ON Semiconductor's Underperformance Amid Broader Market Gains: A Tale of Supply Chain Turbulence and Inventory Correction

The semiconductor industry's third quarter of 2025 has been a study in contrasts. While broader markets have rallied on hopes of AI-driven demand and geopolitical détente, ON Semiconductor has stumbled, posting a 19% year-over-year revenue decline and a 48% drop in gross profitabilityON Semiconductor Earnings Q3 2025 - Report^[2]. This underperformance is not an anomaly but a symptom of systemic challenges rippling through the automotive and industrial sectors—challenges rooted in inventory corrections, supply chain fragility, and the lingering aftershocks of the pandemic-driven chip shortage.

The Auto Sector's Inventory Correction: A Perfect Storm

The automotive industry's semiconductor demand has been in a tailspin since early 2025. According to the TechInsights Auto Semi Index, the sector saw a 7% quarter-over-quarter decline in Q1 2025, driven by excess inventory from 2024 and a cautious start to the new year2025 Automotive and Industrial Semiconductor Trends^[1]. Automakers, having stockpiled chips during the pandemic to avoid production halts, are now grappling with the fallout of overprovisioning. This has forced companies like General Motors and Ford to renegotiate long-term chip supply agreements, while Tesla accelerates its shift to in-house chip designON Semiconductor Earnings Q3 2025 - Report^[2].

For ON Semiconductor, which derives a significant portion of its revenue from automotive clients, the correction has been brutal. The company's Power Solutions Group (PSG) saw its gross margin plummet 19.2 percentage points to 22.6% in Q3 2025, a direct consequence of underutilized manufacturing capacity and depressed pricingON Semiconductor Earnings Q3 2025 - Report^[2]. Meanwhile, competitors like Microchip Technology have fared no better, with a 42% year-on-year revenue drop in Q3 2025 attributed to similar inventory overhangs2025 Automotive and Industrial Semiconductor Trends^[1].

Industrial and IoT Sectors: Flat Shipment, Flatter Prospects

The industrial and IoT sectors have mirrored the automotive sector's struggles. Buyers are working through surplus stockpiles, leading to flat shipments year-over-year2025 Automotive and Industrial Semiconductor Trends^[1]. Texas Instruments, a bellwether for industrial demand, has projected fourth-quarter revenue below expectations, citing weak demand and inventory buildupChip industry update: A review of Q3 2025^[3]. For ON Semiconductor, which serves industrial clients with sensors and power management solutions, this has translated into muted order growth and margin compression.

Compounding these issues is the industry's shift toward AI-driven components. High-end GPUs and advanced packaging technologies like CoWoS remain capacity-constrained, diverting capital and attention from mature node chips that ON Semiconductor traditionally producesChip industry update: A review of Q3 2025^[3]. TSMC, the dominant player in packaging, has warned that CoWoS-L bottlenecks will persist through mid-2026Chip industry update: A review of Q3 2025^[3], creating a ripple effect across the supply chain.

Geopolitical Tensions and Strategic Realignments

The U.S.-China trade conflict has further complicated ON Semiconductor's strategic calculus. With 95% of automotive chips classified as “legacy” components, the industry remains vulnerable to supply chain disruptionsThe Automotive Semiconductor Supply Chain is (Still) Vulnerable^[4]. China's aggressive investment in foundational chip production has forced companies like ON Semiconductor to accelerate domestic production and diversify suppliers—a costly and time-consuming endeavor.

The company's Q3 2025 restructuring charges—$588.5 million in asset impairments and inventory write-offs—reflect this realityON Semiconductor Earnings Q3 2025 - Report^[2]. Notably, $230.3 million of these charges stemmed from the Intelligent Sensing Group (ISG), underscoring a strategic pivot away from underperforming segments. This realignment, while necessary, has come at the expense of short-term profitability.

A Path Forward?

Despite these headwinds, there are glimmers of hope. Industry analysts anticipate a recovery in the second half of 2025 as OEMs begin restocking and new product cycles gain momentum2025 Automotive and Industrial Semiconductor Trends^[1]. ON Semiconductor's acquisition of a SiC JFET technology business for $118.8 million signals a pivot toward high-growth markets like AI data centers, where demand for power semiconductors is surgingON Semiconductor Earnings Q3 2025 - Report^[2]. The company's stock repurchase program—$605.6 million year-to-date—also suggests management's confidence in long-term value creationON Semiconductor Earnings Q3 2025 - Report^[2].

However, the road to recovery is fraught. The normalization of the chip market in early 2025 is expected to be uneven, with constraints on advanced packaging and high-bandwidth memory (HBM) persistingChip industry update: A review of Q3 2025^[3]. For ON Semiconductor, success will depend on its ability to balance short-term cost discipline with long-term innovation—a delicate act in an industry where margins are razor-thin and competition is fierce.

Conclusion

ON Semiconductor's underperformance in Q3 2025 is a microcosm of the semiconductor industry's broader struggles. As automakers and industrial firms grapple with inventory corrections and geopolitical uncertainties, companies like ON must navigate a landscape defined by volatility and rapid technological shifts. While the path to recovery is uncertain, the company's strategic investments in AI and power semiconductors—and its aggressive cost-cutting measures—position it to weather the storm—if it can align its operations with the evolving demands of a post-pandemic world.