Mobile Handset Value Chain

March 2007 - 1Brett Simpson/Richard Kramer

Richard Kramer

Global Handset Outlook: More Than Meets the i


3G 3G EDGE 2GHigh-End Low-End High-End ULC

BOM 141 62 77.5 13Modem (B'band, RF, Codecs, PM) 26 20 13 6Screen, Camera, AP, Memory 70 27 40 2Connectors, Discretes 10 6 6.5 2Mechanics (Battery, Mould., PCBs) 15 5 8 2Software BOM 20 4 10 1

Other Variable Costs 76 44 30 12Packaging, Charger, In-Box Access. 4 2 3 1Manuf., Assembly 6 4 3 1.5IOT, Test, Validation 5 4 3 1Dist., Shipping, Logistics 6 6 6 4Channel Support, Repair, Warranty 10 6 5 2IPR/Royalty Costs 40 20 7 1Product Design, Creation, Custom. 5 2 3 1Total COGS $217 $106 $108 $25

Vendor Gross Margin 35% 25% 35% 25%

Total Wholesale ASP $292 $133 $145 $31

Handset Costs Already Falling

OEM Bottom Up Cost Base, ’06E Chipset roadmaps

the dominant source of GSM handset cost reduction over past 10 yrs.

WCDMA costs are falling faster than GSM. Single-chip 3G in 2-3yrs?

EDGE smartphone vs. low-cost 3G?

IP costs (royalties) and multimedia mean 3G always more expensive.

““Other” costs are not vastly different:Other” costs are not vastly different:Mechanicals, moulding, displays, batteriesMechanicals, moulding, displays, batteriesDistribution, warranty, design, overheadsDistribution, warranty, design, overheads


Radio Ga Ga?

What is the incremental cost of 3G?

$100 WCDMA Device 3G Modem chipsets = $20-25. IPR Royalty (15% ASP) = $15. More testing, approvals Higher fixed cost/unit More components mean more

things go wrong Add display, Multimedia?

$100 EDGE Device EDGE chipsets = c. $10-15 IPR Royalty (7% ASP) = $7 Simpler approvals Lower fixed cost/unit Less component count means

lower return rates Higher volumes

3G LCH economics simply don’t add up 3G LCH economics simply don’t add up yet! yet!

Anyone selling $100 WCDMA devices in ’07 will lose money.Anyone selling $100 WCDMA devices in ’07 will lose money.

EDGE still costs OEMs $20-$40 less, a big difference.EDGE still costs OEMs $20-$40 less, a big difference.


Assessing The Value Chain

SemisSemis EBIT %EBIT %

30%30%

c. 20%c. 20%

LOSSLOSS

LOSSLOSS

OEMsOEMs

16%16%

LOSSLOSS

11%11%

10%10%

6%6%

EBIT %EBIT % OperatorOperatorss

EBIT %EBIT %

18%18%

12%12%

26%26%

9%9%

12%12%

Top 5 =84% share. After Top 5 =84% share. After LG, only RIM & HTC LG, only RIM & HTC make money. make money.

Jury out on Sagem, Jury out on Sagem, Japanese OEMs and Japanese OEMs and Taiwanese ODMs Taiwanese ODMs surviving. See BenQ!surviving. See BenQ!

EBITDA (cash) margins EBITDA (cash) margins are far higher (25%-are far higher (25%-50%+). Operators 50%+). Operators are cash machinesare cash machines

Non-SMS data revs Non-SMS data revs rarely over 7% of rarely over 7% of sales, but rising. sales, but rising.

Need at least $2.5bn Need at least $2.5bn of sales to cover of sales to cover min. R&D min. R&D requirements. requirements.

Only 3 chipmakers Only 3 chipmakers shipped over 100m shipped over 100m units in ’06. M&A units in ’06. M&A has begun.has begun.


3G Semis: Sink or Swim

Site MapContact UsQUALCOMM Worldwide Site MapContact UsQUALCOMM Worldwide

After 15 GSM chipmakers, only 4-5 with proven 3G platforms. The door is closing on 2G platforms

SoftwareStack

Apps.Processor

Multi-ModeCMOS RF

Interop/Approvals

Power Management

OEMs looking for complete offerings. This Places huge R&D burden on chipmakers to

provide platforms and solutions

Problem in 3G is device complexity vs. cost.$500m R&D is not enough!

