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Changes in the Handset Semiconductor Supplier Landscape The past two years have seen some remarkable changes in the supplier base for handset semiconductors, including mergers and acquisitions, and even market exits. Baseband and complete chipset vendors Texas Instruments was the unchallenged leader in the baseband processing space for many years. This leadership position had three major segments. The first was a strong position with handset market leader Nokia. TI supplied a series of custom baseband processors that were joint designs of Nokia and TI, and were only sold to Nokia. These covered 2G and 3G standards. The second stronghold for TI was their relationship with Ericsson Mobile Platforms, supplying custom baseband processors to EMP that were in turn sold to Sony-Ericsson and other handset manufacturers. The third major segment of their business was a series of products for the merchant market – chips and chipsets (with accompanying software) sold to a wide range of customers worldwide. These were nearly all 2/2.5G chipsets. Their leadership position was attacked on several fronts. Nokia made a decision to move away from the high development cost and sole-source nature of customer chips to use open-market chipsets in many of their phones. TI’s open-market product offerings lagged their competition in 2.5 and 3G, and they began to lose market share. Their main focus at the low end of the market was the much-hyped “LoCosto” series of single-chip RF/baseband processors, which represented a major change in radio architecture from classical analog direct conversion to a sampled-RF approach. TI had tried to enter the RF transceiver market several times earlier but never gained market share with conventional radio designs. “DRP” (“Digital Radio Processing”) was announced as TI’s advanced architecture, using the characteristics of deep-submicron CMOS processes. However, with great advances come great risks, and TI was not able to deliver high-yielding product on time, and eventually lost the low-end 2G business at Nokia to Infineon, which used a more conventional architecture in their own single-chip RF/baseband device. Finally, TI’s position in open-market chips and chipsets, predominantly focused on the Chinese market, was significantly impacted by the entrance of MediaTek to the market. MediaTek gained the dominant share of the China 2G market in the space of less than two years. TI chose to participate in development of chipsets for the Chinese TDSCDMA 3G standard by way of a consortium called “Commit”, but that effort fell behind and was ultimately dissolved, leaving TI with a weakened position in the China market. As a result of market share loss in all its major segments, TI tried unsuccessfully in late 2008 to sell the merchant chipset business, and with no buyers, chose in 2009 to wind down the business and redeploy the key personnel to other business units. Most of the top executives were sacked. When contacted for this study, a key TI technologist and manager confirmed TI’s exit from the market. The rapid descent from market leader to market exit in just two years demonstrates how turbulent this market has become. Qualcomm has evolved from a supplier of cdma2000 chipsets used in handsets for the Korean and North American markets to a strong global supplier of 3G chipsets. For this study, it was understood that Vodafone already has excellent dialogue with Qualcomm, and no contact was made. It should be noted that many handset suppliers have found Qualcomm’s chipset pricing much higher, and would change suppliers if suitable alternatives were available. However, Qualcomm has done an excellent job of developing strong new chipsets that meet market needs for features and performance, and generating an ongoing stream of IP. EMP (Ericsson Mobile Platforms) was once a strong supplier, with strong technology originally developed in conjunction with Ericsson (later Sony-Ericsson). In addition to a strong position at Sony-Ericsson, EMP was one of the first to offer open-market 3G chipsets. However, as Sony-Ericsson’s market share has eroded, and 3G chipsets have become available from other suppliers, EMP has found itself in a precarious financial position. ST Microelectronics had a long-standing position at Nokia as the preferred supplier for custom RF transceivers, mostly based on bipolar and BiCMOS technology. However, with the shift at Nokia to open-market solutions, ST has found itself with greatly diminished market share. In 2007, ST acquired the CMOS cellular transceiver product line of U.S.-based Silicon Labs (see later comments on this company). In 2008, ST merged its cellular product lines with EMP in a new company called ST-Ericsson. Industry observers have noted that the new entity has combined three financially-strapped organizations, and while there is a rich portfolio of technology, the management challenges will be to select those technologies and end markets that can be profitable, coordinate developments across multiple geographies and cultures, while reducing the workforce significantly. Infineon was for many years dependent on the Siemens handset division for revenues. The Siemens handset business enjoyed a strong market share in the early days of the 2G cellular market, but eventually exited when the market shifted to more consumer-oriented devices and price competition accelerated. When Siemens exited the business by selling it to BenQ (which later shut down the European operations), Infineon chose to stay in the wireless business with a stronger merchant-market presence, and accelerated its efforts in RF transceivers for the Japanese 3G market. Both efforts were successful in gaining market share and keeping the business alive, including the successful penetration of Nokia for low-end single-chip devices, and the success over multiple generations at Apple in the iPhone product. but profitability has always been elusive. Of all the business units at Infineon, the wireless business is the poorest-performing in terms of profits. Nonetheless, Infineon invested approximately $500M to acquire the former Agere wireless chipset business from LSI Logic in 2007. This gave Infineon an immediate position at Samsung, Agere’s biggest customer, and now the number two handset supplier in the world. Analog Devices had a modest position in 2G devices, including both baseband and RF transceivers, was a major supplier to LG Electronics, and had the leading share of designwins in TD-SCDMA. However, loss of market share in China and lower margins than the rest of the company’s business led to the sale of the business unit in 2008 to MediaTek of Taiwan. It is worth noting that Analog Devices continues to participate in the “nonmodem” segments of handset component market, including leveraging their leadership in MEMS technology. MediaTek began as a design group within Taiwanese foundry UMC and was spun off as an independent entity a few years