M2M modules market concentration

What to retain of the recent acquisition of SagemCom's M2M division by Sierra Wireless

 
This week, Sierra Wireless acquired the M2M division of SagemCom for €44.9 million in cash consideration plus assumed liabilities. In 2011, the M2M business generated €39.9 million in revenue (and was solidly profitable) according to the press release.

For Sierra, the acquisition has 2 main interests:

• Reinforcement of its business positioning on the technology (cellular mainly) and the key verticals which drive the M2M market such as Automotive, Energy market. For instance, Sagemcom provides smart meters for utilities segments and not dedicated modules only. It also reinforces its local presence in Europe, whereas Sierra Wireless is a North American company (based in Canada; even though they bought the France-based Wavecom few years ago).
• Broadening of its vertical positioning. Sagemcom has differentiated assets in key segments like payment, transportation, and railways with its GSM-R technology, where Sierra is less involved in. Moreover, this acquisition offers Sierra new geographical opportunities into emerging countries (and key driver for M2M) like Brazil.

According to IDATE, thanks to this acquisition, Sierra Wireless now becomes the #1 M2M module makers in both volume and value-based ranking. Now, there are three significant players in the market: Sierra Wireless, Gemalto/Cinterion and Telit, followed by SimCom.

However, this acquisition is not a real surprise as the hardware M2M market is experiencing a market concentration since 2008. The phenomenon has been accelerated during the downturn where large players could traditionally make appropriate acquisitions at a good price.

This acquisition has at least two mains origins:

• Fragmentation of the value chain and therefore a quest for scale. The value chain is still too fragmented, being occupied by a large number of small players. Generally, they are specialised in a specific technology/ product, essentially a brick of software or parts of modules. So, we see a quest for scale as some players have already anticipated this consolidation, and they operate a “get bigger or die” strategy.
• Price competition. The M2M market has witnessed fierce price competition on the module market and the entry of Chinese players (with aggressive pricing) pushes this trend further. Indeed, over the last few years, some new players have entered the M2M market. As in other traditional industries such as fashion and automotive electronics devices, Chinese players have sought to enter the market by competing on price. The M2M market has seen the arrival of Chinese players with low-cost products (SIMCom is the #4 module maker). Even, Chinese telecom equipment vendors like Huawei and ZTE now address the M2M market.

Other reasons explain the multiple mergers and acquisitions occurred in the latest months:

• End-to-end solutions. This phase is reinforced by the eagerness of the leaders to provide end-to-end solutions as fast as possible. This willingness is translated into the form of acquisitions rather than R&D expenditure. Telit, for example, strengthened its positioning on short-range technologies by acquiring a specialist player called One RF Technologies, including its R&D centre. One RF Technologies provides its own proprietary mesh network solution. For the same reason, Gemalto acquired Sensor Logic, a platform provider.
• Global economic situation. Multiple acquisitions have already been made and the economic downturn could accelerate this phenomenon. When a downturn is to be long-lasting, small companies could probably either disappear or be acquired. Actually, small players do not have the financial reserves of the larger ones; their deep pockets allow the latter to resist the downturn for longer.
• New geographical positions. Acquisitions are also made in order to conquer a new geographical market. For instance, Telit acquired BellWave in South Korea. Now, the BellWave R&D centre is the Asian technological point of presence of Telit, supporting CDMA technology. In early 2011, Telit also acquired Motorola Solutions' m2m modules line of products and Motorola Solutions' associated employees joined Telit. This acquisition was an important step to substantially enhance Telit’s global position, including the USA.
• Enter the emerging M2M market. Acquisition could be the way to open doors to the promising M2M market. Gemalto, for instance, became a leading M2M player when it purchased Cinterion, the Number One modules manufacturer, in June 2010. Indeed, Gemalto benefited from Cinterion’s fragility caused by recurring revenue drops, being thus able to enter the M2M market whereas it was only somewhat involved through SIM cards and security expertise, but not to any great extent. Two years earlier, Sierra Wireless had acquired Wavecom for similar reasons. Finally, in November 2010, Enfora was acquired by Novatel Wireless for about 64.5 million USD. The goal is to expand the Novatel product portfolio (based on end-user modules, not an M2M expert).

Samuel ROPERT
Senior Consultant at DigiWorld IDATE
s.ropert@idate.org

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