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Opinion: Proposed JV structure not sustainable

Posted: 26 Aug 2008     Print Version  Bookmark and Share

Keywords:joint venture  mobile platform  ST-NXP Wireless  wireless IC market 

Carlo Bozotti, president and CEO, at STMicroelectronics NV and Carl-Henric Svanberg, his counterpart at Ericsson LM, have accomplished the easier task of forming a joint venture semiconductor and mobile platform business.

Now comes the formidable task of cobbling into one seamless whole businesses that were until a few months ago separate entities operating out of three different countries with varied information technology systems and a host of other distinguishing characteristics.

More importantly, though, ST and Ericsson now must decide the real future of the new business and their continued role in its management.

One key question they must answer is whether the new company should continue as a subsidiary of the two bigger entities—with both mutual and conflicting interests—or secure its future and the ability to determine the best growth and profit direction through complete independence.

Without a doubt, the best course of action for these partners is to dump the current 50-50 per cent ownership structure and truly set the company free by launching it as an independent enterprise.

This could come either through a distribution of their ownership stakes in the company to the shareholders of both ST and Ericsson or via an initial public offering.

So far, it doesn't appear that the partners are thinking of setting the new company completely free.

The proposed ownership structure under which ST and Ericsson would each retain 50 per cent of the JV is not in the best interest of the new company. Svanberg, Ericsson's president and CEO, says the 50-50 structure offers a sense of "balance" to the JV partners.

"This is not about someone being bigger," Svanberg said. "This is about mutual respect."

That's a mistaken goal for a company of this size to pursue and it further demonstrates the unwillingness of some of Europe's high-tech companies to cede control of parts of their businesses.

Proposed JV structure not sustainable

The new JV, which pools together ST's wireless IC business with Ericsson's mobile platform operation, will employ about 8,000 people and have estimated annual revenue of Rs.15,857.63 crore ($3.7 billion), enough to rank it among the industry's leading players.

Before closing the deal, ST expects to purchase the 20 per cent of ST-NXP Wireless that it doesn't already own, according to Bozotti, who points out that the new JV would have "a leading position in wireless and multimedia."

A company of that size with offices in Sweden, the United Kingdom, Germany and a huge share of the wireless IC market shouldn't be a subsidiary of any other enterprise.

By unshackling the new wireless IC and mobile platform company from both Ericsson and ST, the parents would be giving it the opportunity to enter new markets and attract customers that currently compete with the parents.

A different ownership structure would only make it difficult if not impossible for the company to achieve its full potential.

The proposed ownership structure is a reflection of the owners' continuing unwillingness to step outside their comfort zones, a style of operation that isn't any longer efficient in today's environment where competition has become global and partnering has to move beyond the immediate shores.

Being tethered to ST and Ericsson might solve the immediate challenges facing the two companies but in the longer run it does not position the company to move beyond its current customer base to attract new audiences in the Far East.

The new ST-NXP-Ericsson company would be able to count major mobile handset manufacturers like LG, Nokia, Samsung, Sony-Ericsson and Sharp amongst its customers but it also needs to engage with fast-growing companies in the Greater China region.

While Chinese OEMs, for instance, may only have a small share of the wireless equipment and infrastructure market today, they and handset vendors in India and other developing economies are growing at a much faster rate than their western counterparts.

Integration challenge

It's difficult overestimating the challenges facing the new company at a time of increased specialisation in the semiconductor market and the heightened need to pool resources, including R&D, sales and marketing, to hone a competitive edge in today's high-tech industry.

"Standard & Poor's appreciates the business logic of the transaction, which could be supportive for the business risk profiles of both ST and Ericsson in the medium term," said Matthias Raab, an analyst with the research firm. "However, these positive aspects are mitigated by the material execution risks associated with the new joint venture and limited visibility on operating performance."

Even ST's Bozotti acknowledged during a presentation that the new company faces numerous risks though he believes the advantages of the JV are more compelling.

"There are challenges in executing the integration but the complementary nature of the products and customers is giving us the confidence we will be able to successfully do this," Bozotti said.

Aside from the integration hurdle, however, the new entity must also deal with continuing turmoil in its market segment where margin pressures are forcing OEMs across the globe to be much more restrictive in their selection of business partners.

It would also have to forge a new identity for itself, a situation compounded by the fact that ST-NXP Wireless, the unit contributed by ST, is itself barely four months old, having been first proposed in April and created through the union of business divisions from ST and the Netherlands-based NXP.

Who will lead the new JV?

The addition of Ericsson—and the immediate buy-out of NXP's 20 per cent stake by ST—introduces another layer of complexity for employees, suppliers and customers trying to get used to the ST-NXP combo, which was itself only beginning to figure out issues such as management structure within the larger ST corporate body.

For instance, ST's chief operating officer Allain Dutheil was also the CEO of ST-NXP and is likely to hold a similarly important position within the new company jointly owned by ST and Ericsson.

What will Dutheil's position be at the new company? Will he continue to serve as COO at ST while holding perhaps the top executive position at ST-NXP Wireless-EMP?

Although the partners declined to identify the issue of the top leadership of the new JV during their conference call Wednesday (Aug. 20) the slot would most likely be filled by Dutheil or someone already associated with ST-NXP since ST won the rights to name the CEO.

You don't run a nearly Rs.17,143.38 crore ($4 billion) revenue company from the sideline. Dutheil will have to choose one side. He cannot effectively serve as COO at ST and simultaneously CEO at ST-NXP-Ericsson.

There are other identity issues facing the new company. The JV partners did not disclose a name for the company, deferring this until the deal closes sometime within the next few months.

Hopefully, the partners will pick a more distinct name than ST-NXP Wireless, the nomenclature given the ST-NXP joint venture at its formation.

- Bolaji Ojo
EE Times

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