Let the Handset Price Wars Begin

Business 2.0: July 20, 2004: LG, Nokia, Samsung, and the rest are headed down the same path that doomed PC makers.

After nearly half a decade of prosperity, the cell-phone handset business is about to hit a rough patch, thanks to a looming price war. LG Electronics, Nokia (NOK), and Samsung raked in billions of dollars in profits as the whole planet joined the wireless revolution. Their fat margins have not gone unnoticed by smaller upstarts in China and Taiwan, as well as resurgent Japanese who want to crash the party at any cost.

The situation is akin to the PC price wars of the late 1990s: Too many players are trying to dominate an industry that’s becoming increasingly commoditized. Most cell-phone makers use standard chips manufactured by the likes of Texas Instruments (TXN), commodity flash memory, and off-the-shelf silicon for radios. It’s just not that difficult to cobble together a phone these days.

Telltale signs of change are easy to find in the recent quarterly reports. Nokia is predicting a weaker-than-expected third quarter. LG had forecast sales of 12 million handsets in the second quarter, but actual sales came in at about 9.94 million. Intense competition caused Samsung’s profit margins on phones to tumble from 26 to 16 percent.

It’s no surprise that the current leader, Nokia, is going to do whatever it takes to defend its 36 percent share of the global market. The Finnish giant made its intentions clear in last week’s conference call: It will slash prices on its handsets, especially the low-end models. Samsung, the world’s third-largest handset maker, said Friday that Nokia’s price reduction may “influence badly.” LG’s CFO, Kwon Yeong-Su, reportedly responded, “It’s all up to Nokia and Samsung.”

LG, Nokia, and Samsung are girding for a price war, even as they attempt to keep at bay a puckish Motorola (MOT), Japan’s Sharp and NEC (NIPNY), and pesky Asian upstarts. (Ningbo Bird of China, BenQ of Taiwan, and a dozen other Asian manufacturers are taking dead aim at their home markets with cheap, feature-packed phones.) Of course, while the industry is decimating its margins, customers will be the beneficiaries.

Get PDF file