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Handset makers had better watch out

Handset makers had better watch out
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First Published: Wed, Jan 28 2009. 10 23 PM IST

Updated: Wed, Jan 28 2009. 10 23 PM IST
Telecom equipment makers had a rough end to 2008, characterized by shrinking margins, losses and even bankruptcy. But pain of the latest tech downturn is being spread unevenly between the network groups and handset makers in what is starting to look like a reversal of the dotcom bust.
Nokia Oyj warned global handset sales could fall 10% in 2009. The world’s largest handset maker said sales in the fourth quarter contracted for the first time in at least six years and its Ebitda (earnings before interest, taxes, depreciation and amortization) margin halved.
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World No. 3 Sony Ericsson Mobile Communications AB reported a much bigger than expected fourth-quarter loss. Its gross margin halved to 15% after the handset maker aggressively cut prices to maintain its 8% market share. Networks maker Telefonaktiebolaget LM Ericsson posted stronger than expected fourth-quarter results. Rivals Nokia Siemens Networks has forecast the global network market could decline in 2009.
Earlier in the month, Canadian telecom equipment maker Nortel Networks Corp. filed for bankruptcy. Alcatel-Lucent and Motorola Inc. are due to report fourth-quarter earnings within the next two weeks.
Despite Nortel’s bankruptcy, the networks business seems to be better placed to weather the downturn than in 2001. Back then, telecom operators called a sudden halt to spending on infrastructure, after years of over-investment left them saddled with debt. Excess capacity saw industry revenues cut in half, and the sector underwent a brutal restructuring.
But the networks business could have a flat year in 2009. In mature markets, investment levels by telecoms operators are already low, at around 14% of revenues. Continued spending is needed to maintain networks and deploy enhanced multimedia offerings. There’s also growth to be chased in emerging markets. China, India and Latin America are only just rolling out third-generation technology.
Ericsson’s strength in wireless global system for mobile communications (GSM) technology positions it as the clear winner in the current downturn. French-US rival Alcatel-Lucent has fading technologies and looks more vulnerable. Its larger size and strength in the fixed-line business means it probably won’t fail like Nortel, but faces a hard slog.
The real pain this time round is with the handset makers, who are grappling with both a consumer slowdown and operator moves to push customers onto longer, or SIM-card-only, contracts. Industry mobile sales grew an estimated 9% in 2008. After expanding so fast, the market looks likely to choke, and is forecast to shrink by as much as 10% in 2009—twice the volume contraction seen in the dotcom bust.
In this environment, scale is an advantage. Nokia, still the market leader, is benefiting from a wide product range. Sony Ericsson is losing out to Nokia at the bottom of the market and to Apple Inc.’s iPhone at the top end. Fourth-quarter losses saw Sony Ericsson’s cash pile shrink by a third. Similarly, Motorola has already lost half its handset market share in one year. A bigger loss in the fourth quarter and the planned spin-off of the troubled division could be in jeopardy too. If the handset makers had a good dotcom bust, their day of reckoning may now have arrived.
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First Published: Wed, Jan 28 2009. 10 23 PM IST
More Topics: Mobile | Phone | Nokia | Alcatel Lucent | Sony Ericsson |