ON Semiconductor Corporation (NASDAQ:ON) Citi 2022 Global Technology Conference September 8, 2022 10:30 AM ET
Company Participants
Hassane El-Khoury – CEO
Conference Call Participants
Chris Danely – Citigroup
Chris Danely
Good morning, everyone. I’m Chris Danely, semiconductor analyst here at Citigroup. It’s our pleasure to have ON Semi up next, one of our few buy rated names, of our top picks. Why? We’ve got growth alert in semis combination of silicon carbide, which we’ll definitely talk about, the sensor business, which we will also talk about. And the workings of this man here to my left, taking those margins up, I believe, 20 points in the last year and half. It’s my pleasure to have Hassane El-Khoury, the magician, also known as the CEO of ON Semi. So Hassane, I don’t think I’m speaking out of turn when silicon carbide appears to be a fairly hot topic we’ve had. A few other semiconductor companies talk about it. I guess it makes sense to start there. Otherwise, we’ll just get buried in audience questions. Maybe just talk about the growth drivers of silicon carbide, and then we’ll run through the customers, margins, implications, et cetera, et cetera.
Hassane El-Khoury
Sure. Look, if you think about silicon carbide as a technology and where the growth is getting fueled from, you have to go back to what megatrend are we talking about, and that’s electrification. Now when I talk about electrification, a lot of people think, okay, it’s the car. But let’s expand beyond that, what I referred to typically as a sustainable ecosystem where, yes, the car is the biggest TAM. That’s the biggest addressable market as far as content for silicon carbide. But for us to enable that TAM you also have to support the charging infrastructure, which is, again, a lot of content with the charging, and you have to go back to supplementing the grid with renewables, whether that’s solar, wind or energy storage system. That’s the opportunity we’re talking about. That’s across the board what’s driving the growth for us. Still a majority of the revenue matches the TAM. So it’s coming from automotive. But let’s not forget about the fact that it’s fueling other adjacent markets, primarily in the industrial that will support that growth. So it’s a win-win for both sides, which gives us the diversification of that growth from just being a single focused market.
Question-and-Answer Session
Q – Chris Danely
And maybe talk about ON’s background. How did you guys get into this market, and what’s enabled you to have leading market share there?
Hassane El-Khoury
That’s a good question. I guess what — I’ll start with what enabled us, tenacity is what enabled us to get to that market. But why did we get the confidence to enter that market? Because it’s — look, the barrier of entry is high, it’s expensive, it’s CapEx intensive. You can’t just have the wrong bet on it. So what enabled us to have that confidence? And I recall, I started in the company December of 2020. And one of the first things I’ve done is I looked at what technologies do we have, what do I have to work with here in order to shape the company into a growth value company that I believe the technology that we have allows us to do. And one of the things were silicon carbide as a technology. But why was it, the technology itself, sustainable for our growth given there are other players that started are ahead of us? Well, we have everything else needed. We’re a big IGBT player. When you’re in power, you have a very, very unique recipe if you’re able to take high power modules and manufacture them at scale. We have that with IGBT. We have it with silicon power. So having a new technology that we plug into that capability was actually a very big foundation in the decision that I’ll make.
Now that we wanted silicon carbide, then you look at, okay, how — what does it take to win. And vertical integration is what it takes to win. And what I mean by vertical integration is securing everything from substrate or the raw material all the way now to packaging. That’s where we also doubled down and acquired GTAT. We closed the deal in October of 2021 and right now, we’re in the process of scaling it. So having the capability to go to market at scale, to be able to leverage the power technology having the technology of silicon carbide in-house and now complementing it with a investment — inorganic investment to get that sustainability of the supply is what I would call the recipe of why we are here today as a very primary player in this — in a big emerging market is because of all these decisions, but it all started with the foundational acknowledgment that we do have that capability in-house.
Chris Danely
And ON is the only completely vertically integrated silicon carbide?
Hassane El-Khoury
That’s right. And that comes again from more than two decades of legacy of power module manufacturing and development.
Chris Danely
Can you talk about the advantages and why you guys pursued GTAT, the advantage of being vertically integrated versus being just the wafer supplier or the chip supplier?
