Nokia's cheap phone tops electronics chart

HELSINKI (Reuters) - The design team that conceived Nokia’s new handset in 2002 called it simply “Penny”, a modest nickname for what would five years and 200 million units later become the world’s top-selling consumer electronics product.

The Nokia 1100 hit the market in late 2003, just in time to catch a major growth wave in emerging markets like China. With a torch light, no-slip grips, and a dust-proof case, the little phone was made for the new growth regions.

Nokia said on Thursday that the entry-level 1100 and its heirs had surpassed the 200 million-unit milestone. It also unveiled seven new models, all priced below 100 euros ($136), to seek to emulate their success.

In the consumer electronic charts, Apple’s iPod reached the 100 million mark last month, Sony’s PlayStation 2 had sold 115 million by end-2006 and Nokia’s earlier top seller, the 3310/3330, sold 126 million units up to its retirement in 2005.

In 2002, the industry was still suffering a dot-com hangover, with sales in developed markets falling for a second straight year. Emerging markets, however, were taking off.

Annual handset sales in developing markets have grown more than three times since 2002, compared to just 62 percent growth in developed ones, said Strategy Analytics analyst Neil Mawston, adding that 65 percent of all handsets made this year will be sold in emerging markets.

Nokia says with growing wealth lifting emerging market demand for high-end phones, its early forays in these regions are yielding benefits beyond the entry-level segment. India and Russia are now among Nokia’s largest high-end phone markets.

“We have evidence that people who have got their first Nokia, they stay with Nokia,” said Soren Petersen, head of entry business at Nokia’s mobile phones unit.

MILLION PHONES A WEEK

The 1100 and its followers -- 1101, 1108, 1110, 1110i, 1112 -- have crept to the top of sales charts around the world without attracting much media attention.

“The 1100 typifies Nokia’s ability to function as a lean, mean, phone-making machine,” said Ben Wood, a consultant at CCS Insight. “It is a staggeringly successful product.”

With sales of more than a million phones a week, the 1100’s volumes are comparable to all the phones made by the world’s fifth-largest vendor, LG Electronics, and not far behind Sony Ericsson, the fourth-largest player in the industry.

“Such big sales of one product family creates efficiencies which others can hardly match,” said Kai Oistamo, head of Nokia’s Mobile Phones unit, citing bargaining power on component prices and cost savings in production, logistics and sales.

Nokia has kept manufacturing, distribution, supply line management and development of most of its products in-house, outsourcing just 23 percent of its total production in 2006.

Managers say the control of the business chain is key in the fast-growing low-end handset market since it is too costly to outsource viably on entry-level phones.

Nokia’s closest rival, Motorola, has farmed out 41 percent of phone-making and Sony Ericsson 66 percent, according to market research firm iSuppli.

The low-end segment is growing rapidly, with Nokia’s sales of phones priced below 50 euros more than doubling last year to 146 million units, or 42 percent of its total handsets sold, its Chief Executive, Olli-Pekka Kallasvuo, said in January.

50 MILLION FROM SALES BOXES

And with Motorola’s decision at the start of 2007 to back away from the tightest competition in the low-end segment, Nokia has few rivals there.

“Nokia is very strong as a maker of cheap phones. We cannot compete against it in those (models),” Yun Jong-yong, CEO of Samsung Electronics, was quoted as saying in a recent interview to Finnish daily Helsingin Sanomat.

Nokia does not break out profits from the entry-level segment, but analysts believe the margin is running around the level of 17 percent logged by the mobile phones unit as a whole.

This margin is far superior to consumer electronics units of Sony, Philips, Samsung, Panasonic and others which reach 5 to 6 percent operating margins at the best of times, and usually are well below that.

Petersen stresses cost control is vital.

“While we’ve had globally leading logistics, we still have a lot to learn on the cost side,” he said, noting that reducing packaging and stopping color printing brought in annual savings of 50 million euros last year.