Increased functionality, decreased prices drive growth in Q1

Despite a widely reported economic slowdown, the global mobile handset market was largely unaffected in the first quarter of 2008. According to iSuppli, shipments rose by a double-digit percentage compared to the same period in 2007.

More than 296 million mobile-handset units were shipped globally in the first quarter of 2008, up 17% from 253 million in Q1 2007. While shipments were down 12.4% compared to 338 million in Q4 2007, this decline represents normal seasonality for the mobile-handset business, associated with increased inventories to accommodate the holidays in Q4.

Tina Teng, wireless communications analyst for iSuppli, said the solid first quarter could be attributed to both growth in the emerging markets and a continued strong demand in the domestic markets. The wireless market is growing so fast that cell phone manufacturers were able to overcome a general economic downturn, she said.

“When we look at the whole market, it is going to be very balanced out,” Teng said. “People are more likely to upgrade for a handset in the more mature regions in the world, but then for the emerging markets, it is a communications tool that is a necessity.”

While shipments in the two different markets remained balanced in Q1, Teng said the split between emerging markets and established domestic markets is becoming larger and larger. In the emerging markets, manufacturers typically include lower-end phones at lower price points in their product portfolios. Furthermore, as the material and semiconductor costs continue to drop, so to will the average selling price (ASP) from manufacturer to distributor and, as a result, the price to the consumer.

“For the manufacturers, because they understand it is very comparative and the price just keeps dropping, they want to stay profitable, so they will integrate a lot more features in the handset to try to stabilize their ASPs,” Teng said. “That is what they are always trying to do. They can do very simple handsets for the emerging market, but they have to create this demand in more mature markets. Having more advanced features in the handset [is important] so they can also pull money from that part of the world to at least stabilize their revenue and profitability.”

In terms of worldwide handset manufacturers, the top five remained the same as previous quarters, although the rankings have changed since Q1 of last year. Despite first-quarter struggles in North America, Nokia easily maintained its first place finish in market dominance. The handset manufacturer shipped 115.5 million units, up 26.8% from Q1 2007, giving it a market share of 39%. In its Q1 earnings call, Nokia announced it will build more devices to augment its growing services portfolio, starting with two new projects dubbed “Leevi” and “Gadget” to be embedded with new products in the Nokia software portfolio.

“Number one [Nokia] is always number one; I don’t think any player can surpass Nokia’s performance in any short period of time,” Teng said. “The gap between one and two [Samsung] is too huge. It has more than doubled. It is a lot to catch on.”

South Korean manufacturer Samsung continued to beat out Motorola in total shipments, which it surpassed in Q2 2007, with a market share of 15.6%, up from 13.7% in Q4 2007. The vendor was strongest in the emerging markets, particularly China and India. In Q1, Motorola barely clung to its number three ranking behind Samsung. After announcing a planned spin-off of its handset business, Motorola continued to struggle in earnings, with a 9.3% share of shipments, down from 12.1% in the fourth quarter. The company had a negative 10.5% operating profit margin in Q1.

LG Electronics was hot on Motorola’s tail, capturing only 1% less of the market share. South Korean LG saw shipments rise to 3%, compared to Q4 and by 54.4% compared to a year earlier. With 24.4 million shipments and an operating profit of 13.9%, the company saw success in both the emerging markets and its domestic regions. Quarterly sequential growth was 32.4% in emerging markets with 6.6 million units.

Sony Ericsson, the number five vendor, fell from its number four spot in Q4 due largely to weak demand for its mid-range and high-range handsets, areas that have traditionally been strong for the company. Shipments fell by 27.6% sequentially and rose by only 2.3% compared to same period in 2007. Sony Ericsson’s global market share declined to 7.5%, down from 9.1% in the fourth quarter. Teng said the company’s ASP decline of 9.7% compared to the same period in 2007 could be explained by its moves to expand its product portfolio to lower-cost handsets that address emerging markets.

While new entrants into the cellular space are not likely to penetrate the top five, emerging players in the market, particularly China’s Huawei and ZTE, are making a name for themselves. ZTE today announced that first quarter shipments of its GSM products grew by 100% compared to Q1 of last year. ZTE’s GSM equipment is deployed by more than 60 operators in more than 50 countries worldwide, now including three phones over Advanced Wireless Services (AWS) networks in the U.S.

“ZTE is not competitive in the near term [in the U.S.],” Teng said. “They have to work on their relationship with our operators. They just started. It didn’t take them long to be more like a partner with European operators, but this is a totally different environment. They can bring their experience over here in the US, but I don’t think they can even beat Motorola at all.”

Another non-traditional competitor, Apple, was not able to penetrate the top five vendors either. After three quarters of solid growth, its global market share fell for the first time, from 0.7% in Q4 to 0.6% in Q1. The company shipped 1.7 million iPhones worldwide in Q1 of this year, down from 2.3 million in Q4. The high price point of the iPhone was largely responsible for the dip in sales and has prompted rumors of a cheaper iPhone coming out in June. Either way, Teng said she does not anticipate the top-five rankings will be drastically changing anytime soon.