Hassane El-Khoury
Yes. Look, it’s also — one is supply assurance. And even before we announced the GTAT, a lot of people ask me do customers care about the substrate specifically. And my answer, and it’s still consistent, today, look, nobody is — we’re not going to win in design because we have this or that substrate. You’re going to win in design because you have the best technology, the best device and the best packaging, because at the end of the day, what the customer is going to benefit from is really the efficiency that they’re able to get at the vehicle. And what does that translate to? Very simple, range. If you’re able to get more range, you win. Now how do you get more range? Well, better efficiency, converting battery to range — miles or making the inverter smaller because you have better packaging, so you can put one more battery. That’s range also, and wait. That’s why you win. Technology differentiation and technology I define as device and packaging, where substrates come in is supply assurance, where when you’re talking — we’re talking about a $4 billion of committed revenue that I talked about last quarter.
When you talk about $4 billion, the customer’s first question is well, prove to me that you’re able to scale it. If I give you that design, we can be high fiving and all celebrating that we got a design win. How are you going to scale it? And what is that dependency given that most OEMs — well, all OEMs, not most, have gotten burned with supply problems, right? Nobody was immune. So that’s one of the first questions they ask is, okay, well, how does the supply assurance work or supply resilience. And when we’re able to show that then you get the full picture, and that’s really the true meaning of vertical integration that comes in from technology and ability to supply. And look, we’ve had customers visit our site in Hudson.
Chris Danely
Yes, and the…
Hassane El-Khoury
Yes, exactly. To take a look at, okay, show me the growth. And they leave saying, okay, you got it because there’s a lot of — I mean, look, the reason we did the event in Hudson is because there was a lot of nonbelievers, I would say. And hopefully, everybody that looked at it or heard from the report or saw the information coming out of our event is a believer, because it is there, it is happening, and we’re already monetizing that investment. Customers see it the same way, that’s why you’re seeing an acceleration of our committed revenue.
Chris Danely
Now on that note, there’s been this big trend in the previous presentation. We talked about this trend in prepayments for semi equipment, for semis, for foundry. What is sort of the possibility of prepayments for silicon carbide?
Hassane El-Khoury
So that’s — we’re doing that as part of our LTSAs, where some of the LTSAs, depending on the CapEx or anything specific for them, meaning potentially could be a package that is not fungible or they want a faster CapEx intensity that I want to do, right, or it doesn’t really meet my ROIC because of the speed at which it goes for a longer time. So all of these are on the table when we’re talking about those LTSAs with the committed revenue. Some customers opt for — and they’re all take-or-pay with volume and price commitment in there. Some customers will say, you know what, we have the longevity of it. So we’ll take the longevity. Some of them will say, okay, we’re going to start with this platform, and it’s going to fan into the other platform. For that, I would say I want a prepayment. Or if it’s a hell of a ramp, I’ll have them contribute to the CapEx intensity. It doesn’t change the financials but what it would change is the cash offset for what I would outlay from a capacity as a stand-alone. But all of these constructs are in order for us to have — if Thad was here, he’s the biggest, call it, the bar that we have to meet as far as investment. You’re not going to be writing checks left and right for any design. It has to meet our financials and it has to meet our return criteria.
Chris Danely
And then maybe you shed some light on the sort of the customer dynamics. Is this a very concentrated group of customers, is it getting more fragmented? How is the customer base? And do you see anybody especially on the automotive side, that really grasps and does silicon carbide really well, I guess?
Hassane El-Khoury
Yes. So you have some — there’s a lot of things to unwind in the question. If you look at it, the customers are distributed, geographical, but also from a market. I talked about the automotive business being the biggest from a dollar perspective. But from breadth, we have a lot of in industrial. We talked on the call about having LTSAs with seven of the top 10 energy supply alternative energy vendors. That’s a breadth, again, of the penetration of the technology. From an OEM perspective, there are — there’s more ownership of the technology from what we call the disruptors, your nontraditional OEMs, companies that just started with EVs. They didn’t have the legacy of an ICE engine. So there’s no constraint from that. I don’t think it’s a capability. I think it’s just what constraints are you dealing with. But from a technology capability and technology adoption, I think all OEMs are all in on silicon carbide at different levels of maturity or different intercept points from their ICE or EV fleets. But I would tell you I wouldn’t be wrong if I was — about 100% or high 90s percent of RFQs coming in now are all silicon carbide
Chris Danely
Wow. And do you think it’s — in terms of me end market mix, is it like auto now? And then how do you see that trending over the next five years as you bring on more capacity in the technology proliferates…
Hassane El-Khoury
Yes. I think majority, is it going to be 90-10. Right now, our $4 billion of committed revenue is 90 automotive [10] — probably, over time, it will start — we’ll start adding more on nonautomotive. But again, just going back to the TAM, the addressable market is by far the biggest in auto. So that’s still going to be skewed to more automotive, but it’s kind of settled because industrial is going slower than auto but it’s headed there.
