The research house believes the advent of 3G and an uptick in orders from governments and banks, will help chip card manufacturers recover from a troubled 2002.

While prices for SIM cards will continue falling, telecom operators are expected to offer value-added services to retain customers, boosting demand for high-end SIM cards like 32k, 64k and even 128k, capable of driving more applications.

Increased penetration of mobile telephony in countries such as India as well as in Africa and Eastern Europe also provides opportunities for growth.

The role of the SIM in securing mobile transactions over GSM networks is also expected to play a part in the recovery. Simultaneously, EMV (Europay/MasterCard/Visa)-compliant migration from magnetic stripe cards to smart cards within the financial sector is expected to provide greater opportunity to use these cards for mobile commerce.

Frost & Sullivan says high fraud rates together with incentives from Visa and MasterCard are expected to accelerate compliance with EMV standards and lead to more banks issuing smart cards.

In the public sector, chip-based ID applications are coming to the for. The research also notes a demand for the complementary use of smart cards and biometrics for secure identification. Contactless smart cards are being identified as among the best ways to store biometric data on travel documents such as passports, visas and identity cards, says Frost & Sullivan.

Several pilot schemes using contactless technology for transit applications are already underway. Contactless national ID projects and payment applications too are gaining momentum.

"Both Visa and MasterCard are backing the use of contactless technology as a faster and more convenient way to conduct payment transactions, a sign that bodes well for the smart card market," says the document.

In 2002, a total of 1,906.4 million smart cards were shipped globally, of which memory smart card unit shipments accounted for about 55.7% of the sales with microcontroller cards making up the remainder. Frost & Sullivan forecasts a reversal of fortunes by 2006 with microcontroller smart card units capturing 55.5% share of the total 2541.3 million smart card shipments.

With a 43.1% share, EMEA accounted for the majority of smart card unit shipments in 2002. The region led in both memory and microcontroller unit shipments, followed by Asia Pacific and then the Americas. Competition was fierce across all regional markets with price wars affecting every market player.

Despite painful restructuring and falling unit shipments over 2001-2002, traditional giants such as Gemplus, Schlumberger and Oberthur Card Systems (OCS) continued to hold sway over global unit shipment market shares. Multinationals such as Giesecke & Devrient and smaller companies such as Orga also turned in strong performances, says the report.

The major competitive development was the emergence of local players especially in the Asian region such as Ming Wah, Eastcompeace, Tianjin and AMS. This trend is likely to put a further squeeze on short-term profits while intensifying competition.