Everyone loves a horse race, and in the first quarter global competition in the handset industry has tightened, infusing the high-stakes race with a sense that the future is in play.
While first-quarter earnings reports and market analysis found no change in overall tier-one rankings, the players’ momentum has shifted appreciably, revealing the industry’s dynamic nature and its unforgiving demands.
“The sudden shift in momentum demonstrates how competitive this industry is and how innovation on product development is essential,” said Ryan Reith, analyst at IDC.
Reith’s general remark strikes at the heart of the specific fortunes of each vendor, all
underscored by the fact that the handset industry’s growth is slowing to about half its past annual rate of 20 percent. That simple fact is ratcheting up the pressure on the top five players and diminishing opportunity for legions of contenders.
Say cheese
A snapshot of the top-tier vendors might read like this:
Nokia Corp. is behaving like a market leader with a thoughtful, winning strategy and cunning use of Machiavellian tactics. Sony Ericsson Mobile Communications, the fourth-largest vendor in volume shipments-still with less than one-quarter of Nokia’s shipments per quarter-keeps posting industry-beating growth rates, but has reached a crossroads where profit and market share intersect. Samsung Electronics Co. Ltd., appears to have shaken its reputation as a fast follower and its innovative, high-end handsets have won it double-digit margins and-rare among its peers-as much as three points of market share sequentially in one quarter. Motorola Inc.’s monumental blunders have cost it profit, market share and reversed its once-rosy fortunes. LG Electronics Co. is determinedly hanging in, exploiting its strength in CDMA in the United States and attempting to ramp up in GSM markets.
A more detailed look at each vendor reveals that simple horse-race analogies are short-lived: these players toil in an industry where technology, design and price-not to mention manufacturing, distribution and marketing-are juggled at great risk to meet the demands of a bewildering mosaic of markets defined by geography, economics and culture.
Nokia growing
Nokia, the seemingly ponderous market leader, has incrementally increased its market share, is profiting on low-cost phones in the hot emerging markets and has begun to see real growth in its high-end, “multimedia computing devices.” Nokia’s actual results are beginning to reflect its vision.
Formerly modest quarterly profits at Nokia probably reflected a careful investment in those emerging markets as the giant positioned itself for future growth. First-quarter results reflected price cuts in those markets designed to squeeze the competition. A slight increase in revenue and a slight decline in profit and operating margins in the first quarter were offset by a sharp rise in overall unit shipment volumes and the growth of the lucrative smartphone segment; the latter positions Nokia well for the future. It expects market-share growth to come in the second half of the year, as the replacement handset market heats up.
The leader’s Achilles heel, however, remains the North American market: its lackluster share here has dwindled to half over the past year. A reinvigorated effort in Motorola’s home market is underway.
Moto under pressure
Motorola, in contrast, is under intense pressure to improve its bottom line, and dared not respond to Nokia’s squeeze play on low-end handset pricing in emerging markets. Thus it capitulated as much as four points in market share in the first quarter alone. Moto’s lack of innovation and over-reliance on the Razr platform now looks like a blunder of historic proportions, creating an atmosphere in which one investor-read: Carl Icahn-could possibly succeed in bedeviling management at a time when it needs breathing room to innovate and take calculated risks.
Motorola’s exercise in reducing expectations worked so well that its dismal first-quarter results brought relief to investors who feared the worst. Its disastrously low unit shipments for the quarter are said by analysts to stem from over-stocking the channel in the fourth quarter. Look to the action at Motorola’s annual stockholder meeting on May 7 to see if Ed Zander, CEO and chairman, retains investors’ faith or whether Icahn gets a seat on the board.
Samsung profiting
Samsung posted impressive gains in profit and unit shipments on fairly flat revenue based on traction for its Ultra Edition handsets and its work in emerging markets with low-cost handsets. It gained three full points of market share over the fourth quarter, taking nearly all of Motorola’s lost share, according to data from Strategy Analytics. Once again, handsets are providing a big chunk of the profit for the vendor’s parent, an industrial conglomerate with wide-ranging product lines typically led by its semiconductor business, now flagging. Samsung seems to be balancing profitability with market share growth via emerging markets-a challenge now faced by its precocious rival, Sony Ericsson.
Sony Ericsson surging
Sony Ericsson’s astonishing momentum-Strategy Analytics puts its growth rate at triple its nearest growth-related rival (Nokia)-is particularly strong in Europe and Asia. Perhaps inexplicably, though the Americas and their CDMA focus pose challenges to this GSM-only vendor, it nevertheless is posting a 46-percent growth rate here. The company’s Walkman products appear to have met the phone-plus-one-function demand in the market and resonate particularly well in Europe. Deals with electronic manufacturing services to deliver high-end, entry-tier devices in India and with France-based Sagem Communications for similar devices provide the means to compete against rivals Samsung and, indeed, Motorola.
Can Sony Ericsson weather the bruising terrain and maintain its amazing run? Forthcoming quarters may well provide an answer.
LG remains steadfast
Rounding out the top five is LG, which like Samsung has been credited with providing ever-more innovative handset solutions to its carrier customers.
With increased efforts at cost-containment and a focus on profitability, the vendor is credited by Strategy Analytics with improved operating margins, even though unit shipments remain sluggish in an industry often defined by volume growth. LG’s signature strength is in CDMA in the U.S. market and it has taken steps in strategic marketing to put its best foot forward.
