The mobile handset semiconductor market is no longer a two-horse race between two US giants, Qualcomm and Texas Instruments, with another US challenger, Intel, lurking on the sidelines. Out of the ongoing process of consolidation in this sector has arisen a serious European alternative at last, with the creation of a joint venture between Ericsson Mobile Platforms (EMP) and STMicro, both companies that have been emerging from the shadows to become strong lights in the smartphone world. Together, they will be a genuine challenge to the US leaders, combining EMP’s advanced technology and a focus on high growth markets like mobile broadband devices, with STMicro’s market weight and scale, and its Nokia customer deal.

The balance of power:

In April, STMicro and NXP formed a $3bn joint venture, the originally named ST-NXP Wireless, but ST is now set to buy out its partner’s 20% stake before the EMP deal is concluded. The new alliance will have pro forma 2007 revenues of $3.6bn, so tops ST-NXP in scale terms, though still far away from Qualcomm and TI (and of course Intel) in revenue terms. However, more worrying for the US majors will be the range of innovative technologies that the partners can now draw upon, putting them further into Qualcomm’s league in advanced, next generation multimedia platforms; and their impressive customer list, which includes four of the top five handset makers (and a realistic chance to bid for a share of the business of the fifth, Motorola, which is diversifying its supply chain following the end of its tie to its own former chip unit Freescale, and already works with both Qualcomm and TI).

Ericsson brings 3G and LTE platform and reference designs; expertise in low power modems and notebook connectivity; a stable model protocol stack and proven RF technology; plus IPR in many other wireless areas. It has recently been putting new fire under its handset reference design activities, with the parent group moving its once-obscure EMP unit further towards the center of its growth strategy. It has ridden on the back of the rise in interest in complete reference designs – among tier one phonemakers, not just low end ODMs - to enable vendors to bring advanced devices to market more quickly and cheaply, and to customize them more easily for different operators’ requirements.

ST-NXP Wireless, meanwhile, brings multimedia and connectivity solutions as well as a GSM/EDGE platform plus products for WCDMA/ HSPA (including some under development with Nokia), TD-SCDMA, Wi-Fi, UltraWideBand, and location/GPS technology. "We've got the industry's strongest solution, including 2G/3G, HSPA, LTE and a whole range of multimedia applications from ST," said Ericsson CEO Carl-Henric Svanberg, announcing the new JV. "We also have the strongest customer base in the industry."

"It's a bold move, but we decided to go for leadership," said Carlo Bozotti, CEO of STMicro, who during his tenure has certainly scored a reputation for being bold, and is undergoing radical review of his group’s activities. The new venture will have a cash position of $400m. Ericsson will contribute $1.1bn net to the joint venture, out of which the JV will pay $700m to STMicro. The company will be equally owned, and will employ 5,000 people from ST-NXP and 3,000 from EMP. The venture will be fabless and use silicon technologies and manufacturing from STMicro as well as other providers. It will be headquartered in Geneva, Switzerland, where STMicro is based. Svanberg will be chairman of the board and Bozotti will be vice chairman.

Strengths:

This new entity is far worse news for Qualcomm, TI and potentially Intel than the other routes to creating a European mobile silicon powerhouse. These alternatives were far more widely touted than an EMP move, and mainly revolved around uniting the big three silicon players, the Swiss/Italian STMicro, Infineon of Germany and NXP of the Netherlands, either across all their businesses or just in wireless. This would have created a super-company with a scale to impress the US majors. To be sure, scale is vital in the modern handset silicon industry – mirroring the consolidation of the handset makers and their increasingly aggressive buying power. But size is not everything, and the three-way venture, despite some strong products from Infineon and ST, would have come burdened with legacy businesses, cumbersome processes and mismanagement, and would have made sense of the truism that tying two rocks together only makes them sink more quickly.

Although, of course, ST and NXP did join forces in wireless, it was always likely that NXP would exit – though not at such an early stage – and undoubtedly, despite its relatively small size, EMP will be a significantly more powerful partner for ST than the Dutch player. Far from being two rocks slung together, this is an alliance of two companies that have gone through significant repositioning and strengthening lately, though in the shadows of larger parents with their own problems, and so largely invisibly to the stock markets. Separated from those parents and free to concentrate entirely on wireless devices, the new partners will be better placed to start to reap the full rewards of their recent reorganizations and product developments. And the combination of some of their key offerings should put some strong new platforms into the market, as well as extending the customer list and taking on Qualcomm, in particular, in some of the areas, such as notebook 3G, in which it excels.

