The handset market – focus on the others

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					Presentation prepared for 15th Biennial ITS Conference Berlin September 4-7, 2004




 The Distribution Of Mobile Handsets
 Connecting Global And Local Distribution

   Per Andersson, Associate professor    Bengt G Mölleryd, Ph.D
   Stockholm School of Economic, CIC     Evli Bank, Research TMT
   P.O. Box 6501, SE-113 83 Stockholm,   Kungsträgårdsgatan 16,
   Sweden                                SE-117 30 Stockholm, Sweden
   voice +46-8-736 95 38                 voice +46 8 407 80 38
   fax +46-833 43 22                     fax + 46 (0)8 407 80 01
   e-mail: dpa@hhs.se                    e-mail: bengt.molleryd@evli.com




                                                                                1
Aim


The aim of the paper is to discuss a set of
distribution challenges meeting suppliers of
handsets, operators, and other channel actors in
the global mobile telephony industry.




                                                   2
Issues
1.   What are the underlying changes and drivers leading to
     an increased focus on distribution issues in the global
     market for mobile handsets?
2.   What are the distribution challenges for handset
     manufacturers as production increasingly is becoming
     global?
3.   What are the distribution challenges when this global
     distribution has to be connected to regional and local
     distribution and consumption networks with often very
     local, specific characteristics?
4.   What role do operators play in this globalization of
     distribution process, and what are the challenges for
     other actors in the global distribution system?
                                                               3
    Research Background
• “Distribution channel effects of institutional, technological and
    market changes in the rapidly growing market for mobile telecom
    equipment” (Andersson & Mölleryd 1994)
•   “Distribution system and service consequences of technological
    convergence” (Andersson & Mölleryd 1998)
•   “Increased polarization of distributor-customer relations and retailers’
    strategies to cope with this” (Andersson & Mölleryd 1999)
•   “Market system studies of changes in customers’ buying centers,
    buying organizations and buying behavior” (Andersson & Mölleryd
    2001)
•   “The internationalization of distribution” (Andersson 2002)
•   “A global perspective on distribution channel changes in the mobile
    telephony industry” (Andersson & Mölleryd 2004)



                                                                               4
Empirical Background
Changes in the Global Handset Market
•   General rapid growth of new users
•   A growing replacement market
•   New entrants competing with the Big Six in the handset
    market
• Continued regional market variation despite globalization
• Internationalization of handset production and changes in
    the production value chain
•   Internationalization of operators
•   The increased importance of the Chinese market in global
    distribution
                                                               5
The handset market is entering a dynamic
phase…
• The handset market is prospering as the replacement cycle kicks in
    -   extensive upgrades to color screens, camera handsets
    -   commercial volumes of 3G are around the corner
• The big suppliers keeps a firm grip on the market
    -   LG Electronics has now entered the core group
• But the Group other is a force to be recon with, primarily driven by
    strong activity in Asia
    -   A Chinese handset industry is emerging
    -   Extensive development is ongoing in Korea
• Reference designs (platforms) and new chipset pave the way for a
    partial disintegration, technology houses and ODMs are instrumental
=> Market volumes are growing strongly and the big ones are set to
   benefit as they have sufficient resources to master the entire
   production and distribution chain
                                                                       6
Replacement drives the handset market
                                            Handset market

             800                                                                                  80%
                                                                                690
             700                                                                                  70%
                                                           641

             600                                                                                  60%
                                      520

             500                                                                                  50%
                   432
   Million




             400                                                                                  40%

             300                                                                                  30%

             200                                                                                  20%

             100                                                                                  10%

              0                                                                                   0%
                     2002                2003                2004E                2005E

                     Total market   of which replacement   Replacement rate   Replacement ratio


 • Increasing replacement ratio: 30% 2004, 31% 2005
 • Growing share of subs that have their 3-4-5 handset, drives demand
      for mid- and high end handsets
 • Segment: SonyEricsson, Samsung, Motorola, sleeper
                                                                                                        7
 Handset market is worth EUR 71bn 2004

                                                     Market value handsets

Assumption:           76 000                                                                                6%

ASP (EUR)             74 000
                                                                                                            5%
2002: 153
                      72 000
2003: 132                                                                                                   4%
2004: 111             70 000
              MEUR




2005: 109             68 000                                                                                3%

                      66 000
Volume (m)                                                                                                  2%
2002: 432             64 000
2003: 520             62 000
                                                                                                            1%

2004: 641
                      60 000                                                                                0%
2005: 690                                    2002         2003                2004E                 2005E
                     Source: Evli estimate
                                                    Market value (MEUR)   Market value growth y/y




