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Broadcom CEO Sees Consolidation Ahead In Mobile-Chip Sector

05/08/2012 | 05:35pm US/Eastern
   By Shara Tibken 

Consolidation is ahead for the wireless semiconductor sector, according to the chief executive of chip maker Broadcom Corp. (>> Broadcom Corporation), with many companies likely to face either a financial or technological squeeze.

Scott McGregor, speaking at an investor conference, said the high cost and difficulty of developing new processors for smartphones and tablet computers will cause many chip makers to exit the market.

He said companies fall into one of four categories--those that have the money and technology to create products, those that have the technical capability but don't have the cash, those that have a lot of money but not a lot of technology, and startups or companies without much scale. McGregor said he believes there are only about a handful of companies that can offer a complete product to customers.

"Some people are going to give up, some people will sell out and some people will continue to push forward," he said.

Broadcom--which makes chips for mobile devices, networking and other products--has benefited from its exposure to iPhone maker Apple Inc. (>> Apple Inc.) and competing smartphone maker Samsung Electronics Co. (SSNHY, 005930.SE). Broadcom's overall results have been hurt in recent periods by weakness at Nokia Corp. (NOK, NOK1V.HE) and other major handset customers, but it eked out a better-than-expected performance in the most recent quarter.

Meanwhile, McGregor said 28 nanometers, or billionths of a meter, is the first semiconductor-production recipe that doesn't have apparent cost advantages over the prior chip generation manufactured at 40 nanometers.

Typically, moving to more-advanced chips lowers their price and power consumption while also boosting their performance. The processors start out more expensive to make when production first begins, but they eventually become less expensive than the older chips.

However, McGregor said 28-nanometer chips never become cheaper than those at 40 nanometers, based on current projections. The same situation will occur with 20 nanometers, he said.

"What we're seeing in the industry is the cost of next-generation nodes rising exponentially," McGregor said. "What this means is, unless you need the advanced process because of performance reasons or die-size reasons, you're not going to get a cost benefit from converting to the new node."

McGregor said this will change the dynamics in the semiconductor industry, with companies converting to advanced chips more slowly and contract manufacturers updating their factories less often. In addition, customers won't see chip pricing decline as quickly as in the past.

The comments came as semiconductor makers struggle with 28-nanometer production. Many companies that design processors for cellphones rely heavily on the manufacturing services of Taiwan Semiconductor Manufacturing Co. (TSM). TSMC has had difficulties with 28-nanometer production, with companies such as Qualcomm Inc. (QCOM) and Nvidia Corp. (>> NVIDIA Corporation) saying they can't get enough supply to meet demand.

Broadcom hasn't yet made the transition to 28-nanometers chips, though it plans to ramp up production of the advanced processors later this year and early next year.

"Our view is we need to choose the right time to enter a new process generation," McGregor said. "We did not see the need to be first in 28 nanometers."

Broadcom shares, up 16% in 2012 through Tuesday's close, ended the regular trading session down 1.2% to $33.95.

-By Shara Tibken, Dow Jones Newswires; 212-416-2189; shara.tibken@dowjones.com

Stocks mentioned in the article : Broadcom Corporation, Apple Inc., NVIDIA Corporation
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