Global Insight Perspective | |
Significance | Handset sales, which had been rising inexorably, are expected to drop in 2009 as a number of influences that have already slowed the market combine with the global economic slowdown. |
Implications | Nokia is recognising that economic factors will impact on the business and has highlighted the moves it has already made to limit the impact, while noting that further cost-cutting may be implemented. |
Outlook | Cutbacks are hitting the handset industry as consumers faced with economic uncertainty rein in spending and carriers cut demand forecasts, creating an immediate hit in the fourth quarter. The actual impact of the slowdown has yet to be determined in terms of the product mix, with the slew of high-end handsets—an area in which Nokia has limited its presence—complete. |
Nokia has posted an updated outlook for the fourth quarter and a preliminary outlook for 2009 as the rocky economic climate bites, with the global economic slowdown, coupled with currency volatility, cited for a reining in of consumer spending, including in the handset market, while the limited availability of credit is blamed for impacting negatively on the purchasing ability of trade customers.
Fourth-quarter device volumes across the industry are now expected to be approximately 330 million, which, while slightly up on the third quarter's 310 million, is less than the expected seasonal fourth-quarter boost and would decrease full-year estimates by 20 million units to 1.24 billion. This will still be up on the previous year, with 1.14 billion handsets estimated to have been sold during 2007. However, 2008 is considered to be something of a peak year, with the full-year outlook for 2009 expected to be down on 2008. Nokia's market share is expected to be maintained or even rise marginally on the previous quarter, having expected and seen a slight fall in share in the third quarter after reaching a high of 40% unit share by the end of 2007. In addition, with the strong euro not helping the situation, Nokia and Nokia Siemens Networks' mobile and fixed infrastructure is also positioned to see a decline in sales in euro terms.
Nokia notes that a number of cost-saving actions have already been instigated, including the job cuts announced recently, although these were attributed to long-term strategies rather than in direct response to the economic climate (see Germany-Finland: 12 November 2008: Nokia Siemens Slashes 1,250 Jobs across Finland and Germany and World: 5 November 2008: Nokia Restructure Will Cost 600 Jobs). Nokia notes that it will also curtail the use of external contractors, consultants and professional services as it rides out the recession and is prepared to act to cut operating expenses further in 2009 in order to respond appropriately to market conditions as they evolve. Nokia chief executive Olli-Pekka Kallasvuo stated, "Nokia believes that its advantages of scale, leading brand, superior logistics, low-cost and broad product portfolio are competitive advantages that will enable us to distinguish ourselves from the competition in a challenging 2009".
Outlook and Implications
Impact on the Handset Market
The general economic conditions have piled on the pressure in a market that is already facing significant pressure from the market developments of the last few years. Factors effecting handset sales include:
- Highly Penetrated, Mature Markets: The market in the richer developed economies has been slowing as penetration rates have exceeded 100%. For example, Spain is expected to reach 119%, the United Kingdom 124% and Italy 160% by the end of 2008. At the end of 2007 the U.A.E. stood at 173%, while the Ukraine topped 100%. These SIM-based penetration rates are highly skewed by multiple SIM ownership, with around 84% actual penetration of the U.K. population for instance. In the United States where pre-paid is less popular, the penetration rate will only reach 89% by the end of the year, although a significant slowdown in net additions has already hit the market, with the third quarter of 2007 counting 5.2 million new customers for the top eight carriers compared to 3.4 million in the third quarter of 2008 and no-contract or pre-paid options becoming increasingly popular (see United States: 10 November 2008: Sprint Loses 1.3 mil. Customers, Continues Swing to Loss).
- SIM-Only Sales, Lengthening Contracts and Replacement Cycles: Contract lengths have been extended, with European carriers pushing up from one- to two-year contracts as they seek to take back the subsidies they expend on handsets. In Canada, the iPhone sold by Rogers was introduced on a three-year contract (see Canada: 1 July 2008: Rogers Criticised over iPhone Pricing). This has been matched by the introduction of SIM-only sales, helping customers to save money by using their own, independently acquired handsets, or more usually keep their old handsets. In the United States, this has been extended to CDMA handsets that do not use SIM cards, with the low-cost carriers offering to re-flash handsets onto their network (see United States: 27 June 2008: Keep Your Old Handset—MetroPCS Pushes Re-Flashing).
