While Motorola Inc. grabbed the spotlight after posting strong, second-quarter results last month, the American vendor’s success obscured a remarkable surge in shipments by Sony Ericsson Mobile Communications L.P. Sony Ericsson shipped nearly 19-percent more handsets from the previous quarter, propelling it to fourth place among the top five handset vendors-ahead of LG Electronics Co. Ltd. by a nose.
That “nose” equated to a mere half-million units, according to iSuppli Corp.; Sony Ericsson shipped 15.8 million handsets during the second quarter vs. LG’s 15.3 million units.
To place Sony Ericsson’s results in the context of momentum, however, consider the other top handset vendors’ sequential quarterly growth figures by shipment volume: Motorola posted 12.6-percent growth over the prior quarter and Nokia Corp. shipments grew 4.4 percent, while Samsung Electronics Co. Ltd. and LG both posted negative growth of minus 9.3 percent and 1.9 percent, respectively, according to iSuppli Corp.
Sony Ericsson’s and LG’s global market shares both sit at roughly 7 percent each, the only two of the top five handset vendors to find themselves so closely matched by shipment volumes and market share. This competitive match-up is made more intriguing by the two companies’ contrasting strategies, products, technologies and brands.
Sony Ericsson seized the opportunity to assert that it had finally finessed the challenges of its five-year-old joint venture, established its brand, attained the profitability it avidly sought and begun to ramp up production in a long-distance race with Samsung, which holds double Sony Ericsson’s market share.
“We overtook LG in the second quarter in terms of volume,” said Paul Hamnett, Sony Ericsson’s vice president of sales in North America. “We’ve always been ahead of LG in revenue. The next target is Samsung.”
LG asserted that a half-million units equated to nothing more than a single shipment and said that its brand-building and current marketing push on its Chocolate family of phones would pay off this year.
“This is not a derailment,” said Jon Maron, LG’s marketing director. “It’s a speed bump.”
Tina Teng, an analyst at iSuppli, suggested that the fourth position among the top-tier handset original equipment manufacturers remains in play-LG could regain market share eventually-and that both firms had issues to address, a view echoed by reports from Strategy Analytics and Gartner.
Strategy Analytics’ Chris Ambrosio, in a report on the handset vendors’ second-quarter results, wrote that Sony Ericsson is “nearly firing on all cylinders.” One major challenge: how to broaden its portfolio to include low-tier handsets while maintaining average selling prices. Its ASPs were up 6 percent compared with the year-ago quarter, but down sequentially due to the launch in the second quarter of entry-tier products in its J series.
iSuppli’s Teng credits Sony Ericsson’s sharp volume growth with a fortunate alignment between the vendor’s offerings and the market.
“Their product offerings are matching the trends of the handset industry this year,” she said. “It’s all about music and camera phones.”
“What troubles LG is operating profit,” said Teng. “If you want to grow revenue, you need to get your feet wet in the W-CDMA market.”
While LG indeed has remained competitive in CDMA technology in the showcase U.S. market, it has displayed declining shipments in GSM and announced the loss of a key distributor in Europe, Teng said. Distribution channels outside the United States account for the bulk of any top OEM’s sales. Competition with Nokia in Europe and with Motorola at Verizon Wireless should also be of major concern to LG, according to the iSuppli analyst.
Though the Chocolate family of LG phones addresses the vendor’s need to catch consumers’ attention, it’s too early to tell whether the well-publicized model will shore up LG’s fortunes, Teng said.
“I have no doubt LG will be back on track in the third and fourth quarters,” LG’s Maron said. “Because that’s where the big push for our products is going to be. We knew Q2 would be a tough quarter for us.”
Maron said that if one compared the first half of 2005 with the first half of 2006, the numbers fall in LG’s favor. (Indeed, iSuppli’s numbers show that in the first half of 2005, LG shipped 54.1 million units vs. Sony Ericsson’s 50.2 million. However, momentum narrowly favored Sony Ericsson, whose shipments increased about 38 percent year-on-year, while LG’s increased about 35 percent.)
According to Maron, LG’s Fusic music phone, the CU500 and the Chocolate would power third-quarter results in the U.S., though he acknowledged that his company has projected fairly flat growth worldwide for the remainder of the year.
Maron also indicated that new LG models would be announced in the fourth quarter that would further strengthen the vendor’s portfolio.
As for ASPs, Maron said, prices are set by the carriers, at least in the U.S., and that is outside LG’s control-particularly since it prides itself on delivering precisely what the U.S. carriers are requesting. Meanwhile, the LG brand has gone from virtually no recognition to major, carrier-sponsored advertising in a mere couple of years.
For Sony Ericsson’s Hamnett, however, there’s no looking back.
“This business had to establish itself as a profitable one and we’ve done that. We had to establish a brand and we’ve done that. We’re a business with great margins and we’re out-growing the market still, even though we’re a relatively small player if you compare us with a Nokia or a Motorola,” Hamnett said. “We’re growing our business in mature markets with mid- and high-end devices, which carriers use to generate ever-higher (average revenue per user). The more a phone can do, the more you’re going to play with it and spend money on it.”
Hamnett acknowledges that to become competitive with Samsung, Sony Ericsson has to get into the low-tier price points that can erode ASPs and margins.
“A controlled expansion of our business to reach a Samsung means we have to expand our portfolio across price points,” he said.
But there’s a limit to Sony Ericsson’s willingness to battle it out in the lower price tiers in emerging markets, he said. Rather, so-called emerging markets also offer sophisticated urban centers that behave more like mature markets, he pointed out.
“Markets like India and China represent opportunities that Sony Ericsson will look to exploit in a profitable fashion,” Hamnett said.
