Samsung taps Infineon as second source for UMTS chipsets

Last year, Nokia sparked the biggest realignment of the handset chipset market for years when it diversified its supply chain to create more competition to its silicon alter ego, Texas Instruments.

Now Samsung has made a similar move, just as the world’s second largest handset maker faces a rejuvenated challenge from Nokia in its home market, one that could drive Korean phonemakers to slash their prices and become more cost-sensitive. Samsung has signed up Infineon as a second source, alongside Qualcomm, for its UMTS models, claiming the German supplier offers 20 per cent lower prices, and putting new pressure on its primary chip partner.

Challenging Qualcomm

Qualcomm has won significant business for its UMTS chipsets by being early to market with almost every technological milestone, and looks set to repeat the cycle in HSPA. However, as it adjusts to the eventual decline of the CDMA business, where it has a near monopoly, it also has to adapt to working on a more level playing field with other chipmakers.

While it has done well in terms of staying ahead of the technology curve, it has greater challenges when markets mature and the playing field shifts to pricing rather than features. This is where Infineon has been carving out its own competitive edge, focusing on price sensitive markets and customers as it fights to preserve a major position in the mobile chip market.

Infineon was one of the companies chosen by Nokia to compete with TI, and its low cost credentials were highlighted because it was picked as a second source for GSM, while Broadcom got the EDGE slot and STMicro the coveted high end 3G/HSPA deal and R&D agreement.

Now the German firm has snapped up Samsung, which has been heavily dependent on Qualcomm but now wishes to reduce that reliance in the interest of more effective price negotiation. This strategy carries clear risk though – UMTS is still relatively cutting edge and handsets are differentiated by performance, particularly in areas like multimedia applications support and integration with other radios (aspects in which Qualcomm excels), as well as cost. It is not clear that Infineon can match Qualcomm and TI in these respects, though it may be that Samsung aims to use its processors mainly for the burgeoning breed of low cost 3G devices for emerging markets – a sector that has been driven by LG, also working with Qualcomm.

Although phonemakers, with the obvious exception of Nokia, find it hard to circumvent Qualcomm, they undoubtedly want to limit the chip designer’s power. The pressure on the US giant’s IPR model, and on the CDMA market where it has virtually no rivals, will both make it more vulnerable to competition in the coming years, though so far these threats have only galvanized the company into renewed efforts to establish a market lead in HSPA and, as it evolves, LTE (where Qualcomm aims to supply silicon across the whole equipment chain, not just phones). But in the shorter term, vendors want a better pricing deal from Qualcomm. Nokia will never buy from the San Diego company until they sort out their licensing differences (and perhaps not even then), but nonetheless its diversification of its supply chain was clearly designed not only to increase competition for TI, but to strengthen other potential challengers to Qualcomm, notably Broadcom.

Motorola, before its handset business went into freefall, put a deal with Qualcomm for UMTS chips onto abeyance and turned to TI, only to make friends with the CDMA company again, reportedly after some serious pricing adjustments.