Cautious optimism

Wireless industry assesses effects of economic slowdown Wireless industry executives last week said they were uncertain about growth in the U.S. wireless market during the first half of the year because of the faltering economy.

"We have a much bigger uncertainty," Nokia's CEO Jorma Ollila told analysts last week as he lowered predictions for the worldwide handset market. "We just don't know exactly what will happen."

The world's largest handset vendor said a slowdown in the U.S. handset market began during the second week of December and continued through January. "I would be looking at a situation where the economies in the U.S. and consumer confidence and demand will be picking up toward the end of the second quarter," said Ollila, who also blamed slower demand on European operators that have become more cautious in pushing new subscriber plans.

Sprint PCS, which posted a strong fourth quarter with $1.94 billion in revenues, expects 2001 subscriber additions to compare with the 4.1 million it added in 2000. But the carrier indicated a slower economy could change that figure. "As we head into 2001, we are seeing some signs of a slower economy," said Arthur Krause, chief financial officer of Sprint. "In addition, significantly higher energy costs in many parts of the country may have an impact on discretionary spending over the next several months. How this plays on the wireless industry is anybody's guess, but our sense is that these signs suggest a degree of caution is in order over the near term."

With an additional half percentage point interest rate reduction last Wednesday, the Federal Reserve signaled its readiness to re-ignite the economy. But analysts wonder how much further the economy will slow before it begins to pick up again.

"I'm not hearing [carriers] lower their numbers for this year," said David Freedman, wireless services analyst for Bear, Stearns & Co. "I expect the industry to grow 8% to 8.5% this year, which would be up from last year.... If we go into a recession, obviously there are some concerns."

A slower economy in the U.S., coupled with a maturing European wireless market, doesn't bode well for some handset makers that are struggling already. Nokia could make matters worse for Motorola and Ericsson, the No. 2 and No. 3 handset vendors. Nokia will sacrifice its margins to grab more market share in 2001 through competitive pricing, Ollila said. Nokia's ability to be more competitive with its pricing may stem in part from it decision to outsource up to 20% of its handset manufacturing this year, which should result in meaningful cost savings.

The company predicts its market share in 2002 will reach 32%, more than twice that of Motorola and three times that of Ericsson.

"Our strategy is to continue to focus aggressively on taking additional market share," Ollila said. "While we are not totally immune to the challenges at hand, our strong leadership position and strong financials will enable us not only to prevail but also capitalize on opportunities as they arise."

Ericsson recently announced it is working to improve its poor position in the handset market by outsourcing its handset manufacturing to Singapore-based Flextronics. The vendor believes this move will lead to a rapid improvement of economies of scale, a smaller capital exposure and reduced risk in the market. This move is in addition to the restructuring plan the company adopted last year to turn its handset business around.

Ericsson said the move will save the company about $1.6 billion a year by 2002. It reduced its sales growth forecast because of the uncertain economy and heavy investments in third generation technology.