Mobile phones giant Motorola has rattled its rivals around the world with downbeat sales forecasts, but analysts stressed on Friday that surging demand in China and India meant the outlook remained bright for handset makers.
The world's second-biggest mobile phone maker unsettled investors by warning late on Thursday that its quarterly results would be lower than its own forecasts and those of Wall Street analysts.
The update was taken by markets as more evidence of intense price competition with world leader Nokia and suggested to many that the Finnish firm could also report a similar high volume, low price sales trend for its handsets.
In early trading in New York on Friday shares in RAZR-maker Motorola were down 8% to $18.90 (£9.79).
Nokia shares closed down 4.5% at 15.21 (£10.25) and the gloomy sentiment spilled into handset suppliers in Britain like chip designer Arm Holdings and Bluetooth specialist CSR.
The two Cambridge-based firms closed down 3% at 122p and 4.2% at 615p respectively, as equity analysts predicted companies supplying handset makers would have to charge less.
"CSR does produce industry-beating power consumption, however, it has been our contention for a while that they will have to bring down that premium pricing, especially in handsets and especially given some of the pricing competition we are seeing between the top two, Motorola and Nokia in particular, in emerging markets," said Lee Simpson, analyst at Evolution Securities.
Upwardly mobile
As rapid industrialisation has boosted both disposable incomes and phone network coverage in emerging markets like India and China, handset makers have tapped into growing demand. Over the last two years China has enjoyed growth of 5m users per month, while Indian growth now stands at 6m a month.
The need for lower cost models for large parts of those markets along with intensifying competition between manufacturers has eaten away at margins.
Shaun Collins, principal analyst at telecoms consultants CCS Insight, said competitive intensity was at an all-time high.
"This is a market place that is making a lot more phones but it's gaining less profit from making a lot more phones. Many of the volumes that are moving now in terms of the increase are into market places that are lower priced and in some cases ultra-low price," he said, citing Motorola's launch this winter of the Motofone handset in India for the equivalent price of less than £20.
But he cautioned against the pitfalls of overlooking a massive middle class in India and rising incomes in other emerging markets.
"We shouldn't imagine that just because there are very low-cost products in there, it is only a low cost market," he said.
Martin Garner at industry experts Ovum agreed and noted handset makers also benefited from consumers in emerging markets doing exactly as in developed countries and trading up when they replace old handsets.
And for those buying their first phone, he highlighted anecdotal evidence that cut price models were not as popular as expected.
"It's very easy in a western, patronising way to think that people in poor countries with no money, who want a phone, just want an ordinary, boring, very cheap phone. And that's not true. What they want is a nice phone. The reason is, they are spending a larger amount of their disposable income on it than you or I would," he said.