Chris Danely
And then maybe run through the competitive landscape. We had another one of your competitors yesterday. I don’t want to mention any names, STMicro talking about essentially the same numbers you guys have were going to be $1 billion pretty soon and then to $2 billion, $3 billion, $4 billion, $5 billion, pick your $1 billion in two, three, four, five years, run through the competitive landscape. Who do you see as the toughest, are there any up-and-comers and then maybe touch on if and when China gets into the market?
Hassane El-Khoury
Look, I don’t think there are — I would consider anybody credible as an up and comer in silicon carbide. You can’t — even if you have the cash, you can decide, I’m going to be a power semiconductor number one. Number two, a silicon carbide power semiconductor vendor for all the reasons we talked about, about packaging and so on, which answers indirectly the China comment where this is no secret. We’re heavily engaged with NIO. I publicly speak about it because their CEO mentioned it publicly. And that tells you that’s kind of a marquee name they selected ON Semi, but they also selected ON Semi not against Chinese suppliers or potential suppliers, but they selected it from anybody that was out there. I mean it was at our Analyst Day, his commentary was we evaluated everybody in the market. So you know who the players are, and we selected ON Semi because of the two primary reasons I mentioned, which are device and package technology. That was before we even had the GTAT. So that’s — I’m not too [worried] — am I watching? Yes, because there’s capital there that’s being invested, but you can make up time. So that goes to our advantage or anybody, not just ON Semi’s advantage.
When it comes to other parties, other — some of my peers, competitors, obviously, it’s a wide range, and you have to define where they’re coming from. And what I mean by that is Infineon is number one in IGBTs today, right? So they’re coming from a legacy of power, very similar to ON Semi and a lot of confidence in packaging. What they lack as a supply assurance or the substrate side of it, right? And they try to do that inorganically, but we are where we are, that’s kind of how I watch. The same with ST. I mean we know ST where they get their substrates. They have an internal capability that they are working on, but it hasn’t really come out because it’s hard as hell to do. And I’m not going to discount it, but they have the intent to be there. And then you have, obviously, Wolfspeed that actually came from a legacy of material and substrate, very, very credible, very, very good, trying to get upstream with a lot of advanced packaging and modules and so on.
So that’s kind of the — if you think about the landscape and the market is big enough for — a lot of people ask, okay, well, is your $1 billion going to take away from their $1 billion or their $1 billion is going to impact your $1 billion. There’s enough billions to go around in that market right now. The focus right now is when you get to scale and how fast and who can get to scale. And for that, you have to look two steps ahead, who’s got the firepower to win scale. Because if you look at IGBT, it was kind of the same thing a decade or two ago. Now there are two players, Infineon and us, right? Because you need to have the ability to scale. That’s, I think, the secondary question that you need to answer as things converge. Now that’s a decade plus, but that’s the time horizon that I plan to. I don’t plan for two years, five years. I plan for 10 and plus. So that’s where my eyesight is.
Chris Danely
We like that. Do you have any sense or estimate of the size of the silicon carbide market and ON’s share of it?
Hassane El-Khoury
Right now, it’s hard to tell because a lot of it is not yet in production I think we’ll have a better idea over the next few years.
Chris Danely
Okay. And then you mentioned ramping and capacity. Talk about the, I guess, level you need to make this gross margin accretive, what the drivers of that are and what we could expect going forward?
Hassane El-Khoury
Silicon carbide specifically?
Chris Danely
Yes.
