Mobile giants in crisis as Sony Ericsson profit alert shocks sector

Handset sales set to fall by more than a tenth this year as downturn bites

Sony Ericsson plunged the mobile phone industry into crisis yesterday, issuing a disastrous profits warning as it revealed that it expected the world to buy 10 per cent fewer handsets this year.

The warning, which comes just days after rival manufacturer Nokia announced plans for 1,700 job losses, suggests that the mobile phone sector, which has until now been relatively resilient, is the latest to be caught up in the global downturn.

Ian Fogg, an analyst at the telecoms specialist Forrester, said: "These companies are genuinely global, and given the crisis is a global phenomenon, there is nowhere to look for growth. It is a young industry, and has been very successful at growing through downturns, but the nature of this one means it is the first time they have caught a cold."

Sony Ericsson is the fourth largest mobile phone producer in the world, and yesterday it starkly spelt out the damage that the credit crisis and the changing mobile telecoms market had wrought on its business.

This quarter, it is expected to ship about 14 million mobile phones, for sale at, on average, €120 (£113) each. By contrast, it shipped 24.2 million phones at €121 in the previous three months. Sony Ericsson warned that weak demand from consumers, as well as destocking, meant it would lose up to €390m in the first three months of its financial year.

The handset maker, which was established in a joint venture between Sony and Ericsson in 2001, sold about 97 million phones last year. This figure is now expected to fall substantially as the economic crisis continues.

Nokia, the Finnish giant which is number one in the market, said on Tuesday that it would cut 3 per cent of its workforce, "in accordance with market demand". The second and third largest handset makers, Samsung and LG, have also suffered a drop in handset sales this year. Analysts pointed out, however, that they could be near-term winners, by offering cheaper phones than the competition following the huge depreciation in the Korean won.

Didier Scemama, an analyst at Royal Bank of Scotland, said: "There has been a really brutal decline for Sony Ericsson and Nokia. Demand has been extremely poor this year, and has been since the third quarter." Mr Scemama said he expected mobile sales to fall 14 per cent globally this year, the first decline since 2001.

Analysts said that consumer behaviour has changed. The industry has always been good at persuading customers to buy new phones, Mr Fogg said, as they became smaller, more stylish, and included internet, cameras and MP3 players. "Because of the wider economic issues, sentiment is changing. People are postponing getting new phones," Mr Fogg warned.

Another analyst added that customers were either trading up to high-end products like the iPhone or trading down to the cheapest models.

The change in consumer trends has been compounded by the operators' reaction. Network providers including Vodafone, O2 and Orange have ridden the recession relatively well, and have been branded by market observers as almost akin to utilities.

"People are not going to give up their phones, even if there is a recession," one analyst said. "If they lose their job it might be more important, but they are looking at their spending plans, and postponing buying new phones."

In competitive markets such as the UK, operators heavily subsidise customer handsets, which costs them between £250 and £300 each. One source at a mobile services group said customers were less keen on new phones, and were more interested in cheaper voice and text plans, as well as sim-only contracts. As customers want to access the internet more, companies have shifted accordingly.

"There is an amazing appetite for data, as well as smartphones and things like dongles," Mr Scemama said. "This has been negative for handset makers as the operators' subsidies are shifting away from handsets."