Mad Dash for the Low End
If anyone still doubts that low-income folks make good customers, they should talk to executives from Nokia (NOK). The Finnish company owes its 40% share of the global handset market in large part to residents of places like Calcutta, Lagos, and Shanghai, many of whom live on just a few dollars a day. Now, with the No. 3 player, Motorola (MOT), on the ropes, Nokia has an opportunity to extend that lead. But other rivals are eyeing the Finns' success and stepping up efforts to woo those same people.
Motorola's woes create a substantial opening. The company is suffering after missteps in emerging markets and its failure to develop a new model as popular as its smash hit Razr, and management may sell the handset business. Moto is particularly vulnerable in Latin America, where the U.S. company and Nokia are neck-and-neck at about 26% each. "Motorola is holding up pretty well in its home territory. But if the weakness spreads, there is potential for rivals to take market share," says Neil Mawston, an analyst at Strategy Analytics.
There's no shortage of contenders. Despite Nokia's intimidating position—it has 46% of the market in Asia and 66% in Africa, Mawston estimates—challengers sense an opening as poorer users trade up to better models with features such as digital cameras or music players. Sony Ericsson, for instance, on Jan. 24 launched two new phones in India, including one with speakers that doubles as an AM/FM radio. "If we're going to grow our share, we need to address [the low-end] market," says Howard Lewis, Sony Ericsson's chief of entry-level handsets.
Nokia, though, has proven it can exploit market turmoil to build sales, and it goes into battle with formidable advantages. The company earned an industry-leading operating profit margin of 25% on handset sales in the fourth quarter of 2007. It is one of the most efficient manufacturers on the planet and has factories in or near all of the biggest markets. And Nokia invested more than $8 billion in research and development last year. That helped it offer models for every market segment, from top-of-the-line devices with GPS and high-resolution cameras to mass-market phones with menus in some 80 languages.
Even without unseating Nokia, rivals could reduce its lead. Korea's Samsung, No. 2 globally, last year abandoned a seven-year-old strategy of focusing on high-end phones. Its 6% share in India pales next to Nokia's 57%, but it's double what Samsung had in 2006. Samsung also is targeting middle-class buyers in China and Latin America. In the past 13 months the Koreans have sold 18 million E250s, a $150 model with a camera, an MP3 player, and an FM radio. "When markets start to evolve from the low end to being more modern, Nokia's share usually starts to fall," says Jari Honko, an analyst at eQ Bank in Helsinki.
Nokia also faces a challenge from Asian upstarts offering ultracheap phones. In India, Reliance Communications sells a model for $19, with no subsidies. And a $30 handset by China's ZTE is doing well in poorer Central European countries. Nokia, whose cheapest phones retail for as little as $32, doesn't plan to beat those rivals on price. Even poor customers are willing to pay a little more for a phone that can stand up to rugged conditions, the company insists. Still, managers admit they are keeping a close eye on the competition. "There is talk again that others are going to do more" in emerging markets, says Chief Financial Officer Rick Simonson. "We're ready."