People are switching to cheaper smartphones

Losses by a prominent European chip producer add weight to claims that high-end smartphones are losing appeal


Published October 23, 2013 6:52PM (EDT)

  (Kostenko Maxim/Shutterstock)
(Kostenko Maxim/Shutterstock)

Oct. 24 (Bloomberg) -- STMicroelectronics NV, Europe’s biggest semiconductor maker, said chip demand is taking a hit as smartphone manufacturers trim orders, adding to testimony of weakening appetite for high-end handsets.

Fewer orders and slower demand have dominated third-quarter reports in the chip industry, which caters to phonemakers from Apple Inc. to BlackBerry Ltd. Taiwan Semiconductor Manufacturing Co., the world’s largest contract maker of chips, as well as the likes of Texas Instruments Inc., Qualcomm Inc. and Broadcom Corp. reported earnings or forecasts missing analyst estimates.

STMicroelectronics has tallied more than $1.6 billion in losses over the past eight quarters as it strove to restructure -- then shutter -- its wireless venture with Ericsson AB. This week, the Geneva-based company pushed back when it expects to hit its 10 percent profit-margin target, citing “softness” in demand for high-end smartphones in Asia. The stock slumped 8.9 percent in Paris yesterday to a six-month low.

“It’s not just us, you’ll see it also from our competitors,” Chief Executive Officer Carlo Bozotti said in a conference call. He said the slowing demand is temporary.

Wells Fargo Securities LLC analysts last week cut their 2013 growth forecast for the semiconductor industry to a range of 6 percent to 7 percent, compared with 8 percent to 10 percent previously, saying it’s unlikely global chip sales growth will pick up speed in the fourth quarter.


Losing Appeal


A shift in demand toward lower-priced smartphones will drive handset shipments this year, according to a report this week by researcher Gartner Inc. While fancy devices will grab people’s attention, they won’t necessarily buy them, consumer analyst Carolina Milanesi said. The year-end shopping season will “be all about smaller tablets as even the long-term holiday favorite — the smartphone — loses its appeal,” she said in the statement.

STMicroelectronics reported a net loss of $142 million in the third quarter, equivalent to 16 cents a share, compared with a $478 million loss, or 54 cents, a year earlier. Net revenue fell 7.1 percent to $2.01 billion, falling short of the $2.05 billion average of analysts’ estimates compiled by Bloomberg.

“Volumes are there, but they’re more focused on lower-end phones than higher-end phones,” Bozotti said on the call. “We can’t name any customers, but higher-end smartphones were lower than what we expected.”

STMicroelectronics didn’t break out the impact of slowing demand for high-end smartphones in the report.


‘Wishful Thinking’


The company now forecasts it will reach its operating margin target in mid-2015, about six months later than planned. STMicroelectronics had an operating loss of $66 million in the third quarter and said its operating margin was 2.7 percent, excluding some charges for a $120 million impairment and restructuring.

“The margin target at this stage includes a lot of wishful thinking,” Bernd Laux, an analyst at Kepler Cheuvreux, said in a phone interview. “The company requires a recovery in demand in orders to be able to achieve a 10 percent margin, otherwise it will be impossible.”

Bozotti has yet to prove that STMicroelectronics can reinvent itself by focusing on industries such as cars, game consoles and high-end smartphones. Earlier this year, STMicroelectronics and Ericsson dissolved their partnership, which designed chips for handsets, as customers such as Nokia Oyj grappled with shrinking sales as they lost market share to Apple and Samsung Electronics Co.


Revenue Forecast


About 10 percent of STMicroelectronics sales come from Nokia, BlackBerry and HTC Corp., which “continue to underperform their market,” according to estimates by Pierre Ferragu, an analyst at Sanford C. Bernstein. Bozotti said the company’s exposure to BlackBerry, the Canadian smartphone maker that put itself up for sale in August after years of shrinking market share, is “very limited.”

Since the venture’s split was completed in August, 1,800 employees have joined Stockholm-based Ericsson, which took on the modem business. STMicroelectronics absorbed much of the rest, along with about 1,000 workers. The Global Navigation Satellite System group was sold off.

Taiwan’s TSMC last week deemed the semiconductor-demand decline episodic and unlikely to prove lasting.

“The timing for us to achieve our operating margin target will depend greatly on sales and demand,” Bozotti said. “For now we have a short-term correction.”

--Editors: Heather Smith, Kenneth Wong


To contact the reporters on this story: Marie Mawad in Paris at; Daniele Lepido in Milan at


To contact the editor responsible for this story: Kenneth Wong at





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