The cell phone sector has become a pillar of the chip industry, but smaller chip makers are buckling under research costs to keep pace with ever more sophisticated phones and mergers are due, chip sector executives say.
Semiconductor companies need to invest between $500 million and $1 billion every year in research and development (R&D) to keep up with the mobile phone sector, said Gilles Delfassy, who leads the wireless chip business at Texas Instruments.
"The R&D budget to be able to take part in this race is horrible. It needs to be between $0.5 billion and $1 billion. Guess how much business you have to do to earn that back?," he said in an interview at the 3GSM wireless trade show here.
The chips inside mobile phones need to be more powerful every year, because of new and faster network technologies and multimedia demands such as video. Last year alone, 810 million mobile phones were sold for a total $115 billion, with the chips inside being the most valuable components alongside the display.
The top two wireless chip suppliers in the market are Texas Instruments and Qualcomm. Both have their headquarters in the United States and in 2005 reported revenues of $13.4 billion and $5.7 billion respectively.
Behind them are the likes of Infineon, Philips, Freescale, Broadcom, Ericsson and others with significantly smaller wireless chip businesses, and Delfassy wonders how they can survive.
"Look at Infineon, Philips and others. I don't see how the maths can work," he said.
Asked how many chip suppliers the wireless industry can support he said: "Clearly less than the number we're seeing today. There needs to be consolidation."
Philips agrees it is too small and that it needs to increase its sales, possibly through a merger or partnership.
"Scale matters, to get the right ratio of R&D over sales," Philips Semiconductors chief Frans van Houten told Reuters at the world's top mobile phone trade show, agreeing with Delfassy's R&D spending estimates for a successful chip company. Van Houten's annual wireless chip revenues are 1.7 billion euros ($2.02 billion), not enough to permit investment of $500 million to $1 billion on R&D.
Philips is two months into a nine-month programme of scanning the market for opportunities, but already believes it has much to gain from a partnership with a rival that is active in wireless, automotive and consumer electronics, like itself.
Less interesting are large volume chip makers active in memory or contract manufacturing, Van Houten said.
"The breadth and depth of R&D and customer reach are more important value drivers than manufacturing," Van Houten said.
Financial analysts have suggested that Infineon and Motorola may be good partners or merger candidates for Philips.
Hermann Eul, the chief of Infineon's communications unit told Reuters: "Clearly, we have some strengths that they (Philips) don't have." He declined further comment.
Delfassy dismissed a tie-up with TI. "I cannot comment on Philips, but I don't think there's a lot of synergy," he said.
Chip sector executives at 3GSM have mentioned Samsung Electronics as a dark horse, because the strength of the world's second biggest chip maker is almost entirely built on commodity memory chips and it wants to broaden its reach.
"The South Koreans would love to get their hands on logic," one executive said, pointing out that Samsung's handset unit, the world's third biggest, also happens to be Philips' most important mobile phone chip customer.
Logic refers to chips that power electronic gadgets. Chip maker Broadcom Chief Executive Scott McGregor said the winners in the wireless chip industry will need to supply complete sets of chips that can power a mobile phone without any hard work required by the phone maker, he said.
"The characteristics of a loser are those suppliers that only provide part of the total chips needed for a cell phone, but also the ones that are slow to market, and the ones that don't win deals from top handset makers," he told Reuters.
"If you don't have a significant design win (for a 3G mobile phone chip) with a top tier player (handset maker) today, you're in trouble." (Additional reporting by Georgina Prodhan)
