Will Asian Tigers run the show?

MobileToday, March 2005: Three years ago Samsung emerged as a significant force in the UK with successful Asian-influenced GSM/GPRS clamshell designs, prompting operators to look again to the old Tiger economies for relatively cheap, and often more advanced manufacturers.

The Korean manufacturer has swept all before it, setting the pace for style with a string of highly desirable handsets, and jostling with Motorola for the world’s number two position as its stock with operators, retailers and consumers soared. The success of its mobile products has rubbed off on the rest of its divisions, helping to make its consumer electronics brand one of the most trusted around.

Other Asian companies have taken note. Far Eastern manufacturers are keen to emulate Samsung’s success. LG wants to boost its standing as a luxury electrical goods brand, and is so keen to follow the Samsung way that even it tried to recruit UK MD Mark Mitchinson at Christmas. Other manufacturers like NEC and Sanyo are aiming to ride the wave of 3G sales to surf into the UK.

Can they sustain their roar and mount a sustained challenge or will they be drowned out by Western rivals like Nokia and Motorola?

Samsung has seen a blip in sales in recent months, precisely because of the growing volumes from 3G (page 3). In truth this has less to do with technology and more to do with the subsidy 3 has pumped into the market. Asian firms with 3G models have positioned themselves to cash in, as has Motorola. Other Western firms like Nokia and Siemens have missed out on the benefits of aligning with an aggressive new European operator.

With 3G the table has turned again. Developments like higher bandwidths and mobile internet technologies were invented in Asia, meaning Asian manufacturers like Samsung, LG and NEC are taking advantage of the transition from 2G to 2.5G to 3G to grab back market share from established Western manufacturers. Asian tigers have been successful so far, but will they sustain their onslaught?

3G opportunities

Jerome Buvat, senior analyst at consultancy Capgemini, argues that in a market where subsidies have forced prices down at tremendous rates, manufacturers best able to cut costs will win out, and that those best positioned to do so are those that can outsource as much as possible.

Nokia outsources only a small proportion of its production but is expected to maintain dominance by refocusing on mid-range handsets and cheap operator-customised handsets However, Buvat thinks it will find it increasingly tough and even more so for Asian newcomers trying to establish themselves in the UK.

‘The way for these newcomers to gain market share is to cut prices sharply and that is going to be difficult,’ he says. ‘I don’t think they are going to realise their ambitions.’

Arni Teigene of Usability by Design, a consultancy to major mobile manufacturers, says shifts in technology like 2G-3G can prove disastrous to companies wanting to break into new markets like the UK.

‘Motorola suffered considerable market share losses when technology shifted to the 2G networks,’ he claims. ‘It is therefore critical to get it right when we move into the next generation.’

Teigene pinpoints LG as the current leading 3G handset vendor in Europe. LG, according to its own estimates, achieved 6.5%-7% UK market share in just one year by supplying to 3, and it believes it can maintain this momentum.

John Bernard, LG Mobile marketing manager, explains: ‘Our strategy is to supply one operator at a time until we get to a nice level and then move on to the next.’ LG’s goal for 2005 is 10%-15% UK market share by targeting the Big Four operators, bringing it within range of the coveted number two or three spots in the UK market, and close rival Samsung.

At the other end of the market, one of the newest entrants is Sanyo. Its strategy is similar to LG’s, which entered the market late last year after Orange took on its S750 3G device.

Sanyo’s business development director, Aya Tate, says: ‘There is a lot of competition in the 3G market, but it offers a golden opportunity for a newcomer. The key to success will be the ability to offer the right phone at the right time.’

Instead of price, Sanyo places emphasis on innovation, claiming that an important factor in making successful 3G phones will be large colour screens.

‘We believe we are in the lead but others are catching up,’ Tate notes.

Two-Pronged Attack

Most Asian manufacturers are taking a similar approach of targeting individual operator partners and technological advances, except one: Panasonic. It is the only major Asian mobile phone maker not to be pushing 3G this year.

In Cannes it announced seven phones for 2005 – in 2004 it launched only two, and saw UK market share drop from 4% to 2% – all placing emphasis on style, and none supporting 3G.

