UPDATE: Ericsson pullout heralds tough times for mobile makers

Analyst blames Ericsson's product line for decision to pull out of handset market, and predicts consolidation for other manufacturers

Ericsson's decision Friday to stop manufacturing mobile phones is further evidence that handset makers are facing a slowdown in demand which could see companies working together to save money, experts believe.

The Swedish telecoms company has decided to outsource the production of its handsets after making a total loss of £107m in the fourth quarter of 2000. Its consumer products division -- responsible for mobile phone sales -- recorded a loss of £1.1bn. Flextronics International will take on the manufacture of Ericsson handsets and, although some staff will move to Flextronics, thousands of jobs will be lost.

According to Philip Taylor, senior analyst at research company The Yankee Group, the decision shows that mobile manufacturers will face a tough time, as was indicated by recent warnings issued by some manufacturers.

"This is evidence that the mobile market is slowing down. All manufacturers are very dependant on users replacing their mobile phone, and need to encourage them to upgrade every six to eight months," Taylor said. He explained that persuading users to upgrade to GPRS phones would be especially important. GPRS, or General Packet Radio Service, is the high-speed successor to today's GSM phones.

Companies looking to survive in more difficult market conditions are likely to team up with a competitor, Taylor believes. "I think we'll see consolidation within the industry, as companies look to reduce production costs and gain entry to important markets. For example, I wouldn't be surprised to even see Nokia, which has very little presence in Japan, teaming up with someone in order to reduce costs while maintaining growth," he predicted.

Germany's Siemens, Europe's second largest mobile phone maker, claimed that Ericsson's move was good news for itself, and for Nokia. Volker Jung, a Siemens board member, said that the only benefit from outsourcing phone production was flexibility and insisted there was no cost saving.

Speaking Friday, Ericsson's chief executive Kurt Hellstroem blamed the decision to end phone production on delivery failure from key suppliers, and an inadequate product mix in the entry-level market. Taylor agreed that Ericsson was hampered by supply problems, but blames the company's inferior product line for problems.

"A fire at one of their key suppliers in the US caused problems, so in some ways they were unlucky. However, the company has been poor at delivering high-end products, and has stuck to existing models for far too long," he explained.

Rival manufacturer Nokia claimed 30 percent of the mobile phone handset market in 2000, compared to Ericsson's 10 percent, which Taylor put down to the Finnish firm's superior phones, and rapid turnover of new models.

"Nokia has traditionally done very well by consistently releasing new products on an almost quarterly basis. Ericsson has failed to release new models in a timely fashion, and has also stuck with poor designs," Taylor claimed.

You may have read that Ericsson is pulling out of the phone business -- Guy Kewney say it isn't. What it is doing is "the smart thing". According to Guy it's going to be a horrible mess; the data devices are horrible, the networks don't know how to charge for data, and the applications you might need, don't work yet. Go to AnchorDesk UK for the news comment.

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