Only Nokia, SE and Motorola outspends Qualcomm and TI in handset R&D.

Software Apps Suites

Radio Peripherals

Chip Integration

65nm and 45nm

IPR


Supply Chain: Devils in the Detail

Handset OEMs have the most complex supply chains and the highest volumes of any end-market

100bncomponents

per year

100 differentplatforms

2-3 week firm order

backlog

Negative networking capital

6,000productvariants

6m handsetsshipped per week

Operator customisations

Product cycles 6-12 months

Inventory channel checks

High delivery accuracy

High in-house yields, low FFR

OEMs that could not manage this complexity shifted the problem via outsourcing. Has it worked?

Motorola just put supply-chain head in charge of devices. They have new platform strategy, but will struggle until 2H08 at earliest

Outside of Nokia no one makes money in the low-endOutside of Nokia no one makes money in the low-end


IPR: License to Kill

GSM IPR is falling but remains high for new entrants. Cumulative rates of 8-10% are common.

Established players can largely net off exposure via cross licensing agreements.

3G royalties are being set at erroneous levels. Some IPR players are out to solely press patent claims. New entrants (Chinese) are being asked

to pay 15-20% royalties. LEGAL CLAIMS ARE ON THE RISE For new entrants, royalties will cost more than a

modem chipset Top tier OEMs are all in disputes with each other, tied

in knots over definitions of FRAND. Needs reference pt.As handsets embrace cameras, colour screens etc, why should royalties

be based on the full selling price of the handset. The modem value is shrinking, so should royalties.

Lowering Royalty Rates is a must for OEMs to offer ULC WCDMA devices. Who can police this?

Watch what Intel does in Wimax.

Qualcomm hope to collect $7bn in cumulative PROFITS from this over the next 5 yrs. A raft of other IPR companies also hope to

gain.


3G For All?

What is trying to be achieved with 3G4All? Will it really kick-start data adoption?

What new services requires 3G and

not simply EDGE?

ULCH 2G initiatives boosted mobile phone penetration in low-income markets by driving down prices.

Other than Qcom, who else makes

money from this?

Is there evidence 3G is bringing in

incremental sales?

Let’s see initiatives to drive data usage that work; making e-mail ubiquitous on

all phones would be a good start.

MUCH MORE NEEDS TO BE DONE!SonyEricsson

22%

Samsung8% Motorola

6%

LG3%

Nokia35%

Other26%

WCDMA Share 4Q06WCDMA Share 4Q06

Japan!Japan!Huawei & ZTE look to be replacing Sharp, Option, at Vodafone. Do they make money?


Mobile Data: Now or Never

Device with highest dataplan attach rate not even 3G, but EDGE!

Mega-markets not yet mobile: 8bn searches in the US alone last

month, up 30% yoy. 1bn consumer email boxes

globally <1% are mobilised. YouTube claims 2bn viewings/day. Over 1bn IM user, despite no IOT. Google collecting millions of mobile

numbers. What for? Push g-mail?

There are plenty of services There are plenty of services around to drive 3G/data usagearound to drive 3G/data usage

Operators starting to bite the bullet on flat rate dataplans.

But it only has 8m subs!

World’s largest operator China Mobile going EDGE; avoids near-term issues around 3G licensing,.

India 3G 100% spectrum-led!

Non-SMS data revenues rarely Non-SMS data revenues rarely over 5% of sales, but rising. over 5% of sales, but rising.

2007/08 should finally bring “convergence” business models

iPhone + iTunes cuts out operatorWiFi/VOIP Google-fone by ODMs?Nokia acquires YHOO?Microsoft-Motorola JV/partnership?


Key Issues

Consumer smartphones – open OS for all? 3G IPR – snake in the grass. Still big issue. Internet Service Delivery platforms – iTunes? Chipset Battles – many casualties to come Attach rates for new features – GPS, WiFi? OEM strategies vs tactics, pipeline problems What stops operators moving to flat-rate data? USB modems – inflection point?


Q&A

Brett Simpson, [email protected]

Richard Kramer, Managing [email protected]

Mobile Handset Value Chain

Business

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