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Days after Intel spied signs of hope in the personal computer market, Nokia’s forecast cheered the mobile phone sector. The Finnish group’s shares jumped more than 9 per cent on Thursday – in spite of profits down 90 per cent – after it said the wave of destocking that had crushed sales in recent months may be nearing an end.
Investors hailed the handset maker’s decision to maintain its forecast for the full year. They should not get carried away. Calling an end to falling inventories is not the same as calling a market bottom.
Nokia’s handset unit sales fell 19 per cent year on year in the first quarter, as weak demand led retailers to trim stockpiles to reduce carrying costs. That was not as bad as the 37 per cent drop expected by Sony Ericsson, Nokia’s smaller rival, which reports quarterly results on Friday – but still dismal.
Next quarter may be little different. Nokia expects shipments to hold steady at first-quarter levels, or perhaps increase slightly as inventories stabilise. Its re-sellers were carrying four to five weeks of mobile phone inventory at the end of the first quarter, down from five to six weeks in the fourth quarter. Nokia reckons this may be the nadir – retailers and distributors need to keep some minimal amount of supply to run their businesses.
If the bleeding stops, it would help companies to control costs by making it easier to forecast demand. But with end-user demand showing no sign of improving, inventories may languish at depressed levels, providing little impetus for increased sales. Handset makers must also grapple with a faster fall in average selling prices, as customers trade down. Nokia might benefit as its massive scale gives it an advantage at the lower end of the market. But it will not be easy going.
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