Japan threatens Vodafone's plans for global mobile phone domination

Vodafone's attempt to strengthen its position as the world's largest mobile phone operator is being undermined in its biggest market - Japan.

The company will on Tuesday announce pre-tax profits of around £10bn, on the back of a strong performance in Europe and the US.

But Vodafone's operation in Japan, which accounts for 25 per cent of its revenues, is losing market share. Vodafone's subscription growth last month fell 88 per cent on the same period last year, according to Japanese investment bank Nomura.

Vodafone's Japanese operation, which is number three in the country with an 18.3 per cent share of the market, will provide a headache for the company's chief executive, Arun Sarin. Vodafone is aiming to be either number one or number two in most of the countries where it has an operation. However, Mr Sarin is unlikely to contemplate selling the Japanese business because of its huge contribution to earnings.

"Vodafone Japan is likely to be the weak spot in otherwise strong results," said Mark James, a telecoms analyst at Nomura. "Japan is Vodafone's biggest market. Yet [earnings] margins are behind the rest of the group and going backwards. The danger is that this trend may extend to the other regions in the next few years."

The reasons for Vodafone's loss of market share in Japan are twofold. NTT DoCoMo and KDDI, the number one and two operators respectively, are locked in a battle for customers, which has seen the introduction of new competitive rates. Vodafone has come under fire for failing to keep pace with the new tariffs. But the company's new handset range has also failed to inspire.

"We view the new Sharp and Nokia 3G handsets slated for imminent launch as uncompetitive to offerings from the other two operators," said Deutsche Bank last week.