When the telecoms valuation bubble burst in 2000-01, mobile phone makers felt relatively little pain compared with manufacturers of network equipment.

Their respective fortunes look set to be reversed this time. The expected global recession is likely to inflict greater hurt on the handset makers than the network manufacturers.

This is because the mobile makers are badly exposed to a consumer-led downturn that is prompting people to postpone buying new handsets to replace their existing models.

By contrast, after 2000-01, network equipment manufacturers led by France’s Alcatel and Sweden’s Ericsson went into near meltdown because of a corporate-led downturn. They reported double-digit falls in revenue for three years because mobile and fixed-line phone operators slashed their capital spending after realising network capacity far exceeded consumer or corporate needs.

Growth in the number of mobiles sold each year has been slowing since 2004 because about half the world’s population now owns a handset.

Since the credit crunch began last year, western Europeans have led the rising trend of delaying buying new mobiles.

The increase in the length of time that people take to replace their mobiles with new models – from an average of three years in 2007 to an estimated four years in 2009 – is having a nasty impact on some of the handset makers.

This is because providing consumers with replacement mobiles has, since 2005, constituted the majority of handset sales.

Supplying mobiles to first-time users remains an important activity in emerging markets such as China and India. However, rising inflation in developing countries is also prompting some consumers to postpone buying new handsets to replace their existing models.

In addition, increasing numbers of people in developed and developing countries are using second-hand mobiles and confining their purchase to the Subscriber Identity Module – or SIM card – that enables a handset to connect to a network.

Nokia, the world’s largest handset maker, reported a 31 per cent fall in net profit for the three months to September 30 compared with the same period last year, as mobile sales fell in Europe and the US. Nokia is predicting the number of mobiles sold globally by itself and its rivals will increase by 10.5 per cent in 2008 compared with 2007.

However, analysts are now estimating mobile sales could fall by up to 27 per cent in 2009, depending on the extent of the expected global recession.

Nokia’s sheer size should enable it to ride out a recession. Olli-Pekka Kallasvuo, chief executive, said this month: “In a more difficult market environment, the stronger competitors typically fare better, and I really feel that relative to the competition we have definitely got the virtues.”

Motorola, the world’s third-largest handset maker, looks ill-prepared for a recession. It reported a net loss of $49m last year – compared with a profit of $3.7bn in 2006 – after the US company’s efforts to increase market share undermined its profitability.

Sony Ericsson, the fifth-largest handset maker owned by Japan’s Sony and Sweden’s Ericsson, is cutting 2,000 jobs following two profit warnings this year that are rooted in European consumers buying fewer mobiles.

Sharp, Japan’s largest handset maker, blamed the country’s slumping mobile phone market for a profit warning earlier this month.

Sales have collapsed since leading Japanese mobile operators last year stopped subsidising the cost of certain handsets so as to offer cheap call tariffs.

Meanwhile, network equipment makers are likely to experience less pain than handset makers in 2009, partly because expectations about their performance are so low.

The sector saw consolidation in 2006, notably with the merger of Alcatel and Lucent of the US. But Alcatel-Lucent has yet to report a net profit due to botched execution of the merger and increasing competition, led by China’s Huawei.

Carl-Henric Svanberg, chief executive of Ericsson, the world’s largest network equipment maker, said this month that competition on pricing was still “bloody brutal”.

Ericsson last year issued a profit warning, partly because contracts with European mobile operators to upgrade their network infrastructure failed to materialise.

But network equipment makers will be encouraged by how AT&T, the leading US telecoms company, last week announced no reduction in capital spending at its third-quarter results.

AT&T, like other mobile and fixed-line operators round the world, is contending with increasing use of its network by consumers for data functions such as watching television on laptops.

The network equipment makers will be hoping that such activity helps nurture further investment by the operators and thereby avoids a repeat of their 2000-01 nightmare.

Source:ft.com