Handset Vendors -- A Peek Into 2005
By Steve Wallage, Tue Jan 11 16:45:00 GMT 2005

2004 was a surprisingly good year for the handset vendors but, despite the influence of 3G, many challenges lie ahead in 2005.


Forecasters just kept upping their numbers for handset sales in 2004, with the final figure being something around 630-650 million, an increase of around 20% over the previous year. The fact that emerging markets were strong wasn't a big surprise, but replacement sales were far better than predicted in Europe and the US. Yankee Group figures showed a 19% increase in third-quarter sales in Western Europe, while Gartner third-quarter figures for North America showed a 22% rise.

So are these trends expected to continue in 2005? The forecasters are saying No. S&P are saying 700 million handsets, while Gartner say the rises in developed markets are unsustainable. Nokia is predicting 693 million handsets will be sold and Samsung forecasts a less than 10% rise.

The trend in handset replacement is an area of contention between analyst firms. For example, Gartner believes that in Western Europe, "sales growth may slow as the rise seen so far in the number of consumers replacing handsets starts to level off." However, ARC Group research suggests that the replacement cycle will speed up. They predict that, globally, the percentage of sales that are from replacements will go from 55% in 2004 to 83% in 2009.

Of course, it's not just the number of handsets that are sold but the type, and the price. Although 3G can clearly raise the average price per handset, analysts suggest that competition and aggressive operator subsidies will limit this effect.

But what about individual vendors? For the third quarter of 2004 in global sales, Gartner places Nokia at 30.9% (from 34.2% a year ago), and Samsung replacing Motorola at number two with 13.8% (from 11.2% a year ago). While Motorola retains 13.4%, fourth place is Siemens at 7.6%. While Sony Ericsson, Sagem and LG gained share in the year, the top 10 in 2005 is likely to show some major changes. Key issues in 2005 will be the strength of the major vendors, consolidation among vendors and the rise of the Chinese vendors.

The Major Vendors

While Samsung and Motorola battle it out for the number-two slot, Nokia has again reiterated its aim of a 40% share of the global market. It has also committed to releasing 40 new handsets in 2005, with Motorola claiming to be launching 30 new devices.

Looking around the world, one can see the challenges facing the three big vendors. In the US, Gartner sees Nokia suffering from, "lack of clamshell products, reliance on low-end handsets and weakness in CDMA," and that "more significant progress will not come until the second half of 2005." Samsung has continued to do well, though, and roughly doubled shipments in 2004. In Asia and Europe, all three have used price cuts to maintain share. Particularly in emerging markets, domestic players have been able to undercut the big three vendors and use local knowledge, such as Ningbo Bird in China growing through success in smaller towns and cities.

At the high end, smartphone sales have now exceeded those of PDAs, and Gartner estimates that over 80% of this market use Symbian. However, RIM remains its iconic status among PDAs, and its 2005 plans include products such as the 7100 with far more mass-market appeal.

Yankee Group believes that, "most emerging vendors and new market entrants cannot replicate the ready access to internal or quasi-internal resources of the incumbents." Equally, many of the established players are struggling to differentiate their products and match the low-cost production of new entrants. This was a key part of the rationale of Ericsson in forming Sony Ericsson. The agreement between TCL of China and Alcatel in 2004 to form a 55%-45% joint venture is also likely to be a template for other vendors. The most likely candidate is Siemens. It has already announced it plans to make a definitive statement on its future mobile handset plans in the next few weeks. Siemens has already successfully partnered with NEC in 3G infrastructure, and is well represented in China.

Chinese and ODM Vendors

While at the top end of the device market products are becoming increasingly complex and integrating a myriad of new technologies, this still leaves a very large low end of the market. Chinese vendors, such as Ningbo Bird, DBTel and TCL, claim up to 50% of their own market. Ningbo Bird, in particular, has aggressive international expansion plans, it sold 3 million devices outside China in 2004, and plans for 20 million in exports by 2006. Together with its projected 20 million in domestic sales in 2006, this would give it a global market share of over 5%. While its ability to grow at this pace is far from clear, these sort of numbers show the threat to the larger players -- at least two Chinese vendors are likely to enter the global top ten vendors this year.

The increasingly availability of handset reference designs and the desire of some operators for own-branded handsets will also mean that 2005 is another good year for the ODM vendors.

Conclusions

2005 could be a pivotal year among the handset vendors. In previous years, we have seen a number of the players drifting in terms of strategy and market share. There has also been surprisingly little change among the ten largest players, with few new entrants on the list. This year, perhaps spurred by 3G and increasing competition, there seems more focus among vendors to start differentiating their products and focus on particular niches, or form a joint venture or even exit the market. The further segmentation of the market will mean that total sales will become less important than margins and success in particular segments, particularly the high end of the market.