Market Watch

Mobile-Phone Production Rises in Q2

July 05, 2005

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Mobile-Phone Production Accelerates in the Second Quarter
After suffering the typical seasonal slowdown in the first three months of the year, mobile-phone unit production will rise sequentially in the second quarter and for the remainder of 2005, iSuppli Corp. predicts.

Mobile-phone production in the first quarter of 2005 amounted to 173 million units, down 13 percent from 200 million in the fourth quarter of 2004. However, production in the first quarter was up 2.4 percent compared to 169.5 million in the first quarter of 2004.

The second quarter is shaping to be better than the first, with production of 180.5 million mobile phones, up 4 percent from the first quarter, and up 7.1 percent from a year earlier. Shipments will rise 5.3 percent sequentially in the third quarter to 190 million and 8.4 percent in the fourth quarter to 206 million.

After rising 25 percent in 2004, mobile-phone unit production growth will taper off this year. Production will rise to 750 million units in 2005, up about 5 percent from 713 million in 2004.

Slowing Growth
While growth is decelerating this year, a shipment level of more than 700 million units is vast—no matter what the product. With such a huge quantity, the law of large numbers begins to take effect, and a major growth margin becomes difficult or impossible to achieve.

Mobile-phone production growth is driven by purchases by new subscribers and by buying of replacement handsets. Although some regions of the world are becoming saturated, developing nations such as China and India will continue to see strong subscriber growth. Latin America is also a region where mobile-phone penetration is low and offers opportunities for growth.

Worldwide mobile-phone subscribers are set to rise to 1.9 billion this year, up from 1.6 billion in 2004, iSuppli predicts.

Even with subscriber growth, mobile-phone shipments this year and in subsequent years increasingly will be driven by replacement or upgrade sales. Annual subscriber growth will decline from 17.8 percent in 2005 to the low single digits by 2009. Therefore, upgrade phones will become a larger part of the more than 700 million handsets shipped each year.

Upgrade phones will account for 62 percent of all handsets sold this year. In 2009, upgrades will account for almost 83 percent of mobile phones sold.

New Features Spur Upgrades
Upgrade sales are being driven by phones that support new standards, features and functionality.

CDMA2000 1xEV-DO and W-CDMA are Third-Generation (3G) standards that offer more bandwidth and higher data rates than existing 2G and 2.5G systems. The number of CDMA2000 1xEV-DO subscribers is steadily increasing in Korea and North America.

W-CDMA has finally broken out of Japan and is now adding subscribers at a healthy clip in Europe. iSuppli remains bullish on W-CMDA subscriber growth and mobile-phone production this year, with 55 million W-CDMA handsets expected to be shipped.

New features and functions are being added to handsets that enable service providers to offer enhanced services to consumers. Embedded cameras, which allow consumers to snap photos and send them over the cellular network to friends and family, were in 32.5 percent of mobile phones in 2004 and will be in 85 percent in 2009, according to iSuppli. A secondary camera is now being implemented in phones to allow for video conferencing.

MP3 music playback capability is the next consumer-electronics feature being embedded in mobile phones. MP3 penetration in handsets is expected to amount to 15 percent this year, and will rise to 50 percent in 2009, iSuppli predicts.

Mobile-phone makers also are embedding digital TV tuners into mobile phones, allowing them to pick up TV broadcasts. In Korea, network infrastructure is already in place and phones have started shipping supporting digital TV reception.

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