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A Tiny Phone Maker That's Talking Big

By Stephen Baker It's a grim time to be jumping into the cell-phone business. Industry growth is slowing, and giant manufacturers from Ericsson to Philips Electronics are bleeding hundreds of millions of dollars in losses. And yet in Birmingham, England, the aging buckle of Britain's Rust Belt, a 37-year-old former Motorola exec named Hugh Brogan is launching -- of all things -- a cell-phone startup. What's more, he's convinced that his new company, Sendo, will break into the black this year.

Has Brogan noticed that the industry is taking a dive? Yes, but the optimistic Brit is convinced that the problems besieging the big phone makers spell the end of their way of doing business and the beginning of a new order -- the Sendo way.

Big words for an industrial midget. Indeed, Sendo, which just started production in December, 2000, will barely turn out 500,000 phones this year. That comes to barely 1/10 of 1% of global output, which even in these slumping times is expected to grow 15%, to nearly 500 million phones.

STORE-BRAND PHONES. Sendo is clearly a gnat, but perhaps one with survival savvy. Brogan's approach? He looks to his customers, the phone carriers, gives them a cheaper phone than the competition, and lets them configure it to their needs. And most important, he gives them the opportunity to brand it. In essence, Sendo is making store-brand phones, much like the private-label corn flakes that sell at a discount at big supermarket chains. Pointing to the Sendo logo on one of his tiny phones, Brogan says, "If Telefonica wants this to read Telefonica instead of Sendo, Sendo disappears."

But there's one crucial difference between Sendo and the cut-rate cereal makers. Unlike most private labels, Brogan is hoping to carve out a living at the high end of the industry, making the pricey phones that command fatter margins. Of course, nearly every phone maker has the same objective. But already Sendo has surprised the industry by producing one of the tiniest phones in the market in Europe, the D800, which has all the bells and whistles of the newest brand-name phones. "It has a longer battery life than Nokia," says a surprised sales manager at Spain's Telefonica, one of the companies selling the Sendo.

Not that the new Sendos are hot sellers yet. So far, only tens of thousands are produced per month. But Brogan insists he doesn't need massive production to survive. And with this, he's turning the norms of the cell-phone industry on its head.

KING NOKIA. In the cell-phone game as it's played today, brand and bulk reign supreme -- and companies spend massively to market their brand. "Building a global brand is one of the biggest expenses," says Serge Tshuruk, CEO of Alcatel, the French company that's now taking a beating in the marketplace. The other key for manufacturers is size: Bigger companies can produce more cheaply, while bullying suppliers and customers alike. In this area, Nokia, which makes 35% of the world's mobile phones, has emerged as the king. Indeed, Hendrik Zonnenberg, an analyst with ING Barings in London, says of the 60 manufacturers making cell phones today, "Nokia is the only one making profits."

Brogan, naturally, has a different scheme. He scrimped on investment by selling a share of the company -- he won't say how much -- to Hong Kong-based manufacturer CCT Telecom Holdings. In exchange, CCT has built and staffed a new factory in China. Meanwhile, back in Birmingham, an engineering staff of 150 designs the phones and develops software. Why Birmingham? Labor and real estate are cheap in the distressed industrial heartland. And Prime Minister Tony Blair's Labor government, eager to create technology jobs in the region, contributed $10 million toward Sendo's R&D center.

The idea is to make the guts of the phones cheaply in China, then ship them to Europe. Brogan has contracted two Dutch companies, Five Star and Tiemex Assembly, to operate a distribution and configuration center in the Netherlands. Technicians there fit the phones with customized software, casings, and logos, and ship them to phone companies within 72 hours.

LOW BUT SURE. The advantage for the phone companies: They order when they need phones and don't build up large inventories. Brogan estimates that in this fast-moving market, where models grow stale as the months pass, the big companies buy 50 million or 60 million cell phones a year. "Price erosion costs them 1% to 2% every month. It's just one of the ways phone companies get squeezed," he says. They also take a beating on price. Phone maker Nokia, for example, gets 20% margins on its sales to phone companies. Brogan plans to break into the black with margins of only 8%.

This low but sure road to profits was the pitch Brogan used last year, when he scouted funds for the startup. It worked. From CCT Telecom, British VC group Bowman Capital, and a group of private investors, Brogan raised $100 million. Of course, lots of money was still flowing into wireless telephony back then. Mobile was booming, especially in Sendo's home market of Europe, and phone companies practically gave away handsets to gain new subscribers. In Germany alone, Vodafone and Deutsche Telekom spearheaded a subscription race that netted 25 million new customers. European subscriptions soared by 60%. This was a windfall for manufacturers, and even industry also-rans like Alcatel and Philips managed to turn a profit.

The boom came to a close the day after Christmas. Phone carriers were struggling to finance massive investments for the coming high-speed mobile network, known as Third Generation. Investors were fleeing, and stocks crashing. To cut costs, companies slashed subsidies on handsets, and consumer demand slowed to a crawl.

TRENDSETTER? Now, a host of European manufacturers, including Philips and Alcatel, are hinting they'll exit the business. Sweden's Ericsson, meanwhile, is edging toward a path that oddly resembles Sendo's. In January, Ericsson shifted its manufacturing to Flextronics, a contract manufacturer with factories in Asia. And on Apr. 24, Ericsson agreed to form a joint venture with Sony to develop the next generation of Web-surfing phones. This is similar to a deal Sendo has with Microsoft. "Manufacturers are looking to share development costs, especially in software" says Richard Lindh, senior director of marketing for Microsoft's Stockholm-based mobility group. "You'll see more and more operations like Sendo's."

Indeed, with his company in barely its fifth month of production, Brogan is clearly a trendsetter -- but not yet a profitable one. The question now is whether Sendo will grow rich on Brogan's innovations -- or merely light the path for others. Baker covers technology companies in Europe for BusinessWeek

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