Motorola Inventory Issues Put Industry On Hold In 1Q
NEW YORK -(Dow Jones)- Motorola's missteps in the first quarter cast a pall over the handset industry, leaving other key players in a holding pattern.
As other handset makers weigh in with results, it's clear the industry was affected by the No. 2 handset maker's decision to flood the market by dumping its excess cheap phones. Rather than take advantage of Motorola's market share loss, rivals instead held off on fears that their own products would get sucked into the inventory glut and suffer similar price deterioration.
The result: Mobile phone shipments dropped below the 20% growth rate for the first time in two years. Still, experts believe the slowdown is more of a temporary blip.
"If we look at the outlook and regional growth, I think Motorola's market share loss will be broadly distributed among the other players," said Mark Sue, an analyst with RBC Capital Markets. "But it'll take a while for that to be evident."
Niche players and smartphone makers, meanwhile, are helping to fill the vacuum. The industry is looking for things to accelerate towards the second half, particularly as handset makers other than Nokia and Motorola take to the emerging markets.
The restraint shown by the industry underscores the increasing focus on profitability over market share gains. The handset makers are looking to avoid mistakes made by Motorola, when it sacrificed its margins and pricing power in favor of winning market share, going so far as to turn its flagship Razr product into a mass-market device. Speaking to analysts, Motorola Chief Executive Ed Zander said the strategy "was a big error in judgment," adding, "I believe we fixed that."
Wall Street cheered global market leader Nokia's increased gross margins despite selling more low-end phones in the emerging markets, but the company's market share position remained at 36%. Sony Ericsson similarly showed surges in margins and revenue but little share gain, as it looks to fill its product portfolio out with lower tier products.
Analysts have high expectations for Nokia and Sony Ericsson, as both look to increase their share and profitability. But Bill Choi, an analyst at Robert W. Baird, said that Samsung Electronics has a strong portfolio and could stand to benefit from Motorola's pain. The company's handset business was a rare bright spot in the latest quarterly report.
Little Guys Making Waves
As the top five players held serve in the first quarter, smaller companies may have taken some of the share.
According to an estimate provided by Choi, the top five handset makers captured 82% of the market in the first quarter, compared with roughly 84% to 85% a year ago.
Chinese telecommunications equipment maker ZTE is making progress with products in Australia, Choi said. The company recently reported a 40% decline in its 2006 net profit, primarily attributed to higher costs related to the research and development of telecom equipment. It also posted a 33% increase in revenue in its overseas operations.
Robert W. Baird maintains an investment banking relationship with Motorola and Nokia.
Smartphones are likely also taking a slice of the pie. Research in Motion reported a sharp increase in its fiscal fourth-quarter net income helped by sales of its Pearl device, which specifically targets the consumer market. Lehman Brothers analyst Jeffrey Kvall upgraded Palm on Friday, noting that the smartphone market could grow by as much as 50% annually. Taiwan-based High Tech Computer Corp. (HTC), which makes smartphones which carry the brand of the carrier it supports, continues to gain traction around the world.
"Companies that can deliver smartphones or very high-end capable feature phones to consumers at good prices should have a bright future ahead of them," said Miro Kazakoff, an analyst for market research firm Compete Inc.
Balancing Act
Motorola's retreat from the emerging market will give room to others such as Nokia and Samsung. But like Motorola, they face significant challenges in operating in those regions.
"It's a tricky balance between market share and profitability," said RBC's Sue. "The balancing act becomes more difficult in the emerging markets."
In order to turn a profit on selling cheap phones in the emerging markets, handset makers need to devote capital towards developing a local presence, from manufacturing facilities to the sales force.
"You're going to have to have a strong stomach to potentially gain market share in the emerging market," he said.
Nokia has already built out much of the infrastructure. The results showed in the latest quarter as its margins rose even as the average selling price of the device fell. Newer players such as Samsung and LG lack a low-cost system in place, and are slowly wading into the area. In February, Sony Ericsson introduced four low-cost devices as it looks to flesh out its portfolio.
In addition to an efficient, local infrastructure, the handset makers will need to maintain a well-rounded portfolio of products, with particular focus on high-end devices. The lack of newer, pricier phones was how Motorola eventually tripped up.
-By Roger Cheng, Dow Jones Newswires; 201-938-2020; roger.cheng@dowjones.com
(Danial Thomas contributed to this report.)
(END) Dow Jones Newswires"
Posted to the site on 20th April 2007
