Smartphone wars will squeeze profit margins

Fri Jul 30 2010, 12:08 PM

Growing competition in the smartphone market is expected to hit manufacturers' profit margins in the second half of the year, according to Strategy Analytics. The firm says all the major handset makers are set to release new smartphones, driving up sales volumes but hurting margins as firms cut prices and invest heavily in marketing. The three biggest manufacturers are already affected, with Nokia's operating margin slipping from 12.2% in Q2 2009 to 9.5% this year. Samsung's margin recently dropped 7.2% year on year.

"Operating profits among major vendors remain volatile, as the 3G smartphone wars continue to rage," says Strategy Analytics. "The ramp-up in supply will drive higher volumes, but this will inevitably place downward pressure on margins as vendors fight to outsmart rivals."

Strategy Analytics says global handset shipments rose 13% year on year in Q2 to reach 308m units. Nokia maintained its lead, though its share fell from 37.8% a year ago to 36.1%. Both Samsung and Research In Motion outperformed their rivals while Apple's share remained steady at 3%. Growth in the overall market is set to slow slightly in Q3 to 12%, although there are no signs of a double-dip downturn.

Meanwhile, IDC says global mobile phone shipments rose 14.5% to 317.5m units, with most of that growth coming from vendors outside the top five, in particular Apple and Motorola. "Companies with a strict focus on the smartphone market are benefiting from steadily increasing user interest," says IDC. "The upward pressure from vendors outside the current top five will provide tough competition in the quarters to come."