By Lisa Johnston
New products on display at the American International Toy Fair, held in N
Wireless-carrier consolidation is accelerating a shift by major handset manufacturers to outsource a greater share of their production and move more manufacturing to low-cost countries, industry observers said.
Carrier consolidation will likely lead to lower handset prices for consumers, and growing manufacturer outsourcing and low-cost-country manufacturing will help keep some brands in the market, they said.
Consolidation, which has occurred in the United States and worldwide, "has led to bigger and bigger customers, and they're leveraging their volume," said the sales director for one major handset manufacturer. Analyst Herschel Shosteck agreed and said, "Vodafone's marketing power in the U.S. and worldwide is tremendous."
Contract manufacturers such as Solectron and Flextronics can be more efficient producers of phones, especially at the entry level, than some major manufacturers, the sales director said, because contract manufacturers build for multiple phone brands, yielding greater economies of scale than the individual manufacturers could enjoy themselves. "The same equipment, with different software, can be used to manufacture a competitor's phone, producing higher yields," he added.
The drive to reduce manufacturing costs accelerated in recent weeks with separate announcements by the big three handset manufacturers.
First, Motorola announced it would close down its sole U.S. handset manufacturing facility to shift production to its factories in Mexico and China. The company already outsources about 20 percent of its production, said Shosteck.
Next, Ericsson said it would outsource the remainder of its handset manufacturing business to Flextronics, which will make more than half of the company's handsets. Ericsson's two other contract manufacturers are Taiwan manufacturers GVC and Arima.
Then Nokia said it would shift most of the production at its U.S.-based manufacturing facilities in Texas to its factories in Brazil, Mexico and Korea. The company also said it might increase its use of contract manufacturers to build up to 20 percent of its handset volume from the current 10 percent.
"Manufacturing, sourcing components and supply-chain management are not our strong suits, and that's the only thing that Flextronics does," an Ericsson marketer said. "Margins are so thin, you can't afford to make mistakes."
Effective April 1, Flextronics will own Ericsson manufacturing equipment in factories in Brazil, Malaysia, Sweden, Britain and Lynchburg, Va. (where the facility was acquired from General Electric more than a decade ago). The factories employ 4,200 people.
In a prepared statement, Ericsson blamed component delivery problems and an inadequate entry-level product mix for its handset-margin problems.
Mitsubishi was the first handset company with U.S. distribution to outsource all of its production beginning in the 1990s.
Along with coming under margin pressure from carriers with a global presence, Ericsson and Motorola are being pressured by Nokia, which has increased its No. 1 market share, said Shosteck.
Motorola's handset margins average about 6 percent, and Ericsson's were in the "negative double digits," he said, and Nokia "is squeezing the competition by relentlessly and brutally squeezing out costs." The company enjoys handset margins of about 20 percent.
Nokia will keep up the pressure, said Nokia Americas president K.P. Wilska in a prepared statement.
"In recent months, we have increased the capacity of our factories by in-stalling newer machinery and improving our manufacturing processes," he said. "This means we can achieve higher volumes than before with less labor.
"In the future, as we begin to make new products that were designed for manufacturability, as well as performance, we will have even more capacity. Because of this, we are taking actions to increase our market and cost leadership."
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