Threat to smaller Japan handset groups

The end of a business model in which Japanese mobile networks paid to give away high-tech phones was always going to hurt somebody.

For the smaller companies in Japan’s fragmented mobile handset market, however, last year’s decision by the Softbank network to offer a tariff without a subsidised phone may threaten their independent existence.

Mobile handset sales have collapsed since Softbank introduced its “White Plan” in January 2007. Shipments fell by 29.3 per cent compared with a year ago in July according to Jeita, Japan’s electronics industry association.

The plan, which rival Japanese network operators KDDI and NTT DoCoMo were quick to imitate, offers a bundle of free calls for a low monthly subscription of Y980 ($9.28). The handset must either be paid for upfront or over a two-year contract period.

Previously, the handset was cheap or free, and paid for by a high monthly subscription.

As a result, older users, who tended to keep their handset even after the end of the contract period, subsidised students who got a handset every two years.

But now those older users simply continue on their Y980 tariff after the price of the handset is paid off, and younger users, faced with the true cost of a new phone, are not upgrading as often. The average life of a Japanese handset has gone from two years and seven months to more than three years.

The resulting fall in handset sales hurts even more because the industry is so fragmented. Only the biggest player, Sharp, has a market share of more than 20 per cent according to IDC Japan, and only Panasonic, Fujitsu and NEC have more than 10 per cent.

The rest of the market is shared between Toshiba, Sony Ericsson, Kyocera, Casio Hitachi, LG, Nokia and several smaller manufacturers – not least Apple, with the Japanese launch of the iPhone.

Profits at all of these companies are under intense pressure and one likely result is consolidation.

“There is nothing concrete but I think that M&A chances will appear,” says the president of one second-tier handset maker.

There have already been some deals. Earlier this year, Kyocera finalised the acquisition of Sanyo Electric’s mobile handset business and Mitsubishi Electric left the field altogether.

Analysts are speculating about combinations of almost all of those that remain.

If mergers are to work, however, they will need to unite some of the technologies that are converging into Japan’s advanced handsets. One of Sharp’s advantages is that it makes many components inhouse, which allows it to get to market faster.

Another of Sharp’s strengths is that it sells to all three big networks, DoCoMo, KDDI and Softbank. Rivals are trying to do the same: Casio, for example, will soon start sales to Softbank as well as its existing customer KDDI.

That requires mastery of two technologies – KDDI uses a different standard to Softbank and DoCoMo – as well as the skill to make a phone on which Japanese consumers now expect to watch television, pay for their subway ticket and record videos.

Developing such phones is expensive – and increasingly hard to pay for from sales in Japan alone. Japanese makers’ final strategy to deal with their domestic crunch, therefore, is to look abroad.

In spite of their technical strength, Japanese companies have found that difficult in the past, as foreign consumers have not taken to the does-everything-but-make-a-cup-of-tea sophistication of Japanese handsets.

With the success of Apple’s iPhone, however, some handset makers see an opportunity in high-end phones.

Sharp is moving into China. Companies such as Kyocera and Casio, which are strong in the CDMA2000 standard used by KDDI, are keen to boost their sales to US networks that use the same technology.

And all are contemplating the coming shift to a global mobile standard, known as Long-Term Evolution.

“Next-generation mobiles are the most important. LTE is another chance for Japanese makers to sell abroad,” says an industry executive.

If the handset makers are to overcome their domestic woes, it is a chance that they may have to seize.

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