- Effective Handsets Already in the Field: The above trends are only viable as handsets already in use often meet users' requirements. Effective camera-phones with more than 3-megapixel resolution, flash, video recording and playback, music players, email, MMS, and 3G internet access have been widely available for several years. New improvements are largely incremental rather than significant new, must-have features. At the other end of the market, many users are happy with basic voice and text (SMS) services. Technophobes are reluctant to move up to newer, increasingly complex handsets, while the economically ungifted see little added benefit in 'nice to have' rather than must-have communications facilities.
- Tough Competition At the Top: The early adopter segment at the top end of the market has been feted with a slew of attractive handsets, with manufacturers pulled along by the 'sailing ship' effect of the iPhone launch (see World: 22 October 2008: Apple Grows Profits as 6.9 mil. iPhones Sold During Fiscal Q4 and 8 October 2008: RIM Cooks Up a Storm with New Touch-Screen BlackBerry). Nokia has competed at this end of the market with the N-Series handsets, but in repetition of its reluctance to introduce flip phones, has steadfastly refused to release its own touchscreen-based 'iPhone clone'. Even the relatively late entry to the touch-screen format is a more mass market-oriented entry than most of the iPhone competitors (see World: 3 October 2008: Nokia Takes On the iPhone with Touchscreen Handset).
- Economically VulnerableDeveloping Markets: Nokia, as with most other companies, has been looking towards the emerging high-growth markets for its own continued growth. While this has helped to maintain unit sales, it has also pressured average selling prices, thus making margins slimmer. With volatile exchange rates, these margins are under increasing pressure, particularly as Nokia accounts are euro-denominated, which has so far remained relatively strong. In addition, the consumers in these markets are likely to be the first to feel the real impact of a slowing economy as manufacturing slumps and workers with lower levels of protection are laid off. At the very least, the urbanisation processes and new hires that had fed continued growth have halted and personal spending choices have been analysed, making new or first handsets, let alone testing of new services, less likely (see World: 4 November 2008: Nokia Launches New Services and Handsets for Emerging Markets and 22 October 2008: Nokia Looking to China, Emerging Markets for Growth). China in particular has its own local vendors, such as ZTE, which is building a competitive handset business (see China: 3 October 2008: ZTE to Ship Windows-Enabled Smartphones and World: 8 July 2008: ZTE Sets Target of 50 Million Handset Shipments in 2008).
There have been a number of signs of a slowdown for infrastructure and handset vendors. Back in September 2008, Qualcomm and Texas Instruments—the chip companies that supply many of the handset makers—noted that they were seeing a slowdown in orders as their customers tightened inventories in expectation of tougher times, with Qualcomm's chief executive, Paul Jacobs, noting, "We're seeing some evidence there's a lengthening of replacement cycles" (see World: 4 September 2008: Chip Companies Highlight Subdued Handset Market). Motorola was the last of the major vendors to report results and, in consolidating the top vendors' results, sales that usually climb for the top five throughout the year after the post-Christmas Q1 slump actually declined by 1.7% on the previous quarter (see World: 31 October 2008: Motorola Posts Losses as Revenues Drop in All Segments, Handset Spin-off Postponed). Samsung has noted that it expects tough trading in the fourth quarter of 2008, while RIM and Qualcomm note an unpredictable time as the high-end handsets and wider range of devices battle against the prevailing economic climate (see World: 14 November 2008: RIM and Qualcomm Note Unpredictable Ride for Handset Market).
In the infrastructure segment, Nortel has also recorded a significant quarterly drop after carriers have held back on capital spending as the impact of the credit crunch curtails some borrowing/investment and creates a general atmosphere of caution (see World: 11 November 2008: Nortel Reviews Business as Revenues Drop 14% Y/Y). The carriers themselves are slightly better positioned as consumers will largely continue to buy the same services, although growth that had been consistent in the mobile business could slow down—as has been seen in the United States. New value-added services, such as mapping, music and entertainment—an area in which Nokia had hoped to create new revenues as core handset sales were already likely to slow down under some of the pressures outlined above—will also face a tougher time in gaining market acceptance and generating revenues in these less-frivolous times.