Motorola problems could signal larger industry issues

Motorola, one of the world's largest wireless handset makers, revealed this week that it will manufacture fewer phones this year than previously expected--sending shares in the company nearly 5 percent lower.

The company's announcement led to confusion on Wall Street today, with some analysts viewing the news as an indication of reduced plans, while others said the company had already set these same expectations earlier and is simply reiterating their intention to buy fewer wireless components.

Had it been isolated, the warning likely would have been little cause for concern. But the caution follows similar production, sales and profit warnings recently from both Nokia and Ericsson, the other top wireless phone makers.

An expected downturn in mobile phone sales and production is curious, considering the ongoing consumer demand, rapid development of new mobile Internet technologies, and intense industry hype surrounding all things wireless. Many analysts have projected the wireless industry will be among the fastest-growing markets in technology for the foreseeable future.

But the mobile phone market has been ravaged by a low-cost trend, spurred by fickle consumers who want the latest technology and features available at low prices. The wide variety of worldwide technology standards and the introduction of mobile Internet access have made meeting production cycles and simultaneously satisfying investors' demands for lofty profits a difficult task, analysts say.

"This is probably the most competitive telecom market out there," said Elliott Hamilton, a senior communications industry analyst at the Strategis Group, a market research firm. "The market is just too cutthroat."

Although the huge growth potential has made handset manufacturing an attractive market, many factors make success a daunting task.

For one, component suppliers are churning out cellular phone chips just as fast as handset makers can use them, keeping profit margins high for the chipmakers. In addition, a shortage of flash memory--memory chips that retain information such as phone numbers even when the power is turned off--has been a persistent concern. For example, executives at Advanced Micro Devices, a major flash memory maker, say back orders already are sold out through 2001.

Analysts say the industry is a victim of its own success and has created a component shortage by growing so quickly.

"When you have this kind of growth, it's tough to keep up," said Jane Zweig, executive vice president at Herschel Shosteck Associates, a wireless industry research and consulting firm. "This is not a surprise, and we expect it to continue for the next 12 to 18 months."

The standards challenge
Several competing standards and the introduction of new wireless Net access technologies also have forced phone makers into a constant struggle to keep up, some analysts say.

"The marketplace has become so complex for handset makers. There are so many worldwide standards to support, and they've got to develop wireless Internet-ready WAP (Wireless Application Protocol) phones," Hamilton said. "They're being pulled in so many different directions with dual-mode phones and tri-mode phones. Those kinds of production runs are hard to schedule.

The wide variety of standards and technologies has created longer production cycles and increased manufacturing costs in recent years.

"It's a nightmare to support all these different protocols and frequencies," Zweig said. "You have to roll out all sorts of phones with different features at various prices in order to have a full product line. And that's expensive for (research and development) and manufacturing."

Those factors, and the rise of several powerful Korean and Japanese handset makers such as Samsung, Matsushita and Kyocera, which often can produce lower-cost phones, have sent several handset makers packing.

Qualcomm sold its phone business last year, and others including Nortel Networks and a Lucent Technologies-Philips Electronics joint venture exited the business in recent years, analysts said.

Adding to the concerns, a recent report from the Strategis Group projected that worldwide wireless subscriber growth is expected to "slow significantly through 2007, especially in mature markets."

Eyeing growth
Amid signs of a slowdown, overarching growth trends remain. Wireless handset sales dwarf those of personal computers. About 297 million mobile phones were sold worldwide last year, according to a report released this week by the Strategis Group. Many analysts and executives expect worldwide mobile phone sales of about 400 million units this year, while about 120 million PCs are expected to be sold.

In addition, the Strategis study showed that although the wireless industry will grow more slowly than it did between 1993 and 1999, the market will increase to 1.37 billion mobile phone owners worldwide by 2007, up from 530 million today.

But many related industries are watching the wireless market closely.

Whether mobile phone sales are flattening is a major issue for the semiconductor sector. A shortage of flash memory has resulted in profits for Intel and AMD, the two leaders in the industry, given demand for the technology.

The semiconductor industry says demand remains high, and companies are largely capable of handling the supply. Many of the chipmakers that supply the wireless industry are projecting sales of between 420 million and 435 million units this year.

But some analysts question whether mobile phone makers are unnecessarily slowing production cycles and raising costs by trying to pack too much technology and too many features into their phones.

"The phone is not necessarily the best (device) for many of these advanced services," Zweig said. "It's very much an uncertain time in the wireless industry, and Motorola, Nokia and Ericsson are caught up in that."

CNET News.com's Ian Fried, Michael Kanellos and Ben Heskett contributed to this report.