Transcript Macroeconomic Analysis

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Subsidized Markets Always Fail
Macroeconomic Analysis of Today’s
Wireless Industry—the Case for
Disruption
L. Pierre de Rochemont
GM/Founder
Originally presented to Motorola in December 2006 & June 2007
Presented at NanoTx’07 in Dallas, October 2007
Tellabs has released a similar study that shows U.S. telecom service providers will become non-profitable in 2013
(Source: http://www.fiercewireless.com/story/tellabs-study-n-american-operators-may-be-unprofitable-2013/2011-02-02?utm_medium=nl&utm_source=internal)
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State of the Wireless Industry
“. . . a strategic inflection point is a time in the life
of a business when its fundamentals are about to
change. That change can mean an opportunity to
rise to new heights. But it may just as likely signal
the beginning of the end.”
Andrew S. Grove
Former Chairman & CEO, Intel Corp.
in “Only the Paranoid Survive”
The Inflection Curve
Business goes on to
new heights
Business declines
What is needed now in the wireless industry?
a reduced cost mobile terminal that allows wireless operators
to transition their business to the sale of enhanced services and
content as their subscriber base saturates.
MAJOR SHIFT
Unaffordable Mobile Terminal now Dominates Carriers’ “CapEx”
Current Drivers in Handset Market
$44
1,400
$180
Unit chipset BOM expected to
increase by ~12%
$175
1,200
$170
$42
1,000
$165
800
$160
$40
$155
600
$150
Handset price will drop
>14% from peak average
value
400
$38
$145
200
$140
$135
0
$36
2005
2006
2007
2008
2009
Average Handset Price (across all interfaces) in US $
Unit Chipset BOM (averaged across all air interfaces)
in US $
Handset Units Sold (Millions)
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2010
Handset volumes skyrocketed causing the product to be commoditized sooner than anticipated
Prices are dropping faster than anticipated
Chipset BOMs will continue to increase as devices become more sophisticated
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A Pain That Needs Attention
“Too many” discrete components
Semiconductor chips
Passives
Passives
Section of a populated cell phone circuit board
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Need Economy of Scale and Scope
Thru a UNIVERSAL Radio
Radio Systems
User Interface
Cell Phone Engine
Electro-mechanical systems
• OEMs deploy identical subsystems across all handset models
EXCEPT the radio
 Antenna’s tuning is sensitive to component layouts
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Real Cost of Smart Phone Assembly
Nokia N-95 Handset
Component
Count
Assembly Time
Discretes
(mostly passives)
546
40 sec†
IC’s
74
5† – 33‡ sec
Source (part count): Portelligent, Austin, TX
Considerable “cost-of-ownership” to “handling” large number of discretes
†Estimated
using 0.072 sec-chip-1 chip-shooter (50,000 parts/hour)
‡Estimated
using 0.45 sec-chip-1 for fine-pitch assembly (8,000 parts/hour)
Source: major EMS company
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Real Cost of Base Station Assembly
Digital Radio Board
Component
Count
Discrete
1,370
(mostly passives)
IC
77
(incl. approx. 30 voltage regulators)
Assembly time
1 min 29sec*
35sec**
PA’s and LNA’s on separate boards, SAW and other filters (30), VCOs, transformers, Xtals,
couplers are not included above.
Considerable “cost-of-ownership” to “handling” large number of discretes
*Estimated using 0.072 sec-chip-1 chip-shooter (50,000 parts/hour)
**Estimated using 0.45 sec-chip-1 for fine-pitch assembly (8,000 parts/hour)
Source: major EMS company
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Qualification Steps
Cost Inefficiencies of Today’s Wireless
Supply Chain
Historical Model
Acquisition chain with 7 mark-up layers
Mark-up Levels
Consumer (Level 0)
Service Provider (Level 1)
System Integrator (Level 2)
- Cell Phones/PDA’s
Poor visibility
“Down” the food
chain
- Satellites/Base Stations
Final Assembly (Level 3)
- EMS House
Subsystem Manufacturer (Level 4)
- Memory / Radio / Processor Modules
PCB Assembly and Packaging (Level 5)
Component Devices (Level 6)
- Printed Circuit Boards
- Semiconductor Die
- Substrates (Semiconductor Packaging)
- Discrete Passives
Raw Materials (Level 7)
- Ceramic Powders
- Organic Polymers
- Semiconductor Materials
Suppliers market
to next level “up”
the food chain
It’s the Supply Chain Stupid!!
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Nokia aggressively attacked supply chain costs, sharply reducing the
number of its suppliers . . .
Mobile Phone Divisions
Annual Data
2005
2006
Quarterly Data
%YoY
2005 Q4
2006 Q4
%YoY
Nokia
Units Sold (million)
Market Share
Average Selling Price
Operating Earnings (millions)
$
$
264.9
31%
129
4,667
$
$
146.2
21%
131
2,193
$
$
347.5
35%
116
5,330
+31.2
+12.9
-10.1
+14.2
$
$
217.4
22%
120
2,641
+48.7
+4.8
-8.4
+20.4
83.7
31%
$
1,378
105.5
37%
$
1,634
+26.1
+19.4
+18.6
Motorola
Units Sold (million)
Market Share
Average Selling Price
Operating Earnings (millions)
44.7
22%
$
663
$
65.7
23%
+47.0
+4.6
341
-48.6
. . . Motorola was slower to react to these costs
It’s the Supply Chain Stupid!!