       We expect unit growth to be 23% 2004, and 8% 2005
                                                                                                                 8
Passing 1bn handsets 2010
                                   Reaching 1.3bn handsets by 2015

         3500                                                                               100%

                                                                                            90%
         3000
                                                                                            80%
         2500                                                                               70%

                                                                                            60%
         2000
   Million




                                                                                            50%
         1500                                                          1331
                                                                                            40%
                                 1002
         1000                                                                               30%

                                                                                            20%
             500
                                                                                            10%

              0                                                                             0%
                          2010                                  2015
                   Subscribers m        volume   repalcement rate       replacement ratio


  Positive long term outlook with huge volumes will trigger
  industry dynamics with growing platform business…
                                                                                                   9
The big six delivered 74% of all handsets 2003
                                    Market shares (sell-in) 2003


  We have identified 35 suppliers
                                                                                    A consequence of total
                                   Other
                                   25,9 %                                           sell-in volume of 551m
                                                                    Nokia
                                                                    32,6 %




                       LG Electronics
LG Electronics             5,0 %
passed                    SonyEricsson
SonyEricsson                 4,9 %

                                    Siemens                   Motorola
During Q4
                                     7,9 %                     13,6 %
                                              Samsung
                                               10,1 %
                                                        Source: Company reports, Evli estimate




            The leading six supplied 408m handsets 2003
                                                                                                        10
                The ‘smaller’ suppliers will sell 160m 2004
                                                            The Group Other estimated sales 2004

                25
                                               Nec aim to grow
                        19,2 18,9              considerable
                20
                                               through
                                               international sales
million units




                                               of WCDMA
                15
                                               handsets
                                    12,0
                                           11,0 11,3
                                                                 10,0
                                                                              9,5
                10
                                                       8,0 7,6
                                                                                    6,6
                                                                        5,4
                                                                                          4,5         4,9
                 5                                                                              3,5               3,4
                                                                                                                              2,7 3,0                                                           2,4
                                                                                                                        1,9             2,2             2,0
                                                                                                            1,2                               0,8 1,2         0,5 0,9 0,6 0,4 0,5 0,5 0,7 0,6         0,5 0,6
                 0




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                 Source: Company reports, Evli Bank estimates




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                                                                                                                                                                                                      11
The Mobile handset production chain
          EMS                    ODM                 Suppliers
          Ascomp               Arima
          Elcoteq              Benq                   Nokia
          Flextronic           DBTEL
          Solectron            GVC
                               Microcell
                               Sewon
                               Pantech
         Builds up             Telson                 Siemens
         Design capabilities
                               • Growing business
                               • Response to OEMs
                               ambition to provide
                               wider portfolios
                               • Target operators




 => Chipset suppliers go for reference designs to offer complete cellular
 systems
  => Know-how and technical competence is now widely spread in the
 mobile industry                                                        12
                      A growing Chinese handset industry
                                                                                                                               • Amoisonic is primarily targeting the high-end
                                                                                                                               market
                     • We have estimated volumes on 1) reported
                     volumes, 2) reported sales divided with                                                                   • Chinese Electronic Corp works closely with
                     benchmark ASP, and 3) talked to the companies                                                             Philips

                     • We estimated total sell-in volume to be 38m                                                             • Dtang works with CDMA, TD-SCDMA
                     2003                                                                                                      • Eastcom supplies GSM and CDMA phones
                                                                                                                               under own brand, and has a JV with Motorola
                                             The Other - China shipment 2003
                12                                                                                                             • Haier is the leading white goods supplier in
                10
                                                                                                                 9,8           China, has teamed up with Sendo
                                                                                        8,7

                 8                                                                                                             • Keijan is a growing player on the Chinese
Million units




                 6
                                                                                                                               market, collaborates with Samsung
                 4
                     3,0
                                                                      3,4
                                                                            2,7
                                                                                                                               • Konka produces both GSM and CDMA
                                                                                                          2,2
                 2               1,2
                                                    1,9                                                                        handsets
                                                          0,9   0,9                                                      0,8
                           0,5         0,5    0,6                                 0,6         0,5   0,4
                 0                                                                                                             • Ningbo Bird is a leading supplier on the
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                                                                                                                               • TCL leading player on the Chinese market It
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                                                                                                                               uses platforms from Ericsson and Motorola
                                                                                                                               • ZTE manufactures and sells GSM and CDMA
                                                                                                                               handsets, is also a infrastructure provider   13
Strong activity in other parts of Asia
                                                     T he Others - South Korea shipment 2003                                           South Korea spearheading CDMA
                     30
                                             27,7
                                                                                                                                       • LG is ambitious and is expanding rapidly
                     25                                                                                                                • Maxon primarily produces to other OEMs
                     20
                                                                                                                                       • Standard sells under its own brand Nixxo in
                                                                                                                                       Korea, and produces handset for other OEMs
Million units




