Five Dynamics Affecting the Wireless Manufacturing Market

In wireless manufacturing, there are five dynamics affecting the overall market:

First, a lot of the growth is in what’s called the GSM network, which encompasses approximately half of the world’s cell phones. Cingular uses GSM in the United States, China and India have deployed GSM aggressively, and GSM dominates Europe. GSM is a fairly mature network, so the technologies are well established and a lot of the incremental cell phone volume is at the low end. A large portion of the mobile subscriber growth is in five developing economies: Brazil, India, China, Russia and Southeast Asia.

The second dynamic is that some big players, including Motorola, lowered their prices last summer in a dramatic move to take market share. The net result is that the only other company that could compete with them – while still making money – was Nokia. That pushed the two Korean companies, Lucky Goldstar and Samsung, into short-term distress as they had to respond to lower prices. And it pushed many of the second- and third-tier Chinese cell phone companies into real distress. In fact, quite a few of those are either exiting the market or seriously re-evaluating what they’re doing.

The third dynamic is a seasonal effect. After the Christmas holidays, there’s a pause in demand.

The fourth dynamic is the overall growth rates. Manufacturing capacity, which drives test equipment purchases, is added for incremental volumes. The past several years have seen around 15 percent annual growth in cell phone production. The estimate for 2007 is less than 10 percent, so the manufacturing companies are adding less capacity than in previous years.

The fifth dynamic is that in this kind of hyper-competitive market, innovation is happening throughout the supply chain. Many manufacturing companies – whether OEM (original equipment manufacturers, such as Motorola) or CM (contract manufacturers, such as Foxconn, our largest customer in China) – are focusing on lowering the cost of test. We are working with them on this to help their competitiveness, but it clearly reduces our ASPs [average sales prices]. The cell phone testing market is now a duopoly, with Agilent and Rohde & Schwarz battling it out. Our long-term strategy is to enable a breakthrough in cost of test through new technology approaches.

So the wireless manufacturing market is being negatively affected by the deployment of the GSM network; the share plays by big companies like Motorola; the post-holiday effect; a slowdown in the short-term growth rate; and the lowering of cost of test.