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Tricky few quarters ahead for Nokia

Posted: 10 Sep 2008     Print Version  Bookmark and Share

Keywords:market share  mobiles  low-end phones  handset makers 

Nokia's warning that it is losing market share to rivals who are undercutting it spooked the markets late last week.

However, Nokia's problem does not seem to be confined to uneconomic price cutting at the low-end. The

Finnish group has also hinted of a quality problem in a mid-tier device which hit Q3 volumes, which will bear down on margins.

The problem, or problems, are likely to be temporary, but it must still have been galling for Nokia to admit that its long period of gaining market share in mobiles, especially in large emerging markets, which seems to have been almost uninterrupted over the past few years, is stalling.

It tried to sweeten the pill by stressing the decline in market share is a consequence of it not willing to get into a price war for low-end phones. This is being waged not only by major competitors, such as Samsung and lately Motorola—as it tries to beef up volumes ahead of its planned demerger of the mobiles unit—but, importantly, from smaller Asian handset makers, including Chinese ones, who are aggressively trying to gain share.

Of course, as analysts have also been suggesting, Nokia itself has not been immune from an element of price cutting.

The bottom line here is competition has ramped up substantially, and this will not go away quickly.

The emerging vendors are vigorously trying to gain share in China, India and Africa and are compensating for their poor product quality and lack of differentiation by offering the phones at very low prices. They are likely to be hemorrhaging cash to do so, but probably see this as an entry strategy.

As Richard Windsor, analyst at Nomura Securities noted, Nokia is by far the lowest cost producer and if it can't make money at these prices, then probably no one can.

Of course, Nokia is not the only one to have indicated recently that it is feeling the pinch, and that consumer confidence is weakening. But since it took 40 per cent of the market in the second quarter, it is not surprising that its bearish comments had such a brutal and immediate impact on its share price, and questions being asked about the growth of the handsets sector never mind the sustainability of the prices being offered by new competitors.

Sony Ericsson has issued two profit warnings so far this year, and Samsung, admitted it, too, is losing market share amidst signs of a slowdown.

Again, Nokia tried to smooth the nerves of investors and analysts, reiterating that it still sees volumes this year growing by about 10 per cent from the 114 crore (1.14 billion) units shipped mark it estimated late last year.

So, a tricky few quarters ahead for Nokia, and for the wireless sector all round.

- John Walko
EE Times Europe

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