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Japan's phone makers under pressure to exit

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TOKYO, Aug 4 (Reuters) - An abrupt contraction in Japan's mobile phone market is weighing on its top phone makers Sharp 6753.T and Matsushita 6752.T, and smaller makers may face a stark choice soon: band together or get out.

Japanese phone companies have adopted a new strategy that lowers usage rates but charges consumers more to buy new phones, prompting users to hold onto their old sets longer and slashing sales in the world’s fourth-largest handset market by 20 percent.

Tired of mounting development costs, Mitsubishi Electric Co 6503.T pulled out of its loss-making phone business in the spring, and other makers may make a similar decision in the next six to eight months, analysts said.

Some may also be forced into the arms of larger rivals amid fears about tough overseas competition from the likes of leading mobile phone maker Nokia NOK1V.HE.

“Some companies are just not going to be able to keep up with R&D costs” in the race to develop more popular handsets, said Hideaki Yokota, an analyst at MM Research Institute Ltd. “If the current situation continues, things will only get worse.”

He and other analysts declined to name the local companies most likely to pull out next, but the phone makers they seem to see as vulnerable include Hitachi Ltd 6501.T, Kyocera Corp 6971.T and Casio Computer Co Ltd 6952.T because of their low market share.

“The current industry structure cannot be maintained,” said IDC analyst Michito Kimura.

“We will have fewer mobile phone makers, fewer handset sales agents and fewer cellphone models. I just don’t see anything on the horizon that would makes things better.”

Fujitsu Ltd 6702.T, No.3 by 2007 unit sales, and No.5 NEC Corp 6701.T were unlikely to end their phone operations because of their ties with Nippon Telegraph and Telephone Corp 9432.T, which needs them to supply popular models, said another analyst, who asked not to be identified because of his business relationship with some firms in the sector.

But he added they could consider merging operations with a partner to deter possible competition from foreign makers such as Nokia and Apple Inc AAPL.O, which now hold less than a 1 percent market share each in Japan but enjoy bigger global economies of scale.

“With the market contracting at this pace, and with development costs rising, how are they going to make money?”

Japan was the world’s fourth-largest market for phone handset sales in 2007, after the United States, China and India, according to IDC. Some 51.5 million handsets were sold in Japan last year, up 4.4 percent from 2006.

Sony Corp 6758.T is the sole Japanese mobile maker with a substantial global presence through a joint venture with Ericsson ERICb.ST, but Sony Ericsson has been dogged by media reports that it plans to scale back its domestic mobile business, which it has denied.

QUICK SHRINK

Unit phone sales in Japan -- the birthplace of the world's first camera phones and wireless Internet browsing -- dropped 21 percent in April-June via carrier NTT DoCoMo Inc 9437.T, which controls half the country's mobile market of 100 million users.

That brought down phone revenues for Japan’s No.1 phone maker Sharp by 39 percent in April-June from a year earlier, while weighing on the outlook at Fujitsu, NEC and Kyocera.

Tech-savvy consumers are no longer moved by cool new applications that once drove sales, such as music distribution, TV phones and camera phones, said Kenshi Tazaki, vice president of Gartner Japan.

“It is not easy to add something new and attractive. I’m afraid the domestic market is likely to remain sluggish through 2009,” he said.

Analysts also blame a decision last year by DoCoMo and No.2 phone company KDDI Corp 9433.T to cut subsidies they paid out to retailers amounting to a couple hundred dollars per phone.

The subsidies kept handset prices low and helped the sector grow, but it also crowded Japan with phones packed with expensive technology that customers abroad couldn’t use or didn’t need, prompting many Japanese makers to pull out from overseas markets.

Most Japanese makers now focus on the saturated domestic market and supply small lots of phones exclusively to operators.

That contrasts with Nokia, which mass produces models that it supplies to vendors worldwide. It dwarfs Japanese brands, which together hold less than 10 percent of the global market.

But Kyocera, which bought Sanyo Electric Co's 6764.T loss-making U.S. mobile operations in April, and Sharp, which is selling models in China this year, are fighting that trend.

“They have no choice,” said IDC’s Kimura. “If they want to maintain their mobile phone operations, they have to seek growth outside Japan.”

(Editing by Kim Coghill)

((mayumi.negishi@thomsonreuters.com; +81-3-6441-1812; Reuters Messaging: mayumi.negishi.reuters.com@reuters.net))

(Refiles to fix phrasing in paragraphs 3-4)

By Mayumi Negishi and Kiyoshi Takenaka

TOKYO, Aug 4 (Reuters) - An abrupt contraction in Japan's mobile phone market is weighing on its top phone makers Sharp 6753.T and Matsushita 6752.T, and smaller makers may face a stark choice soon: band together or get out.

Japanese phone companies have adopted a new strategy that lowers usage rates but charges consumers more to buy new phones, prompting users to hold onto their old sets longer and slashing sales in the world’s fourth-largest handset market by 20 percent.

Tired of mounting development costs, Mitsubishi Electric Co 6503.T pulled out of its loss-making phone business in the spring, and other makers may make a similar decision in the next six to eight months, analysts said. . Keywords: JAPAN PHONES/

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