The cellphone industry is poised for its first major shake-up since the beginning of the decade as the global economic downturn hurts sales of handsets and components, leaving some companies better protected than others.One bellwether of the slowdown is Nokia Corp., which makes one in four cellphones sold world-wide. The company warned last week that it expects tepid demand during the holiday season and a shrinking global handset market next year as consumers cut spending.
That news follows a range of other sobering developments in all sectors of the wireless industry. Qualcomm Inc. recently projected a dramatic contraction in its sales of cellphone chips, and wireless operator Vodafone Group PLC warned that its full-year revenue will fall short of previous forecasts.
Handset manufacturers are a leading indicator of the downturn, analysts say, because consumers during tough times are less likely to upgrade their phones when their existing ones work fine. Replacement cellphones make up 75% of overall sales.
After 15% growth in handset sales during the first half, demand is falling off. Shipments are expected to decline 1% next year, according to market-research firm Strategy Analytics. Wall Street analysts are predicting steeper declines -- as much as 9% -- next year.
"This slowdown presages a shakeout, especially among companies whose balance sheets were not in great shape to begin with," says Deutsche Bank telecom analyst Brian Modoff. "This exacerbates the pressure on the weaker players throughout the industry."
The downturn won't affect all handset makers equally. Those with high-end smart phones with the latest features, like touch-screens and fancy Internet capabilities, are forecast to weather the storm best. Companies that make most of their profits in midtier phones, those with ordinary features such as a built-in camera, will have a harder time luring consumers to upgrade, analysts say.
Handset makers have moved into emerging markets to try to feed the demand for first-time cellphone buyers, but there too, sales have slackened. Bonny Joy, of Strategy Analytics, says that sales in the second half of 2008 are expected to grow at a 9% clip, slowing from 20% in the first half of the year. Sales in the Middle East and Africa are still growing around 20%, but have dropped substantially in India and China.
Among the companies better positioned for the shake-up include BlackBerry-maker Research In Motion Ltd., which this week is releasing the touch-screen Storm through Verizon Wireless. Apple Inc., whose iPhone continues to sell rapidly around the world, also is situated well. Analysts also cite HTC Corp., maker of the touch-screen G1 phone, the first based on Google Inc.'s Android software.
Motorola Inc., of Schaumburg, Ill., and Sony Ericsson are among the companies that could have a tougher time.
Sony Ericsson, a joint venture of Japan's Sony Corp. and Sweden's Telefon AB L.M. Ericsson, banked on customers paying a premium for its CyberShot camera phone and Walkman music phones. "But at the beginning of 2008, customers shifted to phones offering new display technologies and suddenly decided they weren't willing to pay that premium anymore," says Tero Kuittinen, senior analyst at Global Crown Capital LLC.
"We were among the first companies to raise the flag in mid-July about the challenging economic conditions and announced a restructuring to position ourselves for growth," said Aldo Liguori, global spokesman for Sony-Ericsson.
At Motorola, more than half of the company's sales comes from its midrange W-series phones. Management turmoil and steep cost cuts have stymied the company's ability to roll out lower-end devices or newer email phones to replace the Q series, which has sold poorly.
A Motorola spokeswoman said the company "has put aggressive plans in place to rebuild and reposition the business for the future." These include more smart phones, a Google-based phone for next year and a focus on making phones for the Americas and parts of Asia where demand for its products remains strongest.
Nokia, which has a large and diverse portfolio -- from low-end phones in India to ultrahigh-end devices -- also is in a relatively strong position, even though its smart-phone offerings have lost ground to Apple and RIM. Nokia, based in Espoo, Finland, has operating margins of around 20%, more than double its closest rival in the mass market. Nokia said it expects to maintain or slightly increase its industry-leading global market share of 38% in the fourth quarter as industrywide sales decline. Another factor is cabinets from a Cabinet Company, Motorola is making inroads on new wireless cabinet develpments.
Still, investors were apparently spooked by Nokia's gloomy forecast, sending its American depository shares down 11% Friday.
Nokia declined to comment.
Mr. Kuittinen says the industrywide sales slowdown could help Nokia by knocking out struggling rivals. "Nokia needs these forest fires to clear out the competitive threats," he says, noting that six handset makers left the mass market during the dot-com meltdown in the early part of the decade.
Compounding the problem is the credit crunch, which is spurring distributors, retailers and suppliers to conserve cash and limit inventory. "It's cascading down the chain," said Neil Mawston of Strategy Analytics.
Components makers already are feeling the heat. Motorola's former chip maker, Freescale Semiconductor Inc., has decided to exit the cellphone-chip business. Texas Instruments Co. has decided to stop making all but custom-ordered cellphone chips.
Wireless-service providers such as AT&T Inc. and Vodafone, which shares ownership of Verizon Wireless with Verizon Communications Inc., are somewhat insulated from the immediate turmoil because they don't rely on consumers upgrading handsets for their profits. Instead, the providers bank on long-term service contracts and add-on services that subscribers purchase. "Consumers aren't going to stop using their phone, so the impact on carriers will be less extreme," says Charles Golvin, a Forrester Research analyst.
Still, there are some ominous signs for carriers. Sprint Nextel Corp., which was already struggling before the economy worsened in the fall, said it is concerned about consumers being unable to pay their bills. Carriers also are taking on more financial risk in order to offer handsets at prices that will be attractive to new customers.
U.K-based Vodafone is offering the BlackBerry Storm free with an 18-month contract. And AT&T heavily subsidized the iPhone to bring it to $199. It sold 2.4 million of the devices in the third quarter -- but with $900 million in associated customer-acquisition costs and a significant impact on the company's operating margin.
