Here at PMN we keep a close eye on what’s happening in the handset industry and publish detailed quarterly analysis as part of our PMN Handset Industry Insight subscription product (you can find out more about how to purchase a subscription here). We’ve just released the latest edition to our premium subscribers and we’re pleased to be able to share a short extract with our MEX newsletter readers to give you a taster of what’s available in the full version.
This section looks at the margins the world’s five largest handset manufacturers are making. Which company generates the most profit from each sale? What is the overall trend for the handset industry over the last year? Why is one manufacturing managing to make more money on each handset sale even when their average selling price is the lowest in the industry? Read on to find out…
The headline story of Q307 is Nokia’s continuing improvement of its margins. At 22.2%, its Q307 margin was nearly double that of its nearest competitor Samsung (12.3%). Most significantly of all, Nokia achieved this on the back of its highest ever shipments of low-cost handsets, including a large number under EUR 30. Where other handset manufacturers have feared to tread, the Finnish market leader is proving that logistical expertise, enormous scale and patient investment can make low cost equal good margin.
Even with the steep decline in ASP resulting from the increased proportion of ‘low cost’ sales in its overall unit volumes, Nokia still managed to improve margins. This is a stark contrast with Q306, when investors punished Nokia’s stock after margins sank to 13%. Flash forward to 2007 and margins are up 70.6% YoY.
As a result of this impressive performance, Nokia continues to distort the true picture of margins across the big five manufacturers. Collectively, margins rose 2 percentage points YoY, from 11.9% to 13.9% in Q3. There was also a 1.6 percentage point rise QoQ from Q207 to Q307.
However, if we remove Nokia’s numbers from this calculation, margins across the other four main manufacturers were just 7.6%, down from the 11.2% they recorded in Q306.
Motorola has clearly been the biggest loser in the margins battle with Nokia. A year ago it was making an average of USD 15.25 on every handset it sold. In Q307, it lost USD 3.71 on every handset.
However, it is LG that actually takes the prize for the most improved margins YoY. At 8.4%, they are up 128% on the same period a year ago.
Looking at the QoQ changes, Samsung and Sony Ericsson both saw improvements, while Motorola managed to narrow it’s loss, ‘improving’ from a negative margin of –6.1% in Q207 to –3.1% in Q307.
Samsung saw the biggest leap, with a 48.6% increase from 8.3% to 12.3%, buoyed by strong sales of its high-end products.
There was finally some growth for Sony Ericsson, where margins rose on a QoQ basis after declining every quarter since Q306. The company has suffered a continuing decline in average selling price (even though it still boasts the highest ASP figure in the industry) and this has cut into its margins. However, Q307 saw the ASP stabilising (partially as a result of the favourable dollar conversion rate) and improvements to the cost base. As a result, margins improved by 17.6% to 12.4% – second only to Nokia.
The mobile telecoms business has never been more competitive. At the low-end, Nokia is leveraging its formidable scale to build market share in developing countries, taking a long-term bet on the value of customer loyalty. No other handset manufacturer seems able to match its ability to build inexpensive handsets and still make a healthy margin.
At the high-end, Nokia, Samsung, Sony Ericsson and LG all have particularly buoyant portfolios at the moment. The N-Series continues to break new ground with the sheer amount of features in each device, while Sony Ericsson continues to benefit from the strength of the Walkman and Cybershot brands. Samsung and LG are showing themselves to be adept at capturing the fashion zeitgeist through partnerships and their own hardware innovations.
In tandem with the activities of the big five manufacturers, smaller players such as Apple, HTC and RIM are commanding an influence considerably in excess of their actual shipment volumes by playing a role in defining the cutting edge of innovation. Where Apple and RIM are leading the way in customer experience, HTC is breaking new ground with the technological specifications of its devices.
All of this competitive activity adds up to one thing: pressure on margins. While the industry may escape a significant fall during the seasonally strong Q4, we believe Q108 (and indeed the rest of 2008) will see increasing pressure on margins for all manufacturers. Quite simply, it is becoming more difficult to push customers through the upgrade cycle in developed markets and more difficult to compete with Nokia in emerging markets.
This reality will not have escaped the boards of the leading handset manufacturers and many will now be evaluating whether mergers or joint ventures are the only way to build enough scale to compete with the Finnish market leader.
Our premium digital subscription newsletter tracks the quarterly performance of the five largest handset manufacturers (Nokia, Samsung, Motorola, Sony Ericsson and LG) in several areas, including revenues, profits, margins, average selling price (ASP), market share and unit shipments. In addition, each quarterly issue of Handset Industry Insight provides extensive quantitative and qualitative analysis, combining PMN’s unique knowledge of the competitive landscape with clear, easy-to-understand graphs and charts.
The latest issue of PMN Handset Industry Insight is now out, with full coverage of Q3 2007 results – click here to buy online from just GBP 395.