Hassane El-Khoury
So we talked about silicon carbide, obviously, our reported results are what I would call all in, meaning we don’t take anything out. It embeds all start-up costs, depreciation for the full capacity we have online. And what that number is, think about it as 100 to 200 basis points dilutive to our corporate reported results. That’s the range we’re going to be in until we get to scale, expecting you get to scale in the tail end of ’23. So that’s going to be kind of the band that we have. Now that’s okay because we’re cognizant of the fact that we are adding capacity. And therefore, by adding capacity, you have the depreciation, you have the start-up costs and you have to grow the revenue to utilize that capacity. And we have line of sight of that revenue back to the committed revenue. So that, call it, deterministic, we’re going to be getting out of it. What’s more important for me is I look at the product margin. As to get the confidence that we’re going to grow into it, you’re going to end up converging to the first order to the product margin, and that’s where Thad and I talked about at or above corporate.
Chris Danely
So going into ’24, what’s your confidence level that it will go from dilutive to accretive or at least in line? And can it eventually be accretive to corporate margins?
Hassane El-Khoury
Eventually, I believe it can be accretive, and I think ’24 is — I have high confidence.
Chris Danely
Can you talk about what that takes? Is it a specific revenue level, is it the ability to get perhaps better pricing? What sort of metrics do you look at to make it accretive?
Hassane El-Khoury
Well, so there are a few metrics. Obviously, a lot of — we have the engineering metrics, where we have to remain on track, which we are. A lot of people ask me about the confidence in GTAT. So I look at the engineering metrics. Are we on track to delivering? Now is it ever done? We’re still improving manufacturing on IGBT from two decades ago. So it’ll never be done. But do we have a curve that we have to be at or better? The answer is yes. So that’s an execution thing. We’re maintaining that. I personally review it from an engineering side and then the revenue coming in. And we have a lot of these constructs in place in order for us to get more and more confidence. Like the LTSA solves the issue of, is the revenue going to be where we think it’s going to be. The LTSA, the committed revenue solves that. The rest is engineering work. Do we have that confidence? The answer is yes. That’s why you’ve seen us scale aggressively on GTAT because we have that confidence in the engineering output. So those are kind of the puts and takes that we are managing internally in order to achieve what we’ve committed to externally, and that’s what gives me the confidence where I sit today.
Chris Danely
Great. And then last question, I get this all the time. It’s you guys, it’s Infineon, it’s ST. There’s a lot of — not a lot, but there are some sizable players in the market. Could this develop into an overcapacity situation? Why or why not? Always that fear in semis.
Hassane El-Khoury
Yes, I know. Look, I don’t think it’s going to be overcapacity because if you look, overcapacity is more a big concern when, number one, the technology is more accessible, meaning it’s CapEx and you get it. You can’t basically get a $1 billion and build a fab and all of a sudden, you got the capacity, just for the reasons we talked about. There’s a constraint up and down the chain that don’t let you. But that’s from a, call it, barrier of entry. But at a higher level, I mean, the market and the scale of that market from going from zero to all of these, and we’re talking about EVs, and this is prediction, EVs being 50% by ’28 or 2030 as penetration, so that’s — think about the next six, seven years and — or eight years. And we’re not even halfway there. So if you’re going to talk about concern of order supply, you have to project 20 years from now. I don’t think we’re there yet because a lot of things are going to shake out in that time where people are going to go, I can’t afford to keep up that rat race. And that’s why in IGBT, you only got…
Chris Danely
Two guys left…
Hassane El-Khoury
Yes.
Chris Danely
Right. Let’s talk about the semi , now that we’ve beaten the silicon carbide horse to death twice over…
Hassane El-Khoury
Don’t beat it to death. We need it.
Chris Danely
Okay, feed it to death. It’s been an interesting year in semis to say the least. A number of your competitors have lowered guidance, talked about downturn. Here you guys are. Everything is great. Everything is fine, everything is awesome. It’s like the Lego movie. How do you explain why ON has done so well versus the competitors? Is it product positioning, is it things that you’ve done to change around the business, all of the above?
