Only a few months ago, it looked like the mobile-phone industry might escape the worst of the global economic slowdown. After all, billions of people in emerging markets still don't have phones and are keen to get them. Executives at Nokia and other manufacturers had hoped that pent-up demand in developing countries would help them power past a slump in Europe and the U.S.
Those hopes are evaporating fast. Market watchers are now warning that sales are slowing faster than expected even in markets such as China, which had seen explosive growth for years. After a fourth quarter of 2008 that some analysts are calling disastrous, manufacturers could be stuck with millions of unsold handsets. Weaker players such as Motorola (MOT) and Sony Ericsson, which were struggling even before the downturn, could drastically scale back their ambitions or even leave the market.
Even mighty Nokia (NOK), once a stock market favorite, is suffering the humiliation of downgrades by analysts. Jari Honko of Helsinki-based eQ Bank is among those now advising clients to sell their Nokia shares. 'Christmas sales were very, very disappointing,' says Honko, who cut his rating on Nokia shares to 'reduce' on Jan. 13. 'We might be facing a historically difficult first quarter.'
How steep a slump‾
Data on handset sales in recent weeks are fragmentary, but there seems to be a consensus among analysts that one of the worse slumps ever is already under way. Market watchers disagree only on the depth of the decline. Strategy Analytics, for example, officially predicts a 1% decline in global handset sales for the fourth quarter of 2008 as well as all of 2009.
But Neil Mawston, who follows the wireless industry for the market research firm, says it's likely that the forecast will be revised downward to minus 5% or so for the fourth quarter and the coming year. 'Obviously the pendulum has swung from upside to downside,' Mawston says. He says some suppliers are bracing for an even worse decline of 20% or more, though Mawston considers such forecasts overly pessimistic.
People in the industry will get a better picture of the situation on Jan. 22 when Nokia, the largest handset maker by far, releases fourth-quarter and 2008 financial results. The company warned in December that it was backing off from an earlier estimate that the industry as a whole would ship some 330 million handsets in the last three months of 2008. But Nokia didn't offer a revised estimate, saying the market had become too unpredictable. A Nokia spokesman declined to comment for this story, citing stock market rules that prohibit companies from speaking publicly ahead of earnings reports.
Handset makers' problems go deeper than the lousy world economy. In Europe and the U.S., growth has been slowing for years because practically everybody has a mobile phone. For people who just use their handsets to talk and send text messages, there haven't been major innovations that would prompt people to buy new devices. 'Five years ago, every time someone upgraded they got a lighter device with better battery life,' says Ian Fogg, analyst at Forrester Research (FORR).
Fewer phone upgrades
Now, he says, 'Handsets are pretty good. There isn't such an incentive to upgrade.' And the shaky economy is only compounding the problem.
As the crisis worsens, manufacturers are trying to cut costs by reducing their workforces and trimming marketing or research and development. According to Finnish press reports, Nokia has offered buyouts to senior engineers. Analysts also expect the company to slow its launch of new products and delay a major push to increase its share in the U.S., where Nokia has never achieved the market leadership it enjoys in Europe and Asia.
All the manufacturers want to avoid a ruinous price war. Nokia is sending signals that it won't sacrifice profitability to maintain its nearly 40% global market share. But it may be difficult for handset makers to avoid price cuts as their warehouses fill up with unsold products. Companies will face pressure to fetch whatever they can before the devices become obsolete. 'Inventory has a shelf life. It may be better to blast it out on the market,' says Mark McKechnie, analyst at brokerage Broadpoint AmTech (BPSG). McKechnie, who downgraded Nokia shares to 'sell' on Jan. 12, expects total handset unit sales to plunge 12% this year.
For some, an opportunity
To be sure, the crisis could prove to be an opportunity for players such as Canada's Research In Motion (RIMM), maker of the BlackBerry, or iPhone maker Apple (AAPL). RIM has been successfully expanding beyond its traditional market among corporate users, while Apple has been challenging Nokia's dominance in high-end smartphones.
Korea's Samsung and LG Electronics could also gain market share as a decline in the Korean won makes their handsets cheaper for foreign buyers. And even Nokia may ultimately benefit from the downturn as weaker players exit the handset business and the Finnish giant exploits its dominance in emerging markets. 'The long-term fundamentals are still solid,' says Mawston of Strategy Analytics. 'There are still hundreds of millions of people waiting to get their hands on their first handset.'
Still, it's unlikely that any manufacturer welcomes the worsening slump. Says Mawston: 'The fear has spread from one region to another.'
Ewing is Frankfurt bureau chief for BusinessWeek. With Moon Ihlwan in Seoul
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