Hutchison blames 3G handset shortages for supply problem

By PETER GRIFFIN

Fledgling 3G heavyweight Hutchison will finish the year well shy of its target of one million subscribers in both the UK and Italy as handset shortages and sluggish demand slow the operator's momentum.

While Hutchison's two main handset suppliers, NEC and Motorola have undertaken to deliver millions of handsets in the next few months, shortages in the pre-Christmas shopping rush will see a key selling period roll by untapped.

But is it handset shortages or just slack demand for 3G services that will see Hutchison fail to make up the numbers for the year?

Neil Strother, a mobile handset analyst at US research group Instat-MDR, says the "ebb and flow" of handset manufacturing had left a lot of vendors ill prepared for the timely switch to making 3G handsets. But that's only half the story.

"For the past several years, manufacturers were pumping out handsets at a fairly steady rate, conservatively estimating growth in a time of stagnant world economies," he told the Herald.

"Then all of a sudden SARS ends, the war in Iraq goes rather quickly, the US economy picks up after tax cuts kick in, Europeans come out of their economic funk and boom, 2003 turns into a big growth year for mobiles."

Strother estimates some 485 million mobile may have been shipped this year, most of them 2G handsets churned out to feed demand in high-growth markets like China.

The result was that vendors have had their hands full with orders they can easily fill, but supplies of components such as colour displays and digital cameras have been tight, with 3G handsets given a lower priority due to the softer market for them.

"With overall demand so high for colour displays, camera components and the required manufacturing lines, all this has put the 3G phones somewhat at a disadvantage, especially since the volume demands for 3G phones are much lower than for GSM/GPRS, and CDMA handsets for that matter," said Strother.

But Hutchison's problems may go beyond handset to supply issues to a key business fundamental - customer demand. While the limited number of phones on the market have been selling, is there really pent-up demand for the millions more handsets which are promised to arrive in the coming months?

"Subscribers just don't see the need to jump to video services that frankly aren't that compelling, just yet. And even with Hutchison offering some pretty awesome deals for 3G handsets, demand just hasn't taken off as hoped," said Strother.

A dearth of attractive video-enabled handsets has been blamed in part for the slow development of 3G. The style merchants of the mobile world, Nokia and Sony Ericsson have been slower to get into 3G handset manufacturing.

The scene will change as 2004 turns out to be a pivotal year for 3G, according to Strother.

"As 3G networks continue to pick up steam, and handset manufacturers adjust their plans, the shortage will subside, but it won't happen quickly, since the big volume game is still in GSM/GPRS handsets and there will likely be a small demand surge for EDGE phones.

While being a pioneer in 3G would always see Hutchison test the water in terms of customer demand, it's first steps have also shown the technical issues of running cutting edge, high-speed networks.

The Australian and UK operations in particularly have been criticised for their network reliability with nightmare end-user stories of call drop-outs and poor coverage.

In the UK, regulator Oftel said Hutchison's 3G service had 14 times the number of complaints of its competitors.

"Hutchison will probably face relatively slow subscriber demanD if prices for the handsets stay high and the networks are perceived as glitchy," said Strother.

While making 3G work in Europe is the main priority for Hutchison, it has a global strategy to implement and will sell its first third-generation phones in the Hong Kong market in early January.

Hutchison is "ready to do business," Group Managing Director Canning Fok said this week, referring to the long-awaited launch of 3G services in Hong Kong. Fok didn't give a specific launch date, however.

Hutchison said it has 660,000 third-generation services subscribers worldwide. This includes 210,000 in the UK, 340,000 in Italy, 110,000 in other markets, an estimated 60,000 to 70,000 in Australia.

Introducing the c616 handset, Japan's NEC Corp. President Akinobu Kanasugi said the company will make available one million units of the new phone this month around the world.

Some 700,000 have already been delivered to Hutchison.

"Our main emphasis is to deliver (the new handsets) to the European market first," Fok said.

An additional 1.5 million units will be available by the end of the first quarter, Kanasugi said.

With local mobile operators Vodafone, Telstra, Optus, Telecom and mobile wannabe TelstraClear all in the early stages of mapping out their 3G network strategies, the carriers are unlikely to face the task of procuring handsets until early 2005 by which time most handset vendors will be in full 3G mode.

"Realistically, 3G's better days are in 2005, 2006 and beyond, presuming the networks get built out by then," said Strother.

"I think the big carriers in Europe, such as Vodafone and T-Mobile and the likes of AT&T in North America view 3G as something they can wait to develop in a big way, as they squeeze all they can out of existing networks and handsets. I have to hand it to Hutchison though for being a pioneer. But the price for that aggressive stance could be $2 billion. Ouch."