Low-cost handsets strategy is risky

As seen in the Telcoflash Issue 143, the mobile future is seen in the emerging markets with more and more low-income subscribers. To address these markets, the natural answer is, of course, to offer low-cost handsets. The dilemma here for vendors is:

• either selling low-cost products with much lower margin and higher costs (new distribution networks to be built, new production ), meaning that the vendor has stable revenues and earnings from developed markets and it is not a permanent case for all vendors; remember Alcatel, Siemens, Sagem, ... and many others that disappeared or are in bad shape. The strategy is to expect harvesting profits when entry-level subscribers upgrade their handsets, and to establish its brand. But the challenge is to survive.

• or do not enter the emerging markets and compromise its future with higher production costs, lower volume and the risk to have much more competition in a narrowing market.

Top 2 vendors, Nokia and Motorola, have chosen to pursue the emerging markets with their own product mix between low-cost and medium/ high-end products. Motorola is embarked in the GSMA ultra-low cost handset initiative and won the two first tenders, providing several millions of handsets in several emerging countries. Both vendors, however, are periodically suffering profit and margin concerns (look at 3Q06 and 4Q06) when high-profit sales in developed countries cannot offset low-profit nature of strong growth in emerging markets.

Sony Ericsson targets profitability and has not yet how to address emerging markets without sacrificing profit or brand value. Samsung, LG, Ningbo Bird and Kyocera are all pursuing the ultra low-cost segment, but their impact is still weak.

According to ABI, 25% of the 1.3bn units shipped by 2011 would be sold at retail price below $20. Given the expected high volume, no vendor can escape thinking at its bottom line and how to remain profitable. Fine tuning of product mix and balanced operations between developed and emerging markets are key for vendor future. Very few will survive.