By Michael Cohn<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Nokia selected Infineon on Wednesday to provide its single-chip technology for the Finnish phone maker’s entry-level models, giving the German chip maker a big boost while representing a setback for Texas Instruments, a rival chip maker that has been Nokia’s main supplier.

The deal involves a combined baseband and RF (radio frequency) chip for Nokia’s entry-level GSM (global system for mobile communications) phones. Munich-based Infineon will supply Nokia with its single-chip E-GOLDvoice products.

Shares of Infineon jumped $1.11 to $15.22 in recent trading, while Nokia shares climbed $0.02 to $22.11, and Texas Instruments shares fell $0.55 to $30.67.

Nokia, the No. 1 phone maker in the world, has been relying increasingly on entry-level phones to help build its share of the market, especially in developing countries. But like rival Motorola, the extra sales of the low-cost phones have hurt its profit margins (see Cheap Phones Hurting Vendors).

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The company thus needs to squeeze suppliers as much as possible to improve its margins, even if that means turning to alternative suppliers. The Infineon chips will also help Nokia improve the power performance of its entry-level phones and reduce their size.

Infineon’s E-GOLDvoice system-on-chip technology includes a power management unit and RAM, along with the baseband and RF transceiver, in a single chip that measures just 8 by 8 millimeters.

The technology will be able to power phones with color displays, text messages, musical ring tones, and applications such as hands-free operation and a talking clock.

“While widely expected over the past few weeks, this is a very encouraging confirmation of a design win with Nokia that we believe could provide as much as €200 million ($260 million) in revenue to Infineon in fiscal 2008/09,” wrote Goldman Sachs analyst Simon F. Schafer in a research note.

He noted that the chip is priced at $16 and believes Nokia will start using it in its 2008 product line. Assuming Nokia ships about 200 million low-end phones in 2008, 30 percent of them could potentially employ low-cost single chips such as those provided by Infineon.

Sharing Business with TI

The Nokia business opportunity at the low-end will be shared with Texas Instruments, predicted Mr. Schafer.

“TI is still a very important supplier of ours so this is not an exclusive agreement at all,” confirmed Keith Nowak, a media relations manager at Nokia.

“We can’t talk about the cost, but price was just one of many considerations,” he added. Other factors included volume, quality, and performance, he noted.

“We felt that for our entry-level portfolio, this 8 by 8 millimeter chip was an elegant solution for our entry-level products,” said Mr. Nowak.

Infineon did not immediately respond to a request for comment. Nokia sees the deal as more than just improving the profit margins on its low-end phones.

“There’s a lot more involved than simply margins,” said Mr. Nowak. “The entry level is an important part of our market and this is a solution that will help us compete more effectively in this market.”