TORONTO-As the handset manufacturing business gets tougher because of declining demand, more phone makers are looking at joint ventures as their economic salvation and perhaps their best strategy to catch number-one handset supplier Nokia.
In October, after much fanfare, Ericsson and Sony launched a new mobile-phone brand called Sony Ericsson Mobile Communications. The Japanese electronics kingpin and the Swedish telecommunications equipment maker hope their combined efforts will make them the world leader within five years.
Earlier in the year, German mobile handset manufacturer Siemens and Japanese rival Toshiba signed a partnership agreement. Not to be outdone, Panasonic and NEC teamed up in Japan to gain greater market clout.
Also, there has been industry speculation that U.S.-based Motorola and Siemens are contemplating a joint venture worth between US$20 billion and US$25 billion. Any possible deal may include combining their wireless infrastructure businesses, the manufacturing of handsets, or both.
“The market is definitely consolidating because the revenue stream is declining. But having two weak players joining forces doesn’t necessarily make one strong entity,” said Sarah Kim, an analyst with U.S.-based Yankee Group. She questioned whether the Ericsson-Sony marriage will be harmonious, let alone prosperous. She also wondered whether a Motorola-Siemens partnership would be consummated, given Motorola’s financial difficulties. Motorola recently reported its third straight quarterly loss, registering a deficit of US$1.4 billion for the third quarter of 2001.
“Nokia seems well positioned for 2.5G (2.5-generation) and the more advanced 3G (third-generation) services. I don’t see it being that much at risk,” said Kim.
But malaise is spreading throughout the industry because of the economic slowdown. During the second quarter of 2001, global sales of mobile phones fell by more than 8 million to 89.76 million units from 97.98 million-a drop of 7.2 percent from the first quarter.
According to Gartner Dataquest figures, Nokia’s market share fell to 34.8 percent from 35.3 percent in the first quarter. On a year-on-year comparison, though, the Finnish manufacturer’s market share actually increased from a 27.5 percent share in the second quarter of last year. Motorola came in second with a 14.8-percent share compared with 13.2 percent last quarter, while number-three manufacturer Ericsson, climbed to 8.3 percent from 6.8 percent.
“Sure, the tough economic conditions hurt,” said Nokia President Kari-Pekka Wilska, who is responsible for all business operations for North and South America. “But the slowdown hurts our rivals even more. We don’t face the same financial difficulties, so we can develop products faster and easier.”
He said Nokia has no pressing need to join forces with anyone to stay ahead of the pack. The manufacturer expects to sell millions of high-margin General Packet Radio Service (GPRS) phones in the fourth quarter of this year.
From a distribution perspective, Motorola has gained an edge over its Finnish rival in getting GPRS phones into the hands of consumers. “First to market means a competitive advantage. We expect not only to gain market share, but also consumer confidence,” said Steve Lalla, Motorola’s senior director for its handset division. He expects Motorola to ship about 5 million GPRS phones in 2001.
Lalla would not comment on any possible partnership arrangements with Siemens. But on paper, it would make sense. A Motorola-Siemens venture in wireless handsets would solidify Motorola’s number-two position. On the infrastructure side, the liaison would make the combined entity number three globally behind Ericsson and Nokia, respectively.
Motorola is a strong force in CDMA, while Siemens is anxious to move into wideband-CDMA (W-CDMA) for next-generation handset sales in Europe, where Siemens has a significant presence. Meanwhile, Motorola could use Siemens’ clout in the European wireless infrastructure market.
If the two do sign a business pact, there would be conflicts. Motorola already has an infrastructure partnership with Cisco Systems. Siemens has a handset joint venture with NEC and an infrastructure relationship with Fujitsu.
In the telco world, cooperative efforts do not necessarily succeed. In 1998, an alliance between Lucent Technologies and Philips faltered after a year. Sony formed a joint venture with Qualcomm in 1996, but that arrangement unraveled in 1999.
“Sony has never been known to be the easiest player in a partnership,” said Yankee Group’s Kim. “Sony would rather lead and expect Ericsson to follow. I am not sure if Ericsson will be that compliant.”
Announced in February, the Sony-Ericsson mobile brand will make its first appearance in the third quarter of 2002. Its initial release will be a line of GPRS phones. Ericsson, in the midst of a painful restructuring designed to return the company to profitability, is looking at the marquee branding of the Sony name. For the Japanese powerhouse, a tier-three player in the global wireless market, it means a new opportunity to gain economies of scale.
Still, handset manufacturers recognize that one misstep, whatever the brand, could be calamitous. In this fickle market, many consumers are postponing their purchases until mobile-Internet services are more widely available. Global shipments of mobile handsets in 2001 are estimated to be no more than 400 million units, down from an earlier Gartner estimate of 500 million units. And that is terribly worrisome for a business predicated on sheer volumes.
