Sony Ericsson’s profits slump along with sales of 3G phones

Sony Ericsson posted a 47% drop in first quarter profits on Apr. 23, reconfirming a slump in high end phone sales in Western Europe and North America and underscoring the challenges ahead for the company’s new CEO, Hideki “Dick” Komiyama. Financial analysts have been sounding the alarm about a drop in demand for high end phones ever since Texas Instruments, a leading supplier of semiconductors for mobile phones, set off shock waves on Mar. 10 by lowering its first-quarter growth estimates for sales of wireless chips and pinned the blame on weakening demand from a major customer for high-end chips used to power third generation (3G) phones.

The handset market is still expected to grow at 10% year-on-year in unit terms but with a greater emphasis on less expensive low-end phones, where Sony Ericsson only has a small presence. With no major new products expected in the second quarter, there is little scope for Sony Ericsson to retake lost share. The news is also negative for Samsung, which is also mainly present in the high-end of developed markets. That leads Richard Windsor, a financial analyst at Nomura Securities, to conclude that it too is likely to not fare very well this quarter.

Consumers are opting for free, lower-end devices instead of paying for an upgrade as discretionary spending is hit by an economic downturn, says Windsor.

The winners are LG, which is snapping up battered Motorola’s customers in N. America, and Nokia, because nearly 80% of its handset unit sales are lower-end models popular in high growth markets like India.

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