Hassane El-Khoury
Yes. Look, it’s all of the above and also the end market mix. A lot of the peers that have really pulled the emergency court are way more on consumer and compute in those markets, and we saw that too. We talked about it last quarter. What we’ve done differently is we’ve managed to start draining our inventory. So we took utilization down in order to be better positioned when that — and people ask, okay, did the backlog go down? The answer is no. But I read the same headlines as everybody and we’re a proactive company. I don’t hyperventilate when the market is good. I tell my team when the market is good is when I stop sleeping because everybody is foaming in the mouth. Who’s watching the door? That’s what I’m doing. That’s why we are taking — people say, okay, but that’s short term headwind, if you take utilization down. Yes, but I’d rather not be stuck with inventory in the — back to the long term planning that we have in the company. So we’re taking a proactive approach. That’s on that side of the market. And look, we have that business that we still want to get out of that a lot of it is in those markets. That low margin business, we haven’t really lost that at the speed we want. So if the market gets — turns faster in those markets and we lose it faster, our margin actually will get better because that’s still dilutive to our corporate margin. So we have a structure in the company that we’re setting ourselves up for that.
Now where most of our revenue comes in and why we’ve posted good results is auto and industrial are still strong. And there are — again, when you hear some people talk about, yes, but the supply constraints are getting easier, the question that I would ask is on what technology. Maybe microcontroller or compute, logic is getting easier because it shares capacity with the compute and the gaming and so on. So of course, it’s a zero-sum game. But what about power? What about analog? What about sense, all of these? The answer is they’re not getting better. And some of my peers that do that are still constrained, and they’ll say the same thing. So it’s not about the market. It’s more on the technology within these markets. So we have to be able to differentiate. So the reason we’re still posting the results that we — and I’m bullish about that is, one, we are more — we’re 66% now auto and industrial. So that gives us that market backdrop that is strong. And we have power analog, mixed signal, a lot of the, call it, lagging edge analog, which there’s no capacity coming online. So that keeps us in the environment, which we’re — and we see a lot of strength.
Now the one thing that I give an example to, when people talk about content, I know we talked about silicon carbide, but one thing people have to understand, when we talk about EVs, EV penetration, EVs doubled from last year this year. Small number, but it’s still 2x. When you take that engine out of the car, if you’ve ever looked under the hood, you have all these belts driving compressors and pumps. And okay, when you take that engine out and now you have a motor, what do you think is going to drive all of these? Motor, mixed-signal analog chips. Everything we make is now going to be even more needed in an EV, not just the inverter, that’s the stuff we make. That’s why we’re seeing a lot of strength, because I always talked about content. That’s a perfect example of content going way up just by going from ICE to EV car.
Chris Danely
One of the only complaints I hear about you guys is long lead times and shortages from your customers. Can you just give us an update? Is there — I actually had a couple of people I know in the auto industry asked me to ask you, when are we going to see some improvement in these things? Is there any hope out there on the shortages and lead time front?
Hassane El-Khoury
Well, I’ll tell you to tell them. I hope they have an LTSA.
Chris Danely
And if they don’t, operators are standing by…
Hassane El-Khoury
Look, because — but in all seriously, I mean, that’s the reason we put LTSAs is, look, it’s not — I don’t want to invest in capacity. But you asked the same question about overcapacity. Although I won’t be worried about it for silicon carbide because of where the market. But when a customer comes in and says, I have 25% increase in these technologies I have been running for five years, okay, if I put capacity for that, I’m going to live with it for the next 10 years. I don’t think we say, I’m not going to do that, unless somebody signs up. So if my customers believe that they increase back to what I said about EVs with the belts and everything, if there’s confidence in that uptick and that demand being sustainable, forward looking on that technology, no problem. I’ll put the CapEx. It will be a long LTSA, or if it’s a short LTSA, that’s where co-investment comes in, where you offset the payback period by cash.
All of these are constructs for us to solve the problem. I’ve told all the customers the LTSAs are in order to solve the root cause, which is lack of visibility causing investments that don’t get monetized. And we don’t need long term memory, that’s what 2019 was, right? We did 2017, 2018, everybody is high-fiving. 2019, troughed. Why? Everybody shipped a lot more and built on the trend that we were in versus a trend that we’re going to end up in. I’m not making that mistake, but I will have the engagement with customers to solve the problem.
