Nokia Redistributes The Chips (NOK)

By Hans Wagner | August 16, 2007 AAA

When Nokia (NYSE:NOK) makes a move the market must pay attention. It is the largest cell phone company by far - it shipped more than 100 million phones in the last quarter, three-times the total shipped by the three next largest manufactures combined according to International Data Corporation (IDC). Now Nokia is leveling the wireless playing field by changing who supplies its chips.

Balancing The Chipset Environment
Basically, Nokia is employing a multi-sourcing strategy for its chipsets, establishing a "dual supplier" relationship for all key components. Prior to this strategy Nokia depended on its own chips and on chips from Texas Instruments (NYSE:TXN). This strategy helps Nokia to resolve potential supply constraints as well as encourage price competition.

Nokia will retain its modem technology, because management believes this gives the company a key competitive advantage and it holds a strong intellectual property rights position in this technology. This strategy also allows Nokia to focus on software, which is an important differentiator in handset markets.

Also, Nokia will license its technology to other chip manufacturers, similar to Qualcomm's (Nasdaq: QCOM) business model. Each supplier can sell the chipsets to other handset manufacturers, helping to spread the fixed costs for the supplier to other handset manufacturers.

The Potential Winners
In executing this strategy Nokia is making three interesting moves, each aligned with a cell phone program standard.

First, Infineon Technologies (NYSE:IFX) will provide chips for some of Nokia's low-end phones focused on the 2G (second generation) standard. This is a new contract for Infineon.

Second, Broadcom (Nasdaq:BRCM) was awarded a contract to design a new cell phone chip for selected EDGE based phones. EDGE is known as the 2.5-generation standard. Broadcom's sales are not expected to begin until the second half of 2008.

Third and most significant, STMicroelectronics (NYSE:STM) was given a contract to make 3G chipsets for Nokia. Also, STMicro will acquire Nokia's 3G cell phone chip-unit for an undisclosed price. This move essentially establishes STMicro's 3G chip design business.

The Potential Losers
These moves are likely to hurt Texas Instruments the most as they had been the primary supplier of chips to Nokia. However, Texas Instruments will continue to supply chips to Nokia as part of the dual supplier strategy for each generational program. Each supplier will be measured on their performance and price. Nokia did not indicate which supplier will get the bulk of its chip sales, so it is not possible to tell the full impact on Texas Instruments.

Qualcomm will also feel the effects of this move as Nokia is creating a new competitor for 3G chipsets. With the dual supplier strategy, price will become more important; this will hurt Qualcomm's margins. Broadcom's market position is also further strengthened as an important supplier in the handset chipset business.

Broadcom is a relatively new player in the handset business. The contract with Nokia should help it become a much more significant player in the chip market. Recently, Broadcom was successful in developing new chip-set designs. In fact, Broadcom has won an important law suit against Qualcomm over some of these designs, with a judge recently ordering Qualcomm to pay $39.3 million in penalties, double what the jury ordered, plus attorney fees. Broadcom is also asking for an injunction that would bar Qualcomm from future infringement of the patents.

The Bottom Line
For investors interested in the wireless sector, the strategic move by Nokia is an important consideration. It positions the company in a very strong position with its suppliers, giving it access to their competitive design capabilities and lower prices. Nokia should benefit from this move for the next several years. (To learn more, see Competitive Advantage Counts.)

Broadcom, Infineon and STMicroelectronics will each be in a position to expand the size of their market. First, they have the opportunity to sell products and services to Nokia and then with other handset manufacturers. Yes, they will face more price competition, but in return they get to grow their business with the big gorilla in the handset business. Investors should view each of these companies as important new players in the wireless chip-set business.

Texas Instruments and Qualcomm each now have stronger competitors and less share of Nokia's growing business. The full extent is not yet known, however investors should carefully consider their options before making a commitment.

Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!

comments powered by Disqus
Related Analysis
  1. 3 Tech Stocks Immune To A Potential Tech Bubble
    Investing

    3 Tech Stocks Immune To A Potential Tech Bubble

  2. 3 Tech Stocks That Could Survive The Next Tech Bubble Burst
    Investing

    3 Tech Stocks That Could Survive The Next Tech Bubble Burst

  3. 4 Stocks With The Fastest Dividend Growth On The Market
    Investing

    4 Stocks With The Fastest Dividend Growth On The Market

  4. Unconventional Drilling Still Has Room To Boom
    Stock Analysis

    Unconventional Drilling Still Has Room To Boom

  5. Finding An Alternative With Currency ETFs
    Stock Analysis

    Finding An Alternative With Currency ETFs

Trading Center