Nimble Asian Rivals Raid Nokia's Emerging Markets Turf

From New Delhi to Shanghai to Johannesburg, a flood of cheap handsets from the likes of ZTE and Micromax is destroying Nokia's top position in emerging markets.

Compounding the woes for the Finnish phone maker, Asian handset manufacturers are increasingly turning to Google's free Android software, which is popular with operators and consumers in cut-rate markets.

Nokia is already under pressure in the high-margin smartphone sector as Apple, Blackberry maker Research In Motion and Google seize market share, leaving the basic cellphone business as Nokia's most valuable part. That is now under threat.

"Three years ago Nokia's position in emerging markets looked impenetrable, but low-cost chipsets and growing scale has helped a number of Asian manufacturers to price aggressively and seize market share," said CCS Insight analyst Geoff Blaber in London.

"The 'lean mean phone-making machine' that used to dominate the sub $50 space has come under huge pressure from agile rivals."

Last week, Nokia abandoned hope of meeting key targets just weeks after setting them, blaming difficult conditions in China and Europe. Its shares slumped 18 percent in one session on scepticism about its strategy to team up with Microsoft for Windows Phone software in the smartphone war.

The battle for the cheap phone market could be even tougher.

Nokia has been able to rely on its brand and distribution chain across emerging markets, home to 1.7 billion mobile phone subscribers.

But ZTE and larger Chinese rival Huawei Technologies, which have traditionally been in the network equipment business, are aggressively muscling in on mobile devices.

ZTE expects to ship more than 80 million handsets this year, up by a third from last year's 60 million units, a senior executive told Reuters in April. Key markets for ZTE's handsets include China and Europe.

Huawei has targeted shipments of 60 million handsets this year, even marketing its devices in glitzy Beijing malls and a Milan fashion show to raise its profile.

"They are already familiar with what the operators are looking for," said Melissa Chau, research manager for client devices at IDC Asia Pacific in Singapore, referring to ZTE and Huawei.

"At the very low-end, they offer handsets at very low prices in huge bulk shipments to operators."

Demand for low-end cellphones has surged across emerging markets since the global economic crisis began to ease in 2009. However, Nokia's sales of basic cellphones has fallen for three straight quarters. In January-March, Nokia sold 84.3 million non-smartphones, 2 percent less than a year ago.

CRUMBLING MARKET SHARE

"Nokia should really have begun this fight back two years ago and leaving it so late in the day puts the vendor in a very tough competitive position," said Neil Mawston, analyst at research firm Strategy Analytics.

Some of the Asian vendors are hardly household names. But in China, the biggest competitive threat comes from manufacturers that have no name at all.

So-called no-brand manufacturers -- small Chinese firms using chipsets from Mediatek or Spreadtrum Communications Inc -- control 45 percent of the market in the world's most populous country. Nokia's market share in China has shrunk to 19 percent from 33 percent two years ago.

No-brand Chinese manufacturers have also expanded into Africa, India, Latin America and Russia over the last year, research firm Gartner says. In total, they sell more phones than Nokia, said Gartner.

Analysts expect these manufacturers to focus next on cheap smartphones running Android software.

In India, Nokia is in a bruising fight.

The company is jostling with about 150 vendors in the world's fastest-growing cellular market, home to more than 800 million subscribers and with mass market phones selling for about $20 with basic features.

Cheap handsets and phone charges as low as half a cent a minute are fuelling growth.

Some Indian manufacturers, who mostly make handsets in China and Taiwan, make net margins of only about 2 percent, analysts said.

No-brand Chinese vendors controlled 20 percent of the Indian market in the first quarter, with Nokia at 26 percent, Gartner said. Only two years ago, Nokia had close to 60 percent.

About 220 million new handsets are expected to be sold in India this year, up about 25 percent from last year.

By adapting to local tastes, handset makers such as Micromax grabbed 7.6 percent of handset sales in India last year, local research firm CyberMedia Research says.

Funded by private equity, Micromax sells handsets packed with features such as dual SIM cards, which allow users to take advantage of different call and data pricing plans as well as separate business and private usage; gravity sensors that allow users to change mobile networks by rotating handsets; and others that can be used as a remote control for televisions, air conditioners and DVD players.

"Micromax sells like 1 million devices a month. Out of the 1 million, more than 80-85 percent were dual-SIM," said Abhishek Chauhan, senior consultant, information communications practice at Frost & Sullivan.

Nokia started to sell its first dual-SIM phone only last month in India.

"First-time phone users are looking for new features at an affordable price," said Daljit Singh, a mobile handset retailer in New Delhi.

"Nokia hasn't really been able to improve on features, while these new brands give you everything -- dual-SIM, FM radio, multimedia, memory, video."

ASIAN MAKERS ALSO TARGET SMARTPHONES

Surging demand for more advanced features and falling prices boosted the smartphone market to roughly double last year. Smartphones now create 25 percent of all phone market volumes, and the majority of the profits.

Growing demand for phones running on Android will help the smartphone market further in 2011, boosting Asian companies such as Taiwan's HTC and South Korea's Samsung Electronics, which are both betting on the platform.

While Nokia still sells more smartphones than anyone else with its soon-to-be-ditched Symbian platform, it is rapidly losing market share to Apple, RIM and Samsung.

"Samsung will achieve more than many had expected from Nokia's retreat. Its diversified lineups from the high-end Galaxy to mid-to-low-end models will take market share from Nokia's strongholds in Asia, Europe and the North America," said Lee Seung-woo, an analyst at Shinyoung Securities.

Meanwhile, HTC's market value overtook Nokia's for the first time in April. The firm's shares have jumped 37 percent so far this year, taking its market value to $35 billion, while Nokia's stands at $24.5 billion, a 41 percent plunge.

Nokia still has higher volumes, selling 19 phones for each HTC phone sold last year. But its average sale price was $85 compared with HTC's $360, Strategy Analytics says.

The HTC Desire series has been a hit, and investors are betting recent models such as Thunderbolt and Incredible S will build on that success among consumers in the United States and Europe.

In the Western European pre-pay market, where no-brand manufacturers do not have a presence, Samsung took the No. 1 slot in the first quarter, overtaking long-term market leader Nokia on its home turf.

Samsung's sales rose 5 percent year-on-year in the region, with its market share rising to 29 percent, while Nokia sales dropped 10 percent, and its market share slipped to 28 percent, market research group IDC said.

Nokia's market share in smartphones sold in Western Europe dropped to 20 percent from 41 percent a year ago.

"For now, Nokia is destined to remain trapped in a pincer movement between low-end Asian vendors at the bottom and high-end American players at the top," said Mawston of Strategy Analytics.

(Additional reporting by Chyen Yee in HONG KONG, Clare Jim in TAIPEI and Miyoung Kim in SEOUL; Writing by Anshuman Daga; Editing by Dean Yates)