An abrupt contraction in the mobile phone market in Japan is weighing on the leading Japanese phone makers, Sharp and Matsushita, and smaller makers may face a stark choice soon: band together or get out.

Phone companies have adopted a strategy of lowering usage rates but charging consumers more to buy new phones, prompting users to hold onto their old one longer and leading to a 20 percent slump in cellphone sales in the country.

Mitsubishi Electric, fed up with mounting development costs and tough overseas competition from the likes of Nokia, pulled out of its loss-making phone business in the spring, and other makers could make a similar decision in the next six to eight months, analysts said.

Some may also be led into the arms of larger rivals.

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

He and other analysts declined to identify the local companies most likely to pull out next, but the phone makers they seem to consider vulnerable include Hitachi, Kyocera and Casio Computer because of their low market share.

"The current industry structure cannot be maintained," said Michito Kimura, an analyst at IDC. "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 and NEC were unlikely to abandon their phone operations because of their ties with Nippon Telegraph and Telephone, which needs them to supply popular models, said another analyst, who asked not to be identified because of his business relationship with companies in the sector.

But he added that they could consider merging their operations with a partner to deter possible competition from foreign makers like Nokia and Apple, 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?" the analyst asked.

Japan was the world's fourth-largest market for cellphone sales in 2007, after the United States, China and India, according to IDC. About 51.5 million phones were sold in Japan last year, up 4.4 percent from 2006.

Sony is the sole Japanese mobile maker with a substantial global presence, through a joint venture with Ericsson, but Sony Ericsson has been dogged by media reports that it plans to substantially scale back its mobile business in Japan, which it has denied.

The number of cellphones sold in Japan - the birthplace of the world's first camera phones and wireless Internet browsing - by NTT DoCoMo, which controls half the country's mobile market of 100 million users, dropped 21 percent in the April-June period from a year earlier.

That brought down phone revenue for Sharp, the No. 1 phone maker in Japan, 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 impressed by cool new applications that once drove sales, like 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 KDDI, the country's second-largest mobile operator, to cut the subsidies they pay to retailers, which amounted to a couple hundred dollars per phone.

The subsidies kept phone prices low and helped the sector grow, but it also crowded Japan with phones packed with expensive technology that customers abroad could not use or did not need, prompting many Japanese makers to pull out from overseas markets and focus on their home turf.

Source:iht.com