From ugly duckling to industry leader: chip maker onsemi’s reinvention

As with any investment, your capital is at risk.

Our investment approach rests on the search for underappreciated growth. We get especially excited by businesses that have started on a journey of self-improvement, yet where the market still focuses on historical challenges, ignoring or dismissing the potential for a much brighter future.

Often these are firms operating in cyclical or challenged markets that are improving their competitive position through self-help, industry consolidation and innovation. Ingredients that enable them to thrive as demand improves, and earnings inflect. We call these “emerging quality growth” businesses. 

An agent of change 

Scottsdale, Arizona based onsemi is one such ugly duckling that has been quietly developing distinctly swan-like features.

onsemi develops and manufactures power and sensing chips – the “power plumbing” that converts, controls and delivers electricity inside cars, factories, energy systems and data centres. In the two decades since its founding in 1999, it has been viewed as the sector’s low-end laggard: over-acquisitive, focused on volume over value, and prone to disappointing execution.

Enter new CEO Hassane El-Khoury in late 2020.  

Change was swift. With 90 per cent of the executive team replaced within the first year and a new compensation scheme linking pay more directly to performance, onsemi was jolted into a complete cultural reset. Strategic changes to the product line, while less immediate, were equally transformative. Pricing and portfolio decisions have moved from chasing orders at any price to value creation. Strategically, the company has exited lower-margin product lines, rationalised manufacturing, and redirected investment to higher-value areas such as silicon carbide (SiC) power devices.

In short, a ‘me-too’ industry follower has been rewired to become a leader focused on pricing power and delivering value to their customers.  

From component supplier to problem solver 

The results have been impressive. Even through a prolonged cyclical downturn and lower factory utilisation, gross margins and operating margins have improved materially, reflecting a better mix, improving pricing power and cost improvements.

The company has also launched ‘Treo’, a new platform that brings high‑voltage power handling and digital control together on a single chip. Treo helps customers develop more efficient, reliable, and quicker solutions, all with better performance and less complexity, representing a shift that elevates onsemi from component supplier to problem-solver.  

Automotive (c.50 per cent of sales) and industrial (c.30 per cent) use cases represent onsemi's main end markets.

In both, advanced power devices are becoming more central. SiC, though costlier than traditional silicon, improves efficiency and shrinks system size, making it attractive for high-voltage applications such as electric vehicles (EVs), where onsemi’s solutions play a critical role in functions like battery management, charging, and motor control.

As a result, the value of onsemi products steps up substantially, from around $40–$50 per traditional (internal combustion engine) car, to between $1,500–$3,000 per EV. Meanwhile, industrial use cases, from renewable integration and factory automation to backup power for data centres, embed power electronics more deeply each year. 

Two additional factors further reinforce our growth case.

First, Treo has gone from concept to commercial shipments in under a year, with early traction in medical devices (eg, markedly extending the battery life of continuous glucose monitors) and strong engagement in AI data-centre designs. Treo’s economics are attractive: management expects gross margins of roughly 60–70 per cent, materially above the corporate average, and scaling the platform requires limited additional capital.

Second, as the power demands for AI data-centres increase by orders of magnitude, onsemi’s addressable content increases sharply, creating a new, under-appreciated, growth opportunity for high-efficiency power systems. 

Where next? 

Market perception still leans on yesterday’s onsemi: cyclical and operationally inconsistent. This view has been reinforced by recent caution around the cycle and the company’s decision to retire roughly $300m of lower-value revenue to accelerate the portfolio transition.

Despite being wholly consistent with the company’s strategic direction, the decision to walk away from this revenue was taken negatively by the market. We think this reaction is myopic.

Exiting commoditised products speeds the mix shift towards SiC, Treo and other differentiated platforms, raising long-term returns. The company also continues to gain share in SiC. While EV content is still a minority of auto revenue, the composition of auto sales should pivot from internal-combustion content to higher-value EV systems. This inflection is not yet reflected in consensus views. 

The company’s valuation also embeds the old narrative, despite structurally better economics and more self-help ahead. We believe the combination of an improving demand backdrop, structural growth in EV and AI power, and improved pricing power can sustain higher margins over time.

As the downy fuzz of the duckling that was is finally shed, the company’s growth and quality will emerge more clearly, and the swan will spread its wings. 

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