Tech Hardware Supply Chain - Gazhoo

Bhavin Shah
(852) 2800-8538
bhavin.a.shah@jpmorgan.com
80
Asia Pacific Equity Research
20 April 2009
The low and ultra-low cost segment
The low-cost handset market has been the fastest growing in the past two years. The
low affordability of the emerging markets coupled with the high economic growth
seen in these markets has made this a major growth segment.
The massive growth in this market has made Nokia and Samsung, which are exposed
to this market, focus on new sourcing strategies for this market given that cost is a
major consideration and not leading edge communication protocol capabilities
implemented in the smallest silicon area.
Cost reduction in the handset market
Handset cost reduction is achieved through: (1) higher level of integration; (2) IC die
size shrink; and (3) large scale and outsourcing.
• Higher level of integration in IC and other components: GSM handset, which
required six chips in the baseband in 1999, now can be implemented with three
chips (Motofone and the Nokia 1110). TI’s Locosto and Infineon’s E-Gold are
moving towards the single-chip solution. In acoustic components, multifunctional
devices (which integrate the speaker, receiver, and even the vibrator)
are increasingly being adopted.
• IC die size shrink: Due to the Moore’s Law, Communications IC die size is
shrinking fast (45nm process), leading to lower cost and power consumption.
• Large scale and outsourcing: Nokia has aggressively adopted Asia-based
suppliers to take advantage of the lower cost structure, for instance, utilizing
BYD/FIH/Silitech for mechanical components, AAC for acoustic, and Largan
for camera lens.
Handset vendor market position and outsourcing strategy within ULC
Scale is critical in the ULC segment, and thus vendors such as LG and Sony-Ericsson
have not been able to penetrate this segment.
Nokia has been the dominant player in ULC since 2006, leveraging its scale
advantage. Its 1-series phones are well received among consumers for reliability and
availability. BYD is the main EMS in this segment.
Motorola engaged in a ULC market share war with Nokia in 2006 by using ODMs
(Compal Comm). Motofone was an innovative product, yet it was not successful due
to poor reception to E-Paper display. As Motorola fell fast in 2007 and 2008, it no
longer has the necessary scale to compete effectively in this segment.
Samsung is growing fast in this segment; it gained market share in 2008 with
appealing phone style and willingness to customize for operators. We expect
Samsung’s upward trend to continue in 2009. Samsung now sources mechanical
components from FIH and BYD, but has kept assembly in-house.
Besides the top-tier vendors, ZTE and Huawei also have ODMed mobile phones for
operators, and many such models are in the ULC segment.
Designer phones
Designer phones are a new niche segment in the handset space, where “IT meets
fashion”. Several leading fashion houses are teaming up with handset OEMs to