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A profit warning by Motorola could signal a tough 2007 for cell phone makers who increasingly depend on competitive emerging markets as growth in the rest of the world slows, analysts said.
Motorola and its bigger rival, Nokia, are faced with the stark choice of either upsetting shareholders with lower profit margins as they push into China and India, or forsaking some growth by pursuing these and other emerging markets less aggressively.
And while margins at the No. 3 and No. 4 handset makers Samsung Electronics Co. Ltd. and Sony Ericsson may be under less pressure this year as they focus mainly on developed markets, analysts said they could suffer over the long term.
"Lower-price phones is where the demand is going be and that's going to put pressure on prices and margins across the handset industry," said Deutsche Bank analyst Brian Modoff.
He forecast that growth in handset sales would slow to around 15 per cent this year compared with the 20 per cent and above growth rates the industry has enjoyed in recent years.
Motorola said it would report worse-than- expected fourth-quarter 2006 sales and earnings because of an unfavourable geographic and product mix.
The news pushed Motorola's shares down 7.8 per cent by the close on Friday, its biggest one-day drop in four years. Nokia's US shares fell 5 per cent.
Nokia and Motorola have focused on developing new markets to counter slowing growth in the United States and Europe, but they face stiff competition from an array of local handset makers in the low-end of the market.
In established markets, the handset makers also had to offer steep discounts to drive growth because cell phone penetration rates are already high, analysts said.
JP Morgan analyst Ehud Gelblum said in a research note that Motorola may choose to try to improve profits by easing its push into emerging markets, but others believe this would put long term prospects at risk for any cellphone maker.
"They have no choice. Emerging markets eventually become developed markets," said Oppenheimer analyst Lawrence Harris.
Some analysts said Motorola's profit warning was also due to increased pressure from Sony Ericsson -- a venture of Sony Corp. and Ericsson -- for high-end phones, particularly in Europe.
But while Samsung and Sony Ericsson may see less of a profit crunch this year, they may miss out on emerging market growth in the longer term if they continue to focus on advanced phones for developed markets, analysts said.
"In 2007, they may benefit but longer term the question is where do they get their growth from," said Morningstar analyst John Slack.
Piper Jaffray analyst Michael Walkley slashed his target for Motorola's fourth quarter operating margin to a range of 4 per cent to 5 per cent from 11 per cent and expects it to take several quarters to correct the sudden decline.
The shares in Motorola chip supplier RF Micro Devices Inc. closed 6.2 per cent down and wireless chip maker Broadcom Corp. fell 3.2 per cent on Nasdaq.
- REUTERSjc