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Nokia aggressively attacked supply chain costs, sharply reducing the
number of its suppliers . . .
Mobile Phone Divisions
Annual Data
2005
2006
2007 Quarterly Data
%YoY
Q1
Q2
Nokia
Units Sold (million)
Market Share
Average Selling Price
Operating Earnings (millions)
$
$
264.9
31%
129
4,667
$
$
146.2
21%
131
2,193
$
$
347.5
35%
116
5,330
+31.2
+12.9
-10.1
+14.2
Net Sales (millions)
Operating Earnings (millions)
Earnings as % of net sales
$
$
7,313
1,226
16.8%
$
$
7,994
1,688
21.1%
$
$
217.4
22%
120
2,641
+48.7
+4.8
-8.4
+20.4
Net Sales (millions)
Operating Earnings (millions)
Earnings as % of net sales
$
$
5,408
(233)
-4.3%
$
$
4,273
(332)
-7.8%
Motorola
Units Sold (million)
Market Share
Average Selling Price
Operating Earnings (millions)
. . . Motorola was slower to react to these costs
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The Hidden Cost of Supply Chain Inefficiency
2005 Handset Nokia 2005
Market
Cost Structure
Global Revenues
(billions)
Cost of Goods Sold (COGS)
Operating Cost
Profit Margin
Total Units (millions)
Average Selling Price
Estimated Values Industrywide (millions)
LOWER
$126
66%
20%
14%
$ 78,879
$ 78,879
($ 31,460)
816.6
$159
Semiconductor Chipset
ASP/unit†
$ 38.53
($ 31,460)
Non-semiconductor
component cost/unit‡
$ 37
$ 19
($ 30,214)
Economic value lost due to assembly and
multiple supply chain inefficiencies
† Averaged
‡
UPPER
$ 17,205
“Inefficiency” Cost
($ 15,515)
$/unit Value
% unit price
$ 31,904
$20.67
$39.07
14%
25%
over all air-interfaces and all semiconductor chipset types (processors, memory, RF, camera, etc.)
JP Morgan reports $37 per unit for 3G models and $19 per unit for 2G models
Strain of Economic Cross Currents
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+20%
1,400
Millions of Handset Units
+15%
1,000
+10%
800
+5%
600
Assumes Inefficiency Costs are fixed at 14% of
unit price
0%
400
Assumes Inefficiency Costs remain fixed at $20.67
per unit
200
-5%
Industry-wide Handset OEM Operating Margin
1,200
-10%
0
2005
2006
2007
2008
Forecast Industry-wide Operating Margin as volumes
Handset Volumes   Price =
Projected Revenues  20% =
Handset Volume  (Unit Inefficiency Cost + BOM)=
Operating Margin =
2009
2010
 and chipset BOM
 while prices 
Revenues
(Operating Costs)
(COGS)
Profit/(Loss)  Revenues
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Transformational Result of a Fully Integrated
Passive Solution
“Design Model” allows a consumer demand driven supply chain that will
effectively lower costs by JIT, Lean, 6 Sigma methodologies
Design Model
Qualification Steps
Mark-up Levels
Minimizes acquisition and mark-up levels while
maximizing supply chain efficiencies
Consumer (Level 0)
Service Provider (Level 1)
System Integration (Level 2)
-Cell Phones/PDA’s
-Satellites/Base Stations
Design (Level 3a)
-Semiconductor Die
-Integrated PCB’s
Integrated Component (Level 3b)
Data Interchange
-Semiconductor Die
-Integrated PCB’s
Raw Materials (Level 4)
Backbone of Design Model is a data interchange system to allow customers to design through
all levels of the supply chain and for their design to be carried forward through fabrication.
Enabled by nano-engineered ceramics!!
Industry Impact
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Potential to cut passive component BOM AND “top-to-bottom” supply chain management
and assembly costs by 35%-50%
Assumes inefficiency cost (14% of handset price) is cut by 50%
Assumes inefficiency costs are fixed at 14% of
unit price
+15%
+15%
+10%
+5%
+20%
+10%
Projection of our economic
value to handset industry
+5%
Assume inefficiency cost (fixed at $20.67 per
unit) is cut by 35%
0%
0%
-5%
-5%
Assumes Inefficiency Costs stay fixed at $20.67
per unit
-10%
-10%
2005
2006
2007
2008
2009
2010
Assuming adoption rates of 15%, 50%, 100% of total market volume phased in
over 3 years starting in 2008
Industry-wide Handset OEM Operating Margin
Industry-wide Handset OEM Operating Margin
+20%
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Conditions Needed for Disruption
Microelectronics industry has to embrace nano-engineered electronics
NOW!!—in freer markets it would have been done10-15 years ago!
The major Cost Benefit is not always measured by direct accounting
methods!
Having a disruptive technology is a necessary, but not a sufficient
condition for market disruption . . . a busted market and the exhaustion
of overbearing government influence is necessary for market entry!