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Handset vendors at risk : Squeeze from top may take victims

“Consolidation” is a well-worn phrase in business circles because it politely masks the fact that someone probably is going to get it in the neck.
Typically, that means workers get hurt, though the game of executive heave-ho remains popular, particularly after a difficult quarter or two.
In the maturing handset industry, growth has slowed, opportunities are narrowing and the upshot is harrowing. The basic forces driving consolidation are well-documented and seemingly inexorable. The real question is who and when? Those remaining may ponder how and why, lest they be next.
Name names? Let’s put it this way: discussions with a half-dozen analysts touched on every well-known vendor outside the top tier and a score of lesser lights, with a few notable exceptions.

Recent lesson
One need look no further than BenQ Mobile’s fiery fall late last year-it plunged from the world’s No. 6 handset vendor to No. 9 and counting virtually overnight-for evidence that pain is in the forecast. With a wounded Motorola Inc.’s drawing billionaire investor Carl Icahn’s interest, it’s not hard to imagine companies with less talent, brand recognition and economies of scale making fatal stumbles.
“Whether the number of companies falling to consolidation increases or the magnitude of the companies exiting the market is greater underscores the topic’s subtleties,” said Ben Wood, director of clients at Collins Consulting Services.
The macro-economic forces at play are clear. As Gartner Inc. reported last week, the top-tier vendors are gaining share at everyone else’s expense, a historical trend now picking up steam. Indeed, the top vendors are not immune to the same pressures squeezing their lesser competitors. While Nokia Corp., Motorola and Sony Ericsson gained market share last year over the prior year, Samsung Electronics Co. Ltd. and LG Electronics Co. Ltd. saw their shares erode.
The “other” category that represents as many as 100 vendors worldwide now feeds on about 16 percent global market share, down from about 19 percent the prior year, according to Gartner.

Pressure from above
Speculation about competitive moves by top-tier players focuses on scenarios that could exacerbate the top-down squeeze play: Nokia could incrementally lower prices to pressure a weakened Motorola, resulting in ancillary damage.
“Olli-Pekka Kallasvuo said on Nokia’s 4Q call, in a glorious Finnish accent, ‘We think it’s time to turn up the pressures. Slowly, slowly, slowly,'” Wood said. “Those three words should be the most terrifying words to any competitor. Nokia might drop only a few bucks off the price of an entry-level product, but that’s a 10-percent drop. For some companies, that’s more than their entire margin on a product. Nokia can smell blood in the water.”
Adversity could spur Motorola to innovate, as it did in creating its Razr sensation, according to Tero Kuittinen of Nordic Partners Inc., though that will take time to impact the market. Samsung, which just appointed a new CEO of its telecom and handset business, could cut costs by moving manufacturing to China. Samsung, LG and Sony Ericsson may draw on corporate parents’ deep pockets for marketing resources, overwhelming other voices. If Sony Ericsson succeeds in grow volume at the low-end of its portfolio to exploit emerging markets, even the top tier could look different next year.
The result for smaller companies without inspired designs, well-honed platform manufacturing strategies, differentiated feature sets and the means to get their message across could retreat to their domestic markets, become the target of mergers and acquisitions, or simply close their doors, most analysts interviewed agreed.
As major carriers play the vendors off of each other to maintain their role in deal-making, alternately signing and snubbing former or would-be partners, grand ambitions may become smoking craters.

Pressure from partners
Wood said such gamesman ship will cause pain. Sharp Corp., for instance, had worked closely with Vodafone Group plc, which tactically employed the vendor to address the Japanese market. To a degree, the analyst said, Sharp became beholden to Vodafone.
“That was a very convenient stick to beat the big guys with,” Wood said. “Now, Vodafone has found a new stick in China. They’ve just done a 3G handset deal with Huawei. That’s a brutal deal for a company like Sharp, which relied on selling high value goods to Vodafone. And, at 3GSM, Vodafone announced they’d deal with ZTE for low-cost phones. That’ll put the squeeze on Sagem and Japanese vendors, whose products have become commoditized.”
Wood said that Japanese vendors can retreat to their home market and make a go of it with volumes of 10 million units a year in a 50 million-unit annual market. Ten million units a year almost cracks the top-ten global vendor club.
Chris Ambrosio of Strategy Analytics disagrees to an extent. With the top-tier multinationals making inroads into Japan’s domestic market, with share increasing 15-20 percent annually, Japanese vendors will fall, Ambrosio said.
“Even for those who retreat to their domestic markets, the pressure is mounting from outside multinational vendors and someone has to give,” Ambrosio said. Meanwhile, dozens of Chinese vendors may well “melt away.”

Ray of light?
As in any business, of course, counter-examples abound. Technical and design prowess, marketing savvy and old-fashioned grit undoubtedly will find the rare openings to nourish a few companies, particularly in a patchwork market of competing technologies, geographies, cultures and different carrier and distribution business models.
“Consolidation doesn’t mean a sub-scale vendor can’t make money,” Jackson said. “In this business, the barriers to entry are low. The barriers to scaling up and breaking even are high.”
Analysts were split on the question of whether original design manufacturers and electronic manufacturing services would drive consolidation or suffer from its pressures. While the foregoing article focuses on original equipment manufacturers, the complexity of business models can blur those distinctions.
“One man’s OEM is another man’s EMS,” Jackson said.
Analysts seemed to agree that more shooting stars will drop from the sky. “The spectacular disappearances will be those that depend on the global GSM market for their bread-and-butter and that goes back to Sagem, among others,” Wood concluded.

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