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Handset makers could face more margin pressure next year

The cellphone industry is in the early stages of a price war at a time when handset sales are expected to decline amid a global slowdown in consumer spending. Many makers are eyeing the faster-growing but less profitable emerging markets.

Meanwhile, in industrialized nations, the increasing affordability of smartphones places additional pressure on basic cellphones and the manufacturers that rely on them for a vast majority of their revenue.

"If pressure is on you to move low-end units, you can see pricing get tougher," said Bill Choi, an analyst at Jefferies & Co."With industry-wide pricing pressure, no one fares well in this environment."

Nokia Corp. ceded a share of its market-leading position in the third quarter because it refused to compete on price, illustrating the more aggressive stance taken by its peers. The moves by Nokia's rivals parallel the tack Motorola Inc. took three years ago in ruthlessly gaining market share. The strategy resulted in a startlingly quick drop in profitability and the pending breakup of the company.

"History has shown that sometimes people make pushes forward then have to pull back a bit," Nokia Chief Financial Officer Rick Simonson said after the company's third-quarter results."In other words, they aren't able to consolidate the ground they've gained."

The most vulnerable cellphone makers include Samsung Electronics Co. Ltd., Motorola Inc., LG Electronics Inc. and Sony Ericsson, which all have wide portfolios of basic phones, and are examining - or already testing - the lower-end markets.

Sony Ericsson, a joint venture between Sony Corp. and L.M. Ericsson Telephone Co., bolstered the sector on Monday by posting a narrower-than-expected third-quarter loss. But falling margins and expectations of falling prices remain a concern for the company.

"As expected, the third quarter has continued to be challenging for Sony Ericsson," Chief Executive Dick Komiyama said in a conference call.

Sony Ericsson said it expects to cut costs to compensate for the falling margins.

LG, which also reported Monday, warned of weakening demand in the coming months. The company said it plans to enter the low-end market to compete with bigger rivals such as Nokia.

"We'll focus on profitability for the time being, but we'll be serious about entering the low-tier market next year," Chief Financial Officer James Jeong said."We are targeting a high-single-digit profit margin in the low-end market by 2011."

Samsung, which is scheduled to report Friday, has been among the most aggressive in pursuing the emerging markets. A spokesman wasn't immediately available for comment.

A Motorola spokeswoman declined to comment ahead of the company's earnings report on Oct. 30. Industry Leader's Warning

Nokia, which has extensive experience with the emerging markets, cautioned its rivals against pursuing market share through price cuts, particularly in a time when sales are slowing.

"Economic gravity applies to everyone," Simonson said.

And, the pursuit of low-end customers carries risks that haven't appeared before. The companies are going after these areas at a time when the market is slowing dramatically. Critics believe that next year, shipments will decline for the first time since 2001.

Nokia has spent years streamlining and cutting costs in its manufacturing process to be able to profitably serve the emerging markets. As a result, the company is seen as best positioned to withstand the downturn.

"As the market leader, Nokia is holding its own," said Mark Sue, an analyst at RBC Capital."And with strong liquidity and a relatively healthy supplier base, Nokia is likely better to weather the storm." High-End Squeeze

The major handset makers may find themselves getting squeezed from both ends.

In focusing on feature and basic phones, the major handset makers have given up their positions in the high-end devices to the likes of Apple Inc. and its iPhone, and Research in Motion Ltd.'s Blackberry line. With a tighter portfolio and no presence in the low-end tier, Apple and RIM have little legacy business to lose and can focus on smartphones, said Matt Thornton, an analyst at Avian Securities.

Smartphones account for nearly one in five cellphones sold, and are growing much faster than basic-feature phones. Consumers increasingly are eyeing smartphones as a realistic alternative, especially as prices decline and players like Google Inc. and HTC Corp. join the mix.

Wireless carriers, meanwhile, are interested in pushing smartphones because they require more costly phone plans. As a result, the service providers are offering them at lower prices with higher subsidies. The iPhone sells for $200, while the new Google phone, G1, costs $180.

This puts even more pressure on makers of basic phones, which may find it difficult to justify higher prices if a respectable smartphone costs only $20 to $50 more.

"The world is sprinting towards smartphones," Choi said."I think voice-only phones are definitely under severe pressure."

For the major players, a large percentage of sales are derived from basic handsets. Motorola, for example, counts on its dated Razr ultra-slim clamshell, which NPD Group says is still the No. 1 selling phone in the U.S. LG has built its market position with feature phones.

As if that wasn't enough to worry about, handset makers face a slowdown in consumer spending, as people are likely to hold off for longer stretches before getting their next phone.

"It wouldn't be surprising," to see a significant drop in margins and prices in the coming months, Thornton said.

Источник: Total Telecom

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