Two of Europe’s major chip manufacturers, STMicro and NXP, are to place
their wireless activities into a joint venture, though with ST owning 80% of
the combined company, the deal looks more like a staged acquisition - and one
that represents the latest move by the Swiss-based organization to escape its
legacy in the traditional European silicon industry and become a genuine
challenger to Intel and the other global giants.
STMicro said in statements that the division of the JV would give
“clear ownership structure”. It seems highly likely that, while
former Philips chip unit NXP gains a much needed cash injection in the short
term (it gains $1.55bn from ST as part of the deal), in the medium term it
will exit wireless, leaving ST to buy it out when the financial timing is
right, and to reap the rewards of a likely future flotation. In the official
statements, the two companies said: "The parents have also agreed on a
future exit mechanism for NXP's ongoing 20% stake."
Apart from the complexity of the process, the deal fits into the recent
pattern of decisions by STMicro’s management – streamlining
operations, investing in moving up the food chain in wireless, selling off
non-core activities.
The hand of Nokia can be seen behind the latest development, unsurprisingly
given the rising level of influence that the Finnish giant’s towering
market share and logistical excellence gives it over the structure of the
handset chip market. To increase its own cost efficiency and purchasing
power, and to strengthen its hand in its ongoing battles with Qualcomm, Nokia
last year broadened its supplier list to create a second source to Texas
Instruments in each handset category. While Broadcom and Infineon were
anointed for EDGE and GSM, STMicro gained the real prize of preferred
supplier status and a joint development deal with Nokia for UMTS/HSPA, the
key growth market. This was a massive boost to ST’s credibility against
TI and Qualcomm in the 3G baseband sector, and saw Nokia selecting the Swiss
firm as its chosen counterweight to the US giants. This decision by Nokia is
further vindicated by the new JV, which should make ST a more powerful
partner, and removes a competitor (one not included on the Nokia guest list)
from an increasingly cut throat market. Nokia was swift to endorse the new
venture, commenting that the wireless supply chain is in need of
consolidation – a process for which it is proving the most powerful
catalyst.
Consolidation is particularly important in Europe, where the three large
chipmakers, STMicro, NXP and Germany’s Infineon, struggle to compete
against leaner and more focused competitors. All are relics of previously
state-owned conglomerates, with the cost base and legacy of lumbering
processes that entails, and the past couple of years have seen many proposals
and rumored talks about ways in which they could combine their efforts
– including a full merger into a pan-European super-chipmaker, as
championed by former STMicro senior executive Joseph Borel (see Wireless
Watch March 18 2008). Such a grouping would achieve major economies of scale
and efficiencies, though would also be a political and management nightmare
to implement effectively. In a market where scale is all for the
manufacturers; where many manufacturers are increasingly outsourcing to
foundries and seeing the advantages of control over processes fading; and
where the future seems to belong to agile fabless innovators, the argument
for consolidation of Europe’s big three was obvious. They might have to
embark on the slow process of streamlining their diverse activities and
outsourcing much of their chipmaking, but in the meantime, at least they
could pool resources and achieve massive scale. The three together would
almost equal Intel’s revenues, and would just pip the combined chip
revenues of Samsung and TI ($31.3bn for Intel versus $26.5bn for the
Euro-trio in 2006).
But in the end, the STMicro approach is more modern and less likely to be
scuppered by over-ambition, European bureaucracy and labor laws, and cultural
mismatch – all of which could have distracted the companies for long
enough to allow Intel and the others to render European chip manufacturing
the stuff of nostalgia. Rather than consolidation, the future for the
European integrated manufacturers is all about break-up, and ST has been the
quickest to recognize it, putting its flash memory operations into the
Numonyx spin-off, and working increasingly closely with Freescale in the
automotive market, to the extent that another JV might be on the horizon. CEO
Carlo Bozotti said in response to press questions about the new venture:
"It is all about portfolio management. Numonyx is an independent
company. In that case we wanted to deconsolidate the flash memory business
and create a global leader. In this case we will create a global leader but
we WILL consolidate the dimension of scale in ST."
