as BYD and Xpeng have intensified competition for traditional automakers, emphasizing technological advancements. Nvidia's primary market in this sector comprises Chinese original equipment manufacturers.

Brady Wang, Associate Director at Counterpoint Research, suggested that the decline in sequential automotive revenue might be due to excess inventory among Chinese manufacturers, along with downward revisions of sales forecasts for upscale vehicles in the next two quarters.

Xpeng, one of the local electric car companies, offers driver-assist software in select Chinese cities, setting itself apart. This is in contrast to Tesla's "Full Self-Driving" technology, which is not yet fully available in China. Notably, Xinzhou Wu, Xpeng's former head of autonomous driving, recently announced his move to Nvidia, potentially indicative of a shift in talent.

Nvidia's product focus is concentrated on the high-end automotive segment, facing competition from other vendors like Horizon Robotics, Mobileye, and startups in the mid-range market, according to Counterpoint's Wang.

Analog Devices reported a 5% drop in automotive revenue for the three months ending July 29, and other automotive chip companies, such as Mobileye and Qualcomm, also witnessed quarter-on-quarter revenue declines.

Although Nvidia tapped into the automotive market relatively recently, it projected a substantial pipeline of automotive projects worth $14 billion over the next six years in its latest annual report. However, the company acknowledged that the growth of automotive revenue has moderated due to the adjustment of production schedules by some Chinese new energy vehicle (NEV) customers.

Despite the slowdown in the fast-growing EV segment, car manufacturers intend to continue procuring parts for assisted-driving capabilities. Hesai, a company specializing in light detection and ranging (LiDAR) units used in driver-assist systems, reported robust revenue growth. CEO David Li expects the number of shipped units to more than double this year, with collaborations between Hesai's products and Nvidia's autonomous driving system further strengthening.