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!

Related Articles
  1. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  2. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  3. Investing Basics

    What Does Plain Vanilla Mean?

    Plain vanilla is a term used in investing to describe the most basic types of financial instruments.
  4. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  5. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  6. Options & Futures

    Pick 401(k) Assets Like A Pro

    Professionals choose the options available to you in your plan, making your decisions easier.
  7. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  8. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  9. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  10. Stock Analysis

    Top 3 Stocks for the Coming Holiday Season

    If you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
  1. Can mutual funds invest in options and futures?

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!