The mobile-phone industry has evolved in countless ways during the past few decades. Phones today feature a dizzying array of new technologies and services, from multiple radios to integrated digital cameras to blazing fast processors. But perhaps the most notable change in the market has to do with the bottom line-the bottom line for consumers.
Some in the industry have been around long enough to remember the brick-sized mobile phones of the early 1990s. Such phones cost $1,000 or more in some cases. Now, phones can sell for as little as $100 and are free in many cases thanks to carrier subsidies. Further, Motorola Inc. recently announced plans to sell a $40 phone in India, Thailand and elsewhere-evidence that prices still have room to fall.
Inexpensive phones have helped expand the market beyond business travelers and early adopters. And handset manufacturers, like most electronics companies, continue to try to lower the cost of their products to score additional customers. Indeed, handset players are now targeting emerging markets like China, India and Russia-areas where price increasingly becomes important.
“Our feeling is that we’re on the verge of a structural change within this industry,” said James Patrick Seifert, an analyst with ABI Research. “Our research indicates that the convergence of key functionalities, coupled with increasing performance and design productivity, is driving steeply falling system-level costs. This in turn is enabling solutions that allow $200 digital cameras and $35 DVD players to come to market. The greatest innovation is in the portable and mobile device sectors.”
Hence, cutting costs is key. And handset makers and handset component suppliers have introduced a wide range of strategies and technologies to keep product costs low.
ISuppli Corp. analyst Scott Smyser said there are two main areas in which handset makers have discovered cost savings. The first is one that has drawn a notable amount of concern, but has grown into a common trend within the electronics manufacturing industry.
“We’re forecasting increased usage of outsourcing … especially on low- to mid-tier handsets,” said Smyser, the research and consulting firm’s director and principal analyst for wireless and networking.
Motorola, Sony Ericsson Mobile Communications L.P., Siemens AG and others outsource the manufacture of their phones to some extent. Indeed, Kyocera Wireless Corp. recently announced it would outsource all of its manufacturing efforts to electronics manufacturing services company Flextronics to cut manufacturing costs.
Flextronics and other EMS companies generally operate factories in countries like China and India, where labor costs are inexpensive. And because such companies build a range of electronics for thousands of different customers, they are able to purchase electronics components at much larger volumes-and cheaper prices-than smaller electronics manufacturers.
According to iSuppli, Flextronics is the world’s largest EMS company in terms of revenues. The company builds gadgets for Sony Ericsson, Siemens and others. Fully 31 percent of Flextronics’ revenues come from handheld devices, ahead of its computer, communications equipment and other business segments. The next largest EMS companies in terms of revenues are Solectron, Sanmina, Foxconn, Celestica and Jabil. ISuppli forecasts that total EMS industry revenues will hit $117 billion this year and will rise to $164 billion by 2008.
Although outsourcing the manufacture of handsets has become a fairly standard practice, some companies are also outsourcing the design of their handsets. This has given rise to original design companies like Quanta Computer, Asustek, Compal Electronics, Inventec, BenQ and others-companies that will design and engineer electronics gadgets and then sell those designs to companies like Motorola and Kyocera. While top EMS companies saw their revenues increase 17 percent in the first quarter compared to a year ago, the top five ODM suppliers saw their revenues increase by at least 24 percent during that same period. ISuppli forecasts ODM market revenues will total $134 billion by 2008. Indeed, the interest in the ODM market has spurred some EMS companies to offer design as well as manufacturing services.
Smyser said Motorola is the industry leader when it comes to outsourcing the design of its handsets. Around 22 percent of Motorola’s revenues come from ODM phones. Smyser said Nokia sits on the opposite side of the bench; the company to date largely has shied away from the use of ODMs. However, Nokia recently indicated it will use ODM phones where appropriate.
Electronics outsourcing has served to raise concerns among some U.S. government officials. At a recent hearing in Washington, Sen. John Ensign (R-Nev.) said manufacturing competitiveness is important to the health of the United States. He said American manufacturers remain the cornerstone of the economy, and that the United States cannot grow unless it can compete with India and China. Echoing others at the hearing, Sen. George Allen (R-Va.) said government needs to embrace advances in technology to compete, rather than through lax environmental laws and low wages.
Although outsourcing is one of the major ways handset makers and electronics manufacturers have managed to drop costs, it is not the only strategy open to market players. Innovations inside phones have also served to cut prices.
“The single-chip solution from TI (Texas Instruments Inc.) is another way to reduce costs,” Smyser said.
Chip vendors like TI have been working to combine various features and functions onto single bits of silicon. For example, Smyser said most chip vendors now sell baseband chips that include a ringtone generator. A ringtone generator allows users to download and play new ring tones. The combination of a baseband chip and ringtone generator can cut as much as $2 off the cost of the phone. Thus, as more functions are combined onto one chip, the costs will continue to drop.
Smyser said TI’s new single-chip offering combines the two main silicon elements inside a mobile phone-the baseband processor and the RF transceiver. TI uses digital RF and CMOS technology to combine the two chips. By combining those two elements, Smyser said phone makers can cut down on their bill of materials as well as the number of their suppliers. Such efforts can help save on inventory and supply chain management costs.
Smyser said outsourcing and chip innovations are two main factors affecting the industry in general. Nokia, however, said that it has instituted several key strategies itself to bring down costs. Indeed, Nokia has long enjoyed solid margins due to its efficient manufacturing and distribution processes-the company’s operating margin in the first quarter of this year was 17.4 percent, second only to Samsung Electronics Co. Ltd.’s 18.4 percent.
“We have an extremely flexible manufacturing process,” explained Nokia spokesman Keith Nowak.
Nowak said Nokia operates about a dozen phone building factories across the world. He said that each plant looks and works much the same, which means that Nokia can move the manufacture of one of its phone models from one plant to another depending on where it’s needed.
Nowak said Nokia also reuses many of the same components across its line of phones, such as chips and software, which allows the company to keep its manufacturing process streamlined. Further, due to Nokia’s size-it sold almost twice as many phones in the first quarter as its nearest competitor-the company can keep its component costs low through its purchasing power.
“We are able to negotiate really good deals with our vendors,” Nowak said.
Motorola too has been working to cut costs and streamline its phone business. At a recent investor conference, Motorola chief executive Ed Zander said he and the rest of the company’s managers have managed to improve the company’s supply chain, IT operations, and research and development spending.
“I felt it was too complex, too decentralized,” he said. “I think we have a much lighter feel, a much more focused organization.”
Zander said Motorola continues to work on simplifying its manufacturing plants, centralizing its procurement and making its distribution systems more consistent.
Although phone makers continue to try to cut costs, Smyser pointed out that mobile phones are among the most complicated electronics gadgets available. Phones feature a variety of technologies, from streaming video to RF receivers, and require a variety of component suppliers and a high degree of engineering. Thus, cutting costs may not be as straightforward as with other electronics offerings.
RCR Wireless News reporter Heather Forsgren Weaver contributed to this article.
