Nokia's warning is wake-up call for rivals

By Georgina Prodhan - Analysis

LONDON (Reuters) - Nokia (NOK1V.HE) blamed price-cutting by rivals for its loss of market share this quarter but its warning may be a sign that profitable growth at the rates the industry has been enjoying is nearing its limit.

Coming at the end of a week in which the world's two top wireless chip makers said they were seeing slowing demand, the statement from Nokia, the world's biggest cellphone maker, sent out waves of alarm on Friday to investors primed to flee at the first sign of trouble.

Although most analysts agreed the market reaction was overdone -- Nokia shares fell to their lowest level in nearly three years -- there was bad news for the wider industry in the company's short statement and later conference call.

As well as the weaker consumer confidence in several markets that Nokia cited, echoing comments from Qualcomm (QCOM.O) and Texas Instruments (TXN.N), Nokia said it was facing tougher competition in entry markets, its powerhouse in recent years.

"It took time for Nokia to feel the pain because they are in a better place. Motorola (MOT.N), Sony Ericsson (6758.T)(ERICb.ST) and LG (066570.KS) already started feeling it in Q1 and Q2," said Gartner analyst Carolina Milanesi.

"I think the bottom line is if that if even Nokia is feeling the pain then the market is really in trouble," added Milanesi, who is chief handsets analyst with the research firm.

Nokia said it was protecting its profit at the price of losing market share if necessary, saying it had made a tactical decision not to be drawn into a price war.

But several sources told Reuters that rivals such as Samsung (005930.KS), Sony Ericsson and LG as well as a host of smaller handset makers had likely been responding to price cuts from Nokia, backed by the 40 percent of the market it commands.

Nokia, which said on Friday mobile devices and services margins would likely dip below 20 percent this quarter from just over 20 percent last quarter, may simply have reached its limit.

"Nokia, as far as we can make out, has been slashing prices quite a lot over the last few months or so," said Neil Mawston, chief wireless analyst with research firm Strategy Analytics.

"It's the first time I can recall such a bearish comment since shipments of their iconic 3310/3330 candybar phones collapsed overnight in first quarter of 2004."

CHRONIC OVERSUPPLY

Nokia stuck to its forecast, raised two months ago, for the overall handset market to grow at least 10 percent in volume this year from the 1.14 billion phones that were sold last year -- although it has said the market will shrink in euro terms.

But many now question whether the industry can afford to continue cutting prices at such a rate that a billion-plus new phones are sold every year.

Growth is already slowing from the 16 percent increase seen in 2007 as mature markets such as western Europe and the United States become saturated.