Perfect storm forces European St-Ericsson chip JV break-up
Earlier, in April 2012, ST-Ericsson announced the transfer of its stand-alone apps processor R&D activity to ST Microelectronics. In addition, ST-Ericsson will put its connectivity business up for sale, but the company hasn’t identified any potential buyer yet for that business. We note that previously, several big names have left the baseband market including Analog Devices, EMP (Ericsson Mobile Platforms), Freescale, Infineon, NXP, and Texas Instruments among others. The baseband market requires intensive R&D for a company to remain competitive.
ST-Ericsson struggled since its formation in February 2009. The JV hasn’t been able to produce a single profitable quarter during its existence so far. Part of the JV’s struggles can be attributed to duplication among legacy products, transition to a new product roadmap and constant management changes. ST-Ericsson was formed by combining the modem assets of ST Microelectronics, EMP, NXP and T3G (TD-SCDMA consortium). Clearly, the JV struggled to integrate multiple companies and execute on its original plan to become a leading mobile chip company both in Europe and globally.
ST-Ericsson failed to establish itself as a true competitor to market leader Qualcomm over the last four years. ST-Ericsson got stuck in continuous product transitions to fill gaps in its product lines while the market moved on rapidly. The company lost momentum in the TD-SCDMA market and later lost significant revenue opportunities at Nokia. In 2012, ST-Ericsson saw some success with its excellent NovaThor U8500 dual-core chip at Sony and Samsung and the company shipped about 25 million NovaThor chips in 2012. However, this late success couldn’t bring ST-Ericsson to profitability, given its growing debt burden and legacy products. Based on our estimates ST-Ericsson ranked number-five in the baseband market in unit terms in 2012.
The latest breakup announcement jeopardises the relatively successful NovaThor “ModAp” product line of ST-Ericsson. Ericsson said it will solely focus on multi-mode 4G LTE slim modems in future, and will pursue licensing opportunities for its NovaThor baseband-integrated apps processor business.
Ericsson said the company wants to be the number three player in the slim modem market, and the company has given a 18-24 month time frame to achieve that. We think this self-imposed target is really aggressive unless the company has un-announced design-wins with Apple and Samsung. Currently, Qualcomm and Intel are the dominant 3G/4G multi-mode baseband players in the market. Ericsson said its LTE-Advanced slim modem M7450 will ramp in 1H 2014 and the successor product M7500 will ramp in 1H 2015.
To achieve the number three position, Ericsson would have to score iPhone or Galaxy S design-wins as the market for slim modems is relatively limited outside of Apple and Samsung. Based on Strategy Analytics estimates, baseband-integrated applications processors dominated the smartphone modem market with 62 percent unit share in Q3 2012. Ericsson could potentially pursue M2M, USB dongles, tablets and other non-handset markets as an opportunity to expand its slim modem business, but this would put it in direct competition with Intel and many small, innovative LTE baseband suppliers such as Sequans, Altair and GCT Semi.
We were somewhat surprised by the lack of buyers for ST-Ericsson’s modem business given ST-Ericsson’s 4G LTE products, which are production-ready. We have been saying for a while in our baseband tracker reports that the JV’s concerning financial performance would eventually make it as a takeover target. We feel that the slim modem business is not a long-term fit for Ericsson. In retrospect, we think that Ericsson and ST Micro’s venture to create a European cellular chip powerhouse was always going to be a challenge, one that ultimately ended in failure, not just because of the difficulty of integrating disparate cultures from different companies, but also because the formation of ST-Ericsson coincided with a drastic decline in the joint-venture’s top customers, Nokia and Sony Ericsson (now Sony).
About the author
Sravan Kumar Kundojjala is Senior Analyst at Strategy Analytics – www.strategyanalytics.com
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