                     15
                                                                                                                                       • VK Corp is a small player on the Korean market
                     10

                                                                                                                                       Japanese suppliers primarily sell to domestic
                            5

                                                                      0,7
                                                                                                2
                                                                                                                          0,55
                                                                                                                                       operators
                            0
                                      LG Electronics                 Maxon               Standard Telecom            VK Corp
                                                                                                                                       • Fujitsu sells to NTT DoCoMo
                                                                                                                                       • Kyocera focus on CDMA
                                                                                                                                       • Hitachi sells small volumes to Japanese operators
                                                           The Others - Shipment Japan 2003
                                18
                                                                                                                                       • Mitsubishi primarily sells on the domestic
                                16
                                                                                             16,0
                                                                                                                                       market
                                14
                                                                                  14,0
                                                                                                                                       • NEC is a leading supplier in Japan, growing
                                12                  10,9
                                                                                                                                       export sales of WCDMA
                Million units




                                10

                                                                                                                                       • Panasonic sold ~10m handsets in Japan, growing
                                                                                                            9,0
                                                                                                                   8,0
                                8
                                                                        6,6
                                6                                                                                                5,4
                                                                                                                                       export
                                                                                                                                       • Sanyo supplies CDMA handsets to KDDI, Sprint,
                                4      3,5

                                2
                                                             0,4
                                0                                                                                                      and PDC handsets to Vodafone
                                     Fujitsu    Kyocera    Hitachi   Mitsubishi   Nec     Panasonic    Sanyo      Sharp      Toshiba
                                                                                                                                       • Sharp spearheads camera phones, 2.2m units sold
                                                                                                                                       overseas
                                                                                                                                       • Toshiba is a leading CDMA supplier         14
    The Handset Distribution System
  Suppliers                    Distributors            Retailers              End customers



                                                                     Sell-
                     Sell-in                                         throug
                                                                     h




Sell-in:                           Inventory : Normalized 6-8                Sell-through:
handsets delivered to              weeks, á 10-12m/w, but it is a      handsets bought by
the distribution system            wide range in different regions          end-customers
                                                                                     15
General Drivers of Change

•   Internationalization and structural change processes
•   Technological changes/drivers
•   New power-dependence relations and power shifts in the
    marketing channels
• New patterns of competition and cooperation between
    firms in and between channels




                                                             16
Concluding Discussion

 Channel issues facing handset manufacturers, operators
 and other channel actors:

 1. Important drivers leading to increased importance of
 distribution issues
 2. Distribution challenges for handset manufacturers with
 increased globalization
 3. Distribution challenges with global, regional and local
 distribution and consumption
 4. Role of the operators and challenges for other channel
 actors

                                                              17
1. Important drivers leading to increased
importance of distribution issues


•   Globalization of markets and growth of markets
    for handsets
•   Technological changes in channels
•   Changes in competition and cooperation in and
    between channels




                                                     18
2. Distribution challenges for handset
manufacturers with increased globalization


•   Globalization and weaker brand loyalty
•   Increased distribution complexity with more
    focus on efficient information systems:
•   Ownership of handset consignments and channel
    control




                                                    19
3. Distribution challenges with global,
regional and local consumption


•   Globalization in combination with apparent local
    variations
•   Handling and changing local variations in
    demand




                                                       20
  Distribution is a regional business
US: Operator focus              Europe: Fragmented distribution
• Sales to operators over 90%   • Sales to operators over 50%
• Retail 5%                     • Retail 15%
• Distribution 5%               • Distribution 35%




                                                                  APAC:
                                                                  Fragmented
                                                                  distribution
                                                                  • Sales to
                                                                  operators over
                                                                  30%
                                                                  • Distribution
                                                                  more than 60%
                                                                  • Retail 10%


   Close connections with operators essential, beneficial for both
   Nokia and Ericsson                                                       21
4. The role of the operators and challenges for
other channel actors


•   Branding issues and the battles for channel
    leadership
•   Controlling user interfaces and relations with
    system integrators
•   Increased focus on professional procurement in
    the channel
•   Taking the Distribution Center role


                                                     22

				
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