Crunch Time for Nokia

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There's no sign of slacking demand overall, notes analyst Carolina Milenesi of market researcher Gartner. Indeed, sales in 2006 may have topped 1 billion units.

But as customers in developing economies snap up millions of low-cost phones, sales of high-end models tricked up with cameras, MP3 music players, and support for speedy next-generation 3G networks aren't growing fast enough to compensate.

Some companies are managing to stay above the fray by concentrating on the mid-tier and high-end segments of the market. Sony Ericsson, the 50/50 joint venture of Sony (SNE) and Ericsson (ERIC), enjoys the highest average selling prices in the industry and is gaining market share, especially in Western Europe, thanks to its popular Walkman music phones and Cybershot camera phones.

Korean giants Samsung and LG Electronics also lean to the high end, with products such as LG's hit Chocolate phone. Samsung's market share has been relatively flat for three years, and both companies had a difficult time in the first half of 2006 because of stiff competition.

But the LG Chocolate and Samsung's new Ultra line are helping to spark turnarounds. Samsung figures its unit sales will grow 10% in 2007, to 130 million units, while LG anticipates nearly 22% growth, to 78 million.

Heavy Investments in Design

Where does this leave Nokia? Despite tough market conditions and continued concerns about prices and margins, most analysts believe the Finnish giant will continue to outpace rivals.

"Nokia can handle the price competition better," says analyst Jari Honko with Helsinki-based brokerage eQBank. "When problems hit, they hit Motorola harder."

In part, that's due to Nokia's formidable scale. "It has a broader product line and better geographical mix than Motorola does," says analyst Hyoty of FIM Securities. Nokia also invested earlier and more aggressively in emerging markets from China to India to Latin America, which gives it "enormous volume and distribution advantages," Hyoty adds.

Nokia is also investing more heavily in design to make its phones more appealing, and scrambling to fill out the weak mid-section of its product portfolio (see BusinessWeek.com, 12/26/06, "Nokia's Grand Plans for 2007").

No doubt, growth and profits will get harder to squeeze out of a business that is rapidly commoditizing around the world. But the Nokia shareholders who pressed the sell button on Jan. 5 may have jumped the gun.

Reinhardt is Europe channel editor for BusinessWeek.com. With Olga Kharif and Moon Ihlwan