Nokia losing market share as price war bites

By Tarmo Virki and Sakari Suoninen

HELSINKI (Reuters) - Nokia Oyj (NOK1V.HE), the world's biggest cellphone maker, said it expects to lose market share in the third quarter as it fights to maintain profit margins, sending its shares as much as 14 percent lower.

Nokia warned its third-quarter market share would fall from the 40 percent notched up in the second three months of the year, compared with a steady market share it forecast earlier.

It said it expected the mobile device market in 2008 to be hit by weak consumer confidence in many markets and also cited tough competition in developing markets, its stronghold.

"Most alarming for me is that they're saying they're seeing more pressure in the low end of the market," said analyst Neil Mawston at Strategy Analytics.

"That really defines their profits, volumes; they get a lot of their economies of scale out of it. They really dominate that area," he said.

Analysts said Nokia and some other top vendors were likely to be losing ground to small vendors who are cutting prices in the hope of winning increased orders in the competitive business.

Nokia said it would ramp up one mid-range model more slowly than planned, with analysts saying the comments were likely related to the 5320 music phone.

Due to the confluence of negative factors, Nokia said margins at its core Devices & Services unit would fall below 20 percent in the third quarter.

"In certain markets and in certain areas, including in some of the low end, we are meeting certain aggressive pricing that we believe may not be sustainable," Nokia Chief Financial Officer Rick Simonson told a conference call.

"So it really is not margins. What we're talking about is units here," he added.

STILL HIGHER MARGINS

Even below 20 percent, Nokia's phones operating profit margin could still be superior to rivals -- margins at Samsung and LG were below 15 percent in the second quarter, while Sony Ericsson and Motorola are struggling to make profits.

Shares in the Finnish handset maker closed 9.6 percent lower at 14.20 euros in Helsinki, dragging down the DJ Stoxx European technology index .SX8P almost 5 percent. Shares troughed at 13.51 euros, their lowest since October 2005.

"I think the share reaction is a bit much," said analyst Greger Johansson at market researchers Redeye. "It seems to be their own decisions to a large extent."

Nokia stuck to its forecast of overall market volume growth of at least 10 percent and said it still targeted an increase in its device market share over 2008 as a whole.