Mid-September, as the economic downturn set in, consumer spending took a hit, creating perhaps the most difficult business climate in decades. Most business verticals felt the effects of the crisis ?? from real estate, to banking and financial services, to fast moving consumer goods (FMCGs) and retail and manufacturing.
The lean economic times trickled down to even high-growth sectors like telecom. After six years of uninterrupted growth, the mobile handset industry suddenly took a beating. Sales that had grown by 15 per cent in the first half of calendar year 2008, saw demand diminish by the third quarter.
According to research firm Strategy Analytics, global mobile handset shipments grew by a meagre 5.4 per cent to 303 million units in the third quarter of 2008, compared with 13.2 per cent in the corresponding quarter of the previous year, as growth in the emerging markets slowed down to its lowest rate since 2002.
The $190 billion handset market, which started building up in the 1980s and became a major growth industry after a spike in telecom in the late 1990s, faced a brief lull in 2001 (the year of the “dotcom bubble burst”) when sales dipped somewhat. But demand picked up soon after. The current economic crisis, analysts say, is much bigger and will last far longer than the previous one.
Forecasts for the handset industry are, therefore, not too bright. A week after Qualcomm cut down its fiscal 2009 estimates, citing a sharp drop in orders for its wireless chips, the world’s top mobile handset maker, Nokia, announced that it expects mobile phone sales in the fourth quarter of 2008 to be lower than expected earlier. It is the second time in successive quarters that Nokia has issued a profit warning. According to an industry expert, “Normally, this does not happen until later in the quarter. For them to pronounce this downside does not augur well. To preannounce this in November means it’s really bad.” Nokia’s revised estimate for 2008 handset sales is 1.24 billion devices, down from 1.26 billion.
There are several reasons for this trend. “While new subscribers around the world continue to be added in droves, those replacing their phones are going to put off those purchases,” says an analyst who expects a continued drop in profit earnings by major handset makers as the fourth quarter wears on. The fourth quarter is otherwise considered to be the highest revenue-generating period as it includes the crucial Christmas holiday season.
The market for mobile devices has also been negatively impacted by the relatively limited availability of credit, which has narrowed the purchasing ability of trade customers/retailers.
Manufacturer outlook
While Nokia, with its key advantages of brand following, low cost and broad product portfolio, is better positioned to face competition in a challenging 2009, Motorola and Sony Ericsson look more vulnerable, given that both companies are reporting losses.
LG Electronics, which has faced difficulty turning in profit in the handset business, is also unlikely to improve margins. Meanwhile Samsung, which has posted a continued drop in margins, recently overtook Motorola in the US handset market. Analysts do not expect it to fare as badly as Motorola and Sony Ericsson.
Seemingly impervious to the global sales recession, Apple saw its global market share rise sharply by 2.1 percentage points to 2.3 per cent in the third quarter of 2008, from 0.2 per cent posted in the second quarter, becoming the world’s sixth largest handset brand.
Indian scenario
Though not so badly off, the Indian handset market too is seeing its first major drop in handset sales since the mobile revolution hit the country. According to a recent data by ORG, handset sales in the top 35 cities fell by 3.7 per cent in the JulySeptember 2008 quarter, compared to the corresponding period in 2007.
But analysts do not expect this trend to continue long. Notwithstanding the impact of the global financial crisis on the Indian economy, subscriber additions seem to be growing at a constant pace. The mobile industry is still adding 8-10 million subscribers every month, a major portion of them in the hinterland. Handset manufacturers are now counting on these new areas for growth. “As the present consumers are opting not to upgrade their phones, our focus now is on the semi-urban and rural markets,” says a senior Motorola official.
Meanwhile, the high-end handset segment may not be overly impacted by the downturn, believes Pradeep Shrivastava, chief marketing officer, Idea Cellular, which recently introduced two touchphone models with HTC: “The ongoing recessionary trend may not affect the demand for these types of phones, though customers may tend to be a little cautious before shifting to the new products.”
Future outlook
As far as 2009 is concerned, most telecom analysts forecast it to be lacklustre, belying handset maker hopes for a sales upswing from new models and services.
According to research firm Informa Telecoms & Media, revenues from mobile phone sales are expected to grow at a compounded annual growth rate of 6.8 per cent between 2007 and 2013, and should exceed $200 billion by the end of 2013. Importantly, it is expected that the emerging markets, including Brazil, Russia, India and China (BRIC), and Africa, will contribute in a big way to the global handset market value, with a 60 per cent share in 2013.
