Smartphone sales could drop by as much as 5 percent this year because the Japanese earthquake in March seriously affected supplies of key parts for a number of suppliers, say industry sources. Among those affected in the £100 ($163.35) billion industry are the world leader Nokia (NYSE: NOK), BlackBerry-maker Research in Motion (NSDQ: RIMM) (RIM) and Sony (NYSE: SNE) Ericsson.
But other key players – including iPhone maker Apple (NSDQ: AAPL), as well as Samsung, HTC and China’s Huawei – are understood to have moved quickly immediately after the quake hit to secure supplies from alternative locations in China, Taiwan and Korea, which could give them a substantial advantage as shortages hit rivals over the next three months.
A key element is a chemical for lithium-ion batteries, used in mobile phones, tablets and laptops, for which 70 percent of the production comes from a Japanese factory shut by the quake.
The phone companies will come under the microscope when they announce first-quarter results, with Apple, Sony Ericsson (NSDQ: ERIC) and Nokia due to announce their figures between 19 and 21 April.
The latter two have already said that their supply chains of components could be hit by the after effects of the quake and tsunami, which shut down a number of factories in Japan that produced phone cameras, lenses and battery components, while RIM in its earnings announcement earlier in April guided profits lower and said delivery times for some components were “uncertain”.
That could have serious implications as the company prepares to launch its PlayBook rival to Apple’s iPad tablet on 19 April in the US, as well as a number of other handsets later this year.
The long-term effects of the quake may only become apparent towards the end of May, when it will become clear whether factories in Japan have been able to restart production successfully. “There is widespread uncertainty about the Japanese situation … we believe the shortages will start to bite in the third quarter, when we’ll get a clearer picture of who is most affected,” said Ben Wood, head of research at CCS Insight.
Phone vendors usually carry four to five weeks’ supply of components, and have an additional six or seven weeks’ inventory of finished phones in the sales channel, said Carolina Milanesi, smartphone analyst for the research company Gartner. “If things go back to normal quickly then the third quarter [of the year] will probably see sales down 3 percent to 5 percent, and then the fourth quarter come back strongly,” she said. “But if the problems continue and in the third quarter they can’t restock, then sales there could be down 5 percent to 7 percent, and the year as a whole could be down overall 5 percent.”
A critical bottleneck could be the supply of a heat-resistant chemical called polyvinylidene fluoride (PVDF) – used as an adhesive in the lithium ion batteries used in both mobile phones and portable computers. Kureha Corp, which makes about 70 percent of the world’s supply, halted production at its factory in Iwaki, Fukushima Prefecture, following the disaster. The company has been relying on inventories and hopes to restart production at the end of April, but a spokesman said it was likely that clients had been affected.
On average, analysts expect global mobile phone sales volumes to have grown 10.8 percent in the first quarter of 2011, according to 18 analysts polled by Reuters (NYSE: TRI). The market recovered from a slump in 2009 to see a total of 302.6m smartphones worldwide, up 74.4 percent from the 173.5m shipped in 2009, according to research firm IDC.
However, the poll found financial analysts now think it will only grow by 9 percent this year – although Gartner’s previous full-year forecast before the quake was for 58 percent growth, which could at worst now be held back to just over 50 percent.
Analysts also expect that of the major handset makers only Apple will have grown its market share when it announces its results. It is expected to have sold 15.8m iPhones in the first quarter, up 81 percent from a year ago. Samsung is reckoned to have sold about 13m smartphones, and Korea’s LG (SEO: 066570) about 4m. Both have benefited from the growing appetite for low-cost phones running Google’s Android operating system.
Sony Ericsson’s reliance on Japanese production, especially by Sony, means the quake’s effects are limiting production volume of its arc, Play and neo smartphones – delaying the wider launch of the neo to the third quarter.
“Given these three devices are central to Sony Ericsson’s relatively narrow 2011 portfolio, there is likely to be considerable concern about the financial implications,” said CCS’s Wood.
Sony Ericsson warned in January of a weak first quarter as it struggled to fill an awkward hole in its product portfolio. The company has to cut the prices of its old models to maintain its market position, analysts said.
“Older products will have to be discounted to remain somewhat relevant. Sony Ericsson really needs the new products to get to the market and ramp up quickly,” Milanesi said.
Nokia also warned last month it would have shortages of some of its phones as the quake is set to cause industry-wide shortage of components and raw materials sourced from Japan, but said the impact on earnings would be limited.
Last week Taiwan’s HTC, which was one of the quickest to assure its supply chain after the quake, reported a tripling in its first-quarter profit, driven by strong demand for Android phones.
This article originally appeared in MediaGuardian.