A shrinking domestic mobile phone market and ballooning costs on Thursday forced NEC, Japan's third largest electronics conglomerate, to issue a full-year profits warning.

NEC said its mobile businesswas likely to lose Y20bn ($188m)in the year to March, havingpreviously forecast a Y40bn profit. This led the company to cutits group net profit forecast by10 per cent to Y60bn on expected sales of Y4,900bn, as it announced half-year net income of Y25bn.

NEC, Japan's biggest mobile phone supplier, issued a grim statement on the domestic handset market, saying it had contracted for nine straight months this year and that ?no substantial recovery? was expected.

Mobile phones have long been staple products for Japanese electronics manufacturers but are now being overtaken in importance by flat-panel TVs, digital cameras and DVD recorders. Mobile phone sales are slowing as roughly two-thirds of Japanese people now own a mobile phone, leaving replacement purchases rather than first buys as the main source of demand.

Outside Japan, NEC was more optimistic. The group said sales of 2.5G phones in China, where it has already shipped 700,000 units, were likely to continue growing steadily.

But it admitted that the development of 3G products for the international market had been delayed and that the costs of adapting the next generation platform to other countries as well as funding for overseas sales support would eat into second-half profits.

NEC also cut profit forecasts for its networking and information technology businesses. The news came the day after NEC Electronics, the chipmaker spun off from the group and floated in 2003, did the same.

Data yesterday revealed high levels of technology inventory and a decline in the production of electronic devices in September, suggesting that manufacturers could be entering a phase of cyclical retrenchment, economists said.

Meanwhile, Fujitsu, a rival electronics conglomerate, remained in the red with a Y8bn first-half loss. It said that, despite fears of a broader slowdown forecast, it would swing into profit of Y70bn by the end of the fiscal year on sales of Y4,900bn.

The group acknowledged sluggish mobile phone sales but said it had narrowed its losses from the previous year.

Reporting results for its third quarter, Canon, the camera and office equipment maker, said net profit rose 39 per cent to a record Y102bn, beating the group's own forecast.

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