In the short term, how will the JV fare while it remains under dual
ownership? It will gain economies of scale, though any reductions in
headcount or facilities will be hampered by legislation, especially in
NXP’s home country of the The Netherlands and in STMicro’s French
bases. The combined unit will have all the major handset makers as customers,
with ST’s Nokia deal the strategic flagship but certainly not the key
revenue generator – it is unlikely to create real revenue until next
year, and last year’s pact did not include any minimum revenue
guarantees, so much will depend on the success of the R&D project. In
2007 the two wireless businesses generated $3bn in revenue, and so the JV
comes within reach of the big two US players, TI and Qualcomm, in wireless.
But this is still distant reach – in 2007 TI made revenues of $13.83bn,
all but $500m from chips, with 53% gross margin and 25% operating margin,
both beyond the dreams of European counterparts (STMicro as a whole has gross
margins around 36% and in 2007 was lossmaking, though it made $698m profit
before restructuring charges. NXP’s margin is around 30%. The wireless
businesses of STMicro and NXP each made operating profit around $100m last
year.) TI’s largest businesses, analog and DSPs, made over $5bn each,
with wireless the major contributor and 80% of revenue coming from outside
the US. Net income was $2.65bn.
If those figures look daunting to the new venture, Qualcomm’s are
potentially even more scary, given that they have been achieved against a
background of challenges, from market squeeze (in CDMA) to IPR battles and
exclusion from the business of the largest handset maker (by contrast, Nokia
accounted for 19% of TI’s revenue last year, and TI, despite strong
cashflow and generally sound economic footing, is only just entering its own
period of challenge, notably the threat to its critical smartphone market
from the potential recession, Nokia’s opening up of its supply chain,
and some stumbles in its 3G roll-out). Despite facing a tougher climate than
its rival last year, Qualcomm reported 2007 revenue of $8.87bn, a big leap
from $7.5bn a year earlier, with net income of $3.3bn and gross margin over
70%.
Although the new JV will face many of the same challenges as its larger
rivals in terms of possible consumer spending squeeze, it will certainly be
more focused and agile in raising its assault on the two-towered US fortress
represented by those TI and Qualcomm statistics. The new JV will combine
design, sales and marketing, and back end manufacturing assets, and is able
to sort out its staffing and manufacturing requirements from a clean slate,
as well as being established to be debt-free, a major contrast to most
debt-ridden European technology big names. So it will have a staff of 9,000,
taken virtually equally from each side. It will be fabless, though less
flexible than this might imply as it is committed to using its parents’
foundries for wafer fabrication services – presumably at a preferential
rate, though denying it the ability to shop around for the latest process
innovations. It will operate its own assembly and test facilities in the
Philippines and Malaysia. The venture will target the UMTS/HSPA, TD-SCDMA,
Wi-Fi, Bluetooth, GPS, FM Radio, USB and UltraWideBand technologies, said the
statement – no mention as yet of LTE or WiMAX. It will also include the
Silicon Laboratories wireless and GloNav GPS operations recently acquired by
NXP. The company will be incorporated in the Netherlands and headquartered in
Switzerland and will be run by a board of directors on which the
parents’ respective CEOs, Carlo Bozotti and Frans van Houten, will
participate. All this should generate about $250m in annual cost synergies by
2011.
Fabless chip revenues:
As the manufacturers realign, fabless chip companies saw their revenues leap
by 7% in 2007, year-on-year, according to new figures released by the Global
Semiconductor Alliance (GSA). The total in 2007 was $53bn, or 19.8% of total
worldwide semiconductor revenues of $267.5bn.
The top 20 semiconductor companies by 2007 revenue accounted for $158.4bn, or
58% of the overall total.
The top 15 companies (not including foundries) were as follows:
CourtesyRethink
Research, publisher of Wireless Watch, a weekly
assessment of the impact of events that have happened this week in the world
of wireless and mobile technology.
Wireless Watch: STMicro-NXP wireless venture signifies handset supply chain realignment
