=DJ Nokia-Sanyo JV May Spur Need For More Handset Co Tie-Ups
By Yun-Hee Kim Of DOW JONES NEWSWIRES
HONG KONG (Dow Jones)--Nokia Corp. (NOK) and Sanyo Electric Co.'s (6764.TO) proposed joint venture in the code division multiple access, or CDMA, cellphone business may not alter significantly the market landscape in the near term but could raise the need for more tie-ups in the future as competition intensifies.
"In the short term, handset mergers nearly always lead to market-share losses as the two parties struggle to mesh together effectively," said Neil Mawston, an analyst at market research firm Strategy Analytics in London. "In the longer term, the outlook for Nokia-Sanyo is encouraging due to an impressive combination of Nokia's brand and distribution, and Sanyo's product and technology expertise."
Last week, Nokia and Sanyo said they plan to form a joint venture to become one of the world's biggest makers of advanced technology phones based on the CDMA wireless standard widely used in the U.S. and Korea. While the CDMA market is smaller in scale compared with the GSM, or global system for mobile communications standard, it accounts for roughly 20% of overall handsets worldwide, according to industry estimates.
The tie-up of Finland's Nokia, the world's largest maker of handsets by volume and Japan's Sanyo, a relatively smaller global player, is a further sign that the competitive cellphone market is forcing players to look for partners to save costs and combine weak businesses to strengthen operations. Analysts say as competition continues to intensify, mergers or tie-ups may be the only option for some cellphone operators struggling to maintain decent profit margins.
"Where Nokia leads, the rest follow, so this CDMA merger will prompt other megavendors to reconsider their options for growth by acquisition in the next 12 to 24 months," said Mawston.
Mawston said assuming that Korea's Samsung Electronics Co. (005930.SE) and LG Electronics Inc. (066570.SE) do not partner up, or merge with other vendors, Nokia and Sanyo's proposed joint venture is likely to be the number one player in the CDMA market by the end of 2007.
"It's clear that Nokia and Sanyo are gunning for the No.1 slot in the CDMA market, and this puts Samsung and LG in a tough position," he said.
In 2005, LG Electronics held the No. 1 spot in the CDMA market with a 20.9% share, followed by Samsung with 18.4% share, according to figures released by Strategy Analytics. Nokia ranked third with 12.9%, and Motorola ranked fourth with 11.8%.
Both Samsung and LG Electronics have said in the past that they aren't interested in a partnership and many analysts say given their strong position in the CDMA market already, the two have little incentive to find a partner.
"Given the cycle of innovation in this industry, Samsung and to a lesser extent LG currently have little incentive to drive up dynamic transaction costs by working with other players," Nick Ingelbrecht, an analyst at market research firm Gartner said.
Nokia and Sanyo's announcement already follows a string of mergers in the handset industry. China's TCL Corp. (000100.SZ) and Alcatel SA (ALA) merged in 2004, and Taiwan's BenQ Corp. (2352.TW) took over the mobile phone business of Germany's Siemens AG (SI) late last year after the business had lost significant market share. Also in 2005, Korea's Pantech & Curitel Communications Inc. (063350.SE) acquired a majority stake in the handset manufacturing business of wireless operator SK Telecom Co., (SKM) SK Teletech Co., while Motorola Inc. (MOT) bought the research and development team of U.K. mobile phone maker Sendo when it closed down.
"Companies will have to find a way to survive in the cutthroat industry where margins are increasingly becoming thin," said Kevin Lee, an analyst at Woori Investment & Securities in Seoul. "With a saturated market, a joint venture or merger makes sense."
Second-Tier Makers To Benefit From Tie-ups
According to Mawston, companies that may be vulnerable to a merger or acquisition in the near term include Japan's NEC Corp. (6701.TO) and Kyocera Corp. (6971.TO), which are both struggling in their mobile phone business due to stiff competition and pricing pressures.
But Masumi Sakurai, a spokeswoman for Kyocera, said the company has no concrete plans for a merger or a new relationship with other companies.
At NEC, "there is no specific talks going on," spokeswoman Diane Foley said. "But NEC is always looking into any kind of possible alliance," she said, declining to comment further.
Companies that may be on the look out for acquisitions may include U.S.-based Motorola with its hefty net cash balance of $10.5 billion, said Mawston. China's Huawei Technologies Co. (HWI.YY) and Ningbo Bird Co. (600130.SH) are also players "ambitiously on the look out to expand their operations," he said.
Officials at Motorola, Huawei and Ningbo Bird couldn't immediately be reached for comment.
Gartner's Ingelbrecht said any tier-two cellphone makers such as Ningbo, could benefit from a merger or a tie-up.
Companies are "looking for opportunities and some alliances will deliver market access and some will deliver technology benefits like intellectual property," he said.
In the case of the latest tie-up, "Nokia is using this agreement to shore up its position in the CDMA (market) which has been a big weakness in its global strategy but without making a huge investment in R&D (research and development.) Sanyo is struggling internationally and Nokia will help Sanyo sustain its existence in the handset business," he said.
Richard Windsor, a communications equipment analyst at Nomura in London, said while the Nokia and Sanyo joint venture will take time to make any big impact on the overall global cellphone market, it will be beneficial for both companies in the long run, and smaller vendors in Taiwan and China may need to follow suit.
"It's a big advantage," he said. "Many of the small vendors that aren't making money might also benefit by seeking a joint venture."
-By Yun-Hee Kim, Dow Jones Newswires; 852-2832-2330; yun-hee.kim@dowjones.com
-Edited by Jenny Paris
(END) Dow Jones Newswires
02-22-06 0353ET
Copyright (c) 2006 Dow Jones & Company, Inc.
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