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Ready To Dominate?: Less than a year after Gemplus International and Axalto announced their planned merger, Gemalto is making its massive presence felt. The $2 billion behemoth promises to reshape the industry-while competitors fight for survival.

Article Excerpt
Gemalto cast its hulking shadow over the smart card industry almost from the day of the surprise merger announcement last December by executives of Gemplus International and Axalto.

It was then the scramble for market share among card vendors began. Competitors saw their chance to seize business from the budding goliath for the industry's major product, SIM cards for mobile phones. They slashed prices and reminded mobile network operators they should not risk concentrating too much of their supply with Gemalto.

Gemplus and Axalto countered with their own price cuts-determined not to lose too much market share in the run-up to the merger. And some of the fiercest competition took place between Gemplus and Axalto themselves, as sales managers sought to snatch business from their counterparts in hopes of securing their jobs in an expected post-merger consolidation.

"Since the merger was announced, the whole SIM card industry went somehow out of control," says Flemming Breinholt, CEO of Sweden-based card vendor XponCard.

In the six months leading up to the merger, SIM prices plunged by more than a third from a year earlier. While prices had been falling before, the additional cuts wiped out perhaps $100 million to $200 million in industry revenue. It forced XponCard to cut 8% of its workforce. Other vendors are cutting jobs, as well, and are accelerating plans to move more of their operations to low-cost countries. (See chart on page 50).

The measures are not only an attempt to prop up sagging profit margins and a hedge against continuing price drops. Vendors are girding to compete with Gemalto for the long-term-at least what they hope will be the long-term.

"Gemplus and Axalto merging creates a very big guy," says Philippe d'Andrea, chief operating officer for Franco-German card vendor Sagem Orga. "Only a few big guys can survive. We are going to be one of those."

Gemalto emerged bloodied from the price war, too, but with all of its market share intact. That amounted to 48% of the global SIM card market, valued at more than 1.1 billion euros in 2005 for Gemplus and Axalto combined. The vendor also owns nearly half of the market for chip-based banking cards and seems likely to dominate the emerging segment for ID cards and related products.

But the price war of 2006 is only the first shot in what experts predict will be far-reaching changes to be wrought by the merger of the industry's two largest players.

There are likely more consolidations to come for remaining vendors, which will find it difficult to compete with Gemalto's economies of scale and...

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