Wireless Industry Analyst

[Originally for Sramana Mitra's site]

Over the past two weeks, we have looked at Infineon’s financials and various business units. Before we proceed to its valuation, it will be useful to examine the company’s key strategic initiatives and growth possibilities if we exclude Qimonda from the picture.

With Nokia and InterDigital (IDCC) engaged in a prolonged legal battle over licensing issues, the title of this article is sure to raise more than a few eyebrows. I think that recent industry events make this an interesting but overlooked possibility. Here is why –

[Originally for Sramana Mitra's site]

I value ST Microelectronics at just under $15 per share. This is about 30% more than its current value. Its strengths include its broad portfolio, its position in the strengthening European block and its resultant wireless business outlook. The operating constraints caused by STM’s geopolitical ties are growth deterrents. Its commitment to the IDM model can make it tough to compete effectively against the crop of nimble fabless companies.

[Originally for Sramana Mitra's site]

In the last part of this series, we looked at STM’s strategic initiatives that are aimed at making the company more nimble and profitable. A very important part of this strategy was unveiled last month when the company decided to form a Joint venture with its wireless business and that of NXP. Before moving on to STM’s wireless business and outlook, it is important to understand the dynamics behind this move.

In my Texas Instruments (TXN) valuation series, I pointed out that the company did not have a strong 3G product strategy. I subsequently also discussed in detail the synergies that existed between InterDigital and TI. I had also noted that if not InterDigital, TI could consider Icera also as a viable option to buttress its 3G roadmap. Let us take a quick look at this possibility.

In my last article on the STM, NXP merger, I analyzed the JV from STM’s perspective. The merger is a clear sign of further consolidation in the 3G space. To understand this further, it is also illustrative to look at how other players in the vendor space can be impacted by this merger.

The importance of this merger primarily comes from my thesis that Texas Instruments has fumbled in its 3G strategy, leaving its huge market share wide open for other vendors to steal from it. Especially at risk is its huge Nokia account. The Finnish handset maker has already moved towards a multiple vendor strategy sourcing 3G chips from STM. Last year, it committed about 200 engineers to STM for the latter’s 3G chipset development program. Nokia is essentially focusing away from chipset IP and development. This has worked against TI and into the hands of STM and Broadcom (whose EDGE solutions are now being sourced by Nokia.) You can get further insights into TI’s wireless strategy and its potential pitfalls in my valuation series here, here and here.

The JV can further consolidate this relationship between Nokia and STM. Further, the complete portfolio of connectivity solutions will make it very attractive for the future smartphones from Nokia and the others. So, the JV will likely add to TI’s wireless woes. The impediment that I see is performance. The JV will still be behind Infineon, InterDigital, Icera and Qualcomm on performance. The hope is that a renewed R&D thrust will help narrow the gap in future designs.

Broadcom is perhaps another vendor for whom the merger can cause headaches. The Irvine-based company has in the past made its ambitions apparent – to work diligently towards the coveted third spot in the mobile vendor matrix. Broadcom has been very aggressive in its mobile campaign, not just with product announcements but also in its legal battles with Qualcomm to defend its IP position. The bottom-line is that it is also looking to grab market share from TI. If the JV can improvise on the connectivity solutions and build a stable and complete platform, it will give Broadcom a run for its money. But Broadcom will still have the time-to-market advantage for now. You can read more on Broadcom’s wireless outlook and my valuation analysis here, here and here.

Qualcomm is less likely to be threatened by the JV though the latter now has access to Samsung. Qualcomm’s technology leadership, its support network and its longer-term view of the mobile space places it on firmer ground. Infineon, which is likely to be at the heart of iPhone 3G, will now be a distant second in the European vendor matrix. InterDigital, Infineon’s 3G partner, will have to rely on performance as it tries to gain in the smart-phone market. Marvell and Icera among others will also come up with niche selling points to counter such consolidation.

So, while the price STM paid for the merger can be debated, there is no doubt in my mind that it is a consolidation that will send some vendors scampering. I have a lot of questions in my mind now. Will someone pick up Freescale as well? Will TI target an acquisition that will give it 3G baseband capabilities, perhaps InterDigital or Icera? Will InterDigital and Infineon further formalize their strong alliance to gain scale? Well, there is consolidation in the air. I can’t wait to see how the vendor matrix ends up a couple of years from now.

ST Microelectronics (STM) and NXP announced last week that they were going to combine their wireless chip manufacturing capabilities to form a joint venture. This is an industry consolidating event that may well define the direction in which the mobile value chain is headed.

As per the deal, structured as a merger, STM will have control on the JV with about 80% stake. The company will pay NXP $1.55bn to close the deal in the third quarter. The merger combines two of the bigger wireless chipmakers, which together had about 10 percent of the global market in 2007, according to iSuppli. STM CEO Carlo Bozotti claimed that the JV will create a global leader with a more optimistic 14% market-share in wireless chips.

The companies’ combined wireless revenue for 2007 was about $3bn. They reported that the synergies are expected to save up to $250mn in 2011. Nokia, Samsung and Sony-Ericsson are among the customers for the JV. The company will primarily compete with Broadcom , and to a lesser degree with Infineon and Freescale, hoping to take market share away from TI. You can read more about TI’s precarious position in the mobile space and how such events aggravate this situation from my valuation series here, here and here.

Bozotti justifies the JV as a move to compete with the giants (Qualcomm and TI) on scale. “This is a business where scale is fundamental,” he says. The economy of scale, both in R&D and manufacturing, gives the leaders substantial ASP gains. The JV will also have a stronger IP position than either STM or NXP. This, in turn, gives it greater negotiating power in IP cross-licensing discussions further increasing its margins.

Besides establishing a strong R&D team to develop 3G solutions and beyond, the joint venture has what I would call a complete portfolio of connectivity solutions. These technologies – WiFi, Bluetooth, FM and GPS - will be integral to tomorrow’s convergence devices. This allows the company to chalk out a product roadmap that integrates these solutions into a state-of-the-art single stop platform that will be attractive to handset vendors.

The wireless industry, especially the 3G chip vendor space, will consolidate and the stronger players will pick themselves out of the crowd. The JV is STM’s statement of arrival. Over the last couple of years it has made tremendous strides culminating in design wins from Nokia and Sony Ericsson. The JV will perhaps not make an immediate impact in its product line. It, however, expands its customer base and also positions STM to exploit the convergence market over the next few years. The need now is to make use of the synergies and deliver on its design wins. The need now is for agility and execution.

[Long Qualcomm at the time of writing]

• interest shown by cellular companies in GPS: This was even before Atheros made a smart move picking up U-Nav (incidentally, I had stated then that U-Nav would be acquired too) and NXP got GloNav. I also mentioned that SiRF with its $2 billion market cap (then) was too big to be acquired. Now the company finds its value almost reduced to a fourth of that valuation.
  
• Other companies wanting to grad more silicon: That left SiRF as more of a one-trick pony!
• 'Keep the Bill of Materials low' dictum: Effectively, with more competition comes lower margins. This was something I saw as a critical issue that faced SiRF. Today, this has shown its ugly face with a reduced gross margin that has got the Street scampering.