Only a few months ago, it looked like the mobile-phone industry might escape the worst of the global economic slowdown. After all, billions of people in emerging markets still don't have phones and are keen to get them. Executives at Nokia and other manufacturers had hoped that pent-up demand in developing countries would help them power past a slump in Europe and the U.S.
Those hopes are evaporating fast. Market watchers are now warning that sales are slowing faster than expected even in markets such as China, which had seen explosive growth for years. After a fourth quarter of 2008 that some analysts are calling disastrous, manufacturers could be stuck with millions of unsold handsets. Weaker players such as Motorola (MOT) and Sony Ericsson, which were struggling even before the downturn, could drastically scale back their ambitions or even leave the market.
Even mighty Nokia (NOK), once a stock market favorite, is suffering the humiliation of downgrades by analysts. Jari Honko of Helsinki-based eQ Bank is among those now advising clients to sell their Nokia shares. 'Christmas sales were very, very disappointing,' says Honko, who cut his rating on Nokia shares to 'reduce' on Jan. 13. 'We might be facing a historically difficult first quarter.'
How steep a slump‾
Data on handset sales in recent weeks are fragmentary, but there seems to be a consensus among analysts that one of the worse slumps ever is already under way. Market watchers disagree only on the depth of the decline. Strategy Analytics, for example, officially predicts a 1% decline in global handset sales for the fourth quarter of 2008 as well as all of 2009.
But Neil Mawston, who follows the wireless industry for the market research firm, says it's likely that the forecast will be revised downward to minus 5% or so for the fourth quarter and the coming year. 'Obviously the pendulum has swung from upside to downside,' Mawston says. He says some suppliers are bracing for an even worse decline of 20% or more, though Mawston considers such forecasts overly pessimistic.
People in the industry will get a better picture of the situation on Jan. 22 when Nokia, the largest handset maker by far, releases fourth-quarter and 2008 financial results. The company warned in December that it was backing off from an earlier estimate that the industry as a whole would ship some 330 million handsets in the last three months of 2008. But Nokia didn't offer a revised estimate, saying the market had become too unpredictable. A Nokia spokesman declined to comment for this story, citing stock market rules that prohibit companies from speaking publicly ahead of earnings reports.
Handset makers' problems go deeper than the lousy world economy. In Europe and the U.S., growth has been slowing for years because practically everybody has a mobile phone. For people who just use their handsets to talk and send text messages, there haven't been major innovations that would prompt people to buy new devices. 'Five years ago, every time someone upgraded they got a lighter device with better battery life,' says Ian Fogg, analyst at Forrester Research (FORR).
Fewer phone upgrades
Now, he says, 'Handsets are pretty good. There isn't such an incentive to upgrade.' And the shaky economy is only compounding the problem.