Impact on Qualcomm and TI:

Qualcomm executives, indeed, recently named EMP as the company’s most serious competitor apart from TI. With its eyes on its own potential Nokia deal, in the wake of the settlement of its licensing disputes with the mighty Finn, the San Diego company will certainly see an ST-EMP combination as a blow to those hopes. There are still many areas where Qualcomm excels ahead of its major competitors, such as highly integrated, low power chipsets for smartphones, and its Gobi notebook system – and it will surely manage to lure Nokia to some of those highly differentiated technologies over time.

But some of its avenues, and its chances of a far reaching contract with Nokia, must be squeezed by the EMP-ST combination. Nokia already works with ST and any conflicts of interest with Ericsson are largely over since the Finnish company spun off its equipment business into its Nokia Siemens venture, and its fellow Scandinavian pushed handsets into Sony Ericsson. Nokia and Sony Ericsson have many suppliers in common, as well as working together on Symbian and other technologies, while Nokia and the parent Ericsson often present a united front in promoting European wireless standards and approaches, a process which has often brought them into conflict with Qualcomm.

As for TI, the chipmaker has gone from being a virtual monopoly in Nokia handsets to seeing its largest customer selecting a second source in each handset baseband category (STMicro in 3G, Broadcom in EDGE, Infineon in GSM). A strengthened STMicro and a clear route for EMP into Nokia can only be bad news for TI, although one of the interesting issues to be addressed will be the future of TI’s own alliance with EMP, which it formed last July, with the pair combining EMP basebands and TI application processors, to create full 3G smartphone reference platforms – an area where TI had previously been outpaced by Qualcomm and Freescale, and also another sector where EMP has been gaining ground on the CDMA supremo.

TI has supplied chips to Sony Ericsson and customized products to EMP, including its joint reference platform activity, but it has lost some of this business in the past two years to rivals including ST. It had made confident statements that it expected to recover lost ground at Ericsson by 2010 but a spokesperson admitted this week that, in light of the new venture, the company was “less optimistic about the expected incremental revenue growth" in its custom business with EMP. Analysts were negative, with John Dryden of Charter Equity Research voicing the views of many, saying this was "a long term negative for TI based on share loss ...They have been taking punches. This takes the Ericsson mobile platform farther out of equation in my opinion."

More than the sum of its parts:

Whatever third parties the new entity works with, it is certainly greater than the sum of its parts, unlike most silicon industry mergers. STMicro has significant market weight because of the power and customer contacts of its parent, but until the Nokia deal was not well regarded for differentiated technologies in wireless. EMP has been the opposite – strong in cutting edge technology, with a world class engineering effort and hordes of patents to its name, and a revivified focus on reference platforms. But for all that, it was a sideline business within the Ericsson Empire, and lacked strong market clout, especially as it was perceived as being too closely tied into Sony Ericsson. Putting those complementary strengths together and escaping from out of the shadows of the parent groups – and their conflicts with otherwise likely customers – should create a powerhouse.

The two-step process that STMicro has masterminded – first NXP, then EMP, with the Dutch company stepping aside without damage – also indicates another strength that the Swiss company will bring to the party, its political acumen and skill at deal making and partnership brokering. Applied to the mobile market, and underpinned by EMP technology, this could start to score significant points. The first win has been the as-yet unnamed new venture itself, in which both parties gain, but STMicro more so than its new consort. EMP gains reach and the complete hardware platform it has lacked as the basis for its innovative applications, services and reference designs.

But STMicro gains that advanced technology – and has been prepared to give Ericsson a 50% stake and the right to name the chairman of the board in return for it. Without it, ST ran the risk of getting tied too closely into Nokia, getting over-dependent as TI has been, since the 3G project was the only really cutting edge aspect of its armory. Once separated from the other ST businesses, it was vital that the wireless arm had more arrows in its quiver, for all the importance of the Nokia win – whose actual revenue potential could still be squeezed by a rejuvenated TI. And while scale is important in the competitive world of handset silicon, and is helped by teaming with EMP, the most important factors to preserve margins and gain top tier customers revolve around getting first to the advanced functions and applications that smartphones and the mobile internet require. EMP brings strong capabilities in this respect, enabling ST to aim for something it could not have dreamed of before – challenging Qualcomm, which understands differentiation in the multimedia mobile web world better than anyone, rather than resigning itself to competing on price and low power in basic phones.

There are many decisions still to be made and risks still to be run, not least managing the merger of two entities with very different cultures and with some conflicts of interest between their parents. One important future decision will be whether to spin the JV off completely through an IPO or by distributing ownership stakes to ST and Ericsson shareholders. But once this deal is finalized, the handset chip sector, which has been through massive shake-up in the past year, will take on a new face, and one where there will be a serious new contender for leadership in the emerging mobile multimedia markets.

Source:arcchart