‘Nice looking products are very important to the consumers,’ argues Graham Carter, Panasonic’s UK general manager for mobile phones. ‘3G phones are still too big and heavy. In many ways, the move to a 3G phone looks like a step backwards to consumers.’

Carter believes 3G will not really take off in the UK until 2006, by which time Panasonic will have its first 3G phone on the market.
While Asian companies such Panasonic, LG and Sanyo are piling pressure on the mid to high-end of the market, other less well-known brands are looking to squeeze in at the bottom.

Haier, for example, is one of a raft of cheap but very aggressive Asian manufacturers looking to break into the UK market. Others include fellow Chinese TCL and Amoi, plus Koreans Pantech and VK (currently distributed exclusively by Unique Distribution in the UK).

However, low-cost newcomers face the problem of the UK market being controlled by the network operators, claims Tim Sagar, Haier’s UK sales and operations manager.

Haier’s P-series pen phones and V100 clamshell camera phone sold well in Germany and Italy in 2004, but it’s still struggling to make an impact in the UK, although it is being distributed by Dextra/4u.

Another method of getting a foothold in the UK is to brand products by operator name, like Taiwanese manufacturer BenQ with its X2 and X3 phones for O2; Nokia has already identified the strategy as a means to maintaining market share.

However, Haier is following Nokia’s old example of making it a principle to put its own badge on the front of the phones sold in the UK, as it wants to establish itself as an all-round consumer technology company like LG or Samsung. The company will initially rely on low-cost manufacturing and lack of expensive brand equity to aggressively target UK consumers.

‘In the longer term we expect to sell our phones through the operator market but it’s a long process,’ says Sagar.

Simon Robinson, Siemens UK brand marketing manager, believes that the most important weapons in the battle for 2.5G and 3G market share are brand and design.

But while new entrants have to focus on design while they build brand awareness, he warns them against underestimating incumbent manufacturers.

‘When consumers are faced with a wide choice of handsets in-store, research shows that brand plays a very important role in the decision-making process,’ he claims.

Peter Davies, head of marketing at TTPCom, a technology developer for mobile phone makers, believes that new-entrant manufacturers will have only 20% of the UK market in which to make an impact.

‘The top six hold 80% of the market and it tends to move back and forwards between them,’ he explains.

The competitors

Realistically, in light of the above views from industry commentators, Sanyo doesn’t see itself in the same league as Nokia, Motorola, Siemens or Sony Ericsson. Yet.

‘Given where they are and where we are it’s difficult to see them as competitors,’ says Tate. ‘Our main competitors right now are LG and Samsung. They too seem to be concentrating on 3G for growth.

‘This is our first step in the UK and Europe. One day, of course, we hope to be up there with Nokia and Sony Ericsson, but right now we are happy concentrating on our part of the market,’ she adds.
Even LG’s Bernard admits that in the short to mid-term, Nokia’s crown is safe, ‘thanks in no small part to its aggressive pricing strategy’.

But everybody has got to start somewhere and just like it would be foolish for any newcomer to underestimate the incumbents, it would be foolish for any incumbent to underestimate the new competition from the East.

Subsidies – should they stay or should they go?

Handset subsidies are crucial to the UK market (where the concept was invented over 15 years ago), dropping prices of mid to high-end handsets to attract consumers.

But if T-Mobile boss Rene Obermann’s recent call for the scrapping of prepay subsidies came true, could higher prices open the market to less well-established manufacturers?

In China, where there are no handset subsidies, some 30 to 50 new handsets of all prices are launched every month. But TTPCom’s Peter Davies claims that with subsidies UK operators effectively control the mobile market, favouring bigger manufacturers.

Despite occasional grumbles from operators, prepay subsidies will survive – 3G has provided some of the highest subsidies to date – but if they ever went, the biggest effect would be on the higher end of the handset market, hurting the likes of NEC and LG ‘Hutchison 3G had no choice but to [heavily] subsidise 3G phones,’ notes Capgemini’s Buvat, who says that unsubsidised 3G handsets are too expensive to have mass-market consumer appeal. ‘But I don’t think operators will cut subsidies; if they did, they would do it at the lower end of the market and not on 3G phones.’

Panasonic’s Carter claims: ‘It would be a very brave operator that would get rid of its handset subsidies. They would see their market share fall overnight. I don’t think we will ever see subsidies go.’