Chris Danely
Yes. In terms of capacity, you’re one of the few to be able to find and secure capacity for less than $0.100 on the dollar with the 300-millimeter fab you guys are picking up. Can you talk about that, the impact on both the model from a revenue and a margin perspective?
Hassane El-Khoury
Yes. Look, it’s — I have to put it in the context of everything because we are in the process of what we talked about fab lighter, about not reshuffling but readjusting our manufacturing footprint in order to leverage more capacity at a better cost. I’ll give you an example of how that worked out perfectly for us. We run — historically, we’ve run the IGBT, our power in our Korea fab, high scale power fab. We have now silicon carbide that is ramping. The choice of building greenfield versus utilizing a footprint was an easy choice for us. We took IGBT. We moved it to 12-inch. So you had a diameter output and you had a scale in East Fishkill. And then we move to silicon carbide to ramp into an existing power fab. So when you asked about my confidence in ramping silicon carbide, it gets higher because that fab has been running for years, high yield, very good [telemetry]. Everything is in that fab, I just put new technology in it, which we do in fabs all the time. So that shuffling created now capacity that I can ramp all of the silicon carbide revenue very, very fast. So I don’t need to build a new clean room and maintain a very good cost for IGBT going from a depreciated fab to a 12-inch fab.
So you call it a little bit equal because now you have depreciation versus no depreciation, but you got 8 to 12. So we look at our manufacturing footprint from that lens, where do we need to move to get better capacity and better cost? And in our Analyst Day, we talked about divesting some of our fabs, which we’ve done a lot of progress towards since then. And people say, okay, well, how are you going to grow? The growth is going to come because we’re putting online a 12-inch fab. So we have 30% plus growth that we can do. And on top of that, the ASPs that we are targeting versus the ASPs that we’re running in our fabs are much higher today because we’re divesting a lot of that. So that gives you the dollar growth not just the unit growth. So net-net, we’re very comfortable with where our manufacturing footprint is and where it will be kind of in a steady state in the next couple of years.
Chris Danely
Before we jump into gross margins, we have a few minutes left. I’d like to open it up to the audience in case anybody has any questions. [Multiple Speakers] [CitiTech] in position. Yes, in the back.
Unidentified Analyst
Can you — you speak highly about silicon carbide. You have annual silicon carbide today a few weeks ago. Any more numbers that you can share with us? Wall Street and a few are very out front with numbers over there? What can you say about devices and materials in terms of numbers? That would be very helpful.
Hassane El-Khoury
You mean technical numbers?
Unidentified Analyst
Revenue growth, what do you expect silicon carbide in here to be 2024, 2025, given your — given cycles? I guess you have a lot of clarity on that years.
Hassane El-Khoury
Yes, but I’m not giving it. I gave — I’m talking about…
Chris Danely
[Multiple Speakers] the numbers that you guys gave…
Hassane El-Khoury
Yes. So just to reiterate the number, we’re talking about more than 3x the revenue for this year. We’re going to get to the $1 billion plus in 2023. That changed from exiting 2023 at $1 billion run rate to actually achieving the $1 billion plus the $4 billion in committed revenue in ’23, ’24 and ’25. That’s kind of the framework that we’ve given.
Chris Danely
I have a question e-mailed to me. So the question was you talked earlier about getting silicon carbide margins higher. And so the question was how much of that depends on internalizing the supply?
Hassane El-Khoury
Yes, of course, mix is part of that. But it’s — we’re — I’ve always said there’s always going to be external substrate. But majority of our substrate will be internal. So a big part of that is based on the mix of where we get the substrate for sure. Now that’s part of the cost, but it’s not back to 100% internal.
Chris Danely
Any other questions? I left my sunglasses at home, maybe say something I can’t see. Gross margins. You guys clearly benefit from pricing. One would assume raising pricing, mix, dropping lower price, lower margin products. How much did pricing help gross margins this year and then what are your expectations for pricing next year? How much can help gross margins next year?
