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Chip makers drive race to $20 cellphones by 2007

By Lucas van Grinsven
European Technology Correspondent
Tue Dec 6,11:36 AM ET

AMSTERDAM (Reuters) - Prices of mobile phones will drop sharply over coming years with $20 handsets available to consumers as early as 2007, chip companies said on Tuesday.


Mobile phones may even be produced as cheaply as $10, but the major phone vendors seem reluctant to do so because they will have to use cheap parts and the lower quality may hurt their brand image, said Horst Pratsch, vice president for Entry Platforms at German chip maker Infineon (IFXGn.DE).

"Low quality is not an option, but accepting fewer features is," he said in a telephone interview on the fringes of an ultra low-cost handset conference in Brussels.

Low-cost handsets have been a major driver of the cell phone market in 2005, with vendors such as Motorola (NYSE:MOT - news) selling models for less than $50 to consumers in emerging markets who could previously not afford to buy a phone.

Infineon, and rivals such as Philips (PHG.AS) from the Netherlands, are striving to integrate the key functions of a mobile phone into a single chip of around $5.

This will help phone producers assemble a complete phone with far fewer components than the 150 used now, Pratsch said.

"In 2007, we can do 50 components," he said, unveiling the next step of Infineon's roadmap to cheaper phones.

The company said in July that by early 2006 it would start selling a low-cost phone platform with less than 100 components for handsets that cost less than $20 to produce, versus $35 now.

PRICES AROUND $15 IN 2007

With the component count halving in the next year, the production price will come down sharply.

"In 2007 we are, for sure, significantly below $20," Pratsch said.

With production prices at that level, the wholesale price of a handset, which includes distribution and other costs, will be at or below $20, he estimates. Most consumers get their phones directly from their wireless operator, and the retail price is based on the wholesale cost to mobile carriers.

Philips estimates it will be 2008 when it can supply phone vendors with a design which enables handset production below

$15.

Chip makers have become more important than ever to phone vendors, as they now supply them with complete reference designs as well as core software for basic phone models.

Semiconductor makers squeeze costs out of their designs by integrating all key functions on a single chip, but also by reorganizing the remaining components more cleverly on a smaller surface which also speeds up test procedures.

Analysts estimate some 810 million mobile phones will be sold to consumers this year, up from around 680 million last year. Close to 2 billion people now carry one.

Even cheaper handsets will open up new markets.

"There are around 3.5 billion people living in areas with mobile phone coverage who cannot afford their own handset," said Ameet Shah, strategy chief for emerging markets handsets at the GSM Association which represents the world's mobile carriers.

Phone vendors can drive down costs by using weaker batteries, lower-grade plastics and stripped-down software, similar to cordless phones for the home. But the big vendors are hesitant to do so, because they fear that unhappy customers will switch brands when replace their first phone, Pratsch said.