NOK, NOK, Which Suppliers Are There?

JUNE 10, 2011    the wall street journal  

By ROLFE WINKLER

Tectonic shifts in the mobile handset market raise a serious question for investors: Which suppliers are on the wrong side of fault lines? The issue has developed new urgency since the earthquake that struck Nokia last week.

The Finnish handset maker, which once was undisputed king of the industry, said sales and profits would be "substantially" below previous estimates. According to Gartner, its market share of global handsets fell to 25% in the first quarter from 31% a year before. Its share of high-end smartphones has plummeted even faster.

Aftershocks are already being felt. Texas Instruments, among the biggest suppliers of chips to Nokia, said Wednesday that its revenue and earnings will also miss expectations. It blamed the entire shortfall on its struggling Finnish customer. Analyst Chris Caso of Susquehanna said in a note to clients that TI's commentary about Nokia is "surprisingly bad," even after Nokia's comments last week. TI's stock was little impacted, though, since it is winding down its so-called "cellular baseband" chip business. This makes up the bulk of its sales to Nokia.

But there are other big Nokia suppliers that could feel the heat, too, according to data from IHS iSuppli, including chip makers RF Micro Devices and STMicroelectronics. While both companies also sell chips to Samsung, whose handset business is stronger, they sell far more to Nokia.

Not all of Nokia's chip suppliers are drifting out to sea. The wireless-chip business that Intelbought from Infineon Technologies, for example, may be a Nokia supplier, but it does bigger business with Samsung and Apple.

LCD displays are another market for investors to keep their eye on. Here, they should be most concerned about Taiwan's AU Optronics, says IHS iSuppli analyst Vinita Jakhanwal, because it has tied its fortunes to Nokia more than others.

Nor is Nokia the only handset maker in a difficult competitive position. Research in Motion is also losing share in smartphones. Its key chip supplier is Marvell Technology. Like the other chip companies above, Marvell sells chips into many devices besides mobile phones. Still, its mobile business is largely tied to RIM and, as a result, will continue to face problems, the company has warned.

The mobile-phone market is, of course, still growing fast overall, particularly at the high end. But investors should do their homework to ensure component suppliers aren't tethered too tightly to Nokia or RIM.

Write to Rolfe Winkler at rolfe.winkler@wsj.com