ON Semiconductor Navigates Tariff Headwinds with Strategic Supply Chain Shifts and AI Growth Horizons

The semiconductor industry faces unprecedented geopolitical and economic pressures as tariffs and trade restrictions reshape global supply chains. ON Semiconductor (NASDAQ: ON), a leader in energy-efficient power and signal management solutions, has emerged as a case study in resilience. By reconfiguring its supply chain, diversifying its customer base, and capitalizing on AI-driven demand, the company is positioning itself to weather tariff turbulence while capitalizing on long-term growth opportunities.

Supply Chain Reconfiguration: A Shield Against Tariff Volatility

ON Semiconductor's geographic diversification strategy has become a cornerstone of its tariff mitigation efforts. With 19 global manufacturing facilities, including operations in the U.S., Europe, and Asia, the company avoids overreliance on high-tariff regions like China and Taiwan. For example, its recent decision to cut internal fab production capacity by 12% and reduce its workforce by 9% (approximately 2,400 employees) aligns with a broader shift toward leaner, more agile operations. These moves, expected to save $105–$115 million annually, reflect a focus on trimming costs while maintaining flexibility.

The company's CEO, Hassane El-Khoury, emphasized that its global footprint limits direct tariff exposure. However, the looming threat of a 32% tariff on Taiwanese imports—a possibility under the U.S. Section 232 investigation—remains a wildcard. Analysts estimate such tariffs could raise industry-wide COGS by 7%, but ON is proactively mitigating risks through:
1. Supply Chain Redesign: Collaborating with partners to shift production to tariff-free regions (e.g., Malaysia or Texas).
2. Tariff Exemption Applications: Leveraging trade agreements to qualify components for exemptions.
3. Product Optimization: Redesigning products to minimize reliance on high-tariff materials, such as gallium and germanium, which China dominates.

AI and Silicon Carbide: The Growth Catalysts

While tariff pressures loom, ON Semiconductor is betting on secular trends to drive long-term value. The company's investments in silicon carbide (SiC)—a material critical for high-voltage applications like EVs and data centers—position it to capture a $14.2 billion market by 2032. ON's automotive revenue, though currently challenged by weak demand, remains a core pillar: automotive applications account for 70% of SiC sales.

The firm is also strategically aligning with AI's rise. As the U.S. rescinds AI chip export restrictions (the “AI diffusion rule”), ON's advanced sensor and power management technologies are poised to benefit. For instance, its imaging sensors are integral to AI-driven autonomous systems, while its power solutions reduce energy consumption in data centers—a key AI infrastructure bottleneck.

Inventory Risks and Near-Term Challenges

Despite its strategic moves, ON faces near-term headwinds. Its inventory turnover ratio dropped to 1.75 in Q4 2024, with inventory processing time rising to 209 days—significantly lagging peers like TSMC (4.2x–5.7x turnover). This inefficiency strains working capital and raises obsolescence risks, particularly in weak automotive markets.

Additionally, the company's Q1 2025 revenue fell 22.4% year-over-year to $1.45 billion, underscoring sector-wide demand volatility. Analysts caution that SiC commoditization—a risk as wafer yields improve—could pressure margins unless ON continues to innovate with differentiated products.

Investment Takeaways: A Buy for the Long Game

ON Semiconductor's stock has stumbled recently, dropping 8.92% to $31.95 in April 2025, reflecting investor anxiety over tariffs and automotive slowdowns. However, its RSI of 21.87 suggests an oversold condition, and its $60.37 average analyst target price implies a potential 90% upside.

Recommendation:
- Hold for the long term: Investors with a 3–5 year horizon should consider ON as a play on SiC and AI growth. Its supply chain agility and R&D focus on high-margin segments (e.g., industrial and automotive) provide a moat against commoditization.
- Monitor tariff developments: If the U.S. imposes tariffs on Taiwanese chips, ON's global network and cost-saving measures could mitigate impacts better than peers.
- Avoid near-term dips: Short-term volatility is likely as automotive demand recovers unevenly.

Conclusion

ON Semiconductor's resilience stems from its ability to pivot supply chains and invest in future markets. While near-term risks linger, its dual focus on SiC innovation and geopolitical-proof operations makes it a compelling bet for investors willing to look beyond the tariff storm. As AI and EVs redefine tech demand, ON's strategic bets could crystallize into sustained growth—a rarity in an industry bracing for turbulence.

Disclosure: This analysis is for informational purposes only and should not be construed as financial advice. Always conduct independent research or consult a financial advisor.