STOCKHOLM Sony Ericsson (6758.T) (ERICb.ST) was sucked back into a loss in 2011 by an industry slowdown and cut-throat competition, leaving new owner Sony facing an uphill struggle to join the top tier of handset providers.
The world's ninth-biggest cellphone maker was left behind in the smartphone boom powered by rivals such as Apple (AAPL.O) and Samsung Electronics (005930.KS) and its legacy of unappealing feature phones and high costs continue to drag on performance.
Japan's Sony Corp, with $85 billion in annual sales, is expected to take full control of the joint venture next month[ID:nL5E7LE0AL] and will integrate phones with its other consumer electronic products such PlayStation game consoles, Bravia TVs and Vaio computers.
But the firm is a distant challenger to smartphone market leaders like the iPhone and Samsung's Galaxy range and recovery will not be helped by the global downturn, which forced down handset prices in the fourth quarter.
"The phone market is slowing down and most vendors will be impacted by a decline in demand, already seen since the second quarter of 2011," IDC analyst Francisco Jeronimo said.
"IDC expects a significant decline in the feature phone segment and a strong slowdown in smartphone growth in the fourth quarter of 2011, which will continue into the first half of 2012."
Taiwanese group HTC (2498.TW), BlackBerry-maker Research In Motion RIM.TO and Motorola Mobility (MMI.N) have all warned of weak sales in the holiday season, a key period for mobile firms.
Sony Ericsson reported a fourth-quarter pretax loss of 247 million euros ($317 million), compared with a forecast for a 42 million profit in a Reuters poll in which estimates ranged from a 130 million loss to a 94 million profit.
For the full year, Sony Ericsson slipped to a 243 million euro loss, forcing Ericsson to take a 1.1 billion crowns ($160 million) hit to its operating income in the fourth quarter.
The venture shipped 9 million units in the fourth quarter, down 20 percent on last year, with smartphone deliveries failing to compensate for falling feature phone sales.
Although the company will shift all its production to smartphones during 2012, feature phones still make up some 20 percent of Sony Ericsson's sales volumes.
Fourth-quarter sales -- which usually jump due to the holiday season -- fell 16 percent year-on-year and 19 percent quarter-on-quarter with the company blaming the macro-economic climate and competition for the decline.
"Volume and profitability at Sony Ericsson are both considerably worse than expected, illustrating not only the intense competitive environment, but the huge challenge facing Sony as it embraces the mobile business," Geoff Blaber at CCS Insight said on Thursday.
Key to success going forward will be Sony's ability to gain traction in the smartphone market, which Sony Ericsson estimated grew 60 percent to 463 million units in 2011.
The firm said it expected strong growth in phones with PC-like functions this year, despite the global slowdown.
While the iPhone revolutionized the sector, late-starter Samsung has become the leading smartphone maker. That has given Sony a glimmer of hope that it can make a quick impact if it gets its products right.
IDC's Jeronimo said Sony, which is paying Ericsson 1.05 billion euros for its 50 percent share in the joint venture, needs to put mobile phones at the centre of its offering, acting as a link for all its products and services.
"The mobile business comes to Sony at the right time," he said.
"The company was never able to differentiate with a strong set of devices at competitive price points and was always seen as a tier 2 supplier to most operators. The handset business was the missing part and will drive this integration."
World number one handset maker Nokia NOK1V.HE, also struggling in the smartphone market, was set to report results on January 26.
($1 = 0.7802 euro = 6.8614 Swedish crowns)
(Additional reporting by Olof Swahnberg; Editing by David Cowell)