Mobile Phones
Is Siemens' Gloomy Handset Outlook Off Target?
By Peter Benesh
IBD
Sometimes small clues, or small numbers, yield big insights. On May 9, Siemens AG board member Volker Jung said at a London analysts' meeting that total world handset sales this year could be as low as 400 million units. That would mean a decline from the 412 million units sold last year. It would be the first time that cell phone sales fell year-to year. That sounds bad. It also sounds wrong, says market tracker Dataquest Inc. The San Jose, Calif. based market research firm on Thursday said handset sales could reach 506 million this year.
The true number of sales, of course, will depend on many factors. Dataquest analyst Bryan Prohm and others say the handset makers are being cautious this year after overestimating sales last year. But some analysts say that Siemens' projection could be a warning of problems at the company, or industry wide.
Most Pessimistic Siemens is the first to go public with such a pessimistic number, says Bob House, London-based analyst with consulting firm Adventis.
"That's the most aggressive reduction I've heard," House said. .All handset makers conceded months ago that 2001 sales would miss the rosy forecasts made before tech industries started slumping badly in the fourth quarter. But Siemens offers the grimmest 'outlook.
.No.1 handset seller -Nokia Corp. predicts sales of 450 million to 500 million units this year. No.2 Motorola Inc. sees 425 million to 500 million units. No.3 LM Ericsson AB says 430 million to 480 million units.
The' Siemens projection throws doubt on the belief that new technology will drive wireless demand, industry observers say. It adds weight to warnings that key markets are near saturation.
Yet House says it's not surprising. Many people in the industry, he says, no longer expect handset sales even will meet reduced expectations.
Dataquest couches its projection, saying it depends on factors such as what happens with the economy, with Nokia's production and with subscriber growth among wireless carriers.
Locking in a number for handset sales this year is difficult, says Sosia Ghachem, an analyst with UBS Warburg LLC in London. "We came to a number between 425 (million) and 450 million," she said; Siemens' outlook bears study, she says, since the German company has been on the upswing. UBS Warburg has reported that Siemens has overtaken Ericsson for third place, "We believe this is due to Siemens' more attractive product portfolio, said a recent UBS Warburg report. .
Like other handset makers, Siemens is cutting costs: The company has said it will cut 8, 100 jobs, or almost 10% of its wireless and network work force.
Company: Slowdown Won't Last
The company didn't return phone calls, but in an e-mail response a Siemens spokesman backed away from lung's prediction. "We see a world- wide growth rate of about 10% for mobile phones for 2001 (which would be about 465 million)," wrote Siemens spokesman Axel Heim. He says the slowdown in handset sales growth won't last long.
"It is going to stabilize," he said. "The growth potential is in the markets which are not highly saturated,"
Unsold inventory is what has hit the entire wireless industry, says Lief SoQerberg, a senior vice president with Motorola. He says 35 million phones are in stock, six to seven weeks of inventory. That, however, is an improvement. At the end of 2000, carriers world- wide had more than II weeks of inventory, Soderberg says. And he says the rest of those unsold phones will be sold this quarter.
Several factors, both good and bad, might affect handset sales, analyst Ghachem says. One is the growth of the Chinese market. It's outpacing' predictions. Another is the changeover by A T &T Wireless from a standard it's long championed, called time division multiple access, or TDMA, to a worldwide standard called Global System for Mobile Communications, or GSM. This change will prod some subscribers to get new phones.
A third factor is that European carriers are starting to experiment with a new system. More carriers are requiring subscribers to pay for their phones up front instead of subsidizing the phones over time.
"Subsidy cuts have just kicked in in Western Europe, and we don't know how the market will react," Ghachem said.
Europe Gets saturated
Cell phone makers must attract first time and replacement buyers. In Europe, where mobile phone penetration is highest, the market for first- time buyers is becoming saturated. A recent report from the U .K. arm of J.D. Power & Associates says more than two of every three British households have mobile phones. That's up from 44% in the past year.
Of those U .K. households with mobile phone's, 67% have two or more. Teen-agers account for 90% of new phone sales, says 1he report. They, or their parents, prefer cheap phones and, low-cost service. Parents often won't pay to upgrade a child's cell phone.
Europe has seen a huge slowdown, says anil1yst House, especially ill Germany and the U .K. "The largest factor in these (European) markets is that the replacement rates are not going to come through as previously Expected," he said.
Just months ago, handset makers and wireless carriers were predicting that new technology .would spawn a wave of demand: A new standard, called Wireless Application Protocol, was going to put image-rich Internet content on mobile devices. The industry also expected third-generation wireless would energize mobile commerce and bring on a host of services, from live video conferencing to music and games, . Neither 3G nor WAP has delivered as promised. Surveys show people don't feel compelled to upgrade to either. The J. D. Power U.K. study found that fewer than 10% of house-holds with mobile phones had WAP- enabled devices. , Only 25% of British non-WAP. Cell.phone owners are interested in the mobile Internet. That's down from 33% in 2000, says Gunda Lapski, a J.D. Power analyst: "The difference may well reflect the negative publicity that has surrounded WAF features and content," she wrote in the report. . "This (W AP) is one of the technologies people were expected to want in a replacement phone," said analyst House. "But they're not as interested as the, industry had hoped: "
Losing Market Share?
lung's dark view may reflect Siemens' slipping sales, says Mark Roberts, San Francisco.-based analyst for First Union Securities Inc; "If you look at different handset makers, any time they announce they're seeing a weakening in demand it usually turns out that they're starting to lose marketshare," he said.
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It can take two quarters for a company to accept that its problems aren't industry wide, " he says. "If you're a sales and marketing vice president and you're missing your target numbers, what do you tell your boss? His answer: 'It's not my fault. It's the market.' "
Rising inventories are a sign of a company's woes, Roberts says. "We suspect that Siemens' inventories, unlike others in the industry, may actually be rising," he said. Nokia isn't facing that kind of weakness, Roberts points out. "In order to generate demand you have to reinvent your entire product line every year, which Nokia does," he said. "Last year, Siemens had three or four cool, sexy phones. It might be difficult for them to come up with an encore this year. Nokia's success formula is 20 new models a year. That's a very high R&D barrier."
Ghachem of UBS Warburg says Siemens faces the trials of all companies that aren't in the top tier of their market. She says Siemens definitely is an up-and-comer, At the same time, Ghachem says, it only has about 8% of the market" At that level market share," she said, "they're going to be much more sensitive to changes in demand, and they're likely to suffer more than others if demand falls. " |