Hassane El-Khoury
Look, there’s no expectation that pricing — net pricing is going to be anything, because we’ve done pricing increases early on in ’21. So even in ’22, it’s more of an annualized second half of ’21. We’ve done it as we see it. We’ve done it early. But because a lot of our pricing actions was outside of the market directly related to market and where we are in the market, I talked about price to value discrepancies back in ’21 before kind of we got into the midst of the shortages. But let me give you the example just to make sure we understand the sustainability of it because that is an important distinction of raising prices because supply versus demand versus raising prices because of value. When I looked at the company and I looked at the pricing, the discrepancy that I found is I had a high volume automotive customer buying a part for $1 and I had five customers, I don’t even recognize in the tail, low volume, buying it for $0.50. Well, if you ask anybody, what’s the market price for that? It’s a dollar. Because if it was $0.50, the big guys would have gotten it. So we adjusted that to a dollar. Is that sustainable? The answer is yes. Why wouldn’t it be if the market value is there, and I’m not losing that business at all at a dollar.
So that gives you the discrepancy that we bridge. That’s sustainable two ways. One is we put it under LTSA as well. Some of our LTSA had 200 parts. So we also captured in the LTSA. But structurally, in the company, I consolidated all pricing in the company under one leader, which means they’re accountable versus being distributed where a marketing person that doesn’t even own the P&L, shakes in their boots, give price because that’s how I got to the $0.50 to begin with. So structurally, we changed the company organizationally in order to sustain it. But also from a market perspective, the percent maybe higher than what you hear about, ON Semi was more aggressive and so on. But where it landed is nowhere outside of the market, and that’s what I look at as far as sustainability. So those are sustainable. I’m comfortable with the gross margin. It has all of the structure that we put in place. What is not sustainable is that business that we’re planning on losing. We’ve been very upfront about it. We price ourselves out of the market. So back to using the example, that was above the dollar in areas we don’t want. That’s still dilutive to the corporate margin. We talked about walking away from the $210 million already, a 24% margin after the price increases.
Chris Danely
Yes.
Hassane El-Khoury
So that business, look, when the market recovers and customers can get it somewhere else cheaper, no problem. We’re not going to chase it down, which means when we lose it, our margin actually get better. That adds to the sustainability of our margin.
Chris Danely
Yes. Can you just give us an update on that $200 million-something size of the business that you were trying to exit, what’s the size of it now? And I mean, did you think it would maybe half of it would go away by now? And do you expect some of it to roll off next year? Just give us an update…
Hassane El-Khoury
Yes. So I thought it would be all done by now. But the market is stronger so we haven’t lost it. But the $210 million is what we’ve lost already, to date. What is left, what we’ve talked about is we have about $150 million left this year and about $400 million next year. So we’ll roll into ‘23. Now how fast in ’23 is really — it’s literally market dependent. If a customer can get it somewhere else cheaper and they can supply it, they go. We’ve had some customers — why the number kind of changed. We’ve had some customers say, okay, it’s — I mean we’re talking about a penny…
Chris Danely
Yes, or less than a penny.
Hassane El-Khoury
Yes. They’re not going to go design and qualify 200 dollar qualification for a penny if there — if we are able to give supply. So they’re signing up for it. And if they sign up for it at the better price, that makes it sustainable and that’s fine. Otherwise, we’ll help them design this up.
Chris Danely
Do you give any thought that since this business is not rolling off as you expected to raise price again or keep raising price, or does that start to deteriorate the customer relationship?
Hassane El-Khoury
Yes. I mean it does. The reason we’re not — we haven’t lost that business is because it’s on the same board as other things that we want, which means it’s the same customer or same system. I can choose to stop shipping it to improve my margin, but then that becomes the golden screw. So yes, there’s a relationship we’ve committed and we’ve been public about it. We’re passing increased input costs to our customers. We’re not in the business of fixing our P&L by gouging. It’s not a pricing initiative. It’s about fixing a fundamental problem. And we have done a lot of progress fixing that problem. And we’re going to maintain that kind of the approach with our customers because we’ve been very straightforward with the customer. As soon as you start moving pricing, just spot pricing, that’s not the company we are. So that’s why we’re — we have to be cautious but we also have to be very open with our customers, because it’s not about, again, this quarter, it’s about the long term engagement that we have with them.
Chris Danely
Great. Thanks, Hassane. Thanks, everyone.
Hassane El-Khoury
Awesome. Thank you.
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