The good news is that about 80 percent of the world’s population is covered by wireless networks, and only about one-quarter of those actually subscribe to a wireless service, which means emerging markets offer opportunities for handset vendors to grow market share and, possibly, profits. The not-so-good news is that profits on entry-level handsets are slim and profitability depends on massive volumes-favoring those with economies of scale and in-country manufacturing facilities-that only two major brands can muster.
This is the world according to Daniel Longfield, a wireless analyst with Frost & Sullivan, which recently issued its first Global Mobile Handheld Device Market study.
“I think it will be very difficult to profit from low-price handset manufacturing,” Longfield said.
Why pursue the bruising low-cost handset market at all? Samsung Electronics Co. Ltd. and Sony Ericsson Mobile Communications L.P. both have avoided the massive scale of manufacturing, channel intricacies, operator relations and marketing costs required to tackle it, preferring instead to focus on higher-end handsets with fatter profit margins. The answer for Nokia Corp. and Motorola Inc., according to Frost & Sullivan, is that global branding could lead entry-level handset purchasers to eventually replace their first handset with a Nokia- or Motorola-brand model in the mid- to high-tier, where profits are more assured.
One perhaps unintended consequence, in Longfield’s view, is that increased mobile phone usage in emerging countries could drive a shift to consumer-based economies like the United States. (This is presumed to be a good thing, particularly for those companies that profit from such economies, such as credit card companies, banks and merchandisers.)
“Mobile devices can play a huge role in pushing the world’s population into the kind of consumer economy that the U.S. has, helping people establish credit and credit histories and using the phone as a payment device,” Longfield said. “It’s important to every player in the mobile value chain to drive as many mobile phone users as possible.”
Embedding a company in an emerging market, however, is about more than cramming cheap phones into the channel. Part of Nokia’s success in India, for instance, where it has achieved 60 percent market share, is due to a decade-long branding effort, the recent establishment of a major manufacturing facility near Chennai, and close carrier relationships. At the same time, Nokia has not shot low. Its handsets may be entry-level, but they are more stylish, offer a few features and, thus, command a slightly higher price tier. Conversely, Motorola shot low and simply hasn’t done as well.
In emerging markets, carrier relationships are even more important than in established markets.
“Carriers in India and China are going to grow exponentially, so if you strike a deal with them, you’re going to sell a lot of handsets,” Longfield said. Plus, working with the carriers in emerging markets provides solid data that vendors can use to match specific phone models to specific markets in quantities that closely meet actual demand. “Obviously that’s the case for Nokia in India,” Longfield added.
Taiwan-based BenQ Mobile Corp. too has a great opportunity to produce handsets there or elsewhere in Asia to meet the demand for low-cost devices.
“BenQ is really focused on China and the rest of Asia and they should do well as they execute their business plans,” said Longfield. “Companies typically don’t perform particularly well following an acquisition and last year BenQ didn’t do anything spectacular, but you may see them make some waves in the next 18 months.”
In contrast, Korean handset makers like Samsung tend to focus on the high-end devices. They have some of the highest average selling prices.
“Koreans themselves spend about $300 on a handset, more than anyone else in the world that I know of right now,” Longfield said. “If you look at LG Electronics [Co. Ltd.], for instance, they’re rolling out video capabilities. They’re not aimed at the emerging markets. They’re letting Nokia and generic ODM manufacturers go after the $50 phone markets, and they’ll keep targeting the market for $300 and $400 phones. Obviously there’s much greater opportunity for a healthy margin with the high-end phones.”
Pricing pressure continues
The other peril for mobile phone vendors is that average selling prices keep dropping, in part due to Nokia and Motorola’s pursuit of emerging markets, which put pressure on ASPs. Looking at total revenues, Motorola is rapidly catching up and may surpass Nokia this year because its handsets come in at a higher ASP.
Last year, industrywide ASPs were about $180, and Nokia’s ASP was at about $150. So if the leader is at $150, the whole market will come down to $150, Longfield said. This year, the market indeed is down to $150, but Nokia could drop below $100 this year. “So now I’m wondering how far down ASPs will go this year,” the analyst said. “I don’t think ASPs will drop that far, but they may hit $120. We’re going to see significant price declines. Here in the U.S. you’re going to get a lot of features for your money because the feature phones going to the emerging markets will be `free’ here, meaning subsidized by the carriers.”
“The handset market is similar to the desktop or laptop markets, where there are too many competitors and prices continue to decline through competition,” Longfield added. “In the past five years, several of the top ten handset makers have exited the market due to lack of profitability.”
Longfield cited Siemens AG’s sale of its handset unit to BenQ, Qualcomm Inc. selling to Kyocera Wireless Corp. and Audiovox selling to UTStarcom Inc. “These players all left the market at firesale prices,” Longfield noted. As ASPs decline, he added, “you’ll see more companies exit the market.”
The danger for behemoths such as Nokia that depend on big volume plays is shrinking market share, according to Longfield.
“They’re defending their position well, but it’s impossible to stop the flow of new competitors, especially considering how cheap it is to do manufacturing in China. And I think the Chinese handset vendors will have a leg up with Chinese carriers versus the international vendors in that market. For smart phones, China has jumped onboard the Linux operating system because it’s free. That’ll also help the Chinese vendors compete on cost.”
In mature markets, the positive sign is that replacement cycles are getting shorter. In the Frost & Sullivan survey, when phones were about voice only, subscribers in mature markets replaced their handsets every two years, coinciding with contract renewals.
“Now,” Longfield said, “with premium content and services, your handset becomes obsolete every 18 months. So if you want to keep up with your friends, you need to upgrade your handset. That’s the other end of the spectrum from the low-end phone sales in emerging markets.”
