Nokia will outsource development of third-generation (3G) chips to STMicroelectronics and license out its modem technology, it said on Wednesday, widening its supplier base and opening up the market.

The world's top cell phone maker said STMicro would design and build 3G chips based on Nokia technologies for Nokia and other customers, freeing up research and development resources for other areas.

Nokia will continue to develop its own modems -- the interfaces between chips and radio signals. Its decision to license out the technology will bring in additional revenue and allow new players to enter the technically difficult market.

The news, which marked STMicro's first design win for a complete 3G chipset, lifted shares in both companies.

By 7:26 a.m. EDT, shares in STMicro were up 5 percent at 12.90 euros, and Nokia shares were up 2.1 percent, both among top contributors to a 1.8 percent rise in the DJ European technology index on Wednesday.

Nokia's decision to effectively exit the chip business is part of a trend by makers of handsets and consumer electronics to concentrate on their core competencies.

This is a pragmatic move which increases our competitiveness in the future, Niklas Savander, head of technology platforms at Nokia, told Reuters in an interview.

This frees R&D resources for other areas ... like Internet, services, user interfaces, he said.

Handelsbanken analyst Karri Rinta said: This is a good sign that the company is constantly looking for opportunities to improve efficiency, even after just reporting very strong results.

Last week Nokia reported stronger-than-expected second-quarter results, boosted by strong profitability in its cellphone business.

As part of the deal with STMicro, Nokia will transfer 200 staff to the Franco-Italian chipmaker in the fourth quarter.

Tommi Uhari, head of STMicro's mobile and multimedia unit, told Reuters the new chip would be on the market in early 2010.

Nokia is STMicro's largest client, generating about 20 percent of the chipmaker's turnover in the first half of 2007.

This was a natural step in our co-operations, but bigger than steps we have taken before, Uhari said.


Nokia said that to balance its increasing dependence on chipset makers it was widening its supplier base. In addition to deeper ties with STMicro, Broadcom, one of its existing suppliers, will now also make EDGE chips for Nokia. It aims to start shipping phones using Broadcom's EDGE chipset -- advanced GSM chips with faster data connections -- in the second half of 2008.

Broadcom shares were indicated to open up 4 percent on the deal.

Texas Instruments has hitherto been Nokia's sole supplier of 3G and EDGE chips. It will remain Nokia's biggest chip supplier, and Infineon will continue to supply its GSM chips.

We think it will damage Texas Instrument's very healthy gross margins, as it now faces competition in all technologies that it supplies to Nokia in contrast to just GSM. This value will be transferred to Nokia, Nomura analyst Richard Windsor said in a note.

Analysts said the deal would clearly increase competition in the 3G (WCDMA) chipset market, where Qualcomm and Ericsson are the leading suppliers.

This is most negative for Qualcomm, which makes excellent margins in WCDMA chipsets, and will now face much greater competition and pricing pressure in the long term, Nomura's Windsor said.

(Additional reporting by Cyril Altmeyer in Paris and Georgina Prodhan in Frankfurt)