There was much talk 2 years ago about a slump in the GSM market but 2003 surprised everyone. Adjustments in expectations were made on a monthly basis by all vendors involved in the smart card industry. Units in the SIM area grew at a phenomenal rate leaving a very healthy growing market. However, revenues did not follow route, they did not provide the same growth units offered.
Clear trends of a better product mix have been seen as many countries move to higher-memory SIM cards. This better product mix kept the average selling prices (ASPs) flat, negating any pricing pressure experienced in previous years. Demand for 64k and 128k SIM cards was experienced in Europe and Asia Pacific. The largest market, China, where most ICs are 16k, is also witnessing migration to higher-memory ICs. North America is already a 32k market that is migrating to 64k ICs.
In 2004, the smart card and chip markets are expected to rebound with vendors remaining focused on the SIM market, followed by banking and ID application segments. Global SIM unit shipments are expected to continue to grow in 2004 due to penetration in less SIM saturated markets in Asia Pacific and the Americas. An increasing demand for high-memory 64k and 128k SIM cards as well as the growing demand for Java cards is also improving the product mix. 128k SIM cards are already being supplied to Telecom Italia Mobile (TIM) as well as a couple of other mobile operators. Prices of SIM ICs in 2004 are either likely to remain flat or slightly increase due to a demand-supply gap.
The banking application is expected to experience good growth rates due to EMV migration in Europe. The contactless market is also expected to surge with interest and eventual high volume demand from secure travel documents. Though there are increasing shipments of 64k and 128k ICs, a majority of the shipments remain ICs of 32k and lower.
One of the key challenges for semiconductor vendors is that its customers tend to underestimate vertical market sizes. Chip manufacturers need good forecast from their customers and service providers in order to better plan their production and to align demand and supply of chip ICs effectively. However, this is rarely the case causing discrepancies in demand and supply of chip ICs.
The value chain for smart cards is changing from the traditional horizontal line of semiconductor vendors-smart card manufacturers-card issuers to a mesh of vendors. The growing demand for open platforms and the need for interoperability has led to the arrival of independent Java OS companies such as IBM and Aspects Software that have an impact on the smart card value chain. The arrival of these companies with interoperable operating systems has made it possible for silicon vendors to push themselves up the value chain into the smart card manufacturer territory leading to possible competition with their own clients. This has already been witnessed in the industry with ST Microelectronics having a licensing agreement with Aspects Software, and having acquired Proton World and Incard. The trend in the government ID market toward electronic passports has brought in new participants that have traditionally provided passport covers and pages to governments. Most of these suppliers are regional in nature. As a result, a new set of partnerships and alliances are likely to be required to target these markets full-scale.
In 2003, 2,473.2 million smart card ICs were shipped generating revenues of $1,404.4 million. In 2007, Frost & Sullivan expects to see the total number of ICs shipped to rise to 4,184.1 million generating revenues of $2,384.1 million, recording a CAGR of 14.0 percent and 14.1 percent for unit shipments and revenues, respectively. It comes as no surprise that the EMEA region is the largest and accounts for the majority of the market both in terms of revenues and units. The Asia Pacific region was the second largest in 2003.
North America is experiencing a tremendous amount of momentum in government and ID applications after the events of September 11, 2001 in the form of several government-sponsored smart card programs. Latin America's use of smart cards is predominantly for GSM and banking applications. These application segments are the largest within this region. The memory card market is primarily composed of phone card applications. Mexico is the largest country in the phone card business. A much smaller percentage of memory cards in the region comes from transit and loyalty cards. Brazil leads the transit application in the region with projects in Sao Paulo and Rio de Janeiro.
The European market gained momentum especially in the SIM card area. Many operators resumed investments in the latter part of the year to improve their cost of operations through improved SIM renewal process. This, in turn, led to a higher demand for high-end cards (64 k and 128 k cards) -- some of these were 3G. The potential of national ID and private government projects is mammoth and expectation is high, even on a global level. Passport projects are also expected to inject some steady growth into the market in the next 4 years. In Asia Pacific, the smart card IC market is particularly driven by successful and emerging applications. There are a variety of applications and each are at different stages of development. The memory and microcontroler markets in APAC are expected to grow at 0.9 percent and 18.0 percent respectively.
The stronghold of the top six smart card IC participants remains though there have been market ranking shifts within these six participants. Infineon continues to dominate the market share and has distanced itself further from the number two-market player. Renesas Technologies has gained the second spot in the microcontrollers market, overtaking STMicroelectronics in the process. Philips has the third spot in total smart card IC unit shipments. Atmel Corporation and SAMSUNG continue to strengthen themselves, recording massive growth rates. Local Asian participants especially in China have also created further competition. STMicroelectronics and Atmel were the successful companies in terms of gaining market shares for revenues. ST made inroads through the sale of micro-modules and Atmel with its Flash memory products kept a very healthy ASP.
Anoop Ubhey ist Senior Smart Card Industry Analyst bei Frost & Sullivan.
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