ago. After some early wins in storage and digital TV devices, that enabled a public stock offering, they turned their attention to the handset IC market, and have been extraordinarily successful in the Chinese market by offering complete solutions with quickly-customized software features. They reportedly now supply over 20% of the chipsets in the market, including the product lines acquired form Analog Devices in 2008. Thus far, their products have all been 2 and 2.5G; they have not yet delivered 3G chips in volume, and recently announced that they will assign 500 engineers to 3G to accelerate their development activities. Agere (previously known as AT&T Microelectronics, and later Lucent) was acquired in 2007 by LSI Logic, which then divested the wireless handset IC product line to Infineon. Agere was weak in RF technology, but had a competitive product line and strong presence at Samsung and in early NEC 3G handsets. Broadcom entered the handset IC market through an acquisition, and has struggled for the past few years to gain market share. They have had a few design wins announced at Nokia and Samsung, but have not yet been able to gain significant market share yet. Silicon Labs entered the cellular handset IC market first with a family of innovative CMOS RF transceivers that quickly gained market share by providing good performance, and offering simple interfaces to Agere’s (and other baseband-only suppliers’) chipsets. Later, Silicon Labs tried to expand their product line to include a complete single-chip integrated RF/baseband product, but quickly learned that their expertise in analog/RF design did not carry over to the software expertise needed to customize the baseband section to add feature sets required by their customers. As prices for RF transceivers fell, Silicon Labs chose to exit the low-margin support-intensive handset IC business and sold the product line to ST Microelectronics. Freescale (formerly Motorola Semiconductor) enjoyed a sole-source supplier position at the Motorola handset division for many years, and tried with little success to expand to a merchant-market position. As the Motorola handset division grew, largely on the success of the RAZR family of products they explored alternative suppliers, choosing Texas Instruments for some products and Qualcomm for others. When Motorola divested Freescale, a short-term supply agreement kept Freescale as the primary supplier for 2G chipsets, but that agreement has long since expired. Most 3G handset developments at Motorola now revolve around using Qualcomm chipsets. The wireless chipset product line was the least profitable of all of Freescale’s business, and consumed massive amounts of R&D funding. Freescale was subsequently purchased by a private-equity group, which has been trying unsuccessfully for several months to sell the wireless product line. Intel attempted to enter the baseband processor market by integrating flash memory with the baseband processor. They acquired DSPC at a cost of $1.6B to gain CDMA technology. DSPC had licensed CDMA technology from Qualcomm and had developed a series of chipsets that began to gain market share, especially in Asia. However, the business faltered post-acquisition, the first few Intel-developed baseband products were unsuccessful, and the product line was ultimately sold to Marvell Semiconductor, which has not yet been able to gain market share. Several smaller baseband players have announced products for one standard or another, but few have delivered in any kind of production volume. This list includes Eonex (bankrupt), Prairiecomm (acquired by Freescale), Sandbridge, Sunplus, Via Telecom (shipping some cdma2000 1XRTT basebands), and T3G (JV company in China formed to develop TD-SCDMA chipsets based on NXP technology). Renesas, Toshiba, and other Japanese suppliers have not been successful in the global market. Of this lengthy list, only a few companies survive as credible baseband/chipset suppliers going forward: Qualcomm Broadcom MediaTek Infineon ST-E Of these, only Qualcomm has delivered baseband processors with EV-DO capability. Any attempt to develop a multi-mode data card or handset that includes EV-DO will have to use a Qualcomm baseband processor, either in conjunction with another vendor’s baseband for the other modes, or integrated as a single-chip Qualcomm multi-mode processor. The price tag for such a device is likely to be extremely high. Two smaller suppliers may become relevant in the coming years. IP developer Interdigital Communications has begun shipments of their “SlimChip” WCDMA baseband processor to a few data card manufacturers. Infineon’s 2/2.5G chipset is used in their reference design to provide multi-mode operation. Icera is delivering product to data card manufacturers in Europe and Asia, but does nto appear to have won any handset design-ins yet. RF Vendors A number of small RF-specialist players have emerged, mostly targeting emerging technologies such as OFDM, diversity, programmable bands/bandwidths and such. Some, such as Sirific, have been acquired (in Sirific’s case, by startup baseband supplier Icera). It is unclear if any of these companies can survive without either a close alliance with a baseband-only supplier or a few niche design wins, leading to a design win at one of the top-tier handset manufacturers. While not the focus of this study, it is worth noting that other component suppliers to the handset market have also been hard-hit by falling prices and slowing demand due to the worldwide economic situation. Flash memory supplier Spansion recently filed for reorganization under Chapter 11. The key messages in all the consolidation in the handset IC market are quite clear: 1. Margins are extremely thin in this business. Handset manufacturers have abandoned high-development-cost proprietary/custom solutions in favor of using open-market chipsets, and playing the remaining suppliers off each other on pricing. With margins so low, chipset suppliers are trying to leverage a smaller number of developments into high-volume production in mainstream segments. Niche products are not considered worth developing. 2. Few RF-only suppliers exist outside the PA space. Most baseband suppliers are trying to integrate the RF transceiver either in-package or on-chip in an effort to gain a higher share of the Bill of Materials in the handset. This has been successful in 2 and 2.5G, and most suppliers want to do the same for 3G and beyond, discouraging the mix-and-match approach of using one supplier’s baseband with a second supplier’s transceiver. 3. Suppliers who fail to achieve significant traction with the top-tier handset suppliers will simply not have sufficient operating-profit dollars to sustain the R&D levels needed to keep up with changes in the market, especially in software. 4. Ironically, handset manufacturers have become increasingly risk-averse, and are unwilling to take a chance on new IC suppliers, either for baseband or RF components.