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September 5, 2005 5:00 pm

Japanese makers endure handset hell

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Towering above the sleepy suburban train station of Mukaihara, more than an hour from central Tokyo, is a gleaming new glass-encased building that is home to NEC’s mobile phone division.

But Ben Nakamura, who heads NEC’s mobile phone business, is hardly in the mood to enjoy the swanky new offices into which his division moved this spring.

“The domestic mobile phone market is no longer rising. That is a clear fact, so each company is suffering,” Mr Nakamura says. “Japanese handset makers face a shake-out.”

The handset market is crowded with more than 10 manufacturers, ranging from heavyweights such as NEC and Matsushita, number one and two in the market respectively, to smaller competitors such as Casio.

But few companies are able to generate profits from a business where research and development costs are high, product shelf-life short and competition fierce.

The combined sales of Japan’s 10 mobile phone manufacturers is more than Y1,000bn ($9.2bn), but at the operating level they made a combined loss of Y35bn last year and are forecast to jointly make no profits at all this year, notes Yoshiharu Izumi, electronics analyst at JPMorgan in Tokyo.

“Mobile phones are not a profitable business,” concedes Toshinori Hoshi, director of the mobile terminal division of Matsushita’s Panasonic Mobile Communications.

Mobile phone penetration is about 70 per cent in Japan and manufacturers have had to introduce ranges of slightly different models to lure buyers.

And with Japanese consumers so keen to get the latest fads, manufacturers have had to provide the most advanced features to remain competitive, Mr Hoshi points out.

Consequently, manufacturers have seen volume sales of each model decline while development costs have remained high because of the demands of consumers.

The development of third-generation technology, for example, is so expensive that NEC and Matsushita joined forces to share the burden of R&D in wide-band CDMA technology, the 3G standard in Japan and Europe.

“Compared with PDC [Japan’s second-generation standard] it takes 50 times as many people, depending on how much [of the R&D] you include,” says Mr Hoshi. Together, the two groups still have 2,000 people working on 3G product development, he notes.

On top of this, mobile phones continue to evolve, doubling as cameras, radios and TVs.

Next year, manufacturers will have to add a smart chip to turn them into mobile wallets, which allows users to pay for goods and services by charging their phones with pre-paid money.

“The software in mobile phones is already more advanced than Windows 95,” says Mr Hoshi. “The speed of development is so fast, and you have to be able to do so many things.”

What is more, Japanese mobile phone makers, which have dominated the domestic market, will face competition from formidable global rivals that are significantly more cost-competitive.

Nokia, the world’s largest mobile phone maker, is developing a dual-mode GSM/3G phone with DoCoMo that can be used in Japan and Europe, where the GSM standard dominates.

Motorola has already launched a DoCoMo phone and LG, the Korean maker, is also coming out with a dual-mode phone for DoCoMo next spring.

Although Samsung has not unveiled plans to follow suit, many expect it to be just a matter of time before the world’s second-largest player enters the fray.

“Japan is no longer an isolated country as in the days of PDC,” says Matsushita’s Mr Hoshi.

Until the recent spread of third-generation mobile phone technology, the dominant standard for mobile phone communications was a proprietary standard known as PDC, which was developed in Japan and only used there.

This discouraged foreign mobile phone makers from building a strong presence in Japan, leaving local manufacturers to compete among themselves.

But the increasing shift to third-generation technology using the W-CDMA standard in Japan and Europe as well as some parts of the US, gives foreign handset makers a greater incentive to compete in Japan.

In spite of these pressures, Japanese mobile phone makers are sticking it out, believing it is important to have the technology expertise and hoping they can make a comeback when there is a technology shift.

Market leaders such as NEC and Matsushita are trying to reduce costs to improve profitability. NEC is shifting its attention to overseas markets, particularly China, to make up for the slumping domestic market.

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