News From Telecom World

Average margin at top five handset vendors shrinks to 4%

Posted on: May 28, 2009

New research from Wireless Intelligence has revealed that the world’s largest mobile handset vendors are facing severe financial pressures as they continue to invest in their product portfolios during the market slowdown. We estimate that the average operating margin at the top five vendors – Nokia, Samsung, Sony Ericsson, Motorola and LG – declined to around 4% in 1Q09, down from an average of 13% a year ago.

However, as our data shows, vendors have been unable to reduce expenditure in core areas such as R&D and marketing to offset shrinking margins. R&D expenses are estimated to have risen from 10% in 1Q08 to 12% in 1Q09, while marketing costs have risen from 9% to 10% over the same period. Margins in the sector have also been negatively affected by a high-level of product inventories, fierce price competition, and a decline in the Average Selling Price (ASP) of devices.

The figures highlight the predicament faced by handset vendors as they continue to invest in markets where demand is slowing and margins are shrinking. Vendors are looking to cut costs in R&D and marketing during 2009.

In the first quarter of the year, the top five vendors shipped 191 million devices worldwide compared to 236 million a year ago, a 19% decline. Many vendors – including market-leader Nokia – are predicting a further 10% decline in shipments during the current calendar year. Shipments for the current quarter are expected to be flat sequentially and down year-on-year.

Nokia, Sony Ericsson and Motorola all reported an annual decline in revenues in 1Q09, while only Samsung and LG, the two South Korean vendors, reported positive revenue growth. As a consequence, profits have dropped significantly at most vendors.

Our analysis forecasts the following trends in the mobile devices market in 2009:

• cost savings to be made in R&D as vendors look to streamline their portfolio of devices;
• vendors to focus on smartphones to generate high-margins and lower-tier devices to generate high volumes and maintain market share. Less focus on devices in the mid-tier segment;
• vendors embracing content/media services, shifting the battle in the handset space from a pure hardware play to a software-centric strategy;
• an increase in joint-marketing campaigns with mobile operators and distributors;
• the outsourcing of lower-tier devices to Original Design Manufacturers (ODMs) such as HTC, Compal, Foxconn and Asustek.

The current pressures we are seeing in the handset market have been caused mainly by the high level of maturity in developed markets, though the economic downturn has also played a part with regards to unfavourable currency fluctuations. Depending on the level of subsidies and how fast the bill-of-materials for smartphones declines, handset vendors will have to monitor price elasticity and device price erosion in 2009 carefully.

Vendors that do not have a compelling and competitively-priced portfolio of devices ready to ship in time for the crucial last quarter of the year are likely to be in for a rocky ride in 2010.

Source: telecomasia.net

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