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Nokia feels pressure of economic slowdown

Posted: 10 Sep 2008 ?? ?Print Version ?Bookmark and Share

Keywords:Nokia market share? effect economic slowdown? wireless industry?

It seems that even handset giant Nokia Corp. is not immune from the economic malaise.

The mobile phone giant's warning that it is losing market share to rivals who are undercutting it spooked the market late last week, and with it major suppliers such as STMicroelectronics, Texas Instruments and Qualcomm.

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 Motorolaas it tries to beef up volumes ahead of its planned demerger of the mobiles unitbut, 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.

Market pressures
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 percent of the market in Q2, 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, the number two player in cellphones, admitted that 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 percent from the 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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