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=DJ THE BOTTOM LINE: Cheap Phones Key To Emerging Mkt Riches
By Buster Kantrow Of DOW JONES NEWSWIRES
STOCKHOLM (Dow Jones)--Fancy new cellphones may grab the headlines, but there's a pivotal scrum underway at the other end of the mobile phone market too.
From China to India to Brazil, European phonemakers are scrambling to bolster their positions in some of the world's most populous countries, where cellphones remain far less common than in the developed world. In these markets, simple and inexpensive models are the weapons of choice.
At stake for the phonemakers is a chance to seize an early edge in regions where subscriber growth remains brisk, enabling them to offset mixed results in convincing their existing phone users to upgrade to pricier models.
"In terms of volumes, the emerging markets are vital," said Neil Mawston, a senior wireless analyst at research firm Strategy Analytics Ltd., "and for vendors in second, third and fourth positions, there's the potential to grab some market share from Nokia."
Sales to new phone users should account for at least a third of overall industry shipments this year, and Deutsche Bank analysts estimate that nearly two thirds of new subscribers will be in developing countries.
Phonemakers have taken notice. Nokia (NOK), the world's largest handset maker, has a special unit dedicated to developing low-end phones for first-time buyers. Samsung Electronics Co. (Q.SSE), which has focused until now on mid-range and high-end handsets, said earlier this year that it is considering producing inexpensive handsets for India.
Both Nokia and industry No. 2 Motorola (MOT) are scrambling to fight off competition in China, already the world's largest phone market and still one of the fastest growing.
Other key growth markets include Russia, Eastern Europe, Indonesia and parts of Africa, said Bengt-Aake Gyllenberg, the head of Nokia's entry-level phone division.
Business in emerging countries is also influencing the wider market in unexpected ways. In April, Nokia Chief Executive Jorma Ollila said subscriber growth in emerging markets is pressuring the average selling price, or ASP, of Nokia phones, which has deteriorated more quickly than many analysts expected and raised concerns about Nokia's growth prospects.
"There is a bigger portion of new subscribers coming in emerging markets than was forecast a year or two ago, which has been very low-end (phones) and that has affected the ASP and unit prices," Ollila said.
Despite falling prices, Nokia's profit margins have been improving. Revenue, though, can be hit. And if revenue isn't growing, it's tough to boost profits.
China The Big Battleground
China remains the biggest battleground. Operators there have been adding 4 million subscribers a month, but four out of five Chinese still don't have a mobile phone.
Motorola and Nokia are the largest suppliers in China, but both have been losing ground to domestic manufacturers. Deutsche Bank estimates that there are at least 30 local phonemakers in China, where overproduction in recent months has left phones sitting on retailers' shelves and put pressure on prices.
Analysts say the Chinese phonemakers that survive the fierce local competition may move into the worldwide market in coming years, providing new competition at the low end for Nokia and its rivals.
China is particularly crucial for Motorola, which is strong in North America and other parts of Asia but a smaller player in Europe. Motorola has hinted in recent weeks that the outbreak of severe acute respiratory syndrome, which has kept shoppers in Beijing and other Chinese cities at home, could weaken its second-quarter results.
Nokia, for its part, recently revamped its distribution network in China, hoping to bolster its position in rural areas where analysts say local suppliers have an advantage. The company also plans to begin selling handsets for China's second-largest network standard, code division multiple access, or CDMA, during the second half of the year, Gyllenberg said.
"It gives us both reach and a more immediate market touch," Gyllenberg said. "You have your finger on the market pulse because you're closer to where the real action is."
Nokia has had early success in China with its 2100 handset, the first from Gyllenberg's unit. The 2100 - a characteristic, candy-bar shaped model that supports voice and text messaging - is now on sale in Europe and Brazil.
Gyllenberg, Nokia's top salesman in Europe as mobile phones took off in the mid-1990s and later its sales director for Asia, said the common thread in emerging markets is a lack of well-established fixed-line networks.
Mobile networks can step into the breach, he said. But the key to subscriber growth isn't simply selling inexpensive phones. Operators, together with manufacturers, must lower the "total cost of ownership," including the subscription.
He said Nokia helps explain the business case to operators, encouraging the use of strategies such as prepaid plans and calling-party-pays charging that allow subscribers to control their spending.
Next to China, today's hottest market is India, where the number of subscribers has tripled to around 12 million in the past year. Strategy Analytics expects the base to balloon to 75 million by 2008. Even then, though, fewer than one in 10 Indians would have a mobile phone.
Mawston said Nokia is tops in India but other phonemakers are taking aim at the market. In addition to Samsung, Siemens AG (SI) said last week it would ramp up its own sales efforts and add engineers in India, which it said would become its second most important wireless market in Asia. Qualcomm Inc. (QCOM), which receives licensing revenue for CDMA phones, also has high hopes for growth in India.
"They are really, really underdeveloped," Gyllenberg said of the Indian market. "The regulatory environment and the competitive environment are just starting to fall into place. You're going to see quite substantial growth in markets like India."
Strategy Analytics' Mawston said the early battles are important because the phonemakers can establish relationships with customers who will eventually want to buy another, likely more sophisticated and more expensive phone.
"Once you build up that installed base, it's very difficult for someone else to penetrate it," Mawston said, citing Nokia's entrenched position in Europe, where it supplies nearly half of all phones sold.
"If they're familiar with a particular brand already, it can be very difficult and very expensive to get them to switch," he said.
-By Buster Kantrow, Dow Jones Newswires; [phone]; [e-mail]

(END) Dow Jones Newswires
05-30-03 0535ET