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Cell phone makers face toughest year since 2001

HELSINKI (Reuters) - A wave of economic gloom is set to hit mobile phone buyers next year, with a growing number of analysts expecting the once-buoyant market to shrink for the first time since the 2001 crash, a Reuters poll showed.

Employees walk to the change of shift at the plant of Nokia in Bochum, Germany, February 12, 2008. REUTERS/Ina Fassbender

On average, analysts expect global growth to be 3 percent in both the fourth quarter and 2009, compared with well above 10 percent in recent years, although 8 out of 22 analysts said they expect the market to contract next year.

In a similar poll just a month ago, only one analyst out of 23 forecast 2009 market sales volumes to fall, and then only slightly.

For the fourth quarter, analysts expect the market to grow 11.6 percent from the third quarter, less than top phone maker Nokia’s expectation of 13.5 percent.

The fourth quarter has traditionally been a bonanza for cell phone makers as consumers snap up phones for holiday gifts.

The $190 billion handset market, which was born in the 1980s and became a major growth industry after a surge in the late 1990s, had a brief shock in 2001 when the market fell for the only time thus far.

SMALLER INVENTORIES, MORE PHONES

Cell phone makers have prepared themselves for the market slowdown over the last months, avoiding the build-up of large inventories that hurt the market in 2001.

Also, some distributors have been held back from building up phone inventories due to the credit crisis, analysts said.

The first indications of future demand, however, are not promising.

Wireless chip firm Qualcomm Inc gave, late on Thursday, a disappointing profit outlook for the current quarter and year ahead, indicating that the economic crisis could have a prolonged impact on cell phone demand.

Chief Executive Paul Jacobs said the credit crisis and economic uncertainty means sales of wireless gadgets would likely be slower in 2009 than previously thought, adding he saw a “significant contraction” in customers’ inventory in the first two quarters.

Analysts said cell phone makers may feel more pain this time around. When the market crashed in 2001, replacement sales tumbled but sales to first subscribers continued to grow due to the low penetration of cell phones.

“Mobile subscriber growth remained relatively vibrant through 2001, giving the handset industry a buffer even as upgrade demand fizzled,” said analyst Tero Kuittinen from Global Crown Capital.

“This time around, things could get a whole lot uglier. It would seem like Europe is getting hammered,” Kuittinen said.

The European market -- where almost everybody has a phone and margins are fatter thanks to higher sales of technologically advanced phones -- is set to fall already this year and analysts say this trend is likely to continue next year.

EMERGING MARKETS KEY

“My fear is that, depending on the global economic situation, the downturn could be more prolonged than it was in 2001,” said Geoff Blaber, analyst with research firm CCS Insight.

“Emerging markets account for a significant amount of growth, so a lot will depend on the cost of commodities and how significantly the total cost for mobile phone ownership declines,” he said.

Sales volumes in emerging markets surpassed developed markets in 2005, and this year around two-thirds of sales are in emerging markets.

“Emerging markets hold the key for 2009. Emerging markets have been affected more by the financial crisis than developed markets this year,” said Neil Mawston from Strategy Analytics.

Reporting by Tarmo Virki; editing by Simon Jessop

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