The squeeze is on, the stakes are high and the options few.
Second-tier handset makers-their exact numbers globally are unclear, but there may be more than 100 players-are scrambling to survive, let alone thrive, as the top six vendors increased their market share last year to 84 percent, according to Current Analysis.
Second-tier handset vendors are facing desperate times, said Mike Burton, a financial analyst with ThinkEquity Partners L.L.C., who pointed to two major mergers in the South Korean market in the past six months: Pantech Co. Ltd.’s acquisition of SK Teletech and LG Electronics Co. Ltd.’s recent announcement that it would acquire KTF Technologies.
Beyond the top six vendors-Nokia, Motorola, Samsung Electronics Co. Ltd., LG, Sony Ericsson Mobile Communications L.P. and BenQ Mobile-more than 100 other vendors are fighting for the remaining 16-percent market share in an “extremely crowded” market, according to John Jackson, principal analyst at the Yankee Group. The prospects are untenable for many of them, he said, as quarter-to-quarter margins continue to trend downward-a trend affecting the larger vendors as well.
Where Nokia and Samsung once had margins in the 20-percent range, they’re both south of 15 percent today, said Jackson. Sony Ericsson and Motorola both are barely making 10-percent margins, he added. Players without a significant brand, economies of scale, and effective and widespread distribution have been pushed into three choices: shoot high, shoot low, or get out of the market, Jackson said. Shooting high means focusing on high margin, high-end handsets. Aiming low means manufacturing low-end phones with no brand agenda of one’s own. Getting out means becoming an acquisition target or simply closing the doors. The market is too complex and fractured to handicap the horses, according to Jackson.
The outlook is not uniformly gloomy. Market intelligence firm Visiongain projected last week that an increase in demand from carriers, including mobile virtual network operators, to customize and brand their own handsets will boost second-tier vendors involved in contract manufacturing. In the MVNO market, Earthlink Inc. and SK Telecom’s Helio MVNO has contracted with Pantech for the Hero model handset. Walt Disney Co. is expected to launch its Mobile Disney service this year, but is keeping handset news under wraps. And then there are specialty manufacturing opportunities for such high-flying computer giants such as Microsoft Corp. and Apple Computer Inc. that ply the mobile PC market and, increasingly, entertainment applications such as music.
Visiongain predicts that outsourced handset manufacturing will account for more than one-third of total handset shipments in 2006 and rise in three years to nearly half of all phones shipped.
For example, Flextronics Corp., the top contract manufacturer, produced 47 million handsets last year, just behind the world’s fourth-largest vendor, LG, and ahead of Sony Ericsson. Vodafone Group plc’s recent announcement of a five-year deal with Huawei Technologies Co. Ltd. for 3G phones to be supplied in 21 countries underscored the trend of carriers looking beyond Tier 1 handset vendors identified by Visiongain. In fact, according to Visiongain analyst Adam Walkden, this trend puts pressure on the Tier 1 handset vendors to accommodate carrier demands, putting further pressure on margins.
Walkden also said that the ultra low-cost handset segment in emerging markets-an area that Motorola Inc. has placed increased emphasis on of late in a bid to overtake Nokia’s global market share-is another growing opportunity for original design manufacturers and electronic manufacturing service providers. Kyocera Wireless Corp., based in the United States but of Japanese corporate parentage, recently projected that it expected this year to repeat its 50-percent growth in handset sales from the year prior, as it had in 2005 vs. 2004. Since 2003, Kyocera has been the sole supplier for Brazil CDMA carrier Vivo, the country’s largest carrier. Half of Kyocera’s Brazilian offerings are aimed at the youth market.
Kyocera has also been a major player in the domestic MVNO market, having been the initial exclusive supplier of devices for Virgin Mobile USA L.L.C. and providing Amp’d Mobile L.L.C. with its entry-level handset.
Jackson suggested that one way to view the second-tier handset vendors’ markets is by looking at their geographic and product heritage.
Among household names are numerous Japanese vendors with a heritage in durable goods or consumer electronics-Panasonic, Toshiba Corp., NEC Corp. and Fujitsu-as well as Chinese manufacturers in the same vein, such as TCL, Haier, Amoi-that have jumped into mobile handset manufacturing, in many cases to supply Japanese telecom giant NTT DoCoMo Inc. In contrast, a number of Chinese firms such as ZTE Corp. or Huawei have been telecom infrastructure players that grew a handset business.
Taiwanese player BenQ Mobile comes from an ODM background supplying Motorola, but is evolving into an OEM now that it has acquired Siemens AG’s handset business. HighTech Computer has provided Microsoft-powered pocket PCs. Compal continues to do a high-volume ODM business, turning out handsets for Motorola and Chinese carriers, for example.
In South Korea, consolidation is taking place. LG and Samsung are Tier 1 vendors, followed by Pantech, which is aggressively exploiting the export market for both CDMA and GSM phones.
“So you can essentially map the most significant vendors in this space to particular geographies and their `genetic heritage,’ so to speak, as well as being based in low-labor cost markets,” Jackson said.
Add a dash of European second-tier vendors to round out the global picture-VitelCom in Spain is an ODM supplying Telefonica SA and Grundig in Western Europe and Latin America.
“So, yes, market share is shrinking,” Jackson said. “And if you look at margins, the picture is even less rosy. Quarter-on-quarter margins are experiencing severe compression, even for the big five vendors. Any forward progress is what I would call incremental. If you look at Nokia and Samsung, their margins have been on a downward trend for the past eight quarters or so. Those who had been in the 20-percent range are now in the 15-percent range.
“The competitive environment for those who lack economies of scale, lack global distribution and brand recognition are experiencing even greater compression on margins,” Jackson added. “On NEC’s 4Q earnings call, for instance, in my opinion, they came very close to saying outright that they were leaving the handset business. This is a company that had a market leadership position in 3G for awhile that has found it an untenable market to compete in.”
