Low cost handsets - 5 June 2005

Low-cost handset:

The mobile handset market is regularly scrutinized because it is now a mass market, with huge volume (some 700m units) and decreasing average selling prices. So the global market is slightly increasing in value (around $90bn and +4% p.a.). The market is roughly made of 2/3 in replacement and 1/3 with new subscribers. What happened is the relative saturation in developed countries (and associated fierce competition) while developing countries are demanding for low-cost handsets (related to their low income). Both trends are bringing lower margin: higher costs in developed countries and lower margin in developing countries. It is exactly what happened to most handset vendors, and some of them had to exit the market (Alcatel, Siemens, ...). And there are signs that margins will continue to shrink significantly.

There are some lessons to learn from the recent Nokia experience. First margin is key, and it is not a surprise if handset leaders are better than others. Nokia maintained (while decreasing 5 points) a margin around 20%, Samsung saw its margin contracting 9 points to 17%, Motorola increased its margin 0.2 point to 10%. Many others are just at break even or worse negative.

So what is important to do today? It will also highlight main vendors' strategies.

The most important factor is the product range (remember Nokia case). The product range must cover all markets: smartphones for high-income users and low-cost for low-income users. A good mix between those products will help maintaining margins. Second, it is scale. Lowering manufacturing and supply chain costs need high volumes. And high volumes will only come now from developing countries (with low-cost products) in Asia, Africa, LATAM and Eastern Europe.

Most vendors have identified the need for low-cost products and are already active to develop or ship such a device. Remember Motorola winning in February the first low-cost ($40) phone bid launched by GSMA and an alliance of emerging operators. Others are following. It is true to say that the game is worth 1.5bn units over next five years. But the story does not end there. Already, many thought $25 cellular handset achievable within 1 or 2 years. A recent survey conducted by Portelligent confirms that target (with 80% of professional respondents agreeing).